As filed with the SEC on __________. Registration No. 333-01031
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------
Post-Effective Amendment No. 1 to
FORM S-6
FOR REGISTRATION UNDER THE SECURITIES ACT OF 1933
OF SECURITIES OF UNIT INVESTMENT TRUSTS REGISTERED
ON FORM N-8B-2
------------
THE PRUDENTIAL VARIABLE CONTRACT ACCOUNT GI-2
(Exact Name of Trust)
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
(Name of Depositor)
PRUDENTIAL PLAZA
NEWARK, NEW JERSEY 07102-3777
(201) 802-6000
(Address and telephone number of principal executive offices)
------------
C. CHRISTOPHER SPRAGUE
ASSISTANT GENERAL COUNSEL
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
213 WASHINGTON STREET
NEWARK, NEW JERSEY 07102-2992
(Name and address of agent for service)
------------
Group Variable Universal Life Insurance Certificates. The Registrant has elected
to register an indefinite amount of securities pursuant to Rule 24f-2 under the
Investment Company Act of 1940. The Registrant has not yet filed a Rule 24f-2
Notice because it has not yet sold any securities.
It is proposed that this filing will become effective (check appropriate space):
|X| immediately upon filing pursuant to paragraph (b) of Rule 485
| | on pursuant to paragraph (b) of Rule 485
----------------------------
(date)
| | 60 days after filing pursuant to paragraph (a)(1) of Rule 485
| | on pursuant to paragraph (a)(1) of Rule 485
----------------------------
(date)
<PAGE>
CROSS REFERENCE SHEET
[AS REQUIRED BY FORM N-8B-2]
N-8B-2 ITEM NUMBER LOCATION
- ------------------ --------
1. Cover Page
2. Cover Page
3. Not Applicable
4. Sale of the Contract and Sales Commissions
5. The Prudential Variable Contract Account GI-2
6. The Prudential Variable Contract Account GI-2
7. Not Applicable
8. Not Applicable
9. Litigation
10. Brief Description of the Group Contract and
Certificates; Issuance of a Certificate; Applicant
Owner Provision; Short-Term Cancellation or "Free
Look"; Procedures; Premiums; Effective Date of
Insurance; Allocation of Premiums; Transfers; Dollar
Cost Averaging; Death Benefits; Changes in Face Amount;
Charges and Expenses; Reduction of Charges;
Dividends/Experience Credits; Cash Surrender Value;
Full Surrenders; Election of Paid-Up Insurance; Partial
Withdrawals; Loans; Certificate Exchange Privilege;
Telephone and Electronic Transactions; Lapse;
Termination of the Contractholder's Participation in
Group Contracts; Participants Who Are No Longer
Eligible Group Members; Options on Termination of
Coverage; Reinstatement; Tax Treatment of Certificate
Benefits; ERISA considerations; When Proceeds are Paid;
Beneficiary; Incontestability; Misstatement of Age;
Suicide Exclusion; Assignment; Voting Rights;
Substitution of Fund Shares; Additional Insurance
Benefits
11. Brief Description of the Group Contract and
Certificate; The Prudential Variable Contract Account
GI-2; The Funds.
12. Cover Page; Brief Description of the Group Contract and
Certificate; The Funds; Sale of the Contract and Sales
Commissions
13. Brief Description of the Group Contract and
Certificate; Premiums; Reduction of Charges; Sale of
the Contract and Sales Commissions
14. Brief Description of the Group Contract and
Certificate; Issuance of a Certificate; Procedures
15. Brief Description of the Group Contract and
Certificate; Procedures; Allocation of Premiums;
Transfers
16. Brief Description of the Group Contract and
Certificate; Detailed Information About the Variable
Universal Life Insurance Certificates
17. Death Benefits; Full Surrenders; Partial Withdrawals;
Loans; When Proceeds are Paid
<PAGE>
N-8B-2 ITEM NUMBER LOCATION
- ------------------ --------
18. The Prudential Variable Contract Account GI-2; The
Funds
19. Reports
20. Not Applicable
21. Loans
22. Not Applicable
23. Not Applicable
24. Incontestability; Misstatement of Age; Suicide
Exclusion; Assignment
25. The Prudential Insurance Company of America
26. The Funds; Charges and Expenses
27. General Information About The Prudential; The
Prudential Variable Contract Account GI-2 and the
Variable Investments Under the Certificates
28. The Prudential Insurance Company of America; Directors
and Officers
29. The Prudential Insurance Company of America
30. Not Applicable
31. Not Applicable
32. Not Applicable
33. Not Applicable
34. Not Applicable
35. The Prudential Insurance Company of America
36. Not Applicable
37. Not Applicable
38. Sale of the Contract and Sales Commissions
39. Sale of the Contract and Sales Commissions
40. Not Applicable
41. Sale of the Contract and Sales Commissions
42. Not Applicable
43. Not Applicable
44. Brief Description of the Group Contract and
Certificate; The Funds; Premiums; Cash Surrender Value
45. Not Applicable
46. Brief Description of the Group Contract and
Certificate; The Prudential Variable Contract Account
GI-2; The Funds; Death Benefits; Full Surrenders;
Partial Withdrawals
47. The Prudential Variable Contract Account GI-2; The
Funds
48. Not Applicable
49. Not Applicable
<PAGE>
N-8B-2 ITEM NUMBER LOCATION
- ------------------ --------
50. Not Applicable
51. Brief Description of the Group Contract and
Certificates; Detailed Information About the Variable
Universal Life Insurance Certificates
52. Substitution of Fund Shares
53. Tax Treatment of Certificate Benefits; ERISA
considerations
54. Not Applicable
55. Not Applicable
56. Not Applicable
57. Not Applicable
58. Not Applicable
59. Financial Statements; Statutory Financial Statements of
The Prudential Insurance Company of America
<PAGE>
PART I
INFORMATION IN PROSPECTUS
<PAGE>
PROSPECTUS
MAY 14 1997
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
THE PRUDENTIAL VARIABLE CONTRACT ACCOUNT GI-2
GROUP VARIABLE UNIVERSAL LIFE
INSURANCE CONTRACTS
This prospectus describes Group Variable Universal Life insurance contracts
offered by The Prudential Insurance Company of America ("Prudential") which are
designed for use in group-sponsored insurance programs.
Each Eligible Group Member or "eligible applicant owner" (as defined in this
prospectus) who elects to obtain coverage under the Group Contract
("Participant") will receive a Certificate describing the coverage. Certain
Group Contracts may also permit a Participant to apply for separate insurance
coverage for his or her dependents.
The Group Contracts and Certificates provide life insurance protection with
flexible premium payments and a choice of underlying investment options. The
Death Benefit and Cash Surrender Value of a Certificate will vary daily with the
performance of the investment options selected, but the Death Benefit will not
be less than the Face Amount of the Certificate. Subject to certain requirements
and limitations, surrenders, partial withdrawals and loans are available.
The Prudential Variable Contract Account GI-2 (the "Separate Account") is
composed of 151 variable investment options (each, a "Subaccount"). The assets
of each Subaccount will be invested in a corresponding portfolio of The
Prudential Series Fund, Inc. (the "Series Fund") or certain other mutual fund
portfolios available to insurance company separate accounts (collectively, the
"Funds") and certain qualified plans. A Contractholder will be permitted to
choose up to 20 of such Funds, one of which must be the Series Fund money market
portfolio. In addition, at least 50% of the Funds chosen by the Contractholder
(up to a maximum of 8 Funds) must be selected from the Series Fund. Once that
choice is made, the Contractholder's Participants will then be allowed to direct
premium payments only to the Subaccounts corresponding to the selected Funds or
to the Fixed Account, an investment option under which Prudential guarantees an
effective annual interest rate of at least 4%.
The Funds in which the Separate Account invests are briefly described under THE
FUNDS, beginning on page 6. The investment objectives and policies of each Fund,
and the risks of investing in the Fund, are described in each Fund's prospectus
and statement of additional information. This prospectus is accompanied by
current prospectuses for each of the Funds that the Contractholder has chosen on
behalf of its Participants.
THE REPLACEMENT OF LIFE INSURANCE IS GENERALLY NOT IN THE INTEREST OF THE
CUSTOMER. IN MOST CASES, WHEN A CUSTOMER REQUIRES ADDITIONAL COVERAGE,
SUPPLEMENTING THE EXISTING POLICY BY PURCHASING ADDITIONAL INSURANCE OR A NEW
POLICY SHOULD BE REQUESTED. THEREBY PROTECTING THE BENEFITS OF THE ORIGINAL
POLICY. IF YOU ARE CONSIDERING REPLACING A POLICY, YOU SHOULD COMPARE THE
BENEFITS AND COSTS OF SUPPLEMENTING YOUR EXISTING POLICY WITH THE BENEFITS AND
COSTS OF PURCHASING THE CERTIFICATE DESCRIBED IN THIS PROSPECTUS AND YOU SHOULD
CONSULT WITH A QUALIFIED TAX ADVISOR.
PLEASE READ THIS PROSPECTUS AND KEEP IT FOR FUTURE REFERENCE. IT IS ACCOMPANIED
BY CURRENT PROSPECTUSES FOR EACH OF THE FUNDS THAT YOUR GROUP CONTRACTHOLDER HAS
MADE AVAILABLE TO YOU. EACH OF THESE PROSPECTUSES SHOULD BE READ CAREFULLY AND
RETAINED FOR FUTURE
REFERENCE.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
PRUDENTIAL PLAZA
NEWARK, NEW JERSEY 07102-3777
TELEPHONE (201) 716-8721
GVUL-1 Ed. 5-97
<PAGE>
TABLE OF CONTENTS
PAGE
-----
BRIEF DESCRIPTION OF THE GROUP CONTRACT AND CERTIFICATES.................... 1
HYPOTHETICAL ILLUSTRATIONS OF DEATH BENEFITS AND CASH SURRENDER VALUES...... 4
GENERAL INFORMATION ABOUT PRUDENTIAL, THE PRUDENTIAL VARIABLE
CONTRACT ACCOUNT GI-2, AND THE VARIABLE INVESTMENT OPTIONS
AVAILABLE UNDER THE CERTIFICATES....................................... 6
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA............................ 6
THE PRUDENTIAL VARIABLE CONTRACT ACCOUNT GI-2.......................... 6
THE FUNDS.............................................................. 6
THE FIXED ACCOUNT...................................................... 27
DETAILED INFORMATION ABOUT THE CERTIFICATES................................ 28
ISSUANCE OF A CERTIFICATE.............................................. 28
APPLICANT OWNER PROVISION.............................................. 28
SHORT-TERM CANCELLATION RIGHT OR "FREE LOOK"........................... 29
PROCEDURES............................................................. 29
PREMIUMS............................................................... 29
EFFECTIVE DATE OF INSURANCE............................................ 30
ALLOCATION OF PREMIUMS................................................. 30
TRANSFERS.............................................................. 30
DOLLAR COST AVERAGING.................................................. 30
DEATH BENEFITS......................................................... 31
CHANGES IN FACE AMOUNT................................................. 33
CHARGES AND EXPENSES................................................... 34
REDUCTION OF CHARGES................................................... 35
DIVIDENDS/EXPERIENCE CREDITS........................................... 36
CASH SURRENDER VALUE................................................... 36
FULL SURRENDERS........................................................ 36
ELECTION OF PAID-UP INSURANCE.......................................... 36
PARTIAL WITHDRAWALS.................................................... 37
LOANS ............................................................... 37
CERTIFICATE EXCHANGE PRIVILEGE......................................... 38
TELEPHONE AND ELECTRONIC TRANSACTIONS.................................. 38
LAPSE ............................................................... 38
TERMINATION OF A CONTRACTHOLDER'S PARTICIPATION IN GROUP CONTRACTS..... 39
PARTICIPANTS WHO ARE NO LONGER ELIGIBLE GROUP MEMBERS.................. 39
OPTIONS ON TERMINATION OF COVERAGE..................................... 39
REINSTATEMENT.......................................................... 40
TAX TREATMENT OF CERTIFICATE BENEFITS.................................. 40
ERISA CONSIDERATIONS................................................... 43
WHEN PROCEEDS ARE PAID................................................. 44
BENEFICIARY............................................................ 44
INCONTESTABILITY....................................................... 44
MISSTATEMENT OF AGE.................................................... 44
SUICIDE EXCLUSION...................................................... 44
ASSIGNMENT............................................................. 44
VOTING RIGHTS.......................................................... 45
SUBSTITUTION OF FUND SHARES............................................ 45
ADDITIONAL INSURANCE BENEFITS.......................................... 45
REPORTS ............................................................... 46
SALE OF THE CONTRACT AND SALES COMMISSIONS............................. 47
RATINGS AND ADVERTISEMENTS............................................. 47
PAYMENTS TO THIRD-PARTY ADMINISTRATORS AND ASSOCIATIONS
SPONSORING PARTICIPATION
IN THE GROUP CONTRACTS............................................... 47
STATE REGULATION....................................................... 47
EXPERTS................................................................ 48
LITIGATION............................................................. 48
ADDITIONAL INFORMATION................................................. 48
DEFINITIONS OF SPECIAL TERMS USED IN THIS PROSPECTUS....................... 50
DIRECTORS AND OFFICERS OF PRUDENTIAL....................................... 52
<PAGE>
FINANCIAL STATEMENTS....................................................... 54
STATUTORY FINANCIAL STATEMENTS OF THE PRUDENTIAL INSURANCE COMPANY
OF AMERICA ............................................................ A-1
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING IN ANY JURISDICTION IN WHICH
SUCH OFFERING MAY NOT LAWFULLY BE MADE. NO PERSON IS AUTHORIZED TO MAKE ANY
REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS AND THE PROSPECTUS AND STATEMENT OF ADDITIONAL INFORMATION FOR
EACH OF THE FUNDS.
<PAGE>
BRIEF DESCRIPTION OF THE GROUP CONTRACT
AND CERTIFICATES
The following section provides brief answers to some common questions about the
more significant features of the Contracts and Certificates. More detailed
information is provided in the subsequent sections of this prospectus and in the
Group Contract and Certificate themselves.
WHAT IS A GROUP VARIABLE UNIVERSAL LIFE INSURANCE CONTRACT?
It is an insurance contract issued by Prudential to an employer or other
sponsoring entity that sets forth the terms under which eligible members of the
group can obtain life insurance protection for themselves and, under some Group
Contracts, their dependents as well. Group members (or "eligible applicant
owners") who obtain such insurance ("Participants") receive a Certificate
describing their coverage. Certificates will provide for a Death Benefit and a
Cash Surrender Value. Both the Death Benefit and the Cash Surrender Value of a
Certificate will vary daily with the performance of the investment options
chosen by the Participant. Prudential will determine the share, if any, of its
divisible surplus allocable to a Group Contract as of each Contract Anniversary,
if the Group Contract stays in force by the payment of all required premiums to
that date.
HOW IS THE DEATH BENEFIT UNDER A CERTIFICATE COMPUTED?
A Participant will choose a Face Amount of insurance for his or her Certificate,
within certain limits. The Death Benefit will generally be that Face Amount plus
the value of the Participant's Certificate Fund as of the date of death. The
Certificate Fund initially consists of the Net Premiums invested in the
investment options chosen by the Participant. The value of the Certificate Fund
will vary daily to reflect the investment performance of the selected option(s)
and the deduction of charges by Prudential. Under certain circumstances, the
Death Benefit will be increased above the value of the Face Amount plus the
Certificate Fund to assure that the Certificate continues to meet the definition
of "life insurance" under the Internal Revenue Code. Any Death Benefit otherwise
payable will be reduced by any Certificate Debt and outstanding charges. See
DEATH BENEFITS, page 31.
HOW IS THE CASH SURRENDER VALUE OF A CERTIFICATE COMPUTED?
The Cash Surrender Value of a Certificate as of any date is equal to the value
of the Certificate Fund as of that date, reduced by any Certificate Debt,
outstanding charges, and under certain Group Contracts, a transaction charge of
up to $20. See CASH SURRENDER VALUE, page 36.
WHAT PREMIUMS MUST BE PAID?
A Participant generally has flexibility to select the frequency and amount of
premium payments, and the insurance will remain in force so long as the balance
in the Certificate Fund is sufficient to pay the monthly charges under the
Certificate. There may be an initial minimum premium required to enroll as a
Participant. If the balance in the Certificate Fund is not sufficient to pay any
month's charges, and the Participant fails to make premium payments sufficient
to bring the balance above this minimum amount during the grace period, the
Participant's insurance will lapse. See PREMIUMS, page 29.
Some Group Contracts may provide that if a Participant pays certain specified
premiums during the first two Certificate Years, the Certificate will not lapse
even if the Certificate Fund balance is insufficient to pay monthly charges. See
LAPSE, page 38.
WHAT INVESTMENT OPTIONS ARE AVAILABLE?
The Separate Account is composed of 151 Subaccounts, each of which invests in a
single corresponding Fund. Prudential permits a Contractholder to choose up to
20 Funds as investment options for such Contractholder's Participants, provided
that at least 50% of the Funds (up to a maximum of 8 Funds) are selected from
the Series Fund and one of those Funds is the Series Fund money market
portfolio. In lieu of selecting Funds itself, a Contractholder may ask
Prudential to present it with one or more predetermined groups of Funds in which
the Contractholder's Participants would invest. Whether the Contractholder
selects Funds itself or from a predetermined set presented by Prudential, the
Contractholder will be prohibited from substituting other Funds for any Funds
that it has already selected. However, a Contractholder that chooses fewer than
20 Funds initially will be permitted to select additional Funds so long as the
total number of Funds available to the Participants does not exceed 20.
Prudential recommends that the Contractholder consult a qualified investment
adviser in the selection of investment options for the Contractholder's
Participants. Participants in a Contractholder's insurance program
1
<PAGE>
will be allowed to allocate their premium payments only to the Subaccounts that
correspond to the Funds chosen by their Contractholder. Participants may also
allocate premium payments to the Fixed Account, an option under which interest
is credited at rates declared periodically by Prudential. See THE FIXED ACCOUNT,
page 27. For more information about the Funds and the different investment
objectives of all the Fund portfolios in which the Separate Account invests, see
THE FUNDS, page 6. More information about the Funds available to a particular
Contractholder is contained in the prospectuses for such Funds, which will
accompany the delivery of this prospectus.
Under the Certificate, Prudential will notify affected Participants concerning a
material change in a Fund's investment objective. As discussed more fully on
page 45 of this prospectus, Prudential may seek to substitute the shares of a
different mutual fund for shares of a Fund, and would notify Contractholders and
Participants of any such substitution. Changes that Prudential may make to the
Group Contracts or the Certificates are detailed in those documents.
DO CERTIFICATES PROVIDE PARTICIPANTS WITH CHOICE AND FLEXIBILITY IN
ADDRESSING A RANGE OF DIFFERENT INSURANCE PROTECTION AND INVESTMENT
OBJECTIVES?
Yes. Because the Cash Surrender Value of a Participant's insurance will vary
with the investment experience of the investment options, a Certificate under
the Group Contract offers an opportunity for the Cash Surrender Value to
appreciate more than it would under comparable insurance without variable
investment options. It is also possible, however, for the Cash Surrender Value
to decrease in value if the investment experience of the selected investment
option(s) is unfavorable. The variable investment options vary in their risks,
and Participants can choose to direct the amounts in their Certificate Fund to
more aggressive or more conservative variable investment options as their
personal circumstances and investment objectives may dictate over time.
Participants who prefer to avoid or reduce the risks involved in any of the
variable options may elect to allocate all or a portion of Net Premiums to the
Fixed Account. Prudential guarantees that the part of the Certificate Fund
allocated to this option will accrue interest daily at a rate that Prudential
declares periodically. Although this rate will change from time to time, it may
not be less than an effective annual rate of 4%. See THE FIXED ACCOUNT, page 27.
In short, the Certificate's investment options and premium flexibility can be
used to meet the changing needs of Participants over time.
WHAT CHARGES ARE MADE?
Prudential deducts certain charges from each premium payment and from the
amounts held in the designated investment option(s). All of these charges, which
are designed to compensate Prudential for insurance costs and risks, as well as
cover Prudential's expenses, are fully described under CHARGES AND EXPENSES,
page 34. The following diagram briefly outlines the charges that may be made:
2
<PAGE>
PREMIUM PAYMENT
-------------------------------------------------------------------------------
o less the sum of a charge (currently 2.6%, however, for certain
Group Contracts, this charge may equal up to 5.35%) for taxes
attributable to premium payments
o a processing fee of up to $2, which may be reduced or waived
under certain Group Contracts
o a sales charge of up to 3 1/2%, which may be reduced or waived
under certain Group Contracts
- --------------------------------------------------------------------------------
NET PREMIUM AMOUNT
o To be invested in one or a combination of the investment portfolio options
available to the Participant.
- --------------------------------------------------------------------------------
DAILY CHARGES
o A daily charge is deducted from the assets of the Subaccounts of the
Separate Account for mortality and expense risks. The current daily charge
is equivalent to an effective annual rate of 0.45%. The charge is
guaranteed not to exceed an effective annual rate of 0.90%.
o Investment management fees and expenses are deducted from the assets of the
Funds. In 1996, the total expenses (after expense reimbursement) of the
Funds ranged from 0.40% to 2.57% of their average net assets. See page 8.
- --------------------------------------------------------------------------------
MONTHLY CHARGES
o An administrative expense charge may be deducted each month from the
Certificate Fund. The charge is currently up to $3 per month and is
guaranteed not to exceed $6 per month.
o A charge for the cost of insurance is deducted from the Certificate Fund.
o Charges for any additional insurance benefits not already taken into
account in the cost of insurance charge are deducted from the Certificate
Fund.
- --------------------------------------------------------------------------------
Possible Additional Charges
o Under certain Group Contracts, a transaction charge of up to the lesser of
$20 or 2% of the amount surrendered or withdrawn will be assessed under
each surrender or partial withdrawal.
o Under certain Group Contracts, a transaction charge of up to $20 may be
made in connection with each loan or additional statement request.
o No transaction charge is currently assessed in connection with transfers,
but certain Group Contracts may give Prudential the right to assess a
charge of up to $20 for each transfer after the twelfth with respect to the
same Certificate in the same Certificate Year.
o No charge is currently made for any other taxes imposed upon the operations
of the Separate Account, but Prudential reserves the right to impose such a
charge.
- --------------------------------------------------------------------------------
WHAT WITHDRAWAL OR LOAN RIGHTS DO PARTICIPANTS HAVE?
At any time while a Certificate is in effect, a Participant may elect to
surrender his or her insurance and receive its Cash Surrender Value. A
Participant may also request a partial withdrawal from the Certificate Fund. See
FULL SURRENDERS, page 36, and PARTIAL WITHDRAWALS, page 37.
A Participant may borrow (before any applicable transaction charge) a total
amount up to the Loan Value of his or her Certificate. The Loan Value of a
Certificate at any time is determined by multiplying the Certificate Fund by 90%
(or higher where required by state law) and then subtracting any existing loan
with accrued interest, outstanding charges, and the amount of the next month's
charges. When a loan is taken, an amount equal to the loan is transferred from
the investment options to a Loan Account that remains part of the Certificate
Fund. This Loan Account earns interest at an effective annual rate that is
generally 2% less than the interest charged on the loan. Any outstanding
Certificate Debt will be deducted from proceeds payable at the Covered Person's
death or upon surrender. See LOANS, page 37.
3
<PAGE>
HOW IS A PARTICIPANT'S INSURANCE AFFECTED IF HE OR SHE IS NO LONGER A MEMBER OF
THE GROUP?
Depending on the terms of the particular Group Contract, a Participant who is no
longer included in the group of eligible members may be able to elect to
continue the insurance provided by the Group Contract on a Portable basis.
Certificates continued on a Portable basis may be subject to higher charges. A
Participant may also surrender the insurance for its Cash Surrender Value, elect
to use the Cash Surrender Value of the insurance to purchase paid-up insurance,
or convert the insurance to an individual life insurance policy. See OPTIONS ON
TERMINATION OF COVERAGE, page 39.
WHAT IS THE FEDERAL INCOME TAX STATUS OF AMOUNTS RECEIVED UNDER A CERTIFICATE?
Variable life insurance contracts, such as those offered by this Prospectus,
receive the same federal income taxation treatment as conventional fixed benefit
life insurance. This means, first, that any Death Benefit paid would generally
be excluded from the gross income of the beneficiary. Second, any annual
increases in the value of the Certificate Fund, whether from income or capital
appreciation, would not be included in the taxable income of a Participant.
Third, assuming that premiums are not paid above levels that would make a
Certificate a "Modified Endowment Contract" as defined in the Internal Revenue
Code, pre-death distributions, whether in the form of surrenders or partial
withdrawals, would be treated first as a return of the Participant's investment
in the Certificate and then as a distribution of taxable income, and loans would
not be treated as distributions at the time the loan was made. See TAX TREATMENT
OF CERTIFICATE BENEFITS, page 40.
HYPOTHETICAL ILLUSTRATIONS OF
DEATH BENEFITS AND CASH SURRENDER VALUES
The two illustrations that follow show how the Death Benefit and Cash Surrender
Value change with the investment experience of the Separate Account. They are
not projections of values; they are intended to show how a Certificate works.
They are "hypothetical" because they are based upon several assumptions, as
described below. Both illustrations assume that a Certificate with a Face Amount
of $100,000 has been bought by a 40-year old Covered Person. The illustrations
assume that a premium of $1,200 is paid at issuance and annually on each
Certificate Anniversary.
The first illustration assumes that a 2.6% charge is deducted for charges
attributable to premiums and that current sales, cost of insurance, mortality
and expense risk and administrative charges and processing fee will continue for
the indefinite future. It assumes that the Covered Person is in a risk class
that has current standardized cost of insurance charges equal to rates equal to
Table I under Section 79 of the Internal Revenue Code. It assumes a monthly
administrative charge of $3, which applies to Certificates that do not involve
any direct billing by Prudential. See ADMINISTRATIVE CHARGE, page 35.
The second illustration is based upon the same assumptions except it is assumed
that the maximum amount for taxes attributable to premiums, sales, cost of
insurance, mortality and expense risk and administrative charges and processing
fee permitted by the particular Certificate have been made throughout the life
of the Certificate. It assumes that the Covered Person is in a risk class that
has maximum guaranteed cost of insurance charges equal to the maximum rates that
could be charged, which are 150% of the 1980 Commissioner's Standard Ordinary
Mortality Table (Male), Age Last Birthday (the "1980 CSO Table").
Although Prudential may under some Group Contracts pay Dividends or Experience
Credits to Contractholders, who may distribute those Dividends/Experience
Credits to Participants in the Group Contract, neither table reflects Dividends
or Experience Credits. See DIVIDENDS/EXPERIENCE CREDITS, page 36.
Another assumption is that the Certificate Fund has been invested in equal
amounts in each of the 151 Funds. Finally, there are four assumptions, shown
separately, about the average investment performance of the portfolios. The
first is that there will be a uniform zero percent gross rate of return, that
is, that the average value of the Certificate Fund will uniformly be adversely
affected by very unfavorable investment performance. The other three assumptions
are that investment performance will be at a uniform gross annual rate of 4%, 8%
and 12%. These, of course, are merely assumptions, and actual returns will
fluctuate from year to year. Nevertheless, these tables help show how the Cash
Surrender Value and the Death Benefit change with investment experience.
4
<PAGE>
The first column in the following illustrations shows the contract year. The
second column, to provide context, shows what the aggregate amount would be if
the assumed premiums had been invested in a savings account paying a 4%
effective annual rate. Of course, if that were done, there would be no life
insurance protection. The next four columns show the Death Benefit payable in
each of the years shown for the four different assumed investment returns. Note
that a gross return (as well as the net return) is shown at the top of each
column. The gross return represents the combined effect of income and capital
appreciation of the portfolios before any reduction is made for investment
management fees or other Fund expenses. The net return reflects an average total
annual expense ratio of the 151 Funds of 1.00%, and the daily deduction from the
Certificate Fund of 0.45% per year for the first table, which is based on
current charges, and 0.90% for the second table, which is based on maximum
charges. Thus, assuming maximum charges, gross returns of 0%, 4%, 8% and 12% are
the equivalent of net returns of -1.90%, 2.10%, 6.10%, and 10.10% respectively.
The Death Benefits and Cash Surrender Values shown reflect the deduction of all
expenses and charges both for the Subaccounts and under the Certificate.
The amounts shown assume that there is no loan or partial withdrawal.
Upon request, Prudential will provide comparable hypothetical illustrations for
a Certificate reflecting the proposed Covered Person's age, risk class, proposed
Face Amount of insurance, and proposed premium payments.
5
<PAGE>
ILLUSTRATIONS
GROUP VARIABLE UNIVERSAL LIFE INSURANCE CERTIFICATE
SPECIFIED FACE AMOUNT: $100,000
ISSUE AGE 40
ASSUME PAYMENT OF $1,200 ANNUAL PREMIUMS FOR ALL YEARS
USING CURRENT CHARGES
<TABLE>
<CAPTION>
Death Benefit (1) Cash Surrender Value (1)
---------------------------------------------------- ---------------------------------------------------
Assuming Hypothetical Gross (and Net) Assuming Hypothetical Gross (and Net)
Annual Investment Return of Annual Investment Return of
End of Premiums ---------------------------------------------------- ---------------------------------------------------
Certificate Accumulated 0% Gross 4% Gross 8% Gross 12% Gross 0% Gross 4% Gross 8% Gross 12% Gross
Year at 4% per year (-1.45% Net) (2.55% Net) (6.55% Net) (10.55% Net) (-1.45% Net) (2.55% Net) (6.55% Net) (10.55% Net)
- ----------- ------------- -------------- ----------- ----------- ------------ ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 $1,248 $100,914 $100,955 $100,997 $101,039 $ 914 $ 955 $ 997 $ 1,039
2 2,546 101,814 101,935 102,059 102,187 1,814 1,935 2,059 2,187
3 3,896 102,702 102,940 103,191 103,456 2,702 2,940 3,191 3,456
4 5,300 103,577 103,970 104,397 104,860 3,577 3,970 4,397 4,860
5 6,760 104,439 105,027 105,682 106,411 4,439 5,027 5,682 6,411
6 8,278 105,145 105,965 106,903 107,974 5,145 5,965 6,903 7,974
7 9,857 105,842 106,926 108,203 109,702 5,842 6,926 8,203 9,702
8 11,499 106,528 107,912 109,588 111,613 6,528 7,912 9,588 11,613
9 13,207 107,204 108,924 111,064 113,725 7,204 8,924 11,064 13,725
10 14,984 107,871 109,961 112,637 116,060 7,871 9,961 12,637 16,060
15 24,989 109,964 114,341 120,845 130,507 9,964 14,341 20,845 30,507
20 37,163 110,348 117,582 130,206 152,252 10,348 17,582 30,206 52,252
25 51,974 108,276 118,570 140,091 184,876 8,276 18,570 40,091 84,876
30 69,994 0 (2) 113,737 147,082 231,474 0 (2) 13,737 47,082 131,474
35 91,918 0 0 (2) 144,933 295,439 (0) (0)(2) 44,933 195,439
40 118,592 0 0 141,980 401,071 (0) (0) 41,980 301,071
</TABLE>
- -----------
(1) Assumes no loan or partial withdrawal has been made.
(2) Zero value in cash value and death benefit indicates lapse of insurance
coverage in the absence of a sufficient additional premium payment.
THE HYPOTHETICAL INVESTMENT RATES OF RETURN SHOWN ABOVE AND ELSEWHERE IN THIS
PROSPECTUS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF
PAST OR FUTURE INVESTMENT RATES OF RETURN. ACTUAL RATES OF RETURN MAY BE MORE OR
LESS THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS INCLUDING THE
INVESTMENT ALLOCATIONS MADE BY AN OWNER, PREVAILING INTEREST RATES, FEDERAL AND
STATE INCOME TAXES, AND RATES OF INFLATION. THE DEATH BENEFIT AND CASH SURRENDER
VALUE FOR A CERTIFICATE WOULD BE DIFFERENT FROM THOSE SHOWN IF THE ACTUAL RATE
OF RETURN AVERAGED 0%, 4%, 8%, AND 12% OVER A PERIOD OF YEARS, BUT ALSO
FLUCTUATED ABOVE OR BELOW THOSE AVERAGES FOR INDIVIDUAL CERTIFICATE YEARS. NO
REPRESENTATIONS CAN BE MADE BY PRUDENTIAL OR THE FUNDS THAT THESE HYPOTHETICAL
RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR OVER ANY PERIOD OF TIME.
T-1
<PAGE>
ILLUSTRATIONS
GROUP VARIABLE UNIVERSAL LIFE INSURANCE CERTIFICATE
SPECIFIED FACE AMOUNT: $100,000
ISSUE AGE 40
ASSUME PAYMENT OF $1,200 ANNUAL PREMIUMS FOR ALL YEARS
USING CURRENT CHARGES
<TABLE>
<CAPTION>
Death Benefit (1) Cash Surrender Value (1)
---------------------------------------------------- ---------------------------------------------------
Assuming Hypothetical Gross (and Net) Assuming Hypothetical Gross (and Net)
Annual Investment Return of Annual Investment Return of
End of Premiums ---------------------------------------------------- ---------------------------------------------------
Certificate Accumulated 0% Gross 4% Gross 8% Gross 12% Gross 0% Gross 4% Gross 8% Gross 12% Gross
Year at 4% per year (-1.90% Net) (2.10% Net) (6.10% Net) (10.10% Net) (-1.90% Net) (2.10% Net) (6.10% Net) (10.10% Net)
- ----------- ------------- -------------- ----------- ----------- ------------ ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 $ 1,248 $100,531 $100,563 $100,595 $100,627 $ 511 $ 543 $ 575 $ 607
2 2,546 101,013 101,098 101,185 101,276 993 1,078 1,165 1,256
3 3,896 101,442 101,599 101,766 101,944 1,422 1,579 1,746 1,924
4 5,300 101,816 102,063 102,334 102,629 1,796 2,043 2,314 2,609
5 6,760 102,133 102,486 102,883 103,330 2,113 2,466 2,863 3,310
6 8,278 102,389 102,862 103,410 104,044 2,369 2,842 3,390 4,024
7 9,857 102,584 103,187 103,909 104,770 2,564 3,167 3,889 4,750
8 11,499 102,714 103,457 104,375 105,504 2,694 3,437 4,355 5,484
9 13,207 102,775 103,666 104,801 106,242 2,755 3,646 4,781 6,222
10 14,984 102,764 103,805 105,177 106,977 2,744 3,785 5,157 6,957
15 24,989 101,285 103,017 105,793 110,173 1,265 2,997 5,773 10,153
20 37,163 0(2) 0(2) 102,554 110,874 (0)(2) (0)(2) 2,534 10,854
25 51,974 0 0 0(2) 105,170 (0) (0) (0)(2) 5,150
30 69,994 0 0 0 0(2) (0) (0) (0) (0)(2)
35 91,918 0 0 0 0 (0) (0) (0) (0)
40 118,592 0 0 0 0 (0) (0) (0) (0)
</TABLE>
- -----------------
(1) Assumes no loan or partial withdrawal has been made.
(2) Zero value in cash value and death benefit indicates lapse of insurance
coverage in the absence of a sufficient additional premium payment.
THE HYPOTHETICAL INVESTMENT RATES OF RETURN SHOWN ABOVE AND ELSEWHERE IN THIS
PROSPECTUS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF
PAST OR FUTURE INVESTMENT RATES OF RETURN. ACTUAL RATES OF RETURN MAY BE MORE OR
LESS THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS INCLUDING THE
INVESTMENT ALLOCATIONS MADE BY AN OWNER, PREVAILING INTEREST RATES, FEDERAL AND
STATE INCOME TAXES, AND RATES OF INFLATION. THE DEATH BENEFIT AND CASH SURRENDER
VALUE FOR A CERTIFICATE WOULD BE DIFFERENT FROM THOSE SHOWN IF THE ACTUAL RATE
OF RETURN AVERAGED 0%, 4%, 8%, AND 12% OVER A PERIOD OF YEARS, BUT ALSO
FLUCTUATED ABOVE OR BELOW THOSE AVERAGES FOR INDIVIDUAL CERTIFICATE YEARS. NO
REPRESENTATIONS CAN BE MADE BY PRUDENTIAL OR THE FUNDS THAT THESE HYPOTHETICAL
RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR OVER ANY PERIOD OF TIME.
T-2
<PAGE>
GENERAL INFORMATION ABOUT PRUDENTIAL, THE
PRUDENTIAL VARIABLE CONTRACT ACCOUNT GI-2, AND THE
VARIABLE INVESTMENT OPTIONS AVAILABLE UNDER THE
CERTIFICATES
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
The Prudential Insurance Company of America ("Prudential") is a mutual insurance
company, founded in 1875 under the laws of the State of New Jersey. It is
licensed to sell life insurance and annuities in all states, in the District of
Columbia, and in all United States territories and possessions. Prudential's
statutory financial statements begin on page A-1 and should be considered only
as bearing upon Prudential's ability to meet its obligations under the Group
Contracts and the insurance provided thereunder. Prudential and its affiliates
act in a variety of capacities with respect to registered investment companies
including as depositor, advisor, and principal underwriter.
THE PRUDENTIAL VARIABLE CONTRACT ACCOUNT GI-2
The Prudential Variable Contract Account GI-2 (the "Separate Account") was
established on June 14, 1988 under New Jersey law as a separate investment
account. The Separate Account meets the definition of a "separate account" under
the federal securities laws. The Separate Account holds assets that are
segregated from all of Prudential's other assets.
The obligations arising under the Group Contracts and the Certificates are
general corporate obligations of Prudential. Prudential is also the legal owner
of the assets in the Separate Account. Prudential will maintain assets in the
Separate Account with a total market value at least equal to the liabilities
relating to the benefits attributable to the Separate Account. These assets may
not be charged with liabilities which arise from any other business Prudential
conducts. In addition to these assets, the Separate Account's assets may include
funds contributed by Prudential to commence operation of the Separate Account
and may include accumulations of the charges Prudential makes against the
Separate Account. From time to time, these additional assets will be transferred
to Prudential's general account. Before making any such transfer, Prudential
will consider any possible adverse impact the transfer might have on the
Separate Account.
The Separate Account is registered with the Securities and Exchange Commission
("SEC") under the Investment Company Act of 1940 ("1940 Act") as a unit
investment trust, which is a type of investment company. This does not involve
any supervision by the SEC of the management or investment policies or practices
of the Separate Account. For state law purposes, the Separate Account is treated
as a part or division of Prudential. There are currently 151 Subaccounts within
the Separate Account, each of which invests in a single corresponding portfolio
of the Funds. Prudential reserves the right to take all actions in connection
with the operation of the Separate Account that are permitted by applicable law
(including those permitted upon regulatory approval).
THE FUNDS
Set out below is a list of each Fund, its investment objectives, investment
management fees and other expenses, and its investment adviser. For certain of
the Funds, investment policy information in addition to the Fund's fundamental
investment objective is provided.
THE PRUDENTIAL SERIES FUND, INC.
The twelve portfolios of the Series Fund in which the Separate Account may
currently invest and their investment objectives and fees are as follows:
MONEY MARKET PORTFOLIO: The maximum current income that is consistent with
stability of capital and maintenance of liquidity through investment in
high-quality short-term debt obligations.
DIVERSIFIED BOND PORTFOLIO: A high level of income over the longer term while
providing reasonable safety of capital through investment primarily in readily
marketable intermediate and long-term fixed income securities that provide
attractive yields but do not involve substantial risk of loss of capital through
default.
6
<PAGE>
GOVERNMENT INCOME PORTFOLIO: Achievement of a high level of income over the
longer term consistent with the preservation of capital through investment
primarily in U.S. Government securities, including intermediate and long-term
U.S. Treasury securities and debt obligations issued by agencies of or
instrumentalities established, sponsored or guaranteed by the U.S. Government.
At least 65% of the total assets of the portfolio will be invested in U.S.
Government securities.
ZERO COUPON BOND PORTFOLIOS 2000 AND 2005: Achievement of the highest
predictable compounded investment return for a specific period of time,
consistent with the safety of invested capital, by investing primarily in debt
obligations of the United States Treasury and investment-grade corporations that
have been issued without interest coupons or stripped of their unmatured
coupons, interest coupons that have been stripped from such debt obligations,
and receipts and certificates for such stripped debt obligations and stripped
coupons.
To obtain the predicted investment return an investor must plan to retain his or
her investment in the selected portfolio until the designated year in which the
portfolio will be liquidated. Redemption prior to that time may result in a
loss. Moreover, since the portfolios will be actively managed with the objective
of obtaining a yield higher than the predicted yield, there is a risk that the
actual yield may be lower.
CONSERVATIVE BALANCED PORTFOLIO: Achievement of a favorable total investment
return consistent with a portfolio having a conservatively managed mix of money
market instruments, fixed income securities, and common stocks, in proportions
believed by the investment manager to be appropriate for an investor desiring
diversification of investment who prefers a relatively lower risk of loss than
that associated with the Flexible Managed Portfolio while recognizing that this
reduces the chances of greater appreciation.
FLEXIBLE MANAGED PORTFOLIO: Achievement of a high total return consistent with a
portfolio having an aggressively managed mix of money market instruments, fixed
income securities, and common stocks, in proportions believed by the investment
manager to be appropriate for an investor desiring diversification of investment
who is willing to accept a relatively high level of loss in an effort to achieve
greater appreciation.
HIGH YIELD BOND PORTFOLIO: Achievement of a high total return through investment
in high yield/high risk fixed income securities in the medium to lower quality
ranges.
STOCK INDEX PORTFOLIO: Achievement of investment results that correspond to the
price and yield performance of publicly traded common stocks in the aggregate by
following a policy of attempting to duplicate the price and yield performance of
the Standard & Poor's 500 Composite Stock Price Index.
EQUITY INCOME PORTFOLIO: Both current income and capital appreciation through
investment primarily in common stocks and convertible securities that provide
favorable prospects for investment income returns above those of the Standard &
Poor's 500 Composite Stock Price Index or the New York Stock Exchange Composite
Index.
EQUITY PORTFOLIO: Capital appreciation through investment primarily in common
stocks of companies, including major established corporations as well as smaller
capitalization companies, that appear to offer attractive prospects of price
appreciation that are superior to broadly-based stock indices. Current income,
if any, is incidental.
PRUDENTIAL JENNISON PORTFOLIO: Long-term growth of capital through investment
primarily in equity securities of established companies with above-average
growth prospects. Current income, if any, is incidental.
SMALL CAPITALIZATION STOCK PORTFOLIO: Long-term growth of capital through
investment primarily in equity securities of publicly-traded companies with
small market capitalization. Current income, if any, is incidental.
GLOBAL PORTFOLIO: Long-term growth of capital through investment primarily in
common stock and common stock equivalents of foreign and domestic issuers.
Current income, if any, is incidental.
NATURAL RESOURCES PORTFOLIO: Long-term growth of capital through investment
primarily in common stocks and convertible securities of "natural resource
companies" and in securities (typically debt securities and preferred stock) the
terms of which are related to the market value of a natural resource.
Prudential is the investment adviser of each of the portfolios of the Series
Fund. Prudential's principal business address is Prudential Plaza, Newark, New
Jersey 07102-3777. Prudential has a service agreement with its wholly-owned
subsidiary The Prudential Investment Corporation ("PIC"), which provides that,
subject to Prudential's supervision, PIC will furnish investment advisory
services in connection with the management of the Series Fund. In addition,
Prudential has entered into a subadvisory agreement with its wholly-owned
subsidiary Jennison Associates Capital Corp. ("Jennison"), under which Jennison
furnishes investment advisory services in connection with the management of the
Prudential Jennison Portfolio. Further detail is provided in the prospectus and
statement of additional information for the Series Fund. Prudential, PIC and
Jennison are registered as investment advisers under the Investment Advisers Act
of 1940.
7
<PAGE>
================================================================================
TOTAL FUND
INVESTMENT OTHER ANNUAL EXPENSES
FUNDS MANAGEMENT EXPENSES (AFTER EXPENSE
FEE REIMBURSEMENTS)
- --------------------------------------------------------------------------------
THE SERIES FUND
Money Market Portfolio (1) 0.40% 0.04% 0.44%
Diversified Bond Portfolio (1) 0.40% 0.05% 0.45%
Government Income Portfolio (1) 0.40% 0.06% 0.46%
Zero Coupon Bond 2000 Portfolio (1) 0.40% 0.12% 0.52%
Zero Coupon Bond 2005 Portfolio (1) 0.40% 0.13% 0.53%
Conservative Balanced Portfolio (1) 0.55% 0.04% 0.59%
Flexible Managed Portfolio (1) 0.60% 0.04% 0.64%
High Yield Bond Portfolio (1) 0.55% 0.08% 0.63%
Stock Index Portfolio (1) 0.35% 0.05% 0.40%
Equity Income Portfolio (1) 0.40% 0.05% 0.45%
Equity Portfolio (1) 0.45% 0.05% 0.50%
Prudential Jennison Portfolio (1) 0.60% 0.06% 0.66%
Small Capitalization Stock Portfoli 0.40% 0.16% 0.56%
Global Portfolio (1) 0.75% 0.17% 0.92%
Natural Resources Portfolio (1) 0.45% 0.07% 0.52%
================================================================================
(1) SERIES FUND. With respect to the Series Fund portfolios, except for the
Global Portfolio, Prudential reimburses a portfolio when its ordinary
operating expenses, excluding taxes, interest, and brokerage commissions
exceed 0.75% of the portfolio's average daily net assets. The amounts
listed for the portfolios under other expenses are based on amounts
incurred in the last fiscal year.
AIM VARIABLE INSURANCE FUNDS, INC.
The portfolios of the AIM Variable Insurance Funds, Inc. in which the Separate
Account may currently invest and their investment objectives and fees are as
follows:
AIM V.I. CAPITAL APPRECIATION FUND: The Fund's investment objective is to seek
capital appreciation through investments in common stocks, with emphasis on
medium-sized and smaller emerging growth companies.
AIM V.I. DIVERSIFIED INCOME FUND: The Fund's investment objective is to seek to
achieve a high level of current income. The Fund will seek to achieve its
investment objective by investing primarily in: (1) foreign government
securities, (2) foreign and domestic corporate debt securities, (3) U.S.
Government securities, including U.S. Government Agency Mortgage-Backed
Securities and (4) lower-rated or unrated high yield debt securities (commonly
known as "junk bonds") of U.S. and foreign companies.
AIM V.I. GLOBAL UTILITIES FUND: The Fund's investment objective is to achieve a
high level of current income, and as a secondary objective the Fund seeks to
achieve capital appreciation, by investing primarily in the common and preferred
stocks of public utility companies (either domestic or foreign).
AIM V.I. GOVERNMENT SECURITIES FUND: The Fund's investment objective is to
achieve a high level of current income consistent with reasonable concern for
safety of principal by investing in debt securities issued, guaranteed or
otherwise backed by the United States Government.
AIM V.I. GROWTH FUND: The Fund's investment objective is to seek growth of
capital principally through investment in common stocks of seasoned and better
capitalized companies considered by AIM to have strong earnings momentum.
Current income will not be an important criterion of investment selection, and
any such income should be considered incidental.
AIM V.I. GROWTH AND INCOME FUND: The Fund's investment objective is to seek
growth of capital, with current income as a secondary objective. Although the
amount of the Fund's current income will vary from time to time, it is
anticipated that the current income realized by the Fund will generally be
greater than that realized by mutual funds whose sole objective is growth of
capital.
AIM V.I. INTERNATIONAL EQUITY FUND: The Fund's investment objective is to seek
to provide long-term growth of capital by investing in a diversified portfolio
of international equity securities the issuers of which are considered by AIM to
have strong earnings momentum. Any income realized by the Fund will be
incidental and will not be an important criterion in the selection of portfolio
securities.
8
<PAGE>
AIM V.I. VALUE FUND: The Fund's investment objective is to achieve long-term
growth of capital by investing primarily in equity securities judged by AIM to
be undervalued relative to the current or projected earnings of the companies
issuing the securities, or relative to current market values of assets owned by
companies issuing the securities or relative to the equity market generally.
Income is a secondary objective and would be satisfied principally from the
income (interest and dividends) generated by the common stocks, convertible
bonds and convertible preferred stocks that make up the Fund's portfolio.
A I M Advisors, Inc. ("AIM") serves as the investment advisor to each Fund.
AIM's principal business address is 11 Greenway Plaza, Suite 100, Houston, Texas
77046-1173. The principal underwriter of the funds is A I M Distributors, Inc.,
a subsidiary of AIM, located at 11 Greenway Plaza, Suite 100, Houston, Texas
77046-1173.
================================================================================
FUNDS MANAGEMENT OTHER TOTAL FUND
FEE EXPENSES ANNUAL EXPENSES
- --------------------------------------------------------------------------------
AIM VARIABLE INSURANCE FUNDS, INC.
AIM V.I. Capital Appreciation Fun 0.64% 0.09% 0.73%
AIM V.I. Diversified Income Fund 0.60% 0.26% 0.86%
AIM V.I. Global Utilities Fund (1) 0.65% 0.90% 1.55%
AIM V.I. Government Securities Fu 0.50% 0.41% 0.91%
AIM V.I. Growth Fund 0.65% 0.13% 0.78%
AIM V.I. Growth and Income Fund 0.65% 0.13% 0.78%
AIM V.I. International Equity Fun 0.75% 0.21% 0.96%
AIM V.I. Value Fund 0.64% 0.09% 0.73%
================================================================================
(1) Management fees have been restated to reflect current agreements.
ALLIANCE CAPITAL
The portfolios of the Alliance Variable Products Series Fund, Inc. in which the
Separate Account may currently invest and their investment objectives and fees
are as follows:
CONSERVATIVE INVESTORS PORTFOLIO: Seeks the highest total return without, in the
view of the Fund's Adviser, undue risk to principal by investing in a
diversified mix of publicly traded equity and fixed-income securities.
GLOBAL BOND PORTFOLIO: Seeks a high level of return from a combination of
current income and capital appreciation by investing in a globally diversified
portfolio of high quality debt securities denominated in the U.S. Dollar and a
range of foreign currencies. The Investment Manager has entered into a
subadvisory agreement with AIG Global Investors, Inc. (the "Sub-Adviser"), a
subsidiary of American International Group, Inc. and an affiliate of the
Company, to provide investment advice for the Global Bond Portfolio.
GLOBAL DOLLAR GOVERNMENT PORTFOLIO: Seeks a high level of current income through
investing substantially all of its assets in U.S. and non-U.S. fixed-income
securities denominated only in U.S. dollars. As a secondary objective, the
Portfolio seeks capital appreciation. Substantially all of the Portfolio's
assets will be invested in high yield, high risk securities that are low-rated
(i.e., below investment grade), or of comparable quality and unrated, and that
are considered to be predominately speculative as regards the issuer's capacity
to pay interest and repay principal.
GROWTH PORTFOLIO: Seeks long-term growth of capital by investing primarily in
common stocks and other equity securities.
GROWTH AND INCOME PORTFOLIO: Seeks to balance the objectives of reasonable
current income and reasonable opportunities for appreciation through investments
primarily in dividend-paying common stocks of good quality.
GROWTH INVESTORS PORTFOLIO: Seeks the highest total return consistent with what
the Fund's Adviser considers to be reasonable risk by investing in a diversified
mix of publicly traded equity and fixed-income securities.
INTERNATIONAL PORTFOLIO: Seeks to obtain a total return on its assets from
long-term growth of capital and from income principally through a broad
portfolio of marketable securities of established non-United States companies
(or United States companies having their principal activities and interests
outside the United States), companies participating in foreign economies with
prospects for growth, and foreign government securities.
9
<PAGE>
NORTH AMERICAN GOVERNMENT INCOME PORTFOLIO: Seeks the highest level of income,
consistent with what the Fund's Adviser considers to be prudent investment risk,
that is available from a portfolio of debt securities issued or guaranteed by
the governments of the United States, Canada and Mexico, their political
subdivisions (including Canadian Provinces but excluding the States of the
United States), agencies, instrumentalities or authorities. The Portfolio seeks
high current yields by investing in government securities denominated in local
currency and U.S. Dollars. Normally, the Portfolio expects to maintain at least
25% of its assets in securities denominated in the U.S. Dollar.
PREMIER GROWTH PORTFOLIO: Seeks growth of capital rather than current income. In
pursuing its investment objective, the Premier Growth Portfolio will employ
aggressive investment policies. Since investments will be made based upon their
potential for capital appreciation, current income will be incidental to the
objective of capital growth. This portfolio is not intended for investors whose
principal objective is assured income or preservation of capital.
QUASAR PORTFOLIO: Seeks growth of capital by pursuing aggressive investment
policies. This portfolio invests in a diversified portfolio of equity securities
of any company and industry and in any type of security which is believed to
offer possibilities for capital appreciation.
REAL ESTATE INVESTMENT PORTFOLIO: Seeks a total return on its assets from
long-term growth of capital and from income principally through investing in a
portfolio of equity securities of issuers that are primarily engaged in or
related to the real estate industry.
SHORT-TERM MULTI-MARKET PORTFOLIO: Seeks the highest level of current income,
consistent with what the Fund's Adviser considers to be prudent investment risk,
that is available from a portfolio of high-quality debt securities having
remaining maturities of not more than three years.
TECHNOLOGY PORTFOLIO: Seeks growth of capital through investment in companies
expected to benefit from advances in technology. This portfolio will invest
principally in a diversified portfolio of securities of companies which use
technology extensively in the development of new or improved products or
processes.
TOTAL RETURN PORTFOLIO: Seeks to achieve a high return through a combination of
current income and capital appreciation by investing in a diversified portfolio
of common and preferred stocks, senior corporate debt securities, and U.S.
Government and agency obligations, bonds and senior debt securities.
U.S. GOVERNMENT/HIGH GRADE SECURITIES PORTFOLIO: Seeks a high level of current
income consistent with preservation of capital by investing principally in a
portfolio of U.S. Government Securities and other high grade debt securities.
UTILITY INCOME PORTFOLIO: Seeks current income and capital appreciation by
investing primarily in the equity and fixed-income securities of companies in
the "utilities industry." The Portfolio's investment objective and policies are
designed to take advantage of the characteristics and historical performance of
securities of utilities companies. The utilities industry consists of companies
engaged in the manufacture, production, generation, provision, transmission,
sale and distribution of gas, electric energy, and communications equipment and
services, and in the provision of other utility or utility-related goods and
services.
WORLDWIDE PRIVATIZATION PORTFOLIO: Seeks long-term capital appreciation by
investing principally in equity securities issued by enterprises that are
undergoing, or have undergone, privitization. The balance of the Portfolio's
investment portfolio will include equity securities of companies that are
believed by the Fund's Adviser to be beneficiaries of the privatization process.
Alliance Capital Management L.P. ("Alliance") is the investment adviser to each
of the above-mentioned funds. Alliance's principal business address is 1345
Avenue of the Americas, New York, New York 10105. The principal underwriter of
the funds is Alliance Fund Distributors, Inc., a subsidiary of Alliance, located
at 1345 Avenue of the Americas, New York, New York 10105.
10
<PAGE>
<TABLE>
<CAPTION>
========================================================================================
TOTAL FUND
INVESTMENT OTHER ANNUAL EXPENSES
FUNDS MANAGEMENT EXPENSES (AFTER EXPENSE
FEE REIMBURSEMENTS)
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC.
Conservative Investors Portfolio (1) 0.30% 0.65% 0.95%
Global Bond Portfolio (1) 0.44% 0.50% 0.94%
Global Dollar Government Portfolio (1) 0.00% 0.95% 0.95%
Growth Portfolio (1) 0.74% 0.19% 0.93%
Growth and Income Portfolio (1) 0.63% 0.19% 0.82%
Growth Investors Portfolio (1) 0.00% 0.95% 0.95%
International Portfolio (1) 0.04% 0.91% 0.95%
North American Government Income Portfolio 0.19% 0.76% 0.95%
Premier Growth Portfolio (1) 0.72% 0.23% 0.95%
Quasar Portfolio (1)(3)(4) 0.00% 0.95% 0.95%
Real Estate Investment Portfolio (1)(5) 0.00% 0.95% 0.95%
Short-Term Multi-Market Portfolio (1) 0.00% 0.95% 0.95%
Technology Portfolio (1)(2)(4) 0.33% 0.62% 0.95%
Total Return Portfolio (1) 0.46% 0.49% 0.95%
U.S. Government/High Grade Securities Portfolio(1) 0.54% 0.38% 0.92%
Utility Income Portfolio (1) 0.19% 0.76% 0.95%
Worldwide Privatization Portfolio (1) 0.10% 0.85% 0.95%
========================================================================================
</TABLE>
(1) Net of expense reimbursement. The expenses of the following Portfolios,
before expense reimbursements, would be: Conservative Investors Portfolio:
investment management fees 0.75%, other expenses 0.65% and total fund
annual expenses 1.40%; Global Bond Portfolio: investment management fees
0.65%, other expenses 0.50% and total fund annual expenses 1.15%; Global
Dollar Government Portfolio: investment management fees 0.75%, other
expenses 1.22% and total fund annual expenses 1.97%; Growth Portfolio:
investment management fees 0.74%, other expenses 0.19% and total fund
annual expenses 0.93%; Growth and Income Portfolio: investment management
fees 0.63%, other expenses 0.19% and total fund annual expenses 0.82%;
Growth Investors Portfolio: investment management fees 0.75%, other
expenses 1.10% and total fund annual expenses 1.85%; International
Portfolio: investment management fees 1.00%, other expenses 0.91% and total
fund annual expenses 1.91%; North American Government Income Portfolio:
investment management fees 0.65%, other expenses 0.76% and total fund
annual expenses 1.41%; Premier Growth Portfolio: investment management fees
1.00%, other expenses 0.23% and total fund annual expenses 1.23%; Quasar
Portfolio: investment management fees 1.00%, other expenses 3.44% and total
fund annual expenses 4.44%; Real Estate Investment Portfolio: investment
management fees 0.90%, other expenses 1.00% and total fund annual expenses
1.90%; Short-Term Multi-Market Portfolio: investment management fees 0.55%,
other expenses 1.54% and total fund annual expenses 2.09%; Technology
Portfolio: investment management fees 1.00%, other expenses 0.62% and total
fund annual expenses 1.62%; Total Return Portfolio: investment management
fees 0.63%, other expenses 0.49% and total fund annual expenses 1.12%; U.S.
Government/High Grade Securities Portfolio: investment management fees
0.60%, other expenses 0.38% and total fund annual expenses 0.98%; Utility
Income Portfolio: investment management fees 0.75%, other expenses 0.76%
and total fund annual expenses 1.51% and Worldwide Privatization Portfolio:
investment management fees 1.00%, other expenses 0.85% and total fund
annual expenses 1.85%.
(2) For the period of 1/11/96 through 12/31/96.
(3) For the period of 8/5/96 through 12/31/96.
(4) Annualized.
(5) The amounts shown are estimated. This portfolio began on 1/9/97.
AMERICAN CENTURY VARIABLE PORTFOLIOS, INC.
The portfolios of American Century Variable Portfolios, Inc. in which the
Separate Account may currently invest and their investment objectives and fees
are as follows:
11
<PAGE>
VP ADVANTAGE PORTFOLIO: The investment objective of the VP Advantage Portfolio
is current income and capital growth. As described more fully in the Portfolio's
prospectus, the Portfolio intends to invest in cash or cash equivalents, certain
fixed income securities, and certain equity securities.
VP BALANCED PORTFOLIO: The investment objective of the VP Balanced Portfolio is
capital growth and current income. Management of the Portfolio intends to
maintain approximately 60% of the Portfolio's assets in the equity securities
described in the prospectus, and intends to maintain approximately 40% of the
Portfolio's assets in fixed income securities (with a minimum of 25% of that
amount in fixed income senior securities).
VP CAPITAL APPRECIATION PORTFOLIO: Seeks capital growth over time by investing
primarily in common stocks that are considered by management to have
better-than-average prospects for appreciation.
VP INTERNATIONAL PORTFOLIO: Seeks capital growth over time by investing in
common stocks of foreign companies considered to have better-than-average
prospects for appreciation.
VP VALUE PORTFOLIO: Seeks long-term capital growth with income as a secondary
objective. The fund seeks to achieve its objectives by investing primarily in
equity securities of well-established companies with intermediate-tolarge market
capitalizations that are believed by management to be undervalued at the time of
purchase.
The investment adviser for each fund is American Century Investment Management,
Inc. ("ACIM"). ACIM's principal business address is American Century Tower, 4500
Main Street, Kansas City, Missouri 64111. The distributor of the funds is
American Century Investment Services, Inc., located at 4500 Main Street, Kansas
City, Missouri 64111.
================================================================================
FUNDS TOTAL FUND
ANNUAL EXPENSES
- --------------------------------------------------------------------------------
AMERICAN CENTURY VARIABLE PORTFOLIOS, INC.
VP Advantage Portfolio (1) 1.00%
VP Balanced Portfolio (1) 1.00%
VP Capital Appreciation Portfolio (1) 1.00%
VP International Portfolio (1) 1.50%
VP Value Portfolio (1) 1.00%
================================================================================
(1) Fees are all-inclusive.
THE BERGER FUNDS
The portfolios of the Berger Institutional Products Trust ("Berger IPT") in
which the Separate Account may currently invest and their investment objectives
and fees are as follows:
BERGER IPT - 100 FUND: The investment objective of the Berger IPT - 100 Fund is
long term capital appreciation. The Berger IPT - 100 Fund seeks to achieve this
objective by investing primarily in common stocks of established companies which
are believed to offer favorable growth prospects. Current income is not an
investment objective of the Berger IPT - 100 Fund, and any income produced will
be a by-product of the effort to achieve the Fund's objective.
BERGER IPT - GROWTH AND INCOME FUND: The primary investment objective of the
Berger IPT - Growth and Income Fund is capital appreciation. A secondary
objective is to provide a moderate level of current income. The Berger IPT -
Growth and Income Fund seeks to achieve these objectives by investing primarily
in common stocks and other securities, such as convertible securities or
preferred stocks, which the Fund's advisor believes offer favorable growth
prospects and are expected to also provide current income.
BERGER IPT - SMALL COMPANY GROWTH FUND: The investment objective of the Berger
IPT - Small Company Growth Fund is capital appreciation. The Berger IPT - Small
Company Growth Fund seeks to achieve this objective by investing primarily in
equity securities (including common and preferred stocks, convertible debt
securities and other securities having equity features) of small growth
companies with market capitalization of less than $1 billion at the time of the
initial purchase.
12
<PAGE>
BERGER/BIAM IPT - INTERNATIONAL FUND: The investment objective of the
Berger/BIAM IPT - International Fund is long-term capital appreciation. The
Berger/BIAM IPT - International Fund seeks to achieve this objective by
investing primarily in common stocks of well established companies located
outside the United States. The Fund intends to diversify its holdings among
several countries and to have, under normal market conditions, at least 65% of
the Fund's total assets invested in the securities of companies located in at
least five countries, not including the United States.
Berger Associates, Inc. ("Berger") is the investment adviser to the Berger IPT -
100 Fund, Berger IPT - Growth and Income Fund and Berger IPT - Small Company
Growth Fund. BBOI Worldwide LLC ("BBOI"), a joint venture of Berger and Bank of
Ireland Asset Management (U.S.) Limited ("BIAM"), is the adviser to the
Berger\BIAM IPT International Fund, and BIAM serves as the Fund's subadviser.
Berger Distributors, Inc., a wholly-owned subsidiary of Berger, is the principal
underwriter for all of the portfolios of Berger IPT. The principal business
address of Berger, BBOI and Berger Distributors, Inc. is 210 University
Boulevard, Denver, Colorado 80206.
<TABLE>
<CAPTION>
==============================================================================================
INVESTMENT
FUNDS MANAGEMENT OTHER TOTAL FUND
FEE EXPENSES ANNUAL EXPENSES
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
BERGER INSTITUTIONAL PRODUCTS TRUST
Berger IPT - 100 Fund (1)(2) 0.00% 1.00% 1.00%
Berger IPT - Growth & Income Fund (1)(2) 0.00% 1.00% 1.00%
Berger IPT - Small Company Growth Fund (1)(2) 0.00% 1.15% 1.15%
Berger/BIAM IPT - International Fund (1) 0.00% 1.20% 1.20%
===============================================================================================
</TABLE>
(1) Other Expenses primarily include transfer agency fees, shareholder report
expenses, registration fees and custodian fees.
(2) After fee waivers and expense reimbursements. The Funds' investment advisor
has voluntarily agreed to waive its advisory fee and has voluntarily
reimbursed the Funds for additional expenses to the extent that normal
operating expenses in any fiscal year, including the investment fee but
excluding brokerage commissions, interest, taxes and extraordinary
expenses, of each of the Berger IPT - 100 Fund and the Berger IPT - Growth
and Income Fund exceed 1.00%, and the normal operating expenses in any
fiscal year of the Berger IPT - Small Company Growth Fund exceed 1.15%, of
the respective Fund's average daily net assets. Absent the voluntary waiver
and reimbursement, the investment management fee for the Berger IPT - 100
Fund, Berger IPT - Growth and Income Fund and the Berger IPT - Small
Company Growth Fund would have been 0.75%, 0.75% and 0.90%, respectively,
and their total fund operating expenses would have been 7.69%, 7.70% and
8.57%, respectively.
(3) Based on estimated expenses for the first year of operations of the
Berger/BIAM IPT - International Fund, after fee waivers and expense
reimbursements. The Fund's investment advisor has voluntarily agreed to
waive its advisory fee and expects to voluntarily reimburse the Fund for
additional expenses to the extent that normal operating expenses in any
fiscal year, including the investment management fee but excluding
brokerage commissions, interest, taxes and extraordinary expenses, of the
Berger/BIAM IPT - International Fund exceed 1.20%, of the Fund's average
daily net assets. Absent the voluntary waiver and reimbursement, the
investment management fee for Berger/BIAM IPT - International Fund would be
0.90%, and its total operating expenses would be estimated to be 8.96%.
DREYFUS CORPORATION FUNDS
The portfolios of the Dreyfus Variable Investment Fund, The Dreyfus Socially
Responsible Growth Fund, Inc., and the Dreyfus Stock Index Fund in which the
Separate Account may currently invest and their investment objectives and fees
are as follows:
CAPITAL APPRECIATION PORTFOLIO: Seeks to provide long-term capital growth
consistent with the preservation of capital; current income is a secondary
investment objective. This portfolio invests primarily in the common stocks of
domestic and foreign issuers.
DISCIPLINED STOCK PORTFOLIO: Seeks to provide investment results that are
greater than the total return performance of publicly-traded common stocks in
the aggregate, as represented by the Standard & Poor's 500 Composite Stock
Index. This portfolio will use quantitative statistical modeling techniques to
construct a portfolio in an attempt to achieve its investment objective, without
assuming undue risk relative to the broad stock market.
13
<PAGE>
GROWTH AND INCOME PORTFOLIO: Seeks to provide long-term capital growth, current
income and growth of income, consistent with reasonable investment risk. This
portfolio invests primarily in equity securities, debt securities and money
market instruments of domestic and foreign issuers.
INTERNATIONAL EQUITY PORTFOLIO: Seeks to maximize capital growth. This portfolio
invests primarily in equity securities of foreign issuers located throughout the
world.
INTERNATIONAL VALUE PORTFOLIO: Seeks long-term capital growth. This portfolio
invests primarily in a portfolio of publicly-traded equity securities of foreign
issuers which would be characterized as "value" companies according to criteria
established by The Dreyfus Corporation.
MANAGED ASSETS PORTFOLIO: Seeks to maximize total return, consisting of capital
appreciation and current income. This portfolio follows an asset allocation
strategy by investing in equity securities, debt securities and money market
instruments of domestic and foreign issuers.
QUALITY BOND PORTFOLIO: Seeks to provide the maximum amount of current income to
the extent consistent with the preservation of capital and the maintenance of
liquidity. This portfolio invests principally in the debt obligations of
corporations, the U.S. Government and its agencies and instrumentalities, and
U.S. major banking institutions.
SMALL CAP PORTFOLIO: Seeks to maximize capital appreciation. This portfolio
invests primarily in common stocks of domestic and foreign issuers. This
portfolio will be particularly alert to companies that The Dreyfus Corporation
considers to be emerging smaller-sized companies which are believed to be
characterized by new or innovative products, services, or processes which should
enhance prospects for growth in future earnings.
SMALL COMPANY STOCK PORTFOLIO: Seeks to provide investment results that are
greater than the total return performance in publicly-traded common stocks in
the aggregate, as represented by the Russell 2500(TM) Index. This portfolio
invests primarily in a portfolio of equity securities of small to medium-sized
domestic issuers, while attempting to maintain volatility and diversification
similar to that of the Russell 2500(TM) Index.
SOCIALLY RESPONSIBLE GROWTH FUND: The Fund's primary goal is to provide capital
growth through equity investment in companies that, in the opinion of the Fund's
management, not only meet traditional investment standards but which also show
evidence that they conduct their business in a manner that contributes to the
enhancement of the quality of life in America. Current income is secondary to
the primary goal.
ZERO COUPON 2000 PORTFOLIO: Seeks to provide as high an investment return as is
consistent with the preservation of capital. This portfolio invests primarily in
debt obligations of the U.S. Treasury that have been stripped of their unmatured
interest coupons, interest coupons that have been stripped from debt obligations
issued by the U.S. Treasury, receipts and certificates for such stripped debt
obligations, and stripped coupons and zero coupon securities issued by domestic
corporations, which will mature on or about December 31, 2000.
The Dreyfus Corporation ("Dreyfus") is the investment adviser to each of the
above-mentioned portfolios and funds. Dreyfus' principal business address is 200
Park Avenue, New York, New York 10166. The principal underwriter of the
portfolios and funds is Premier Mutual Fund Services, Inc., located at 60 State
Street, Boston, Massachusetts 02109.
================================================================================
TOTAL FUND
INVESTMENT OTHER ANNUAL EXPENSES
FUNDS MANAGEMENT EXPENSES (AFTER EXPENSE
FEE REIMBURSEMENTS)
- --------------------------------------------------------------------------------
DREYFUS FUNDS
Capital Appreciation Portfolio (1) 0.75% 0.09% 0.84%
Disciplined Stock Portfolio (1) 0.59% 0.21% 0.80%
Growth and Income Portfolio 0.75% 0.08% 0.83%
International Equity Portfolio 0.75% 0.53% 1.28%
International Value Portfolio (1) 0.66% 0.35% 1.01%
Managed Assets Portfolio 0.75% 0.18% 0.93%
Quality Bond Portfolio 0.65% 0.14% 0.79%
Small Cap Portfolio 0.75% 0.04% 0.79%
Small Company Stock Portfolio (1) 0.56% 0.19% 0.75%
Socially Responsible Growth Portfolio(1) 0.72% 0.24% 0.96%
Zero Coupon 2000 Portfolio 0.45% 0.21% 0.66%
================================================================================
14
<PAGE>
(1) From time to time, The Dreyfus Corporation and, with respect to the Capital
Appreciation Portfolio, Fayez Sarofim & Co., may in their sole discretion
waive all or part of their fees and/or voluntarily assume certain expenses.
For a more complete description of fees and expenses, see the Funds'
prospectuses. As of the date of this Prospectus, certain fees are being
waived or expenses being assumed in each case on a voluntary basis. Without
such waivers or reimbursements, the investment management fees, other
expenses and total fund annual expenses that would have been incurred,
respectively, for the fiscal year ended December 31, 1996 are as follows:
Disciplined Stock Portfolio: 0.75%, 0.21% and 0.96%; International Value
Portfolio: 1.00%, 0.35% and 1.35%; Small Company Stock Portfolio: 0.75%,
0.19% and 0.94%; and Socially Responsible Growth Portfolio: 0.75%, 0.24%
and 0.99%. There is no guarantee that any fee waivers or expense
reimbursements will continue in the future.
FRANKLIN TEMPLETON
The portfolios of the Templeton Variable Products Series Fund in which the
Separate Account may currently invest and their investment objectives and fees
are as follows:
ASSET ALLOCATION FUND: The Asset Allocation Fund seeks a high level of total
return through a flexible policy of investing in the following market segments:
stocks of companies in any nation, debt securities of companies and governments
of any nation, and money market instruments.
BOND FUND: The Bond Fund's investment objective is high current income. The Fund
seeks to achieve its objective through a flexible policy of investing primarily
in debt securities of companies, governments and government agencies of various
nations throughout the world, and in debt securities which are convertible into
common stock of such companies.
DEVELOPING MARKETS FUND: The investment objective of the Developing Markets Fund
is long-term capital appreciation. The Fund seeks to achieve this objective by
investing primarily in equity securities of issuers in countries having
developing markets.
INTERNATIONAL FUND: The International Fund's investment objective is long-term
capital growth through a flexible policy of investing in stocks and debt
obligations of companies and governments outside the United States. In pursuit
of its investment objective, the Fund will invest at least 65% of its assets in
securities of issuers in at least three countries outside the United States.
STOCK FUND: The Stock Fund's investment objective is capital growth through a
policy of investing primarily in common stocks issued by companies, large and
small, in various nations throughout the world. In the pursuit of its investment
objective, the Fund will normally maintain at least 65% of its assets in common
and preferred stocks.
Templeton Investment Counsel, Inc. ("TICI") serves as the investment manager for
the Asset Allocation Fund, Bond Fund, International Fund, and Stock Fund. TICI
is a Florida corporation with offices at Broward Financial Centre, Fort
Lauderdale, Florida 33394-3091. The Investment Manager for the Developing
Markets Fund is Templeton Asset Management Ltd., a Singapore corporation with
offices at 7 Temasek Blvd., #38-03, Suntec Tower One, Singapore 038987. The
principal underwriter of the Funds is Franklin Templeton Distributors, Inc., 700
Central Avenue, St. Petersburg, Florida 33701.
<TABLE>
<CAPTION>
========================================================================================
INVESTMENT
FUNDS MANAGEMENT 12b-1 OTHER TOTAL FUND
FEE FEES EXPENSES ANNUAL EXPENSES
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FRANKLIN TEMPLETON PRODUCTS SERIES
FUND (CLASS 2 SHARES) (1)(5)
Asset Allocation Fund (2) 0.61% 0.25% 0.17% 1.03%
Bond Fund 0.50% 0.15% 0.18% 0.83%
Developing Markets Fund (3)(4) 1.25% 0.25% 0.53% 2.03%
International Fund (2) 0.70% 0.25% 0.18% 1.13%
Stock Fund (2) 0.70% 0.25% 0.18% 1.13%
========================================================================================
</TABLE>
(1) Because Class 2 shares were not offered until May 1, 1997, the figures for
"investment management fees" and "other expenses" are based on the
historical expenses of the Fund's Class 1 shares for the fiscal year ended
December 31, 1996, except as otherwise noted.
15
<PAGE>
(2) Investment management fees and total fund annual expenses have been
restated to reflect the investment management fee schedule approved by
shareholders and effective May 1, 1997. See fund prospectus for details.
Actual investment management fees and total fund annual expenses before May
1, 1997 were lower.
(3) Figures are estimates for 1997 based on annualized 1996 figures. The fund
began operations in March 1996.
(4) Investment management fees and total fund annual expense figures do not
reflect the Investment Manager's agreement in advance to waive of a portion
of its fees during 1996. After the waiver, actual investment management
fees and total fund annual expenses of the portfolio in 1996 were 1.17% and
1.95% of net assets, respectively. This waiver agreement has been
terminated.
(5) Class 2 of the Fund has a distribution plan or "Rule 12b-1 plan" which is
described in the Fund's prospectus.
INVESCO FUNDS
The portfolios of the INVESCO Variable Investment Funds, Inc. in which the
Separate Account may currently invest and their investment objectives and fees
are as follows:
DYNAMICS PORTFOLIO: Seeks appreciation of capital through aggressive investment
policies. The Dynamics Portfolio invests primarily in common stocks of U.S.
companies traded on national securities exchanges and over-the- counter.
GROWTH PORTFOLIO: Seeks long-term capital growth. The Portfolio also seeks, as a
secondary objective, to obtain investment income through the purchase of
securities of carefully selected companies representing major fields of business
and industrial activity. In pursuing its objectives, the Portfolio invests
primarily in common stocks, but may also invest in other kinds of securities,
including convertible and straight issues of debentures and preferred stock.
HEALTH SCIENCES PORTFOLIO: Seeks capital appreciation by normally investing at
least 80% of its total assets in equity securities of companies that develop,
produce, or distribute products or services related to health care.
HIGH YIELD PORTFOLIO: Seeks a high level of current income by investing
substantially all of its assets in lower-rated bonds and other debt securities
and in preferred stock. The Portfolio pursues its investment objective through
investment in a variety of long-term, intermediate-term, and short-term bonds.
Potential capital appreciation is a factor in the selection of investments, but
is secondary to the Portfolio's primary objective.
INDUSTRIAL INCOME PORTFOLIO: Seeks the best possible current income. Capital
growth potential is an additional consideration in the selection of portfolio
securities. The Portfolio normally invests at least 65% of its total assets in
dividend-paying common stocks. Up to 10% of the Portfolio's total assets may be
invested in equity securities that do not pay regular dividends. The remaining
assets are invested in other income-producing securities, such as corporate
bonds. The Portfolio also has the flexibility to invest in other types of
securities.
SMALL COMPANY GROWTH PORTFOLIO: Seeks long-term capital growth. The Small
Company Growth Portfolio invests primarily in equity securities of
small-capitalization U.S. companies traded "over-the-counter."
TECHNOLOGY PORTFOLIO: Seeks capital appreciation. The Technology Portfolio
normally invests at least 80% of its total assets in equity securities of
companies in technology-related industries such as computers, communications,
video, electronics, oceanography, office and factory automation, and robotics.
TOTAL RETURN PORTFOLIO: Seeks a high total return on investment through capital
appreciation and current income. The Total Return Portfolio seeks to achieve its
investment objective by investing in a combination of equity securities
(consisting of common stocks and, to a lesser degree, securities convertible
into common stock) and fixed income securities.
UTILITIES PORTFOLIO: Seeks capital appreciation and income. The assets of the
Utilities Portfolio are invested primarily in equity securities of companies
principally engaged in business as public utilities.
INVESCO Funds Group, Inc. ("INVESCO") serves as the investment adviser and
principal underwriter of each of the above-mentioned funds. INVESCO's principal
business address is 7800 E. Union Avenue, Denver, Colorado
16
<PAGE>
================================================================================
TOTAL FUND
INVESTMENT OTHER ANNUAL EXPENSES
FUNDS MANAGEMENT EXPENSES (AFTER EXPENSE
FEE REIMBURSEMENTS)
- -------------------------------------------------------------------------------
INVESCO VARIABLE INVESTMENT FUNDS, INC.
Dynamics Portfolio (1) 0.60% 0.30% 0.90%
Growth Portfolio (1) 0.85% 0.40% 1.25%
Health Sciences Portfolio (1) 0.75% 0.25% 1.00%
High Yield Portfolio (2)(3) 0.60% 0.27% 0.87%
Industrial Income Portfolio (2)(3) 0.75% 0.20% 0.95%
Small Company Growth Portfolio (1) 0.75% 0.25% 1.00%
Technology Portfolio (1) 0.75% 0.25% 1.00%
Total Return Portfolio (2)(3) 0.75% 0.19% 0.94%
Utilities Portfolio (2)(3) 0.60% 0.56% 1.16%
================================================================================
(1) Expenses for the Dynamics Portfolio, the Growth Portfolio, the Health
Sciences Portfolio, the Small Company Growth Portfolio and the Technology
Portfolio are estimated.
(2) Various expenses of the Portfolios were voluntarily absorbed by INVESCO
Funds Group, Inc. for the year ended December 31, 1996. If such expenses
had not been voluntarily absorbed. the ratio of expenses to average net
assets for the High Yield Portfolio, Industrial Income Portfolio, Total
Return Portfolio, and Utilities Portfolio would have been 1.32%, 1.19%,
1.30% and 5.36%, respectively.
(3) It should be noted that the Portfolio's actual total fund annual expenses
were lower than the figures shown because the Portfolio's custodian and
pricing expenses were reduced under an expense offset arrangement. However,
as a result of an SEC requirement, the figures shown above do not reflect
these reductions.
INVESTORS FUND -- KEMPER SERIES
The portfolios of Investors Fund Series in which the Separate Account may
currently invest (the "Kemper Series") and their investment objectives and fees
are as follows:
BLUE CHIP PORTFOLIO: Seeks growth of capital and of income by investing
primarily in common stocks of well capitalized, established companies having
potential for growth of capital, earnings and dividends.
GLOBAL INCOME PORTFOLIO: Seeks high current income consistent with prudent total
return asset management by investing primarily in a portfolio of investment
grade foreign and domestic fixed income securities.
GOVERNMENT SECURITIES PORTFOLIO: Seeks high current return consistent with
preservation of capital from a portfolio composed primarily of U.S. Government
securities.
GROWTH PORTFOLIO: Seeks maximum appreciation of capital through diversification
of investment securities having potential for capital appreciation.
HIGH YIELD PORTFOLIO: Seeks to provide a high level of current income by
investing in fixed-income securities.
HORIZON 5 PORTFOLIO: Designed for investors with approximately a 5 year
investment horizon, seeks income consistent with preservation of capital, with
growth of capital as a secondary objective.
HORIZON 10+ PORTFOLIO: Designed for investors with approximately a 10+ year
investment horizon, seeks a balance between growth of capital and income,
consistent with moderate risk.
HORIZON 20+ PORTFOLIO: Designed for investors with approximately a 20+ year
investment horizon, seeks growth of capital, with income as a secondary
objective.
INTERNATIONAL PORTFOLIO: Seeks total return, a combination of capital growth and
income, principally through an internationally diversified portfolio of equity
securities.
INVESTMENT GRADE BOND PORTFOLIO: Seeks high current income by investing
primarily in a diversified portfolio of investment grade debt securities.
SMALL CAP GROWTH PORTFOLIO: Seeks maximum appreciation of investors' capital
from a portfolio primarily of growth stocks of smaller companies.
17
<PAGE>
SMALL CAP VALUE PORTFOLIO: Seeks long-term capital appreciation from a portfolio
primarily of value stocks of smaller companies.
TOTAL RETURN PORTFOLIO: Seeks a high total return, a combination of income and
capital appreciation, by investing in a combination of debt securities and
common stocks.
VALUE PORTFOLIO: Seeks to achieve a high rate of total return from a portfolio
primarily of value stocks of larger companies.
VALUE+GROWTH PORTFOLIO: Seeks growth of capital through professional management
of a portfolio of growth and value stocks.
Zurich Kemper Investments, Inc., ("ZKI", formerly named Kemper Financial
Services, Inc.) serves as investment manager for each of the portfolios other
than the Value Portfolio and the Small Cap Value Portfolio. Dreman Value
Advisors, Inc. ("DVA"), a wholly owned subsidiary of ZKI, serves as the
investment manager for the Value and the Small Cap Value Portfolio. ZKI's
principal business address is 222 South Riverside Plaza, Chicago, Illinois
60606. DVA's principal business address is 280 Park Avenue, 40th Floor, New
York, New York 10017. Zurich Kemper Distributors, Inc. serves as the principal
underwriter of the portfolios and is located at 222 South Riverside Plaza,
Chicago, Illinois 60606.
DVA is also the sub-adviser for the Value+Growth, Horizon 20+, Horizon 10+, and
Horizon 5 Portfolios. Under the terms of its Sub-Advisory Agreement with ZKI,
DVA will manage the value portion of each of these Portfolios and will provide
such other investment advice, research and assistance as ZKI may, from time to
time, reasonably request. Zurich Investment Management Limited ("ZIML"), an
affiliate of ZKI, is a sub-adviser for certain Portfolios described below. Under
the terms of the Sub-Advisory Agreement between ZIML and ZKI for the Total
Return, High Yield, Growth, International, Small Cap Growth, Investment Grade
Bond, Value+Growth, Horizon 20+, Horizon 10+, Horizon 5, Global Income and Blue
Chip Portfolios, ZIML renders investment advisory and management services with
regard to that portion of a Portfolio's assets as may be allocated by ZKI to
ZIML from time to time for management of foreign securities.
================================================================================
INVESTMENT
FUNDS MANAGEMENT OTHER TOTAL FUND
FEE EXPENSES ANNUAL EXPENSES
- --------------------------------------------------------------------------------
INVESTORS FUND SERIES
Blue Chip Portfolio (1) 0.65% 0.30% 0.95%
Global Income Portfolio (1) 0.75% 0.30% 1.05%
Government Securities Portfolio 0.55% 0.11% 0.66%
Growth Portfolio 0.60% 0.04% 0.64%
High Yield Portfolio 0.60% 0.05% 0.65%
Horizon 5 Portfolio 0.60% 0.30% 0.90%
Horizon 10+ Portfolio 0.60% 0.20% 0.80%
Horizon 20+ Portfolio 0.60% 0.25% 0.85%
International Portfolio 0.75% 0.21% 0.96%
Investment Grade Bond Portfolio 0.60% 0.25% 0.85%
Small Cap Growth Portfolio 0.65% 0.10% 0.75%
Small Cap Value Portfolio 0.75% 0.20% 0.95%
Total Return Portfolio 0.55% 0.04% 0.59%
Value Portfolio 0.75% 0.20% 0.95%
Value+Growth Portfolio 0.75% 0.20% 0.95%
================================================================================
(1) Estimated first-year expenses.
JANUS ASPEN SERIES
The portfolios of the Janus Aspen Series in which the Separate Account may
currently invest and their investment objectives and fees are as follows:
AGGRESSIVE GROWTH PORTFOLIO: The investment objective of this Portfolio is
long-term growth of capital. It is a nondiversified portfolio that pursues its
investment objective by normally investing at least 50% of its equity assets in
securities issued by medium-sized companies.
18
<PAGE>
BALANCED PORTFOLIO: The investment objective of this Portfolio is long-term
capital growth, consistent with preservation of capital and balanced by current
income. It is a diversified portfolio that, under normal circumstances, pursues
its objective by investing 40-60% of its assets in securities selected primarily
for their growth potential and 40-60% of its assets in securities selected
primarily for their income potential.
FLEXIBLE INCOME PORTFOLIO: The investment objective of this Portfolio is to
obtain maximum total return, consistent with preservation of capital. The
Portfolio pursues its objective primarily through investments in
income-producing securities. Total return is expected to result from a
combination of current income and capital appreciation, although income will
normally be the dominant component of total return. The Portfolio invests in
many types of income-producing securities and may have substantial holdings in
debt securities rated below investment grade.
GROWTH PORTFOLIO: The investment objective of this Portfolio is long-term growth
of capital in a manner consistent with the preservation of capital. It is a
diversified portfolio that pursues its objective by investing in common stocks
of issuers of any size. This Portfolio generally invests in larger, more
established issuers.
HIGH-YIELD PORTFOLIO: The primary investment objective of this Portfolio is to
obtain high current income. Capital appreciation is a secondary objective when
consistent with its primary objective.
INTERNATIONAL GROWTH PORTFOLIO: The investment objective of this Portfolio is
long-term growth of capital. It is a diversified portfolio that pursues its
objective primarily through investments in common stocks of issuers located
outside the United States.
SHORT-TERM BOND PORTFOLIO: The investment objective of this Portfolio is to seek
as high a level of current income as is consistent with preservation of capital.
The Portfolio pursues its objective by investing primarily in short- and
intermediate-term fixed-income securities.
WORLDWIDE GROWTH PORTFOLIO: The investment objective of this Portfolio is
long-term growth of capital in a manner consistent with the preservation of
capital. It is a diversified portfolio that pursues its objective primarily
through investments in common stocks of foreign and domestic issuers.
Janus Capital Corporation ("Janus Capital") serves as the investment adviser and
principal underwriter to each of the above-mentioned portfolios. Janus Capital's
principal business address is 100 Fillmore Street, Denver, Colorado 80206-4928.
================================================================================
TOTAL FUND
INVESTMENT OTHER ANNUAL EXPENSES
FUNDS MANAGEMENT EXPENSES (AFTER EXPENSE
FEE REIMBURSEMENTS)
- --------------------------------------------------------------------------------
JANUS ASPEN SERIES
Aggressive Growth Portfolio (1) 0.72% 0.04% 0.76%
Balanced Portfolio (1) 0.79% 0.15% 0.94%
Flexible Income Portfolio (1) 0.65% 0.19% 0.84%
Growth Portfolio (1) 0.65% 0.04% 0.69%
High-Yield Portfolio (1) 0.00% 1.01% 1.01%
International Growth Portfolio 0.05% 1.21% 1.26%
Short-Term Bond Portfolio (1) 0.47% 0.19% 0.66%
Worldwide Growth Portfolio (1) 0.66% 0.14% 0.80%
==============================================================================
(1) The fees and expenses in the table above are based on gross expenses of the
Portfolios before expense offset arrangements for the fiscal year ended
December 31, 1996. The information for each Portfolio other than the
Flexible Income Portfolio is net of fee waivers or reductions from Janus
Capital. Fee reductions for the Aggressive Growth, Balanced, Growth,
International Growth and Worldwide Growth Portfolios reduce the investment
management fee to the level of the corresponding Janus retail fund. Other
waivers, if applicable, are first applied against the investment management
fee and then against other expenses. Without such waivers or reductions,
the investment management fee, other expenses and total fund annual
expenses would have been 0.79%, 0.04% and 0.83% for Aggressive Growth
Portfolio; 0.92%, 0.15% and 1.07% for Balanced Portfolio; 0.79%, 0.04% and
0.83% for Growth Portfolio; 0.75%, 5.54% and 6.29% for the High-Yield
Portfolio; 1.00%, 1.21% and 2.21% for International Growth Portfolio;
0.65%, 0.19% and 0.84% for ShortTerm Bond Portfolio and 0.77%, 0.14% and
0.91% for Worldwide Growth Portfolio, respectively. Janus Capital may
modify or terminate the waivers or reductions at any time upon at least 90
days' notice to the Trustees.
19
<PAGE>
JPM SERIES TRUST II
The portfolios of the JPM Series Trust II in which the Separate Account may
currently invest and their investment objectives and fees are as follows:
JPM BOND PORTFOLIO: Seeks to provide a high total return consistent with
moderate risk of capital and maintenance of liquidity. Total return will consist
of realized and unrealized capital gains and losses plus income less expenses.
Although the net asset value of the Portfolio will fluctuate, the Portfolio
attempts to preserve the value of its investments to the extent consistent with
its objective. The Adviser also actively allocates the Portfolio's assets among
the broad sectors of the fixed income market including, but not limited to, U.S.
Government agency obligations, corporate securities, private placements,
asset-backed and mortgage-related securities.
JPM EQUITY PORTFOLIO: Seeks to provide a high total return from a portfolio
comprised of selected equity securities. Total return will consist of realized
and unrealized capital gains and losses plus income less expenses. The Portfolio
invests primarily in the common stock of U.S. corporations with market
capitalizations above $1.5 billion.
JPM INTERNATIONAL EQUITY PORTFOLIO: Seeks to provide a high total return from a
portfolio of equity securities of foreign corporations. Total return will
consist of realized and unrealized capital gains and losses plus income less
expenses. The Portfolio's primary equity investments are the common stock of
companies based in developed countries outside the U.S. and in developing
countries.
JPM SMALL COMPANY PORTFOLIO: Seeks to provide high total return from a portfolio
of equity securities of small companies. Total return will consist of realized
and unrealized capital gains and losses plus income less expenses. The Portfolio
invests at least 65% of the value of its total assets in the common stock of
small U.S. companies primarily with market capitalizations less than $1 billion.
J.P. Morgan Investment Management, Inc. ("Morgan" or the "Adviser") serves as
the investment adviser to each of the above-mentioned portfolios. Morgan's
principal business address is 522 Fifth Avenue, New York, New York 10036. The
Trust's distributor is Funds Distributor, Inc. located at 60 State Street, Suite
1300, Boston, Massachusetts 02109.
================================================================================
INVESTMENT
FUNDS MANAGEMENT OTHER TOTAL FUND
FEE EXPENSES ANNUAL EXPENSES
- --------------------------------------------------------------------------------
JPM SERIES TRUST II
JPM Bond Portfolio (1) 0.30% 0.45% 0.75%
JPM Equity Portfolio (1) 0.40% 0.50% 0.90%
JPM International Equity Portfolio(1) 0.60% 0.60% 1.20%
JPM Small Company Portfolio (1) 0.60% 0.55% 1.15%
===============================================================================
(1) The information in the foregoing table has been restated to reflect an
agreement by Morgan Guaranty Trust Company of New York ("Morgan
Guaranty"), an affiliate of Morgan, to reimburse the Trust to the extent
certain expenses exceed in any fiscal year 0.75%, 0.90%, 1.20% and 1.15%
of the average daily net assets of JPM Bond Portfolio, JPM Equity
Portfolio, JPM International Equity Portfolio and JPM Small Company
Portfolio, respectively.
LAZARD RETIREMENT SERIES, INC.
The portfolios of the Lazard Retirement Series, Inc. in which the Separate
Account may currently invest and their investment objectives and fees are as
follows:
LAZARD RETIREMENT BANTAM VALUE PORTFOLIO: Seeks capital appreciation by
investing primarily in equity securities of companies with market
capitalizations under $500 million that the Investment Manager considers
inexpensively priced relative to the return on total capital or equity and which
it believes are likely to increase market capitalization as a result of growth
or are likely to be the subject of acquisitions or other events.
LAZARD RETIREMENT EMERGING MARKETS PORTFOLIO: Seeks capital appreciation by
investing primarily in equity securities of non-United States issuers located,
or doing significant business, in emerging market countries that the Investment
Manager considers inexpensively priced relative to the return on total capital
or equity.
20
<PAGE>
LAZARD RETIREMENT EQUITY PORTFOLIO: Seeks capital appreciation by investing
primarily in equity securities of companies with relatively large
capitalizations that the Investment Manager considers inexpensively priced
relative to the return on total capital or equity.
LAZARD RETIREMENT GLOBAL EQUITY PORTFOLIO: Seeks capital appreciation by
investing primarily in equity securities of companies with relatively large
capitalizations that are located anywhere in the world which the Investment
Manager considers inexpensively priced relative to the return on total capital
or equity.
LAZARD RETIREMENT INTERNATIONAL EQUITY PORTFOLIO: Seeks capital appreciation by
investing primarily in the equity securities of non-United States companies that
the Investment Manager considers inexpensively priced relative to the return on
total capital or equity.
LAZARD RETIREMENT INTERNATIONAL FIXED-INCOME PORTFOLIO: Seeks high total return,
consisting of current income and capital appreciation, consistent with what the
Investment Manager considers to be prudent investment risk. This Portfolio
invests primarily in foreign fixed-income securities of varying maturities.
LAZARD RETIREMENT INTERNATIONAL SMALL CAP PORTFOLIO: Seeks capital appreciation
by investing primarily in equity securities of non-United States companies with
market capitalizations under $1 billion that the Investment Manager considers
inexpensively priced relative to the return on total capital or equity.
LAZARD RETIREMENT SMALL CAP PORTFOLIO: Seeks capital appreciation by investing
in equity securities of companies with market capitalizations under $1 billion
that the Investment Manager considers inexpensively priced relative to the
return on total capital or equity.
LAZARD RETIREMENT STRATEGIC YIELD PORTFOLIO: Seeks total return, consisting of
current income and capital appreciation. This Portfolio invests principally in
high-yielding domestic and foreign fixed-income securities. These securities,
which are often referred to as "junk bonds," are subject to greater risk of loss
of principal and interest than higher rated securities and are considered to be
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal.
Lazard Freres Asset Management, a division of Lazard Freres & Co. LLC ("Lazard
Freres") serves as the investment manager and principal underwriter to each of
the above-mentioned portfolios. Lazard Freres' principal business address is 30
Rockefeller Plaza, New York, New York 10020.
<TABLE>
<CAPTION>
===========================================================================================
TOTAL FUND
INVESTMENT 12b-1 OTHER ANNUAL EXPENSES
FUNDS MANAGEMENT FEES EXPENSES (AFTER EXPENSE
FEE REIMBURSEMENTS)
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
LAZARD RETIREMENT SERIES, INC.
Bantam Value Portfolio (1) 0.75% 0.25% 0.50% 1.50%
Emerging Markets Portfolio (1) 1.00% 0.25% 0.55% 1.80%
Equity Portfolio (1) 0.75% 0.25% 0.50% 1.50%
Global Equity Portfolio (1) 0.75% 0.25% 0.60% 1.60%
International Equity Portfolio (1) 10.75% 0.25% 0.60% 1.60%
International Fixed-Income Portfolio (1) 0.75% 0.25% 0.50% 1.50%
International Small Cap Portfolio (1) 0.75% 0.25% 0.80% 1.80%
Small Cap Portfolio (1) 0.75% 0.25% 0.50% 1.50%
Strategic Yield Portfolio (1) 0.75% 0.25% 0.50% 1.50%
===========================================================================================
</TABLE>
(1) The other expenses noted above are based on estimated amounts for the
current fiscal year.
MFS VARIABLE INSURANCE TRUST
The portfolios of the MFS Variable Insurance Trust in which the Separate Account
may currently invest and their investment objectives and fees are as follows:
MFS BOND SERIES: Seeks primarily to provide as high a level of current income as
is believed consistent with prudent investment risk and secondarily to protect
shareholders' capital.
MFS EMERGING GROWTH SERIES: Seeks long-term growth of capital.
MFS GROWTH WITH INCOME SERIES: Seeks to provide reasonable current income and
long-term growth of capital and income.
21
<PAGE>
MFS HIGH INCOME SERIES: Seeks high current income by investing primarily in a
professionally managed diversified portfolio of fixed-income securities, some of
which may involve equity features.
MFS LIMITED MATURITY SERIES: Seeks primarily to provide as high a level of
current income as is believed to be consistent with prudent investment risk and
secondarily to protect shareholders' capital.
MFS RESEARCH SERIES: Seeks to provide long-term growth of capital and future
income.
MFS TOTAL RETURN SERIES: Seeks primarily to provide above-average income
(compared to a portfolio invested entirely in equity securities) consistent with
the prudent employment of capital and secondarily to provide a reasonable
opportunity for growth of capital and income.
MFS UTILITIES SERIES: Seeks capital growth and current income (income above that
available from a portfolio invested entirely in equity securities).
MFS VALUE SERIES: Seeks capital appreciation.
MFS WORLD GOVERNMENT SERIES: Seeks not only preservation, but also growth, of
capital, together with moderate current income.
The investment adviser for each series is Massachusetts Financial Services
Company ("MFS"). MFS' principal business address is 500 Boylston Street, Boston,
Massachusetts 02116. The principal underwriter of the series is MFS Fund
Distributors, Inc. located at 500 Boylston Street, Boston, Massachusetts 02116.
================================================================================
INVESTMENT
MANAGEMENT TOTAL FUND
FUNDS AND FUND OTHER ANNUAL EXPENSES
ADMINISTRATION EXPENSES (AFTER EXPENSE
FEE REIMBURSEMENTS)
- --------------------------------------------------------------------------------
MFS VARIABLE INSURANCE TRUST
MFS Bond Series (1)(2) 0.60% 0.40% 1.00%
MFS Emerging Growth Series (1)(2) 0.75% 0.25% 1.00%
MFS Growth with Income Series (1)(2) 0.75% 0.25% 1.00%
MFS High Income Series (1)(2) 0.75% 0.25% 1.00%
MFS Limited Maturity Series (1)(2) 0.55% 0.45% 1.00%
MFS Research Series (1)(2) 0.75% 0.25% 1.00%
MFS Total Return Series (1)(2) 0.75% 0.25% 1.00%
MFS Utilities Series (1)(2) 0.75% 0.25% 1.00%
MFS Value Series (1)(2) 0.75% 0.25% 1.00%
MFS World Government Series (1)(2) 0.75% 0.25% 1.00%
============================== =================================================
(1) MFS has agreed to bear expenses for each Series, subject to reimbursement
by each Series, such that each Series' "Other Expenses" shall not exceed
the following percentages of the average daily net assets of the Series
during the current fiscal year: 0.40% for the Bond Series, 0.45% for the
Limited Maturity Series, and 0.25% for each remaining Series. Otherwise,
"Other Expenses" for the Bond Series, Emerging Growth Series, Growth with
Income Series, High Income Series, Limited Maturity Series, Research
Series, Total Return Series, Utilities Series, Value Series and World
Government Series would be 8.85%, 0.41%, 1.32%, 0.87%, 7.00%, 0.73%, 1.35%,
2.00%, 3.08% and 1.28%, respectively, and total fund annual expenses would
be 9.45%, 1.16%, 2.07%, 1.62%, 7.55%, 1.48%, 2.10%, 2.75%, 3.83% and 2.03%,
respectively, for these Series. See "Information Concerning Shares of Each
Series - Expenses."
(2) Each Series has an expense offset arrangement which reduces the Series'
custodian fee based upon the amount of cash maintained by the Series with
its custodian and dividend disbursing agent, and may enter into other such
arrangements and directed brokerage arrangements (which would also have the
effect of reducing the Series' expenses). Any such fee reductions are not
reflected under "Other Expenses."
NEUBERGER & BERMAN MANAGEMENT INC.
The portfolios of the Neuberger & Berman Advisers Management Trust in which the
Separate Account may currently invest and their investment objectives and fees
are as follows:
N&B AMT BALANCED PORTFOLIO: Seeks long-term capital growth and reasonable
current income without undue risk to principal.
22
<PAGE>
N&B AMT GOVERNMENT INCOME PORTFOLIO: Seeks to provide a high level of current
income and total return, consistent with safety of principal. Investments are
made in a diversified portfolio of fixed and variable rate debt securities and
seeks to increase income and preserve or enhance total return by actively
managing weighted average portfolio duration in light of market conditions and
trends.
N&B AMT GROWTH PORTFOLIO: Seeks capital appreciation without regard to income
through investments in common stocks of companies believed to be under-valued
and have the maximum potential for capital appreciation. The portfolio is
heavily diversified among a number of stocks to limit risk.
N&B AMT INTERNATIONAL PORTFOLIO: Seeks long-term capital appreciation by
investing primarily in a diversified portfolio of equity securities of foreign
issuers. The Portfolio will invest in stocks of medium-to-large capitalization
companies, traded on foreign exchanges.
N&B AMT LIMITED MATURITY BOND PORTFOLIO: Seeks the highest current income
consistent with low risk to principal and liquidity; and secondarily, total
return. Investments are made in a diversified portfolio primarily consisting of
U.S. Government and Agency securities and investment grade debt securities
issued by financial institutions, corporations, and others.
N&B AMT PARTNERS PORTFOLIO: Invests primarily in common stocks of established
companies, using the valueoriented investment approach. Capital growth is sought
through an investment approach that is designed to increase capital with
reasonable risk. Investments are made in securities that are believed to be
undervalued based on strong fundamentals such as low price-to-earnings ratios,
consistent cash flow, and the company's track record through all parts of the
market cycle.
N&B Management ("N&B") serves as the investment manager of the portfolios and is
also the principal underwriter of the portfolios. N&B's principal business
address is 605 Third Avenue, New York, New York 10158-0180.
<TABLE>
<CAPTION>
================================================================================
INVESTMENT
MANAGEMENT/ OTHER TOTAL FUND
FUNDS ADMINISTRATIVE EXPENSES ANNUAL EXPENSES
FEES
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
NEUBERGER & BERMAN ADVISERS MANAGEMENT
TRUST
N&B AMT Balanced Portfolio (1) 0.85% 0.24% 1.09%
N&B AMT Government Income Portfolio (1) (0.00% 1.02% 1.02%
N&B AMT Growth Portfolio (1) 0.83% 0.09% 0.92%
N&B AMT International Portfolio (1)(2) 1.09% 0.61% 1.70%
N&B AMT Limited Maturity Bond Portfolio 0.65% 0.13% 0.78%
N&B AMT Partners Portfolio (1) 0.84% 0.11% 0.95%
================================================================================
</TABLE>
(1) Neuberger & Berman Advisers Management Trust is divided into portfolios
("Portfolios"), each of which invests all of its net investable assets in a
corresponding series ("Series") of Advisers Managers Trust. The figures
reported under "Investment Management/Administrative Fees" include the
aggregate of the administration fees paid by the Portfolio and the
management fees paid by its corresponding Series. Similarly, "Other
Expenses" includes all other expenses of the Portfolio and its
corresponding Series.
(2) Expenses reflect expense reimbursement. NBMI has undertaken to reimburse
the Government Income and International Portfolios for certain operating
expenses, including the compensation of NBMI and excluding taxes, interest,
extraordinary expenses, brokerage commissions and transaction costs, that
exceed, in the aggregate, 1.00% of the Government Income Portfolio's and
1.70% of the International Portfolio's average daily net asset value.
Absent such reimbursement, the total fund annual expenses for the year
ended December 31, 1996 would have been 2.95% for the Government Income
Portfolio and was estimated to be 1.76% for the International Portfolio.
This expense reimbursement policy is subject to termination upon 60 days
written notice with respect to the Government Income Portfolio and after
April 30, 1998 for the International Portfolio and there can be no
assurance that this policy will continue thereafter. The International
Portfolio had not commenced operations as of December 31, 1996. Therefore,
the expense figures for this Portfolio are estimated.
23
<PAGE>
THE ROYCE PORTFOLIOS
The portfolios of Royce Capital Fund (Series Trust) in which the Separate
Account may currently invest and their investment objectives and fees are as
follows:
ROYCE MICRO-CAP PORTFOLIO: Seeks long-term capital appreciation, primarily
through investments in common stocks and convertible securities of small and
micro-cap companies. Production of income is incidental to this objective.
ROYCE PREMIER PORTFOLIO: Seeks long-term growth and secondarily current income
by investing in a limited portfolio of common stocks and convertible securities
viewed as having superior financial characteristics and/or unusually attractive
business prospects.
ROYCE TOTAL RETURN PORTFOLIO: Seeks to have an equal focus on both long term
growth of capital and current income by investing in a broadly diversified
portfolio of dividend paying common stocks of companies selected on a value
basis.
Royce & Associates, Inc. ("Royce") serves as the investment manager of the
portfolios. Royce's principal business address is 1414 Avenue of the Americas,
New York, New York 10019. The principal underwriter of the portfolios is Royce
Fund Services, Inc., 1414 Avenue of the Americas, New York, New York 10019.
================================================================================
INVESTMENT TOTAL FUND
MANAGEMENT OTHER ANNUAL EXPENSES
FUNDS FEE (AFTER EXPENSES (AFTER EXPENSE
WAIVERS) REIMBURSEMENTS)
- --------------------------------------------------------------------------------
THE ROYCE PORTFOLIOS
Royce Micro-Cap Portfolio (1) 0.00% 1.35% 1.35%
Royce Premier Portfolio (1) 0.00% 1.35% 1.35%
Royce Total Return Portfolio (10.00% 1.35% 1.35%
================================================================================
(1) Investment management fees would be 1.25%, 1.00% and 1.00% and total fund
annual expenses would be 3.24%, 2.99% and 2.99% for the Micro-Cap
Portfolio, the Premier Portfolio, and the Total Return Portfolio,
respectively, without the waivers of investment management fees by Royce.
Royce has voluntarily committed to waive its fees and reimbursed fund
expenses through December 31, 1997 to the extent necessary to maintain
total fund annual expenses of each Fund at or below 1.35%.
SCUDDER VARIABLE LIFE INVESTMENT FUND
The portfolios of the Scudder Variable Life Investment Fund in which the
Separate Account may currently invest and their investment objectives and fees
are as follows:
BALANCED PORTFOLIO: Seeks a balance of growth and income, as well as long-term
preservation of capital, from a diversified portfolio of equity and fixed income
securities.
BOND PORTFOLIO: Seeks high income from a high quality portfolio of bonds.
CAPITAL GROWTH PORTFOLIO: Seeks to maximize long-term capital growth from a
portfolio consisting primarily of equity securities.
GLOBAL DISCOVERY PORTFOLIO: Seeks above-average capital appreciation over the
long term by investing primarily in the equity securities of small companies
located around the world.
GROWTH & INCOME PORTFOLIO: Seeks long-term growth of capital, current income and
growth of income from a portfolio consisting of common stocks and securities
convertible into common stocks.
INTERNATIONAL PORTFOLIO: Seeks long-term growth of capital principally from a
diversified portfolio of foreign equity securities.
The investment adviser for each portfolio is Scudder, Stevens & Clark, Inc.
("Scudder"). Scudder's principal business address is Two International Place,
Boston, Massachusetts 02110-4103. The principal underwriter of the portfolios is
Scudder Investor Services, Inc., a Scudder subsidiary, located at Two
International Place, Boston, Massachusetts 02110-4103.
24
<PAGE>
================================================================================
OTHER
MANAGEMENT 12b-1 EXPENSES TOTAL FUND
FUNDS FEE FEE (AFTER ANNUAL
REIMBURSE- EXPENSES
MENT)
- --------------------------------------------------------------------------------
SCUDDER VARIABLE LIFE INVESTMENT FUND-
(CLASS B SHARES)
Balanced Portfolio 0.475% 0.250% 0.125% 0.850%
Bond Portfolio 0.475% 0.250% 0.135% 0.860%
Capital Growth Portfolio 0.475% 0.250% 0.055% 0.780%
Global Discovery Portfolio (1) 0.975% 0.250% 1.345% 2.570%
Growth & Income Portfolio 0.475% 0.250% 0.185% 0.910%
International Portfolio 0.863% 0.250% 0.187% 1.300%
================================================================================
(1) The ratio of operating expenses to average net assets for the Global
Discovery Portfolio has been restated to reflect actual expenses. During
1996 the portfolio had an expense limitation of 1.50% which consisted of an
investment management fee of 0.155% and other expenses of 1.345%.
THE STRONG FUNDS
The Strong Funds in which the Separate Account may currently invest and their
investment objectives and fees are as follows:
STRONG DISCOVERY FUND II: Seeks capital growth by investing primarily in equity
securities that are believed to represent attractive growth opportunities. The
fund's investment advisor seeks companies, regardless of size or maturity, that
are poised for accelerated earnings growth due to innovative products or
services, new management, or favorable economic or market cycles.
STRONG GROWTH FUND II: Seeks capital growth by investing primarily in equity
securities that are believed to have above-average growth prospects. The fund
will generally invest in companies whose earnings are believed to be in a
relatively strong growth trend, and to a lesser extent, in companies in which
significant further growth is not anticipated but whose market value is thought
to be undervalued.
STRONG INTERNATIONAL STOCK FUND II: Seeks capital growth by investing primarily
in equity securities of issuers located outside the United States. The fund will
normally invest in securities of issuers in at least three different countries.
STRONG SPECIAL FUND II: Seeks capital growth by investing in equity securities
emphasizing investments in medium-sized companies that the investment advisor
believes are under-researched and attractively valued. The fund's investment
advisor looks for companies with fundamental value or growth potential that is
not yet reflected in their current market prices.
The investment adviser for each fund is Strong Capital Management, Inc.
("Strong"). Strong's principal business address is P.O. Box 2936, Milwaukee,
Wisconsin 53201. The principal underwriter of the funds is Strong Funds
Distributors, Inc., located at P.O. Box 2936, Milwaukee, Wisconsin 53201.
================================================================================
INVESTMENT
FUNDS MANAGEMENT OTHER TOTAL FUND
FEE EXPENSES ANNUAL EXPENSES
- --------------------------------------------------------------------------------
THE STRONG FUNDS
Strong Discovery Fund II (1) 1.000% 0.210% 1.210%
Strong Growth Fund II (1) 1.000% 1.000% 2.000%
Strong International Stock Fund I 1.000% 0.900% 1.900%
Strong Special Fund II (1) 1.000% 0.170% 1.170%
================================================================================
(1) As of December 31, 1996.
25
<PAGE>
T. ROWE PRICE VARIABLE FUNDS
The portfolios of the T. Rowe Price Equity Series, Inc., T. Rowe Price
International Series, Inc., and the T. Rowe Price Fixed Income Series, Inc. in
which the Separate Account may currently invest and their investment objectives
and fees are as follows:
EQUITY INCOME PORTFOLIO: Seeks to provide substantial dividend income and also
long-term capital appreciation by investing primarily in dividend-paying common
stocks, particularly of established companies, with favorable prospects for both
increasing dividends and capital appreciation.
INTERNATIONAL STOCK PORTFOLIO: Seeks to provide capital appreciation through
investment primarily in established companies based outside the United States.
LIMITED-TERM BOND PORTFOLIO: Seeks to provide a high level of income consistent
with moderate fluctuation in principal value by investing primarily in
investment-grade, corporate bonds.
MID-CAP GROWTH PORTFOLIO: Seeks to provide long-term capital appreciation by
investing primarily in common stocks of medium-sized (mid-cap) growth companies.
The portfolio will focus on companies with superior earnings growth potential
that are no longer considered new or emerging, but are not yet well-established.
NEW AMERICA GROWTH PORTFOLIO: Seeks to provide long-term capital growth by
investing primarily in common stocks of U.S. growth companies operating in
service industries. The portfolio invests in the stocks of large and small
service companies expected by the fund's investment advisor to show superior
earnings growth.
PERSONAL STRATEGY BALANCED PORTFOLIO: Seeks the highest total return over time
consistent with an emphasis on both capital appreciation and income by investing
in a diversified portfolio of stocks, bonds, and money market securities.
The investment manager for each portfolio, except the International Stock
Portfolio, is T. Rowe Price Associates, Inc. ("T. Rowe Price"). T. Rowe Price's
principal business address is 100 East Pratt Street, Baltimore, Maryland 21202.
Rowe Price-Fleming International Inc. ("Price-Fleming"), an affiliate of T. Rowe
Price, serves as investment adviser to the International Stock Portfolio and its
U.S. office is located at 100 East Pratt Street, Baltimore, Maryland 21202. T.
Rowe Price also serves as the principal underwriter of the portfolios.
================================================================================
INVESTMENT
FUNDS MANAGEMENT OTHER TOTAL FUND
FEE EXPENSES ANNUAL EXPENSES
- --------------------------------------------------------------------------------
T. ROWE PRICE VARIABLE FUNDS
Equity Income Portfolio (1) 0.85% 0.00% 0.85%
International Stock Portfolio (1) 1.05% 0.00% 1.05%
Limited-Term Bond Portfolio (1) 0.70% 0.00% 0.70%
Mid-Cap Growth Portfolio (1) 0.85% 0.00% 0.85%
New America Growth Portfolio (1) 0.85% 0.00% 0.85%
Personal Strategy Balanced
PortfoliO (1) 0.90% 0.00% 0.90%
================================================================================
(1) The investment management fee includes the ordinary expenses of operating
the Funds.
WARBURG PINCUS PORTFOLIOS
The portfolios of Warburg Pincus Trust and Warburg Pincus Trust II in which the
Separate Account may currently invest and their investment objectives and fees
are as follows:
EMERGING MARKETS PORTFOLIO: Seeks long-term growth of capital by investing
primarily in equity securities of non-U.S. issuers consisting of companies in
emerging securities markets.
FIXED INCOME PORTFOLIO: Seeks total return consistent with prudent investment
management.
GLOBAL FIXED INCOME PORTFOLIO: Seeks total return consistent with prudent
investment management, consisting of a combination of interest income, currency
gains and capital appreciation.
INTERNATIONAL EQUITY PORTFOLIO: Seeks long-term capital appreciation by
investing primarily in a broadly diversified portfolio of equity securities of
non-U.S. issuers.
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POST-VENTURE CAPITAL PORTFOLIO: Seeks long-term growth of capital by investing
primarily in equity securities of issuers in their post-venture capital stage of
development and pursues an aggressive investment strategy.
SMALL COMPANY GROWTH PORTFOLIO: Seeks capital growth by investing in equity
securities of small-sized domestic companies.
The investment adviser for each portfolio is Warburg, Pincus Counsellors, Inc.
("Warburg"). Warburg's principal business address is 466 Lexington Avenue, New
York, New York 10017-3147. The principal underwriter of the portfolios is
Counsellors Securities, a Warburg subsidiary, located at 466 Lexington Avenue,
New York, New York 10017-3147.
================================================================================
TOTAL FUND
INVESTMENT OTHER ANNUAL EXPENSES
PORTFOLIOS MANAGEMENT EXPENSES (AFTER EXPENSE
FEE REIMBURSEMENTS)
- --------------------------------------------------------------------------------
WARBURG PINCUS TRUST
Emerging Markets Portfolio (1) 0.45% 0.95% 1.40%
Fixed Income Portfolio (2) 0.48% 0.51% 0.99%
Global Fixed Income Portfolio (2) 0.52% 0.47% 0.99%
International Equity Portfolio (3) (30.96% 0.40% 1.36%
Post-Venture Capital Portfolio (1) (10.62% 0.78% 1.40%
Small Company Growth Portfolio (3) (30.90% 0.26% 1.16%
===============================================================================
(1) Absent the waiver of fees by the Portfolio's investment adviser and
co-administrator, investment management fees for the Emerging Markets
Portfolio and the Post-Venture Capital Portfolio would each equal 1.25%;
other expenses would equal 0.95% and 0.82%, respectively; and total fund
annual expenses would equal 2.20% and 2.07%, respectively. Other expenses
for each portfolio are based on annualized estimates of expenses for the
fiscal year ending December 31, 1997, net of any fee waivers or expense
reimbursements. The investment adviser and co-administrator have
undertaken to limit each portfolio's total fund annual expenses to the
limits shown in the table above through December 31, 1997.
(2) Absent the waiver of fees by the Portfolio's investment adviser and
co-administrator, investment management fees would equal 0.50% and 1.00%,
other expenses would equal 0.65% and 0.55% and total portfolio annual
expenses would equal 1.15% and 1.55% for the Fixed Income and Global Fixed
Income Portfolios, respectively. Other expenses are based upon annualized
estimates of expenses for the fiscal year ending December 31, 1997, net of
any fee waivers or expense reimbursements. The investment adviser and
coadministrator have undertaken to limit each portfolio's total annual
expenses to the limits shown in the table above through December 31, 1997.
(3) Investment management fees, other expenses and total fund annual expenses
are based on actual expenses for the fiscal year ended December 31, 1996,
net of any fee waivers or expense reimbursements. Without such waivers or
reimbursements, investment management fees would have equalled 1.00% and
0.90%; other expenses would have equalled 0.40% and 0.27%; and total fund
annual expenses would have equalled 1.40% and 1.17% for the International
Equity and Small Company Growth Portfolios, respectively. The investment
adviser and co-administrator have undertaken to limit total fund annual
expenses to the limits shown in the table above through December 31, 1997.
A FULL DESCRIPTION OF THE FUNDS, THEIR INVESTMENT OBJECTIVES, MANAGEMENT,
POLICIES, AND RESTRICTIONS, THEIR EXPENSES, THE RISKS ATTENDANT TO INVESTMENT
THEREIN, AND ALL OTHER ASPECTS OF THEIR OPERATIONS IS CONTAINED IN THE
ACCOMPANYING PROSPECTUSES FOR EACH AVAILABLE FUND AND IN THE RELATED STATEMENTS
OF ADDITIONAL INFORMATION, WHICH SHOULD BE READ IN CONJUNCTION WITH THIS
PROSPECTUS. THERE IS NO ASSURANCE THAT THE INVESTMENT OBJECTIVES WILL BE MET.
SUBJECT TO COMPLIANCE WITH APPLICABLE LAW, PRUDENTIAL MAY CEASE OFFERING ANY
FUND AND MAY SUBSTITUTE ANOTHER MUTUAL FUND FOR ANY FUND.
THE EXPENSES RELATING TO THE FUNDS (OTHER THAN THOSE OF THE SERIES FUND) HAVE
BEEN PROVIDED TO PRUDENTIAL BY THE FUNDS, AND HAVE NOT BEEN INDEPENDENTLY
VERIFIED BY PRUDENTIAL.
THE FIXED ACCOUNT
A Participant may elect to allocate all or part of the amount in his or her
Certificate Fund to the Fixed Account. The amount so allocated or transferred
becomes part of Prudential's general assets, commonly referred to as the
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general account. Subject to applicable law, Prudential has sole discretion over
the investment of the assets of the general account, and Participants do not
share in the investment experience of those assets. Instead, Prudential
guarantees that the part of the Certificate Fund allocated to the Fixed Account
will accrue interest daily at a rate that Prudential declares periodically. This
rate may not be less than an effective annual rate of 4%, but Prudential may in
its sole discretion periodically declare a higher rate. At least annually and on
request, a Participant will be advised of the interest rate that currently
applies to his or her Certificate. Under certain Group Contracts, interest rates
may be determined based on the contract year the premium payments were received.
By allocating premium payments to the Fixed Account in amounts sufficient to
cover the monthly Certificate Fund charges, a Participant can use the
Certificate as a way to obtain life insurance coverage, with little or no
accumulation of Cash Surrender Value. Even such a Participant retains, of
course, the option to build a Cash Surrender Value by paying larger premiums and
applying the excess amount to any of the investment options available under the
Certificate.
Transfers from the Fixed Account are subject to strict limits. See TRANSFERS,
page 30. The payment of any Cash Surrender Value attributable to the Fixed
Account may be delayed for up to 6 months. See WHEN PROCEEDS ARE PAID, page 44.
Because of exemptive and exclusionary provisions, interests in the Fixed Account
have not been registered under the Securities Act of 1933 and Prudential has not
been registered as an investment company under the Investment Company Act of
1940. Accordingly, interests in the Fixed Account are not subject to the
provisions of these Acts, and Prudential has been advised that the staff of the
Securities and Exchange Commission has not reviewed the disclosure in this
Prospectus relating to the Fixed Account. Disclosures concerning the Fixed
Account may, however, be subject to certain provisions of the federal securities
laws relating to the accuracy of statements made in a prospectus.
DETAILED INFORMATION ABOUT THE CERTIFICATES
ISSUANCE OF A CERTIFICATE
Eligible Group Members wishing to obtain insurance coverage through the Group
Contract must complete the appropriate enrollment form and undergo any required
medical underwriting, including in some cases a medical examination. If the
enrollment form is accepted, Prudential will issue a Certificate to that
individual (the "Participant") which will describe the rights, benefits,
coverage, and obligations with respect to the coverage. The minimum Face Amount
for a Certificate is $10,000. The maximum age at which a Certificate may
initially be issued is generally 74. The maximum age beyond which a person may
no longer be covered under a Certificate is generally 100. At age 100, the
Participant may: (1) elect to receive the Cash Surrender Value of the
Certificate; (2) elect to purchase Paid-Up Insurance; or (3) continue to hold
the Certificate. If option 3 is chosen, monthly charges attributable to the cost
of insurance and additional insurance benefits will be waived and the Death
Benefit will equal the Certificate Fund reduced by any Certificate Debt and any
past due monthly charges. At age 100 and beyond, the Participant cannot make
premium contributions, although loan repayments will be permitted. Prudential
believes a cash distribution upon termination of coverage will be subject to the
same tax treatment as other cash surrenders. See TAX TREATMENT OF CERTIFICATE
BENEFITS, page 40. Particular Group Contracts may provide that coverage under a
Certificate will terminate at less than age 100. Participants should refer to
their particular Certificate and Group Contract for the details of when coverage
will terminate.
Generally, the Participant is the Covered Person under a Certificate. Some Group
Contracts, however, may permit an Eligible Group Member to also apply for a
Certificate naming his or her spouse as the Covered Person. A separate
Certificate will be issued for such spousal coverage but, under each Certificate
the Participant and/or Assignee(s) are the only persons eligible to exercise the
rights provided under the Certificate.
APPLICANT OWNER PROVISION
The "applicant owner provision," included as part of the Group Contract, allows
an "eligible applicant owner" to apply for insurance coverage on the life of an
Eligible Group Member. An "eligible applicant owner" is a person other than the
Eligible Group Member who may be, but is not limited to, the Eligible Group
Member's spouse, child, parent, grandparent, grandchild, sister, brother, or the
trustee of any trust of which the Eligible Group Member is the grantor. At any
one time, only one person may be an "eligible applicant owner" with respect to a
Certificate.
The "eligible applicant owner" must complete the appropriate enrollment form,
which may require the Eligible Group Member to undergo any required medical
underwriting, including in some cases a medical examination. The enrollment form
must also be signed by the Eligible Group Member. If the enrollment form is
accepted, Prudential
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<PAGE>
will issue a Certificate to the "eligible applicant owner" which will describe
the rights, benefits, coverage, and obligations with respect to the coverage.
References in this prospectus to "Participant" will be deemed to include
reference to an "eligible applicant owner".
SHORT-TERM CANCELLATION RIGHT OR "FREE LOOK"
Generally, a Certificate may be returned for a refund within 10 days after it is
received by the Participant. Some states allow a longer period of time during
which a Certificate may be returned for a refund. A refund can be requested by
mailing or delivering the Certificate to Prudential (or Prudential's designated
agent) at the address specified in the Certificate. The Participant who
exercises his or her short-term cancellation right will receive a refund of all
premium payments made, with no adjustment for investment experience. However, if
applicable state law so requires, the Participant will then receive a refund of
all premium payments made, plus or minus any change due to investment experience
in the value of the invested portion of the premiums, calculated as if no
charges had been made against the Separate Account or the Funds. During the
first 20 days following the Certificate Date, premium payments will be invested
in the Series Fund money market portfolio. Prudential also reserves the right to
limit contributions during the Free Look period.
PROCEDURES
The procedures for submitting enrollment forms, premium payments, transfer
orders, reallocations, loan or withdrawal requests or other communications
relating to the Participant's insurance will depend on the specific terms of the
particular Group Contract. Under some Group Contracts, communications relating
to a Participant's insurance may be submitted to the Contractholder or its agent
who then passes the communications on to Prudential. Under some Group Contracts,
the Participant may communicate directly with Prudential (or Prudential's
designated agent) with respect to certain types of transactions. Each Group
Contract and the Certificates issued thereunder will set forth the applicable
procedures, so a Participant should consult those documents in determining how
to submit a payment or document, make transfers, request loans and withdrawals,
or reallocate premium payments. In all cases, enrollment forms and other
documents, payments, orders and all other communications will be deemed received
by Prudential when received in good order at the address specified in the
Certificate.
PREMIUMS
Participants will generally have flexibility in determining the amount and
timing of premium payments, although a Participant may be required to pay an
appropriate specified initial premium to become a Participant. The minimum
initial premium will vary by group, but will always be no more than 50% of the
Guideline Annual Premium. A Certificate will remain in force so long as the
Certificate Fund is sufficient to cover monthly charges. In general, if the
Certificate Fund minus Certificate Debt and outstanding charges on any
Monthiversary is insufficient to cover the charges for that month, then the
coverage will be in default and a grace period will begin. See LAPSE, page 38.
Some Contracts may provide that if a Participant pays certain specified premiums
during the first two Certificate Years, the Certificate will not go into default
even if the Certificate Fund is insufficient to cover monthly charges.
Participants should refer to their particular Certificates for the details of
this default protection.
In addition to any premium paid on a routine basis, for example through salary
deduction, a Participant may make additional premium payments at any time,
subject to any applicable charges. There is no minimum amount for premiums paid
on a routine basis, but any additional premium payment must be at least $100.
Prudential reserves the right to limit the amount of such additional premiums.
The method by which premiums will be paid will be set forth in the Group
Contract. Some Participants will make payments to the Contractholder (or its
agent), which will then remit them to Prudential as premium payments. Prudential
will then allocate premium payments it receives to the Participant's investment
options according to the instructions received. Other Participants will make
payments directly to Prudential at the address specified in their Certificate or
authorize Prudential (or Prudential's designated agent) to receive payment using
electronic funds transfers or credit/debit cards. There may be higher monthly
administrative charges when premium payments are made directly to Prudential.
See CHARGES AND EXPENSES, page 34.
Due to the payment of additional premiums, or investment growth, the total
amount of insurance may have to be increased for the insurance to continue to
qualify as life insurance for federal tax purposes. In addition, if a
Participant makes premium payments in excess of certain limits, the tax status
of the insurance may change to that of a "Modified Endowment Contract" under
Section 7702A of the Internal Revenue Code, which could be significantly
disadvantageous from a tax standpoint. See TAX TREATMENT OF CERTIFICATE
BENEFITS, page 40. Prudential reserves the right not to accept or to return any
premium payment which would cause a Participant's
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<PAGE>
insurance to fail to qualify as life insurance under applicable tax laws, or
which would increase the Death Benefit by more than it increases the Certificate
Fund.
EFFECTIVE DATE OF INSURANCE
A Participant's insurance will go into effect on the first Contract
Monthiversary after his or her enrollment form for participation under the Group
Contract, including underwriting, if any, is approved. That effective date is
the Certificate Date.
ALLOCATION OF PREMIUMS
BEFORE OR ON CERTIFICATE DATE. All premium payments (less any applicable
charges) received before the Certificate Date will not be invested and will be
deposited, for the benefit of the Participant, in Prudential's general account.
All premium payments received on the Certificate Date will be applied to the
Series Fund money market portfolio as of the Certificate Date, after the
deduction of any applicable charges, see CHARGES AND EXPENSES, page 34. Such Net
Premiums will be invested as of the Certificate Date in the Series Fund money
market portfolio for 20 days and will thereafter be allocated to the investment
options selected by the Participant.
AFTER CERTIFICATE DATE. Premiums paid after the Certificate Date will be reduced
by any applicable charges. See CHARGES AND EXPENSES, page 34. Assuming the
Certificate has been effective for 20 days, such Net Premiums will be allocated
to the investment options selected by the Participant as of the end of the
Valuation Period in which Prudential (or Prudential's designated agent) receives
such premium payments. Premium payments received within the first 20 days after
the Certificate Date will be applied to the Series Fund money market portfolio.
CHANGING PREMIUM ALLOCATIONS. If his or her insurance is not in default, a
Participant may change the way in which premiums are allocated among the
available investment option(s). Such a change will be effective as of the end of
the Valuation Period during which Prudential (or Prudential's designated agent)
receives the Participant's request on a form approved by Prudential. The minimum
percentage that a Participant may allocate to any available Subaccount or the
Fixed Account is 5%, and all allocations must be in whole percentages.
Currently, there is no transaction charge for reallocating future premiums,
although Prudential reserves the right to impose a transaction charge in the
future.
TRANSFERS
If his or her insurance is not in default, a Participant may transfer amounts
from one available Subaccount to another available Subaccount, or to the Fixed
Account. There is no limit on the number of transfers among available
Subaccounts or to the Fixed Account. Under certain Group Contracts, Prudential
may reserve the right to impose a transaction charge of up to $20 for each
transfer in a Certificate Year after the twelfth transfer in that Certificate
Year.
Transfers will take effect as of the end of the Valuation Period in which a
proper transfer request is received by Prudential (or Prudential's designated
agent) on a form approved by Prudential. The request may be in terms of dollars,
such as a request to transfer $10,000 from one available Subaccount to another
available Subaccount, or may be in terms of a percentage reallocation among
available Subaccounts. The minimum amount that may be transferred from any one
investment option is $100 or the entire balance in that investment option,
whichever is less. For transfer requests in percentage terms, as with premium
reallocations, the percentages must be in whole numbers and no allocation may be
less than 5%.
Transfers from the Fixed Account to the available Subaccounts are currently
permitted once each Certificate Year. The amount of that transfer cannot exceed
$5,000 or 25% of the balance in the Fixed Account, whichever is greater. Such
transfer requests will take effect as of the end of the Valuation Period in
which a proper transfer request is received by Prudential (or Prudential's
designated agent) on a form approved by Prudential. These limits are subject to
change in the future.
DOLLAR COST AVERAGING
Each Group Contract will include a provision under which a Participant may elect
Dollar Cost Averaging ("DCA"). DCA enables a Participant to systematically
transfer specified dollar amounts or percentages from the Series Fund money
market Subaccount to the other available Subaccounts at regular intervals. The
Participant can elect that a certain number of transfers be made under the DCA
feature. Once the designated number of transfers has been made, DCA will
terminate.
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To initiate DCA, a Participant must make a premium payment of at least $1,000 to
the Series Fund money market Subaccount. The minimum transfer amount is $100.
All DCA transfers will be made effective as of the end of the first Valuation
Period following the first of the month. Election of this arrangement may occur
at any time after the Certificate Date by properly completing the DCA election
form and returning it to the address specified on the form. If the DCA election
form is received by the tenth day of the month, then DCA processing will
commence during the next month. If the DCA election form is received after the
tenth day of a month, then DCA processing will commence during the month
immediately following the next succeeding month. Any transfers made pursuant to
DCA are not counted in determining the number of transfers subject to the
transfer charge.
DCA will terminate when any of the following occurs: (1) the number of
designated transfers has been completed; (2) the Series Fund money market
Subaccount value is insufficient to complete the next transfer; (3) Prudential
(or Prudential's designated agent) receives a written request for termination by
the tenth of the month in order to cancel the transfer scheduled to take effect
the following month (written requests received after the tenth day of the month
will take effect during the month immediately following the next succeeding
month); or (4) the Certificate is lapsed, surrendered or otherwise terminated.
There is currently no charge for DCA. Prudential reserves the right to charge
for this feature in the future.
The main objective of DCA is to shield investments from short term price
fluctuations. Since the same dollar amount is transferred to an available
Subaccount with each transfer, more Subaccount units are purchased if the
Subaccount unit value is low, and fewer Subaccount units are purchased if the
unit value is high. Therefore, a lower than average cost per unit may be
achieved over the long term. This plan of investing allows investors to take
advantage of market fluctuations but does not assure a profit or protect against
a loss in declining markets.
DEATH BENEFITS
A Death Benefit is payable upon the death of the Covered Person. The Death
Benefit is generally the Face Amount of the Certificate, plus the value of the
Certificate Fund as of the date of death. The Death Benefit otherwise payable
will be reduced by any Certificate Debt and any past due monthly charges. If the
insurance is kept in force for several years and/or substantial premium payments
are made, the Certificate Fund may grow to a point where it is necessary to
increase the Death Benefit in order to ensure that the insurance will satisfy
the Internal Revenue Code's definition of life insurance. In that case, the
Death Benefit (before the subtraction of Certificate Debt and unpaid charges)
must, under most Group Contracts, at least equal the following "corridor
percentage" of the Certificate Fund based on the insured's Attained Age:
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INSURED'S CORRIDOR INSURED'S CORRIDOR
ATTAINED AGE PERCENTAGE ATTAINED AGE PERCENTAGE
------------ ---------- ------------ ----------
0-40 250% 70 115%
41 243 71 113
42 236 72 111
43 229 73 109
44 222 74 107
---- --- --- ---
45 215 75 105
46 209 76 105
47 203 77 105
48 197 78 105
49 191 79 105
---- --- --- ---
50 185 80 105
51 178 81 105
52 171 82 105
53 164 83 105
54 157 84 105
---- --- --- ---
55 150 85 105
56 146 86 105
57 142 87 105
58 138 88 105
59 134 89 105
---- --- --- ---
60 130 90 105
61 128 91 104
62 126 92 103
63 124 93 102
64 122 94 101
---- --- --- ---
65 120 95 100
66 119 96 100
67 118 97 100
68 117 98 100
69 116 99 100
Alternatively, certain Group Contracts may be issued under the cash value
accumulation test of the Internal Revenue Code. In such a case, the Death
Benefit under a Certificate (before the subtraction of Certificate Debt and
unpaid charges) must at least equal the Certificate Fund divided by the Net
Single Premium per dollar of insurance for the covered person's attained age.
For this purpose, Net Single Premiums are based upon the 1980 CSO Table.
The Death Benefit may be received in a lump sum. Alternatively, Prudential or
the Contractholder may elect for Death Benefits to be deposited into
Prudential's Alliance Account. However, the Participant or beneficiary can
receive the Death Benefit in the form of a check upon request instead of having
the Death Benefit deposited to the Alliance Account.
The Alliance Account is an interest-bearing account that holds the Death Benefit
while the Participant or the beneficiary takes time to consider other options.
The Participant or the beneficiary has complete ownership of funds held in the
Alliance Account, and may draw on all or part of their funds by writing a draft.
Interest earnings in the Alliance Account are compounded daily and credited
monthly. Proceeds placed in the Alliance Account can be transferred to other
modes of settlement at any time. The proceeds contained in the Alliance Account
are part of Prudential's general account.
The Participant or the beneficiary may arrange with Prudential for the Death
Benefit to be paid in another mode of settlement other than the payment options
listed above. The following settlement options can be selected by the
Participant or the beneficiary if the Death Benefit is $1,000 or more. More than
one option can be selected.
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OPTION 1: PAYMENTS FOR A FIXED PERIOD
The Death Benefit plus interest is paid over a fixed number of years (1 -
25). The payment may be received monthly, quarterly, semi-annually or
annually. The payment amount will be higher or lower depending on the
period selected.
The interest rate can change, but will not be less than the guaranteed rate
shown in the claim settlement certificate that a Participant or beneficiary
will receive. The Participant or beneficiary may withdraw the total present
value of payments not yet made at any time.
OPTION 2: PAYMENTS IN INSTALLMENTS FOR LIFE
The Death Benefit provides monthly payments in installments for as long as
the beneficiary lives. The beneficiary may choose a guaranteed minimum
payment period (5, 10 or 20 years) or an installment refund, which will
guarantee that the sum of the payments equals the amount of the Death
Benefit payable under this option. If the beneficiary dies before
Prudential has made all guaranteed payments, Prudential will pay the
present value of the remaining guaranteed payments to a payee the
beneficiary designated.
OPTION 3: INTEREST INCOME
The Death Benefit remains with Prudential and earns interest. This option
allows the Participant or beneficiary to leave the Death Benefit with
Prudential and choose another settlement option at a later time.
Withdrawals of $100 or more (including the entire unpaid Death Benefit) can
be made at any time. The interest income payment may be received monthly,
quarterly, semi-annually or annually.
The interest rate can change, but will not be less than the guaranteed rate
shown in the claim settlement certificate that a Participant or beneficiary
will receive.
OPTION 4: PAYMENTS OF A FIXED AMOUNT
The Participant or beneficiary receives a guaranteed specified sum for a
limited number of years. This guaranteed specified sum represents a return
of the principal (Death Benefit) and interest paid over the selected number
of years. The payment may be received monthly, quarterly, semi-annually or
annually.
The interest rate can change, but will not be less than the guaranteed rate
shown in the claim settlement certificate that a Participant or beneficiary
will receive. Any interest credited will be used to extend the payment
period.
OPTION 5: CERTIFICATE OF DEPOSIT
The Death Benefit is used to purchase a certificate of deposit that is
issued by The Prudential Bank. Certificates of Deposit (CDs) are
investments that allow a Participant or beneficiary to choose a variety of
short- and long-term deposit options. They are designed to pay interest
monthly, quarterly, semi-annually, annually or at maturity. Interest rates
are guaranteed for the term of the CD. There is generally a $10,000 minimum
amount for this option.
Under each of the above options, each payment must generally be at least $20.
A beneficiary life claim guide is available upon request. This guide explains in
more detail the modes of payment and settlement options that are available.
CHANGES IN FACE AMOUNT
Some Group Contracts may allow Participants to elect to increase the Face Amount
of their insurance at certain times. Other Group Contracts may provide for
increasing Face Amounts based on factors such as salary increases. Additional
underwriting requirements may have to be satisfied in either case. An increase
in the Face Amount will result in higher insurance charges because the net
amount at risk for Prudential will increase.
Some Group Contracts may also permit Participants to decrease the Face Amount of
their insurance at certain times. In no event, however, may the Face Amount be
decreased below $10,000 or below the minimum amount required to maintain the
insurance's status as life insurance under the federal tax laws.
Under certain Group Contracts, there may be a retirement/age related adjustment
in the Participant's Face Amount. Under the retirement/age adjustment provision,
the Face Amount is adjusted at a predetermined age or qualifying event
("triggering event") to an amount equal to five times the then-existing value of
the Certificate Fund. However, in no event will the adjusted Face Amount exceed
the then-existing Face Amount or be less than
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$25,000. This adjustment in the Face Amount occurs at the latest of retirement,
age 70, or the tenth Certificate Anniversary. For Portable Certificates and
Certificates issued under the Dependent Benefits Life coverage, the adjustment
will occur at the latest of age 70 or the tenth Certificate Anniversary. The
retirement/age adjustment to the Participant's Face Amount will be determined as
of the end of the Valuation Period in which the triggering event occurs but the
actual adjustment to the Participant's Face Amount will be effective the first
contract Monthiversary following this determination.
An increase or decrease in Face Amount, or the addition or removal of certain
additional insurance benefits, may create the potential for the insurance to be
treated as a Modified Endowment Contract under the Internal Revenue Code. This
is particularly true of decreases in Face Amount during the first seven years
that insurance is in force. See TAX TREATMENT OF CERTIFICATE BENEFITS, page 40.
In addition, a decrease in coverage may limit the amount of premiums that a
Participant may contribute in the future.
CHARGES AND EXPENSES
The maximum deductions and charges described below will not be increased by
Prudential with respect to any Certificate in effect regardless of any changes
in mortality and expense experience. Where current charges are lower than
maximum charges, Prudential reserves the right to increase the current charges,
although it has no present intention to do so. Participants should refer to
their particular Group Contract and Certificate for further information on
applicable charges.
CHARGES DEDUCTED FROM PREMIUMS. The following charges are deducted from premium
payments before they are invested in the Separate Account or the Fixed Account.
1. Charges for Taxes Attributable to Premiums. A charge for taxes attributable
to premiums is deducted from each premium payment. For these purposes,
"taxes attributable to premiums" shall include any federal, state or local
income, premium, excise, business or any other type of tax (or component
thereof) measured by or based on the amount of premium received by
Prudential. That charge is currently made up of two parts. The first part
is for state and local premium taxes and is currently equal to 2.25% of the
premium received by Prudential. For certain Group Contracts, the charge may
equal up to 5%. The second part is for federal income taxes measured by
premiums and is currently equal to 0.35% of premiums received. Prudential
believes that this second charge is a reasonable estimate of the increased
cost for premium-based federal income taxes resulting from a 1990 change in
the Internal Revenue Code. These charges may be increased if the cost of
Prudential's taxes related to premium payments are increased.
2. Processing Fee. A charge of up to $2 may be deducted from each premium
payment from a Participant to cover the costs of collecting and processing
premiums. This charge may be reduced or eliminated on certain Group
Contracts. See REDUCTION OF CHARGES, page 35.
3. Sales Charge. A sales charge may be deducted to pay part of the costs
Prudential incurs in selling the Group Contract and the coverage under the
Group Contract, including commissions, advertising and the printing and
distribution of prospectuses and sales literature. The maximum charge is
equal to 3.5% of each premium payment. This charge may be reduced or
eliminated on certain Group Contracts. See REDUCTION IN CHARGES, page 35.
MONTHLY CERTIFICATE FUND CHARGES. The following charges are deducted monthly
from the Certificate Fund, pro-rata from each Subaccount and the Fixed Account.
Monthly Certificate Fund charges will generally be processed on the
Monthiversary. However, under certain Group Contracts, monthly Certificate Fund
charges for a particular Monthiversary may be made when premiums are received by
Prudential (or its designated agent) from the Contractholder. Under no Group
Contract, however, will the monthly Certificate Fund charges for any given
Monthiversary be deducted later than 45 days past the applicable Monthiversary.
1. Cost of Insurance. On each contract Monthiversary, Prudential will deduct a
charge for the cost of the Participant's insurance. When a Covered Person
dies, the amount paid to the beneficiary is generally larger than the
Certificate Fund. The cost of insurance charges are designed to enable
Prudential to pay this larger Death Benefit. The charge is determined by
multiplying the "net amount at risk" under a Certificate (the amount by
which the Certificate's Death Benefit, computed as if there was no
Certificate Debt, exceeds the Certificate Fund) by the cost of insurance
rate applicable to the Covered Person. The cost of insurance rates are
based on the age and rate class of the Covered Person, mortality
characteristics of the group, and particular aspects of the Group Contract,
such as the rate class structure and portability of the coverage. Separate
cost of insurance rates may apply to Certificates continued on a Portable
basis. Since the cost of
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insurance rate applicable under a Certificate increases as the Covered
Person ages, the monthly cost of insurance charge deducted from the
Certificate Fund will increase as the Covered Person ages, and this
increased charge will be reflected in the Cash Surrender Value and Death
Benefit under a Certificate.
Under some Group Contracts, any additional insurance benefits provided may
be taken into account in determining the cost of insurance rates. The rate
classes for a particular Group Contract may include classes for smokers and
nonsmokers, active and retired Participants, Portable Certificates, and
other criteria agreed to by Prudential and the Contractholder.
The actual cost of insurance rates will be set by Prudential based on its
expectations as to future experience in mortality and total expenses
(including, in some instances, those for additional insurance benefits) and
may be adjusted periodically, based on a number of factors including the
number of Certificates in force, the number of Certificates surrendered or
becoming Portable and the actual and anticipated mortality and expense
experience of the group. The expense experience considered by Prudential in
this regard includes whether a Group Contract sponsor or a party acting on
the sponsor's behalf performs administrative or other services related to
the Certificates and the extent to which the sponsor may receive
compensation for its services. Any change in the cost of insurance rates
will apply to all persons of the same age, rate class, and group.
Certificates continued on a Portable basis may be considered a separate
group. The cost of insurance rate applicable to a Participant may not,
however, be greater than the guaranteed cost of insurance rate set forth in
his or her Certificate. That guaranteed rate will be no higher than a rate
based upon 150% of the 1980 CSO Table. The maximum guaranteed rates are
150% of the 1980 CSO Table because Prudential uses simplified underwriting
and guaranteed issue procedures that may not require a medical examination
of a prospective Covered Person and may provide coverage to groups with
substandard risk characteristics from an underwriting standpoint. The
current cost of insurance charges are generally lower than 100% of the 1980
CSO Table.
2. Charge for Additional Insurance Benefits. Under certain Group Contracts,
Participants may obtain certain additional insurance benefits. See
ADDITIONAL INSURANCE BENEFITS, page 45. Where such additional insurance
benefits are not taken into account in determining the cost of insurance
charge as discussed above, a separate charge for any such additional
insurance benefits obtained under a Certificate will be deducted each
Monthiversary from the Participant's Certificate Fund.
3. Administrative Charge. An administrative charge may be deducted on each
contract Monthiversary. It is intended to pay for maintaining records, and
communicating with Contractholders and Participants. It is currently not
more than $3 per month and is guaranteed not to exceed $6 per month. This
charge may be reduced or eliminated on certain Group Contracts. See
REDUCTION OF CHARGES, page 35.
4. Other Taxes. Prudential reserves the right to deduct a charge to cover
federal, state or local taxes (other than "taxes attributable to premiums"
described above) that are imposed upon the operations of the Separate
Account. Currently, no such charges are made.
DAILY DEDUCTION FROM THE SUBACCOUNTS OF THE SEPARATE ACCOUNT. Each day a charge
is deducted from the assets of each of the Subaccounts in an amount currently
equal to an effective annual rate of 0.45%. The charge is guaranteed not to
exceed an effective annual rate of 0.90%. This charge is intended to compensate
Prudential for assuming the mortality and expense risks of the insurance
provided through the Group Contract. The mortality risk assumed is that Covered
Persons may live for shorter periods of time than Prudential estimated when it
determined the mortality charge. The expense risk assumed is that expenses
incurred in issuing and administering the insurance will be greater than
Prudential estimated in fixing its administrative charges. Prudential will
realize a profit from this risk charge to the extent it is not needed to provide
benefits and pay expenses under the Certificates. This charge is not assessed on
amounts allocated to the Fixed Account.
TRANSACTION CHARGES. There may be charges associated with surrenders, partial
withdrawals, loans, transfers and additional statement requests. These charges
are described in the prospectus section dealing with the transaction itself.
EXPENSES INCURRED BY THE FUNDS. The charges and expenses of the Funds are
indirectly borne by the Participants. Details about investment management fees
and other underlying fund expenses are provided in the fee table and in the
accompanying prospectuses for the available Funds and the related statements of
additional information.
REDUCTION OF CHARGES
Prudential may reduce or waive the sales charges, processing fee, and/or other
charges under certain Group Contracts, where it is expected that the Group
Contract will involve reduced sales or administrative expenses.
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Prudential determines both the eligibility for such reduced or waived charges,
as well as the amount of such reductions, by considering the following factors:
(1) the size of the group; (2) the total amount of premium payments expected to
be received; (3) the expected persistency of the individual Certificates; (4)
the purpose for which the Group Contract is purchased and whether that purpose
makes it likely that expenses will be reduced; and (5) any other circumstances
which Prudential believes to be relevant in determining whether reduced sales or
administrative expenses may be expected. Some of the reductions in or waivers of
charges for cases may be contractually guaranteed; other reductions or waivers
may be discontinued or modified by Prudential. Prudential's reductions in, or
waivers of, charges for these cases will not be unfairly discriminatory to the
interests of any individual Participants.
DIVIDENDS/EXPERIENCE CREDITS
Because the Group Contract is issued by Prudential, a mutual life insurance
company, it is a participating contract. This means it is eligible to be
credited with part of Prudential's divisible surplus attributable to the Group
Contract ("Dividends"), or a refund based on the experience of the case
("Experience Credits"), as determined annually by Prudential's Board of
Directors. Most of these Group Contracts are expected to be priced such that
there will be no source of distributable surplus attributable to these Group
Contracts and no refunds based on experience. Prudential may, however, issue
these Group Contracts in certain cases on terms such that Dividends or
Experience Credits may be declared.
The method of distribution of any Dividends or Experience Credits may vary
depending on the terms of a particular Group Contract. Dividends or Experience
Credits that are reinvested as premiums will be subject to the charges made for
premium payments. If an individual Participant becomes a Portable Certificate
holder, he or she will no longer be entitled to receive any Dividends or
Experience Credits under the Group Contract.
Participants should refer to their Group Contract for details on Dividends or
Experience Credits.
CASH SURRENDER VALUE
The Cash Surrender Value of the Certificate is equal to the Participant's
Certificate Fund, reduced by any Certificate Debt, outstanding charges, and any
applicable transaction charge. The Certificate Fund on any day equals the sum of
the amounts in the Subaccounts, the amount invested in the Fixed Account, and
the Loan Account. See LOANS, page 37. The Cash Surrender Value will change
daily, reflecting the Net Premiums paid, withdrawals made, the increases or
decreases in the value of the Fund shares in which the assets of the Subaccounts
have been invested, interest credited on any amounts allocated to the Fixed
Account and on the Loan Account, interest accrued on any loan, and by the daily
asset charge for mortality and expense risks assessed against the variable
investment options. The Cash Surrender Value will also reflect monthly charges.
Upon request, Prudential (or Prudential's designated agent) will inform a
Participant as to the Cash Surrender Value of his or her Certificate. There is
no guaranteed minimum Cash Surrender Value and it is possible for the Cash
Surrender Value of a Certificate to decline to zero.
The tables on pages T-1 and T-2 of this prospectus illustrate approximately what
the Cash Surrender Values would be for selected Certificates with the specified
premium payments (assuming uniform hypothetical investment results in the
selected Subaccount portfolios).
FULL SURRENDERS
A Participant may surrender his or her Certificate for its Cash Surrender Value
at any time. All insurance will end at this time. Prudential will pay the Cash
Surrender Value calculated as of the end of the Valuation Period during which
Prudential (or Prudential's designated agent) receives the Participant's request
on a form approved by Prudential and the proceeds will be paid as described in
WHEN PROCEEDS ARE PAID, page 44. Under certain Group Contracts, there may be a
transaction charge of up to the lesser of $20 or 2% of the amount received upon
surrender. A surrender may have tax consequences. See TAX TREATMENT OF
CERTIFICATE BENEFITS, page 40.
ELECTION OF PAID-UP INSURANCE
At any time, a Participant may elect to exchange his/her existing Group Variable
Universal Life insurance coverage for fixed paid-up insurance on the life of the
Covered Person with all or part of the Cash Surrender Value. The minimum amount
of Cash Surrender Value that a Participant can transfer in such an exchange is
$1,000. Under certain Group Contracts, a transaction charge of up to $20 may be
made in connection with the exchange.
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The paid-up insurance amount cannot be more than can be exchanged using the
Certificate's Cash Surrender Value or more than the Death Benefit under the
Certificate at the time the exchange is made. Once the exchange is made,
Prudential may reduce any future amount of coverage for which the Participant is
eligible under the Group Contract.
An exchange is effective as of the end of the Valuation Period during which
Prudential (or its designated agent) receives the Participant's request on a
form approved by Prudential. Once an exchange occurs, all coverages provided by
the Certificate will end, including additional insurance benefits, if any.
An exchange may result in the paid-up insurance becoming a Modified Endowment
Contract. See TAX TREATMENT OF CERTIFICATE BENEFITS, page 40.
Any amounts not used in an exchange will be withdrawn from the Certificate Fund
as of the end of the Valuation Period when the exchange was effective, and the
proceeds will be paid as described in WHEN PROCEEDS ARE PAID, page 44. A
withdrawal of a portion of the Cash Surrender Value of a Certificate may have
tax consequences. See TAX TREATMENT OF CERTIFICATE BENEFITS, page 40
PARTIAL WITHDRAWALS
A Participant may withdraw a portion of the Cash Surrender Value of his or her
Certificate during the lifetime of the Covered Person and while the Certificate
is not in default. When a partial withdrawal is made, an amount equal to the
withdrawal will be taken out of each of the Participant's investment options on
a pro-rata basis unless the Participant selects specific investment options.
Such partial withdrawals will be effected as of the end of the Valuation Period
during which Prudential (or Prudential's designated agent) receives the
Participant's request on a form approved by Prudential, and the proceeds will be
paid as described in WHEN PROCEEDS ARE PAID, page 44. Under certain Group
Contracts, there is no limit on the number of partial withdrawals a Participant
can take each year, but there may be a transaction charge for each withdrawal of
up to the lesser of $20 or 2% of the amount of the withdrawal. This transaction
charge will be deducted from the amount withdrawn from the Certificate Fund. A
withdrawal of a portion of the Cash Surrender Value of a Certificate may have
tax consequences. See TAX TREATMENT OF CERTIFICATE BENEFITS, page 40.
The minimum amount of any partial withdrawal is $200. The maximum amount of any
partial withdrawal is the amount that would reduce the Certificate Fund (less
any Certificate Debt and outstanding charges) to an amount equal to the next
month's charges. Any withdrawal greater than that amount will not be permitted
because it would cause the Certificate to default. Upon request, Prudential (or
Prudential's designated agent) will inform a Certificate owner how much Cash
Surrender Value may be withdrawn.
An amount withdrawn may not be repaid except as a premium payment subject to
applicable charges.
LOANS
A Participant may borrow up to the Loan Value of the Certificate from
Prudential. The Loan Value of a Certificate (before any applicable transaction
charge) at any time is determined by multiplying the Certificate Fund by 90% (or
higher where required by state law) and then subtracting any existing loan with
accrued interest, outstanding charges, and the amount of the next month's
charges. The minimum amount that may be borrowed at any one time is $200. A loan
will not be permitted if Certificate Debt exceeds the Loan Value. Under certain
Group Contracts, there may be a transaction charge up to $20 for each loan made.
Loan proceeds will be paid as described in WHEN PROCEEDS ARE PAID, page 44.
Interest charged on any loan will accrue daily at an annual rate determined each
year by Prudential. Interest payments on any loan are due at the end of each
contract year. If interest is not paid when due, it will be added to the
principal amount of the loan. Prudential will notify a Participant 31 days
before the interest on the loan becomes due.
When a loan is made, an amount equal to the loan will be taken out of each of
the Participant's investment options on a pro-rata basis unless the Participant
selects specific investment options. At the same time, a Loan Account will be
started for the Participant and will be credited with an amount equal to the
loan. Prudential will generally credit interest to the amount in the Loan
Account at an annual rate of 2% less than the interest rate on the loan. The
crediting rate will generally be equal to the Fixed Account crediting rate.
A Participant may repay a part or all of the loan at any time. Loans may be
repaid by payment or by withdrawing amounts from the Certificate Fund.
Participants should designate whether a payment is intended as a premium payment
or as a loan repayment. If no such designation is made, the payment will be
treated as a loan repayment. If a loan is repaid by using the Certificate Fund,
Prudential will treat such repayment as a partial withdrawal from
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the Certificate Fund and under certain Group Contracts, there may be a
transaction charge of up to the lesser of $20 or 2% of the amount of the
withdrawal. A partial withdrawal from the Certificate Fund may have tax
consequences. See TAX TREATMENT OF CERTIFICATE BENEFITS, page 40. The balance in
a Participant's Loan Account will be reduced by the amount of any loan
repayment.
A Participant's Loan Account plus accrued interest ("Certificate Debt") may not
exceed the value of the Certificate Fund. If the Certificate Debt equals this
amount the Certificate will go into default. See LAPSE page 38.
If Certificate Debt is still outstanding when the Certificate is surrendered or
allowed to lapse, the borrowed amount may become taxable. In addition, loans
from Modified Endowment Contracts may be treated for tax purposes as
distributions of income. See TAX TREATMENT OF CERTIFICATE BENEFITS, page 40.
Should a Death Benefit become payable while a loan is outstanding, or should the
Certificate be surrendered while a loan is outstanding, any proceeds otherwise
payable will be reduced to reflect the amount of the loan and any accrued
interest.
A loan will have a permanent effect on a Certificate's Cash Surrender Value and
may have a permanent effect on the Death Benefit. This is because the investment
results of the selected investment options will apply only to the amount
remaining in those investment options after the loan amount is transferred to
the Loan Account. The longer the loan is outstanding, the greater the effect is
likely to be. The effect could be favorable or unfavorable. If investment
results are greater than the rate being credited upon the amount of the loan
while the loan is outstanding, Cash Surrender Values will not be as high as they
would have been if no loan had been made.
CERTIFICATE EXCHANGE PRIVILEGE
During the first 24 months following the issuance of a Certificate, the
Participant may exercise the Certificate exchange privilege, which entails the
exchange of the existing Group Variable Universal Life insurance coverage for a
flexible premium fixed benefit life insurance coverage. An exchange results in
the transfer of funds from the Separate Account to Prudential's general account.
The exchange is effective as of the end of the Valuation Period during which
Prudential receives the Participant's request on a form approved by Prudential.
The Certificate acquired in the exchange will have the same Issue Age as the
original Certificate. No evidence of insurability is required to effect such an
exchange.
No transaction charge is currently imposed with respect to this exchange
privilege. However, Prudential reserves the right to impose such a transaction
charge in the future.
The Participant may also exercise the Certificate exchange privilege once during
the first 24 months following the effective date of an increase in the Face
Amount of a Certificate only for the amount of coverage that was increased. See
TAX TREATMENT OF CERTIFICATE BENEFITS, page 40.
TELEPHONE AND ELECTRONIC TRANSACTIONS
Some Group Contracts permit a Participant to transfer amounts among available
investment options, make surrenders and partial withdrawals, and obtain loans by
telephone or electronically provided he or she is enrolled to use Prudential's
telephone or electronic transfer system. Prudential will not be liable for
following instructions communicated by telephone or electronically that it
reasonably believes to be genuine. It has adopted security procedures reasonably
designed to verify that such communications are genuine. Prudential cannot
guarantee that Participants will be able to get through to complete a telephone
or electronic transaction during peak periods such as periods of drastic
economic or market change or during system failures or power outages.
LAPSE
In general, a Certificate will remain in force so long as the balance in the
Certificate Fund less Certificate Debt and outstanding charges is sufficient to
pay the monthly charges when due. If it is not, the Participant's insurance is
in default and will lapse if a grace period expires without a sufficient payment
being made. Certain Group Contracts may provide that if a Participant pays
certain specified premiums during the first two Certificate Years, the
Certificate will not go into default even if the Certificate Fund is
insufficient to cover monthly charges. Participants should refer to their
particular Certificates for the details of this default protection. A
Certificate that lapses with Certificate Debt may result in tax consequences.
See TAX TREATMENT OF CERTIFICATE BENEFITS, page 40.
Prudential will send a notice to a Participant in default at the last known
address on file with Prudential (or to Prudential's designated agent) specifying
the amount of premium required to keep the Certificate in force and the
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date the payment is due. The grace period expires on the later of 61 days from
the date of default or 30 days from the date notice was mailed. If Prudential
(or Prudential's designated agent) does not receive the required premium payment
within the grace period, the Participant's insurance will lapse and have no
remaining value.
If the Covered Person dies during the grace period, the Death Benefit will be
reduced by any past due monthly charges and any Certificate Debt.
TERMINATION OF A CONTRACTHOLDER'S PARTICIPATION IN GROUP CONTRACTS
The Contractholder may decide to terminate the Group Contract with Prudential.
In addition, Prudential may terminate the Group Contract if the aggregate Face
Amount of all Certificates and/or the number of Certificates issued under the
Group Contract falls below the minimum permissible levels established by
Prudential or the Contractholder or its agent fails to timely remit premiums to
Prudential.
The party terminating participation in the Group Contract must provide ninety
days written notice to the other party, as well as to all Participants, before
terminating participation in the Group Contract. Termination of participation in
the Group Contract means that the Contractholder or its agent will no longer
remit premiums to Prudential under the Group Contract and that no new
Certificates will be issued under the Group Contract. The effects on
Participants of termination of the Contractholder's participation in the Group
Contract are described in OPTIONS ON TERMINATION OF COVERAGE, below. The options
available to Participants from Prudential may depend on what other insurance
options are available to them. The Participant should refer to the Group
Contract and Certificate for further details on termination of coverage.
PARTICIPANTS WHO ARE NO LONGER ELIGIBLE GROUP MEMBERS
The terms of each Group Contract will determine the effect on a Participant's
insurance coverage if the Participant is no longer an Eligible Group Member.
Some Group Contracts may provide that insurance coverage will continue even if
the Participant is no longer an eligible member of the group. Under such Group
Contracts, within 61 days after the Participant is no longer eligible under the
Group Contract, Prudential will notify the Participant that Prudential will now
mail periodic premium reminders directly to the Participant, who will remit
premium payments directly to Prudential or authorize Prudential to receive
payment using electronic funds transfers or credit/debit cards. Continuation of
insurance may be subject to certain conditions and limitations specified in the
Group Contract. The notice will also explain the Participant charges and
expenses applicable to Portable Certificates. See CHARGES AND EXPENSES, page 34.
These charges and expenses may be higher than those paid by the Participant
while he or she was still an Eligible Group Member, but will not exceed the
maximum charges and expenses described in this prospectus. Continuation as a
Portable Certificate holder may be conditioned on maintenance of a specified
minimum Certificate Fund value.
Under other Group Contracts, the portability privileges described above will not
be available. Participants under those Group Contracts will have the options
described in the next section of this prospectus.
OPTIONS ON TERMINATION OF COVERAGE
Insurance coverage obtained through a Group Contract will terminate when the
Group Contract itself terminates. Some Group Contracts also provide that
coverage purchased by an individual Participant will terminate when the
Participant is no longer an Eligible Group Member.
When the Contractholder's participation in the Group Contract terminates, the
effect on individual Participants depends on whether the Contractholder replaces
the Group Contract with another life insurance contract(s) that provides for
accumulation of cash value. In general, if the Contractholder does enter into
such a contract, Certificates will be terminated and the Cash Surrender Value of
each such Certificate will be directly transferred to the new contract unless
the Participant elects to receive the Cash Surrender Value of the Certificate.
Some Group Contracts may, however, provide that Certificates can continue on a
Portable basis unless the Participant elects to transfer the Cash Surrender
Value to the new life insurance contract or to surrender the Certificate.
Certain conditions and limitations may apply and are specified in the Group
Contract. Participants should consult the Group Contract and Certificate
concerning issuance of Portable Certificates in these circumstances.
If the Contractholder does not enter into a new life insurance contract(s) that
provides for accumulation of cash value, Participants will have the following
options and may also have the option of a Portable Certificate if the Group
Contract so provides. Participants who are no longer Eligible Group Members will
also have the following options under Group Contracts that do not provide for
issuance of Portable Certificates to such persons.
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CONVERSION. A Participant may elect to convert the Certificate to an individual
life insurance policy without showing evidence of insurability. If a Participant
elects this option, he or she must apply for the individual contract and pay the
first premium within 31 days after the coverage under the Group Contract ends.
The Participant may select any form of individual life insurance (other than
term insurance) that Prudential normally makes available to insureds who are the
same age and requesting the same amount of insurance provided that the
Participant has been insured for at least five years (or less under certain
Group Contracts) under the Group Contract and any other Prudential rider or
Group Contract replaced by this insurance. Premiums will be based on the form
and amount of insurance elected by the Participant, as well as the Covered
Person's risk class and age.
If the insurance is ending because the Participant is no longer eligible to
participate in the Group Contract, the amount of insurance under the individual
policy cannot be more than the Face Amount of the Certificate under the Group
Contract. If the insurance is ending because the Group Contract is terminating,
the amount of individual insurance may, depending on applicable state law, be
limited to the lesser of (1) $10,000 or (2) the Face Amount of the Certificate
under the Group Contract less the amount of any group insurance the Participant
becomes eligible for in the next 45 days.
If a Covered Person dies within 31 days after the insurance ends under the Group
Contract, and the Participant had the right to convert to an individual policy,
a Death Benefit equal to the amount of individual insurance on the Covered
Person the Participant could have purchased upon conversion will be payable by
Prudential.
PAID-UP INSURANCE. The Participant may elect to purchase fixed paid-up insurance
on the Covered Person with the Cash Surrender Value of the Certificate. The
Participant must have at least $1,000 of Cash Surrender Value for this option to
be available. The insurance amount will depend on the Cash Surrender Value on
the date of termination and the age of the Covered Person but cannot exceed the
Death Benefit immediately before the paid-up purchase. The Participant must
elect this option within 61 days of the date on which the Certificate coverage
would end. The election is effective as of the end of the Valuation Period
during which Prudential (or its designated agent) receives the Participant's
request on a form approved by Prudential. Acquisition of reduced paid-up
insurance may result in that insurance becoming a Modified Endowment Contract.
See TAX TREATMENT OF CERTIFICATE BENEFITS, page 40.
PAYMENT OF CASH SURRENDER VALUE. The Participant may receive the Cash Surrender
Value by surrendering the Certificate and making a proper request on a form
approved by Prudential.
The above options apply whether the Participant or a spouse is the Covered
Person under the Certificate. A Participant who does not choose any of the above
options within 61 days of the date on which Certificate coverage would end will
be provided with Paid-Up Insurance, if his or her Certificate has at least
$1,000 of Cash Surrender Value and, if not, will be paid the Cash Surrender
Value.
REINSTATEMENT
Except as indicated in the next sentence, a lapsed Certificate may be reinstated
at any time within 3 years after the end of the grace period and before the
Participant reaches the maximum age at which a Certificate may be held. A lapsed
Certificate may not be reinstated if the Group Contract is terminated and the
Participant would not have been permitted to retain the Certificate on a
portable basis. To reinstate coverage, a Participant must submit the following
items to Prudential (or Prudential's designated agent): (1) a written request
for reinstatement; (2) evidence of insurability satisfactory to Prudential; and
(3) a premium payment (less any applicable charges) that is at least equal to
the monthly Certificate Fund charges for the grace period plus the monthly
Certificate Fund charges for two months. See CHARGES AND EXPENSES, page 34.
The reinstatement is effective on the Monthiversary following the date
Prudential approves the request. The terms of the original Certificate will
apply to the reinstated Certificate. A reinstated Certificate is subject to a
new two year incontestability period and a new suicide exclusion period. All
Certificate Debt is retired at the same time the Certificate lapses and will not
be reestablished.
No transaction charge is currently imposed in connection with a reinstatement,
although Prudential reserves the right to impose such a transaction charge in
the future.
TAX TREATMENT OF CERTIFICATE BENEFITS
Each prospective Participant is urged to consult a qualified tax advisor. The
following discussion is not intended as tax advice, and it is not a complete
statement of what the effect of federal income taxes will be under all
circumstances. Rather, it provides information about how Prudential believes the
federal income tax laws apply
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in the most commonly occurring circumstances. There is no guarantee, however,
that the current federal income tax laws and regulations or interpretations will
not change.
TREATMENT AS LIFE INSURANCE AND INVESTOR CONTROL. The Certificate will be
treated as "life insurance," as long as it satisfies certain definitional tests
set forth in section 7702 of the Internal Revenue Code (the "Code") and as long
as the underlying investments for the Certificate satisfy diversification
requirements under section 817(h) of the Code. For further detail on
diversification requirements, see the applicable Fund prospectuses.
Prudential believes that it has taken adequate steps under the Code and existing
regulations under it to cause the Certificates to be treated as life insurance
for tax purposes. This means that: (1) except as noted below, the Participant
should not be taxed on any part of the Certificate Fund, including additions
attributable to interest, dividends, or appreciation; and (2) the Death Benefit
should be excludable from the gross income of the beneficiary under section
101(a) of the Code.
Although Prudential believes the Certificate should qualify as "life insurance"
for federal tax purposes, there are uncertainties. Section 7702 of the Code
which defines life insurance for tax purposes gives the Secretary of the
Treasury authority to prescribe regulations to carry out the purposes of the
Section. In this regard, proposed regulations governing mortality charges were
issued in 1991 and proposed regulations under Sections 101, 7702 and 7702A
governing the treatment of life insurance policies that provide accelerated
death benefits were issued in 1992. None of these proposed regulations has yet
been finalized. Additional regulations under Section 7702 may also be
promulgated in the future.
Moreover, IRS regulations issued to date do not provide guidance concerning the
extent to which Participants may direct their investments to the particular
available Subaccounts of a Separate Account without causing the Participants
instead of Prudential to be considered the owners of the underlying assets. Such
guidance will be included in regulations or revenue rulings under Section 817(d)
relating to the definition of a variable contract. The ownership rights under
the Certificate are similar to, but different in certain respects from, those
addressed by the IRS in Rulings in which it was determined that contract owners
were not owners of separate account assets. For example, a Contractholder may
select the investment strategies, Participants have the choice of more Funds,
including Funds with similar broad investment strategies and different
investment managers, and Participants may be able to reallocate amounts between
available Subaccounts more frequently than in such Rulings. While Prudential
believes it will be considered the owner of the Separate Account assets, these
differences could result in the Participant being considered the owner of the
assets.
Prudential intends to comply with final regulations issued under Sections 7702
and 817. Therefore, because of this uncertainty, it reserves the right to make
such changes as it deems necessary to assure that the Group Contract continues
to qualify as variable life insurance for tax purposes. Any such changes will
apply uniformly to affected Participants and will be made only after advance
written notice to the Contractholder.
PRE-DEATH DISTRIBUTIONS. The taxation of pre-death distributions depends on
whether the Certificate is classified as a Modified Endowment Contract. The
following discussion first deals with distributions under Certificates not so
classified, and then with Modified Endowment Contracts.
1. A surrender or lapse of the Certificate may have tax consequences. Under
surrender, the Participant will not be taxed on the Cash Surrender Value
except for the amount, if any, that exceeds the gross premiums paid less
the untaxed portion of any prior withdrawals. The amount of any unpaid
Certificate Debt will, upon surrender or lapse, be added to the Cash
Surrender Value and treated, for this purpose, as if it had been received.
Any loss incurred upon surrender is generally not deductible.
A withdrawal generally is not taxable unless it exceeds total premiums paid
to the date of withdrawal less the untaxed portion of any prior
withdrawals. However, under certain limited circumstances, in the first 15
Certificate Years all or a portion of a withdrawal may be taxable if the
Certificate Fund exceeds the total premiums paid less the untaxed portions
of any prior withdrawals, even if total withdrawals do not exceed total
premiums paid to date.
Extra premiums for additional insurance benefits generally do not count in
computing gross premiums paid, which in turn determines the extent to which
a withdrawal might be taxed.
Loans received under the Certificate will ordinarily be treated as
indebtedness of the Participant and will not be considered to be
distributions subject to tax. However, if a loan is still outstanding when
the Certificate is surrendered or allowed to lapse, the outstanding
Certificate Debt will be taxable at that time to the extent the Cash
Surrender Value exceeds gross premiums paid less the untaxed portion of any
prior withdrawals.
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2. Some of the above rules are changed if the Certificate is classified as a
Modified Endowment Contract under Section 7702A of the Code. It is possible
for the Certificate to be classified as a Modified Endowment Contract under
at least two circumstances: premiums in excess of the 7 pay premiums
allowed under Section 7702A are paid or a decrease in the Death Benefit or
a removal of certain additional insurance benefits is made during the first
7 Certificate Years. Moreover, the addition of certain additional insurance
benefits (or an increase in the Death Benefit) after the Certificate Date
may have an impact on the Certificate's status as a Modified Endowment
Contract. Participants contemplating any of these steps should first
consult a qualified tax advisor and their Prudential representative.
If the Certificate is classified as a Modified Endowment Contract, then
pre-death distributions, including loans, assignments and pledges are
includible in income to the extent that the Certificate Fund exceeds the
gross premiums paid for the Certificate increased by the amount of any
loans previously includible in income and reduced by any untaxed amounts
previously received other than the amount of any loans excludible from
income. These rules may also apply to pre-death distributions, including
loans, made during the two year period prior to the Certificate becoming a
Modified Endowment Contract.
In addition, pre-death distributions from such Certificates (including full
surrenders) will be subject to a penalty of 10 percent of the amount
includible in income unless the amount is distributed on or after age
59 1/2, on account of the taxpayer's disability or as a life annuity. It is
presently unclear how the penalty tax provisions apply to contracts owned
by non-natural persons such as trusts.
Under certain circumstances, multiple Modified Endowment Contracts issued
to the same Participant during any calendar year will be treated as a
single contract for purposes of applying the above rules.
Any Dividends or Experience Credits (to the extent not redeposited in the
Certificate) will effectively reduce the gross premiums paid for purposes of the
above rules.
TREATMENT AS GROUP TERM LIFE INSURANCE. Section 79 of the Code and the
regulations thereunder provide for the treatment of certain life insurance as
group-term life insurance ("GTLI"). In most cases, employee-pay-all coverage
under the Group Contract will not qualify as GTLI or be deemed to be part of an
employer GTLI plan, and the Certificate will be treated the same as any
individually-purchased life insurance policy for tax purposes. However,
depending on the structure of the arrangement under which the Group Contract is
held, including other insurance plans offered by or through the employer, a
portion of the coverage under the Group Contract may qualify as group term life
insurance and, in addition, covered employees may be taxable on certain
increases in cash values under an IRS-prescribed formula.
WITHHOLDING. The taxable portion of any amounts received under the Certificate
will be subject to withholding to meet federal income tax obligations, if the
Participant fails to elect that no taxes be withheld. Prudential will provide
the Participant with forms and instructions concerning the right to elect that
no taxes be withheld from the taxable portion of any payment. All recipients may
be subject to penalties under the estimated tax payment rules if withholding and
estimated tax payments are not sufficient. Participants who do not provide a
social security number or other taxpayer identification number will not be
permitted to elect out of withholding. Special withholding rules apply to
payments to non-resident aliens.
OTHER TAX CONSIDERATIONS. Transfer of the Certificate to a new owner or
assignment of the Certificate may have tax consequences depending on the
circumstances. In the case of a transfer of the Certificate for valuable
consideration, the Death Benefit may be subject to federal income taxes under
Section 101(a)(2) of the Code. In addition, a transfer of the Certificate to or
the designation of a beneficiary who is either 37 1/2 years younger than the
Participant or a grandchild of the Participant may have Generation Skipping
Transfer tax consequences under Section 2601 of the Code.
In certain circumstances, deductions for interest paid or accrued on Certificate
Debt or on other loans that are incurred or continued to purchase or carry the
Certificate may be denied under Sections 163 of the Code as personal interest or
under Section 264 of the Code. Participants should consult a qualified tax
advisor regarding the application of these provisions to their circumstances.
The individual situation of each Participant or beneficiary will determine the
federal estate taxes and the state and local estate, inheritance and other taxes
due if the Participant or insured dies.
The earnings of the Separate Account are taxed as part of the operations of
Prudential. Accordingly, the Separate Account does not intend to qualify as a
regulated investment company under the Code.
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The Certificate Exchange Privilege, whereby a Participant may exchange the
existing Group Variable Universal Life Coverage for flexible premium fixed
benefit life insurance coverage, is tax free provided that cash is not
distributed to the Participant as part of the exchange and any existing loan is
carried over to the new coverage. Additionally, the exchange could limit the
amount of premiums that a Participant may pay without causing the Certificate to
become a Modified Endowment Contract.
ERISA CONSIDERATIONS
DEFINITION OF AN EMPLOYEE BENEFIT PLAN. An "employee benefit plan" is defined
under the Employee Retirement Income Security Act of 1974, as amended ("ERISA")
to include two broad categories of arrangements that are established by certain
entities (employers or unions) to cover employees - "pension" plans or "welfare"
plans.
A "pension plan" under ERISA includes any program that provides retirement
income to employees, or results in a deferral of income by employees for periods
extending to the termination of covered employment or beyond. For these
purposes, the term "pension plan" includes, but is not limited to, retirement
plans qualified under Section 401(a) of the Code (for example, a "Section 401(k)
plan"), as well as other arrangements which, by their operation, are intended to
provide retirement income or deferrals beyond termination of employment. The
decision to invest plan assets in a Group Contract would be subject to these
rules. Any plan fiduciary which proposes to cause a plan to acquire a Group
Contract should consult with its counsel with respect to the potential
consequences under ERISA and the Code of the plan's acquisition and ownership of
such Contract.
A "welfare plan" under ERISA includes a program established or maintained for
the purposes of providing to employees, among other things, medical, accident,
disability, death, vacation, and unemployment benefits.
Regulations issued by the United States Department of Labor ("Labor") clarify
when specific plans, programs or other arrangements will not be either pension
or welfare plans (and thus not considered "employee benefit plans" for purposes
of ERISA). Among other exceptions, "group" or "group-type insurance programs"
offered by an insurer to employees of an employer will not be a "plan" where:
(i) no contributions are made by the employer for the coverage; (ii)
participation in the program is completely voluntary for employees; (iii) the
"sole" function of the employer with respect to the program is, without
endorsing the arrangement, to permit the insurer to publicize the program, to
collect premiums through payroll deductions and to remit them to the insurer;
and (iv) the employer does not receive any consideration in connection with the
program, other than reasonable compensation (excluding any profit) for
administrative services actually provided in connection with payroll deductions.
Whether or not a particular group insurance arrangement satisfies these
conditions is a question of fact depending on the particular circumstances.
Counsel and other competent advisors should be consulted to determine whether,
under the facts of the particular case, a particular Group Contract might be
treated as an "employee benefit plan" (either a pension or a welfare plan)
subject to the requirements of ERISA.
FIDUCIARY/PROHIBITED TRANSACTION REQUIREMENTS UNDER ERISA. If applicable, ERISA
and Section 4975 of the Internal Revenue Code of 1986, as amended (the "Code")
impose certain restrictions on employee benefit plans subject to ERISA and/or
subject to the requirements of Section 4975 of the Code, and on persons who are
(1) "parties in interest" (as defined under ERISA) or "disqualified persons" (as
defined under the Code) (collectively, "parties in interest") and (2)
"fiduciaries" with respect to such plans. These restrictions may, in particular,
prohibit certain transactions in connection with a Group Contract, absent a
statutory or administrative exemption. Counsel and other competent advisors
should be consulted to determine the application of ERISA under these
circumstances.
For example, administrative exemptions issued by Labor under ERISA permit
transactions (including the sale of insurance contracts like the Group Contract)
between insurance agents and employee benefit plans. To be able to rely upon
such exemptions, certain information must be disclosed to the plan fiduciary
approving such purchase on behalf of the plan. The information that must be
disclosed includes: (1) the relationship between the agent and the insurer; (2)
a description of any charges, fees, discounts, penalties or adjustments that may
be imposed in connection with the purchase, holding, exchange or termination of
the Group Contract; and (3) the commissions received by the agent. Information
about any applicable charges, fees, discounts, penalties or adjustments may be
found under CHARGES AND EXPENSES, commencing on page 34. Information about sales
representatives and commissions may be found under SALE OF THE CONTRACT AND
SALES COMMISSIONS, on page 47.
Execution of a Group Contract by a Contractholder and an enrollment form by a
Participant will be deemed to be an acknowledgment of receipt of this
information and approval of transactions under the Group Contract.
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WHEN PROCEEDS ARE PAID
Prudential will generally pay any Death Benefit, Cash Surrender Value, partial
withdrawal or loan proceeds supported by the Separate Account within 7 days
after receipt at the Prudential office specified in the Certificate or by
Prudential's designated agent of all the documents required for such a payment.
Other than the Death Benefit, which is determined as of the date of death, the
amount will be determined as of the end of the Valuation Period in which the
necessary documents are received in good order. However, Prudential may delay
payment of proceeds from the Subaccount(s) and the variable portion of the Death
Benefit due under a Participant's insurance if the disposal or valuation of the
Separate Account's assets is not reasonably practicable because the New York
Stock Exchange is closed for other than a regular holiday or weekend, trading is
restricted by the SEC, or the SEC declares that an emergency exists.
With respect to the amount of any Cash Surrender Value allocated to the Fixed
Account, and with respect to a Certificate in force as paid-up insurance,
Prudential expects to pay the Cash Surrender Value promptly upon request.
However, Prudential has the right to delay payment of such Cash Surrender Value
for up to six months (or a shorter period if required by applicable law).
Prudential will pay interest at the current Fixed Account rate, under the Group
Contract, if it delays such a payment for more than 30 days (or a shorter period
if required by applicable law).
BENEFICIARY
The Participant has the right to designate and name a beneficiary to receive
Death Benefits under the Certificate. The Participant must designate a
beneficiary on a form approved by Prudential. A Participant may change the
beneficiary at any time without the consent of the present beneficiary in
accordance with the terms of the Group Contract. If there is more than one
beneficiary at the death of the Covered Person, each will receive equal payments
unless otherwise specified by the Participant.
INCONTESTABILITY
After a Participant's Certificate has been in force during a Covered Person's
lifetime for two years or, with respect to any change in the Certificate that
requires Prudential's approval and could increase its liability, after the
change has been in effect during the insured's lifetime for two years from the
effective date of the change, Prudential will not contest its liability under
the Certificate in accordance with its terms.
MISSTATEMENT OF AGE
If a Covered Person's stated age is incorrect in the Certificate, Prudential
will adjust the Death Benefit payable, as required by law, to reflect the
correct age.
SUICIDE EXCLUSION
Generally, if a Covered Person, whether sane or insane, dies by suicide within
two years from the effective date of the Certificate, Prudential will pay no
more under the Certificate than the sum of the contributions paid less any
Certificate Debt, outstanding charges, and less any partial withdrawals.
If a Covered Person, whether sane or insane, dies by suicide within two years
from the effective date of an increase in the Face Amount of insurance that was
requested after issue and required approval, Prudential will pay, with respect
to the amount of the increase, no more than the sum of the monthly charges
attributable to the increase.
ASSIGNMENT
A Participant may assign the insurance coverage and all rights, benefits or
privileges that he or she has under a Certificate. Prudential will be bound by
an assignment of insurance or the rights, benefits or privileges under the
insurance only if: (1) it is in writing; (2) it is signed by the Participant;
and (3) Prudential receives a copy of the assignment at the Prudential office
specified in the Certificate or at the address of Prudential's designated agent.
Prudential is not responsible for determining the validity or legality of any
assignment. References in this prospectus to rights that a Participant may
exercise shall include exercise of such rights by any person to whom the
Participant has validly assigned such rights. Assignment of a Certificate that
is a Modified Endowment Contract could have adverse federal income tax
consequences. See TAX TREATMENT OF CERTIFICATE BENEFITS, page 40.
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VOTING RIGHTS
As stated above, all of the assets held in the Subaccounts of the Separate
Account will be invested in shares of the corresponding portfolios of the Funds.
Prudential is the legal owner of those shares and as such has the right to vote
on any matter voted on at any shareholders meetings of the Funds. However,
Prudential will, as required by law, vote the shares of the Funds at any regular
and special shareholders meetings the Funds hold in accordance with voting
instructions received from Participants. A Fund may not hold annual shareholders
meetings when not required to do so under the laws of the state of its
incorporation or the Investment Company Act of 1940. Fund shares for which no
timely instructions from Participants are received, and any shares attributable
to general account investments of Prudential, will be voted in the same
proportion as shares in the respective portfolios for which instructions are
received. Should the applicable federal securities laws or regulations, or their
current interpretation, change so as to permit Prudential to vote shares of the
Funds in its own right, it may elect to do so.
Generally, a Participant may give voting instructions on matters that would be
changes in fundamental policies and any matter requiring a vote of the
shareholders of the Funds. With respect to approval of the investment advisory
agreement or any change in a portfolio's fundamental investment policy,
Participants participating in such portfolios will vote separately by portfolio
on the matter, pursuant to the requirements of Rule 18f-2 under the 1940 Act.
The number of Fund shares for which instructions may be given by a Participant
is determined by dividing the portion of the value of the Certificate Fund
derived from participation in a Subaccount, by the value of one share in the
corresponding portfolio of the applicable Fund. The number of votes for which
each Participant may give Prudential instructions will be determined as of the
record date chosen by the Board of the applicable Fund. Prudential will furnish
Participants with proper forms and proxies to enable them to give these
instructions. Prudential reserves the right to modify the manner in which the
weight to be given voting instructions is calculated where such a change is
necessary to comply with current federal regulations or interpretations of those
regulations.
Prudential may, if required by state insurance regulations, disregard voting
instructions if such instructions would require shares to be voted so as to
cause a change in the sub-classification or investment objectives of one or more
of the Funds' portfolios, or to approve or disapprove an investment advisory
contract for a Fund. In addition, Prudential itself may disregard voting
instructions that would require changes in the investment policy or investment
advisor of one or more of the Funds' portfolios, provided that Prudential
reasonably disapproves such changes in accordance with applicable federal
regulations. If Prudential does disregard voting instructions, it will advise
Participants of that action and its reasons for such action in the next annual
or semi-annual report to Participants.
Participants also share with the owners of all Prudential contracts and policies
the right to vote in elections for members of the Board of Directors of
Prudential.
SUBSTITUTION OF FUND SHARES
Although Prudential believes it to be unlikely, it is possible that in the
judgment of its management, one or more of the available portfolios of the Funds
may become unsuitable for investment by Participants. This may occur because of
investment policy changes, tax law changes or considerations, the unavailability
of shares for investment or at the discretion of Prudential. In that event,
Prudential may seek to substitute the shares of another portfolio or of an
entirely different mutual fund. Before this can be done, the approval of the
SEC, and possibly one or more state insurance departments, will be required.
Contractholders and Participants will be notified of such substitution.
ADDITIONAL INSURANCE BENEFITS
Depending on the terms of the Group Contract, one or more of the following
additional insurance benefits may be available to Participants through their
Group Contract. Under some Group Contracts, some or all of these benefits may be
provided to all Participants while under other Group Contracts, individual
Participants may elect whether to receive some or all of these benefits for an
additional charge. The Participant should refer to the Group Contract and
Certificate for further details on additional insurance benefits.
ACCELERATED DEATH BENEFIT. Under some Group Contracts, Participants may be
provided an accelerated death benefit that allows the Participant to elect to
receive an accelerated payment of part of the Certificate's Death Benefit,
adjusted to reflect current value, at a time when certain special needs exist.
The adjusted Death Benefit will always be less than the Death Benefit, but will
generally be greater than the Certificate's Cash Surrender Value.
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The accelerated death benefit may be discounted for interest under certain Group
Contracts and where permitted by law. Prudential may charge a fee not to exceed
$350 for payment of an accelerated death benefit.
The following option may be available to the Participant depending on the terms
of the Group Contract.
Terminal Illness Option. This option is available if the Covered Person is
diagnosed as terminally ill with a life expectancy of 12 months or less. When
satisfactory evidence is provided, Prudential will provide to the Participant
an accelerated payment, which may be received in a lump sum, of the portion of
the Death Benefit selected by the Participant as an accelerated death benefit.
No benefit will be payable if the Participant is required to elect it in order
to meet the claims of creditors or to obtain a government benefit. Prudential
can furnish details about the amount of accelerated death benefit that is
available to an eligible Participant. Unless required by law, a Participant who
has elected to receive an accelerated death benefit can no longer request an
increase in the Face Amount of his or her Certificate, and the amount of future
premium payments he or she can make will be limited.
Adding the accelerated death benefit to the Contract has no adverse
consequences; however, electing to use it could. The recently enacted Health
Insurance Portability and Accountability Act of 1996 excludes from income,
effective January 1, 1997, the accelerated death benefit if the insured is (1)
terminally ill or (2) chronically ill (although the exclusion in the latter case
may be limited). Receipt of an accelerated death benefit payment may also affect
a Participant's eligibility for certain government benefits or entitlements.
ACCIDENTAL DEATH AND DISMEMBERMENT BENEFIT. Under some Group Contracts,
Participants may be provided an accidental death and dismemberment benefit that
provides insurance for accidental loss of life, sight, hand, or foot. This
benefit will exclude losses due to suicide or attempted suicide, diseases and
infirmities, medical or surgical treatments, and acts of war. It may be subject
to other exclusions from coverage, age limitations, and benefit limitations set
forth in the Group Contract.
EXTENDED DEATH PROTECTION DURING TOTAL DISABILITY. Under some Group Contracts,
Participants will be provided with extended death protection during their total
disability. Under this provision, even if a Participant's insurance (or that of
a spouse) has otherwise ended, insurance equal to the Face Amount of the
Certificate will continue if the Participant became totally disabled prior to
age 60. The extended death protection will continue for successive one-year
periods, generally until age 65, so long as the Participant provides
satisfactory proof of continued total disability.
DEPENDENT LIFE BENEFITS. Under some Group Contracts, Participants may be
provided dependent life benefits, which provide insurance on the life of a
qualified dependent. A qualified dependent may be the Participant's spouse
and/or unmarried child.
SEAT BELT COVERAGE. Under some Group Contracts, Participants may be provided
seat belt coverage, which provides a benefit for the loss of life while driving
or riding in a motor vehicle while wearing a seat belt. "Motor vehicle" means a
private automobile, van, four-wheel drive vehicle, self-propelled motor home and
truck. It does not mean a motor vehicle used for farming, military, business,
racing, or any other type of competitive speed event. Certain exclusions will
apply.
REPORTS
At least once each Certificate Year, Participants will be sent statements that
provide certain information pertinent to their own insurance. These statements
detail values and transactions made and specific insurance data that apply only
to each Participant. On request, a Participant will be sent a current statement
in a form similar to that of the annual statement described above, but
Prudential may limit the number of such requests or impose a reasonable
transaction charge not to exceed $20 for an additional report.
The Contractholder and each Participant will also be sent an annual and
semi-annual report listing the securities held in each available portfolio of
the Funds, as required by the 1940 Act. Records with respect to the Separate
Account are kept in accordance with the 1940 Act.
If a Participant invests in the Series Fund through more than one variable
insurance contract, then the Participant will receive only one copy of each
annual and semi-annual report issued by the Series Fund. However, if such
Participant wishes to receive multiple copies of any such report, a request may
be made by calling the telephone number listed on the cover page of this
prospectus.
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SALE OF THE CONTRACT AND SALES COMMISSIONS
Prudential Investment Management Services LLC ("PIMS"), a direct wholly-owned
subsidiary of Prudential, acts as the principal underwriter of the Group
Contracts and Certificates. PIMS, organized in 1996 under Delaware law, is
registered as a broker-dealer under the Securities Exchange Act of 1934 and is a
member of the National Association of Securities Dealers, Inc. PIMS's principal
business address is 751 Broad Street, Newark, New Jersey 07102. PIMS also acts
as principal underwriter with respect to the securities of other Prudential
investment companies. The Group Contracts and Certificates are sold by
registered representatives of PIMS who are also authorized by state insurance
departments to do so. The Group Contracts and Certificates may also be sold
through other broker-dealers authorized by PIMS and applicable law to do so.
Registered representatives of such other broker-dealers may be paid on a
different basis than described below. The maximum commission that will be paid
to the representative upon the purchase of the Contract is 15% of the premium
payment received, and the amount paid to the broker-dealer to cover both the
individual representative's commission and other distribution expenses will not
exceed 15% of the premium payment. The representative may be required to return
all of the first year commission if the Group Contract is not continued through
the first year. Sales representatives who meet certain productivity,
profitability, and persistency standards with regard to the sale of the Group
Contract will be eligible for additional bonus compensation payable by
Prudential. PIMS will generally receive a commission of no more than 15% of the
premium payment. The commission and distribution percentages will depend on
factors such as the size of the group involved and the amount of sales and
administrative effort required in connection with the particular Group Contract
and will not exceed in the aggregate 15% of the premium payment.
The distribution agreement between PIMS and Prudential will terminate
automatically upon its assignment within the meaning of such term in the 1940
Act. The agreement, however, may be transferred by PIMS without the prior
written consent of Prudential under the circumstances set forth in Rule 2a-6
under the 1940 Act. The agreement may be terminated at any time by either party
upon 60 days written notice to the other party.
Sales expenses in any year are not equal to the sales charge in that year.
Prudential may not recover its total sales expenses for some or all Group
Contracts over the periods the Certificates for such Group Contracts are in
effect. To the extent that the sales charges are insufficient to cover total
sales expenses, the sales expenses will be recovered from Prudential's surplus,
which may include amounts derived from the mortality and expense risk charge and
the monthly cost of insurance charge. See CHARGES AND EXPENSES, page 34.
RATINGS AND ADVERTISEMENTS
Prudential is rated by independent financial rating services, including Moody's,
Standard & Poors, Duff & Phelps and A.M. Best Company. The purpose of these
ratings is to reflect the financial strength of claims-paying ability of
Prudential. They are not intended to rate the investment experience or financial
strength of the Separate Account. Prudential may advertise these ratings from
time to time. Furthermore, Prudential may include in advertisements comparisons
of currently taxable and tax deferred investment programs, based on selected tax
brackets, or discussions of alternative investment vehicles and general economic
conditions.
PAYMENTS TO THIRD-PARTY ADMINISTRATORS AND ASSOCIATIONS SPONSORING
PARTICIPATION IN THE GROUP CONTRACTS
Prudential may make payments to third party administrators or groups sponsoring
the Group Contracts for their services related to administration and sponsorship
of the Group Contracts.
STATE REGULATION
Prudential is subject to regulation and supervision by the Department of
Insurance of the State of New Jersey, which periodically examines its operations
and financial condition. It is also subject to the insurance laws and
regulations of all jurisdictions in which it is authorized to do business.
Prudential reserves the right to change the Group Contract and Certificate to
comply with applicable state insurance laws and interpretations thereof.
Prudential is required to submit annual statements of its operations, including
financial statements, to the insurance departments of the various jurisdictions
in which it does business to determine solvency and compliance with local
insurance laws and regulations.
In addition to the annual statements referred to above, Prudential is required
to file with New Jersey and other jurisdictions a separate statement with
respect to the operations of all its variable contract accounts, in a form
promulgated by the National Association of Insurance Commissioners.
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EXPERTS
The financial statements included in this prospectus for the year ended December
31, 1996 have been audited by Price Waterhouse LLP, independent accountants, as
stated in their report appearing herein, and are included in reliance upon the
report of such firm given upon their authority as experts in accounting and
auditing. Price Waterhouse LLP's principal business address is 1177 Avenue of
the Americas, New York, New York 10036.
The financial statements included in this prospectus for years ended December
31, 1995 and December 31, 1994, have been audited by Deloitte & Touche LLP,
independent auditors, as stated in their reports appearing herein, and are
included in reliance upon the reports of such firm given upon their authority as
experts in accounting and auditing. Deloitte & Touche LLP's principal business
address is Two Hilton Court, Parsippany, New Jersey 07054-0319.
On March 12, 1996, Deloitte & Touche LLP was dismissed as the independent
accountants of Prudential. There have been no disagreements with Deloitte &
Touche LLP on any matter of accounting principles or practices, financial
statement disclosure or auditing scope or procedure which, if not resolved to
the satisfaction of the accountant, would have caused them to make reference to
the matter in their reports.
Actuarial matters included in this prospectus have been examined by Stuart L.
Liebeskind, FSA, MAAA, Vice President and Actuary of Prudential whose opinion is
filed as an exhibit to the registration statement.
LITIGATION
On October 28, 1996, Prudential entered into a Stipulation of Settlement in a
multidistrict proceeding involving allegations of various claims relating to
Prudential's life insurance sales practices. (In re Prudential Insurance Company
of America Sales Practices Litigation, D.N.J., MDL No. 1061, Master Docket No.
95-4704 (AMW)). On March 7, 1997, the United States District Court for the
District of New Jersey approved the Stipulation of Settlement as fair,
reasonable and adequate.
Pursuant to the Settlement, Prudential has agreed to provide an alternative
dispute resolution process for class members who believe they were misled
concerning the sale or performance of their life insurance policies. The
Settlement also provides certain no-fault relief. The ultimate cost of the
Settlement will depend on a variety of factors, including the number of
policyowners who participate in the Settlement, the number of policyowners who
are afforded relief and the remediation option they select. The administrative
costs of implementing the Settlement are also subject to a number of complex
uncertainties. In light of the uncertainties attendant to these and other
factors, it is difficult at this time to estimate the ultimate cost of the
Settlement to Prudential.
In addition, a number of actions have been filed against Prudential by
policyowners who have excluded themselves from the settlement; Prudential
anticipates that additional suits may be filed by other policyowners.
Also, on July 9, 1996, a Multi-State Life Insurance Task Force comprised of
insurance regulators from 29 states and the District of Columbia, released a
report on Prudential's activities. As of February 24, 1997, Prudential had
entered into consent orders or agreements with all 50 states and the District of
Columbia to implement a remediation plan, whose terms closely parallel the
Settlement approved in the MDL proceeding, and agreed to a series of payments
allocated to all 50 states and the District of Columbia amounting to a total of
approximately $65 million.
Litigation is subject to many uncertainties, and given the complexity and scope
of these suits, their outcome cannot be predicted.
Accordingly, management is unable to make a meaningful estimate of the amount or
range of loss that could result from an unfavorable outcome of all pending
litigation. It is possible that the results of operations or the cash flow of
Prudential, in particular quarterly or annual periods could be materially
affected by an ultimate unfavorable outcome of certain pending litigation and
regulatory matters. Management believes, however, that the ultimate outcome of
all pending litigation and regulatory matters referred to above should not have
a material adverse effect on Prudential's financial position.
ADDITIONAL INFORMATION
A registration statement has been filed with the SEC under the Securities Act of
1933, relating to the offering described in this prospectus. This prospectus
does not include all the information set forth in the registration statement.
Certain portions have been omitted pursuant to the rules and regulations of the
SEC. The omitted
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information may, however, be obtained from the SEC's principal office in
Washington, D.C., upon payment of a prescribed fee.
Further information may also be obtained from Prudential's office. The address
and telephone number are set forth on the cover of this prospectus.
49
<PAGE>
DEFINITIONS OF SPECIAL TERMS
USED IN THIS PROSPECTUS
ATTAINED AGE -- A person's age as defined by the Group Contract.
CASH SURRENDER VALUE -- The amount payable to the Participant upon surrender of
the Certificate. The Cash Surrender Value is equal to the Participant's
Certificate Fund on the date of surrender, less any Certificate Debt,
outstanding charges, and any applicable transaction charge.
CERTIFICATE -- A document issued to an Eligible Group Member under a Group
Contract, setting forth or summarizing the Participant's rights and benefits.
CERTIFICATE ANNIVERSARY -- The same date each year as the Certificate Date.
CERTIFICATE DATE -- The effective date of coverage under a Certificate.
CERTIFICATE DEBT -- The principal amount of any outstanding loans to the
Participant under his or her Certificate plus any interest accrued thereon.
CERTIFICATE FUND -- The total amount credited to a Participant under his or her
Certificate. On any date it is equal to the sum of the amounts under that
Certificate allocated to: (1) the Subaccounts, (2) the Fixed Account, and (3)
the Loan Account.
CERTIFICATE YEAR -- The year from the Certificate Date to the first Certificate
Anniversary or from one Certificate Anniversary to the next.
CONTRACT ANNIVERSARY -- The same date each year as specified in the contract.
CONTRACT DATE -- The date as of which the Group Contract is issued.
CONTRACTHOLDER -- The employer, association, sponsoring organization or trust
that is issued a Group Contract. In the case of an employer that joins a
multiple employer trust, the employer exercises the rights accorded to a
Contractholder as described throughout this prospectus.
COVERED PERSON -- The person whose life is insured under the Group Contract. The
Covered Person is generally the Participant. Some Group Contracts may permit a
Participant to apply for insurance under a second Certificate naming the
Participant's spouse as the Covered Person.
DEATH BENEFIT -- The amount payable upon the death of the Covered Person (before
the deduction of any Certificate Debt or any outstanding charges).
DIVIDEND -- A portion of Prudential's divisible surplus attributable to the
Group Contract that may be credited to the Group Contract as determined annually
by Prudential's Board of Directors.
ELIGIBLE GROUP MEMBERS -- The persons specified in the Group Contract as
eligible to apply for insurance protection under the Group Contract.
EXPERIENCE CREDIT -- A refund that may be given under certain Group Contracts
based on favorable mortality experience.
FACE AMOUNT -- The amount of life insurance in a Participant's Certificate. The
Face Amount will be the minimum Death Benefit as long as the Participant's
Certificate remains in force.
FIXED ACCOUNT -- An investment option under which Prudential guarantees that
interest will be added to the amount deposited at a rate declared periodically
in advance.
FUNDS -- The Series Fund portfolios and other mutual fund portfolios in which
the Separate Account invests.
GROUP CONTRACT -- A Group Variable Universal Life insurance contract issued to
the Contractholder by Prudential.
GUIDELINE ANNUAL PREMIUM -- A level annual premium that would be payable
throughout the duration of a Certificate to fund the future benefits if the
certificate were a fixed premium contract, based on certain assumptions set
forth in a rule of the SEC. Upon request, Prudential will advise a Participant
of the guideline annual premium under the Certificate.
ISSUE AGE -- The Covered Person's Attained Age on the date that the insurance on
that Covered Person goes into effect as defined by the Group Contract.
LOAN ACCOUNT -- An account within Prudential's general account to which is
transferred from the Separate Account and/or the Fixed Account an amount equal
to the amount of any loan.
LOAN VALUE -- The amount (before any applicable transaction charge) that a
Participant may borrow at any given time under his or her Certificate. The Loan
Value at any time is determined by multiplying the Certificate Fund by 90% (or
higher where required by state law) and then subtracting any existing loan with
accrued interest, outstanding charges, and the amount of the next month's
charges.
50
<PAGE>
MONTHIVERSARY -- The Contract Date and the first day of each succeeding month,
except that whenever the contract Monthiversary falls on a date other than a
Valuation Date the Monthiversary will be the next Valuation Date.
NET PREMIUM -- A Participant's premium payment minus any charges for taxes
attributable to premiums, any processing fee, and any sales charge. Net Premiums
are the amounts available for allocation to the Separate Account and/or the
Fixed Account.
PARTICIPANT -- An Eligible Group Member or "eligible applicant owner" under a
Group Contract who obtains insurance under the Group Contract and is eligible to
exercise the rights described in the Certificate. The Participant will be the
person entitled to exercise all rights under a Certificate, regardless of
whether the Covered Person under the Certificate is the Participant or his or
her spouse. References to rights that a Participant may exercise under a
Certificate shall include exercise of such rights by any person to whom the
Participant has validly assigned such rights.
PORTABLE -- A status that may occur when a Participant is no longer an Eligible
Group Member under the Group Contract because of the occurrence of an event
specified in the Group Contract or the Certificate. Such events may include
termination of the Participant's employment or other relationship with the
Contractholder or retirement of the Participant. Cost of insurance rates and
charges may increase under a Portable Certificate since the Covered Person under
a Portable Certificate may no longer be considered to be a member of the
Contractholder's group for purposes of determining those rates and charges.
SEPARATE ACCOUNT -- Prudential Variable Contract Account GI-2, a separate
investment account registered as a unit investment trust under the Investment
Company Act of 1940 and established by Prudential to receive and invest the Net
Premiums paid under the Certificates.
SERIES FUND -- The Prudential Series Fund, Inc., a mutual fund with separate
portfolios, one or more of which may be used as an underlying investment for the
Group Contracts.
SUBACCOUNT -- A division of the Separate Account, the assets of which are
invested in the shares of the corresponding Fund.
VALUATION DATE -- Each day on which the value of the amount invested in a
Subaccount is determined, which is generally each day that the New York Stock
Exchange is open for trading.
VALUATION PERIOD -- The period of time from one determination of the value of
the amount invested in a Subaccount to the next. Such determinations are made
when the net asset values of the portfolios of the Funds are calculated.
51
<PAGE>
DIRECTORS AND OFFICERS OF PRUDENTIAL
The directors and certain officers of Prudential, listed with their principal
occupations during the past 5 years, are shown below.
DIRECTORS OF PRUDENTIAL
FRANKLIN E. AGNEW. Director. -- Business Consultant. Address: USX Tower, Suite
660, 600 Grant Street, Pittsburgh, PA 15219.
FREDERIC K. BECKER, Director. -- President, Wilentz, Goldman, and Spitzer (law
firm). Address: 90 Woodbridge Center Drive, Woodbridge, NJ 07095.
JAMES G. CULLEN, Director.--Vice Chairman, Bell Atlantic Corporation since 1995;
1993 to 1995: President, Bell Atlantic Corporation; Prior to 1993: President,
New Jersey Bell. Address: 1310 North Court House Road, 11th floor, Alexandria,
VA 22201.
CAROLYNE K. DAVIS, Director.--National and International Health Care Advisor,
Ernst & Young LLP. Address: 1225 Connecticut Avenue, NW, Washington, DC 20036.
ROGER A. ENRICO, Director.--Chairman and Chief Executive Officer, Pepsico Inc.
since 1996; Vice Chairman, Pepsico, Inc., from 1993 to 1996; Chairman and Chief
Executive Officer, Pepsi Co. Worldwide Food, from 1991 to 1993. Address: 14841
North Dallas Parkway, Dallas, TX 75240.
ALLAN D. GILMOUR, Director.--Former Vice Chairman, Ford Motor Company. Address:
Prudential Plaza, Newark, NJ 07102-3777.
WILLIAM H. GRAY, III, Director.--President and Chief Executive Officer, The
College Fund/UNCF. Address: 8260 Willow Oaks Corporate Drive, Fairfax, VA 22031.
JON F. HANSON, Director.--Chairman, Hampshire Management Company. Address: 235
Moore Street, Suite 200, Hackensack, NJ 07601.
GLEN H. HINER, JR., Director.--Chairman and Chief Executive Officer, Owens
Corning. Address: One Owens Corning Parkway, Toledo, OH 43659.
CONSTANCE J. HORNER, Director.--Guest Scholar, The Brookings Institution since
1993; 1991 to 1992: Assistant to the President and Director of Presidential
Personnel, U.S. Government. Address: 1775 Massachusetts Avenue, N.W.,
Washington, DC 20036-2188.
GAYNOR N. KELLEY, Director.--Retired Chairman and Chief Executive Officer, The
Perkin Elmer Corporation. Address: 751 Broad Street, Newark, NJ 07102-3777.
BURTON G. MALKIEL, Director.--Professor, Princeton University. Address:
Princeton University, 110 Fisher Hall, Prospect Avenue, Princeton, NJ
08544-1021.
ARTHUR F. RYAN, Chairman of the Board, President, and Chief Executive Officer.
- -- Chairman, President, and Chief Executive Officer, Prudential since 1994;
Prior to 1994, President and Chief Operating Officer, Chase Manhattan
Corporation. Address: 751 Broad Street, Newark, NJ 07102-3777.
IDA F. S. SCHMERTZ, Director.--Principal, Investment Strategies International
since 1994; Prior to 1994: Senior Vice President of Corporate Affairs, American
Express Company. Address: 90 Riverside Dr., New York, NY 10024.
CHARLES R. SITTER, Director.--Former President, Exxon Corporation. Address: 5959
Las Colinas Boulevard, Irving, TX 75039-2298.
DONALD L. STAHELI, Director.--Chairman and Chief Executive Officer, Continental
Grain Company since 1995; Prior to 1995: President and Chief Executive Officer,
Continental Grain Company. Address: 277 Park Avenue, New York, NY 10172.
RICHARD M. THOMSON, Director.--Chairman and Chief Executive Officer, The
Toronto-Dominion Bank. Address: P.O. Box 1, Toronto-Dominion Centre, Toronto,
Ontario, M5K 1A2, Canada.
52
<PAGE>
JAMES A. UNRUH, Director.--Chairman and Chief Executive Officer, Unisys
Corporation. Address: P.O. Box 500, Blue Bell, PA 19424-0001.
P. ROY VAGELOS, M.D., Director.--Former Chairman and Chief Executive Officer,
Merck & Co., Inc. Address: One Crossroads Drive, Bedminster, NJ 07921.
STANLEY C. VAN NESS, Director.--Attorney, Picco Herbert Kennedy (law firm).
Address: One State Street Square, Suite 1000, Trenton, NJ 08607-1388.
PAUL A. VOLCKER, Director.--Business Consultant since 1996; Prior to 1996:
Chairman, Wolfensohn & Co., Inc. Address: 599 Lexington Avenue, New York, NY
10022.
JOSEPH H. WILLIAMS, Director.--Director, The Williams Companies since 1994;
Prior to 1994: Chairman and Chief Executive Officer, The Williams Companies.
Address: One Williams Center, Tulsa, OK 74172.
OTHER EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS
MARTIN A. BERKOWITZ, Senior Vice President and Comptroller.--Senior Vice
President and Chief Financial Officer of Prudential Investment Company.
SUSAN L. BLOUNT, Vice President and Secretary.--Vice President and Secretary of
Prudential since 1995; Prior to 1995: Assistant General Counsel for Prudential
Residential Services Company.
C. EDWARD CHAPLIN, Vice President and Treasurer.--Vice President and Treasurer
of Prudential since 1995; 1993 to 1995: Managing Director and Assistant
Treasurer of Prudential; 1992 to 1993: Vice President and Assistant Treasurer,
Banking and Cash Management for Prudential.
MARK B. GRIER, Chief Financial Officer.--Chief Financial Officer of Prudential
since 1995; Prior to 1995: Executive Vice President and Head of Global Markets,
Chase Manhattan Corporation.
53
<PAGE>
FINANCIAL STATEMENTS
The statutory financial statements of Prudential included herein should be
distinguished from the financial statements of the Separate Account, and should
be considered only as bearing upon the ability of Prudential to meet its
obligations under the Certificates.
Financial statements of the Separate Account are not included in this Prospectus
because the Separate Account had not yet commenced operations as of the date of
this Prospectus.
54
<PAGE>
<TABLE>
<CAPTION>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
STATEMENTS OF ADMITTED ASSETS, LIABILITIES AND SURPLUS (STATUTORY BASIS)
- ------------------------------------------------------------------------------------------------------------------------------------
DECEMBER 31,
1996 1995
-------- --------
(In Millions)
<S> <C> <C>
ASSETS
Bonds ............................................................................ $ 75,006 $ 77,494
Preferred stock .................................................................. 239 396
Common stock ..................................................................... 7,076 6,133
Mortgage loans on real estate .................................................... 17,039 20,280
Real estate ...................................................................... 2,094 2,488
Policy loans and premium notes ................................................... 6,023 6,208
Cash and short-term investments .................................................. 5,982 4,803
Other invested assets ............................................................ 2,591 3,304
-------- --------
TOTAL CASH AND INVESTED ASSETS ................................................... 116,050 121,106
Premiums due and deferred ........................................................ 1,925 1,917
Accrued investment income ........................................................ 1,640 1,688
Other assets ..................................................................... 1,208 1,120
Assets held in separate accounts ................................................. 57,797 53,903
-------- --------
TOTAL ASSETS ..................................................................... $178,620 $179,734
======== ========
LIABILITIES AND SURPLUS
LIABILITIES
Policy liabilities and insurance reserves:
Future policy benefits and claims ............................................ $ 87,582 $ 93,346
Unearned premiums ............................................................ 619 624
Policy dividends ............................................................. 1,878 1,893
Policyholder account balances ................................................ 7,968 7,966
Notes payable and other borrowings ............................................... 763 807
Asset valuation reserve .......................................................... 2,682 2,705
Federal income tax payable ....................................................... 729 1,278
Other liabilities ................................................................ 9,588 9,191
Liabilities related to separate accounts ......................................... 57,436 53,256
-------- --------
TOTAL LIABILITIES ................................................................ 169,245 171,066
-------- --------
CONTINGENCIES (NOTE 11)
SURPLUS
Capital notes .................................................................... 985 984
Special surplus fund ............................................................. 1,268 1,274
Unassigned surplus ............................................................... 7,122 6,410
-------- --------
TOTAL SURPLUS .................................................................... 9,375 8,668
-------- --------
TOTAL LIABILITIES AND SURPLUS .................................................... $178,620 $179,734
======== ========
</TABLE>
SEE NOTES TO STATUTORY FINANCIAL STATEMENTS
<PAGE>
<TABLE>
<CAPTION>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
STATEMENTS OF OPERATIONS AND CHANGES IN SURPLUS (STATUTORY BASIS)
- ------------------------------------------------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31,
1996 1995 1994
(In Millions)
<S> <C> <C> <C>
REVENUE
Premiums and annuity considerations .................................... $ 20,674 $ 21,088 $ 23,612
Net investment income .................................................. 8,677 8,637 7,387
Other income ........................................................... 571 363 367
-------- -------- --------
TOTAL REVENUE .......................................................... 29,922 30,088 31,366
-------- -------- --------
BENEFITS AND EXPENSES
Death benefits ......................................................... 2,943 2,858 2,798
Annuity benefits ....................................................... 3,582 3,495 3,354
Disability benefits .................................................... 5,630 5,765 5,201
Other benefits ......................................................... 806 853 845
Surrender benefits and fund withdrawals ................................ 11,844 12,538 11,714
Net (decrease) increase in reserves .................................... (1,572) (2,178) 1,251
Commissions ............................................................ 477 535 610
Other expenses ......................................................... 2,690 2,650 3,727
-------- -------- --------
TOTAL BENEFITS AND EXPENSES ............................................ 26,400 26,516 29,500
-------- -------- --------
Operating income before dividends and income taxes ..................... 3,522 3,572 1,866
Dividends to policyholders ............................................. 2,526 2,464 2,290
-------- -------- --------
Operating income (loss) before income taxes ............................ 996 1,108 (424)
Income tax provision ................................................... 51 590 453
-------- -------- --------
INCOME (LOSS) FROM OPERATIONS .......................................... 945 518 (877)
NET REALIZED CAPITAL GAINS (LOSSES) .................................... 457 (183) (24)
-------- -------- --------
NET INCOME (LOSS) ..................................................... $ 1,402 $ 335 $ (901)
======== ======== ========
SURPLUS
SURPLUS, BEGINNING OF YEAR ............................................. 8,668 7,449 8,004
Net income (loss) ...................................................... 1,402 335 (901)
Change in net unrealized capital gains (losses) ........................ 191 661 (51)
Change in non-admitted assets .......................................... (206) 717 82
Change in asset valuation reserve ...................................... 11 (694) 653
Other changes, net ..................................................... (691) 200 (338)
-------- -------- --------
SURPLUS, END OF YEAR ................................................... $ 9,375 $ 8,668 $ 7,449
======== ======== ========
</TABLE>
SEE NOTES TO STATUTORY FINANCIAL STATEMENTS
- 1 -
<PAGE>
<TABLE>
<CAPTION>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
STATEMENTS OF CASH FLOWS (STATUTORY BASIS)
- ------------------------------------------------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31,
1996 1995 1994
--------- --------- ---------
(In Millions)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Premiums and annuity considerations ...................................... $ 20,669 $ 21,030 $ 23,635
Net investment income .................................................... 8,629 8,511 7,261
Other income received .................................................... 599 479 502
Separate account transfers ............................................... 1,183 1,002 (494)
Benefits and claims paid ................................................. (24,952) (25,524) (24,403)
Policyholders' dividends paid ............................................ (2,453) (2,393) (2,594)
Federal income taxes (paid) received ..................................... (230) (847) 179
Other operating expenses ................................................. (4,224) (3,738) (3,636)
--------- --------- ---------
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES ...................... (779) (1,480) 450
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from investments sold, matured, or repaid
Bonds ............................................................... 119,195 93,178 80,668
Stocks .............................................................. 4,328 2,985 4,263
Mortgage loans on real estate ....................................... 3,140 4,997 4,205
Real estate ......................................................... 537 573 935
Net gains (losses) on cash and short-term investments ............... 13 (9) (5)
Miscellaneous proceeds .............................................. 2,128 3,707 2,671
Payments for investments acquired
Bonds ............................................................... (118,009) (101,018) (81,677)
Stocks .............................................................. (6,029) (2,199) (2,312)
Mortgage loans on real estate ....................................... (1,841) (2,810) (3,282)
Real estate ......................................................... (120) (425) (194)
Miscellaneous applications .......................................... (718) (1,213) (1,275)
Net (tax) benefit on capital gains and losses ............................ (622) 107 (275)
--------- --------- ---------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES ...................... 2,002 (2,127) 3,722
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Net (repayments of) proceeds from borrowed money ......................... (44) 123 1
Net proceeds from the issuance of capital notes .......................... 0 686 0
--------- --------- ---------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES ..................... (44) 809 1
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND SHORT-TERM INVESTMENTS ............... 1,179 (2,798) 4,173
Cash and short-term investments, beginning of year ....................... 4,803 7,601 3,428
--------- --------- ---------
CASH AND SHORT-TERM INVESTMENTS, END OF YEAR ............................. $ 5,982 $ 4,803 $ 7,601
========= ========= =========
</TABLE>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest payments of $253 million, $144 million and $85 million were made during
1996, 1995 and 1994, respectively.
SEE NOTES TO STATUTORY FINANCIAL STATEMENTS
- 2 -
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO STATUTORY FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1. ACCOUNTING POLICIES AND PRINCIPLES
A. Business and basis of presentation - The statutory financial
statements include the accounts of The Prudential Insurance Company of
America ("the Company"), a mutual life insurance company. The
activities of the Company include a broad range of financial services,
including life and health insurance, asset management, and investment
advisory services.
These financial statements were prepared on an unconsolidated
statutory basis of accounting, which differs from the 1995 and 1994
financial statements prepared for general distribution on a
consolidated statutory basis of accounting, both of which differ from
generally accepted accounting principles ("GAAP"). The financial
statements for 1995 and 1994 have been restated on an unconsolidated
statutory basis of accounting adopted in 1996 for purposes of general
distribution. Certain reclassifications have been made to the 1995 and
1994 financial statement amounts to conform to the 1996 presentation.
The Company, domiciled in the State of New Jersey, prepares its
statutory financial statements in accordance with accounting practices
prescribed or permitted by the New Jersey Department of Banking and
Insurance ("the Department"). Prescribed statutory accounting
practices include publications of the National Association of
Insurance Commissioners ("NAIC"), state laws, regulations, and general
administrative rules. Permitted statutory accounting practices
encompass all accounting practices not so prescribed. The financial
statements are substantially the same as those included in the
Statutory Annual Statement except for certain reclassifications and
adjustments. These financial statements differ from those filed with
the Department in that changes to estimated income and premium taxes
applicable to prior periods, which are recorded as direct charges or
credits to surplus in the Annual Statement, have been included in the
"Income tax provision" and "Other expenses" in the Statements of
Operations and Changes in Surplus. This item has the net effect of
increasing (decreasing) net income by $396 million, ($143) million and
$6 million in 1996, 1995 and 1994, respectively.
Pursuant to the Financial Accounting Standards Board Interpretation
No. 40 "Applicability of Generally Accepted Accounting Principles to
Mutual Life Insurance and Other Enterprises," as amended, which is
effective for 1996 financial statements, statutory accounting
practices ("SAP") are no longer considered GAAP for mutual life
insurance companies. SAP differs from GAAP primarily as follows:
(a) the Commissioner's Reserve Valuation Method ("CRVM") is used for the
majority of individual insurance reserves under SAP, whereas for
individual insurance, policyholder liabilities are generally
established using the net level premium method under GAAP. Policy
assumptions used in the estimation of policyholder liabilities are
generally prescribed under SAP, but are based upon actual company
experience under GAAP;
(b) for investment-type contracts that do not contain mortality or
morbidity risk and universal life-type contracts, cash receipts are
recorded as premiums and reserves are established using prescribed
reserving methods under SAP. Under GAAP, premium from investment-type
and universal life-type contracts are generally recognized as
deposits. Revenues from these contracts represent amounts assessed
against policyholders and are reported in the period of assessment;
(c) policy acquisition costs are expensed when incurred under SAP rather
than being deferred and charged against earnings over the periods
covered by the related policies;
(d) deferred income taxes are not recorded for the tax effect of temporary
differences between book and tax basis of assets and liabilities under
SAP;
(e) certain "non-admitted assets" must be excluded under SAP through a
charge against surplus, e.g. fixed assets, prepaid pensions and
impaired investments;
(f) investments in the common stock of the Company's wholly-owned
subsidiaries are accounted for using the equity method under SAP
rather than consolidated;
(g) bonds are carried at amortized cost under SAP rather than categorized
as "held to maturity", "available for sale", or "trading". Under GAAP,
bonds classified as "available for sale" and "trading" are carried at
market value;
(h) certain reclassifications would be required with respect to the
balance sheet and statement of cash flows under SAP;
(i) the Asset Valuation Reserve ("AVR") and Interest Maintenance Reserve
("IMR") are required for life insurance companies under SAP.
The following is a summary of accounting practices permitted by the
state of New Jersey and reflected in these financial statements:
o Prescribed statutory accounting practices require Department
approval of each and every interest payment at the time of
payment in order to classify the Company's Capital Notes as a
component of surplus. Otherwise, such notes are required to be
classified as a liability. Interest payments on $300 million in
Capital Notes issued in 1993 are pre-approved by the Department,
and permitted to be classified in surplus.
o The Company sells synthetic guaranteed interest contracts
("GICs") containing minimum investment related guarantees on
qualified pension plan assets. The assets are owned by the
trustees of such plans, who invest the assets
- 3 -
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO STATUTORY FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
under the terms of investment guidelines agreed to with the
Company. The investment related guarantees may include a minimum
rate of return on the underlying assets and/or a guarantee of
liquidity to meet plan cash flow requirements. The Company, with
the approval of the Department, reports both the plan liabilities
associated with the synthetic GICs and the trust assets
supporting this potential liability. In addition, the Company
files detailed schedules of trust assets and related statements
with the Department. Currently, prescribed statutory accounting
practices do not address accounting for synthetic GICs.
o The Company establishes guaranty fund liabilities for the
insolvencies of certain life insurance companies. The liabilities
are established net of estimated premium tax credits and federal
income tax. Prescribed statutory accounting practices do not
address the establishment of liabilities for guaranty fund
assessments.
B. Divestiture - On July 31, 1996, Prudential sold a substantial portion
of its Canadian Branch business to the London Life Insurance Company
("London Life"). The transaction was structured as an assumption
reinsurance transaction, whereby London Life assumed total liabilities
of the Canadian Branch equal to $3,146 million as well as a related
amount of total assets equal to $3,040 million. A net gain of $138
million was recorded for this transaction.
C. Use of estimates - The preparation of financial statements in
conformity with SAP requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenue and expenses
during the reported period. Actual results could differ from those
estimates.
D. Investments - Bonds, which consist of long-term bonds, are stated
primarily at amortized cost.
Preferred stock is generally valued at amortized cost.
Common Stock is carried at fair value. Investments in subsidiaries,
which are included in "Common stock", are accounted for using the
equity method. The subsidiaries' change in net assets, excluding
capital contributions and distributions, is included in "Net
investment income." The subsidiaries are engaged principally in the
businesses of life and health insurance, property and casualty
insurance, group health care, securities brokerage, asset management,
investment advisory services, retail banking and real estate and
brokerage.
Mortgage loans on real estate are stated primarily at unpaid principal
balances.
Real estate, except for real estate acquired in satisfaction of debt,
is carried at cost less accumulated straight-line depreciation,
encumbrances and permanent impairments in value. Properties acquired
in satisfaction of debt are valued at lower of depreciated cost or
fair value less disposition costs.
Policy loans and premium notes are stated at unpaid principal
balances.
Cash includes cash on hand, amounts due from banks and money market
instruments. Short term investments, including highly liquid debt
instruments purchased with an original maturity of twelve months or
less, are stated at amortized cost, which approximates fair value.
Other invested assets primarily include the Company's investment in
joint ventures and other forms of partnerships. These investments are
accounted for using the equity method where the Company has the
ability to exercise significant influence over the operating and
financial policies of the entity. The cost method is used for all
other assets.
Derivatives used in asset/liability risk management activities, which
support life and health insurance and annuity contracts, are recorded
at either fair value or statement value, depending upon the underlying
instrument, with unrealized gains and losses recorded in "Change in
net unrealized capital gains (losses)." Upon termination of
derivatives, the interest-related gains and losses are amortized
through the IMR.
E. Separate accounts - These assets and liabilities, reported at
estimated fair value, represent segregated funds invested for pension
and other clients. Investment risks associated with fair value changes
are generally borne by the clients, except to the extent of minimum
guarantees made by the Company with respect to certain accounts.
F. Revenue recognition of insurance income and related expenses - Life
premiums are recognized as income over the premium paying period of
the related policies. Annuity considerations are recognized as revenue
when received. Health premiums are earned ratably over the terms of
the related insurance and reinsurance contracts or policies. Expenses
incurred in connection with acquiring new insurance business,
including such acquisition costs as sales commissions, are charged to
operations as incurred.
- 4 -
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO STATUTORY FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
G. Policyholder dividends - Substantially all of the policies issued by
the Company are participating. The amount of dividends to be paid to
policyholders is determined annually by the Company's Board of
Directors. The aggregate amount of policyholders' dividends is related
to actual interest, mortality, morbidity, and expense experience for
the year and judgment as to the appropriate level of statutory surplus
to be retained by the Company. Dividends declared by the Board of
Directors which have not been paid are included in "Policy dividends".
2. POLICY LIABILITIES AND INSURANCE RESERVES
A. For life insurance and annuities, future policy benefits and claims
include estimates of benefits and associated settlement expenses on
reported claims and those which are incurred but not reported.
Activity in the liability for unpaid claims and claim adjustment
expenses for accident and health business, which is included in
"Future policy benefits and claims", is as follows:
1996 1995 1994
------- ------- -------
(In Millions)
Balance at January 1 $ 2,636 $ 2,440 $ 2,416
Less reinsurance recoverables 15 23 15
------- ------- -------
Net balance at January 1 2,621 2,417 2,401
------- ------- -------
Incurred related to:
Current year 5,734 5,759 5,398
Prior years (87) 42 (87)
------- ------- -------
Total incurred 5,647 5,801 5,311
------- ------- -------
Paid related to:
Current year 4,135 4,028 3,856
Prior years 1,467 1,569 1,439
------- ------- -------
Total paid 5,602 5,597 5,295
------- ------- -------
Net balance at December 31 2,666 2,621 2,417
Plus reinsurance recoverables 10 15 23
------- ------- -------
Balance at December 31 $ 2,676 $ 2,636 $ 2,440
======= ======= =======
As a result of changes in reserve estimates for insured events of
prior years, the provision for claims and claim adjustment expenses
changed by ($87) million and $42 million in 1996 and 1995,
respectively, due to changes in claim cost trends and changed by ($87)
million in 1994 because of faster-than-expected shrinkage in the
indemnity health business.
B. Reserves for individual life insurance are calculated using various
methods, interest rates and mortality tables, which produce reserves
that meet the aggregate requirements of state laws and regulations.
Approximately 39% of individual life insurance reserves are determined
using the net level premium method, or by using the greater of the net
level premium reserve or the policy cash value. About 52% of
individual life insurance reserves are calculated according to CRVM
or methods which compare CRVM to policy cash values. The remaining
reserves include universal life reserves which are equal to the
greater of the policyholder account value less the unamortized expense
allowance and the policy cash value, or are for supplementary benefits
whose reserves are calculated using methods, interest rates and tables
appropriate for the benefit provided.
For group life insurance, about 56% of the reserves are associated
with extended death benefits. These reserves are primarily calculated
using modified group tables at various interest rates. The remainder
are unearned premium reserves (calculated using the 1960
Commissioner's Standard Group Table), reserves for group life fund
accumulations and other miscellaneous reserves.
Reserves for deferred individual annuity contracts are determined
using the Commissioner's Annuity Reserve Valuation Method. These
account for 72% of the individual annuity reserves. The remaining
reserves are equal to the present value of future payments with the
annuity mortality table and interest rates based on the date of issue
or maturity as appropriate.
Reserves for other deposit funds or other liabilities with life
contingencies reflect the contract deposit account or experience
accumulation for the contract and any purchased annuity reserves.
Accident and health reserves represent the present value of the future
potential payments, adjusted for contingencies and interest. The
remaining material reserves for active life reserves and unearned
premiums are valued using the preliminary term method, gross premium
valuation method, or a pro rata portion of gross premiums. Reserves
are also held for amounts not yet due on hospital benefits and other
coverages.
- 5 -
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO STATUTORY FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
The reserve for guaranteed interest contracts, deposit funds and other
liabilities without life contingencies equal either the present value
of future payments discounted at the guaranteed rate or the fund
value.
Policyholders, at their discretion, may withdraw funds from their
annuity policies. At December 31, 1996 and 1995, approximately 55% of
total annuity actuarial reserves and deposit liabilities of $92,536
million and $95,092 million, respectively, were not subject to
discretionary withdrawal.
3. INCOME TAXES
The Company and its domestic subsidiaries file a consolidated federal income
tax return. The Internal Revenue Code (the "Code") taxes the Company on its
operating income after dividends to policyholders. In calculating this tax,
the Code requires the capitalization and amortization of policy acquisition
expenses.
The Code also imposes an "equity tax" on mutual life insurance companies
which, in effect, imposes an additional amount of taxable income to the
Company. "Income tax provision" includes an estimate for the total equity tax
to be paid with respect to the year. Income from sources outside the United
States is taxed under applicable foreign statutes.
The Internal Revenue Service (the "Service") has completed an examination of
the consolidated federal income tax return through 1989. The Service is
examining the years 1990 through 1992. Discussions are being held with the
Service with respect to proposed adjustments. However, management believes
there are adequate defenses against, or sufficient reserves to provide for,
such adjustments.
4. INVESTED ASSETS
A. Bonds and stocks - The Company invests in both investment grade and
non-investment grade public and private bonds. The Securities
Valuation Office of the NAIC rates the bonds held by insurers for
regulatory purposes and classifies investments into six categories
ranging from highest quality bonds to those in or near default. The
lowest three NAIC categories represent primarily high-yield securities
and are defined by the NAIC as including any security with a public
agency rating equivalent to B+ or B1 or less. Securities in these
lowest three categories approximated 2.8% and 1.0%, of the Company's
bonds at December 31, 1996, 1995, respectively.
The following tables provide additional information relating to bonds
and preferred stock as of December 31:
<TABLE>
<CAPTION>
1996
-------------------------------------------------------
GROSS GROSS ESTIMATED
CARRYING UNREALIZED UNREALIZED FAIR
AMOUNT GAINS LOSSES VALUE
------- ------- ------ -------
Bonds (In Millions)
<S> <C> <C> <C> <C>
U.S. Treasury securities and obligations of
U.S. government corporations and agencies $ 9,504 $ 353 $ 74 $ 9,783
Obligations of U.S. states and their
political subdivisions 206 7 6 207
Foreign government bonds 2,420 133 11 2,542
Corporate securities 57,282 2,625 323 59,584
Mortgage-backed securities 5,594 131 15 5,710
------- ------- ------- -------
Total $75,006 $ 3,249 $ 429 $77,826
======= ======= ======= =======
Preferred Stock
Redeemable $ 142 $ 3 $ 6 $ 139
Non-redeemable 97 23 0 120
------- ------- ------- -------
Total $ 239 $ 26 $ 6 $ 259
======= ======= ======= =======
</TABLE>
- 6 -
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO STATUTORY FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1995
--------------------------------------------------
GROSS GROSS
CARRYING UNREALIZED UNREALIZED FAIR
AMOUNT GAINS LOSSES VALUE
------- ------- ------- -------
Bonds (In Millions)
<S> <C> <C> <C> <C>
U.S. Treasury securities and obligations of
U.S. government corporations and agencies $15,715 $ 1,392 $ 1 $17,106
Obligations of U.S. states and their
political subdivisions 214 22 1 235
Foreign government bonds 3,196 260 1 3,455
Corporate securities 54,411 4,609 97 58,923
Mortgage-backed securities 3,958 241 8 4,191
------- ------- ------- -------
Total $77,494 $ 6,524 $ 108 $83,910
======= ======= ======= =======
Preferred Stock
Redeemable $ 304 $ 16 $ 4 $ 316
Non-redeemable 92 2 0 94
------- ------- ------- -------
Total $ 396 $ 18 $ 4 $ 410
======= ======= ======= =======
</TABLE>
The carrying amount and estimated fair value of bonds at December 31,
1996, categorized by contractual maturity, are shown below. Actual
maturities may differ from contractual maturities because borrowers
may prepay obligations with or without call or prepayment penalties.
CARRYING ESTIMATED
AMOUNT FAIR VALUE
-------- ----------
(In Millions)
Due in one year or less $ 1,999 $ 2,012
Due after one year through five years 19,125 19,445
Due after five years through ten years 19,406 20,081
Due after ten years 28,882 30,578
------- -------
69,412 72,116
------- -------
Mortgage-backed securities 5,594 5,710
------- -------
Total $75,006 $77,826
======= =======
Proceeds from the sale and maturity of bonds during 1996, 1995 and
1994 were $119,195 million, $93,178 million and $80,668 million,
respectively. Gross gains of $1,516 million, $1,913 million and $618
million and gross losses of $988 million, $782 million and $1,841
million were realized on such sales during 1996, 1995 and 1994,
respectively. Realized gains and losses are determined using the
specific identification method.
B. Mortgage loans on real estate - Mortgage loans on real estate at
December 31 are as follows:
1996 1995
------------------ ------------------
CARRYING PERCENT CARRYING PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL
------ -------- ------ --------
(In Millions)
Commercial and agricultural loans:
In good standing $15,546 91.3% $17,649 87.0%
In good standing
with structured terms 809 4.7% 966 4.8%
Past due 90 days or more 229 1.3% 144 0.7%
In process of foreclosure 68 0.4% 157 0.8%
Residential loans 387 2.3% 1,364 6.7%
------- ----- ------- -----
Total $17,039 100.0% $20,280 100.0%
======= ===== ======= =====
At December 31, 1996, the Company's mortgage loans on real estate were
collateralized by the following property types: office buildings
(34%), retail stores (22%), residential properties (2%), apartment
complexes (18%), industrial buildings (11%), agricultural properties
(9%) and other commercial properties (4%). The maximum percentage of
any one loan to the value of collateral at the time of the loan,
exclusive of insured, guaranteed, purchase money mortgages or
mortgages supported by high credit leases is 80%. The mortgage loans
are geographically dispersed throughout the United States and
- 7 -
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO STATUTORY FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
Canada with the largest concentrations in California (26%) and New
York (8%). Included in these balances are mortgage loans with
affiliated joint ventures of $560 million and $653 million at December
31, 1996 and 1995, respectively.
C. Real estate - Real estate at December 31 was as follows:
1996 1995
------ ------
(In Millions)
Investment real estate $1,201 $1,484
Properties occupied by the Company 525 533
Properties acquired in
satisfaction of debt 368 471
------ ------
Total $2,094 $2,488
====== ======
Accumulated depreciation on real estate was $808 million and $853
million at December 31, 1996 and 1995, respectively.
D. Other invested assets - Other invested assets of $2,591 million and
and $3,304 million as of December 31, 1996 and 1995, respectively,
principally include the Company's net equity in joint ventures and
other forms of partnerships. The Company's share of net income from
other invested assets was $283 million, $240 million and $348 million
for 1996, 1995 and 1994, respectively.
E. Investment in subsidiaries - Included in "Common stock" is the
Company's investment in subsidiaries of $4,610 million and $4,328
million at December 31, 1996 and 1995, respectively. Included in "Net
investment income" for 1996, 1995 and 1994 is $370 million, $143
million and $(936) million, respectively, attributable to
undistributed income (loss) of subsidiaries.
In October 1995, the Company completed the sale of Prudential
Reinsurance Holdings, Inc., through an initial public offering of
common stock. As a result of the sale, an after-tax gain of $72
million was recorded in 1995.
In March 1995, the Company announced its intention to sell its
mortgage banking unit. On January 26, 1996, the Company entered into a
definitive agreement to sell substantially all the assets of
Prudential Home Mortgage Company, Inc. ("PHMC") and it also
liquidated certain mortgage-backed securities and extended warehouse
loans. In 1995, PHMC recorded an after-tax loss of $98 million which
includes operating gains and losses, asset write downs, and other
costs directly related to the sale. The Company continues to have
discussions with prospective buyers for the sale of the remaining
assets.
F. Net unrealized capital gains (losses) - Changes in net unrealized
capital gains (losses), which result principally from changes in the
differences between cost and carrying amounts of invested assets, were
$191 million and $661 million for the years ended December 31, 1996
and 1995, respectively, and are reflected in "Unassigned surplus."
G. Asset valuation reserve and interest maintenance reserve - These
reserves are required for life insurance companies under NAIC
requirements. The AVR is calculated based on a statutory formula and
is designed to mitigate the effect of valuation and credit-related
losses on unassigned surplus. The IMR captures realized capital gains
and losses, net of tax, resulting from changes in the general level of
interest rates. These gains and losses are amortized into net
investment income utilizing grouped amortization schedules over the
expected remaining life of the investments sold. At December 31, 1996,
AVR is comprised of 68% for bonds, stocks, and short-term investments;
17% for mortgage loans on real estate; and 15% for real estate and
other invested assets. The IMR balance at December 31, 1996 and 1995
was $1,365 million and $1,163 million, respectively, and is recorded
in "Other liabilities". During 1996, 1995 and 1994, $327 million, $766
million and ($910) million, respectively, of net realized capital
gains (losses) were deferred and $126 million, $82 million and $102
million, respectively, was amortized and included in income.
H. Restricted assets and special deposits - Assets in the amounts of $941
million and $5,072 million at December 31, 1996 and 1995,
respectively, were on deposit with governmental authorities or
trustees as required by law. Assets valued at $2,994 million and
$3,121 million at December 31, 1996 and 1995, respectively, were
maintained as compensating balances or pledged as collateral for bank
loans and other financing agreements. Letter stock or other securities
restricted as to sale amounted to $720 million in 1996 and $354
million in 1995.
I. Loan backed and structured securities - A retrospective method is
employed to recalculate the values of the loan backed and structured
securities holdings with the exception of interest only bonds. Each
acquisition lot was reviewed to recalculate the effective yield. The
recalculated effective yield was used to derive a book value as if the
new yield were applied at the time of acquisition. Outstanding
principal
- 8 -
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO STATUTORY FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
factors from the time of acquisition to adjustment date were used to
calculate the prepayment history for all applicable securities.
Conditional prepayment rates, computed with life to date factor
histories and weighted average maturities, were used to affect the
calculation of projected payments for pass through, interest only and
principal only security types. Interest only bond adjustments are
developed on a prospective basis with adjustments made for permanent
impairments if needed.
J. Securities lending is a program whereby the Company loans securities
to third parties, primarily major brokerage firms. As of December 31,
1996 and 1995, the estimated fair values of loaned securities were
$6,362 million and $5,939 million respectively. Company and NAIC
policies require a minimum of 102% and 105% of the fair value of the
domestic and foreign loaned securities, respectively, to be separately
maintained as collateral for the loans. Cash collateral received is
invested in short-term investments. The offsetting collateral
liability as of December 31, 1996 and 1995 is $4,813 million and
$3,625 million, respectively. Non-cash collateral is not reflected in
the Statements of Admitted Assets, Liabilities and Surplus.
5. EMPLOYEE BENEFIT PLANS
A. Pension plans - The Company has several defined benefit pension plans,
which cover substantially all of its employees. Benefits are generally
based on career average earnings and credited length of service. The
Company's funding policy for U.S. plans is to contribute annually the
amount necessary to satisfy the Internal Revenue Service contribution
guidelines.
Employee pension benefit plan status is as follows:
1996 1995
------- -------
(In Millions)
Actuarial present value of benefit obligation:
Vested benefit obligation $(3,878) $(3,270)
======= =======
Accumulated benefit obligation $(4,174) $(3,572)
======= =======
Projected benefit obligation $(4,989) $(4,330)
Plan assets at fair value 7,326 6,688
------- -------
Plan assets in excess of projected
benefit obligation 2,337 2,358
Unrecognized transition amount (769) (904)
Unrecognized prior service cost 356 199
Unrecognized net gain (916) (753)
------- -------
Prepaid pension cost $ 1,008 $ 900
======= =======
Plan assets consist primarily of equity securities, bonds, real estate
and short-term investments, of which $5,668 million and $4,788 million
are included in separate account assets and liabilities at December
31, 1996 and 1995, respectively.
The components of the net periodic pension benefit for 1996, 1995 and
1994 are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
(In Millions)
<S> <C> <C> <C>
Service cost $ 119 $ 110 $ 141
Interest cost 336 371 293
Actual return on assets (720) (1,249) 62
Net amortization and deferral 57 604 (633)
Net curtailment gains and special termination benefits 63 0 156
------ ------ ------
Net periodic pension benefit $ (145) $ (164) $ 19
====== ====== ======
</TABLE>
The net increase to surplus relating to the Company's pension plans is
$37 million, $30 million and $0 million in 1996, 1995 and 1994,
respectively, which considers the changes in the non-admitted prepaid
pension asset of $108 million, $134 million and ($19) million,
respectively.
The accounting assumptions used by the Company were:
AS OF SEPTEMBER 30,
------------------------
1996 1995 1994
------ ------ ------
Discount rate 7.75% 7.50% 8.50%
Rate of increase in compensation levels 4.50% 4.50% 5.50%
Expected long-term rate of return on assets 9.50% 9.00% 9.00%
The Company maintains non-qualified supplemental retirement plans
providing benefits that may not be paid from the Company's two
qualified plans since qualified plans have limits imposed by Section
415 and 401(a)(17) of the Code. One of these plans also provides
certain participants with a subsidized early retirement benefit.
- 9 -
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO STATUTORY FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
B. Postretirement benefits - The Company provides certain life insurance
and health care benefits for its retired employees. Substantially all
of the Company's employees may become eligible to receive these
benefits if they retire after age 55 with at least 10 years of
service.
Postretirement benefits are accounted for in accordance with
prescribed NAIC policy. The Company has elected to amortize its
transition obligation over 20 years. During 1996, 1995 and 1994,
funding of its postretirement benefit obligations totaled $35 million,
$47 million and $31 million, respectively.
The postretirement benefit plan status is as follows:
SEPTEMBER 30,
------------------
1996 1995
---- ----
(In Millions)
Accumulated postretirement benefit obligation for:
Retirees $(1,418) $(1,465)
Fully eligible active plan participants (35) (103)
Plan assets at fair value 1,341 1,309
------- -------
Funded status (112) (259)
Unrecognized transition amount 355 378
Unrecognized net gain (177) (19)
------- -------
Prepaid postretirement benefit cost $ 66 $ 100
======= =======
Plan assets consist of group and individual variable life insurance
policies, group life and health contracts and short-term investments,
of which $1,003 million and $990 million are included in the separate
account assets and liabilities at December 31, 1996 and 1995,
respectively.
Net periodic postretirement benefit cost for 1996, 1995 and 1994
includes the following components:
1996 1995 1994
----- ----- -----
(In Millions)
Service cost $ 24 $ 30 $ 36
Interest cost 115 117 107
Actual return on plan assets (104) (144) (98)
Amortization of transition obligation 22 22 23
Other 12 49 52
----- ----- -----
Net periodic postretirement benefit cost $ 69 $ 74 $ 120
===== ===== =====
The net reduction to surplus relating to the Company's postretirement
benefit plans is $35 million, $46 million, and $30 million in 1996,
1995 and 1994, respectively, which considers the changes in the
prepaid postretirement benefit cost of $34 million, $28 million and
$90 million in 1996 , 1995 and 1994, respectively.
The assumptions used for the postretirement benefit plan were:
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30,
---------------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Discount rate 7.75% 7.50% 8.50%
Expected long-term rate of return on plan assets 9.00% 8.00% 9.00%
Rate of increase in compensation levels 4.50% 4.50% 5.50%
Health care cost trend rates 8.50-12.50% 8.90-13.30% 9.10-13.90%
Ultimate health care cost trend rate at 2006 5.00% 5.00% 6.00%
</TABLE>
A 1% increase in health care cost trend rates would increase the
September 30, 1996 accumulated postretirement benefit obligation and
service/interest costs by $115 million and $12 million, respectively.
C. Postemployment benefits - The Company accrues for postemployment
benefits primarily for life and health benefits provided to former or
inactive employees who are not retirees. The net accumulated liability
for these benefits at December 31, 1996 and 1995 was $99 million and
$96 million, respectively.
- 10 -
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO STATUTORY FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
6. NOTES PAYABLE AND OTHER BORROWINGS
Notes payable and other borrowings consisted of the following at December
31:
Short-term: 1996 1995
---- ----
(In Millions)
Notes payable to affiliate $ 99 $ 0
Current portion of long term
notes payable 11 128
---- ----
$110 $128
Long-Term: 1996 1995
---- ----
8.173% note due 2002 $249 $249
7.501% note due 1999 248 248
5.0819% note due 2004 56 66
12.00% note due 1999 0 16
Secured demand note
due 1998 100 100
---- ----
653 679
---- ----
Total principal repayments and accrued interest $763 $807
==== ====
Scheduled principal repayments as of December 31, 1996, are as
follows: $110 million in 1997, $100 million in 1998, $239 million in
1999, $0 in 2000, $0 in 2001 and $294 million thereafter.
7. SURPLUS
A. Capital notes - The Company issues Capital Notes that are subordinate
in right of payment to policy claims, prior claims and senior
indebtedness. A summary of the outstanding Capital Notes as of
December 31, 1996 is as follows:
PRINCIPAL CARRYING INTEREST MATURITY
ISSUE DATE (PAR) AMOUNT RATE DATE
- ---------- --------- -------- -------- --------
(In Millions)
April 28, 1993 $ 300 $ 299 6.875% April 15, 2003
July 1, 1995 350 340 8.300% July 1, 2025
July 1, 1995 250 246 7.650% July 1, 2007
July 15, 1995 100 100 8.100% July 15, 2015
------- -----
Total $ 1,000 $ 985
======= =====
B. Special surplus fund - In accordance with the requirements of various
states, a special surplus fund has been established for contingency
reserves of $1,268 million and $1,274 million as of December 31, 1996
and 1995, respectively.
C. Non-admitted assets - Non-admitted assets were $1,367 million and
$1,167 million as of December 31, 1996 and 1995, respectively.
8. FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair values presented below have been determined using available
information and reasonable 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 fair
values. (For all other financial instruments, the carrying value is a
reasonable estimate of fair value.)
Bonds and preferred stock - Fair values for bonds and preferred stock,
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 fair value of certain non-performing private placement
securities is based on amounts provided by state regulatory
authorities.
Common stock - Fair value of unaffiliated common stock is based on
quoted market prices, where available, or prices provided by state
regulatory authorities.
- 11 -
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO STATUTORY FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
Mortgage loans on real estate - The fair value of residential
mortgages is based on recent market trades or quotes, adjusted where
necessary for differences in risk characteristics. The fair value of
the commercial mortgage and agricultural loan portfolio is primarily
based upon the present value of the scheduled cash flows discounted at
the appropriate U.S. Treasury rate, adjusted for the current market
spread for a similar quality mortgage. For certain non-performing and
other loans, fair value is based upon the value of the underlying
collateral.
Policy loans and premium notes - 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.
Derivative financial instruments - The fair value of swap agreements
is estimated based on the present value of future cash flows under the
agreements discounted at the applicable zero coupon U.S. Treasury rate
and swap spread. The fair value of forwards, futures and options is
estimated based on market quotes for a transaction with similar terms.
The fair value of loan commitments is derived by comparing the
contractual future stream of fees with such fee streams adjusted to
reflect current market rates that would be applicable to instruments
of similar type, maturity and credit standing.
Investment-type insurance contract liabilities - Fair values for the
Company's investment-type insurance contract liabilities are estimated
using a discounted cash flow model, based on interest rates currently
being offered for similar contracts. Carrying amounts are included in
"Future policy benefits and claims."
Notes payable and other borrowings - The estimated fair value of notes
payable is derived using discount rates based on the borrowing rates
currently available to the Company for debt with similar terms and
remaining maturities.
The following table discloses the carrying amounts and estimated fair
values of the Company's financial instruments at December 31:
<TABLE>
<CAPTION>
1996 1995
---- ----
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
------ ---------- ------ ----------
(In Millions)
FINANCIAL ASSETS:
<S> <C> <C> <C> <C>
Bonds $75,006 $77,826 $77,494 $83,910
Preferred stock 239 259 396 410
Common stock * 2,466 2,466 1,805 1,805
Mortgage loans on real estate 17,039 17,364 20,280 20,839
Policy loans and premium notes 6,023 5,942 6,208 6,452
Short-term investments 5,817 5,817 4,633 4,633
Cash 165 165 170 170
Assets held in separate accounts 57,797 57,797 53,903 53,903
Derivative financial instruments 9 16 15 64
FINANCIAL LIABILITIES:
Investment-type insurance
contracts 30,194 30,328 34,799 35,720
Notes payable and other borrowings 763 794 807 829
Liabilities related to separate accounts 57,436 57,436 53,256 53,256
Derivative financial instruments 60 63 94 108
</TABLE>
* Excludes investments in subsidiaries of $4,610 million and $4,328 million
at December 31, 1996 and 1995, respectively.
- 12 -
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO STATUTORY FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
9. DERIVATIVE AND OFF-BALANCE SHEET CREDIT-RELATED INSTRUMENTS
A. Derivative financial instruments - Derivatives include swaps,
forwards, futures, options and fixed-rate loan commitments subject to
market risk, all of which are used by the Company in the normal course
of business in activities other than trading. The Company does not
issue or hold derivatives for trading purposes. This classification is
based on management's intent at the time of contract inception and
throughout the life of the contract. The Company uses derivatives
primarily for asset/liability risk management and to reduce exposure
to interest rate, currency and other market risks. Of those
derivatives held at December 31,1996, 35% of the notional amounts
consisted of interest rate derivatives and 65% consisted of foreign
currency derivatives.
The tables below summarize the Company's outstanding positions on a
gross basis before netting pursuant to rights of offset, qualifying
master netting agreements with counterparties or collateral
arrangements at December 31:
<TABLE>
<CAPTION>
DERIVATIVE FINANCIAL INSTRUMENTS
1996 1995
---- ----
(In Millions)
CARRYING ESTIMATED CARRYING ESTIMATED
NOTIONAL AMOUNT FAIR VALUE NOTIONAL AMOUNT FAIR VALUE
-------- ------ ---------- -------- ------ ----------
<S> <C> <C> <C> <C> <C> <C>
Swaps:
Assets $ 159 $ 1 $ 6 $ 418 $ (1) $ 32
Liabilities 479 50 53 371 76 79
Forwards:
Assets 453 8 8 235 13 17
Liabilities 980 9 9 1,074 13 13
Futures:
Assets 0 0 0 683 5 5
Liabilities 399 1 1 864 5 7
Options:
Assets 175 0 0 195 0 0
Liabilities 0 0 0 3 0 0
Loan Commitments:
Assets 164 0 2 122 (2) 10
Liabilities 9 0 0 532 0 9
------ ------ ------ ------ ------ ------
Total:
Assets $ 951 $ 9 $ 16 $1,653 $ 15 $ 64
====== ====== ====== ====== ====== ======
Liabilities $1,867 $ 60 $ 63 $2,844 $ 94 $ 108
====== ====== ====== ====== ====== ======
</TABLE>
B. Off-balance sheet credit-related instruments - During the normal
course of its business, the Company utilizes financial instruments
with off-balance sheet credit risk such as commitments, financial
guarantees and letters of credit. Commitments include variable rate
commitments to purchase and sell mortgage loans and the unfunded
portion of commitments to fund investments in private placement
securities. The Company also provides financial guarantees incidental
to other transactions and letters of credit that guarantee the
performance of customers to third parties. These credit-related
financial instruments have off-balance sheet credit risk because only
their origination fees, if any, and accruals for probable losses, if
any, are recognized until the obligation under the instrument is
fulfilled or expires. These instruments can extend for several years
and expirations are not concentrated in any period. The Company seeks
to control credit risk associated with these instruments by limiting
credit, maintaining collateral where customary and appropriate, and
performing other monitoring procedures.
The notional amount of these instruments, which represents the
Company's maximum exposure to credit loss from other parties'
non-performance, was $785 million and $1,254 million at December 31,
1996 and 1995, respectively. Because many of these amounts expire
without being advanced in whole or in part, the notional amounts do
not represent future cash flows.
The estimated fair value of these instruments, which represents the
Company's current exposure to credit loss from other parties'
non-performance, was $8 million and $56 million at December 31, 1996
and 1995, respectively.
10. RELATED PARTY TRANSACTIONS
A. Service agreements - The Company has entered into service agreements
with various subsidiaries. Under these agreements, the Company
furnishes services of officers and employees and provides supplies,
use of equipment, office space, and makes payment to
- 13 -
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO STATUTORY FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
third parties for general expenses, state and local taxes. The
agreements obligate the subsidiaries to reimburse the Company for the
approximate cost of providing such services. The amounts receivable
from subsidiaries, reported in "Other assets" at December 31, 1996 and
1995, were $490 million and $509 million, respectively. The
subsidiaries also furnish similar services to the Company in
connection with such agreements. The amount payable to subsidiaries,
reported in "Other liabilities" at December 31, 1996 was $87 million.
There was no outstanding balance at December 31, 1995.
Certain of the Company's group health care subsidiaries provide health
insurance to certain employees of the Company. Enrollment contract
costs reported in "Other expenses" were $126 million, $111 million and
$104 million for the years ended December 31, 1996, 1995 and 1994,
respectively.
The Company purchases corporate owned life insurance policies from one
of its life insurance subsidiaries for certain employees. The premium
charged for these policies reported in "Other expenses" was $3
million, $12 million and $12 million for the years ended December 31,
1996, 1995 and 1994, respectively. The cash value associated with
these policies was $118 million and $102 million at December 31,
1996 and 1995, respectively.
Certain of the Company's subsidiaries perform services for the Company
in connection with the Company's obligations under investment advisory
or subadvisory agreements. The costs incurred in connection with
performing such services, primarily reported in "Other expenses," were
$145 million, $327 million and $342 million for the years ended
December 31, 1996, 1995 and 1994, respectively. The Company also
provides these services to subsidiaries in connection with such
agreements. The investment advisory fees received from affiliates by
the Company, reported in "Other income" were $161 million, $92 million
and $110 million for the years ended December 31, 1996, 1995 and 1994,
respectively.
The Company borrows short-term funds from Prudential Funding
Corporation ("Funding"), a wholly owned subsidiary. The interest
expense for these borrowings was $131 million, $66 million and $21
million for the years ended December 31, 1996, 1995 and 1994,
respectively. The outstanding balance at December 31, 1996 was $99
million. There was no outstanding balance at December 31, 1995.
B. Net worth maintenance agreement - The Company has entered into a
support agreement with Funding under which it agrees to maintain
Funding's tangible net worth, including subordinated debt, at not less
than $1.00. As of December 31, 1996, the tangible net worth of Funding
was $44 million. Since the inception of the agreement, no support
payments have been required.
11. CONTINGENCIES
The Company is reviewing its obligations under certain managed care
arrangements for possible failure to comply with contractual and regulatory
requirements. It is the opinion of management that appropriate reserves
have been established in accordance with applicable accounting standards to
provide for appropriate reimbursements to customers.
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.
Twenty-six purported class actions and over 280 individual actions are
pending against the Company on behalf of those persons who purchased life
insurance policies allegedly because of deceptive sales practices engaged
in by the Company and its insurance agents in violation of state and
federal laws. The Company anticipates additional suits may be filed by
individuals who opted out of the class action settlement described below.
The sales practices alleged to have occurred are contrary to Company
policy. Some of these cases seek very substantial damages while others seek
unspecified compensatory, punitive and treble damages. The Company intends
to defend these cases vigorously.
A Multi-State Life Insurance Task Force (the "Task Force"), comprised of
insurance regulators from 29 states and the District of Columbia, was
created to conduct a review of sales and marketing practices throughout the
life insurance industry. As the largest life insurance company in the
United States, the Company was the initial focus of the Task Force
examination. On July 9, 1996, the Task Force released its report on the
Company's activities. In it, the Task Force found that some sales of life
insurance policies made by the Company were improper. The report criticizes
the Company's training, oversight, discipline and compliance programs
related to insurance sales. Based on these findings, the Task Force
recommended, and the Company agreed to, a series of fines allocated to all
50 states and the District of Columbia amounting to a total of $35 million.
In addition, the Task Force recommended a remediation program pursuant to
which the Company would offer relief to policyowners who purchased 10.7
million whole life insurance policies in the United States from the Company
from 1982 through 1995. In subsequent negotiations with several states, the
Company agreed to pay additional amounts aggregating approximately $30
million by way of fine, reimbursement of investigation expenses and costs
associated with outreach to residents of Florida and California.
On October 28, 1996, the Company entered into a Stipulation of Settlement
with attorneys for the plaintiffs in the class actions consolidated in a
Multi-District Litigation involving alleged improprieties in connection
with the Company's sale of whole life
- 14 -
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO STATUTORY FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
insurance policies from 1982 through 1995. Pursuant to the proposed
settlement, the Company has agreed to provide certain enhancements and
changes to the remediation program previously accepted by the Multi-State
Task Force, including some additional remedies. In addition, the Company
agreed that a minimum cost of $410 million (which was recorded in the
Statement of Operations and Changes in Surplus) would be incurred in
providing remedies to policyowners under the program, and agreed to certain
other payments and guarantees. Under the terms of the guarantees, the
Company has agreed that the average cost per remedy will not be less than
$2,364 for up to 330,000 claims remedied. For claims remedied in excess of
330,000, the Company has not guaranteed an average cost per remedy. The
Company has also agreed to provide additional compensation to be
distributed by formula that will range in an aggregate amount from $50
million to $300 million depending on the total number of claims remedied.
The Company cannot predict how many claims ultimately will be remedied. The
Company has also recorded in the Statement of Operations and Changes in
Surplus, its estimate of the minimum administrative costs related to the
remediation program. As of March 5, 1997, all 50 states and the District of
Columbia have directed the Company to offer a remediation plan based on the
program accepted by the Task Force and containing many of the enhancements
of the class action settlement.
Also on October 28, 1996, the U.S. District Court of the District of New
Jersey, in which the Multi-District Litigation is pending, conditionally
certified a class for settlement purposes and scheduled a hearing on the
fairness, reasonableness and adequacy of the proposed settlement. This
hearing was held on February 24, 1997. On March 7, 1997, the Court
rendered its decision approving the settlement. The owners of approximately
23,000 policies have taken steps to exclude themselves from the class
action and are not bound by the settlement.
To date, the Company has mailed packages to 8.5 million policyowners
eligible for the remediation program, informing policyowners in all 50
states and the District of Columbia of their rights under the program. The
deadline for electing to participate in the Alternative Dispute Resolution
Process ("ADR") or Basic Claim Relief is June 1, 1997. Policyowners who
believe that they were misled can file a claim through the ADR.
Policyowners who do not believe they were misled, or who do not wish to
file a claim under the ADR, may choose from several options available under
Basic Claim Relief, such as preferred rate premium loans, or the purchase
of enhanced annuities, mutual fund shares or life insurance policies.
It is not possible on any reliable basis to estimate how many policyowners
will participate in the settlement. The cost of the settlement is dependent
upon complex and varying factors, including the number of policyowners that
participate in the settlement, the relief options chosen and the ultimate
dollar value of the settlement. The administrative costs to the Company of
remediation of policyowner claims are also subject to a number of complex
uncertainties in addition to the unknown quantity and cost of policyowner
claims. In light of the uncertainties attendant to these and other factors,
management is unable to make a reasonable estimate of the ultimate cost of
the remediation program to the Company.
A purported class action was brought against the Company and certain
subsidiaries alleging common law fraud, negligent misrepresentation and
violations of the New Jersey RICO statute arising out of the plaintiffs'
purchase of certain subordinated mortgage pass-through securities and
seeking compensatory and punitive damages and injunctive relief. The
Company will deny the substantive allegations of the complaint in its
answer and will vigorously defend the suit. The case is at a preliminary
stage, and management is not now in a position to predict the outcome or
effect of the litigation.
Litigation is subject to many uncertainties, and given the complexity and
scope of these suits, their outcome cannot be predicted. It is also not
possible to predict the likely results of any regulatory inquiries or their
effect on litigation which might be initiated in response to widespread
media coverage of these matters. Accordingly, management is unable to make
a meaningful estimate of the amount or range of loss that could result from
an unfavorable outcome of all pending litigation and the regulatory
inquiries. It is possible that the results of operations or the cash flow
of the Company, in particular quarterly or annual periods, could be
materially affected by an ultimate unfavorable outcome of certain pending
litigation and regulatory matters. Management believes, however, that the
ultimate outcome of all pending litigation and regulatory matters referred
to above should not have a material adverse effect on the Company's
financial position, after consideration of applicable reserves.
In 1993, Prudential Securities, Inc. ("PSI"), a subsidiary of Prudential,
entered into an agreement with the Securities and Exchange Commission, the
National Association of Securities Dealers, Inc., and state securities
commissions whereby PSI agreed to pay $330 million into a settlement fund
to pay eligible claims on certain limited partnership matters. Under this
agreement, if partnership matter claims exceed the established settlement
fund, PSI is obligated to pay such additional claims. The agreement also
required PSI to take measures to enhance the adequacy of its sales
practices compliance controls.
In October 1994, the United States Attorney for the Southern District of
New York (the "U.S. Attorney") filed a complaint against PSI in connection
with its sale of certain limited partnerships. Simultaneously, PSI entered
into an agreement to comply with certain conditions for a period of three
years, and to pay an additional $330 million into the settlement fund. At
the end of the three year period, assuming PSI has fully complied with the
terms of the agreement, the U.S. Attorney will institute no further action.
In the opinion of management, PSI is in compliance with all provisions of
the aforementioned agreements.
- 15 -
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO STATUTORY FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
The Company has entered into a reinsurance agreement with The Prudential
Life Insurance Company, Ltd., a wholly owned subsidiary, under which it has
agreed to reinsure certain individual life insurance policies through a
yearly renewable term contract. The reinsurance assumed premiums and
reserves for 1996 were $27 million and $17 million, respectively.
The Company as a result of the sale of Prudential Reinsurance Inc. (a PRUCO
Inc. subsidiary), agreed to guarantee up to $775 million of Gibraltar
Casualty Company (a Prudential subsidiary) obligations with respect to a
Stop Loss Agreement and PRUCO Inc.'s (a Prudential subsidiary) payment
obligations under an Indemnity Agreement, subject to maximum aggregate
payments of $400 million. The maximum aggregate payments under the
Prudential Guarantee of the Gibraltar Casualty Company obligations will be
reduced in certain circumstances to take account of payments made and
collateral provided in respect of the guaranteed obligations. The Stop Loss
Agreement is intended to mitigate the impact on Prudential Reinsurance Inc.
of adverse development of loss reserves, as of June 30, 1995, of up to $375
million of the first $400 million of adverse development. The Company has
recorded a loss reserve of $175 million as of December 31, 1996.
Gibraltar Casualty Company and other property and casualty insurance
subsidiaries receive claims under expired contracts which assert alleged
injuries and/or damages relating to or resulting from toxic torts, toxic
waste and other hazardous substances. The liabilities for such claims
cannot be estimated by traditional reserving techniques. As a result of
judicial decisions and legislative actions, the coverage afforded under
these contracts may be expanded beyond their original terms. Extensive
litigation between insurers and insureds over these issues continues and
the outcome is not predictable. In establishing the unpaid claim reserves
for these losses, management considered the available information and
established these reserves in accordance with applicable accounting
standards. However, given the expansion of coverage and liability by the
courts and legislatures in the past, and potential for other unfavorable
trends in the future, the ultimate cost of these claims could increase from
the levels currently established.
The Company and a number of other insurers (the "Consortium") entered into
a Reinsurance and Participation Agreement ("the Agreement") with MBL Life
Assurance Corporation ("MBLLAC") and others, under which the Company and
the other insurers agreed to reinsure certain payments to be made to
contractholders by MBLLAC in connection with the plan of rehabilitation of
Mutual Benefit Life Insurance Company. Under the Agreement, the Consortium,
subject to certain terms and conditions, will indemnify MBLLAC for the
ultimate net loss sustained by MBLLAC on each contract subject to the
Agreement. The ultimate net loss represents the amount by which the
aggregate required payments exceed the fair market value of the assets
supporting the covered contracts at the time such payments are due. The
Company's share of any net loss is 30.55%. The Company has determined that
it does not expect to make any payments to MBLLAC under the agreement. The
Company concluded this after testing a wide range of potentially adverse
scenarios during the rehabilitation period for MBLLAC.
******
- 16 -
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Policyholders of
The Prudential Insurance Company of America
We have audited the accompanying statement of admitted assets, liabilities and
surplus (statutory basis) of The Prudential Insurance Company of America as of
December 31, 1996, and the related statements of operations and changes in
surplus (statutory basis), and of cash flows (statutory basis) for the year then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
As described in Note 1, these financial statements were prepared in conformity
with accounting practices prescribed or permitted by the New Jersey Department
of Insurance, which practices differ from generally accepted accounting
principles. The effects on the financial statements of the variances between the
statutory basis of accounting and generally accepted accounting principles,
although not reasonably determinable, are presumed to be material.
In our opinion, because of the effects of the matters referred to in the
preceding paragraph, the financial statements referred to above do not present
fairly, in conformity with generally accepted accounting principles, the
financial position of The Prudential Insurance Company of America at December
31, 1996, and the results of its operations and its cash flows for the year then
ended.
Also, in our opinion, the financial statements referred to above present fairly,
in all material respects, the admitted assets, liabilities and surplus of The
Prudential Insurance Company of America at December 31, 1996, and the results of
its operations and its cash flows for the year then ended, on the basis of
accounting described in Note 1.
/s/ PRICE WATERHOUSE, LLP
New York, New York
March 10, 1997
- 17 -
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
The Prudential Insurance Company of America
Newark, New Jersey
We have audited the accompanying statement of admitted assets, liabilities and
surplus--statutory basis of The Prudential Insurance Company of America as of
December 31, 1995, and the related statements of operations and changes in
surplus--statutory basis, and cash flows--statutory basis for each of the two
years in the period ended December 31, 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our report dated March 1, 1996, we expressed an opinion that the 1995 and
1994 financial statements, prepared using accounting practices prescribed and
permitted by the New Jersey Department of Insurance, presented fairly, in all
material respects, the financial position of The Prudential Insurance Company of
America as of December 31, 1995 and 1994, and the results of its operations and
its cash flows for the years then ended in conformity with generally accepted
accounting principles. As described in Note 1 to these financial statements,
pursuant to the pronouncements of the Financial Accounting Standards Board, the
1995 and 1994 financial statements of The Prudential Insurance Company of
America, prepared using accounting practices prescribed or permitted by
insurance regulators (statutory financial statements) are no longer considered
presentations in conformity with generally accepted accounting principles. The
effects on the financial statements of the differences between the statutory
basis of accounting and generally accepted accounting principles are material
and are also described in Note 1. Accordingly, our present opinion on the
presentation of the 1995 and 1994 financial statements in accordance with
generally accepted accounting principles, as presented herein, is different from
that expressed in our previous report.
In our opinion, because of the effects of the matter discussed in the third
paragraph, the financial statements referred to above do not present fairly, in
conformity with generally accepted accounting principles, the admitted assets,
liabilities and surplus of the Company as of December 31, 1995, and its
operations, changes in surplus and its cash flows for each of the two years in
the period ended December 31, 1995.
However, in our opinion, the financial statements referred to above present
fairly, in all material respects, the admitted assets, liabilities and surplus
of The Prudential Insurance Company of America as of December 31, 1995, and the
results of its operations, changes in surplus and its cash flows for each of the
two years in the period then ended, on the basis of accounting described in Note
1.
Also, as described in Note 1 to the financial statements, these financial
statements were prepared on an unconsolidated statutory basis of accounting,
which differs from the 1995 and 1994 financial statements prepared for general
distribution on a consolidated statutory basis of accounting, both of which
differ from generally accepted accounting principles. The financial statements
for 1995 and 1994 have been restated on an unconsolidated statutory basis of
accounting adopted in 1996 for purposes of general distribution. Further, these
financial statements differ from the previously issued unconsolidated statutory
financial statements because certain permitted financial statement presentation
practices are no longer being used.
/s/ DELOITTE & TOUCHE LLP
Parsippany, New Jersey
March 1, 1996, except for Note 1A,
as to which the date is March 10, 1997
- 18 -
<PAGE>
PART II
OTHER INFORMATION
<PAGE>
UNDERTAKING TO FILE REPORTS
Subject to the terms and conditions of Section 15(d) of the Securities Exchange
Act of 1934, the undersigned Registrant hereby undertakes to file with the
Securities and Exchange Commission such supplementary and periodic information,
documents, and reports as may be prescribed by any rule or regulation of the
Commission heretofore or hereafter duly adopted pursuant to authority conferred
in that section.
REPRESENTATION WITH RESPECT TO CHARGES
The Prudential Insurance Company of America ("Prudential") represents that the
fees and charges deducted under the Group Variable Universal Life Insurance
Contracts registered by this registration statement, in the aggregate, are
reasonable in relation to the services rendered, the expenses expected to be
incurred, and the risks assumed by Prudential.
UNDERTAKING WITH RESPECT TO INDEMNIFICATION
Prudential Directors' and Officers' Liability and Corporation Reimbursement
Insurance program, purchased by Prudential from Aetna Casualty & Surety Company,
CNA Insurance Companies, Lloyds of London, Great American Insurance Company,
Reliance Insurance Company, Corporate Officers & Directors Assurance Ltd.,
A.C.E. Insurance Company, Ltd., XL Insurance Company, Ltd., and Zurich-American
Insurance Company, provides reimbursement for "Loss" (as defined in the
policies) which the Company pays as indemnification to its directors or officers
resulting from any claim for any actual or alleged act, error, misstatement,
misleading statement, omission, or breach of duty by persons in the discharge of
their duties in their capacities as directors or officers of Prudential, any of
its subsidiaries, or certain investment companies affiliated with Prudential.
Coverage is also provided to the individual directors or officers for such Loss,
for which they shall not be indemnified. Loss essentially is the legal liability
on claims against a director or officer, including adjudicated damages,
settlements and reasonable and necessary legal fees and expenses incurred in
defense of adjudicatory proceedings and appeals therefrom. Loss does not include
punitive or exemplary damages or the multiplied portion of any multiplied damage
award, criminal or civil fines or penalties imposed by law, taxes or wages, or
matters which are uninsurable under the law pursuant to which the policies are
construed.
There are a number of exclusions from coverage. Among the matters excluded are
Losses arising as the result of (1) claims brought about or contributed to by
the criminal, dishonest or fraudulent acts or omissions or the willful violation
of any law by a director or officer, (2) claims based on or attributable to
directors or officers gaining personal profit or advantage to which they were
not legally entitled, and (3) claims arising from actual or alleged performance
of, or failure to perform, services as, or in any capacity similar to, an
investment adviser, investment banker, underwriter, broker or dealer, as those
terms are defined in the Securities Act of 1933, the Securities Exchange Act of
1934, the Investment Advisers Act of 1940, the Investment Company Act of 1940,
any rules or regulations thereunder, or any similar federal, state or local
statute, rule or regulation.
The limit of coverage under the program for both individual and corporate
reimbursement coverage is $150,000,000. The retention for corporate
reimbursement coverage is $10,000,000 per loss.
The relevant provisions of New Jersey law permitting or requiring
indemnification, New Jersey being the state of organization of Prudential, can
be found in Section 14A:3-5 of the New Jersey Statutes Annotated. The text of
Prudential's by-law 26, which relates to indemnification of officers and
directors, is incorporated by reference to Exhibit 1.A.(6)(b) of Post-Effective
Amendment No. 1 to Form S-6, Registration No. 33-61079, filed April 25, 1996, on
behalf of The Prudential Variable Appreciable Account.
Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions or otherwise, the Registrant has
been advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
II-1
<PAGE>
CONTENTS OF REGISTRATION STATEMENT
This Registration Statement comprises the following papers and documents:
The facing sheet.
Cross-reference to items required by Form N-8B-2.
The prospectus consisting of 77 pages.
The undertaking to file reports.
The representation with respect to charges.
The undertaking with respect to indemnification.
The signatures.
Written consents of the following persons:
1. Deloitte & Touche LLP, independent auditors.
2. Price Waterhouse LLP, independent accountants.
3. Clifford E. Kirsch, Esq.
4. Stuart L. Liebeskind, FSA, MAAA.
The following exhibits:
1. The following exhibits correspond to those required by paragraph A of
the instructions as to exhibits in Form N-8B-2:
A. (1) Resolutions of Board of Directors of The Prudential Insurance
Company of America:
(a) Resolution establishing The Prudential Variable
Contract Account GI-2. (Note 2)
(b) Amendment to the Resolution proposing investment in
unaffiliated mutual funds for the Prudential Variable
Contract Account GI-2. (Note 6)
(2) Not Applicable.
(3) Distribution Contracts:
(a) Distribution Agreement between Prudential Investment
Management Services LLC and The Prudential Insurance
Company of America. (Note 7)
(b) Proposed form of Agreement between Prudential
Investment Management Services LLC and independent
brokers with respect to the Sale of the Group Contracts
and Certificates. (Note 6)
(c) Schedule of Sales Commissions. (Note 6)
(d) Representative Fund Participation Agreements. (Note 1)
(4) Not Applicable.
(5) (a) Group Contract. (Note 7)
(b) Individual Certificate. (Note 7)
(6) (a) Charter of The Prudential Insurance Company of America,
as amended November 14, 1995. (Note 3)
(b) By-laws of The Prudential Insurance Company of America,
as amended April 8, 1997. (Note 4)
(7) Not Applicable.
(8) Not Applicable.
(9) Not Applicable.
(10) (a) Application Form for Group Contract. (Note 2)
(b) Enrollment Form for Certificate. (Note 6)
(c) Form of Investment Division Allocation Supplement.
(Note 6)
2. Opinion and Consent of Clifford Kirsch, Esq. as to the legality of the
securities being registered. (Note 1)
II-2
<PAGE>
3. None.
4. Not Applicable.
5. Not Applicable.
6. Opinion and Consent of Stuart L. Liebeskind, FSA, MAAA, as to
actuarial matters pertaining to the securities being registered.
(Note 1)
7. Powers of Attorney:
(a) F. Agnew, F. Becker, M. Berkowitz, J. Cullen C. Davis, R. Enrico, A.
Gilmour, W. Gray, III, M. Grier J. Hanson, C. Horner, B. Malkiel, A.
Ryan, C. Sitter D. Staheli, R. Thomson, J. Unruh, P. Vagelos S. Van
Ness, P. Volcker, J. Williams (Note 5)
(b) G. Hiner, Jr. (Note 4)
8. Memorandum describing Prudential's issuance, transfer, and redemption
procedures for the Certificates pursuant to Rule 6e-3(T)(b)(12)(iii)
(Note 5)
(Note 1) Filed herewith.
(Note 2) Incorporated by reference to Registrant's Form S-6, filed February 16,
1996.
(Note 3) Incorporated by reference to Post-Effective Amendment No. 9 to Form
S-1, Registration No. 33-20083, filed April 9, 1997, on behalf of The
Prudential Variable Contract Real Property Account.
(Note 4) Incorporated by reference to Post-Effective Amendment No. 12 to Form
N-4, Registration No. 33-25434, filed April 30, 1997, on behalf of The
Prudential Individual Variable Contract Account.
(Note 5) Incorporated by reference to Pre-Effective Amendment No. 1 to this
registration statement filed August 22, 1996.
(Note 6) Incorporated by reference to Pre-Effective Amendment No. 2 to this
registration statement filed January 27, 1997.
(Note 7) Incorporated by reference to Pre-Effective Amendment No. 3 to this
registration statement filed April 29, 1997.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant, The
Prudential Variable Contract Account GI-2, certifies that this Amendment is
filed solely for one or more of the purposes specified in Rule 485(b)(1) under
the Securities Act of 1933 and that no material event requiring disclosure in
the prospectus, other than one listed in Rule 485(b)(1), has occurred since the
effective date of the Registrant's Registration Statement and has caused this
Registration Statement to be signed on its behalf by the undersigned thereunto
duly authorized, and its seal hereunto affixed and attested, all in the city of
Newark and the State of New Jersey, on this 12th day of May, 1997.
(Seal) THE PRUDENTIAL VARIABLE CONTRACT ACCOUNT GI-2
(Registrant)
By: THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
(Depositor)
Attest: /s/ JOHN SIEB By: /s/ STUART L. LIEBESKIND
------------------------ ------------------------------------
John Sieb Stuart L. Liebeskind, FSA, MAAA
Director, Prudential Vice President and Assistant Actuary
Group Life Insurance
Pursuant to the requirements of the Securities Act of 1933, this Post-Effective
Amendment No. 1 to the Registration Statement has been signed below by the
following persons in the capacities indicated on this 12th day of May, 1997.
SIGNATURE AND TITLE
-------------------
/s/ *
- --------------------------------------
Arthur F. Ryan
Chairman of the Board, President and
Chief Executive Officer
/s/ *
- --------------------------------------
Martin A. Berkowitz
Senior Vice President and Comptroller
/s/ * *By: /s/ C. CHRISTOPHER SPRAGUE
- -------------------------------------- ---------------------------
Mark B. Grier C. Christopher Sprague
Principal Financial Officer (Attorney-in-Fact)
/s/ *
- --------------------------------------
Franklin E. Agnew
Director
/s/ *
- --------------------------------------
Frederic K. Becker
Director
/s/ *
- --------------------------------------
James G. Cullen
Director
/s/ *
- --------------------------------------
Carolyne K. Davis
Director
/s/ *
- --------------------------------------
Roger A. Enrico
Director
II-4
<PAGE>
/s/ *
- --------------------------------------
Allan D. Gilmour
Director
/s/ *
- --------------------------------------
William H. Gray, III
Director
/s/ *
- --------------------------------------
Jon F. Hanson
Director
/s/ *
- --------------------------------------
Glen H. Hiner, Jr.
Director
/s/ * By: /s/ C. CHRISTOPHER SPRAGUE
- -------------------------------------- ---------------------------
Constance J. Horner C. Christopher Sprague
Director (Attorney-in-Fact)
- --------------------------------------
Gaynor N. Kelley
Director
/s/ *
- --------------------------------------
Burton G. Malkiel
Director
- --------------------------------------
Ida F. S. Schmertz
Director
/s/ *
- --------------------------------------
Charles R. Sitter
Director
/s/ *
- --------------------------------------
Donald L. Staheli
Director
/s/ *
- --------------------------------------
Richard M. Thomson
Director
/s/ *
- --------------------------------------
James A. Unruh
Director
/s/ *
- --------------------------------------
P. Roy Vagelos, M.D.
Director
/s/ *
- --------------------------------------
Stanley C. Van Ness
Director
/s/ *
- --------------------------------------
Paul A. Volcker
Director
/s/ *
- --------------------------------------
Joseph H. Williams
Director
II-5
<PAGE>
EXHIBIT INDEX
Consent of Deloitte & Touche LLP, independent auditors. Page II-7
Consent of Price Waterhouse LLP, independent accountants. Page II-8
1.A.(3)(d) Representative Fund Participation Agreements Page II-9
3. Opinion and Consent of Clifford E. Kirsch, Esq., as to Page II-52
the legality of the securities being registered.
6. Opinion and Consent of Stuart L. Liebeskind, FSA, MAAA, Page II-53
as to actuarial matters pertaining to the securities
being registered.
II-6
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Post-Effective Amendment No.1 on Form S-6 to the
Registration Statement No. 333-01031 of The Prudential Variable Contract Account
GI-2 of The Prudential Insurance Company of America of our report dated March 1,
1996, except for Note 1A, as to which the date is March 10, 1997, relating to
the statutory financial statements of The Prudential Insurance Company of
America in the Prospectus, which is part of such Registration Statement, and to
the reference to us under the heading "Experts" in such Prospectus.
/s/ Deloitte & Touche LLP
Parsippany, New Jersey
May 13, 1997
II-7
Consent of Independent Accountants
We hereby consent to the use in the Prospectus constituting part of this
Post-Effective Amendment No. 1 to the registration statement on Form S-6 (the
"Registration Statement") of our report dated March 10, 1997, relating to the
statutory financial statements of Prudential Insurance Company of America, which
appears in such Prospectus.
We also consent to the reference to us under the heading "Experts" in the
Prospectus.
/s/ PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York 10036
May 12, 1997
II-8
FUND PARTICIPATION AGREEMENT
THIS FUND PARTICIPATION AGREEMENT is made and entered into as of _________,
1997 by and among THE PRUDENTIAL INSURANCE COMPANY OF AMERICA (the "Company"),
AMERICAN CENTURY INVESTMENT SERVICES, INC. "Distributor"), and AMERICAN CENTURY
INVESTMENT MANAGEMENT, INC. ("Manager").
WHEREAS, the Company offers to the public certain group variable annuity
contracts and group variable life insurance contracts (the "Contracts") and
WHEREAS, the Company wishes to offer as investment options under the
Contracts, the funds identified in EXHIBIT A attached hereto, (the "Funds"),
each of which is a series of mutual fund shares registered under the Investment
Company Act of 1940, as amended, (the Investment Company Act"), and
WHEREAS, on the terms and conditions hereinafter set forth, Distributor and
Manager desire to make shares of the Funds available as investment options under
the Contracts and to retain the Company to perform certain administrative
services on behalf of the Funds,
NOW, THEREFORE, the Company, Manager and Distributor agree as follows:
1. TRANSACTIONS IN THE FUNDS. Subject to the terms and conditions of this
Agreement, Distributor will make shares of the Funds available to be purchased,
exchanged, or redeemed, by the Company on behalf of the Contract owners through
the Accounts (defined in Section 6(a) below) through a single account per Fund
at the net asset value applicable to each order. The Funds' shares shall be
purchased and redeemed on a net basis in such quantity and at such time as
determined by the Company to satisfy the requirements of the Contracts for which
the Funds serve as underlying investment media. Dividends and capital gains
distributions will be automatically reinvested in full and fractional shares of
the Funds.
2. ADMINISTRATIVE SERVICES. The Company shall be solely responsible for
providing all administrative services for the Contracts owners. The Company
agrees that it will maintain and preserve all records as required by law to be
maintained and preserved, and will otherwise comply with all laws, rules and
regulations applicable to the marketing of the Contracts and the provision of
administrative services to the Contract owners.
3. PROCESSING AND TIMING OF TRANSACTIONS.
(a) Distributor hereby appoints the Company as its agent for the limited
purpose of accepting purchase and redemption orders for Fund shares from the
Contract owners. On each day the New York Stock Exchange (the "Exchange") is
open for business (each, a "Business Day"), the Company may receive instructions
from the Contract owners for the purchase or redemption of shares of the Funds
("Orders"). Orders received and accepted by the Company prior to the close of
regular trading on the Exchange (the "Close of Trading") on any given Business
Day (currently, 3:00 p.m. Central time) and transmitted to the Fund's transfer
agent by 9:00 a.m. Central time on the next following Business Day will be
executed at the net asset value determined as of the Close of Trading on the
previous Business Day ("Day 1"). Any Orders received by the Company after the
Close of Trading, and all Orders that are transmitted by the Company after 9:00
a.m. Central time on the next following Business Day, will be executed at the
net asset value next determined following receipt of such Order. The day as of
which an Order is executed pursuant to the provisions set forth above is
referred to herein as the "Effective Trade Date".
II-9
<PAGE>
(b) By 5:30 p.m. Central time on each Business Day, Distributor will
provide to the Company, via facsimile or other electronic transmission
acceptable to the Company, the Funds' net asset value, dividend and capital gain
information and, in the case of income funds, the daily accrual for interest
rate factor (mil rate), determined at the Close of Trading. If Distributor
provides the Company with materially incorrect share net asset value information
through no fault of the Company, the Company on behalf of the separate accounts
shall be entitled to an adjustment to the number of shares purchased or redeemed
to reflect the correct share net asset value. Any material error in the
calculation of net asset value per share, dividend or capital gain information
shall be reported to the Company promptly upon discovery.
(c) By 9:00 a.m. Central time on each Business Day, the Company will
provide to Distributor via facsimile or other electronic transmission acceptable
to Distributor a report stating whether the Orders received by the Company from
Contract owners by the Close of Trading on the preceding Business Day resulted
in the Accounts being a net purchaser or net seller of shares of the Funds. As
used in this Agreement, the phrase "other electronic transmission acceptable to
Distributor" includes the use of remote computer terminals located at the
premises of the Company, its agents or affiliates, which terminals may be linked
electronically to the computer system of Distributor, its agents or affiliates
(hereinafter, "Remote Computer Terminals").
(d) Upon the timely receipt from the Company of the report described in (c)
above, Distributor will execute the purchase or redemption transactions (as the
case may be) at the net asset value computed as of the Close of Trading on Day
1. Payment for net purchase transactions shall be made by wire transfer to the
custodial account designated by the Funds on the Business Day next following the
Effective Trade Date. Such wire transfers shall be initiated by the Company's
bank prior to 3:00 p.m. Central time and received by the Funds prior to 5:00
p.m. Central time on the Business Day next following the Effective Trade Date.
If payments for a purchase Order is not timely received, such Order will be
executed at the net asset value next computed following receipt of payment.
Payments for net redemption transactions shall be made by wire transfer by the
Funds to the account designated by the appropriate receiving party within the
time period set forth in the applicable Fund's then-current prospectus:
provided, however, Distributor will use all reasonable efforts to settle all
redemptions on the Business Day following the Effective Trade Date. On any
Business Day when the Federal Reserve Wire Transfer System is closed, all
communication and processing rules will be suspended for the settlement of
Orders. Orders will be settled on the next Business Day on which the Federal
Reserve Wire Transfer System is open and the Effective Trade Date will apply.
4. PROSPECTUS AND PROXY MATERIALS.
(a) Distributor shall provide to the shareholder of record copies of the
Funds' proxy materials, periodic fund reports to shareholders and other
materials that are required by law to be sent to the Funds' shareholders. In
addition, Distributor shall provide the Company with a sufficient quantity of
prospectuses of the Funds to be used in conjunction with the transactions
contemplated by this Agreement, together with such additional copies of the
Funds' prospectuses as may be reasonably requested by Company. If requested by
the Company in lieu thereof, Distributor or its designee shall provide such
documentation (including a "camera ready" copy of the new prospectus as set in
type or, at the request of the Company, as a diskette in the form sent to the
Funds' printer) and other assistance as is reasonably necessary in order for the
parties hereto once each year (or more frequently if the prospectus for the
Shares is supplemented or amended) to have the prospectus for the Contracts,
prospectuses for other mutual funds in which the Contracts may be invested, and
the Funds' new prospectus printed together in one document. If the Company
provides for pass-through voting by the Contract owners, Distributor will
provide the Company with a sufficient quantity of proxy materials for each
Contract owner.
II-10
<PAGE>
(b) The cost of preparing, printing and shipping of the prospectuses, proxy
materials, periodic fund reports and other materials of the Funds to the Company
shall be paid by Distributor or its agents or affiliates, provided, however,
that if at any time Distributor or its agent reasonably deems the usage by the
Company of such items to be excessive, it may, prior to the delivery of any
quantity of materials in excess of what is deemed reasonable, request that the
Company demonstrate the reasonableness of such usage. If the Distributor
believes the reasonableness of such usage has not been adequately demonstrated,
it may request that the Company pay the cost of printing (including press time)
and delivery of any excess copies of such materials. Unless the Company agrees
to make such payments, Distributor may refuse to supply such additional
materials and this section shall not be interpreted as requiring delivery by
Distributor of any copies in excess of the number of copies to be provided to
existing Contract owners.
(c) The cost of distribution, if any, of any prospectuses, proxy materials,
periodic fund reports and other materials of the Funds to the Contract owners
shall be paid by the Company and shall not be the responsibility of Distributor,
Manager or the Funds.
5. COMPENSATION AND EXPENSES.
(a) The Accounts shall be the sole shareholder of Fund shares purchased for
the Contract owners pursuant to this Agreement (the "Record Owners"). The
Company and the Record Owners shall properly complete any applications or other
forms required by Distributor or the Funds' transfer agent from time to time.
(b) Distributor acknowledges that it will derive a substantial savings in
administrative expenses, such as a reduction in expenses related to postage,
shareholder communications and recordkeeping, by virtue of having a single
shareholder account per Fund for the Accounts rather than having each Contract
owner as a shareholder. In consideration of performance by the Company of the
administrative services and performance of all other obligations under this
Agreement by the Company, Distributor will pay the Company a fee (the
"Administrative Services fee") equal to 20 basis points (0.20%) per annum of the
average aggregate amount invested by the Company under this Agreement,
commencing with the month in which the average aggregate market value of
investments by the Company (on behalf of the Contract owners) in the Funds
exceeds $10 million. No payment obligation shall arise until the Company's
average aggregate investment in the Funds reaches $10 million, and such payment
obligation, once commenced, shall be suspended with respect to any month during
which the Company's average aggregate investment in the Funds drops below $10
million.
(c) The parties understand that Distributor customarily pays, out of its
management fee, another affiliated corporation for the type of administrative
services to be provided by the Company to the Contract owners. The parties agree
that the payments by Distributor to the Company, like Distributor's payments to
its affiliated corporation, are for administrative services only and do not
constitute payment in any manner for investment advisory services or for costs
of distribution.
(d) For the purposes of computing the payment to the Company contemplated
by this Section 5, the average aggregate amount invested by the Accounts in the
Funds over a one month period shall be computed by totaling the Company's
aggregate investment (share net asset value multiplied by total number of shares
of the Funds held by the Company) on each Business Day during the month and
dividing by the total number of Business Days during such month.
(e) Distributor will calculate the amount of the payment to be made
pursuant to this SECTION 5 at the end of each calendar quarter and will make
such payment to the Company within 30 days thereafter. The check for such
payment will be accompanied by a statement showing the
II-11
<PAGE>
calculation of the amounts being paid by Distributor for the relevant months and
such other supporting data as may be reasonably requested by the Company and
shall be mailed to:
The Prudential Insurance Company of America
____________________________________________
____________________________________________
Attention: ________________________________
6. REPRESENTATIONS AND WARRANTIES.
(a) The Company represents and warrants that: (i) this Agreement has been
duly authorized by all necessary corporate action and, when executed and
delivered, shall constitute the legal, valid and binding obligation of the
Company, enforceable in accordance with its terms; (ii) it has established the
accounts set forth on Exhibit B hereto (the "Accounts"), each of which is a
separate account under New Jersey Insurance law, and has to the extent required
by law registered each Account as a unit investment trust under the Investment
Company Act to serve as an investment vehicle for the Contracts: (iii) each
Contract provides for the allocation of net amounts received by the Company to
an Account for investment in the shares of one of more specified investment
companies selected among those companies available through the Account to act as
underlying investment media: (iv) selection of a particular investment company
is made by the Contract owner under a particular Contract, who may change such
selection from time to time in accordance with the terms of the applicable
Contract: and (v) the activities of the Company contemplated by this Agreement
comply with all provisions of federal and state insurance, securities, and tax
laws applicable to such activities.
(b) Distributor and Manager represent that: (i) this Agreement has been
duly authorized by all necessary corporate action and, when executed and
delivered, shall constitute the legal, valid and binding obligation of
Distributor and Manager, enforceable in accordance with its terms: and (ii) the
investments of the Funds will at all times be adequately diversified within the
meaning of Section 817(h) of the Internal Revenue Service Code of 1986, as
amended (the "Code"), and the regulations thereunder, and that at all times
while this Agreement is in effect, all beneficial interests in each of the Funds
will be owned by one or more insurance companies or by any other party permitted
under Section 1.817-5(f)(3) of the Regulations promulgated under the Code. In
the event of a breach of this Section 6 (b)(ii) by any Fund. Distributor or
Manager will take all reasonable steps (A) to notify the Company of such breach
and (B) to adequately diversify the Fund so as to achieve compliance within the
grace period afforded by Treasury Regulation 1.817-5.
(c) Distributor and Manager represent that the Funds are currently
qualified as Regulated Investment Companies under Subchapter M of the Internal
Revenue Code, and that they will maintain such qualification (under Subchapter M
or any successor or similar provision), and that Distributor or Manager will
notify the Company immediately upon having a reasonable basis for believing that
any Fund has ceased to so qualify or that it might not qualify in the future.
7. ADDITIONAL COVENANTS AND AGREEMENTS.
(a) Each party shall comply with all provisions of federal and state laws
applicable to its respective activities under this Agreement.
(b) Each party shall promptly notify the other parties in the event that it
is, for any reason, unable to perform any of its obligations under this
Agreement.
(c) The Company covenants and agrees that all Orders accepted and
transmitted by it hereunder with respect to each Account on any Business Day
will be based upon instructions that it
II-12
<PAGE>
received from the Contract owners in proper form prior to the Close of Trading
of the Exchange on that Business Day.
(d) The Company covenants and agrees that all Orders transmitted to the
Funds' transfer agent, whether by telephone, telecopy, or other electronic
transmission acceptable to Distributor, shall be sent by or under the authority
and direction of a person designated by the Company as being duly authorized to
act on behalf of the owner of the Accounts. Absent actual knowledge to the
contrary, Distributor shall be entitled to rely on the existence of such
authority and to assume that any person transmitting Orders for the purchase,
redemption or transfer of Fund shares on behalf of the Company is "an
appropriate person" as used in Sections 8-107 and 8401 of the Uniform Commercial
Code with respect to the transmission of instructions regarding Fund shares on
behalf of the owner of such Fund shares. The Company shall maintain the
confidentiality of all passwords and security procedures issued, installed or
otherwise put in place with respect to the use of Remote Computer Terminals and
assumes full responsibility for the security therefor. The Company further
agrees to be solely responsible for the accuracy, propriety and consequences of
all data transmitted to Distributor by the Company by telephone, telecopy or
other electronic transmission acceptable to Distributor.
(e) The Company shall furnish, or shall cause to be furnished, to
Distributor, each piece of sales literature or other promotional material in
which a Fund, Manager or Distributor is named, at least ten business days prior
to its use. No such material shall be used if the Fund, Manager or Distributor
reasonably objects in writing to such use within ten business days after receipt
of such material.
(f) The Company shall not give any information or make any representations
or statements on behalf of a Fund or concerning a Fund other than the
information or representations contained in the registration statement or
prospectus for the Fund shares, as such registration statement and prospectus
may be amended or supplemented from time to time, or in reports or proxy
statements for a Fund, or in sales literature or other promotional material
approved by Distributor, except with the permission of Distributor. Distributor
agrees to respond to any request for approval on a prompt and timely basis.
(g) Distributor shall furnish, or shall cause to be furnished, to the
Company or its designee, each piece of sales literature or other promotional
material in which the Company or the Account is named, at least ten business
days prior to its use. No such material shall be used if the Company reasonably
objects in writing to such use within ten business days after receipt of such
material.
(h) Neither Distributor nor Manager shall give any information or make any
representations on behalf of the Company or concerning the Company, each
Account, or the Contracts other than the information or representations
contained in a registration statement or prospectus for the Contracts, as such
registration statement and prospectus may be amended or supplemented from time
to time, or in published reports for each Account which are in the public domain
or approved by the Company for distribution to Contract owners, or in sales
literature or other promotional material approved by the Company, except with
the permission of the Company. The Company agrees to respond to any request for
approval on a prompt and timely basis.
(i) Distributor will provide to the Company at least one complete copy of
all registration statements, prospectuses, statements of additional information,
reports, proxy statements, sales literature and other promotional materials, and
all amendments to any of the above, that relate to any Fund or its shares, upon
the Company's request.
II-13
<PAGE>
(j) The Company will provide to Distributor or Manager at least one
complete copy of all registration statements, prospectuses, statements of
additional information, reports, solicitations for voting instructions, sales
literature and other promotional materials, and all amendments to any of the
above, that relate to the Contracts or each Account, upon Distributor's or
Manager's request.
(k) For purposes of this Section 7, the phrase "sales literature or other
promotional material" includes, but is not limited to, advertisements (such as
material published, or designed for use in, a newspaper, magazine, or other
periodical radio, television, telephone or tape recording, videotape display,
signs or billboards, motion pictures, or other public media), sales
literature(i.e., any written communication distributed or made generally
available to customers or the public, including brochures, circulars, research
reports, market letters, reprints or excerpts of any other advertisement, sales
literature, or published article), educational or training materials or other
communications distributed or made generally available to some or all agents or
employees, prospectuses, statements of additional information, shareholder
reports, and proxy materials and any other material constituting sales
literature or advertising under NASD rules, the Investment Company Act or the
Securities Act of 1933 (the "l993 Act").
8. USE OF NAMES. Except as otherwise expressly provided for in this
Agreement, neither Distributor, Manager nor the Funds shall use any trademark,
trade name, service mark or logo of the Company, or any variation of any such
trademark, trade name, service mark or logo, without the Company's prior written
consent, the granting of which shall be at the Company's sole option. Except as
otherwise expressly provided for in this Agreement, the Company shall not use
any trademark, trade name, service mark or logo of Manager, Distributor or a
Fund, or any variation of any such trademarks, trade names, service marks, or
logos, without the prior written consent of either Manager, Distributor or that
Fund, as appropriate, the granting of which shall be at the sole option of
Distributor, Manager or such Fund.
9. PROXY VOTING.
(a) The Company shall provide pass-through voting privileges to all
Contract owners so long as the SEC continues to interpret the Investment Company
Act as requiring such privileges. It shall be the responsibility of the Company
to assure that it and the separate accounts of the other Participating Companies
(as defined in SECTION 11(A) below) participating in any Fund calculate voting
privileges in a consistent manner.
(b) The Company will distribute to Contract owners all proxy material
furnished by Distributor and will vote shares in accordance with instructions
received from such Contract owners. The Company shall vote Fund shares for which
no instructions have been received in the same proportion as shares for which
such instructions have been received. The Company and its agents shall not
oppose or interfere with the solicitation of proxies for Fund shares held for
such Contract owners.
10. INDEMNITY.
(a) Distributor and Manager agree to indemnify and hold harmless the
Company and its officers, directors, employees, agents, affiliates and each
person, if any, who controls the Company within the meaning of the 1933 Act
(collectively, the "Indemnified Parties" for purposes of this SECTION 10(a))
against any losses, claims, expenses, damages or liabilities (including amounts
paid in settlement thereof) or litigation expenses (including legal and other
expenses) (collectively, "Losses"), to which the Indemnified Parties may become
subject, insofar as such Losses result from a breach by Distributor or Manager
of a material provision of this Agreement, or (ii) arise out or are based upon
any untrue statement or alleged untrue statement of any material fact contained
in any registration statement or prospectus of the Funds or arise out of or are
based upon the omission or alleged omission to state
II-14
<PAGE>
therein a material fact required to be stated therein or necessary to make the
statement there in not misleading. Distributor or Manager will reimburse any
legal or other expenses reasonably incurred by the Indemnified Parties in
connection with investigating or defending any such Losses. Distributor shall
not be liable for indemnification hereunder if such Losses are attributable to
the negligence or misconduct of the Company in performing its obligations under
this Agreement.
(b) The Company agrees to indemnify and hold harmless Distributor, Manager
and the Funds and their respective officers, directors, employees, agents,
affiliates and each person, if any, who controls the Funds, Manager or
Distributor within the meaning of the 1933 Act (collectively, the "Indemnified
Parties" for purposes of this SECTION 10(B)) against any Losses to which the
Indemnified Parties may become subject, insofar as such Losses (i) result from a
breach by the Company of a material provision of this Agreement, or (ii) arise
out of or are based upon any untrue statement or alleged untrue statement of any
material fact contained in any registration statement or prospectus of the
Company regarding the Contracts, if any, or arise out of or are based upon the
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading, or
(iii) result from the use by any person of a Remote Computer Terminal. The
Company will reimburse any legal or other expenses reasonably incurred by the
Indemnified Parties in connection with investigating or defending any such
Losses. The Company shall not be liable for indemnification hereunder if such
Losses are attributable to the negligence or misconduct of Distributor, Manager
or the Funds in performing their obligations under this Agreement.
(c) Promptly after receipt by an indemnified party hereunder of notice of
the commencement of action, such indemnified party will, if a claim in respect
thereof is to be made against the indemnifying party hereunder, notify the
indemnifying party of the commencement thereof, but the omission so to notify
the indemnifying party will not relieve it from any liability which it may have
to any indemnified party otherwise than under this SECTION 10. In case any such
action is brought against any indemnified party, and it notifies the
indemnifying party of the commencement thereof, the indemnifying party will be
entitled to participate therein and, to the extent that it may wish to, assume
the defense thereof, with counsel satisfactory to such indemnified party, and
after notice from the indemnifying party to such indemnified party of its
election to assume the defense thereof, the indemnified party will not be liable
to such indemnified party under this Section 10 for any legal or other expenses
subsequently incurred by such indemnified party in connection with the defense
thereof other than reasonable costs of investigation.
(d) If the indemnifying party assumes the defense of any such action, the
indemnifying party shall not, without the prior written consent of the
indemnified parties in such action, settle or compromise the liability of the
indemnified parties in such action, or permit a default or consent to the entry
of any judgment in respect thereof, unless in connection with such settlement,
compromise or consent, each indemnified party receives from such claimant an
unconditional release from all liability in respect of such claim.
11. POTENTIAL CONFLICTS.
(a) The Company has received a copy of an application for exemptive relief,
as amended, filed by Distributor on December 21, 1987, with the SEC and the
order issued by the SEC in response thereto (the "Shared Funding Exemptive
Order"). The Company has reviewed the conditions to the requested relief set
forth in such application for exemptive relief As set forth in such application,
the Board of Directors of the Funds (the "Board") will monitor the Funds for the
existence of any material irreconcilable conflict between the interests of the
contract owners of all separate accounts ("Participating Companies") investing
in the Funds. An irreconcilable material conflict may arise for a variety of
reasons, including: (i) an action by any state insurance regulatory authority;
(ii) a change in applicable federal or state insurance, tax, or securities laws
or regulations, or a public ruling, private
II-15
<PAGE>
letter ruling, no-action or interpretative letter, or any similar actions by
insurance, tax or securities regulatory authorities; (iii) an administrative or
judicial decision in any relevant proceeding; (iv) the manner in which the
investments of any portfolio are being managed; (v) a difference in voting
instructions given by variable annuity contract owners and variable life
insurance contract owners; or (vi) a decision by an insurer to disregard the
voting instructions of contract owners. The Board shall promptly inform the
Company if it determines that an irreconcilable material conflict exists and the
implications thereof.
(b) The Company will report any potential or existing conflicts of which it
is aware to the Board. The Company will assist the Board in carrying out its
responsibilities under the Shared Funding Exemptive Order by providing the Board
with all information reasonably necessary for the Board to consider any issues
raised. This includes, but is not limited to, an obligation by the Company to
inform the Board whenever contract owner voting instructions are disregarded.
(c) If a majority of the Board, or a majority of its disinterested Board
members, determines that a material irreconcilable conflict exists with regard
to contract owner investments in a Fund, the Board shall give prompt notice to
all Participating Companies. If the Board determines that the Company is
responsible for causing or creating said conflict, the Company shall at its sole
cost and expense, and to the extent reasonably practicable (as determined by a
majority of the disinterested Board members), take such action as is necessary
to remedy or eliminate the irreconcilable material conflict. Such necessary
action may include but shall not be limited to:
(i) withdrawing the assets allocable to the Accounts from the Fund and
reinvesting such assets in a different investment medium or submitting
the question of whether such segregation should be implemented to a
vote of all affected contract owners and as appropriate, segregating
the assets of any appropriate group (i.e., annuity contract owners,
life insurance contract owners, or variable contract owners of one or
more Participating Companies) that votes in favor of such segregation,
or offering to the affected contract owners the option of making such
a change; and/or
(ii) establishing a new registered management investment company or managed
separate account.
(d) If a material irreconcilable conflict arises as a result of a decision
by the Company to disregard its contract owner voting instructions and said
decision represents a minority position or would preclude a majority vote by all
of its contract owners having an interest in the Funds, the Company at its sole
cost, may be required, at the Board's election, to withdraw an Account's
investment in the Funds and terminate this Agreement; provided, however, that
such withdrawal and termination shall be limited to the extent required by the
foregoing material irreconcilable conflict as determined by a majority of the
disinterested members of the Board.
(e) For the purpose of this SECTION 11, a majority of the disinterested
Board members shall determine whether or not any proposed action adequately
remedies any irreconcilable material conflict, but in no event will the Funds be
required to establish a new funding medium for any Contract. The Company shall
not be required by this SECTION 11 to establish a new funding medium for any
Contract if an offer to do so has been declined by vote of a majority of the
Contract owners materially adversely affected by the irreconcilable material
conflict.
12. TERMINATION. This agreement shall terminate as to the sale and issuance
of new Contracts:
II-16
<PAGE>
(a) at the option of either the Company, Distributor or the Manager upon
six months' advance written notice to the other;
(b) at the option of the Company if the Funds' shares are not available for
any reason to meet the requirement of Contracts as determined by the Company.
Reasonable advance notice of election to terminate shall be furnished by
Company;
(c) at the option of either the Company, Distributor or the Manager, upon
institution of formal proceedings against the broker-dealer or broker-dealers
marketing the Contracts, the Accounts, the Company, Distributor, or the Funds by
the National Association of Securities Dealers, Inc. (the "NASD"), the SEC or
any other regulatory body;
(d) upon termination of the Management Agreement between the Funds and
Manager. Notice of such termination shall be promptly furnished to the Company.
This SUBSECTION (D) shall not be deemed to apply if contemporaneously with such
termination a new contract of substantially similar terms is entered into
between the Funds and Manager;
(e) upon the requisite vote of Contract owners having an interest in the
Funds to substitute for the Funds' shares the shares of another investment
company in accordance with the terms of Contracts for which the Funds' shares
had been selected to serve as the underlying investment medium The Company will
give 60 days' written notice to the Funds and Distributor of any proposed vote
to replace the Funds' shares;
(f) upon assignment of this Agreement unless made with the written consent
of all other parties hereto;
(g) if the Funds' shares are not registered, issued or sold in conformance
with Federal law or such law precludes the use of Fund shares as an underlying
investment medium of Contracts issued or to be issued by the Company. Prompt
notice shall be given by either party should such situation occur;
(h) at the option of the Distributor or Manager, if Distributor or Manager
reasonably determines in good faith that the Company is not offering shares of
the Fund in conformity with the terms of this Agreement or applicable law;
(i) at the option of any party hereto upon a determination that continuing
to perform under this Agreement would, in the reasonable opinion of the
terminating party's counsel violate any applicable federal or state law, rule,
regulation or judicial order;
(j) At the option of the Company if a Fund fails to meet the
diversification requirements specified in Section 6(i) hereof; or
(k) At the option of any party to this Agreement, upon another party's
material breach of any provision of this Agreement.
13. CONTINUATION OF AGREEMENT. Termination as the result of any cause
listed in SECTION 12 shall not affect Distributor's obligation to cause the
Funds to continue to furnish their shares under the terms of this Agreement to
Contracts then in force for which their shares serve or may serve as the
underlying medium (unless such further sale of Fund shares is proscribed by law
or the SEC or other regulatory body). Following termination, Distributor shall
not have any Administrative Services payment obligation to the Company (except
for payment obligations accrued but not yet paid as of the termination date).
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<PAGE>
14. NON-EXCLUSIVITY. Each of the parties acknowledges and agrees that this
Agreement and the arrangement described herein are intended to be non-exclusive
and that each of the parties is free to enter into similar agreements and
arrangements with other entities.
15. SURVIVAL. The provisions of SECTION 8 (use of names) and SECTION 10
(indemnity) of this Agreement shall survive termination of this Agreement.
16. AMENDMENT. Neither this Agreement, nor any provision hereof, may be
amended, waived, discharged or terminated orally, but only by an instrument in
writing signed by all of the parties hereto.
17. NOTICES. All notices and other communications hereunder shall be given
or made in writing and shall be delivered personally, or sent by telex,
telecopier, express delivery or registered or certified mail, postage prepaid,
return receipt requested, to the party or parties to whom they are directed at
the following addresses, or at such other addresses as may be designated by
notice from such party to all other parties.
To the Company:
The Prudential Insurance Company of America
751 Broad Street, 21 Plaza
Newark, New Jersey 07102
Attention: Mary L. Cavanaugh, Esq.
(201)802-4799 (office number)
(201) 643-5520 (telecopy number)
To the Issuer or Distributor:
American Century Investments
4500 Main Street
Kansas City, Missouri 64111
Attention: Charles A. Etherington, Esq.
(816)340-4051 (office number)
(816) 340-4964 (telecopy number)
Any notice, demand or other communication given in a manner prescribed in this
SECTION 17 shall be deemed to have been delivered on receipt.
18. SUCCESSORS AND ASSIGNS. This Agreement may not be assigned without the
written consent of all parties to the Agreement at the time of such assignment.
This Agreement shall be binding upon and inure to the benefit of the parties
hereto and their respective permitted successors and assigns.
19. COUNTERPARTS. This Agreement may be executed in any number of
counterparts, all of which taken together shall constitute one agreement, and
any party hereto may execute this Agreement by signing any such counterpart.
20. SEVERABILITY. In case any one or more of the provisions contained in
this Agreement should be invalid, illegal or unenforceable in any respect, the
validity, legality and enforceability of the remaining provisions contained
herein shall not in any way be affected or impaired thereby.
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<PAGE>
21. ENTIRE AGREEMENT. This Agreement, including the Attachments hereto,
constitutes the entire agreement between the parties with respect to the matters
dealt with herein, and supersedes all previous agreements, written or oral, with
respect to such matters.
22. CONFIDENTIALITY. Subject to applicable law and regulatory authority,
each party hereto shall treat as confidential all information reasonably
identified as such in writing by any other parry hereto (including without
limitation the names and addresses of the owners of the Contracts) and, except
as contemplated by this Agreement, shall not disclose, disseminate or utilize
such confidential information until such time as it may come into the public
domain without the expressed prior written consent of the affected party.
23. COOPERATION. Each party hereto shall cooperate with each other party
and all appropriate governmental authorities (including without limitation the
SEC, the NASD, and state insurance regulators) and shall permit each other and
such authorities reasonable access to its books and records in connection with
any investigation or inquiry relating to this Agreement or the transactions
contemplated hereby.
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the
date set forth above.
AMERICAN CENTURY INVESTMENT THE PRUDENTIAL INSURANCE
SERVICES, INC. COMPANY OF AMERICA
By: __________________________________ By:_________________________
William M. Lyons Name: ______________________
Executive Vice President Title: _____________________
AMERICAN CENTURY INVESTMENT
MANAGEMENT, INC.
By:____________________________________
William M. Lyons
Executive Vice President
II-19
<PAGE>
EXHIBIT A
FUNDS AVAILABLE
================================================================================
ISSUER | NAME OF FUND
================================================================================
TCI Portfolios, Inc. | TCI Balanced
|------------------------------------------------
| TCI Growth
|------------------------------------------------
| TCI International
|------------------------------------------------
| TCI Value
================================================================================
II-20
<PAGE>
JANUS ASPEN SERIES
FUND PARTICIPATION AGREEMENT
THIS AGREEMENT is made this l5th day of April , 1997, between JANUS ASPEN
SERIES, an open-end management investment company organized as a Delaware
business trust (the "Trust"), JANUS CAPITAL CORPORATION, a Colorado corporation
(the "Adviser"), and PRUDENTIAL INSURANCE COMPANY OF AMERICA, a life insurance
company organized under the laws of the State of New Jersey (the "Company"), on
its own behalf and on behalf of each segregated asset account of the Company set
forth on Schedule A, as may be amended from time to time (the "Accounts").
W I T N E S S E T H:
WHEREAS, the Trust has registered with the Securities and Exchange
Commission as an open-end management investment company under the Investment
Company Act of 1940, as amended (the "1940 Act"), and has registered the offer
and sale of its shares under the Securities Act of 1933, as amended (the "1933
Act"); and
WHEREAS, the Trust desires to act as an investment vehicle for separate
accounts established for variable life insurance policies and variable annuity
contracts to be offered by insurance companies that have entered into
participation agreements with the Trust (the "Participating Insurance
Companies"); and
WHEREAS, the beneficial interest in the Trust is divided into several
series of shares, each series representing an interest in a particular managed
portfolio of securities and other assets (the "Portfolios"); and
WHEREAS, the Trust has received an order from the Securities and Exchange
Commission granting Participating Insurance Companies and their separate
accounts exemptions from the provisions of Sections 9(a), 13(a), 15(a) and 15(b)
of the 1940 Act, and Rules 6e-2(b)(15) and 6e-3(T)(b)(15) thereunder, to the
extent necessary to permit shares of the Trust to be sold to and held by
variable annuity and variable life insurance separate accounts of both
affiliated and unaffiliated life insurance companies and certain qualified
pension and retirement plans (the "Exemptive Order"); and
WHEREAS, the Company has registered or will register (unless registration
is not required under applicable law) certain variable life insurance policies
and/or variable annuity contracts under the 1933 Act (the "Contracts"); and
WHEREAS, the Company has registered or will register (unless registration
is not required under applicable law) each Account as a unit investment trust
under the 1940 Act; and
II-21
<PAGE>
WHEREAS, the Company desires to utilize shares of one or more Portfolios as
an investment vehicle of the Accounts; and
WHEREAS, the Adviser is registered as an investment adviser under the 1940
Act and serves as investment adviser to the Trust;
NOW THEREFORE, in consideration of their mutual promises, the parties agree
as follows:
ARTICLE I
Sale of Trust Shares
1.1 The Trust shall make shares of its Portfolios available to the Accounts
at the net asset value next computed after receipt of such purchase order by the
Trust (or its agent), as established in accordance with the provisions of the
then current prospectus of the Trust. Shares of a particular Portfolio of the
Trust shall be ordered in such quantities and at such times as determined by the
Company to be necessary to meet the requirements of the Contracts. The Trustees
of the Trust (the "Trustees") may refuse to sell shares of any Portfolio to any
person, or suspend or terminate the offering of shares of any Portfolio if such
action is required by law or by regulatory authorities having jurisdiction or
is, in the sole discretion of the Trustees acting in good faith and in light of
their fiduciary duties under federal and any applicable state laws, necessary in
the best interests of the shareholders of such Portfolio.
1.2 The Trust will redeem any full or fractional shares of any Portfolio
when requested by the Company on behalf of an Account at the net asset value
next computed after receipt by the Trust (or its agent) of the request for
redemption, as established in accordance with the provisions of the then current
prospectus of the Trust. The Trust shall make payment for such shares in the
manner established from time to time by the Trust, but in no event shall payment
be delayed for a greater period than is permitted by the 1940 Act.
1.3 For the purposes of Sections 1.1 and 1.2, the Trust hereby appoints the
Company as its agent for the limited purpose of receiving and accepting purchase
and redemption orders resulting from investment in and payments under the
Contracts. Receipt by the Company shall constitute receipt by the Trust provided
that i) such orders are received by the Company in good order prior to the time
the net asset value of each Portfolio is priced in accordance with its
prospectus and ii) the Trust receives notice of such orders by 11:00 a.m. New
York time on the next following Business Day. "Business Day" shall mean any day
on which the New York Stock Exchange is open for trading and on which the Trust
calculates its net asset value pursuant to the rules of the Securities and
Exchange Commission.
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<PAGE>
1.4 Purchase orders that are transmitted to the Trust in accordance with
Section 1.3 shall be paid for no later than 12:00 noon New York time on the same
Business Day that the Trust receives notice of the order. Payments shall be made
in federal funds transmitted by wire.
1.5 Issuance and transfer of the Trust's shares will be by book entry only.
Stock certificates will not be issued to the Company or the Account. Shares
ordered from the Trust will be recorded in the appropriate title for each
Account or the appropriate subaccount of each Account.
1.6 The Trust shall furnish prompt notice to the Company of any income
dividends or capital gain distributions payable on the Trust's shares. The
Company hereby elects to receive all such income dividends and capital gain
distributions as are payable on a Portfolio's shares in additional shares of
that Portfolio. The Trust shall notify the Company of the number of shares so
issued as payment of such dividends and distributions.
1.7 The Trust shall make the net asset value per share for each Portfolio
available to the Company on a daily basis as soon as reasonably practical after
the net asset value per share is calculated and shall use its best efforts to
make such net asset value per share available by 6 p.m. New York time. If the
Trust provides the Company with materially incorrect share net asset value
information through no fault of the Company, the Company on behalf of the
separate accounts, shall be entitled to an adjustment to the number of shares
purchased or redeemed to reflect the correct share net asset value. Any material
error in the calculation of net asset value per share, dividend or capital gain
information shall be reported to the Company promptly upon discovery.
1.8 The Trust agrees that its shares will be sold only to Participating
Insurance Companies and their separate accounts and to certain qualified pension
and retirement plans as provided under Section 817(h)(4) of the Internal Revenue
Code of 1986, as amended, and the regulations thereunder ("Code"), to the extent
permitted by the Exemptive Order. No shares of any Portfolio will be sold
directly to the general public. The Company agrees that Trust shares will be
used only for the purposes of funding the Contracts and Accounts listed in
Schedule A, as amended from time to time.
1.9 The Trust agrees that all Participating Insurance Companies shall have
the obligations and responsibilities regarding pass-through voting and conflicts
of interest corresponding to those contained in Section 2.8 and Article IV of
this Agreement.
ARTICLE II
Obligations of the Parties
2.1 The Trust shall prepare and be responsible for filing with the
Securities and Exchange Commission and any state regulators requiring such
filing all shareholder reports,
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<PAGE>
notices, proxy materials (or similar materials such as voting instruction
solicitation materials), prospectuses and statements of additional information
of the Trust. The Trust shall bear the costs of registration and qualification
of its shares, preparation and filing of the documents listed in this Section
2.1 and all taxes to which an issuer is subject on the issuance and transfer of
its shares.
2.2 At the option of the Company, the Trust shall either (a) provide the
Company (at the Company's expense) with as many copies of the Trust's current
prospectus, annual report, semi-annual report and other shareholder
communications, including any amendments or supplements to any of the foregoing,
as the Company shall reasonably request; or (b) provide the Company with a
camera ready copy of such documents in a form suitable for printing. The Trust
shall provide the Company with a copy of its statement of additional information
in a form suitable for duplication by the Company. The Trust (at its expense)
shall provide the Company with copies of any Trust-sponsored proxy materials in
such quantity as the Company shall reasonably require for distribution to
Contract owners.
2.3 The Company shall bear the costs of printing and distributing the
Trust's prospectus, statement of additional information, shareholder reports and
other shareholder communications to owners of and applicants for policies for
which the Trust is serving or is to serve as an investment vehicle. The Company
shall bear the costs of distributing proxy materials (or similar materials such
as voting solicitation instructions) to Contract owners. The Company assumes
sole responsibility for ensuring that such materials are delivered to Contract
owners in accordance with applicable federal and state securities laws.
2.4 The Company agrees and acknowledges that the Adviser is the sole owner
of the name and mark "Janus" and that all use of any designation comprised in
whole or part of Janus (a "Janus Mark") under this Agreement shall inure to the
benefit of the Adviser. Except as provided in Section 2.5, the Company shall not
use any Janus Mark on its own behalf or on behalf of the Accounts or Contracts
in any registration statement, advertisement, sales literature or other
materials relating to the Accounts or Contracts without the prior written
consent of the Adviser. Upon termination of this Agreement for any reason, the
Company shall cease all use of any Janus Mark(s) as soon as reasonably
practicable.
2.5 The Company shall furnish, or cause to be furnished, to the Trust or
its designee, a copy of each Contract prospectus or statement of additional
information in which the Trust or the Adviser is named prior to the filing of
such document with the Securities and Exchange Commission. The Company shall
furnish, or shall cause to be furnished, to the Trust or its designee, each
piece of sales literature or other promotional material in which the Trust or
the Adviser is named, at least ten Business Days prior to its use. No such
material shall be used if the Trust or its designee reasonably objects to such
use within ten Business Days after receipt of such material.
2.6 The Company shall not give any information or make any representations
or statements on behalf of the Trust or concerning the Trust or the Adviser in
connection with the
II-24
<PAGE>
sale of the Contracts other than information or representations contained in and
accurately derived from the registration statement or prospectus for the Trust
shares (as such registration statement and prospectus may be amended or
supplemented from time to time), reports of the Trust, Trust-sponsored proxy
statements, or in sales literature or other promotional material approved by the
Trust or its designee, except as required by legal process or regulatory
authorities or with the written permission of the Trust or its designee.
2.7 Neither the Trust nor the Adviser shall give any information or make
any representations or statements on behalf of the Company or concerning the
Company, the Accounts or the Contracts other than information or representations
contained in and accurately derived from the registration statement or
prospectus for the Contracts (as such registration statement and prospectus may
be amended or supplemented from time to time), or in materials approved by the
Company for distribution including sales literature or other promotional
materials, except as required by legal process or regulatory authorities or with
the written permission of the Company.
2.8 So long as, and to the extent that the Securities and Exchange
Commission interprets the 1940 Act to require pass-through voting privileges for
variable policyowners, the Company will provide pass-through voting privileges
to owners of policies whose cash values are invested, through the Accounts, in
shares of the Trust. The Trust shall require all Participating Insurance
Companies to calculate voting privileges in the same manner and the Company
shall be responsible for assuring that the Accounts calculate voting privileges
in the manner established by the Trust. With respect to each Account, the
Company will vote shares of the Trust held by the Account and for which no
timely voting instructions from policyowners are received as well as shares it
owns that are held by that Account, in the same proportion as those shares for
which voting instructions are received. The Company and its agents will in no
way recommend or oppose or interfere with the solicitation of proxies for Trust
shares held by Contract owners without the prior written consent of the Trust,
which consent may be withheld in the Trust's sole discretion.
2.9 The Company shall notify the Trust of any applicable state insurance
laws that restrict the Portfolios' investments or otherwise affect the operation
of the Trust and shall notify the Trust of any changes in such laws.
2.10 For purposes of this Article, the phrase "sales literature or other
promotional material" includes, but is not limited to, advertisements (such as
material published, or designed for use in, a newspaper, magazine, or other
periodical, radio, television, telephone or tape recording, video tape display,
signs or billboards, motion pictures, or other public media), sales literature
(i.e., any written communication distributed or made generally available to
customers or the public, including brochures, circulars, research reports,
market letters, form letters, seminar texts, reprints or excerpts of any other
advertisement, sales literature, or published articles,) educational or training
materials or other communications distributed or made generally available to
some or all agents or employees, registration statements, prospectuses,
statements of
II-25
<PAGE>
additional information, shareholder reports, and proxy materials and any other
material constituting sales literature or advertising under NASD Rules, the 1940
Act or the 1933 Act.
ARTICLE III
Representations and Warranties
3.1 The Company represents and warrants that it is an insurance company
duly organized and in good standing under the laws of the State of New Jersey
and that it has legally and validly established each Account as a segregated
asset account under such law on the date set forth in Schedule A.
3.2 The Company represents and warrants that each Account (1) has been
registered or, prior to any issuance or sale of the Contracts, will be
registered as a unit investment trust in accordance with the provisions of the
1940 Act or, alternatively (2) has not been registered in proper reliance upon
an exclusion from registration under the 1940 Act.
3.3 The Company represents and warrants that the Contracts or interests
in the Accounts (1) are or, prior to issuance, will be registered as securities
under the 1933 Act or, alternatively (2) are not registered because they are
properly exempt from registration under the 1933 Act or will be offered
exclusively in transactions that are properly exempt from registration under the
1933 Act. The Company further represents and warrants that the Contracts will be
issued and sold in compliance in all material respects with all applicable
federal and state laws; and the sale of the Contracts shall comply in all
material respects with state insurance suitability requirements.
3.4 The Trust represents and warrants that it is duly organized and validly
existing under the laws of the State of Delaware.
3.5 The Trust represents and warrants that the Trust shares offered and
sold pursuant to this Agreement will be registered under the 1933 Act and the
Trust shall be registered under the 1940 Act prior to any issuance or sale of
such shares. The Trust shall amend its registration statement under the 1933 Act
and the 1940 Act from time to time as required in order to effect the continuous
offering of its shares. The Trust shall register and qualify its shares for sale
in accordance with the laws of the various states only if and to the extent
deemed advisable by the Trust.
3.6 The Trust represents and warrants that the investments of each
Portfolio will comply with the diversification requirements set forth in Section
817(h) of the Code. In the event of a breach of this Article by a Portfolio, the
Portfolio will take all reasonable steps to notify the Company of such breach
and to adequately diversify the Portfolio so as to achieve compliance with the
grace period afforded by Treasury Regulation 1.817-5.
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<PAGE>
3.7 The Trust represents that it is currently qualified as a regulated
investment company under Subchapter M of the Code, that it will maintain such
qualification (under Subchapter M or any successor or similar provision) and
that it will notify the Company immediately upon having a reasonable basis for
believing that it has ceased to so qualify or that it might not so qualify in
the future.
ARTICLE IV
Potential Conflicts
4.1 The parties acknowledge that the Trust's shares may be made available
for investment to other Participating Insurance Companies. In such event, the
Trustees will monitor the Trust for the existence of any material irreconcilable
conflict between the interests of the contract owners of all Participating
Insurance Companies. An irreconcilable material conflict may arise for a variety
of reasons, including: (a) an action by any state insurance regulatory
authority; (b) a change in applicable federal or state insurance, tax, or
securities laws or regulations, or a public ruling, private letter ruling,
no-action or interpretative letter, or any similar action by insurance, tax, or
securities regulatory authorities; (c) an administrative or judicial decision in
any relevant proceeding; (d) the manner in which the investments of any
Portfolio are being managed; (e) a difference in voting instructions given by
variable annuity contract and variable life insurance contract owners; or (f) a
decision by an insurer to disregard the voting instructions of contract owners.
The Trustees shall promptly inform the Company if they determine that an
irreconcilable material conflict exists and the implications thereof.
4.2 The Company agrees to promptly report any potential or existing
conflicts of which it is aware to the Trustees. The Company will assist the
Trustees in carrying out their responsibilities under the Exemptive Order by
providing the Trustees with all information reasonably necessary for the
Trustees to consider any issues raised including, but not limited to,
information as to a decision by the Company to disregard Contract owner voting
instructions.
4.3 If it is determined by a majority of the Trustees, or a majority of its
disinterested Trustees, that a material irreconcilable conflict exists that
affects the interests of Contract owners, the Company shall, in cooperation with
other Participating Insurance Companies whose contract owners are also affected,
at its expense and to the extent reasonably practicable (as determined by the
Trustees) take whatever steps are necessary to remedy or eliminate the
irreconcilable material conflict, which steps could include: (a) withdrawing the
assets allocable to some or all 1of the Accounts from the Trust or any Portfolio
and reinvesting such assets in a different investment medium, including (but not
limited to) another Portfolio of the Trust, or submitting the question of
whether or not such segregation should be implemented to a vote of all affected
Contract owners and, as appropriate, segregating the assets of any appropriate
group (i.e., annuity contract owners, life insurance contract owners, or
variable contract owners of one or more Participating Insurance Companies) that
votes in favor of such segregation, or offering to the affected Contract owners
the option of making such a change; and (b) establishing a new registered
management investment company or managed separate account.
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<PAGE>
4.4 If a material irreconcilable conflict arises because of a decision by
the Company to disregard Contract owner voting instructions and that decision
represents a minority position or would preclude a majority vote, the Company
may be required, at the Trust's election, to withdraw the affected Account's
investment in the Trust and terminate this Agreement with respect to such
Account; provided, however that such withdrawal and termination shall be limited
to the extent required by the foregoing material irreconcilable conflict as
determined by a majority of the disinterested Trustees. Any such withdrawal and
termination must take place within six (6) months after the Trust gives written
notice that this provision is being implemented. Until the end of such six (6)
month period, the Trust shall continue to accept and implement orders by the
Company for the purchase and redemption of shares of the Trust.
4.5 If a material irreconcilable conflict arises because a particular state
insurance regulator's decision applicable to the Company conflicts with the
majority of other state regulators, then the Company will withdraw the affected
Account's investment in the Trust and terminate this Agreement with respect to
such Account within six (6) months after the Trustees inform the Company in
writing that it has determined that such decision has created an irreconcilable
material conflict; provided, however, that such withdrawal and termination shall
be limited to the extent required by the foregoing material irreconcilable
conflict as determined by a majority of the disinterested Trustees. Until the
end of such six (6) month period, the Trust shall continue to accept and
implement orders by the Company for the purchase and redemption of shares of the
Trust.
4.6 For purposes of Sections 4.3 through 4.6 of this Agreement, a majority
of the disinterested Trustees shall determine whether any proposed action
adequately remedies any irreconcilable material conflict, but in no event will
the Company be required to establish a new funding medium for the Contracts if
an offer to do so has been declined by vote of a majority of Contract owners
materially adversely affected by the irreconcilable material conflict. In the
event that the Trustees determine that any proposed action does not adequately
remedy any irreconcilable material conflict, then the Company will withdraw the
Account's investment in the Trust and terminate this Agreement within six (6)
months after the Trustees inform the Company in writing of the foregoing
determination; provided, however, that such withdrawal and termination shall be
limited to the extent required by any such material irreconcilable conflict as
determined by a majority of the disinterested Trustees.
4.7 The Company shall at least annually submit to the Trustees such
reports, materials or data as the Trustees may reasonable request so that the
Trustees may fully carry out the duties imposed upon them by the Exemptive
Order, and said reports, materials and data shall be submitted more frequently
if deemed appropriate by the Trustees.
4.8 If and to the extent that Rule 6e-2 and Rule 6e-3(T) are amended, or
Rule 6e-3 is adopted, to provide exemptive relief from any provision of the 1940
Act or the rules promulgated thereunder with respect to mixed or shared funding
(as defined in the Exemptive Order) on terms and conditions materially different
from those contained in the Exemptive Order, then the Trust
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<PAGE>
and/or the Participating Insurance Companies, as appropriate, shall take such
steps as may be necessary to comply with Rules 6e-2 and 6e-3(T), as amended, and
Rule 6e-3, as adopted, to the extent such rules are applicable.
ARTICLE V
Indemnification
5.1 Indemnification By the Company. The Company agrees to indemnify and
hold harmless the Trust, the Adviser, and each of their Trustees or Directors,
officers, employees and agents and each person, if any, who controls the Trust
or the Adviser within the meaning of Section 15 of the 1933 Act (collectively,
the "Indemnified Parties" for purposes of this Article V) against any and all
losses, claims, damages, liabilities (including amounts paid in settlement with
the written consent of the Company) or expenses (including the reasonable costs
of investigating or defending any alleged loss, claim, damage, liability or
expense and reasonable legal counsel fees incurred in connection therewith)
(collectively, "Losses"), to which the Indemnified Parties may become subject
under any statute or regulation, or at common law or otherwise, insofar as such
Losses:
(a) arise out of or are based upon any untrue statements or alleged
untrue statements of any material fact contained in a registration
statement or prospectus for the Contracts or in the Contracts themselves or
in sales literature generated or approved by the Company on behalf of the
Contracts or Accounts (or any amendment or supplement to any of the
foregoing) (collectively, "Company Documents" for the purposes of this
Article V), or arise out of or are based upon the omission or the alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, provided that this
indemnity shall not apply as to any Indemnified Party if such statement or
omission or such alleged statement or omission was made in reliance upon
and was accurately derived from written information furnished to the
Company by or on behalf of the Trust or the Adviser for use in Company
Documents or otherwise for use in connection with the sale of the Contracts
or Trust shares; or
(b) arise out of or result from statements or representations (other
than statements or representations contained in and accurately derived from
Trust Documents as defined in Section 5.2(a)) or wrongful conduct of the
Company or persons under its control, with respect to the sale or
acquisition of the Contracts or Trust shares; or
(c) arise out of or result from any untrue statement or alleged untrue
statement of a material fact contained in Trust Documents as defined in
Section 5.2(a) or the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the
statements therein not misleading if such statement or omission was made in
reliance upon and accurately derived from written information furnished to
the Trust or the Adviser by or on behalf of the Company; or
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(d) arise out of or result from any failure by the Company to provide
the services or furnish the materials required under the terms of this
Agreement; or
(e) arise out of or result from any material breach of any
representation and/or warranty made by the Company in this Agreement or
arise out of or result from any other material breach of this Agreement by
the Company.
5.2 Indemnification Bv the Trust and the Adviser. The Trust and Adviser
agree to indemnify and hold harmless the Company and each of its directors, the
Adviser, officers, employees and agents and each person, if any, who controls
the Company within the meaning of Section 15 of the 1933 Act (collectively, the
"Indemnified Parties" for purposes of this Article V) against any and all
losses, claims, damages, liabilities (including amounts paid in settlement with
the written consent of the Adviser) or expenses (including the reasonable costs
of investigating or defending any alleged loss, claim, damage, liability or
expense and reasonable legal counsel fees incurred in connection therewith)
(collectively, "Losses"), to which the Indemnified Parties may become subject
under any statute or regulation, or at common law or otherwise, insofar as such
Losses:
(a) arise out of or are based upon any untrue statements or alleged
untrue statements of any material fact contained in the registration
statement or prospectus for the Trust (or any amendment or supplement
thereto), (collectively, "Trust Documents" for the purposes of this Article
V), or arise out of or are based upon the omission or the alleged omission
to state therein a material fact required to be stated therein or necessary
to make the statements therein not misleading, provided that this indemnity
shall not apply as to any Indemnified Party if such statement or omission
or such alleged statement or omission was made in reliance upon and was
accurately derived from written information furnished to the Trust by or on
behalf of the Company for use in Trust Documents or otherwise for use in
connection with the sale of the Contracts or Trust shares; or
(b) arise out of or result from statements or representations (other
than statements or representations contained in and accurately derived from
Company Documents) or wrongful conduct of the Trust or the Adviser or
persons under their control, with respect to the sale or acquisition of the
Contracts or Trust shares; or
(c) arise out of or result from any untrue statement or alleged untrue
statement of a material fact contained in Company Documents or the omission
or alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading if such
statement or omission was made in reliance upon and accurately derived from
written information furnished to the Company by or on behalf of the Trust
or the Adviser; or
(d) arise out of or result from any failure by the Trust or the
Adviser to provide
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<PAGE>
the services or furnish the materials required under the terms of this
Agreement; or
(e) arise out of or result from any material breach of any
representation and/or warranty made by the Trust or Adviser in this
Agreement or arise out of or result from any other material breach of this
Agreement by the Trust or the Adviser.
5.3 None of the parties to this Agreement shall be liable under the
indemnification provisions of Sections 5.1 or 5.2, as applicable, with respect
to any Losses incurred or assessed against an Indemnified Party that arise from
such Indemnified Party's willful misfeasance, bad faith or negligence in the
performance of such Indemnified Party's duties or by reason of such Indemnified
Party's reckless disregard of obligations or duties under this Agreement.
5.4 None of the parties to this Agreement shall be liable under the
indemnification provisions of Sections 5.1 or 5.2, as applicable, with respect
to any claim made against an Indemnified Party unless such Indemnified Party
shall have notified the other parties in writing within a reasonable time after
the summons, or other first written notification, giving information of the
nature of the claim shall have been served upon or otherwise received by such
Indemnified Party (or after such Indemnified Party shall have received notice of
service upon or other notification to any designated agent), but failure to
notify the party against whom indemnification is sought of any such claim shall
not relieve that party from any liability which it may have to the Indemnified
Party in the absence of Sections 5.1 and 5.2.
5.5 In case any such action is brought against the Indemnified Parties, the
indemnifying party shall be entitled to participate, at its own expense, in the
defense of such action. The indemnifying party also shall be entitled to assume
the defense thereof, with counsel reasonably satisfactory to the party named in
the action. After notice from the indemnifying party to the Indemnified Party of
an election to assume such defense, the Indemnified Party shall bear the fees
and expenses of any additional counsel retained by it, and the indemnifying
party will not be liable to the Indemnified Party under this Agreement for any
legal or other expenses subsequently incurred by such party independently in
connection with the defense thereof other than reasonable costs of
investigation.
5.6 The indemnifications provided by the parties hereunder are in addition
to any liability the parties may otherwise have.
ARTICLE VI
Termination
6.1 This Agreement may be terminated by any party for any reason by ninety
(90) days advance written notice delivered to the other parties.
6.2 Notwithstanding any termination of this Agreement, the Trust shall, at
the option of the Company, continue to make available additional shares of the
Trust (or any Portfolio)
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pursuant to the terms and conditions of this Agreement for all Contracts in
effect on the effective date of termination of this Agreement, provided that the
Company continues to pay the costs set forth in Section 2.3.
6.3 The provisions of Article V shall survive the termination of this
Agreement, and the provisions of Article IV and Section 2.8 shall survive the
termination of this Agreement as long as shares of the Trust are held on behalf
of Contract owners in accordance with Section 6.2.
ARTICLE VII
Notices
Any notice shall be sufficiently given when sent by registered or certified
mail to the other party at the address of such party set forth below or at such
other address as such party may from time to time specify in writing to the
other party.
If to the Trust or the Adviser:
100 Fillmore Street, Suite 300
Denver, Colorado 80206
Attention: David C. Tucker, Esq.
If to the Company:
Prudential Insurance Company of America
751 Broad Street, 21 Plaza
Newark, New Jersey 07102
Attention: Mary L. Cavanaugh, Esq.
ARTICLE VIII
Miscellaneous
8.1 The captions in this Agreement are included for convenience of
reference only and in no way define or delineate any of the provisions hereof or
otherwise affect their construction or effect.
8.2 This Agreement may be executed simultaneously in two or more
counterparts, each of which taken together shall constitute one and the same
instrument.
8.3 If any provision of this Agreement shall be held or made invalid by a
court decision, statute, rule or otherwise, the remainder of the Agreement shall
not be affected thereby.
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<PAGE>
8.4 This Agreement shall be construed and the provisions hereof interpreted
under and in accordance with the laws of State of Colorado.
8.5 The parties to this Agreement acknowledge and agree that all
liabilities of the Trust arising, directly or indirectly, under this Agreement,
of any and every nature whatsoever, shall be satisfied solely out of the assets
of the Trust and that no Trustee, officer, agent or holder of shares of
beneficial interest of the Trust shall be personally liable for any such
liabilities.
8.6 Each party shall cooperate with each other party and all appropriate
governmental authorities (including without limitation the Securities and
Exchange Commission, the National Association of Securities Dealers, Inc., and
state insurance regulators) and shall permit such authorities reasonable access
to its books and records in connection with any investigation or inquiry
relating to this Agreement or the transactions contemplated hereby.
8.7 The rights, remedies and obligations contained in this Agreement are
cumulative and are in addition to any and all rights, remedies and obligations,
at law or in equity, which the parties hereto are entitled to under state and
federal laws.
8.8 The parties to this Agreement acknowledge and agree that this Agreement
shall not be exclusive in any respect.
8.9 Neither this Agreement nor any rights or obligations hereunder may be
assigned by any party without the prior written approval of the other parties.
8.10 No provisions of this Agreement may be amended or modified in any
manner except by a written agreement properly authorized and executed by each
party.
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<PAGE>
IN WITNESS WHEREOF, the parties have caused their duly authorized officers
to execute this Participation Agreement as of the date and year first above
written.
PRUDENTIAL INSURANCE COMPANY OF AMERICA
By: /s/ DEBRA GOLDBERG
--------------------------
Name: Debra Goldberg
Title: Vice President, Marketing
JANUS ASPEN SERIES
By: /s/ BONNIE HOWE
---------------------------
Name: Bonnie Howe
Title: Assistant Vice President
JANUS CAPITAL CORPORATION
By: /s/ STEPHEN L. STIENEKER
----------------------------
Name: Stephen L. Stieneker
Title: Vice President of Compliance
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<PAGE>
Schedule A
Separate Accounts and Associated Contracts
------------------------------------------
Name of Separate Account and Contracts Funded
Date Established by Board of Directors By Separate Account
- -------------------------------------- -------------------
Prudential Variable Contract Account GI-2 Group Variable Universal Life
ets. June 24, 1988 Insurance Contracts
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<PAGE>
PARTICIPATION AGREEMENT
AMONG
MFS VARIABLE INSURANCE TRUST,
PRUDENTIAL INSURANCE COMPANY OF AMERICA
AND
MASSACHUSETTS FINANCIAL SERVICES COMPANY
THIS AGREEMENT, made and entered into this 11th day of April 1997, by and
among MFS VARIABLE INSURANCE TRUST, a Massachusetts business trust (the
"Trust"), PRUDENTIAL INSURANCE COMPANY OF AMERICA, an insurance company
organized under the laws of the state of New Jersey (the "Company"), on its own
behalf and on behalf of each of the segregated asset accounts of the Company set
forth in Schedule A hereto, as may be amended from time to time (the
"Accounts"), and MASSACHUSETTS FINANCIAL SERVICES COMPANY, a Delaware
corporation ("MFS").
WHEREAS, the Trust is registered as an open-end management investment
company under the Investment Company Act of 1940, as amended (the "1940 Act"),
and its shares are registered or will be registered under the Securities Act of
1933, as amended (the "1933 Act");
WHEREAS, shares of beneficial interest of the Trust are divided into
several series of shares, each representing the interests in a particular
managed pool of securities and other assets;
WHEREAS, the series of shares of the Trust offered by the Trust to the
Company and the Accounts are set forth on Schedule A attached hereto (each, a
"Portfolio," and, collectively, the "Portfolios");
WHEREAS, MFS is duly registered as an investment adviser under the
Investment Advisers Act of 1940, as amended. and any applicable state securities
law, and is the Trust's investment adviser;
WHEREAS, the Company will issue certain variable annuity and/or variable
life insurance contracts (individually, the "Policy" or, collectively, the
"Policies") which, if required by applicable law, will be registered under the
1933 Act;
WHEREAS, the Accounts are duly organized, validly existing segregated asset
accounts, established by resolution of the Board of Directors of the Company, to
set aside and invest assets attributable to the aforesaid variable annuity
and/or variable life insurance contracts that are allocated to the Accounts (the
Policies and the Accounts covered by this Agreement, and each corresponding
Portfolio covered by this Agreement in which the Accounts invest, is specified
in Schedule A attached hereto as may be modified from time to time);
WHEREAS, the Company has registered or will register the Accounts as unit
investment trusts under the 1940 Act (unless exempt therefrom);
WHEREAS, MFS Fund Distributors, Inc. (the "Underwriter") is registered as a
broker-dealer with the Securities and Exchange Commission (the "SEC") under the
Securities Exchange Act of 1934, as amended (hereinafter the "1934 Act"), and is
a member in good standing of the National Association of Securities Dealers,
Inc. (the "NASD");
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<PAGE>
WHEREAS, Prudential Investment Management Services, L.L.C. ("PIMS"), the
underwriter for the individual variable annuity and the variable life policies,
is registered as a broker-dealer with the SEC under the 1934 Act and is a member
in good standing of the NASD; and
WHEREAS, to the extent permitted by applicable insurance laws and
regulations, the Company intends to purchase shares in one or more of the
Portfolios specified in Schedule A attached hereto (the "Shares") on behalf of
the Accounts to fund the Policies, and the Trust intends to sell such Shares to
the Accounts at net asset value;
NOW, THEREFORE, in consideration of their mutual promises, the Trust, MFS,
and the Company agree as follows:
ARTICLE I. SALE OF TRUST SHARES
1.1. The Trust agrees to sell to the Company those Shares which the
Accounts order (based on orders placed by Policy holders on that
Business Day, as defined below) and which are available for purchase by
such Accounts, executing such orders on a daily basis at the net asset
value next computed after receipt by the Trust or its designee of the
order for the Shares. For purposes of this Section 1.1, the Company
shall be the designee of the Trust for receipt of such orders from
Policy owners and receipt by such designee shall constitute receipt by
the Trust; provided that the Trust receives notice of such orders by
9:30 a.m. New York time on the next following Business Day. "Business
Day" shall mean any day on which the New York Stock Exchange, Inc. (the
"NYSE") is open for trading and on which the Trust calculates its net
asset value pursuant to the rules of the SEC.
1.2. The Trust agrees to make the Shares available indefinitely for
purchase at the applicable net asset value per share by the Company and
the Accounts on those days on which the Trust calculates its net asset
value pursuant to rules of the SEC and the Trust shall calculate such
net asset value on each day which the NYSE is open for trading.
Notwithstanding the foregoing, the Board of Trustees of the Trust (the
"Board") may refuse to sell any Shares to the Company and the Accounts,
or suspend or terminate the offering of the Shares if such action is
required by law or by regulatory authorities having jurisdiction or is,
in the sole discretion of the Board acting in good faith and in light of
its fiduciary duties under federal and any applicable state laws,
necessary in the best interest of the Shareholders of such Portfolio.
1.3. The Trust and MFS agree that the Shares will be sold only to
insurance companies which have entered into participation agreements
with the Trust and MFS (the "Participating Insurance Companies") and
their separate accounts, qualified pension and retirement plans and MFS
or its affiliates in accordance with Section 817(h)(4) of the Internal
Revenue Code of 1986, as amended, and the regulations thereunder. The
Trust and MFS will not sell Trust shares to any insurance company or
separate account unless an agreement containing provisions substantially
the same as Articles III and VII of this Agreement is in effect to
govern such sales. The Company will not resell the Shares except to the
Trust or its agents.
1.4. The Trust agrees to redeem for cash, on the Company's request, any
full or fractional Shares held by the Accounts (based on orders placed
by Policy holders on that Business Day), executing such requests on a
daily basis at the net asset value next computed after receipt by the
Trust or its designee of the request for redemption. For purposes of
this Section 1.4, the Company shall be the designee of the Trust for
receipt of requests for redemption from Policy owners and receipt by
such designee shall constitute receipt by the Trust; provided that the
Trust receives notice of such request for redemption by 9:30 a.m. New
York time on the next following Business Day.
1.5. Each purchase, redemption and exchange order placed by the Company
shall be placed separately for each Portfolio and shall not be netted
with respect to any Portfolio. However, with respect to payment of the
purchase price by the Company and of redemption proceeds by the Trust,
the Company and the Trust
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<PAGE>
shall net purchase and redemption orders with respect to each Portfolio
and shall transmit one net payment for all of the Portfolios in
accordance with Section 1.6 hereof.
1.6. In the event of net purchases, the Company shall pay for the Shares
by 2:00 p.m. New York time on the next Business Day after an order to
purchase the Shares is made in accordance with the provisions of Section
1.1. hereof. In the event of net redemptions, the Trust shall pay the
redemption proceeds by 2:00 p.m. New York time on the next Business Day
after an order to redeem the shares is made in accordance with the
provisions of Section 1.4. hereof. All such payments shall be in
federal funds transmitted by wire.
1.7. Issuance and transfer of the Shares will be by book entry only.
Stock certificates will not be issued to the Company or the Accounts.
The Shares ordered from the Trust will be recorded in an appropriate
title for the Accounts or the appropriate subaccounts of the Accounts.
1.8. The Trust shall furnish same day notice (by wire or telephone
followed by written confirmation) to the Company of any dividends or
capital gain distributions payable on the Shares. The Company hereby
elects to receive all such dividends and distributions as are payable on
a Portfolio's Shares in additional Shares of that Portfolio. The Trust
shall notify the Company of the number of Shares so issued as payment of
such dividends and distributions.
1.9. The Trust or its custodian shall make the net asset value per share
for each Portfolio available to the Company on each Business Day as soon
as reasonably practical after the net asset value per share is
calculated and shall use its best efforts to make such net asset value
per share available by 6:30 p.m. New York time. In the event that the
Trust is unable to meet the 6:30 p.m. time stated herein, it shall
provide additional time for the Company to place orders for the purchase
and redemption of Shares. Such additional time shall be equal to the
additional time which the Trust takes to make the net asset value
available to the Company. If the Trust provides materially incorrect
share net asset value information, the Trust shall make an adjustment to
the number of shares purchased or redeemed for the Accounts to reflect
the correct net asset value per share. Any material error in the
calculation or reporting of net asset value per share, dividend or
capital gains information shall be reported promptly upon discovery to
the Company.
ARTICLE II, CERTAIN REPRESENTATIONS. WARRANTIES AND COVENANTS
2.1. The Company represents and warrants that the Policies are or will
be registered under the 1933 Act or are exempt from or not subject to
registration thereunder, and that the Policies will be issued, sold, and
distributed in compliance in all material respects with all applicable
state and federal laws, including without limitation the 1933 Act, the
Securities Exchange Act of 1934, as amended (the "1934 Act"), and the
1940 Act. The Company further represents and warrants that it is an
insurance company duly organized and in good standing under applicable
law and that it has legally and validly established the Account as a
segregated asset account under applicable law and has registered or,
prior to any issuance or sale of the Policies, will register the
Accounts as unit investment trusts in accordance with the provisions of
the 1940 Act (unless exempt therefrom) to serve as segregated investment
accounts for the Policies, and that it will maintain such registration
for so long as any Policies are outstanding. The Company shall amend the
registration statements under the 1933 Act for the Policies and the
registration statements under the 1940 Act for the Accounts from time to
time as required in order to effect the continuous offering of the
Policies or as may otherwise be required by applicable law. The Company
shall register and qualify the Policies for sales accordance with the
securities laws of the various states only if and to the extent deemed
necessary by the Company.
2.2. The Company represents and warrants that the Policies are currently
and at the time of issuance will be treated as life insurance, endowment
or annuity contract under applicable provisions of the Internal Revenue
Code of 1986, as amended (the "Code"), that it will maintain such
treatment and that it will notify the Trust or MFS immediately upon
having a reasonable basis for believing that the Policies have ceased to
be so treated or that they might not be so treated in the future.
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<PAGE>
2.3. The Company represents and warrants that PIMS, the underwriter for
the individual variable annuity and the variable life policies, is a
member in good standing of the NASD and is a registered broker-dealer
with the SEC. The Company represents and warrants that the Company and
PIMS will sell and distribute such policies in accordance in all
material respects with all applicable state and federal securities laws,
including without limitation the 1933 Act, the 1934 Act, and the 1940
Act.
2.4. The Trust and MFS represent and warrant that the Shares sold
pursuant to this Agreement shall be registered under the 1933 Act, duly
authorized for issuance and sold in compliance with the laws of The
Commonwealth of Massachusetts and all applicable federal and state
securities laws and that the Trust is and shall remain registered under
the 1940 Act. The Trust shall amend the registration statement for its
Shares under the 1933 Act and the 1940 Act from time to time as required
in order to effect the continuous offering of its Shares. The Trust
shall register and qualify the Shares for sale in accordance with the
laws of the various states only if and to the extent deemed necessary by
the Trust.
2.5. MFS represents and warrants that the Underwriter is a member in
good standing of the NASD and is registered as a broker-dealer with the
SEC. The Trust and MFS represent that the Trust and the Underwriter will
sell and distribute the Shares in accordance in all material respects
with all applicable state and federal securities laws, including without
limitation the 1933 Act, the 1934 Act, and the 1940 Act.
2.6. The Trust represents that it is lawfully organized and validly
existing under the laws of The Commonwealth of Massachusetts and that it
does and will comply in all material respects with the 1940 Act and any
applicable regulations thereunder.
2.7. MFS represents and warrants that it is and shall remain duly
registered under all applicable federal securities laws and that it
shall perform its obligations for the Trust in compliance in all
material respects with any applicable federal securities laws and with
the securities laws of The Commonwealth of Massachusetts. MFS represents
and warrants that it is not subject to state securities laws other than
the securities laws of The Commonwealth of Massachusetts and that it is
exempt from registration as an investment adviser under the securities
laws of The Commonwealth of Massachusetts.
2.8. No less frequently than annually, the Company shall submit to the
Board such reports, material or data as the Board may reasonably request
so that it may carry out fully the obligations imposed upon it by the
conditions contained in the exemptive application pursuant to which the
SEC has granted exemptive relief to permit mixed and shared funding (the
"Mixed and Shared Funding Exemptive Order").
ARTICLE III. PROSPECTUS AND PROXY STATEMENTS: VOTING
3.1. At least annually, the Trust or its designee shall provide the
Company, free of charge, with as many copies of the current prospectus
(describing only the Portfolios listed in Schedule A hereto) for the
Shares as the Company may reasonably request for distribution to
existing Policy owners whose Policies are funded by such Shares. The
Trust or its designee shall provide the Company, at the Company's
expense, with as many copies of the current prospectus for the Shares as
the Company may reasonably request for distribution to prospective
purchasers of Policies. If requested by the Company in lieu thereof, the
Trust or its designee shall provide such documentation (including a
"camera ready" copy of the new prospectus as set in type or, at the
request of the Company, as a diskette in the form sent to the financial
printer) and other assistance as is reasonably necessary in order for
the parties hereto once each year (or more frequently if the prospectus
for the Shares is supplemented or amended) to have the prospectus for
the Policies and the prospectus for the Shares printed together in one
document; the expenses of such printing to be apportioned between (a)
the Company and (b) the Trust or its designee in proportion to the
number of pages of the Policy and Shares' prospectuses, taking account
of other relevant factors affecting the expense of printing, such as
covers, columns, graphs and charts. the Trust or its designee to bear
the cost of printing the Shares' prospectus
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<PAGE>
portion of such document for distribution to owners of existing Policies
funded by the Shares and the Company to bear the expenses of printing
the portion of such document relating to the Accounts; provided,
however, that the Company shall bear all printing expenses of such
combined documents where used for distribution to prospective purchasers
or to owners of existing Policies not funded by the Shares. In the event
that the Company requests that the Trust or its designee provides the
Trust's prospectus in a "camera ready" or diskette format, the Trust
shall be responsible for providing the prospectus in the format in which
it or MFS is accustomed to formatting prospectuses and shall bear the
expense of providing the prospectus in such format (i.e., typesetting
expenses), and the Company shall bear the expense of adjusting or
changing the formal to conform with any of its prospectuses.
3.2. The prospectus for the Shares shall state that the statement of
additional information for the Shares is available from the Trust or its
designee. The Trust or its designee, at its expense, shall print and
provide such statement of additional information to the Company (or a
master of such statement suitable for duplication by the Company) for
distribution to any owner of a Policy funded by the Shares. The Trust or
its designee, at the Company's expense, shall print and provide such
statement to the Company (or a master of such statement suitable for
duplication by the Company) for distribution to a prospective purchaser
who requests such statement or to an owner of a Policy not funded by the
Shares.
3.3. The Trust or its designee shall provide the Company free of charge
copies, if and to the extent applicable to the Shares, of the Trust's
proxy materials, reports to Shareholders and other communications to
Shareholders in such quantity as the Company shall reasonably require
for distribution to Policy owners.
3.4. Notwithstanding the provisions of Sections 3.1, 3.2, and 3.3 above,
or of Article V below, the Company shall pay the expense of printing or
providing documents to the extent such cost is considered a distribution
expense. Distribution expenses would include by way of illustration, but
are not limited to, the printing of the Shares' prospectus or
prospectuses for distribution to prospective purchasers or to owners of
existing Policies not funded by such Shares.
3.5. The Trust hereby notifies the Company that it may be appropriate to
include in the prospectus pursuant to which a Policy is offered
disclosure regarding the potential risks of mixed and shared funding.
3.6. If and to the extent required by law, the Company shall:
(a) solicit voting instructions from Policy owners;
(b) vote the Shares in accordance with instructions received
from Policy owners; and
(c) vote the Shares for which no instructions have been received
in the same proportion as the Shares of such Portfolio for
which instructions have been received from Policy owners;
so long as and to the extent that the SEC continues to interpret the
1940 Act to require pass through voting privileges for variable contract
owners. The Company will in no way recommend action in connection with
or oppose or interfere with the solicitation of proxies for the Shares
held for such Policy owners. The Company reserves the right to vote
shares held in any segregated asset account in its own right, to the
extent permitted by law. Participating Insurance Companies shall be
responsible for assuring that each of their separate accounts holding
Shares calculates voting privileges in the manner required by the Mixed
and Shared Funding Exemptive Order. The Trust and MFS will notify the
Company of any changes of interpretations or amendments to the Mixed and
Shared Funding Exemptive Order.
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<PAGE>
ARTICLE IV. SALES MATERIAL AND INFORMATION
4.1. The Company shall furnish, or shall cause to be furnished, to the
Trust or its designee, each piece of sales literature or other
promotional material in which the Trust, MFS, any other investment
adviser to the Trust, or any affiliate of MFS are named, at least three
(3) Business Days prior to its use. No such material shall be used if
the Trust, MFS, or their respective designees reasonably objects to such
use within three (3) Business Days after receipt of such material.
4.2. The Company shall not give any information or make any
representations or statement on behalf of the Trust, MFS, any other
investment adviser to the Trust, or any affiliate of MFS or concerning
the Trust or any other such entity in connection with the sale of the
Policies other than the information or representations contained in the
registration statement, prospectus or statement of additional
information for the Shares, as such registration statement, prospectus
and statement of additional information may be amended or supplemented
from time to time, or in reports or proxy statements for the Trust, or
in sales literature or other promotional material approved by the Trust,
MFS or their respective designees, except with the permission of the
Trust, MFS or their respective designees. The Trust, MFS or their
respective designees each agrees to respond to any request for approval
on a prompt and timely basis. The Company shall adopt and implement
procedures reasonably designed to ensure that information concerning the
Trust, MFS or any of their affiliates which is intended for use only by
brokers or agents selling the Policies (i.e., information that is not
intended for distribution to Policy holders or prospective Policy
holders) is so used, and neither the Trust, MFS nor any of their
affiliates shall be liable for any losses, damages or expenses relating
to the improper use of such broker only materials.
4.3. The Trust or its designee shall furnish, or shall cause to be
furnished, to the Company or its designee, each piece of sales
literature or other promotional material in which the Company and/or the
Accounts is named, at least three (3) Business Days prior to its use. No
such material shall be used if the Company or its designee reasonably
objects to such use within three (3) Business Days after receipt of such
material.
4.4. The Trust and MFS shall not give, and agree that the Underwriter
shall not give, any information or make any representations on behalf of
the Company or concerning the Company, the Accounts, or the Policies in
connection with the sale of the Policies other than the information or
representations contained in a registration statement, prospectus, or
statement of additional information for the Policies, as such
registration statement, prospectus and statement of additional
information may be amended or supplemented from time to time, or in
reports for the Accounts, or in sales literature or other promotional
material approved by the Company or its designee, except with the
permission of the Company. The Company or its designee agrees to respond
to any request for approval on a prompt and timely basis. The parties
hereto agree that this Section 4.4. is neither intended to designate nor
otherwise imply that MFS is an underwriter or distributor of the
Policies.
4.5. The Company and the Trust (or its designee in lieu of the Company
or the Trust, as appropriate) will each provide to the other at least
one complete copy of all registration statements, prospectuses,
statements of additional information, reports, proxy statements, sales
literature and other promotional materials, applications for exemptions,
requests for no-action letters, and all amendments to any of the above,
that relate to the Policies, or to the Trust or its Shares, prior to or
contemporaneously with the filing of such document with the SEC or other
regulatory authorities. The Company and the Trust shall also each
promptly inform the other or the results of any examination by the SEC
(or other regulatory authorities) that relates to the Policies, the
Trust or its Shares, and the party that was the subject of the
examination shall provide the other party with a copy of relevant
portions of any "deficiency letter" or other correspondence or written
report regarding any such examination.
4.6. The Trust and MFS will provide the Company with as much notice as
is reasonably practicable of any proxy solicitation for any Portfolio,
and of any material change in the Trust's registration statement,
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<PAGE>
particularly any change resulting in change to the registration
statement or prospectus or statement of additional information for any
Account. The Trust and MFS will cooperate with the Company so as to
enable the Company to solicit proxies from Policy owners or to make
changes to its prospectus, statement of additional information or
registration statement, in an orderly manner. The Trust and MFS will
make reasonable efforts to attempt to have changes affecting Policy
prospectuses become effective simultaneously with the annual updates for
such prospectuses.
4.7. For purpose of this Article IV and Article VIII, the phrase "sales
literature or other promotional material" includes but is not limited to
advertisements (such as material published, or designed for use in, a
newspaper, magazine, or other periodical, radio, television, telephone
or tape recording, videotape display, signs or billboards, motion
pictures, or other public media), and sales literature (such as
brochures, circulars, reprints or excerpts or any other advertisement,
sales literature, or published articles), distributed or made generally
available to customers or the public, educational or training materials
or communications distributed or made generally available to some or all
agents or employees.
ARTICLE V. FEES AND EXPENSES
5.1. The Trust shall pay no fee or other compensation to the Company
under this Agreement, and the Company shall pay no fee or other
compensation to the Trust, except that if the Trust or any Portfolio
adopts and implements a plan pursuant to Rule 12b-I under the 1940 Act
to finance distribution and Shareholder servicing expenses, then,
subject to obtaining any required exemptive orders or regulatory
approvals, the Trust may make payments to the Company or to the
underwriter for the Policies if and in amounts agreed to by the Trust in
writing. Each party, however, shall, in accordance with the allocation
of expenses specified in Articles III and V hereof, reimburse other
parties for expense initially paid by one party but allocated to another
party. In addition, nothing herein shall prevent the parties hereto from
otherwise agreeing to perform, and arranging for appropriate
compensation for, other services relating to the Trust and/or to the
Accounts.
5.2. The Trust or its designee shall bear the expenses for the cost of
registration and qualification of the Shares under all applicable
federal and state laws, including preparation and filing of the Trust's
registration statement, and payment of filing fees and registration
fees; preparation and filing of the Trust's proxy materials and reports
to Shareholders; setting in type and printing its prospectus and
statement of additional information (to the extent provided by and as
determined in accordance with Article III above); setting in type and
printing the proxy materials and reports to Shareholders (to the extent
provided by and as determined in accordance with Article III above); the
preparation of all statements and notices required of the Trust by any
federal or state law with respect to its Shares; all taxes on the
issuance or transfer of the Shares; and the costs of distributing the
Trust's prospectuses and proxy materials to owners of Policies funded by
the Shares and any expenses permitted to be paid or assumed by the Trust
pursuant to a plan, if any, under Rule 12b-l under the 1940 Act. The
Trust shall not bear any expenses of marketing the Policies.
5.3. The Company shall bear the expenses of distributing the Shares'
prospectus or prospectuses in connection with new sales of the Policies
and of distributing the Trust's Shareholder reports and proxy materials
to Policy owners. The Company shall bear all expenses associated with
the registration, qualification, and filing of the Policies under
applicable federal securities and state insurance laws; the cost of
preparing, printing and distributing the Policy prospectus and statement
of additional information; and the cost of preparing, printing and
distributing annual individual account statements for Policy owners as
required by state insurance laws.
5.4. MFS will quarterly reimburse the Company certain of the
administrative costs and expenses incurred by the Company as a result of
operations necessitated by the beneficial ownership by Policy owners of
shares of the Portfolios of the Trust, equal to 0.15% per annum of the
net assets of the Trust attributable to variable life or variable
annuity contracts offered by Company or its affiliates up to $100
million and 0.20% per
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<PAGE>
annum of the net assets of the Trust attributable to such contracts over
$100 million. In no event shall such fee be paid by the Trust, its
shareholders or by the Policy holders.
ARTICLE VI. DIVERSIFICATION AND RELATED LIMITATIONS
6.1. The Trust and MFS represent and warrant that each Portfolio of the
Trust will meet the diversification requirements of Section 817(h)(1) of
the Code and Treas. Reg. 1.817-5, relating to the diversification
requirements for variable annuity, endowment, or life insurance
contracts, as they may be amended from time to time (and any revenue
rulings, revenue procedures, notices, and other published announcements
of the Internal Revenue Service interpreting these Sections), as if
those requirements applied directly to each such Portfolio. In the event
that any Portfolio is not so diversified at the end of any applicabIe
quarter, the Trust and MFS will make every effort to (a) adequately
diversify the Portfolio so as to achieve compliance within the grace
period afforded by Treas. Reg. 1.817-5 and (b) notify the Company.
6.2 The Trust and MFS represent that each Portfolio of the Trust will
elect to be qualified as a Regulated Investment Company under Subchapter
M of the Code and that every effort will be made to maintain such
qualification (under Subchapter M or any successor or similar provision)
and that the Trust or its designee will notify the Company promptly upon
having a reasonable basis for believing that any Portfolio of the Trust
has ceased to so qualify or that any Portfolio might not so qualify in
the future.
ARTICLE VII. POTENTIAL MATERIAL CONFLICTS
7.1. The Trust agrees that the Board, constituted with a majority of
disinterested trustees, will monitor each Portfolio of the Trust for the
existence of any material irreconcilable conflict between the interests
of the variable annuity contract owners and the variable life insurance
policy owners of the Company and/or affiliated companies ("contract
owners") investing in the Trust. The Board shall have the sole authority
to determine if a material irreconcilable conflict exists, and such
determination shall be binding on the Company only if approved in the
form of a resolution by a majority of the Board, or a majority of the
disinterested trustees of the Board. The Board will give prompt notice
of any such determination to the Company.
7.2. The Company agrees that it will be responsible for assisting the
Board in carrying out its responsibilities under the conditions set
forth in the Trust's exemptive application pursuant to which the SEC has
granted the Mixed and Shared Funding Exemptive Order by providing the
Board, as it may reasonably request, with all information necessary for
the Board to consider any issues raised and agrees that it will be
responsible for promptly reporting any potential or existing conflicts
of which it is aware to the Board including, but not limited to, an
obligation by the Company to inform the Board whenever contract owner
voting instructions are disregard. The Company also agrees that, if a
material irreconcilable conflict arises, it will. at its own cost remedy
such conflict up to and including (a) withdrawing the assets allocable
to some or all of the Accounts from the Trust or any Portfolio and
reinvesting such assets in a different investment medium, including (but
not limited to) another Portfolio of the Trust, or submitting to a vote
of all affected contract owners whether to withdraw assets from the
Trust or any Portfolio and reinvesting such assets in a different
investment medium and, as appropriate, segregating the assets
attributable to any appropriate group of contract owners that votes in
favor of such segregation, or offering to any of the affected contract
owners the option of segregating the assets attributable to their
contracts or policies, and (b) establishing a new registered management
investment company and segregating the assets underlying the Policies,
unless a majority of Policy owners materially adversely affected by the
conflict have voted to decline the offer to establish a new registered
management investment company.
7.3. A majority of the disinterested trustees of the Board shall
determine whether any proposed action by the Company adequately remedies
any material irreconcilable conflict. In the event that the Board
determines that any proposed action does not adequately remedy any
material irreconcilable conflict, the Company will
II-43
<PAGE>
withdraw from investment in the Trust each of the Accounts designated by
the disinterested trustees and terminate this Agreement within six (6)
months after the Board informs the Company in writing of the foregoing
determination; provided, however, that such withdrawal and termination
shall be limited to the extent required to remedy any such material
irreconcilable conflict as determined by a majority of the disinterested
trustees of the Board.
7.4. If and to the extent that Rule 6e-2 and Rule 6e-3(T) are amended,
or Rule 6e-3 is adopted, to provide exemptive relief from any provision
of the 1940 Act or the rules promulgated thereunder with respect to
mixed or shares funding (as defined in the Mixed and Shared Funding
Exemptive Order) on terms and conditions materially different from those
contained in the Mixed Shared Funding Exemptive Order, then (a) the
Trust and/or the Participating Insurance Companies, as appropriate,
shall take such steps as may be necessary to comply with Rule 6e-2 and
6e-3(T), as amended, and Rule 6e-3, as adopted, to the extent such rules
are applicable; and (b) Sections 3.5, 3.6, 7.1, 7.2, 7.3 and 7.4 of this
Agreement shall continue in effect only to the extent that terms and
conditions substantially identical to such Sections are contained in
such Rule(s) as so amended or adopted.
ARTICLE VIII. INDEMNIFICATION
8.1. INDEMNIFICATION BY THE COMPANY
The Company agrees to indemnify and hold harmless the Trust, MFS,
any affiliates of MFS, and each of their respective directors/trustees,
officers and each person, if any, who controls the Trust or MFS within
the meaning of Section 15 of the 1933 Act, and any agents or employees
of the foregoing (each an "Indemnified Party," or collectively, the
"Indemnified Parties" for purposes of this Section 8.1) against any and
all losses, claims, damages, liabilities (including amounts paid in
settlement with the written consent of the Company) or expenses
(including reasonable counsel fees) to which an Indemnified Party may
become subject under any statute, regulation, at common law or
otherwise, insofar as such losses, claims, damages, liabilities or
expenses (or actions in respect thereof) or settlements are related to
the sale or acquisition of the Shares or the Policies and:
(a) arise out of or are based upon any untrue statement or alleged
untrue statement of any material fact contained in the
registration statement, prospectus or statement of additional
information for the Policies or contained in the Policies or
sales literature or other promotional material for the Policies
(or any amendment or supplement to any of the foregoing), or
arise out of or are based upon the commission or the alleged
omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not
misleading provided that this agreement to indemnify shall not
apply as to any Indemnified Party if such statement or omission
or such alleged statement or omission was made in reasonable
reliance upon and in conformity with information furnished to the
Company or its designee by or on behalf of the Trust or MFS for
use in the registration statement, prospectus or statement of
additional information for the Policies or in the Policies or
sales literature or other promotional material (or any amendment
or supplement) or otherwise for use in connection with the sale
of the Policies or Shares; or
(b) arise out of or as a result of statements or representations
(other than statements or representations contained in the
registration statement, prospectus, statement of additional
information or sales literature or other promotional material of
the Trust not supplied by the Company or this designee, or
persons under its control and on which the Company has reasonably
relied) or wrongfull conduct of the Company or persons under its
control, with respect to the sale or distribution of the Policies
or Shares; or
II-44
<PAGE>
(c) arise out of any untrue statement or alleged untrue statement of
a material fact contained in the registration statement,
prospectus, statement of additional information, or sales
literature or other promotional literature of the Trust, or any
amendment thereof or supplement thereto, or the omission or
alleged omission to state therein a material fact required to be
stated therein or necessary to make the statement or statements
therein not misleading, if such statement or omission was made in
reliance upon information furnished to the Trust by or on behalf
of the Company; or
(d) arise out of or result from any material breach of any
representation and/or warranty made by the Company in this
Agreement or arise out of or result from any other material
breach of this Agreement by the Company; or
(e) arise as a result of any failure by the Company to provide the
services and furnish the materials under the terms of this
Agreement; as limited by and in accordance with the provisions of
this Article VIII.
8.2. INDEMNIFICATION BY THE TRUST
The Trust agrees to indemnify and hold harmless the Company and
each of its directors and officers and each person, if any, who controls
the Company within the meaning of Section 15 of the 1933 Act, and any
agents or employees of the foregoing (each an "Indemnified Party," or
collectively, the "Indemnified Parties" for purposes of this Section
8.2) against any and all losses, claims, damages, liabilities (including
amounts paid in settlement with the written consent of the Trust) or
expenses (including reasonable counsel fees) to which any Indemnified
Party may become subject under any statute, at common law or otherwise,
insofar as such losses, claims, damages, liabilities or expenses (or
actions in respect thereof) or settlements are related to the sale or
acquisition of the Shares or the Policies and:
(a) arise out of or are based upon any untrue statement or alleged
untrue statement of any material fact contained in the
registration statement, prospectus, statement of additional
information or sales literature or other promotional material of
the Trust (or any amendment or supplement to any of the
foregoing), or arise out of or are based upon the omission or the
alleged omission to state therein a material fact required to be
stated therein or necessary to make the statement therein not
misleading, provided that this agreement to indemnify shall not
apply as to any Indemnified Party if such statement or omission
or such alleged statement or omission was made in reasonable
reliance upon and in conformity with information furnished to the
Trust, MFS, the Underwriter or their respective designees by or
on behalf of the Company for use in the registration statement,
prospectus or statement of additional information for the Trust
or in sales literature or other promotional material for the
Trust (or any amendment or supplement) or otherwise for use in
connection with the sale of the Policies or Shares; or
(b) arise out of or as a result of statements or representations
(other than statement or representations contained in the
registration statement, prospectus, statement of additional
information or sales literature or other promotional material for
the Policies not supplied by the Trust, MFS, the Underwriter or
any of their respective designees or persons under their
respective control and on which any such entity has reasonably
relied) or wrongful conduct of the Trust or persons under its
control, with respect to the sale or distribution of the Policies
or Shares; or
(c) arise out of or result from any material breach of any
representation and/or warranty made by the Trust in this
Agreement (including a failure, whether unintentional or in good
faith or otherwise, to comply with the diversification
requirements or a failure to qualify as a
II-45
<PAGE>
registered investment company, each as specified in Article VI of
this Agreement) or arise out of or result from any other material
breach of this Agreement by the Trust; or
(d) arise out of or result from the materially incorrect or untimely
calculation or reporting of the daily net asset value per share
or dividend or capital gain distribution rate; or
(e) arise as a result of any failure by the Trust to provide the
services and furnish the materials under the terms of the
Agreement;
as limited by and in accordance with the provisions of this Article
VIII.
8.3. In no event shall the Trust be liable under the indemnification
provisions contained in this Agreement to any individual or entity,
including without limitation, the Company, or any Participating
Insurance Company or any Policy holder, with respect to any losses,
claims, damages, liabilities or expenses that arise out of or result
from (i) a breach of any representation, warranty, and/or covenant made
by the Company hereunder or by any Participating Insurance Company under
an agreement containing substantially similar representations,
warranties and covenants; (ii) the failure by the Company or any
Participating Insurance Company to maintain its segregated asset account
(which invests in any Portfolio) as a legally and validly established
segregated asset account under applicable state law and as a duly
registered unit investment trust under the provisions of the 1940 Act
(unless exempt therefrom); or (iii) the failure by the Company or any
Participating Insurance Company to maintain its variable annuity and/or
variable life insurance contracts (with respect to which any Portfolio
serves as an underlying funding vehicle) as life insurance, endowment or
annuity contracts under applicable provisions of the Code.
8.4. Neither the Company nor the Trust shall be liable under the
indemnification provisions contained in this Agreement with respect to
any losses, claims, damages, liabilities or expenses to which an
Indemnified Party would otherwise be subject by reason of such
Indemnified Party's willful misfeasance, willful misconduct, or gross
negligence in the performance of such Indemnified Party's duties or by
reason of such Indemnified Party's reckless disregard of obligations and
duties under this Agreement.
8.5. Promptly after receipt by an Indemnified Party under this Section
8.5. of commencement of action, such Indemnified Party will. if a claim
in respect thereof is to be made against the indemnifying party under
this Section, notify the indemnifying party of the commencement thereof;
but the omission so to notify the indemnifying party will not relieve it
from any liability which it may have to any Indemnified Party otherwise
than under this section. In case any such action is brought against any
Indemnified Party, and it notified the indemnifying party of the
commencement thereof, the indemnifying party will be entitled to
participate therein and, to the extent that it may wish, assume the
defense thereof, with counsel satisfactory to such Indemnified Party.
After notice from the indemnifying party of its intention to assume the
defense of an action, the Indemnified Party shall bear the expenses of
any additional counsel obtained by it, and the indemnifying party shall
not be liable to such Indemnified Party under this section for any legal
or other expenses subsequently incurred by such Indemnified Party in
connection with the defense thereof other than reasonable costs of
investigation.
8.6. Each of the parties agrees promptly to notify the other parties of
the commencement of any litigation or proceeding against it or any of
its respective officers, directors, trustees, employees or 1933 Act
control persons in connection with the Agreement, the issuance or sale
of the Policies, the operation of the Accounts, or the sale or
acquisition of Shares.
8.7. A successor by law of the parties to this Agreement shall be
entitled to the benefits of the indemnification contained in this
Article VIII. The indemnification provisions contained in this Article
VIII are in addition to any liability the parties may otherwise have.
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<PAGE>
ARTICLE IX. APPLICABLE LAW
9.1. This Agreement shall be construed and the provisions hereof
interpreted under and in accordance with the laws of The Commonwealth of
Massachusetts.
9.2. This Agreement shall be subject to the provisions of the 1933, 1934
and 1940 Acts, and the rules and regulations and rulings thereunder,
including such exemptions from those statutes, rules and regulations as
the SEC may grant and the terms hereof shall be interpreted and
construed in accordance therewith.
ARTICLE X. NOTICE OF FORMAL PROCEEDINGS
The Trust, MFS, and the Company agree that each such party shall promptly
notify the other parties to this Agreement, in writing, of the institution of
any formal proceedings brought against such party or its designees by the NASD,
the SEC, or any insurance department or any other regulatory body regarding such
party's duties under this Agreement or related to the sale of the Policies, the
operation of the Accounts, or the purchase of the Shares.
ARTICLE XI. TERMINATION
11.1. This Agreement shall terminate with respect to the Accounts, or
one, some, or all Portfolios:
(a) at the option of any party upon six (6) months' advance
written notice to the other parties; or
(b) at the option of the Company to the extent that the Shares
of Portfolios are not reasonably available to meet the
requirements of the Policies or are not "appropriate funding
vehicles" for the Policies, as reasonably determined by the
Company. Without limiting the generality of the foregoing,
the Shares of a Portfolio would not be "appropriate funding
vehicles" if, for example, such Shares did not meet the
diversification or other requirements referred to in Article
VI hereof; or if the Company would be permitted to disregard
Policy owner voting instructions pursuant to Rule 6e-2 or
6e-3(T) under the 1940 Act. Prompt notice of the election to
terminate for such cause and an explanation of such cause
shall be furnished to the Trust by the Company; or
(c) at the option of the Trust or MFS upon institution of formal
proceedings against the Company by the NASD, the SEC, or any
insurance department or any other regulatory body regarding
the Company's duties under this Agreement or related to the
sale of the Policies, the operation of the Accounts, or the
purchase of the Shares; or
(d) at the opt ion of the Company upon institution of formal
proceedings against the Trust by the NASD, the SEC, or any
state securities or insurance department or any other
regulatory body regarding the Trust's or MFS' duties under
this Agreement or related to the sale of the Shares; or
(e) at the option of the Company, the Trust or MFS upon receipt
of any necessary regulatory approvals and/or the vote of the
Policy owners having an interest in the Accounts (or any
subaccounts) to substitute the shares of another investment
company for the corresponding Portfolio Shares in accordance
with the terms of the Policies for which those Portfolio
Shares had been selected to serve as the underlying
investment media. The Company will give thirty (30) days'
prior written notice to the Trust of the Date of any
proposed vote or other action taken to replace the Shares;
or
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<PAGE>
(f) termination by either the Trust or MFS by written notice to
the Company, if either one or both of the Trust or MFS
respectively, shall determine, in their sole judgment
exercised in good faith, that the Company has suffered a
material adverse change in its business, operations,
financial condition, or prospects since the date of this
Agreement or is the subject of material adverse publicity;
or
(g) termination by the Company by written notice to the Trust
and MFS, if the Company shall determine, in its sole
judgment exercised in good faith, that the Trust or MFS has
suffered a material adverse change in this business,
operations, financial condition or prospects since the date
of this Agreement or is the subject of material adverse
publicity; or
(h) at the option of any party to this Agreement, upon another
party's material breach of any provision of this Agreement;
or
(i) upon assignment of this Agreement, unless made with the
written consent of the parties hereto.
11.2. The notice shall specify the Portfolio or Portfolios, Policies
and, if applicable, the Accounts as to which the Agreement is to be
terminated.
11.3. It is understood and agreed that the right of any party hereto to
terminate this Agreement pursuant to Section 11.1(a) may be exercised
for cause or for no cause.
11.4. Except as necessary to implement Policy owner initiated
transactions, or as required by state insurance laws or regulations, the
Company shall not redeem the Shares attributable to the Policies (as
opposed to the Shares attributable to the Company's assets held in the
Accounts), and the Company shall not prevent Policy owners from
allocating payments to a Portfolio that was otherwise available under
the Policies, until thirty (30) days after the Company shall have
notified the Trust of its intention to do so.
11.5. Notwithstanding any termination of this Agreement, the Trust and
MFS shall, at the option of the Company, continue to make available
additional shares of the Portfolios pursuant to the terms and conditions
of this Agreement, for all Policies in effect on the effective date of
termination of this Agreement (the "Existing Policies"), except as
otherwise provided under Article VII of this Agreement. Specifically,
without limitation, the owners of the Existing Policies shall be
permitted to transfer or reallocate investment under the Policies.
redeem investments in any Portfolio and/or invest in the Trust upon the
making of additional purchase payments under the Existing Policies.
11.6. If this Agreement terminates, the parties agree that Article VIII,
and to the extent that all or a portion of the assets of the Accounts
continue to be invested in the Trust, Articles I, II, III, VI and VII,
will remain in effect after termination.
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<PAGE>
ARTICLE XII. NOTICES
Any notice shall be sufficiently given when sent by registered or certified
mail to the other party at the address of such party Set forth below or at such
other address as such party may from time to time specify in writing to the
other party.
If to the Trust:
MFS VARIABLE INSURANCE TRUST
500 Boylston Street
Boston, Massachusetts 02116
Attn: Stephen E. Cavan, Secretary
If to the Company:
PRUDENTIAL INSURANCE COMPANY OF AMERICA
751 Broad Street, 21 Plaza
Newark, NJ 07102-3777
Attn: Mary L. Cavanaugh,
Deputy Chief Legal Officer
If to MFS:
MASSACHUSETTS FINANCIAL SERVICES COMPANY
500 Boylston Street
Boston, Massachusetts 02116
Attn: Stephen E. Cavan, General Counsel
ARTICLE XIII. MISCELLANEOUS
13.1. Subject to the requirement of legal process and regulatory
authority, each party hereto shall treat as confidential the names and
addresses of the owners of the Policies and all information reasonably
identified as confidential in writing by any other party hereto and,
except as permitted by this Agreement or as otherwise required by
applicable law or regulation, shall not disclose, disseminate or utilize
such names and addresses and other confidential information without the
express written consent of the affected party until such time as it may
come into the public domain.
13.2. The captions in this Agreement are included for convenience of
reference only and in no way define or delineate any of the provisions
hereof or otherwise affect their construction or effect.
13.3. This Agreement may be executed simultaneously in one or more
counterparts, each of which taken together shall constitute one and the
same instrument.
13.4. If any provision of this Agreement shall be held or made invalid
by a court decision, statute, rule or otherwise, the remainder of the
Agreement shall not be affected thereby.
13.5. The Schedule attached hereto, as modified from time to time, is
incorporated herein by reference and is part of this Agreement.
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<PAGE>
13.6. Each party hereto shall cooperate with each other party in
connection with inquiries by appropriate governmental authorities
(including without limitation the SEC, the NASD, and state insurance
regulators) relating to this Agreement or the transactions contemplated
hereby.
13.7. The rights, remedies and obligations contained in this Agreement
are cumulative and are in addition to any and all rights, remedies and
obligations, at law or in equity, which the parties hereto are entitled
to under state and federal laws.
13.8. A copy of the Trust's Declaration of Trust is on file with the
Secretary of State of The Commonwealth of Massachuseus. The Company
acknowledges that the obligations of or arising out of this instrument
are not binding upon any of the Trust's trustees, officers, employees,
agents or shareholders individually, but are binding solely upon the
assets and property of the Trust in accordance with its proportionate
interest hereunder. The Company further acknowledges that the assets
and liabilities of each Portfolio are separate and distinct and that the
obligations of or arising out of this instrument are binding solely upon
the assets or property of the Portfolio on whose behalf the Trust has
executed this instrument. The Company also agrees that the obligations
of each Portfolio hereunder shall be several and not joint, in
accordance with its proportionate interest hereunder, and the Company
agrees not to proceed against any Portfolio for the obligations of
another Portfolio.
IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to
be executed in its name and on its behalf by its duly authorized representative
and its seal to be hereunder affixed hereto as of the date specified above.
PRUDENTIAL INSURANCE COMPANY OF AMERICA
By its authorized officer,
By: /s/ DEBRA GOLDBERG
---------------------------------
Name: Debra Goldberg
Title: Vice President, Marketing
MFS VARIABLE INSURANCE TRUST, ON BEHALF OF THE PORTFOLIOS
By its authorized officer and not individually
By: /s/ A. KEITH BRODKIN
----------------------------------
Name: A. Keith Brodkin
Title: Chairman
MASSACHUSETTS FINANCIAL SERVICES COMPANY
By its authorized officer,
By: /s/ ARNOLD D. SCOTT
------------------------------------------
Name: Arnold D. Scott
Title: Senior Executive Vice President
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<PAGE>
As of_______________
SCHEDULE A
ACCOUNTS, POLICIES AND PORTFOLIOS
SUBJECT TO THE PARTICIPATION AGREEMENT
--------------------------------------
<TABLE>
<CAPTION>
==================================================================================================
NAME OF SEPARATE
ACCOUNT AND DATE POLICIES FUNDED PORTFOLIOS
ESTABLISHED BY BOARD OF DIRECTORS BY SEPARATE ACCOUNT APPLICABLE TO POLICIES
==================================================================================================
<S> <C> <C>
THE PRUDENTIAL VARIABLE GROUP VARIABLE UNIVERSAL MFS BOND SERIES
CONTRACT ACCOUNT GI-2 LIFE INSURANCE CONTRACT MFS EMERGING GROWTH SERIES
(EST. 6/24/88) SERIES #89759 MFS GROWTH AND INCOME SERIES
MFS HIGH INCOME SERIES
MFS LIMITED MATURITY SERIES
MFS MONEY MARKET SERIES
MFS RESEARCH SERIES
MFS TOTAL RETURN SERIES
MFS UTILITIES SERIES
MFS VALUE SERIES
MFS WORLD GOVERNMENTS SERIES
===================================================================================================
</TABLE>
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EXHIBIT 3
May 12, 1997
The Prudential Insurance Company of America
Prudential Plaza
Newark, NJ 07102-3777
Ladies and Gentlemen:
In my capacity as Chief Counsel, Variable Products, Law Department of The
Prudential Insurance Company of America ("Prudential"), I have reviewed the
establishment on June 14, 1988 of The Prudential Variable Contract Account -
GI-2 (the "Account") by the Board of Directors of Prudential as a separate
account for assets applicable to certain variable life insurance contracts,
pursuant to the provisions of Section 17B:28-7 of the Revised Statutes of New
Jersey. I have also reviewed the resolution dated December 10, 1996 of the
Finance Committee of the Board of Directors of Prudential expanding the
investment options in which the Account may invest. I am responsible for
oversight of the preparation and review of the Registration Statement on Form
S-6, as amended, filed by Prudential with the U.S. Securities and Exchange
Commission (Registration No. 333-01031) under the Securities Act of 1933 for the
registration of certain group variable universal life insurance contracts and
certificates thereunder issued with respect to the Account.
I am of the following opinion:
1. Prudential is a corporation duly organized under the laws of the State
of New Jersey and is a validly existing corporation.
2. The Account has been duly created and is validly existing as a
separate account pursuant to the aforesaid provisions of New Jersey
law.
3. The portion of the assets held in the Account equal to the reserve and
other liabilities for variable benefits under the group variable
universal life insurance contracts and the certificates thereunder is
not chargeable with liabilities arising out of any other business
Prudential may conduct.
4. The group variable universal life insurance contracts and the
certificates thereunder are legal and binding obligations of
Prudential, in accordance with their terms.
In arriving at the foregoing opinion, I have made such examination of law and
examined such records and other documents as I judged to be necessary or
appropriate.
I hereby consent to the filing of this opinion as an exhibit to the Registration
Statement.
Very truly yours,
/s/ CLIFFORD E. KIRSCH
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Clifford E. Kirsch
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EXHIBIT 6
May 12, 1997
The Prudential Insurance
Company of America
Prudential Plaza
Newark, NJ 07102-3777
To The Prudential:
This opinion is furnished in connection with the registration by The Prudential
Insurance Company of America of certain Group Variable Universal Life insurance
contracts and certificates ("Contract") under the Securities Act of 1933. The
prospectus included in Post-Effective Amendment No. 1 to Registration Statement
No. 333-01031 on Form S-6 describes the Contract. I have reviewed the Contract
form and I have participated in the preparation and review of the Registration
Statement Exhibits thereto. In my opinion:
(1) The illustrations of cash surrender values and death benefits
included in the section of the prospectus entitled
"Hypothetical Illustrations of Death Benefits and Cash
Surrender Values," based on the assumptions stated in this
section, are consistent with the provisions of the respective
forms of the Contracts. The rate structure of the Contracts
has not been designed so as to make the relationship between
premiums and benefits, as shown in the illustrations, appear
more favorable to a prospective purchaser of a Contract issued
on an individual age 40, than to prospective purchasers of a
Contract for other ages.
(2) The examples shown in the section of the prospectus entitled
"Death Benefits" are consistent with the provisions of the
Contract.
(3) The deductions from premium payments for federal taxes in an
amount equal to .35% of each premium is a reasonable charge
for these contracts in relation to the additional income tax
burden imposed upon The Prudential Insurance Company of
America as the result of the enactment of section 848 of the
Internal Revenue Code. In reaching that conclusion a number of
factors were taken into account that, in my opinion, were
appropriate and which resulted in a projected after-tax
deductions allowed in Section 848 in taxable years subsequent
to the year in which the premiums are received.
I hereby consent to the use of this opinion as an exhibit to the Registration
Statement and to the reference to my name under the heading "Experts" in the
prospectus.
Very truly yours,
/s/ STUART L. LIEBESKIND
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Stuart L. Liebeskind, FSA, MAAA
Vice President and Actuary
The Prudential Insurance Company of America
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