AS FILED WITH THE SEC ON __________. REGISTRATION NO. 333-01031
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------
POST-EFFECTIVE AMENDMENT NO. 2 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)
------------
It is proposed that this filing will become effective (check appropriate space):
[ ] immediately upon filing pursuant to paragraph (b) of Rule 485
[X] on May 1, 1998 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; Consolidated Financial
Statements of The Prudential Insurance Company of
America and Subsidiaries
<PAGE>
PART I
INFORMATION IN PROSPECTUS
<PAGE>
PROSPECTUS
MAY 1, 1998
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
generally 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 136 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 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 requirement 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 will be followed 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 ADVISER.
PLEASE READ THIS PROSPECTUS AND KEEP IT FOR FUTURE REFERENCE. IT WILL BE
FOLLOWED 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
751 BROAD STREET
NEWARK, NEW JERSEY 07102-3777
TELEPHONE (800) 562-9874
GVUL-1 Ed. 5-98
i
<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 ................................................. 31
DEATH BENEFITS ........................................................ 31
CHANGES IN FACE AMOUNT ................................................ 33
CHARGES AND EXPENSES .................................................. 34
REDUCTION OF CHARGES .................................................. 36
DIVIDENDS/EXPERIENCE CREDITS .......................................... 36
CASH SURRENDER VALUE .................................................. 36
FULL SURRENDERS ....................................................... 36
ELECTION OF PAID-UP INSURANCE ......................................... 37
PARTIAL WITHDRAWALS ................................................... 37
LOANS ................................................................. 37
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 ................................. 41
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
YEAR 2000 COMPLIANCE .................................................. 49
ADDITIONAL INFORMATION ................................................ 49
DEFINITIONS OF SPECIAL TERMS USED IN THIS PROSPECTUS ...................... 50
DIRECTORS AND OFFICERS OF PRUDENTIAL ...................................... 52
ii
<PAGE>
FINANCIAL STATEMENTS ..................................................... 56
CONSOLIDATED FINANCIAL STATEMENTS OF THE PRUDENTIAL INSURANCE COMPANY
OF AMERICA AND SUBSIDIARIES ............................................ 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.
iii
<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.
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.
WHAT INVESTMENT OPTIONS ARE AVAILABLE?
The Separate Account is composed of 136 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 requirement 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 selects 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 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
1
<PAGE>
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.
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. In some states, this is called a premium-based
administrative charge.
o less a processing fee of up to $2, which may be reduced or waived under
certain Group Contracts
o less 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 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 1997, the total expenses (after expense reimbursement) of the
Funds ranged from 0.40% to 1.83% of their average net assets. See pages 8
through 27.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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
3
<PAGE>
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.
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 41.
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 taxes
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 136 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.
4
<PAGE>
Nevertheless, these tables help show how the Cash Surrender Value and the Death
Benefit change with investment experience.
The first column in the following illustrations shows the Certificate 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 136 Funds of 0.94%, 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 -1.84%, 2.16%, 6.16%, and 10.16% 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>
<TABLE>
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 MAXIMUM CONTRACTUAL CHARGES
<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 (-1.84% Net) (2.16% Net) (6.16% Net) (10.16% Net) (-1.84% Net) (2.16% Net) (6.16% Net) (10.16% Net)
- ----------- -------------- ------------ ----------- ----------- ------------ ------------ ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 $ 1,248 $100,532 $100,564 $100,596 $100,628 $ 512 $ 544 $ 576 $ 608
2 2,546 101,014 101,099 101,186 101,277 994 1,079 1,166 1,257
3 3,896 101,444 101,601 101,769 101,946 1,424 1,581 1,749 1,926
4 5,300 101,820 102,067 102,338 102,633 1,800 2,047 2,318 2,613
5 6,760 102,138 102,491 102,889 103,337 2,118 2,471 2,869 3,317
6 8,278 102,396 102,869 103,418 104,054 2,376 2,849 3,398 4,034
7 9,857 102,592 103,197 103,920 104,783 2,572 3,177 3,900 4,763
8 11,499 102,723 103,469 104,390 105,522 2,703 3,449 4,370 5,502
9 13,207 102,786 103,680 104,819 106,265 2,766 3,660 4,799 6,245
10 14,984 102,776 103,822 105,200 107,007 2,756 3,802 5,180 6,987
15 24,989 101,304 103,049 105,843 110,250 1,284 3,029 5,823 10,230
20 37,163 0(2) 0(2) 102,636 111,037 0(2) 0(2) 2,616 11,017
25 51,974 0 0 0(2) 105,467 0 0 0(2) 5,447
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
- ----------------
(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 A PARTICIPANT, 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.
</TABLE>
T1
<PAGE>
<TABLE>
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
<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 (-1.84% Net) (2.16% Net) (6.16% Net) (10.16% Net) (-1.84% Net) (2.16% Net) (6.16% Net) (10.16% Net)
- ----------- -------------- ------------ ----------- ----------- ------------ ------------ ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 $ 1,248 $100,914 $100,956 $100,998 $101,039 $ 914 $ 956 $ 998 $ 1,039
2 2,546 101,816 101,937 102,061 102,189 1,816 1,937 2,061 2,189
3 3,896 102,705 102,943 103,195 103,460 2,705 2,943 3,195 3,460
4 5,300 103,582 103,976 104,404 104,867 3,582 3,976 4,404 4,867
5 6,760 104,446 105,036 105,692 106,422 4,446 5,036 5,692 6,422
6 8,278 105,156 105,977 106,917 107,991 5,156 5,977 6,917 7,991
7 9,857 105,856 106,943 108,223 109,725 5,856 6,943 8,223 9,725
8 11,499 106,546 107,934 109,614 111,644 6,546 7,934 9,614 11,644
9 13,207 107,226 108,951 111,098 113,767 7,226 8,951 11,098 13,767
10 14,984 107,897 109,995 112,680 116,115 7,897 9,995 12,680 16,115
15 24,989 110,015 114,417 120,957 130,674 10,015 14,417 20,957 30,674
20 37,163 110,425 117,717 130,442 152,663 10,425 17,717 30,442 52,663
25 51,974 108,376 118,778 140,526 185,779 8,376 18,778 40,526 85,779
30 69,994 0(2) 114,024 147,820 233,321 0(2) 14,024 47,820 133,321
35 91,918 0 0(2) 146,095 299,029 0 0(2) 46,095 199,029
40 118,592 0 0 143,719 407,818 0 0 43,719 307,818
- ----------------
(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 A PARTICIPANT, 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.
</TABLE>
T2
<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. Prudential
is currently considering reorganizing itself into a stock company. This form of
reorganization, known as demutualization, is a complex process that may take two
or more years to complete. No plan of demutualization has been adopted yet by
Prudential's Board of Directors. Adoption of a plan of demutualization would
occur only after enactment of appropriate legislation in New Jersey and would
have to be approved by Prudential policyholders and appropriate state insurance
regulators. Throughout the process, there will be continuing evaluation by the
Board of Directors and management of Prudential as to the desirability of
demutualization. The Board of Directors, in its discretion, may choose not to
demutualize or to delay demutualization for a time.
Prudential 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 consolidated financial statements begin on page A-1 (following page
56) 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, adviser, 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 136 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/investment
manager. For certain of the Funds, investment policy information in addition to
the Fund's fundamental investment objective is provided.
Certain of the Funds have adopted distribution plans pursuant to Rule 12b-1 of
the 1940 Act, and under those plans, the Fund may make payments to Prudential
and/or its affiliate for certain marketing efforts.
6
<PAGE>
THE PRUDENTIAL SERIES FUND, INC.
The 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.
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.
7
<PAGE>
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 751 Broad Street, 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.
<TABLE>
<CAPTION>
================================================================================================================
TOTAL FUND
ANNUAL EXPENSES
INVESTMENT OTHER (AFTER EXPENSE
FUNDS MANAGEMENT FEE EXPENSES REIMBURSEMENTS)
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
THE SERIES FUND
Money Market Portfolio (1) 0.40% 0.03% 0.43%
Diversified Bond Portfolio (1) 0.40% 0.03% 0.43%
Government Income Portfolio (1) 0.40% 0.04% 0.44%
Zero Coupon Bond 2000 Portfolio (1) 0.40% 0.26% 0.66%
Zero Coupon Bond 2005 Portfolio (1) 0.40% 0.34% 0.74%
Conservative Balanced Portfolio (1) 0.55% 0.01% 0.56%
Flexible Managed Portfolio (1) 0.60% 0.02% 0.62%
High Yield Bond Portfolio (1) 0.55% 0.02% 0.57%
Stock Index Portfolio (1) 0.35% 0.02% 0.37%
Equity Income Portfolio (1) 0.40% 0.01% 0.41%
Equity Portfolio (1) 0.45% 0.01% 0.46%
Prudential Jennison Portfolio (1) 0.60% 0.04% 0.64%
Small Capitalization Stock Portfolio (1) 0.40% 0.10% 0.50%
Global Portfolio (1) 0.75% 0.10% 0.85%
Natural Resources Portfolio (1) 0.45% 0.09% 0.54%
================================================================================================================
</TABLE>
(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.
8
<PAGE>
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.
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.
<TABLE>
<CAPTION>
===============================================================================================================
OTHER TOTAL FUND
FUNDS MANAGEMENT FEE EXPENSES ANNUAL EXPENSES
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
AIM VARIABLE INSURANCE FUNDS, INC.
AIM V.I. Capital Appreciation Fund (1) 0.63% 0.05% 0.68%
AIM V.I. Diversified Income Fund (1) 0.60% 0.20% 0.80%
AIM V.I. Global Utilities Fund (1) 0.65% 0.63% 1.28%
AIM V.I. Government Securities Fund (1) 0.50% 0.37% 0.87%
AIM V.I. Growth Fund (1) 0.65% 0.08% 0.73%
AIM V.I. Growth and Income Fund (1) 0.63% 0.06% 0.69%
AIM V.I. International Equity Fund (1) 0.75% 0.18% 0.93%
AIM V.I. Value Fund (1) 0.62% 0.08% 0.70%
===============================================================================================================
</TABLE>
(1) AIM may from time to time voluntarily waive or reduce its respective fees.
The Funds listed above did not have any fee waivers for the year ended
12/31/97. None of the expense ratios have been restated. Effective May 1,
1998, the Funds reimburse AIM in an amount up to 0.25% of the average net
asset value of each Fund, for expenses incurred in providing, or assuring
that participating insurance companies provide certain administrative
services. The fee currently only applies to the average net asset value of
each Fund in excess of the net asset value of each Fund as calculated on
April 30, 1998.
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:
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.
9
<PAGE>
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 predominantly 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.
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.
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.
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, privatization. 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 MANAGEMENT OTHER ANNUAL EXPENSES (AFTER
FUNDS FEE EXPENSES EXPENSE REIMBURSEMENTS)
=================================================================================================================================
<S> <C> <C> <C>
ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC.
Global Bond Portfolio (1) 0.56% 0.38% 0.94%
Global Dollar Government Portfolio (1) 0.41% 0.54% 0.95%
Growth Portfolio (1) 0.75% 0.09% 0.84%
Growth and Income Portfolio (1) 0.63% 0.09% 0.72%
International Portfolio (1) 0.53% 0.42% 0.95%
Premier Growth Portfolio (1) 0.85% 0.10% 0.95%
Quasar Portfolio (1) 0.58% 0.37% 0.95%
Real Estate Investment Portfolio (1)(2) 0.00% 0.95% 0.95%
Technology Portfolio (1) 0.76% 0.19% 0.95%
U.S. Government/High Grade Securities Portfolio (1) 0.60% 0.24% 0.84%
Utility Income Portfolio (1) 0.62% 0.33% 0.95%
Worldwide Privatization Portfolio (1) 0.40% 0.55% 0.95%
=================================================================================================================================
</TABLE>
(1) Net of expense reimbursement. The expenses of the following Portfolios,
before expense reimbursements, would be: Global Bond Portfolio: investment
management fee 0.65%, other expenses 0.38% and total fund annual expenses
1.03%; Global Dollar Government Portfolio: investment management fee 0.75%,
other expenses 0.54% and total fund annual expenses 1.29%; Growth
Portfolio: investment management fee 0.75%, other expenses 0.09% and total
fund annual expenses 0.84%; Growth and Income Portfolio: investment
management fee 0.63%, other expenses 0.09% and total fund annual expenses
0.72%; International Portfolio: investment management fee 1.00%, other
expenses 0.42% and total fund annual expenses 1.42%; Premier Growth
Portfolio: investment management fee 1.00%, other expenses 0.10% and total
fund annual expenses 1.10%; Quasar Portfolio: investment management fee
1.00%, other expenses 0.37% and total fund annual expenses 1.37%; Real
Estate Investment Portfolio: investment management fee 0.90%, other
expenses 1.41% and total fund annual expenses 2.31%; Technology Portfolio:
investment management fee 1.00%, other expenses 0.19% and total fund annual
expenses 1.19%; U.S. Government/High Grade Securities Portfolio: investment
management fee 0.60%, other expenses 0.24% and total fund annual expenses
0.84%; Utility Income Portfolio: investment management fee 0.75%, other
expenses 0.33% and total fund annual expenses 1.08%; and Worldwide
Privatization Portfolio: investment management fee 1.00%, other expenses
0.55% and total fund annual expenses 1.55%.
(2) Annualized.
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:
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-to-large
market capitalizations that are believed by management to be undervalued at the
time of purchase.
11
<PAGE>
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.
===============================================================================
TOTAL FUND
FUNDS ANNUAL EXPENSES
- --------------------------------------------------------------------------------
AMERICAN CENTURY VARIABLE PORTFOLIOS, INC.
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 and
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.
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
BergerIPT - 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.
12
<PAGE>
<TABLE>
<CAPTION>
===========================================================================================================================
TOTAL FUND
INVESTMENT ANNUAL EXPENSES
MANAGEMENT OTHER (AFTER EXPENSE
FUNDS FEE EXPENSES REIMBURSEMENTS)
- ----------------------------------------------------------------------------------------------------------------------------
<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)(2) 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%, the normal operating expenses in any fiscal
year of the Berger IPT - Small Company Growth Fund exceed 1.15%, and the
normal operating expenses in any fiscal year of the Berger/BIAM IPT -
International Fund exceed 1.20% 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, Berger IPT - Small Company Growth Fund and the Berger/BIAM IPT
- International Fund would have been 0.75%, 0.75%, 0.90% and 0.90%,
respectively, and the funds' total operating expenses would have been
9.18%, 9.62%, 5.81% and 3.83%, respectively.
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.
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 of domestic and foreign
issuers. The portfolio also may invest in 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.
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.
13
<PAGE>
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.
SPECIAL VALUE 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.
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.
<TABLE>
<CAPTION>
=========================================================================================================================
INVESTMENT
MANAGEMENT OTHER TOTAL FUND
FUNDS FEE EXPENSES ANNUAL EXPENSES
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
DREYFUS FUNDS
Capital Appreciation Portfolio 0.75% 0.05% 0.80%
Disciplined Stock Portfolio 0.75% 0.27% 1.02%
Growth and Income Portfolio 0.75% 0.05% 0.80%
International Equity Portfolio 0.75% 0.31% 1.06%
International Value Portfolio 1.00% 0.42% 1.42%
Quality Bond Portfolio 0.65% 0.10% 0.75%
Small Cap Portfolio 0.75% 0.03% 0.78%
Small Company Stock Portfolio 0.75% 0.37% 1.12%
Socially Responsible Growth Portfolio 0.75% 0.07% 0.82%
Special Value Portfolio 0.75% 0.24% 0.99%
Zero Coupon 2000 Portfolio 0.45% 0.16% 0.61%
=========================================================================================================================
</TABLE>
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.
14
<PAGE>
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 normally 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., 100
Fountain Parkway, St. Petersburg, Florida 33716-1205.
<TABLE>
<CAPTION>
============================================================================================================================
INVESTMENT
MANAGEMENT 12B-1 OTHER TOTAL FUND
FUNDS FEE FEES EXPENSES ANNUAL EXPENSES
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
TEMPLETON VARIABLE PRODUCTS SERIES
FUND (CLASS 2 SHARES)
Asset Allocation Fund (1) 0.60% 0.25% 0.18% 1.03%
Bond Fund (2) 0.50% 0.15% 0.18% 0.83%
Developing Markets Fund (2) 1.25% 0.25% 0.33% 1.83%
International Fund (1) 0.69% 0.25% 0.19% 1.13%
Stock Fund (1) 0.69% 0.25% 0.19% 1.13%
============================================================================================================================
</TABLE>
(1) Class 2 of the Fund has a distribution plan or "Rule 12b-1 plan" which is
described in the Fund's prospectus. Because Class 2 shares were not offered
until May 1, 1997, figures (other than "12b-1 Fees") are estimates for 1998
based on the historical expenses of the Fund's Class 1 shares for the
fiscal year ended December 31, 1997, except that Management Fees and Total
Fund Operating Expenses have also been restated to reflect the management
fee schedule approved by shareholders and effective May 1, 1997. Actual
Management Fees and Total Fund Operating Expenses during 1997 were lower.
See fund prospectus for details.
(2) Class 2 of the Fund has a distribution plan or "Rule 12b-1 Plan" which is
described in the Fund's prospectus. Because Class 2 shares were not offered
until May 1, 1997, figures (other than "Rule 12b-1 Fees") are estimates for
1998 based on the historical expenses of the Fund's Class 1 shares for the
fiscal year ended December 31, 1997.
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 long-term 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.
15
<PAGE>
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 long-term 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 long-term 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 80237.
<TABLE>
<CAPTION>
========================================================================================================================
TOTAL FUND
INVESTMENT ANNUAL EXPENSES
MANAGEMENT OTHER (AFTER EXPENSE
FUNDS FEE EXPENSES REIMBURSEMENTS)
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INVESCO VARIABLE INVESTMENT FUNDS, INC.
Dynamics Portfolio (1)(2) 0.60% 0.30% 0.90%
Growth Portfolio (1)(2) 0.85% 0.40% 1.25%
Health Sciences Portfolio (1)(2) 0.75% 0.25% 1.00%
High Yield Portfolio (1)(2) 0.60% 0.23% 0.83%
Industrial Income Portfolio (1)(2) 0.75% 0.16% 0.91%
Small Company Growth Portfolio (1)(2) 0.75% 0.25% 1.00%
Technology Portfolio (1)(2) 0.75% 0.25% 1.00%
Total Return Portfolio (1)(2) 0.75% 0.17% 0.92%
Utilities Portfolio (1)(2) 0.60% 0.39% 0.99%
========================================================================================================================
</TABLE>
(1) Various expenses of the Portfolios were voluntarily absorbed by INVESCO
Funds Group, Inc. for the year ended December 31, 1997. If such expenses
had not been voluntarily absorbed, the ratio of expenses to average net
assets for Dynamics, Growth, Health Sciences, High Yield, Industrial
Income, Small Company Growth, Technology, Total Return and Utilities
Portfolios would have been 34.18%, 28.76%, 21.45%, 0.94%, 0.97%, 35.99%,
19.25%, 1.10% and 2.07%, respectively.
16
<PAGE>
(2) It should be noted that the Portfolios' actual total fund annual expenses
were lower than the figures shown because the Portfolios' 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.
CONTRARIAN VALUE PORTFOLIO: Seeks to achieve a high rate of total return from a
portfolio primarily of value stocks of larger companies.
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.
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+GROWTH PORTFOLIO: Seeks growth of capital through professional management
of a portfolio of growth and value stocks.
The asset manager of the portfolios is Scudder Kemper Investments, Inc.
("Scudder Kemper"). Scudder Kemper's principal business address is Two
International Place, Boston, Massachusetts 02110-4103.
17
<PAGE>
<TABLE>
<CAPTION>
==================================================================================================================
INVESTMENT
MANAGEMENT OTHER TOTAL FUND
FUNDS FEE EXPENSES ANNUAL EXPENSES
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INVESTORS FUND SERIES
Blue Chip Portfolio 0.65% 0.30% 0.95%
Contrarian Value Portfolio 0.75% 0.05% 0.80%
Global Income Portfolio 0.75% 0.35% 1.10%
Government Securities Portfolio 0.55% 0.09% 0.64%
Growth Portfolio 0.60% 0.05% 0.65%
High Yield Portfolio 0.60% 0.05% 0.65%
Horizon 5 Portfolio 0.60% 0.37% 0.97%
Horizon 10+Portfolio 0.60% 0.23% 0.83%
Horizon 20+Portfolio 0.60% 0.33% 0.93%
International Portfolio 0.75% 0.16% 0.91%
Investment Grade Bond Portfolio 0.60% 0.20% 0.80%
Small Cap Growth Portfolio 0.65% 0.06% 0.71%
Small Cap Value Portfolio 0.75% 0.09% 0.84%
Total Return Portfolio 0.55% 0.05% 0.60%
Value+Growth Portfolio 0.75% 0.09% 0.84%
==================================================================================================================
</TABLE>
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.
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.
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.
18
<PAGE>
<TABLE>
<CAPTION>
==================================================================================================================
TOTAL OPERATING
EXPENSES (AFTER
MANAGEMENT OTHER FEE WAIVERS AND
FUNDS FEE EXPENSES REDUCTIONS)
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
JANUS ASPEN SERIES
Aggressive Growth Portfolio (1) 0.73% 0.03% 0.76%
Balanced Portfolio (1) 0.76% 0.07% 0.83%
Flexible Income Portfolio (1) 0.65% 0.10% 0.75%
Growth Portfolio (1) 0.65% 0.05% 0.70%
High-Yield Portfolio (1) 0.00% 1.00% 1.00%
International Growth Portfolio (1) 0.67% 0.29% 0.96%
Worldwide Growth Portfolio (1) 0.66% 0.08% 0.74%
==================================================================================================================
</TABLE>
(1) Management fees for Aggressive Growth, Balanced, Growth, International
Growth and Worldwide Growth Portfolios reflect a reduced fee schedule
effective July 1, 1997. The management fee for each of these Portfolios
reflects the new rate applied to net assets as of December 31, 1997. Other
expenses are based on gross expenses of the Shares before expense offset
arrangements for the fiscal year ended December 31, 1997. 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 management fee to the level of the corresponding
Janus retail fund. Other waivers, if applicable, are first applied against
the management fee and then against other expenses. Without such waivers or
reductions, the Management Fee, Other Expenses and Total Operating Expenses
for the Shares would have been 0.74%, 0.04% and 0.78% for Aggressive Growth
Portfolio; 0.77%, 0.06% and 0.83% for Balanced Portfolio; 0.74%, 0.04% and
0.78% for Growth Portfolio; 0.75%, 2.52% and 3.27% for High-Yield
Portfolio; 0.79%, 0.29% and 1.08% for International Growth Portfolio; and
0.72%, 0.09% and 0.81% 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.
J.P. MORGAN SERIES TRUST II
The portfolios of the J.P. Morgan Series Trust II in which the Separate Account
may currently invest and their investment objectives and fees are as follows:
J.P. MORGAN 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.
J.P. MORGAN 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.
J.P. MORGAN INTERNATIONAL OPPORTUNITIES 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.
J.P. MORGAN 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.
19
<PAGE>
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.
<TABLE>
<CAPTION>
===================================================================================================================
TOTAL FUND
INVESTMENT ANNUAL EXPENSES
MANAGEMENT OTHER (AFTER EXPENSE
FUNDS FEE EXPENSES REIMBURSEMENTS)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
J.P. MORGAN SERIES TRUST II
J.P. Morgan Bond Portfolio (1) 0.30% 0.45% 0.75%
J.P. Morgan Equity Portfolio (1) 0.40% 0.50% 0.90%
J.P. Morgan International 0.60% 0.60% 1.20%
Opportunities Portfolio (1)
J.P. Morgan Small Company Portfolio (1) 0.60% 0.55% 1.15%
===================================================================================================================
</TABLE>
(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 J.P. Morgan Bond Portfolio, J.P. Morgan Equity
Portfolio, J.P. Morgan International Opportunities Portfolio and J.P.
Morgan Small Company Portfolio, respectively. Without such reimbursements,
total fund annual expenses would have been 1.91% for the J.P. Morgan Bond
Portfolio, 2.31% for the J.P. Morgan Equity Portfolio, 4.25% for the J.P.
Morgan International Opportunities Portfolio and 3.81% for the J.P. Morgan
Small Company Portfolio.
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 EMERGING MARKETS PORTFOLIO: Seeks long-term 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.
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 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 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 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.
20
<PAGE>
<TABLE>
<CAPTION>
================================================================================================================================
INVESTMENT
MANAGEMENT 12B-1 OTHER TOTAL FUND
FUNDS FEE FEES EXPENSES ANNUAL EXPENSES
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
LAZARD RETIREMENT SERIES, INC.
Emerging Markets Portfolio (1) 1.00% 0.25% 0.55% 1.80%
Equity Portfolio (1) 0.75% 0.25% 0.50% 1.50%
International Equity Portfolio (1) 0.75% 0.25% 0.60% 1.60%
Small Cap 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.
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 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.
21
<PAGE>
<TABLE>
<CAPTION>
=============================================================================================================================
INVESTMENT TOTAL FUND
MANAGEMENT ANNUAL EXPENSES
AND FUND OTHER (AFTER EXPENSE
FUNDS ADMINISTRATION FEE EXPENSES REIMBURSEMENTS)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
MFS VARIABLE INSURANCE TRUST
MFS Bond Series (1)(2) 0.60% 0.40% 1.00%
MFS Emerging Growth Series (2) 0.75% 0.12% 0.87%
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 Research Series (2) 0.75% 0.13% 0.88%
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%
=============================================================================================================================
</TABLE>
(1) MFS has agreed to bear expenses for the Series, subject to reimbursement by
the 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 and 0.25% for each
remaining Series. Otherwise, "Other Expenses" for the Bond Series, Growth
with Income Series, High Income Series, Total Return Series, Utilities
Series, Value Series and World Government Series would be 2.98%, 0.35%,
0.40%, 0.27%, 0.45%, 1.33%, and 0.40%, respectively, and total fund annual
expenses would be 3.58%, 1.10%, 1.15%, 1.02%, 1.20%, 2.08%, and 1.15%,
respectively, for these Series.
(2) Each Series has an expense offset arrangement which reduces the Series'
custodian fees 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 also have the
effect of reducing the Series' expenses). Any such fee reductions are not
reflected under "Other Expenses."
NEUBERGER&BERMAN MANAGEMENT INC. ("NBMI")
The portfolios of the Neuberger&Berman Advisers Management Trust ("AMT") in
which the Separate Account may currently invest and their investment objectives
and fees are as follows:
AMT BALANCED PORTFOLIO: Seeks long-term capital growth and reasonable current
income without undue risk to principal.
AMT GROWTH PORTFOLIO: Seeks capital appreciation without regard to income, and
can invest in securities of small-, medium-, and large-capitalization companies
believed to have the maximum potential for long-term capital appreciation. The
portfolio has a current intention to focus on the stocks of medium-cap
companies.
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.
AMT PARTNERS PORTFOLIO: Invests principally in common stocks of medium- to
large-capitalization established companies, using the value-oriented investment
approach. Capital growth is sought through an investment approach that is
designed to increase capital with reasonable risk. N&B Management looks for
securities believed to be undervalued based on strong fundamentals such as a low
price-to-earnings ratio, consistent cash flow, and the company's track record
through all parts of the market cycle.
Neuberger&Berman Management Inc. ("NBMI") serves as the investment manager of
the portfolios and is also the principal underwriter of the portfolios. NBMI's
principal business address is 605 Third Avenue, New York, New York 10158-0180.
22
<PAGE>
<TABLE>
<CAPTION>
===============================================================================================================================
INVESTMENT
MANAGEMENT/
ADMINISTRATIVE OTHER TOTAL FUND
FUNDS FEES EXPENSES ANNUAL EXPENSES
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NEUBERGER&BERMAN ADVISERS MANAGEMENT TRUST
("AMT") (1)
AMT Balanced Portfolio (2) 0.85% 0.19% 1.04%
AMT Growth Portfolio (2) 0.83% 0.07% 0.90%
AMT Limited Maturity Bond Portfolio (2) 0.65% 0.12% 0.77%
AMT Partners Portfolio (2) 0.80% 0.06% 0.86%
==============================================================================================================================
</TABLE>
(1) Shares of the separate Portfolios of Neuberger&Berman Advisers Management
Trust are sold only through the currently effective prospectus and are not
available to the general public. Shares of the AMT Portfolios may be
purchased only by life insurance companies to be used with their separate
accounts which fund variable annuity and variable life insurance policies,
and shares of the AMT Balanced Portfolio are also available as an
underlying investment fund for certain qualified retirement plans.
(2) 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 ("Managers
Trust"), an open-ended management investment company. 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.
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.
23
<PAGE>
<TABLE>
<CAPTION>
==================================================================================================================
TOTAL FUND
INVESTMENT ANNUAL EXPENSES
MANAGEMENT OTHER AFTER EXPENSE
FUNDS FEE EXPENSES REIMBURSEMENTS)
- ------------------------------------------------------------------------------------------------------------------
THE ROYCE PORTFOLIOS
<S> <C> <C> <C>
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 (1) 0.00% 1.35% 1.35%
==================================================================================================================
</TABLE>
(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 reimburse fund
expenses through December 31, 1998 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 primarily 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 Kemper Investments, Inc.
("Scudder Kemper"). Scudder Kemper'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 Kemper
subsidiary, located at Two International Place, Boston, Massachusetts
02110-4103.
<TABLE>
<CAPTION>
===============================================================================================================================
TOTAL FUND
MANAGEMENT 12B-1 OTHER ANNUAL
FUNDS FEE FEE EXPENSES EXPENSES
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SCUDDER VARIABLE LIFE INVESTMENT FUND-
(CLASS B SHARES)
Balanced Portfolio 0.48% 0.25% 0.09% 0.82%
Bond Portfolio 0.48% 0.25% 0.14% 0.87%
Capital Growth Portfolio 0.47% 0.25% 0.03% 0.75%
Global Discovery Portfolio (1) 0.67% 0.25% 0.83% 1.75%
Growth & Income Portfolio 0.48% 0.25% 0.07% 0.80%
International Portfolio 0.83% 0.25% 0.16% 1.24%
===============================================================================================================================
</TABLE>
(1) The Adviser agreed to waive all or a portion of its management fee to limit
the expenses of the Global Discovery Portfolio to 1.75% of average daily
net assets. Had the fee been imposed, the management fee would have been
0.98% and the total operating expenses would have been 2.00%.
24
<PAGE>
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 also has the flexibility to invest in debt obligations and short-term fixed
income securities. 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 OPPORTUNITY 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.
<TABLE>
<CAPTION>
=====================================================================================================================
INVESTMENT
MANAGEMENT OTHER TOTAL FUND
FUNDS FEE EXPENSES ANNUAL EXPENSES
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
THE STRONG FUNDS
Strong Discovery Fund II (1) 1.00% 0.18% 1.18%
Strong Growth Fund II (1)(2) 1.00% 0.20% 1.20%
Strong International Stock Fund II (1) 1.00% 0.51% 1.51%
Strong Opportunity Fund II (1) 1.00% 0.15% 1.15%
=====================================================================================================================
</TABLE>
(1) Calculated on an annualized basis as of December 31, 1997 through the
fiscal year end.
(2) The Fund's advisor is currently absorbing expenses of 5.23%. Without the
absorptions, total fund annual expenses would have been 6.43%.
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.
25
<PAGE>
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.
<TABLE>
<CAPTION>
=======================================================================================================================
INVESTMENT
MANAGEMENT OTHER TOTAL FUND
FUNDS FEE EXPENSES ANNUAL EXPENSES
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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%
=======================================================================================================================
</TABLE>
(1) The investment management fee includes the ordinary expenses of operating
the Funds.
WARBURG PINCUS PORTFOLIOS
The portfolios of Warburg Pincus Trust I 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.
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 Asset Management,
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, Inc., a Warburg subsidiary, located at 466 Lexington
Avenue, New York, New York 10017-3147.
26
<PAGE>
<TABLE>
<CAPTION>
====================================================================================================================
TOTAL FUND
INVESTMENT ANNUAL EXPENSES
MANAGEMENT OTHER (AFTER EXPENSE
PORTFOLIOS FEE EXPENSES REIMBURSEMENTS)
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
WARBURG PINCUS TRUST I
Emerging Markets Portfolio (1) 0.81% 0.59% 1.40%
International Equity Portfolio (2) 1.00% 0.36% 1.36%
Post-Venture Capital Portfolio (2) 1.07% 0.33% 1.40%
Small Company Growth Portfolio (2) 0.90% 0.25% 1.15%
WARBURG PINCUS TRUST II
Fixed Income Portfolio (3) 0.32% 0.67% 0.99%
Global Fixed Income Portfolio (3) 0.29% 0.70% 0.99%
====================================================================================================================
</TABLE>
(1) Absent the waiver of fees by the Portfolio's investment adviser and
co-administrator, the investment management fee for the Emerging Markets
Portfolio would equal 1.25%; other expenses would equal 0.71%; and total
fund annual expenses would equal 1.96%. Other expenses for the 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 the
Portfolio's total fund annual expenses to the limits shown in the table
above through December 31, 1999.
(2) Investment management fees, other expenses and total fund annual expenses
are based on actual expenses for the fiscal year ended December 31, 1997,
net of any fee waivers or expense reimbursements. Without such waivers or
reimbursements, investment management fees would have equalled 1.00%, 1.25%
and 0.90%; other expenses would have equalled 0.35%, 0.44% and 0.25%; and
total fund annual expenses would have equalled 1.35%, 1.69% and 1.14% for
the International Equity, Post-Venture Capital 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, 1999.
(3) 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 12.54% and 4.58% and total portfolio annual
expenses would equal 13.04% and 5.58% 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
co-administrator have undertaken to limit each portfolio's total annual
expenses to the limits shown in the table above through December 31, 1999.
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
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 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.
27
<PAGE>
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 the general
account 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 that time, 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
outstanding charges. In addition, 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 41. 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 certain Group Contracts,
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 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".
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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 the Certificate to Prudential (or Prudential's designee) at the address
specified in the enrollment materials given to Participants or to such other
address specified by Prudential. 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, or under some Group Contracts, the Fixed Account.
Prudential also reserves the right to limit contributions and transactions
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, and will be made available by the Contractholder, its
agent or Prudential. 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 with respect to certain
types of transactions. 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 on the
applicable form.
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.
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 net premium payments it receives to the Participant's
investment options according to the instructions received. Other Participants
will make payments directly to Prudential or authorize Prudential (or
Prudential's designee) to receive payment using electronic funds transfers.
Under certain Group Contracts, some premium payments (e.g., payments made by the
holder of a Portable Certificate) and some loan repayments will be sent to
Prudential Mutual Fund Services, Inc., an indirect wholly-owned subsidiary of
Prudential. 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 41. Prudential reserves the right not to accept or to return any
premium payment which would cause a Participant's 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.
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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 received before the
Certificate Date will be deposited, for the benefit of the Participant, in
Prudential's general account. Prudential will not pay interest on these amounts.
Such premium payments, as well as any payments received on the Certificate Date,
will be applied to the Series Fund money market portfolio (or the Fixed Account
under some Group Contracts) 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 (or the Fixed Account under some Group Contracts) for 20 days and will
thereafter be allocated to the investment options selected by the Participant.
However, if the Participant has failed to furnish an enrollment form containing
complete investment allocation information, then such Participant's Net Premiums
will remain invested in the Series Fund money market portfolio (or the Fixed
Account under some Group Contracts) until such complete information is
furnished.
AFTER CERTIFICATE DATE. Premium payments made after the Certificate Date will be
reduced by any applicable charges. See CHARGES AND EXPENSES, page 34. If the
Participant has failed to furnish an enrollment form containing complete
investment allocation information, then such Participant's Net Premium payments
submitted after the Certificate Date will be invested in the Series Fund money
market portfolio (or the Fixed Account under some Group Contracts) until such
complete information is furnished. 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 designee) 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 (or the Fixed Account under
some Group Contracts).
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 designee) 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 designee) 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
designee) on a form approved by Prudential. These limits are subject to change
in the future.
The Group Contracts and Certificates were not designed for professional market
timing organizations or other organizations or individuals using programmed,
large, or frequent transfers. A pattern of exchanges that
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coincides with a "market timing" strategy may be disruptive to the Separate
Account and the Funds and will be discouraged. If such a pattern were to be
found, Prudential may be required to modify the transfer procedures, including
but not limited to, not accepting transfer requests of an agent acting under a
power of attorney on behalf of more than one Certificate owner.
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 from the Series Fund money market Subaccount
to the other available Subaccounts at monthly intervals. The Participant can
elect that a certain number of transfers be made under the DCA feature.
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 designee) 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 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 outstanding
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
outstanding 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
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by the Participant or the beneficiary if the Death Benefit is $1,000 or more.
More than one option can be selected.
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 status
as life insurance under the federal tax laws.
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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 $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 cause the insurance to be treated as a
Modified Endowment Contract under the Internal Revenue Code. This is
particularly true of decreases in Face Amount at any time that insurance is in
force. See TAX TREATMENT OF CERTIFICATE BENEFITS, page 41. 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. In some states, this is called a
premium-based administrative charge. 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 36.
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 36.
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 designee) 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
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<PAGE>
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 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 36.
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.
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EXPENSES INCURRED BY THE FUNDS. The charges and expenses of the Funds are
indirectly borne by the Participants. Details about management fees and other
underlying fund expenses are provided in THE FUNDS, page 6, and in the
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. 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 designee) 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 (following page 5) 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 that time. Prudential will pay the Cash
Surrender Value calculated as of the end of the Valuation Period during which
Prudential (or Prudential's designee) 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 41.
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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.
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 designee) 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 41.
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 41.
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 designee) 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 41.
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 partial withdrawal greater than that amount will not be
permitted because it would cause the Certificate to default. Upon request,
Prudential (or Prudential's designee) 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.
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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 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 41. A loan repayment will be applied
first against any unpaid loan interest with any remaining amount used to reduce
the principal amount of the loan.
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 41.
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.
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. A Certificate that lapses with Certificate Debt may result in tax
consequences. See TAX TREATMENT OF CERTIFICATE BENEFITS, page 41.
Prudential will send a notice to a Participant in default at the last known
address on file with Prudential (or with Prudential's designee) specifying the
amount of premium required to keep the Certificate in force and the 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 designee) 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.
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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.
Prudential may terminate a Group Contract for any reason effective on the date
of any Contract Anniversary provided it has notified the Contractholder at least
31 days in advance.
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, page
39. 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
begin mailing periodic premium reminders directly to the Participant, who will
remit premium payments directly to Prudential (or Prudential Mutual Fund
Services, Inc.) or authorize Prudential to receive payment using electronic
funds transfers. 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 for which 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 may 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 designee) 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 41.
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 designee): (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. See
INCONTESTABILITY and SUICIDE EXCLUSION, page 44. If the Certificate lapses, the
Participant will be required to pay off any outstanding Certificate Debt, and
will not be permitted to continue the loan under any reinstated Certificate.
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.
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TAX TREATMENT OF CERTIFICATE BENEFITS
Each prospective Participant is urged to consult a qualified tax adviser. 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 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 have 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.
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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.
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 certain circumstances including: premiums
in excess of the seven pay premiums allowed under Section 7702A are
paid or a decrease in the Death Benefit or a removal of certain
additional insurance benefits. 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 adviser 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 gift, estate and income 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
adviser regarding the application of these provisions to their circumstances.
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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.
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 advisers 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 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 advisers 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 applicable form 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 designee.
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 41.
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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
adviser 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.
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. The
accelerated death benefit may be discounted for interest under certain Group
Contracts
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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 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, for example, 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 has
otherwise ended, insurance equal to the Face Amount of the Certificate will be
extended if the Participant became totally disabled prior to age 60. The
extended death protection will be extended 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 inside 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.
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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.
EXPERTS
The financial statements included in this prospectus for the years ended
December 31, 1997 and 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 the year ended December
31, 1995 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 replaced 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, and later issued a Final Order and Judgement in the
consolidated class actions before the court, 962 F. Supp. 450 (March 17, 1997,
as amended April 14, 1997). The Court's Final Order and Judgement approving the
class Settlement has been appealed to the United States Court of Appeals for the
Third Circuit, which held a hearing on January 26, 1998. The Court has not yet
issued a ruling on the appeal.
Pursuant to the Settlement, Prudential agreed to provide and has begun to
implement an Alternative Dispute Resolution ("ADR") process for class members
who believe they were misled concerning the sale or performance of their life
insurance policies. Management now has information which allows for computation
of a reasonable estimate of losses associated with ADR claims. Based on this
information, management estimated the cost of remedying policyholder claims in
the ADR process before taxes to be approximately $2.05 billion. While management
believes these to be reasonable estimates based on information currently
available, the ultimate amount of the total cost of remedied policyholder claims
is dependent on complex and varying factors, including actual claims by eligible
policyholders, the relief options chosen and the dollar value of those options.
There are also additional elements of the ADR process which cannot be fully
evaluated at this time (e.g., claims which may be successfully appealed) which
could increase this estimate.
In addition, a number of actions have been filed against Prudential by
policyholders who have excluded themselves from the Settlement; Prudential
anticipates that additional suits may be filed by other policyholders.
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. These agreements are now being implemented through
Prudential's implementation of the class Settlement.
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.
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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 regulatory inquiries. 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, after consideration of applicable reserves.
YEAR 2000 COMPLIANCE
The benefits and services provided to the Contractholders by Prudential and PIMS
depend on the smooth functioning of their respective computer systems. The year
2000, however, holds the potential for a significant disruption in the operation
of these systems. Many computer programs cannot distinguish the year 2000 from
the year 1900 because of the way in which dates are encoded. Left uncorrected,
the year "00" could cause systems to perform date comparisons and calculations
incorrectly that in turn could compromise the integrity of business records and
lead to serious interruption of business processes.
Prudential, PIMS's ultimate corporate parent, identified this issue as a
critical priority in 1995 and has established quality assurance procedures
including a certification process to monitor and evaluate enterprise-wide
conversion and upgrading of systems for "Year 2000" compliance. Prudential has
also initiated an analysis of potential exposure that could result from the
failure of major service providers such as suppliers, custodians and brokers, to
achieve Year 2000 compliance. Prudential expects to complete its adaptation,
testing and certification of software for Year 2000 compliance by December 31,
1998. During 1999, Prudential plans to conduct additional internal testing, to
participate in securities industry-wide test efforts and to complete major
service provider analysis and contingency planning.
The expenses of Prudential's Year 2000 compliance are allocated across its
various businesses, including those businesses not engaged in providing services
to Contractholders. Accordingly, while the expense is substantial in the
aggregate, it is not expected to have a material impact on Prudential's
abilities to meet its contractual commitments to Contractholders.
Prudential believes that it is well positioned to achieve the necessary
modifications and mitigate Year 2000 risks. However, if such efforts are not
completed on a timely basis, the Year 2000 issue could have a material adverse
impact on Prudential's operations, those of its subsidiary and affiliate
companies and/or the Separate Account. Moreover, there can be no assurance that
the measures taken by Prudential's external service providers will be sufficient
to avoid any material adverse impact on Prudential's operations or those of its
subsidiary and affiliate companies.
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 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 inside cover page (page i) of this
prospectus.
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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 of the effective date of the new rate.
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. The term Group Contract also includes a
participating employer's participation in a multi-employer trust.
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.
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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.
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 as
of the end of each Valuation Period, which occurs at 4:15 p.m. Eastern time on
each Valuation Date.
51
<PAGE>
DIRECTORS AND OFFICERS OF PRUDENTIAL
DIRECTORS OF PRUDENTIAL
FRANKLIN E. AGNEW _ Director since 1994 (current term expires April, 2000).
Member, Committee on Dividends; Member, Finance Committee; Member Corporate
Governance Committee. Business consultant since 1987. Senior Vice President,
H.J. Heinz from 1971 to 1986. Mr. Agnew is also a director of Bausch & Lomb,
Inc. John Wiley & Sons, Inc. and Erie Plastics Corporation. Age 63. Address: 600
Grant Street, Suite 660, Pittsburgh, PA 15219.
FREDERICK K. BECKER _ Director since 1994 (current term expires April, 1999).
Member, Auditing Committee, Member, Committee on Business Ethics; Member,
Corporate Governance Committee. President, Wilentz Goldman and Spitzer, P.A.
(law firm) since 1989, with firm since 1960. Age 62. Address: 90 Woodbridge
Center Drive, Woodbridge, NJ 07095.
JAMES G. CULLEN -- Director since 1994 (current term expires April, 2001).
Member, Compensation Committee; Member, Committee on Business Ethics. President
& Chief Executive Officer, Telecom Group, Bell Atlantic Corporation, since 1997.
Vice Chairman, Bell Atlantic Corporation from 1995 to 1997. President, Bell
Atlantic Corporation from 1993 to 1995. Mr. Cullen is also a director of Bell
Atlantic Corporation and Johnson & Johnson. Age 55. Address: 1310 North Court
House Road, 11th Floor, Alexandria, VA 22201.
CAROLYNE K. DAVIS -- Director since 1989 (current term expires April, 2001).
Member, Finance Committee; Member Committee on Business Ethics; Member,
Compensation Committee. Independent Health Care Advisor. National and
International Health Care Advisor, Ernst & Young, LLP from 1985 to 1997. Dr.
Davis is also a director of Beckman Instruments, Inc., Merck & Co., Inc.,
Science Applications International Corporation, Minimed Incorporated, and
Beverley Enterprises. Age 65. Address: 751 Broad Street, 23rd Floor, Newark, NJ
07102.
ROGER A. ENRICO -- Director since 1994 (current term expires April, 2002).
Member, Committees on Nominations & Corporate Governance; Member, Compensation
Committee. Chairman and Chief Executive Officer, PepsiCo, Inc. since 1996.
Originally with PepsiCo, Inc. since 1971. Mr. Enrico is also a director of A.M.
Belo Corporation and Dayton Hudson Corporation. Age 53. Address: 700 Anderson
Hill Road, Purchase, NY 10577.
ALLAN D. GILMOUR -- Director since 1995 (current term expires April, 1999).
Member, Finance Committee; Member, Committee on Dividends. Retired since 1995.
Vice Chairman, Ford Motor Company, from 1993 to 1995. Mr. Gilmour originally
joined Ford in 1960. Mr. Gilmour is also a director of Whirlpool Corporation,
USWest, Inc., The Dow Chemical Company and DTE Energy Company. Age 63. Address:
751 Broad Street, 23rd Floor, Newark, NJ 07102.
WILLIAM H. GRAY, III -- Director since 1991 (current term expires April, 2000).
Member, Executive Committee; Member, Finance Committee; Chairman, Committees on
Nominations & Corporate Governance. President and Chief Executive Officer, The
College Fund/UNCF since 1991. Mr. Gray served in Congress from 1979 to 1991. Mr.
Gray is also a director of Chase Manhattan Corporation, The Chase Manhattan
Bank, Lotus Development Corporation, Municipal Bond Investors Assurance
Corporation, Rockwell International Corporation, Union-Pacific Corporation,
Warner-Lambert Company, Westinghouse Electric Corporation, and Electronic Data
Systems. Age 56. Address: 8260 Willow Oaks Corp. Drive, Fairfax, VA 22031-4511.
JON F. HANSON -- Director since 1991 (current term expires April, 2003). Member,
Finance Committee; Member, Committee on Dividends. Chairman, Hampshire
Management Company since 1976. Mr. Hanson is also a director of United Water
Resources, Orange & Rockland Utilities, Inc., and Consolidated Delivery and
Logistics. Age 61. Address: 235 Moore Street, Suite 200, Hackensack, NJ 07601.
GLEN H. HINER, JR. -- Director since 1997. (current term expires April, 2001).
Member, Compensation Committee. Chairman and Chief Executive Officer, Owens
Corning since 1991. Senior Vice President and Group Executive, Plastics Group,
General Electric Company from 1983 to 1991. Mr Hiner is also a director of Dana
Corporation. Age 64. Address: One Owens Corning Parkway, Toledo, OH 43659.
CONSTANCE J. HORNER -- Director since 1994 (current term expires April, 2002).
Member, Auditing Committee; Member, Committees on Nominations & Corporate
Governance. Guest Scholar, The Brookings Institution since 1993. Ms. Horner is
also a director of Foster Wheeler Corporation, Ingersoll-Rand Corporation, and
Pfizer, Inc. Age 55. Address: 1775 Massachusetts Ave., N.W. Washington, D.C.
20036-2188.
52
<PAGE>
GAYNOR N. KELLEY -- Director since 1997 (current term expires April, 2001).
Member, Auditing Committee. Retired since 1996. Former Chairman and Chief
Executive Officer, The Perkins Elmer Corporation from 1990 to 1996. Mr. Kelley
is also a director of Hercules Incorporated, Arrow Electronics, Inc., and
Alliant Techsystems. Age 66. Address: 751 Broad Street, 23rd Floor, Newark, NJ
07102-3777.
BURTON G. MALKIEL -- Director since 1978 (current term expires April, 2002).
Chairman, Finance Committee; Member, Executive Committee; Member, Committee on
Dividends. Professor of Economics, Princeton University, since 1988. Dr. Malkiel
is also a director of Banco Bilbao Vizcaya, Baker Fentress & Company, The
Jeffrey Company. The Southern New England Telecommunications Company, and
Vanguard Group, Inc. Age 65. Address: Princeton University, 110 Fisher Hall,
Prospect Avenue, Princeton, NJ 08544-1021.
ARTHUR F. RYAN -- Chairman of the Board, President and Chief Executive Officer
of Prudential since 1994. President and Chief Operating Officer, Chase Manhattan
Corp. from 1990 to 1994, with Chase since 1972. Age 55. Address: 751 Broad
Street, Newark, NJ 07102.
IDA F.S. SCHMERTZ -- Director since 1997 (current term expires April, 2004).
Member, Finance Committee. Principal, Investment Strategies International since
1994. Age 63. Address: 751 Broad Street, 23rd Floor, Newark, NJ 07102.
CHARLES R. SITTER -- Director since 1995 (current term expires April, 1999).
Member, Finance Committee; Member, Committee on Dividends. Retired since 1996.
President, Exxon Corporation from 1993 to 1996. Mr. Sitter began his career with
Exxon in 1957. Age 67. Address: 5959 Las Colinas Boulevard, Irving, TX
75039-2298.
DONALD L. STAHELI -- Director since 1995 (current term expires April, 1999).
Member, Compensation Committee; Member, Auditing Committee. Retired since 1997.
Chairman and Chief Executive Officer, Continental Grain Company from 1994 to
1997. President and Chief Executive Officer, Continental Grain Company from 1988
to 1994. Mr. Staheli is also director of Bankers Trust Company and Bankers Trust
New York Corporation. Age 66. Address: 39 Locust Street, Suite 204, New Canaan,
CT 06840.
RICHARD M. THOMSON -- Director since 1976 (current term expires April, 2000).
Chairman, Executive Committee; Chairman, Compensation Committee; Member,
Committee on Nominations & Corporate Governance. Chairman of the Board, The
Toronto-Dominion Bank since 1997. Chairman and Chief Executive Officer from 1978
to 1997. Mr. Thomson is also a director of CGC, Inc., INCO, Limited, S.C.
Johnson & Son, Inc., The Thomson Corporation, and Canadian Occidental Petroleum,
Ltd. Age 64. Address: P.O. Box 1, Toronto-Dominion Centre, Toronto, Ontario, M5K
1A2, Canada.
JAMES A. UNRUH -- Director since 1996 (current term expires April, 2000).
Member, Compensation Committee. Retired since 1997. Chairman and Chief Executive
Officer, Unisys Corporation, from 1990 to 1997. Mr. Unruh is also a director of
Ameritech Corporation. Age 55. Address: Two Bala Plaza, Suite 300, Bala Cynwyd,
PA 19004.
P. ROY VAGELOS, M.D. -- Director since 1989 (current term expires April, 2001).
Chairman, Auditing Committee; Member, Executive Committee; Member, Committees on
Nominations & Corporate Governance. Chairman, Regeneron Pharmaceuticals since
1995. Chairman and Chief Executive Officer, Merck & Co., Inc. from 1986 to 1994.
Dr. Vagelos is also a director of The Estee Lauder Companies, Inc. and PepsiCo.,
Inc. Age 68. Address: One Crossroads Drive, Building A, 3rd Floor, Bedminster,
NJ 07921.
STANLEY C. VAN NESS -- Director since 1990 (current term expires April, 2002).
Chairman, Committee on Business Ethics; Member, Executive Committee; Member,
Auditing Committee. Counselor at Law, Picco Herbert Kennedy (law firm) from
1990. Mr. Van Ness is also a director of Jersey Central Power & Light Company.
Age 63. Address: 22 Chambers Street, Princeton, NJ 08542.
PAUL A. VOLCKER -- Director since 1988 (current term expires April, 2000).
Chairman, Committee on Dividends; Member, Executive Committee; Member, Committee
on Nominations & Corporate Governance. Consultant since 1996. Chairman, James D.
Wolfensohn, Inc. from 1988 to 1996. Chief Executive Officer, James D.
Wolfensohn, Inc. from 1995 to 1996. Mr. Volcker is also a public member of the
Board of Governors of the American Stock Exchange, a member of the Board of
Overseers of TIAA-CREF, and a director of Nestle, S.A., UAL Corporation, and
Bankers Trust New York Corporation. Age 70, Address: 610 Fifth Avenue, Suite
420, New York, NY 10020.
JOSEPH H. WILLIAMS -- Director since 1994 (current term expires April, 2002).
Member, Committee on Dividends; Member, Auditing Committee. Director, The
Williams Companies since 1971. Chairman & Chief Executive Officer, The Williams
Companies from 1979 to 1993. Mr. Williams is also a director of Flint
53
<PAGE>
Industries, The Orvis Company, and MTC Investors, LLC. Age 64. Address: One
Williams Center, Tulsa, OK 74172.
PRINCIPAL OFFICERS OF PRUDENTIAL
ARTHUR F. RYAN -- Chairman, President and Chief Executive Officer since 1994;
prior to 1994, President and Chief Operating Officer, Chase Manhattan
Corporation, New York, NY. Age 55.
E. MICHAEL CAULFIELD -- Chief Executive Officer, Prudential Investments since
1996; Chief Executive Officer, Money Management Group from 1995 to 1996; prior
to 1995, President, Prudential Preferred Financial Services. Age 51.
MICHELE S. DARLING -- Executive Vice President Human Resources since 1997; prior
to 1997, Executive Vice President, Canadian Imperial Bank of Commerce, Toronto,
Canada. Age 44.
ROBERT C. GOLDEN -- Executive Vice President Corporate Operations and Systems
since 1997; prior to 1997, Executive Vice President, Prudential Securities, New
York, NY. Age 51.
MARK B. GRIER -- Executive Vice President, Financial Management since 1997;
Chief Financial Officer from 1995 to 1997; prior to 1995, Executive Vice
President, Chase Manhattan Corporation, New York, NY. Age 44.
RODGER A. LAWSON -- Executive Vice President, Marketing and Planning since 1996;
President and CEO, Van Eck Global, New York, NY, from 1994 to 1996; prior to
1994, President and CEO, Global Private Banking, Bankers Trust Company, New
York, NY. Age 50.
JOHN V. SCICUTELLA -- Chief Executive Officer, Individual Insurance Group since
1997; Executive Vice President Operations and Systems from 1995 to 1997; prior
to 1995, Executive Vice President, Chase Manhattan Corporation. Age 48.
JOHN R. STRANGFELD -- Executive Vice President, Private Asset Management Group
(PAMG) since 1998; President, PAMG, from 1996 to 1998; prior to 1996, Senior
Managing Director. Age 44.
R. BROCK ARMSTRONG -- Senior Vice President, Individual Insurance Development
since 1997; prior to 1997, Executive Vice President, London Life Insurance
Company, London, Canada. Age 50.
JAMES J. AVERY, JR. -- Senior Vice President & Chief Actuary since 1997;
President Prudential Select from 1995 to 1997; prior to 1995, Chief Financial
Officer, Prudential Select. Age 46.
MARTIN A. BERKOWITZ -- Senior Vice President and Comptroller since 1995; prior
to 1995, Senior Vice President and CFO, Prudential Investment Corporation. Age
48.
WILLIAM M. BETHKE -- Chief Investment Officer since 1997; prior to 1997, Senior
Vice President. Age 50.
RICHARD J. CARBONE -- Senior Vice President and Chief Financial Officer since
1997. Controller, Salomon Brothers, New York, NY, from 1995 to 1997; prior to
1995, Controller, Bankers Trust, New York, NY. Age 50.
LEO J. CORBETT -- Senior Vice President, Individual Insurance Marketing since
1997; prior to 1997, Managing Director, Lehman Brothers, New York, NY. Age 49.
MARK R. FETTING -- President, Prudential Retirement Services since 1996; prior
to 1996, President, Prudential Defined Contribution Services. Age 43.
WILLIAM D. FRIEL -- Senior Vice President and Chief Information Officer since
1993. Age 59.
JONATHAN M. GREENE -- President, Investment Management since 1996; prior to
1996, Vice President, T. Rowe Price, Baltimore, MD. Age 54.
JEAN D. HAMILTON -- President, Diversified Group since 1995; prior to 1995,
President, Prudential Capital Group. Age 51.
RONALD P. JOELSON -- Senior Vice President, Guaranteed Products since 1997;
President, Prudential Investments Guaranteed Products from 1996 to 1998; prior
to 1996, Managing Director, Enterprise Planning Unit. Age 40.
IRA J. KLEINMAN -- Executive Vice President, International Insurance Group,
since 1997; prior to 1997, Senior Vice President. Age 51.
54
<PAGE>
NEIL A. McGUINNESS -- Senior Vice President, Marketing, Prudential Investments,
since 1996; prior to 1996, Managing Director, Putnam Investments, Boston, MA.
Age 51.
PRISCILLA A. MYERS -- Senior Vice President, Audit, Compliance and Investigation
since 1995. Vice President and Auditor from 1989 to 1995. Age 48.
RICHARD O. PAINTER -- President, Prudential Insurance & Financial Services since
1995; prior to 1995, Senior Vice President, New York Life, New York, NY. Age 50.
I. EDWARD PRICE -- Senior Vice President and Actuary since 1995; prior to 1995,
Chief Executive Officer, Prudential International Insurance. Age 55.
KIYOFUMI SAKAGUCHI --President, International Insurance Group since 1995; prior
to 1995, Chairman and CEO, The Prudential Life Insurance Co., Ltd., Japan. Age
55.
BRIAN M. STORMS -- President, Mutual Funds and Annuities, Prudential Investments
since 1996; prior to 1996, Managing Director, Fidelity Investments, Boston. Age
43.
ROBERT J. SULLIVAN -- Senior Vice President, Sales, Prudential Investments since
1997; prior to 1997, Managing Director, Fidelity Investments, Boston. Age 59.
SUSAN J. BLOUNT -- Vice President and Secretary since 1995; prior to 1995,
Assistant General Counsel. Age 40.
C. EDWARD CHAPLIN -- Vice President and Treasurer since 1995; prior to 1995,
Managing Director and Assistant Treasurer. Age 41.
Prudential officers are elected annually.
55
<PAGE>
FINANCIAL STATEMENTS
The consolidated financial statements of Prudential and subsidiaries included
herein should be distinguished from 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.
56
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
---------------------------------
March 5, 1998
To the Board of Directors and Policyholders of
The Prudential Insurance Company of America
In our opinion, the accompanying consolidated statements of financial position
and the related consolidated statements of operations, of changes in equity and
of cash flows present fairly, in all material respects, the financial position
of The Prudential Insurance Company of America and its subsidiaries at December
31, 1997 and 1996, and the results of their operations and their cash flows for
the years then ended in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audit. We conducted our audits of these statements in
accordance with generally accepted auditing standards which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.
Price Waterhouse LLP
1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
The Prudential Insurance Company of America
Newark, New Jersey
We have audited the accompanying consolidated statements of operations, changes
in equity, and cash flows of The Prudential Insurance Company of America and
subsidiaries for the year ended December 31, 1995. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on the 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.
In our opinion, such consolidated statements of operations, changes in equity,
and cash flows present fairly, in all material respects, the results of
operations and cash flows of The Prudential Insurance Company of America and
subsidiaries for the year ended December 31, 1995 in conformity with generally
accepted accounting principles.
Deloitte & Touche LLP
June 4, 1997
2
<PAGE>
<TABLE>
<CAPTION>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
DECEMBER 31, 1997 AND 1996 (IN MILLIONS)
1997 1996
----------- -----------
<S> <C> <C>
ASSETS
Fixed maturities:
Available for sale, at fair value (amortized cost, 1997: $71,496; 1996: $64,545) .......... $ 75,270 $ 66,553
Held to maturity, at amortized cost (fair value, 1997: $19,894; 1996: $21,362) ............ 18,700 20,403
Trading account assets, at fair value........................................................ 6,044 4,219
Equity securities, available for sale, at fair value (cost, 1997: $2,376; 1996: $2,103) ..... 2,810 2,622
Mortgage loans on real estate ............................................................... 16,004 17,097
Investment real estate ...................................................................... 1,519 2,586
Policy loans ................................................................................ 6,827 6,692
Securities purchased under agreements to resell ............................................. 8,661 5,347
Cash collateral for borrowed securities ..................................................... 5,047 2,416
Short-term investments ...................................................................... 12,106 9,294
Other long-term investments ................................................................. 3,360 2,995
----------- -----------
Total investments ......................................................................... 156,348 140,224
Cash ........................................................................................ 3,636 2,091
Deferred policy acquisition costs ........................................................... 5,994 6,291
Accrued investment income ................................................................... 1,909 1,828
Receivables from broker-dealer clients ...................................................... 6,273 5,281
Other assets ................................................................................ 11,276 9,990
Separate Account assets ..................................................................... 74,046 63,358
----------- -----------
TOTAL ASSETS .................................................................................. $ 259,482 $ 229,063
=========== ===========
LIABILITIES AND EQUITY
LIABILITIES
Future policy benefits ...................................................................... $ 65,581 $ 63,955
Policyholders' account balances ............................................................. 32,941 36,009
Other policyholders' liabilities ............................................................ 6,659 6,043
Policyholders' dividends .................................................................... 1,269 714
Securities sold under agreements to repurchase .............................................. 12,347 7,503
Cash collateral for loaned securities ....................................................... 14,117 8,449
Short-term debt ............................................................................. 6,774 6,562
Long-term debt .............................................................................. 4,273 3,760
Income taxes payable ........................................................................ 500 1,544
Payables to broker-dealer clients ........................................................... 3,338 3,018
Securities sold but not yet purchased ....................................................... 3,533 1,900
Other liabilities ........................................................................... 14,774 8,238
Separate Account liabilities ................................................................ 73,658 62,845
----------- -----------
TOTAL LIABILITIES ......................................................................... 239,764 210,540
=========== ===========
COMMITMENTS AND CONTINGENCIES (SEE NOTES 12, 13 AND 14)
EQUITY
Retained earnings ........................................................................... 18,051 17,443
Net unrealized investment gains ............................................................. 1,752 1,136
Foreign currency translation adjustments .................................................... (85) (56)
----------- -----------
TOTAL EQUITY .............................................................................. 19,718 18,523
----------- -----------
TOTAL LIABILITIES AND EQUITY .................................................................. $ 259,482 $ 229,063
=========== ===========
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3
<PAGE>
<TABLE>
<CAPTION>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (IN MILLIONS)
1997 1996 1995
------------ ----------- -----------
<S> <C> <C> <C>
REVENUES
Premiums .................................................................... $ 18,534 $ 18,962 $ 19,783
Policy charges and fee income ............................................... 1,828 1,912 1,824
Net investment income ....................................................... 9,863 9,742 10,178
Realized investment gains, net .............................................. 2,187 1,138 1,503
Commissions and other income ................................................ 4,661 4,521 3,952
------------ ----------- -----------
Total revenues ............................................................ 37,073 36,275 37,240
------------ ----------- -----------
BENEFITS AND EXPENSES
Policyholders' benefits ..................................................... 18,208 19,306 19,470
Interest credited to policyholders' account balances ........................ 2,043 2,251 2,739
Dividends to policyholders .................................................. 2,429 2,339 2,317
General and administrative expenses ......................................... 11,926 10,875 10,345
Sales practice remediation costs ............................................ 1,640 410 --
------------ ----------- -----------
Total benefits and expenses ............................................... 36,246 35,181 34,871
------------ ----------- -----------
INCOME FROM OPERATIONS BEFORE INCOME TAXES .................................... 827 1,094 2,369
------------ ----------- -----------
Income taxes
Current ................................................................... (46) 406 1,293
Deferred .................................................................. 263 (390) (167)
------------ ----------- -----------
217 16 1,126
------------ ----------- -----------
NET INCOME .................................................................... $ 610 $ 1,078 $ 1,243
============ =========== ===========
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (IN MILLIONS)
<TABLE>
<CAPTION>
FOREIGN NET
CURRENCY UNREALIZED
RETAINED TRANSLATION INVESTMENT TOTAL
EARNINGS ADJUSTMENTS GAINS EQUITY
--------- ----------- ---------- ---------
<S> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1995 ........................ $ 15,126 $ (42) $ 16 $ 15,100
Net income .................................... 1,243 -- -- 1,243
Change in foreign currency translation
adjustments ................................. -- 18 -- 18
Change in net unrealized investment gains ..... -- -- 2,381 2,381
--------- --------- --------- ---------
BALANCE, DECEMBER 31, 1995 ...................... 16,369 (24) 2,397 18,742
Net income .................................... 1,078 -- -- 1,078
Change in foreign currency translation
adjustments ................................. -- (32) -- (32)
Change in net unrealized investment gains ..... -- -- (1,261) (1,261)
Additional pension liability adjustment ....... (4) -- -- (4)
--------- --------- --------- ---------
BALANCE, DECEMBER 31, 1996 ...................... 17,443 (56) 1,136 18,523
Net income .................................... 610 -- -- 610
Change in foreign currency translation
adjustments ................................. -- (29) -- (29)
Change in net unrealized investment gains ..... -- -- 616 616
Additional pension liability adjustment ....... (2) -- -- (2)
--------- --------- --------- ---------
BALANCE, DECEMBER 31, 1997 ...................... $ 18,051 $ (85) $ 1,752 $ 19,718
========= ========= ========= =========
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (IN MILLIONS)
<TABLE>
<CAPTION>
1997 1996 1995
---------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ..................................................... $ 610 $ 1,078 $ 1,243
Adjustments to reconcile net income to
net cash provided by operating activities:
Realized investment gains, net ............................... (2,187) (1,138) (1,503)
Policy charges and fee income ................................ (258) (208) (201)
Interest credited to policyholders' account balances ......... 2,043 2,128 2,616
Depreciation and amortization ................................ 258 266 398
Other, net ................................................... 4,681 (1,180) (2,628)
Loss (gain) on divestitures .................................. -- (116) 297
Change in:
Deferred policy acquisition costs .......................... 143 (122) (214)
Policy liabilities and insurance reserves .................. 2,477 2,471 2,382
Securities purchased under agreements to resell ............ (3,314) (217) 461
Trading account assets ..................................... (1,825) (433) 2,579
Income taxes receivable/payable ............................ (1,391) (937) 194
Cash collateral for borrowed securities .................... (2,631) (332) 25
Broker-dealer client receivables/payables .................. (672) (607) (420)
Securities sold but not yet purchased ...................... 1,633 251 (225)
Securities sold under agreements to repurchase ............. 4,844 (490) (712)
--------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES ...................... $ 4,411 $ 414 $ 4,292
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from the sale/maturity of:
Fixed maturities, available for sale .......................... $ 123,550 $ 123,368 $ 97,084
Fixed maturities, held to maturity ............................ 4,042 4,268 3,767
Equity securities, available for sale ......................... 2,572 2,162 2,370
Mortgage loans on real estate ................................. 4,299 5,731 5,553
Investment real estate ........................................ 1,842 615 435
Other long-term investments ................................... 5,081 3,203 3,385
Divestitures .................................................. -- 52 790
Payments for the purchase of:
Fixed maturities, available for sale .......................... (129,854) (125,093) (101,197)
Fixed maturities, held to maturity ............................ (2,317) (2,844) (6,803)
Equity securities, available for sale ......................... (2,461) (2,384) (1,391)
Mortgage loans on real estate ................................. (3,363) (1,906) (3,015)
Investment real estate ........................................ (241) (142) (387)
Other long-term investments ................................... (4,148) (2,060) (1,849)
Cash collateral for securities loaned (net) .................... 5,668 2,891 3,471
Short-term investments (net) ................................... (2,848) (1,915) 2,793
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES ...................... $ 1,822 $ 5,946 $ 5,006
--------- --------- ---------
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (IN MILLIONS)
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Policyholders' account deposits ................................ $ 5,020 $ 2,799 $ 2,724
Policyholders' account withdrawals ............................. (9,873) (8,099) (9,164)
Net increase(decrease) in short-term debt ...................... 305 583 (3,077)
Proceeds from the issuance of long-term debt ................... 324 93 763
Repayments of long-term debt ................................... (464) (1,306) (30)
--------- --------- ---------
CASH FLOWS USED IN FINANCING ACTIVITIES ................... (4,688) (5,930) (8,784)
--------- --------- ---------
NET INCREASE IN CASH ............................................. 1,545 430 514
CASH, BEGINNING OF YEAR .......................................... 2,091 1,661 1,147
--------- --------- ---------
CASH, END OF YEAR ................................................ $ 3,636 $ 2,091 $ 1,661
========= ========= =========
SUPPLEMENTAL CASH FLOW INFORMATION:
Income taxes paid ................................................ $ 968 $ 793 $ 430
--------- --------- ---------
Interest paid .................................................... $ 1,243 $ 1,404 $ 1,413
--------- --------- ---------
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS
The Prudential Insurance Company of America and its subsidiaries
(collectively, "the Company") provide insurance and financial services
throughout the United States and many locations worldwide. Principal
products and services provided include life and health insurance, annuities,
pension and retirement related investments and administration, managed
healthcare, property and casualty insurance, securities brokerage, asset
management, investment advisory services and real estate brokerage.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the Prudential
Insurance Company of America, a mutual life insurance company, and its
subsidiaries, and those partnerships and joint ventures in which the Company
has a controlling interest. The consolidated financial statements have been
prepared in accordance with generally accepted accounting principles
("GAAP"). All significant intercompany balances and transactions have been
eliminated.
USE OF ESTIMATES
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the period. Actual results could differ from
those estimates.
INVESTMENTS
FIXED MATURITIES classified as "available for sale" are carried at estimated
fair value. Fixed maturities that the Company has both the positive intent
and ability to hold to maturity are stated at amortized cost and classified
as "held to maturity." The amortized cost of fixed maturities are written
down to estimated fair value when considered impaired and the decline in
value is considered to be other than temporary. Unrealized gains and losses
on fixed maturities "available for sale," net of income tax, the effect on
deferred policy acquisition costs and participating annuity contracts that
would result from the realization of unrealized gains and losses, are
included in a separate component of equity, "Net unrealized investment
gains."
TRADING ACCOUNT ASSETS are carried at estimated fair value.
EQUITY SECURITIES, available for sale, comprised of common and
non-redeemable preferred stock, are carried at estimated fair value. The
associated unrealized gains and losses, net of income tax, the effect on
deferred policy acquisition costs and participating annuity contracts that
would result from the realization of unrealized gains and losses, are
included in a separate component of equity, "Net unrealized investment
gains."
MORTGAGE LOANS ON REAL ESTATE are stated primarily at unpaid principal
balances, net of unamortized discounts and allowance for losses on impaired
loans. Impaired loans are identified by management as loans in which a
probability exists that all amounts due according to the contractual terms
of the loan agreement will not be collected. Impaired loans are measured
based on the present value of expected future cash flows, discounted at the
loan's effective interest rate or the fair value of the collateral, if the
loan is collateral dependent. The Company's periodic evaluation of the
adequacy of the allowance for losses is based on a number of factors,
including past loan loss experience, known and inherent risks in the
portfolio, adverse situations that may affect the borrower's ability to
repay, the estimated value of the underlying collateral, composition of the
loan portfolio, current economic conditions and other relevant factors.
This evaluation is inherently subjective as it requires estimating the
amounts and timing of future cash flows expected to be received on impaired
loans.
Interest received on impaired loans, including loans that were previously
modified in a troubled debt restructuring, is either applied against the
principal or reported as revenue, according to management's judgment as to
the collectibility of principal. Management discontinues the accrual of
interest on impaired loans after the loans are 90 days delinquent as to
principal or interest or earlier when management has serious doubts about
collectibility. When a loan is recognized as
8
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
impaired, any accrued but unpaid interest previously recorded on such loan
is reversed against interest income of the current period. Generally, a loan
is restored to accrual status only after all delinquent interest and
principal are brought current and, in the case of loans where interest has
been interrupted for a substantial period, a regular payment performance has
been established.
INVESTMENT REAL ESTATE, which the Company has the intent to hold for the
production of income, is carried at depreciated cost less any write-downs to
fair value for impairment losses. Depreciation on real estate is computed
using the straight-line method over the estimated lives of the properties.
Real estate to be disposed of is carried at the lower of depreciated cost or
fair value less selling costs and is not depreciated once classified as
such.
POLICY LOANS are carried at unpaid principal balances.
SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL AND SECURITIES SOLD UNDER
AGREEMENTS TO REPURCHASE are carried at the amounts at which the securities
will be subsequently resold or reacquired, including accrued interest, as
specified in the respective agreements. The Company's policy is to take
possession of securities purchased under agreements to resell. The market
value of securities to be repurchased is monitored, and additional
collateral is requested, where appropriate, to protect against credit
exposure.
SECURITIES BORROWED AND SECURITIES LOANED are recorded at the amount of cash
advanced or received. With respect to securities loaned, the Company obtains
collateral in an amount equal to 102% and 105% of the fair value of the
domestic and foreign securities, respectively. The Company monitors the
market value of securities borrowed and loaned on a daily basis with
additional collateral obtained as necessary. Non-cash collateral received is
not reflected in the Consolidated Statements of Financial Position.
Substantially, all the Company's securities borrowed contracts are with
other brokers and dealers, commercial banks and institutional clients.
Substantially, all of the Company's securities loaned are with large
brokerage firms.
These transactions are used to generate net investment income and facilitate
trading activity. These instruments are short-term in nature (usually 30
days or less) and are collateralized principally by U.S. Government and
mortgage-backed securities. The carrying amounts of these instruments
approximate fair value because of the relatively short period of time
between the origination of the instruments and their expected realization.
SHORT-TERM INVESTMENTS, including highly liquid debt instruments purchased
with an original maturity of twelve months or less, are carried at amortized
cost, which approximates fair value.
OTHER LONG-TERM INVESTMENTS primarily represent the Company's investments
in joint ventures and partnerships in which the Company does not have
control and derivatives held for purposes other than trading. Joint venture
and partnership investments are recorded using the equity method of
accounting, reduced for other than temporary declines in value.
REALIZED INVESTMENT GAINS, NET are computed using the specific
identification method. Costs of fixed maturities and equity securities are
adjusted for impairments considered to be other than temporary. Allowances
for losses on mortgage loans on real estate are netted against asset
categories to which they apply and provisions for losses on investments are
included in "Realized investment gains, net." Unrealized gains and losses on
trading account assets are included in "Commissions and other income."
CASH
Cash includes cash on hand, amounts due from banks, and money market
instruments.
DEFERRED POLICY ACQUISITION COSTS
The costs which vary with and that are related primarily to the production
of new insurance business are deferred to the extent such costs are deemed
recoverable from future profits. Such costs include certain commissions,
costs of policy issuance and underwriting, and certain variable field office
expenses. Deferred policy acquisition costs are subject to recoverability
testing at the time of policy issue and loss recognition testing at the end
of each accounting period. Deferred policy acquisition costs are adjusted
for the impact of unrealized gains or losses on investments as if these
gains or losses had been realized, with corresponding credits or charges
included in equity.
9
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
For life insurance, deferred policy acquisition costs are amortized over the
expected life of the contracts (up to 45 years) in proportion to estimated
gross margins based on historical and anticipated future experience, which
is updated periodically. The effect of changes in estimated gross margins is
reflected in earnings in the period they are revised. Policy acquisition
costs related to interest-sensitive products and certain investment-type
products are deferred and amortized over the expected life of the contracts
(periods ranging from 15 to 30 years) in proportion to estimated gross
profits arising principally from investment results, mortality and expense
margins and surrender charges based on historical and anticipated future
experience, updated periodically. The effect of revisions to estimated gross
profits on unamortized deferred acquisition costs is reflected in earnings
in the period such estimated gross profits are revised.
For property and casualty contracts, deferred policy acquisition costs are
amortized over the period in which related premiums are earned. Future
investment income is considered in determining the recoverability of
deferred policy acquisition costs.
For disability insurance, health insurance, group life insurance and most
group annuities, acquisition costs are expensed as incurred.
POLICYHOLDERS' DIVIDENDS
The amount of the 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, persistency and expense experience for the year and judgment as
to the appropriate level of statutory surplus to be retained by the Company.
SEPARATE ACCOUNT ASSETS AND LIABILITIES
Separate Account assets and liabilities are reported at estimated fair value
and represent segregated funds which are invested for certain policyholders,
pension fund and other customers. The assets consist of common stocks, fixed
maturities, real estate related securities, real estate mortgage loans and
short-term investments. The assets of each account are legally
segregated and are not subject to claims that arise out of any other
business of the Company. Investment risks associated with market value
changes are generally borne by the customers, except to the extent of
minimum guarantees made by the Company with respect to certain accounts. The
investment income and gains or losses for Separate Accounts generally accrue
to the policyholders and are not included in the Consolidated Statement of
Operations. Mortality, policy administration and surrender charges on the
accounts are included in "Policy charges and fee income."
INSURANCE REVENUE AND EXPENSE RECOGNITION
Premiums from participating insurance policies are generally recognized when
due. Benefits are recorded as an expense when they are incurred. A liability
for future policy benefits is recorded using the net level premium method.
Premiums from non-participating group annuities with life contingencies are
generally recognized when due. For single premium immediate annuities and
structured settlements, premiums are recognized when due with any excess
profit deferred and recognized in a constant relationship to insurance
in-force or, for annuities, the amount of expected future benefit payments.
Amounts received as payment for interest sensitive investment contracts,
deferred annuities and participating group annuities are reported as
deposits to "Policyholders' account balances." Revenues from these contracts
are reflected in "Policy charges and fee income" and consist primarily of
fees assessed during the period against the policyholders' account balances
for mortality charges, policy administration charges, surrender charges and
interest earned from the investment of these account balances. Benefits and
expenses for these products include claims in excess of related account
balances, expenses of contract administration, interest credited and
amortization of deferred policy acquisition costs.
For disability insurance, group life insurance, health insurance and
property and casualty insurance, premiums are recognized over the period to
which the premiums relate in proportion to the amount of insurance
protection provided. Claim and claim adjustment expenses are recognized when
incurred.
10
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FOREIGN CURRENCY TRANSLATION ADJUSTMENTS
Assets and liabilities of foreign operations and subsidiaries reported in
other than U.S. dollars are translated at the exchange rate in effect at the
end of the period. Revenues, benefits and other expenses are translated at
the average rate prevailing during the period. Translation adjustments
arising from the use of differing exchange rates from period to period are
charged or credited directly to equity. The cumulative effect of changes in
foreign exchange rates are included in "Foreign currency translation
adjustments."
COMMISSIONS AND OTHER INCOME
Commissions and other income principally includes securities and
commodities, commission revenues, asset management fees, investment banking
revenue and realized and unrealized gains on trading account assets of the
Company's broker-dealer subsidiary.
DERIVATIVE FINANCIAL INSTRUMENTS
Derivatives include swaps, forwards, futures, options and loan commitments
subject to market risk, all of which are used by the Company in both trading
and other than trading activities. Income and expenses related to
derivatives used to hedge are recorded on the accrual basis as an adjustment
to the carrying amount or to the yield of the related assets or liabilities
over the periods covered by the derivative contracts. Gains and losses
relating to early terminations of interest rate swaps used to hedge are
deferred and amortized over the remaining period originally covered by the
swap. Gains and losses relating to derivatives used to hedge the risks
associated with anticipated transactions are deferred and utilized to adjust
the basis of the transaction once it has closed. If it is determined that
the transaction will not close, such gains and losses are included in
"Realized investment gains, net."
DERIVATIVES HELD FOR TRADING PURPOSES are used in the Company's securities
broker-dealer business and in a limited-purpose swap subsidiary to meet the
risk management needs of its customers by structuring transactions that
allow customers to manage their exposure to interest rates, foreign exchange
rates, indices or prices of securities and commodities and when possible,
matched trading positions are established to minimize risk to the Company.
Derivatives used for trading purposes are recorded at fair value as of the
reporting date. Realized and unrealized changes in fair values are included
in "Commissions and other income" in the period in which the changes occur.
DERIVATIVES HELD FOR PURPOSES OTHER THAN TRADING are primarily used to hedge
or reduce exposure to interest rate and foreign currency risks associated
with assets held or expected to be purchased or sold, and liabilities
incurred or expected to be incurred. Additionally, other than trading
derivatives are used to change the characteristics of the Company's
asset/liability mix consistent with the Company's risk management
activities.
INCOME TAXES
The Company and its domestic subsidiaries file a consolidated federal income
tax return. The Internal Revenue Code (the "Code") limits the amount of
non-life insurance losses that may offset life insurance company taxable
income. The Code also imposes an "equity tax" on mutual life insurance
companies which, in effect, imputes an additional tax to the Company based
on a formula that calculates the difference between stock and mutual
insurance companies' earnings. Income taxes include an estimate for changes
in the total equity tax to be paid for current and prior years. Subsidiaries
operating outside the United States are taxed under applicable foreign
statutes.
Deferred income taxes are generally recognized, based on enacted rates, when
assets and liabilities have different values for financial statement and tax
reporting purposes. A valuation allowance is recorded to reduce a deferred
tax asset to that portion which management believes is more likely than not
to be realized.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1996, the Financial Accounting Standards Board ("FASB") issued the
Statement of Financial Accounting Standards ("SFAS") No. 125, "Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities" ("SFAS
11
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
125"). The statement provides accounting and reporting standards for
transfers and servicing of financial assets and extinguishments of
liabilities and provides consistent standards for distinguishing transfers
of financial assets that are sales from transfers that are secured
borrowings. SFAS 125 became effective January 1, 1997 and is to be applied
prospectively. Subsequent to June 1996, FASB issued SFAS No. 127 "Deferral
of the Effective Date of Certain Provisions of SFAS 125" ("SFAS 127"). SFAS
127 delays the implementation of SFAS 125 for one year for certain
provisions, including repurchase agreements, dollar rolls, securities
lending and similar transactions. The Company will delay implementation
with respect to those affected provisions. Adoption of SFAS 125 has not and
will not have a material impact on the Company's results of operations,
financial condition and liquidity.
In June of 1997, FASB issued SFAS No. 130, "Reporting Comprehensive Income,"
which is effective for years beginning after December 15, 1997. This
statement defines comprehensive income as "the change in equity of a
business enterprise during a period from transactions and other events and
circumstances from non-owner sources, excluding investments by owners and
distributions to owners" and establishes standards for reporting and
displaying comprehensive income and its components in financial statements.
The statement requires that the Company classify items of other
comprehensive income by their nature and display the accumulated balance of
other comprehensive income separately from retained earnings in the equity
section of the Statement of Financial Position. In addition,
reclassification of financial statements for earlier periods must be
provided for comparative purposes.
RECLASSIFICATIONS
Certain amounts in the prior years have been reclassified to conform to
current year presentation.
12
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. INVESTMENTS
FIXED MATURITIES AND EQUITY SECURITIES
The following tables provide additional information relating to fixed
maturities and equity securities (excluding trading account assets) as of
December 31:
<TABLE>
<CAPTION>
1997
------------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
-------------- -------------- -------------- ------------
FIXED MATURITIES AVAILABLE FOR SALE (IN MILLIONS)
<S> <C> <C> <C> <C>
U.S. Treasury securities and obligations of
U.S. government corporations and agencies......... $ 9,755 $ 783 $ -- $ 10,538
Obligations of U.S. states and
their political subdivisions..................... 1,375 93 -- 1,468
Foreign government bonds............................ 3,177 218 17 3,378
Corporate securities................................ 49,997 2,601 144 52,454
Mortgage-backed securities.......................... 6,828 210 5 7,033
Other fixed maturities.............................. 364 35 -- 399
-------------- -------------- -------------- ------------
Total fixed maturities available for sale........... $ 71,496 $ 3,940 $ 166 $ 75,270
============== ============== ============== ============
EQUITY SECURITIES AVAILABLE FOR SALE................ $ 2,376 $ 680 $ 246 $ 2,810
============== ============== ============== ============
<CAPTION>
1997
------------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
-------------- -------------- -------------- ------------
FIXED MATURITIES HELD TO MATURITY (IN MILLIONS)
<S> <C> <C> <C> <C>
U.S. Treasury securities and obligations of
U.S. government corporations and agencies......... $ 88 $ - $ - $ 88
Obligations of U.S. states and
their political subdivisions...................... 152 4 1 155
Foreign government bonds............................ 33 5 - 38
Corporate securities................................ 18,282 1,212 34 19,460
Mortgage-backed securities.......................... 1 - - 1
Other fixed maturities.............................. 144 8 - 152
-------------- -------------- -------------- ------------
Total fixed maturities held to maturity............. $ 18,700 $ 1,229 $ 35 $ 19,894
============== ============== ============== ============
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. INVESTMENTS (CONTINUED)
1996
-------------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
--------------- -------------- -------------- ------------
FIXED MATURITIES AVAILABLE FOR SALE (IN MILLIONS)
<S> <C> <C> <C> <C>
U.S. Treasury securities and obligations of
U.S. government corporations and agencies......... $ 10,618 $ 361 $ 77 $ 10,902
Obligations of U.S. states and
their political subdivisions...................... 1,104 29 2 1,131
Foreign government bonds............................ 2,814 137 12 2,939
Corporate securities................................ 43,593 1,737 284 45,046
Mortgage-backed securities.......................... 6,377 140 21 6,496
Other fixed maturities.............................. 39 1 1 39
--------------- -------------- -------------- ------------
Total fixed maturities available for sale........... $ 64,545 $ 2,405 $ 397 $ 66,553
=============== ============== ============== ============
EQUITY SECURITIES AVAILABLE FOR SALE................ $ 2,103 $ 659 $ 140 $ 2,622
=============== ============== ============== ============
<CAPTION>
1996
-------------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
--------------- -------------- -------------- ------------
FIXED MATURITIES HELD TO MATURITY (IN MILLIONS)
<S> <C> <C> <C> <C>
U.S. Treasury securities and obligations of
U.S. government corporations and agencies......... $ 309 $ 3 $ 6 $ 306
Obligations of U.S. states and
their political subdivisions...................... 7 -- -- 7
Foreign government bonds............................ 162 11 -- 173
Corporate securities................................ 19,886 1,033 82 20,837
Mortgage-backed securities.......................... 26 -- -- 26
Other fixed maturities.............................. 13 -- -- 13
--------------- -------------- -------------- ------------
Total fixed maturities held to maturity............. $ 20,403 $ 1,047 $ 88 $ 21,362
=============== ============== ============== ============
</TABLE>
14
<PAGE>
INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. INVESTMENTS (CONTINUED)
The amortized cost and estimated fair value of fixed maturities by
contractual maturities at December 31, 1997, is shown below:
<TABLE>
<CAPTION>
AVAILABLE FOR SALE HELD TO MATURITY
-------------------------------- ------------------------------
ESTIMATED ESTIMATED
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
-------------- -------------- -------------- ------------
(IN MILLIONS) (IN MILLIONS)
<S> <C> <C> <C> <C>
Due in one year or less....................... $ 1,991 $ 2,011 $ 686 $ 695
Due after one year through five years......... 18,916 19,226 4,496 4,659
Due after five years through ten years........ 16,776 17,494 7,161 7,551
Due after ten years........................... 26,985 29,506 6,356 6,988
Mortgage-backed securities.................... 6,828 7,033 1 1
-------------- -------------- -------------- ------------
Total......................................... $ 71,496 $ 75,270 $ 18,700 $ 19,894
============== ============== ============== ============
</TABLE>
Actual maturities may differ from contractual maturities because issuers have
the right to call or prepay obligations
Proceeds from the repayment of held to maturity fixed maturities during 1997,
1996 and 1995 were $4,042 million, $4,268 million, and $3,767 million,
respectively. Gross gains of $62 million, $78 million, and $27 million, and
gross losses of $1 million, $7 million, and $0.2 million were realized on
prepayment of held to maturity fixed maturities during 1997, 1996 and 1995,
respectively.
Proceeds from the sale of available for sale fixed maturities during 1997,
1996 and 1995 were $120,604 million, $121,910 million and $96,134 million,
respectively. Proceeds from the maturity of available for sale fixed
maturities during 1997, 1996 and 1995 were $2,946 million, $1,458 million,
and $950 million, respectively. Gross gains of $1,310 million, $1,562
million, and $2,052 million and gross losses of $639 million, $1,026 million,
and $941 million were realized on sales and prepayments of available for sale
fixed maturities during 1997, 1996 and 1995, respectively.
Write downs for impairments of fixed maturities which were deemed to be other
than temporary were $13 million, $54 million and $100 million for the years
1997, 1996 and 1995, respectively.
During the year ended December 31, 1997, there were no securities classified
as held to maturity that were sold and two securities so classified were
transferred to the available for sale portfolio. These actions were taken as
a result of a significant deterioration in credit worthiness. The aggregate
amortized cost of the securities transferred was $26 million with gross
unrealized investment gains of $0.5 million charged to "Net unrealized
investment gains."
During the year ended December 31, 1996, one security classified as held to
maturity was sold and two securities so classified were transferred to the
available for sale portfolio. These actions were taken as a result of a
significant deterioration in credit worthiness. The amortized cost of the
security sold was $35 million with a related realized investment loss of $0.7
million; the aggregate amortized cost of the securities transferred was $26
million with gross unrealized investment losses of $6 million charged to "Net
unrealized investment gains."
15
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. INVESTMENTS (CONTINUED)
MORTGAGE LOANS ON REAL ESTATE
The Company's mortgage loans were collateralized by the following property
types at December 31:
<TABLE>
<CAPTION>
1997 1996
--------------------------------- --------------------------------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Office buildings............................... $ 4,692 28.5% $ 6,056 34.4%
Retail stores.................................. 3,078 18.7% 3,676 20.9%
Residential properties......................... 891 5.4% 961 5.4%
Apartment complexes............................ 3,551 21.6% 2,954 16.8%
Industrial buildings........................... 1,958 11.9% 1,807 10.3%
Agricultural properties........................ 1,666 10.1% 1,550 8.8%
Other.......................................... 618 3.8% 608 3.4%
--------------- --------- -------------- ------
Subtotal 16,454 100.0% 17,612 100.0%
========= ======
Allowance for losses........................... (450) (515)
--------------- --------------
Net carrying value............................. $ 16,004 $ 17,097
=============== ==============
</TABLE>
The mortgage loans are geographically dispersed throughout the United
States and Canada with the largest concentrations in California (25.3%) and
New York (8.3%) at December 31, 1997. Included in the above balances are
mortgage loans receivable from affiliated joint ventures of $225 million
and $461 million at December 31, 1997 and 1996, respectively.
Activity in the allowance for losses for all mortgage loans, for the years
ended December 31, is summarized as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---------------- ---------------- ---------------
(IN MILLIONS)
<S> <C> <C> <C>
Allowance for losses, beginning of year.............. $ 515 $ 862 $ 1,004
Additions charged to operations...................... 19 9 6
Release of allowance for losses...................... (60) (256) (32)
Charge-offs, net of recoveries....................... (24) (100) (116)
--------------- ---------------- ---------------
Allowance for losses, end of year.................... $ 450 $ 515 $ 862
================ ================ ===============
</TABLE>
The $60 million, $256 million and $32 million reduction of the mortgage
loan allowance for losses in 1997, 1996 and 1995, respectively, is
primarily attributable to the improved economic climate, changes in the
nature and mix of borrowers and underlying collateral and a significant
decrease in impaired loans consistent with a general decrease in the
mortgage loan portfolio due to prepayments, sales and foreclosures.
16
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. INVESTMENTS (CONTINUED)
Impaired mortgage loans and related allowance for losses at December 31,
are as follows:
<TABLE>
<CAPTION>
1997 1996
----------------- ------------------
(IN MILLIONS)
<S> <C> <C>
Impaired mortgage loans with allowance for losses ............. $ 330 $ 941
Impaired mortgage loans with no allowance for losses .......... 1,303 1,491
Allowance for losses .......................................... (97) (189)
----------------- ------------------
Net carrying value of impaired mortgage loans ................. $ 1,536 $ 2,243
================= ==================
</TABLE>
Impaired mortgage loans with no provision for losses are loans where the
fair value of the collateral or the net present value of the expected
future cash flows related to the loan equals or exceeds the recorded
investment. The average recorded investment in impaired loans before
allowance for losses was $2,102 million, $2,842 million and $4,146 million
during 1997, 1996 and 1995, respectively. Net investment income recognized
on these loans totaled $140 million, $265 million and $415 million for the
years ended December 31, 1997, 1996 and 1995, respectively.
INVESTMENT REAL ESTATE
The Company's "investment real estate" of $1,519 million and $2,586 million
at December 31, 1997 and 1996, respectively, is held through direct
ownership. Of the Company's real estate, $1,490 million and $406 million
consists of commercial and agricultural assets held for disposal at
December 31, 1997 and 1996, respectively. Impairment losses and the
valuation allowances aggregated $40 million, $38 million and $124 million
for the years ended December 31, 1997, 1996 and 1995, respectively, and are
included in "Realized investment gains, net."
RESTRICTED ASSETS AND SPECIAL DEPOSITS
Assets of $2,783 million and $2,453 million at December 31, 1997 and 1996,
respectively, were on deposit with governmental authorities or trustees as
required by certain insurance laws. Additionally, assets valued at $2,352
million at December 31, 1997, were held in voluntary trusts. Of this
amount, $1,801 million related to the multi-state policyholder settlement
as described in Note 14. The remainder relates to trusts established to
fund guaranteed dividends to certain policyholders. The terms of these
trusts provide that the assets are to be used for payment of the designated
settlement and dividend benefits, as the case may be. Assets valued at $741
million and $3,414 million at December 31, 1997 and 1996, respectively,
were maintained as compensating balances or pledged as collateral for bank
loans and other financing agreements. Restricted cash and securities of
$1,835 million and $1,614 million at December 31, 1997, and 1996,
respectively, were included in the consolidated financial statements. The
restricted cash represents funds deposited by clients and funds accruing to
clients as a result of trades or contracts.
OTHER LONG-TERM INVESTMENTS
The Company's "Other long-term investments" of $3,360 million and $2,995
million as of December 31, 1997 and 1996, respectively, are composed of
$1,349 million and $832 million in real estate related interests and $2,011
million and $2,163 million of non-real estate related interests, including
a $149 million net investment in a leveraged lease entered into in 1997.
The Company's share of net income from such entities was $411 million, $245
million, and $326 million for 1997, 1996, and 1995, respectively, and is
reported in "Net investment income."
17
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. INVESTMENTS (CONTINUED)
INVESTMENT INCOME AND INVESTMENT GAINS AND LOSSES
NET INVESTMENT INCOME arose from the following sources for the years ended
December 31:
<TABLE>
<CAPTION>
1997 1996 1995
-------------- -------------- -----------
(IN MILLIONS)
<S> <C> <C> <C>
Fixed maturities-available for sale........................ $ 5,074 $ 4,871 $ 4,774
Fixed maturities-held to maturity.......................... 1,622 1,793 1,717
Trading account assets..................................... 504 444 588
Equity securities-available for sale ...................... 52 81 57
Mortgage loans on real estate.............................. 1,555 1,690 2,075
Real estate ............................................... 565 685 742
Policy loans............................................... 396 384 392
Securities purchased under agreements to resell............ 15 11 19
Receivables from broker-dealer clients..................... 706 579 678
Short-term investments..................................... 697 536 590
Other investment income.................................... 573 725 983
-------------- -------------- -------------
Gross investment income.................................... 11,759 11,799 12,615
Less investment expenses................................... (1,896) (2,057) (2,437)
-------------- -------------- -------------
Net investment income...................................... $ 9,863 $ 9,742 $ 10,178
============== ============== =============
</TABLE>
REALIZED INVESTMENT GAINS, NET, including changes in allowances for losses
and charges for other than temporary reductions in value, for the years
ended December 31, were from the following sources:
<TABLE>
<CAPTION>
1997 1996 1995
-------------- -------------- -----------
(IN MILLIONS)
<S> <C> <C> <C>
Fixed maturities....................................... $ 684 $ 513 $ 1,180
Mortgage loans on real estate ......................... 68 248 67
Investment real estate ................................ 700 76 (19)
Equity securities-available for sale .................. 363 267 400
Other gains (losses)................................... 372 34 (125)
-------------- -------------- -----------
Realized investment gains, net......................... $ 2,187 $ 1,138 $ 1,503
============== ============== ===========
</TABLE>
NET UNREALIZED INVESTMENT GAINS on securities available for sale are
included in the consolidated statement of financial position as a component
of equity, net of tax. Changes in these amounts for the years ended
December 31, are as follows:
<TABLE>
<CAPTION>
1997 1996
----------------- -----------------
(IN MILLIONS)
<S> <C> <C>
Balance, beginning of year................................. $ 1,136 $ 2,397
Changes in unrealized investment
gains(losses) attributable to:
Fixed maturities ....................................... 1,766 (2,892)
Equity securities....................................... (85) 254
Participating group annuity contracts................... (564) 479
Deferred policy acquisition costs....................... (154) 261
Deferred federal income taxes........................... (347) 637
----------------- -----------------
Sub-total............................................... 616 (1,261)
----------------- -----------------
Balance, end of year....................................... $ 1,752 $ 1,136
================= =================
</TABLE>
18
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. INVESTMENTS (CONTINUED)
Based on the carrying value, assets categorized as "non-income producing"
for the year ended December 31, 1997 included in fixed maturities available
for sale, mortgage loans on real estate and other long term investments
totaled $26 million, $93 million and $7 million, respectively.
4. DEFERRED POLICY ACQUISITION COSTS
The balances of and changes in deferred policy acquisition costs as of and
for the years ended December 31, are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
-------------- -------------- -----------
(IN MILLIONS)
<S> <C> <C> <C>
Balance, beginning of year ............................ $ 6,291 $ 6,088 $ 6,403
Capitalization of commissions, sales and issue expenses 1,049 931 919
Amortization and other adjustments..................... (1,192) (989) (783)
Change in unrealized investment gains ................. (154) 261 (451)
-------------- -------------- -----------
Balance, end of year .................................. $ 5,994 $ 6,291 $ 6,088
============== ============== ===========
</TABLE>
5. FUTURE POLICY BENEFITS AND OTHER POLICYHOLDERS' LIABILITIES
FUTURE POLICY BENEFITS at December 31 are as follows:
<TABLE>
<CAPTION>
1997 1996
----------------- -----------------
(IN MILLIONS)
<S> <C> <C>
Life insurance ............................................ $ 46,712 $ 44,118
Annuities ................................................. 15,469 14,828
Other contract liabilities ................................ 3,400 5,009
----------------- -----------------
Future policy benefits .................................... $ 65,581 $ 63,955
================= =================
</TABLE>
Life insurance liabilities include reserves for death and endowment policy
benefits, terminal dividends, premium deficiency reserves and certain health
benefits. Annuity liabilities include reserves for immediate annuities and
non-participating group annuities. Other contract liabilities primarily consist
of unearned premium and benefit reserves for group health products.
The following table highlights the key assumptions generally utilized in
calculating these reserves:
<TABLE>
<CAPTION>
PRODUCT MORTALITY INTEREST RATE ESTIMATION METHOD
- ------------------------- ------------------------ --------------- ------------------------
<S> <C> <C> <C>
Life insurance Generally rates 2.5% to 7.5% Net level premium
guaranteed in calculating based on non-forfeiture
cash surrender values interest rate
Individual immediate 1983 Individual 3.25% to 11.25% Present value of
annuities Annuity Mortality expected future payments
Table with certain based on historical
modifications experience
Group annuities in 1950 Group 3.75% to 17.35% Present value of
payout status Annuity Mortality expected future payments
Table with certain based on historical
modifications experience
Other contract liabilities -- 6.0% to 7.0% Present value of
expected future payments
based on historical
experience
</TABLE>
19
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. FUTURE POLICY BENEFITS AND OTHER POLICYHOLDERS' LIABILITIES (CONTINUED)
For the above categories, premium deficiency reserves are established, if
necessary, when the liability for future policy benefits plus the present
value of expected future gross premiums are insufficient to provide for
expected future policy benefits and expenses. A premium deficiency reserve
has been recorded for the group single premium annuity business, which
consists of limited-payment, long duration, traditional non-participating
annuities. A liability of $1,645 million and $1,320 million is included in
"Future policy benefits" with respect to this deficiency for the years
ended December 31, 1997 and 1996, respectively.
POLICYHOLDERS' ACCOUNT BALANCES at December 31, are as follows:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
(IN MILLIONS)
<S> <C> <C>
Individual annuities........................................ $ 5,695 $ 6,408
Group annuities & guaranteed investment contracts........... 19,053 21,706
Interest-sensitive life contracts........................... 3,160 2,888
Dividend accumulations...................................... 5,033 5,007
--------- ---------
Policyholders' account balances............................. $ 32,941 $ 36,009
========= =========
</TABLE>
Policyholders' account balances for interest-sensitive life and
investment-type contracts are equal to policy account values. The policy
account values represent an accumulation of gross premium payments plus
credited interest less withdrawals, expenses and mortality charges.
Certain contract provisions that determine the policyholder account
balances are as follows:
<TABLE>
<CAPTION>
WITHDRAWAL/
PRODUCT INTEREST RATE SURRENDER CHARGES
----------------------------------- ------------------------ -------------------------------------
<S> <C> <C>
Individual annuities 3.1% to 6.6% 0% to 8% for up to 8 years
Group annuities 5.0% to 12.7% Contractually limited or subject to
market value adjustments
Guaranteed investment contracts 3.9% to 14.34% Subject to market value withdrawal
provisions for any funds withdrawn
other than for benefit responsive and
contractual payments
Interest sensitive life contracts 4.0% to 6.5% Various up to 10 years
Dividend accumulations 3.0% to 4.0%
</TABLE>
20
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. FUTURE POLICY BENEFITS AND OTHER POLICYHOLDERS' LIABILITIES (CONTINUED)
OTHER POLICYHOLDERS' LIABILITIES. The following table provides a
reconciliation of the activity in the liability for unpaid claims and claim
adjustment expense for property and casualty and accident and health
insurance, which is included in "Other policyholder's liabilities" at
December 31:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
(IN MILLIONS)
<S> <C> <C> <C>
Balance at January 1......................................... $ 6,043 $ 5,933 $ 7,983
Less reinsurance recoverables.............................. 563 572 865
---------- ---------- ----------
Net balance at January 1..................................... 5,480 5,361 7,118
---------- ---------- ----------
Incurred related to:
Current year............................................... 10,691 10,281 10,534
Prior years................................................ 11 (91) 141
---------- ---------- ----------
Total incurred............................................... 10,702 10,190 10,675
---------- ---------- ----------
Paid related to:
Current year............................................... 7,415 7,497 7,116
Prior years................................................ 2,651 2,574 2,800
---------- ---------- ----------
Total paid................................................... 10,066 10,071 9,916
---------- ---------- ----------
Less Reinsurance
Segment.................................................... -- -- 2,516
---------- ---------- ----------
Net balance at December 31................................... 6,116 5,480 5,361
Plus reinsurance recoverables.............................. 543 563 572
---------- ---------- ----------
Balance at December 31....................................... $ 6,659 $ 6,043 $ 5,933
========== ========== ==========
</TABLE>
The changes in provision for claims and claim adjustment expenses related
to prior years of $11 million, $(91) million and $141 million in 1997, 1996
and 1995, respectively, are due to such factors as changes in claim cost
trends in healthcare, an accelerated decline in indemnity health business,
and lower than anticipated property and casualty unpaid claims and claim
adjustment expenses.
The other policyholders' liabilities presented above consist primarily of
unpaid claim liabilities which include estimates for liabilities associated
with reported claims and for incurred but not reported claims based, in
part, on the Company's experience. Changes in the estimated cost to settle
unpaid claims are charged or credited to the statement of operations
periodically as the estimates are revised. Accident and health unpaid
claims liabilities for 1997 and 1996 included above are discounted using
interest rates ranging from 6.0% to 7.5%.
21
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. SHORT-TERM AND LONG-TERM DEBT
Debt consists of the following at December 31:
SHORT-TERM DEBT
<TABLE>
<CAPTION>
1997 1996
-------------- --------------
(IN MILLIONS)
<S> <C> <C>
Commercial paper.......................................... $ 4,268 $ 4,511
Notes payable............................................. 2,151 1,614
Current portion of long-term debt......................... 355 437
-------------- --------------
Total short-term debt................................ $ 6,774 $ 6,562
============== ==============
</TABLE>
The weighted average interest rate on outstanding short-term debt was
approximately 6.0% and 5.6% at December 31, 1997 and 1996, respectively.
The Company issues commercial paper primarily to manage operating cash
flows and existing commitments, meet working capital needs and take
advantage of current investment opportunities. Commercial paper borrowings
are supported by various lines of credit.
LONG-TERM DEBT
<TABLE>
<CAPTION>
DESCRIPTION MATURITY DATES RATE 1997 1996
------------------------------------ ----------------- -------------- --------- ----------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Floating rate notes ("FRN") 1998 6.5% $ 40 $ 128
Long term notes 1998 - 2023 4% - 12% 1,194 1,023
Zero coupon notes 1998 - 1999 8.6% (a) 334 365
Australian dollar notes 1997 9% -- 55
Canadian dollar notes 1997 - 1998 7.0% - 9.125% 117 320
Japanese yen notes 1998 - 2000 0.5% - 4.6% 178 90
Swiss francs notes 1998 3.875% 120 103
Canadian dollar FRN 2003 5.89% 96 96
Surplus notes 2003 - 2025 6.875% - 8.3% 986 985
Commercial paper backed by long-term
credit agreements 1,500 1,000
Other notes payable 1998 - 2017 4% - 7.5% 63 32
---------- ----------
Sub-total............................................................................. 4,628 4,197
Less: current portion of long-term debt............................................ (355) (437)
---------- ----------
Total long-term debt.................................................................. $ 4,273 $ 3,760
========== ==========
</TABLE>
(a) The rate shown for zero coupon notes, which do not bear interest,
represents a level yield to maturity.
Payment of interest and principal on the surplus notes of $686 million
issued after 1993 may be made only with the prior approval of the
Commissioner of Insurance of the State of New Jersey.
In order to modify exposure to interest rate and currency exchange rate
movements, the Company utilizes derivative instruments, primarily interest
rate swaps, in conjunction with some of its debt issues. The effect of
these derivative instruments is included in the calculation of the interest
expense on the associated debt, and as a result, the effective interest
rates on the debt may differ from the rates reflected in the tables above.
Floating rates are determined by formulas and may be subject to certain
minimum or maximum rates.
Scheduled principal repayments of long-term debt as of December 31, 1997,
are as follows: $357 million in 1998, $808 million in 1999, $260 million in
2000, $32 million in 2001, $1,814 million in 2002 and $1,379 million
thereafter.
At December 31, 1997, the Company had $8,257 million in lines of credit
from numerous financial institutions of which $5,160 million were unused.
These lines of credit generally have terms ranging from 1 to 5 years.
22
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. EMPLOYEE BENEFIT PLANS
PENSION PLANS
The Company has one funded non-contributory defined benefit pension plan,
which covers substantially all of its employees. The Company also has
several non-contributory non-funded defined benefit plans covering certain
executives. Benefits are generally based on career average earnings and
credited length of service. The Company's funding policy is to contribute
annually an amount necessary to satisfy the Internal Revenue Service
contribution guidelines.
Prepaid and accrued pension costs are included in "Other assets" and "Other
liabilities," respectively, in the Company's consolidated statements of
financial position. The status of these plans as of September 30, adjusted
for fourth quarter activity related to funding activity and contractual
termination benefits is summarized below:
<TABLE>
<CAPTION>
1997 1996
--------------------------------- --------------------------------
ASSETS ACCUMULATED ASSETS ACCUMULATED
EXCEED BENEFITS EXCEED BENEFITS
ACCUMULATED EXCEED ACCUMULATED EXCEED
BENEFITS ASSETS BENEFITS ASSETS
--------------- -------------- -------------- -------------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Actuarial present value of
benefit obligation:
Vested benefit obligation.............. $ (4,129) $ (205) $ (3,826) $ (180)
============ ============ =========== =============
Accumulated benefit obligation......... $ (4,434) $ (226) $ (4,121) $ (198)
============ ============ =========== =============
Projected benefit obligation............. $ (5,238) $ (319) $ (4,873) $ (274)
Plan assets at fair value................ 8,489 -- 7,306 --
------------ ------------ ----------- -------------
Plan assets in excess of (less than)
projected benefit obligation........... 3,251 (319) 2,433 (274)
Unrecognized transition amount........... (662) 1 (769) 1
Unrecognized prior service cost.......... 317 10 356 11
Unrecognized net (gain) loss............. (1,689) 45 (916) 16
Additional minimum liability............. -- (11) -- (10)
Effect of fourth quarter activity........ (67) 4 (98) 4
------------ ------------ ----------- -------------
Prepaid (accrued) pension cost
at December 31......................... $ 1,150 $ (270) $ 1,006 $ (252)
============ ============ =========== =============
</TABLE>
Plan assets consist primarily of equity securities, bonds, real estate and
short-term investments, of which $6,022 million and $5,668 million are
included in Separate Account assets and liabilities at December 31, 1997
and 1996, respectively.
Effective December 31, 1996, The Prudential Securities Incorporated Cash
Balance Plan (the "PSI Plan") was merged into The Retirement System for
United States Employees and Special Agents of The Prudential Insurance
Company of America (the "Prudential Plan"). The name of the merged plan is
The Prudential Merged Retirement Plan ("Merged Retirement Plan"). All of
the assets of the Merged Retirement Plan are available to pay benefits to
participants and their beneficiaries who are covered by the Merged
Retirement Plan. The merger of the plans had no effect on the December 31,
1996 consolidated financial position or results of operations.
During 1996, the Prudential Plan was amended to provide cost of living
adjustments for retirees. The effect of this plan amendment increased
benefit obligations and unrecognized prior service cost by $170 million at
September 30, 1996. In addition, the Prudential Plan was amended to provide
contractual termination benefits to certain plan participants who were
notified between September 15, 1996 and December 31, 1997 that their
employment had been terminated. During 1997, the Prudential Retirement Plan
Document, a component of the Merged Retirement Plan was amended to extend
the contractual termination benefits to December 31, 1998. Costs related to
these amendments are reflected below in contractual termination benefits.
23
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. EMPLOYEE BENEFIT PLANS (CONTINUED)
Net periodic pension income included in "General and administrative
expenses" in the Company's consolidated statement of operations for the
years ended December 31, 1997, 1996 and 1995 include the following
components:
<TABLE>
<CAPTION>
1997 1996 1995
-------------- ------------- --------------
(IN MILLIONS)
<S> <C> <C> <C>
Service cost-benefits earned during the year......... $ 127 $ 140 $ 133
Interest cost on projected benefit obligation........ 376 354 392
Actual return on plan assets......................... (1,693) (748) (1,288)
Net amortization and deferral........................ 1,012 73 629
Contractual termination benefits..................... 30 63 --
-------------- ------------- --------------
Net periodic pension income.......................... $ (148) $ (118) $ (134)
============== ============= ==============
</TABLE>
The assumptions at September 30 used by the Company are to calculate the
projected benefit obligations as of that date and determine the pension
expense for the following fiscal year:
<TABLE>
<CAPTION>
1997 1996 1995
-------------- ------------- --------------
<S> <C> <C> <C>
Discount rate.......................................... 7.25% 7.75% 7.50%
Rate of increase in compensation levels................ 4.50% 4.50% 4.50%
Expected long-term rate of return on plan assets....... 9.50% 9.50% 9.00%
</TABLE>
OTHER POSTRETIREMENT BENEFITS
The Company provides certain life insurance and health care benefits for
its retired employees, their beneficiaries and covered dependents.
Substantially all of the Company's employees may become eligible to receive
benefits if they retire after age 55 with at least 10 years of service, or
under circumstances after age 50 with at least 20 years of continuous
service.
The Company has elected to amortize its transition obligation over 20
years. Post-retirement benefits are funded as considered necessary by
Company management. The Company's funding of its postretirement benefit
obligations totaled $43 million, $38 million and $94 million in 1997, 1996
and 1995, respectively.
In 1995 the Company modified the restrictions on certain post-retirement
plan assets to allow these assets to be used for benefits related to both
active and retired employees. Formerly, these benefits were available only
for retired employees. In connection with this modification, the Company
transferred $120 million from one of these plans in 1995. Of the $120
million transferred, $45 million went to Union Post-Retirement Benefits and
$75 million went to Union Medical Benefits.
24
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. EMPLOYEE BENEFIT PLANS (CONTINUED)
The status of the plan at September 30, adjusted for assets transferred to
the plan in the fourth quarter, is provided below. Accrued post-retirement
benefit costs are included in "Other liabilities" in the Company's
consolidated statement of financial position.
<TABLE>
<CAPTION>
1997 1996
---------- ----------
(IN MILLIONS)
<S> <C> <C>
Accumulated postretirement benefit obligation (APBO):
Retirees.......................................................... $ (1,516) $ (1,423)
Fully eligible active plan participants........................... (36) (35)
Other active plan participants.................................... (576) (544)
--------- ---------
Total APBO..................................................... (2,128) (2,002)
Plan assets at fair value............................................ 1,354 1,313
--------- ---------
Funded status........................................................ (774) (689)
Unrecognized transition amount....................................... 707 787
Unrecognized net gain ............................................... (364) (428)
Effects of fourth quarter activity................................... 33 28
--------- ---------
Accrued postretirement benefit cost at December 31................... $ (398) $ (302)
========= =========
</TABLE>
Plan assets with respect to this coverage consist of group and individual
variable life insurance policies, group life and health contracts, common
stocks, U.S. government securities and short-term investments. Plan assets
include $1,044 million and $1,003 million of Company insurance policies and
contracts at December 31, 1997 and 1996, respectively.
Net periodic postretirement benefit cost included in "General and
administrative expenses" for the years ended December 31, 1997, 1996 and
1995 includes the following components:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ----------- -----------
(IN MILLIONS)
<S> <C> <C> <C>
Service cost.............................................. $ 38 $ 45 $ 44
Interest cost............................................. 149 157 169
Actual return on plan assets.............................. (120) (105) (144)
Net amortization and deferral............................. 70 53 111
----------- ----------- -----------
Net periodic postretirement benefit cost.................. $ 137 $ 150 $ 180
=========== =========== ===========
</TABLE>
The following assumptions at September 30 are used to calculate the APBO as
of that date and determine postretirement benefit expense for the following
fiscal year:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Discount rate............................................. 7.25% 7.75% 7.50%
Rate of increase in compensation levels................... 4.5% 4.5% 4.5%
Expected long-term rate of return on plan assets.......... 9.0% 9.0% 8.0%
Health care cost trend rates.............................. 8.2-11.8% 8.5-12.5% 8.9-13.3%
Ultimate health care cost trend rate after gradual
decrease until 2006....................................... 5.0% 5.0% 5.0%
</TABLE>
25
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. EMPLOYEE BENEFIT PLANS (CONTINUED)
The effect of a 1% increase in health care cost trend rates for each future
year on the following costs at December 31, are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
(IN MILLIONS)
<S> <C> <C> <C>
Accumulated postretirement benefit obligation............ $ (218) $ (207) $ (217)
Service and interest costs............................... 24 25 27
</TABLE>
POSTEMPLOYMENT BENEFITS
The Company accrues 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, 1997 and 1996
was $144 million and $156 million, respectively, and is included in "Other
liabilities."
OTHER EMPLOYEE BENEFITS
The Company sponsors voluntary savings plans for employees (401(k) plans).
The plans provide for salary reduction contributions by employees and
matching contributions by the Company of up to three percent of annual
salary, resulting in $63 million, $57 million, and $61 million of expenses
included in "General and administrative expenses" for 1997, 1996 and 1995,
respectively.
8. INCOME TAXES
The components of income tax expense for the years ended December 31, were
as follows:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
(IN MILLIONS)
<S> <C> <C> <C>
Current tax expense (benefit):
U.S...................................................... $ (158) $ 255 $ 1,189
State and Iocal.......................................... 48 103 38
Foreign.................................................. 64 48 66
--------- --------- ---------
Total.................................................... $ (46) $ 406 $ 1,293
========= ========= =========
Deferred tax expense (benefit):
U.S...................................................... $ 227 $ (442) $ (166)
State and Iocal.......................................... 3 (2) (10)
Foreign.................................................. 33 54 9
--------- --------- ---------
Total.................................................... $ 263 $ (390) $ (167)
========= ========= =========
Total income tax expense................................. $ 217 $ 16 $ 1,126
========= ========= =========
</TABLE>
26
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. INCOME TAXES (CONTINUED)
The Company's income tax expense for the years ended December 31, differs
from the amount computed by applying the expected federal income tax rate
of 35% to income from operations before income taxes for the following
reasons:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
(IN MILLIONS)
<S> <C> <C> <C>
Expected federal income tax expense.......................... $ 290 $ 382 $ 829
Equity tax................................................... (91) (365) 163
State and local income taxes................................. 51 100 28
Tax-exempt interest and dividend received deduction.......... (67) (50) (77)
Other........................................................ 34 (51) 183
-------- -------- --------
Total income tax expense..................................... $ 217 $ 16 $ 1,126
======== ======== ========
</TABLE>
Deferred tax assets and liabilities at December 31, resulted from the items
listed in the following table:
<TABLE>
<CAPTION>
1997 1996
------- --------
(IN MILLIONS)
<S> <C> <C>
Deferred tax assets
Insurance reserves.......................................... $ 1,482 $ 1,316
Policyholder dividends...................................... 250 257
Net operating loss carryforwards............................ 80 268
Depreciation................................................ -- 44
Litigation related reserves................................. 178 297
Employee benefits........................................... 42 10
Other....................................................... 360 329
-------- --------
Deferred tax assets before valuation allowance.............. 2,392 2,521
Valuation allowance......................................... (18) (36)
-------- --------
Deferred tax assets after valuation allowance............... 2,374 2,485
-------- --------
Deferred tax liabilities
Investments................................................. 1,867 1,183
Deferred acquisition costs.................................. 1,525 1,707
Depreciation................................................ 36 --
Other....................................................... 73 110
-------- --------
Deferred tax liabilities.................................... 3,501 3,000
-------- --------
Net deferred tax liability.................................... $ 1,127 $ 515
======== ========
</TABLE>
The Company's income taxes payable of $500 million and $1,544 million
includes a $627 million current income tax receivable at December 31, 1997
and a $1,029 million current income taxes payable at December 31, 1996.
27
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. INCOME TAXES (CONTINUED)
Management believes that based on its historical pattern of taxable income,
the Company will produce sufficient income in the future to realize its net
deferred tax asset after valuation allowance. Adjustments to the valuation
allowance will be made if there is a change in management's assessment of
the amount of the deferred tax asset that is realizable. At December 31,
1997, the Company had state non-life operating loss carryforwards for tax
purposes approximating $800 million.
The Internal Revenue Service (the "Service") has completed an examination
of the consolidated federal income tax return through 1989. The Service has
examined the years 1990 through 1992. Discussions are being held with the
Service with respect to proposed adjustments, however, management believes
there are adequate defenses against, or sufficient reserves to provide for,
such adjustments. The Service has begun their examination of the years 1993
through 1995.
9. EQUITY
RECONCILIATION OF STATUTORY SURPLUS AND NET INCOME
Accounting practices used to prepare statutory financial statements for
regulatory purposes differ in certain instances from GAAP. The following
table reconciles the Company's statutory net income and surplus as of and
for the years ended December 31, determined in accordance with accounting
practices prescribed or permitted by the New Jersey Department of Banking
and Insurance with net income and equity determined using GAAP:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
(IN MILLIONS)
<S> <C> <C> <C>
STATUTORY NET INCOME........................................... $ 1,471 $ 1,402 $ 478
Adjustments to reconcile to net income on a GAAP basis:
Insurance revenues and expenses.............................. 12 (478) (496)
Income taxes................................................. 601 439 (596)
Valuation of investments..................................... (62) 121 --
Realized investment gains.................................... 702 327 1,562
Litigation and other reserves................................ (1,975) (906) --
Other, net................................................... (139) 173 295
-------- -------- --------
GAAP NET INCOME................................................ $ 610 $ 1,078 $ 1,243
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
1997 1996
-------- --------
(IN MILLIONS)
<S> <C> <C>
STATUTORY SURPLUS.............................................. $ 9,242 $ 9,375
Adjustments to reconcile to equity on a GAAP basis:
Deferred policy acquisition costs............................ 5,994 6,291
Valuation of investments..................................... 8,067 5,624
Future policy benefits and policyholder account balances..... (2,906) (1,976)
Non-admitted assets.......................................... 1,643 1,285
Income taxes................................................. (1,070) (654)
Surplus notes................................................ (986) (985)
Other, net................................................... (266) (437)
-------- --------
GAAP EQUITY.................................................... $ 19,718 $ 18,523
======== ========
</TABLE>
28
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. EQUITY (CONTINUED)
The New York State Insurance Department ("Department") recognizes only
statutory accounting for determining and reporting the financial condition
of an insurance company, for determining its solvency under the New York
Insurance Law and for determining whether its financial condition warrants
the payment of a dividend to its policyholders. No consideration is given
by the Department to financial statements prepared in accordance with GAAP
in making such determinations.
10. OPERATING LEASES
The Company and its subsidiaries occupy leased office space in many
locations under various long-term leases and have entered into numerous
leases covering the long-term use of computers and other equipment. At
December 31, 1997, future minimum lease payments under non-cancelable
operating leases are estimated as follows:
(IN MILLIONS)
1998........................................ $ 313
1999........................................ 277
2000........................................ 230
2001........................................ 201
2002........................................ 171
Remaining years after 2002.................. 833
-----------
Total....................................... $ 2,025
===========
Rental expense incurred for the years ended December 31, 1997 and 1996 was
approximately $352 million and $343 million, respectively.
11. DIVESTITURES
In October 1995, the Company completed the sale of its reinsurance segment,
Prudential Reinsurance Holdings, Inc., through an initial public offering
of common stock. As a result of the sale, an after-tax loss of $297 million
was recorded in 1995.
On January 26, 1996, the Company entered into a definitive agreement to
sell substantially all the assets of Prudential Home Mortgage Company, Inc.
It has also liquidated certain mortgage-backed securities and extended
warehouse losses, asset write downs, and other costs directly related to
the planned sale. The Company recorded an after-tax loss in 1995 of $98
million which includes operating gains and losses, asset write downs and
other costs directly related with the planned sale. The net assets of the
mortgage banking segment at December 31, 1995 was $78 million, comprised of
$4,293 million in assets and $4,215 million in liabilities.
On July 31, 1996, the Company sold a substantial portion of its Canadian
Branch business to the London Life Insurance Company ("London Life"). This
transaction was structured as a reinsurance transaction whereby London Life
assumed total liabilities of the Canadian Branch equal to $3,291 million as
well as a related amount of assets equal to $3,205 million. This transfer
resulted in a reduction of policy liabilities of $3,257 million and a
corresponding reduction in invested assets. The Company recognized an
after-tax gain in 1996 of $116 million as a result of this transaction,
recorded in "Realized investment gains, net."
12. FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair values presented below have been determined using available
information and valuation methodologies. Considerable judgment is applied
in interpreting data to develop the estimates of fair value. Accordingly,
such estimates presented may not be realized in a current market exchange.
The use of different market assumptions and/or estimation methodologies
could have a material effect on the estimated fair values. The following
methods and assumptions were used in calculating the fair values (for all
other financial instruments presented in the table, the carrying value
approximates fair value).
29
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
FIXED MATURITIES AND EQUITY SECURITIES
Fair values for fixed maturities and equity securities, other than private
placement securities, are based on quoted market prices or estimates from
independent pricing services. Fair values for private placement securities
are estimated using a discounted cash flow model which considers the
current market spreads between the U.S. Treasury yield curve and corporate
bond yield curve, adjusted for the type of issue, its current credit
quality and its remaining average life. The estimated fair value of certain
non-performing private placement securities is based on amounts estimated
by management.
MORTGAGE LOANS ON REAL ESTATE
The fair value of the mortgage loan portfolio is primarily based upon the
present value of the scheduled future cash flows discounted at the
appropriate U.S. Treasury rate, adjusted for the current market spread for
a similar quality mortgage. For certain non-performing and other loans, the
fair value is based upon the present value of expected future cash flows
discounted at the appropriate U.S. Treasury rate adjusted for current
market spread for a similar quality mortgage.
POLICY LOANS
The estimated fair value of policy loans is calculated using a discounted
cash flow model based upon current U.S. Treasury rates and historical loan
repayments.
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 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.
POLICYHOLDERS' ACCOUNT BALANCES
Fair values of policyholders' account balances are estimated using
discounted projected cash flows, based on interest rates being offered for
similar contracts, with maturities consistent with those remaining for the
contracts being valued.
DEBT
The estimated fair value of short-term and long-term debt is derived by
using discount rates based on the borrowing rates currently available to
the Company for debt with similar terms and remaining maturities.
30
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
The following table discloses the carrying amounts and estimated fair
values of the Company's financial instruments at December 31:
<TABLE>
<CAPTION>
1997 1996
-------------------------- ------------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
------------ ----------- ------------ --------------
FINANCIAL ASSETS: (IN MILLIONS)
<S> <C> <C> <C> <C>
Other than trading:
- -------------------
Fixed maturities:
Available for sale....................... $ 75,270 $ 75,270 $ 66,553 $ 66,553
Held to maturity......................... 18,700 19,894 20,403 21,362
Equity securities........................... 2,810 2,810 2,622 2,622
Mortgage loans on real estate............... 16,004 17,153 17,097 17,963
Policy loans................................ 6,827 6,994 6,692 6,613
Securities purchased under
agreements to resell .................... 8,661 8,661 5,347 5,347
Cash collateral for borrowed securities..... 5,047 5,047 2,416 2,416
Short-term investments...................... 12,106 12,106 9,294 9,294
Cash ....................................... 3,636 3,636 2,091 2,091
Separate Accounts assets.................... 74,046 74,046 63,358 63,358
Derivative financial instruments............ 24 35 16 32
Trading:
- --------
Trading account assets...................... 6,044 6,044 4,219 4,219
Receivables from broker-dealer clients...... 6,273 6,273 5,281 5,281
Derivative financial instruments............ 979 979 904 904
FINANCIAL LIABILITIES:
Other than trading:
- -------------------
Policyholders' account balances............. 32,941 33,896 36,009 37,080
Securities sold under
agreements to repurchase................. 12,347 12,347 7,503 7,503
Cash collateral for loaned securities....... 14,117 14,117 8,449 8,449
Short-term and long-term debt............... 11,047 11,020 10,322 10,350
Securities sold but not yet purchased....... 3,533 3,533 1,900 1,900
Separate Accounts liabilities............... 73,658 73,658 62,845 62,845
Derivative financial instruments............ 32 47 32 45
Trading:
- --------
Payables to broker-dealer clients........... 3,338 3,338 3,018 3,018
Derivative financial instruments ........... 1,088 1,088 1,120 1,120
</TABLE>
31
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. DERIVATIVE AND OFF-BALANCE SHEET CREDIT-RELATED INSTRUMENTS
DERIVATIVE FINANCIAL INSTRUMENTS
The tables below summarize the Company's outstanding positions by
derivative instrument types as of December 31, 1997 and 1996. The amounts
presented are classified as either trading or other than trading, based on
management's intent at the time of contract inception and throughout the
life of the contract. The table includes the estimated fair values of
outstanding derivative positions only and does not include the changes in
fair values of associated financial and non-financial assets and
liabilities, which generally offset derivative notional amounts. The fair
value amounts presented also do not reflect the netting of amounts pursuant
to right of setoff, qualifying master netting agreements with
counterparties or collateral arrangements.
DERIVATIVE FINANCIAL INSTRUMENTS
DECEMBER 31, 1997
(IN MILLIONS)
<TABLE>
<CAPTION>
TRADING OTHER THAN TRADING TOTAL
------------------------ ----------------------- ------------------------------------
ESTIMATED ESTIMATED CARRYING ESTIMATED
NOTIONAL FAIR VALUE NOTIONAL FAIR VALUE NOTIONAL AMOUNT FAIR VALUE
----------- ----------- ---------- ----------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Swaps:
Assets.............. $ 7,759 $ 394 $ 61 $ -- $ 7,820 $ 395 $ 394
Liabilities......... 6,754 489 13 3 6,767 493 491
Forwards:
Assets.............. 29,511 429 1,031 23 30,542 452 452
Liabilities......... 29,894 459 647 7 30,541 466 466
Futures:
Assets.............. 4,103 51 46 -- 4,149 51 51
Liabilities......... 3,064 50 3,320 21 6,384 71 71
Options:
Assets.............. 6,893 105 239 -- 7,132 105 105
Liabilities......... 4,165 90 5 -- 4,170 90 90
Loan Commitments:
Assets.............. -- -- 317 12 317 -- 12
Liabilities......... -- -- 524 16 524 -- 16
----------- ----------- ---------- ----------- ----------- ---------- -----------
Total:
Assets.............. $ 48,266 $ 979 $ 1,694 $ 35 $ 49,960 $ 1,003 $ 1,014
=========== =========== ========== =========== =========== ========== ===========
Liabilities......... $ 43,877 $ 1,088 $ 4,509 $ 47 $ 48,386 $ 1,120 $ 1,134
=========== =========== ========== =========== =========== ========== ===========
</TABLE>
32
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. DERIVATIVE AND OFF-BALANCE SHEET CREDIT-RELATED INSTRUMENTS (CONTINUED)
DERIVATIVE FINANCIAL INSTRUMENTS
DECEMBER 31, 1997
(IN MILLIONS)
<TABLE>
<CAPTION>
TRADING OTHER THAN TRADING TOTAL
------------------------ ----------------------- ------------------------------------
ESTIMATED ESTIMATED CARRYING ESTIMATED
NOTIONAL FAIR VALUE NOTIONAL FAIR VALUE NOTIONAL AMOUNT FAIR VALUE
----------- ----------- ---------- ----------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Swaps:
Assets.............. $ 8,080 $ 481 $ 398 $ 10 $ 8,478 $ 481 $ 491
Liabilities......... 8,316 756 139 17 8,455 771 773
Forwards:
Assets.............. 24,275 367 489 13 24,764 376 380
Liabilities......... 20,103 308 920 10 21,023 318 318
Futures:
Assets.............. 2,299 24 3 -- 2,302 24 24
Liabilities......... 2,573 30 1,087 6 3,660 36 36
Options:
Assets.............. 2,981 32 2,083 7 5,064 39 39
Liabilities......... 2,653 26 437 12 3,090 27 38
Loan Commitments:
Assets.............. -- -- 163 2 163 -- 2
Liabilities......... -- -- 445 -- 445 -- --
----------- ----------- ---------- ----------- ----------- ---------- -----------
Total:
Assets.............. $ 37,635 $ 904 $ 3,136 $ 32 $ 40,771 $ 920 $ 936
=========== =========== ========== =========== =========== ========== ===========
Liabilities......... $ 33,645 $ 1,120 $ 3,028 $ 45 $ 36,673 $ 1,152 $ 1,165
=========== =========== ========== =========== =========== ========== ===========
</TABLE>
CREDIT RISK
The current credit exposure of the Company's derivative contracts is
limited to the fair value at the reporting date. Credit risk is managed by
entering into transactions with creditworthy counterparties and obtaining
collateral where appropriate and customary. The Company also attempts to
minimize its exposure to credit risk through the use of various credit
monitoring techniques. Approximately 95% of the net credit exposure for the
Company from derivative contracts is with investment-grade counterparties.
Net trading revenues for the years ended December 31, 1997, 1996 and 1995
relating to forwards, futures and swaps were $54 million, $37 million, $(8)
million; $42 million, $32 million, $(11) million; and $110 million, $42
million, $3 million respectively. Net trading revenues for options were not
material. Average fair values for trading derivatives in an asset position
during the years ended December 31, 1997 and 1996 were $1,015 million and
$881 million, respectively, and for derivatives in a liability position
were $1,166 million and $1,038 million, respectively. Of those derivatives
held for trading purposes at December 31, 1997, 52% of the notional amount
consisted of interest rate derivatives, 40% consisted of foreign currency
derivatives, and 8% consisted of equity and commodity derivatives. Of those
derivatives held for purposes other than trading at December 31, 1997, 72%
of notional consisted of interest rate derivatives and 28% consisted of
foreign currency derivatives.
33
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. DERIVATIVE AND OFF-BALANCE SHEET CREDIT-RELATED INSTRUMENTS (CONTINUED)
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, loans sold with recourse and letters of credit.
Commitments include commitments to purchase and sell mortgage loans, the
unfunded portion of commitments to fund investments in private placement
securities, and unused credit card and home equity lines. 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 fair value of asset positions in these instruments, which represents
the Company's current exposure to credit loss from other parties'
non-performance, was $1,014 million and $936 million at December 31, 1997
and 1996, respectively.
14. CONTINGENCIES AND LITIGATION
FINANCIAL GUARANTEE AGREEMENT
In connection with the sale in 1995 of its wholly-owned subsidiary
Prudential Reinsurance Company ("Pru Re"), the Company's subsidiary,
Gibraltar Casualty Insurance Company ("Gibraltar") entered into a stop-loss
reinsurance agreement with Pru Re whereby Gibraltar has reinsured up to
$375 million of the first $400 million of aggregate adverse loss
development on reserves recorded by Pru Re at June 30, 1995. Gibraltar also
has entered into several quota share reinsurance arrangements with Pru Re
whereby certain medical malpractice, direct insurance and casualty
reinsurance pool risks previously underwritten by Pru Re prior to June 30,
1995 were ceded to Gibraltar. The Company has guaranteed Gibraltar's
obligations arising under each of these contracts subject to a limit of
$375 million for the stop-loss agreement and $400 million for the other
agreements. Through December 31, 1997, Gibraltar has incurred $285 million
in losses under the stop-loss agreement, including $45 million in 1997.
Gibraltar has paid $165 million to Pru Re under the stop-loss agreement.
The Company has not been required to fund losses arising under the other
arrangements.
ENVIRONMENTAL AND ASBESTOS-RELATED CLAIMS
Certain of the Company's subsidiaries received 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 liability for unpaid claims for these losses, management considered the
available information. 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.
MANAGED CARE REIMBURSEMENT
In 1997, the Company continued to review its obligations under certain
managed care arrangements for possible failure to comply with contractual
and regulatory requirements. The estimated cost to the Company for these
reimbursements increased by $115 million in 1997, bringing the total
provision to $265 million. As of December 31, 1997, $163 million has been
paid or credited to customers. It is the opinion of management that the
remaining reserves of $102 million at December 31, 1997 represent a
reasonable estimate of remaining reimbursements to customers and other
related costs.
LITIGATION
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.
Three putative class actions and approximately 677 individual actions were
pending against the Company in the United States as of January 31, 1998
brought 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
34
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. CONTINGENCIES AND LITIGATION (CONTINUED)
these cases seek 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
formed in April 1995 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. The Task Force found that some sales of life
insurance policies by the Company had been improper. Based on the findings,
the Task Force recommended, and the Company agreed to, a series of fines
allocated to all 50 states and the District of Columbia. In addition, the
Task Force recommended a remediation program pursuant to which the Company
would offer relief to the policyowners who were misled when they purchased
permanent life insurance policies in the United States from 1982 to 1995.
On October 28, 1996, the Company entered into a Stipulation of Settlement
with attorneys for the plaintiffs in the consolidated class action lawsuit
pending in a Multi-District Litigation proceeding in the federal court in
New Jersey. The class action suit involved alleged improprieties in
connection with the Company's sale, servicing and operation of permanent
life insurance policies from 1982 through 1995. Pursuant to the settlement,
the Company agreed to provide certain enhancements and changes to the
remediation program previously accepted by the Task Force, including some
additional remedies. In addition, the Company agreed that it would incur a
minimum cost of $410 million in providing remedies to policyowners under
the program and, in specified circumstances, agreed to make certain other
payments and guarantees. Under the terms of the settlement, the Company
agreed to a minimum average cost per remedy of $2,364 for up to 330,000
claims remedied and also agreed to provide additional compensation to be
determined by formula that will range in aggregate amount from $50 million
to $300 million depending on the total number of claims remedied. At the
end of the remediation program's claim evaluation process, the Court will
determine how the additional compensation will be distributed.
The terms of the remediation program described above were enhanced again in
February 1997 pursuant to agreements reached with several states that had
not previously accepted the terms of the program. These changes were
incorporated as amendments to the above-described Stipulation of Settlement
and related settlement documents, and the amended Stipulation of Settlement
was approved as fair to class members by the United States District Court
for the District of New Jersey in March 1997. By that point in time, the
Company had entered into agreements with all 50 states and the District of
Columbia pursuant to which each jurisdiction had accepted the remediation
plan and the Company had agreed to pay approximately $65 million in fines,
penalties and related payments.
The decision of the U.S. District Court to certify a class in the
above-described litigation for settlement purposes only and to approve the
class action settlement as described in the amended Stipulation of
Settlement is presently on appeal to the U.S. Court of Appeals for the
Third Circuit. The appellants claim that the District Court erred in
certifying a class and in finding that the terms of the settlement are fair
to the class.
Pursuant to the state agreements and the amended Stipulation of Settlement,
as approved by the U.S. District Court, the Company initiated its
remediation program in 1997. The Company mailed packages and provided broad
class notice to the owners of approximately 10.7 million policies eligible
to participate in the remediation program, informing them of their rights.
Owners of approximately 21,800 policies elected to be excluded from the
class action settlement. Of those eligible to participate in the
settlement, policyowners who believed they were misled were invited to file
a claim through an Alternative Dispute Resolution ("ADR") process. The ADR
process was established to enable the company to discharge its liability to
the affected policyowners. Policyowners who did not wish to file a claim in
the ADR process were permitted to choose from options available under Basic
Claim Relief, such as preferred rate premium loans, or annuities, mutual
fund shares or life insurance policies that the Company will enhance.
The owners of approximately 1.16 million policies responded to these
notices by indicating an intent to file an ADR claim. All policyholders who
responded were provided an ADR claim form for completion and submission.
Approximately 635,000 claim forms were completed and returned as of January
31, 1998. Management does not believe the number of ADR claims that will be
completed and returned will increase significantly. In addition, the owners
of approximately 510,000 policies indicated an interest in a Basic Claim
Relief remedy. The ADR process requires that individual claim files be
reviewed by one or more independent claim evaluators. Management does not
believe costs associated with providing Basic Claim Relief will be material
to the Company's financial position or results of operations.
35
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. CONTINGENCIES AND LITIGATION (CONTINUED)
In 1996, the Company recorded in its Statement of Operations, the minimum
cost of $410 million as agreed to in the settlement. Management had no
better information available at that time upon which to make a reasonable
estimate of losses. Management now has additional information which allows
for computation of a reasonable estimate of losses associated with ADR
claims. Based on this additional information, in 1997, management had
increased the estimated liability for the cost of remedying policyholder
claims in the ADR process by $1.64 billion before taxes to approximately
$2.05 billion before taxes of which $1.80 billion has been funded in a
settlement trust as described in Note 3. While management believes these
are reasonable estimates based on information currently available, the
ultimate amount of the total cost of remedied policyholder claims is
dependent on complex and varying factors, including actual claims by
eligible policyholders, the relief options chosen and the dollar value of
those options. There are also additional elements of the ADR process which
cannot be fully evaluated at this time (e.g., claims which may be
successfully appealed) which could increase this estimate.
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.
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
contract holders 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.
15. SUBSEQUENT EVENTS
On February 10, 1998, the Company's Board of Directors authorized
management to take the preliminary steps necessary to allow the Company to
demutualize and become a publicly-traded company. The Company has begun
discussions with the New Jersey Department of Banking and Insurance,
leaders in the New Jersey State Legislature, as well as other key
regulatory agencies around the country. The New Jersey State Legislature
must first pass a law permitting demutualization. The New Jersey Department
of Banking and Insurance, the Company's Board and a majority of
participating policyholders must ultimately approve the Company's plan for
demutualization.
* * * * *
36
<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
The Registrant, in conjunction with certain affiliates, maintains insurance on
behalf of any person who is or was a trustee, director, officer, employee, or
agent of the Registrant, or who is or was serving at the request of the
Registrant as a trustee, director, officer, employee or agent of such other
affiliated trust or corporation.
New Jersey, being the state of organization of Prudential Insurance Company of
America ("Prudential"), permits entities organized under its jurisdiction to
indemnify directors and officers with certain limitations. The relevant
provisions of New Jersey law permitting indemnification can be found in Section
14A:3-5 of the New Jersey Statutes Annotated. The text of Prudential's By-law
27, which relates to indemnification of officers and directors, is incorporated
by reference to Exhibit (8)(ii) of 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.
Insofar as indemnification for liabilities arising under the Securities Act of
1933 (the "Act") may be permitted to directors, officers and controlling persons
of the Registrant pursuant to the foregoing provisions or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
II-1
<PAGE>
CONTENTS OF REGISTRATION STATEMENT
This Registration Statement comprises the following papers and documents:
The facing sheet.
Cross-reference to items required by Form N-8B-2.
The prospectus consisting of 97 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 8)
(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)
II-2
<PAGE>
2. Opinion and Consent of Clifford Kirsch, Esq. as to the legality of the
securities being registered. (Note 1)
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. (Note 9)
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.
(Note 8) Incorporated by reference to Post-Effective Amendment No. 1 to this
Registration Statement, filed May 14, 1997.
(Note 9) Incorporated by reference to Post-Effective Amendment No. 10 to Form
S-1, Registration No. 33-20083, filed April 9, 1998 on behalf of The
Prudential Variable Contract Real Property Account.
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 24th day of April, 1998.
(Seal) THE PRUDENTIAL VARIABLE CONTRACT ACCOUNT GI-2
(Registrant)
By: THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
(Depositor)
Attest: /s/ KAREN DAVID-CHILOWICZ By: /s/ STUART L. LIEBESKIND
------------------------------ ------------------------------------
Karen David-Chilowicz Stuart L. Liebeskind, FSA, MAAA
Director, Prudential Group Vice President and Assistant Actuary
Life Insurance
Pursuant to the requirements of the Securities Act of 1933, this Post-Effective
Amendment No. 2 to the Registration Statement has been signed below by the
following persons in the capacities indicated on this 24th day of April, 1998.
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
---------------------------------------- ---------------------------
Richard J. Carbone C. Christopher Sprague
Chief 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)
/s/ *
-----------------------------------------
Gaynor N. Kelley
Director
/s/ *
-----------------------------------------
Burton G. Malkiel
Director
/s/ *
-----------------------------------------
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
3. Opinion and Consent of Clifford E. Kirsch, Esq., as
to the legality of the securities being registered. Page II- 9
6. Opinion and Consent of Stuart L. Liebeskind, FSA, MAAA,
as to actuarial matters pertaining to the securities
being registered. Page II-10
27. Financial Data Schedule. Page II-11
II-6
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Post-Effective Amendment No. 2 to Registration
Statement No. 333-01031 on Form S-6 of The Prudential Variable Contract Account
GI-2 of The Prudential Insurance Company of America of our report dated June 4,
1997 relating to the consolidated financial statements of The Prudential
Insurance Company of America and subsidiaries appearing in the Prospectus, which
is part of such Registration Statement, and to the reference to us under the
heading "Experts" in such Registration Statement.
/s/ DELOITTE & TOUCHE LLP
Parsippany, New Jersey
April 24, 1998
II-7
We hereby consent to the use in the Prospectus constituting part of this
Post-Effective Amendment No. 2 to the registration statement on Form S-6 (the
"Registration Statement") of our report dated March 5, 1998, relating to the
consolidated financial statements of The 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
New York, New York
April 24, 1998
II-8
EXHIBIT 3
April 29, 1998
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
- --------------------------------
Clifford E. Kirsch
II-9
EXHIBIT 6
[logo] PRUDENTIAL
STUART L. LIEBESKIND, FSA,MAAA,CLU,CHFC
Vice President & Actuary
Group Life and Disability Insurance
March 27, 1998
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
290 West Mt. Pleasant Avenue, Livingston NJ 07039
Tel 973 548-6360 Fax 973 548-6350
[email protected]
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 ("Contracts") under the Securities Act of 1933. I
have reviewed the Contract form and I have participated in the preparation and
review of the Registration Statement and Exhibits thereto. In my opinion:
(1) The illustrations of cash surrender values and death benefits included in
the 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 deduction 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 rate of return that is a reasonable rate to use in
discounting the tax benefit of the 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, FSA, MAAA
Vice President and Actuary
The Prudential Insurance Company of America
II-10
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
Exhibit 27
FINANCIAL DATA SCHEDULE
Article 6 of Regulation S-X
Prudential Variable Appreciable Account
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 4,831,144
<INVESTMENTS-AT-VALUE> 5,647,810
<RECEIVABLES> 5,983
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 5,653,793
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 0
<TOTAL-LIABILITIES> 0
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 0
<SHARES-COMMON-STOCK> 277,290
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 5,653,793
<DIVIDEND-INCOME> 162,292
<INTEREST-INCOME> 0
<OTHER-INCOME> 475,211
<EXPENSES-NET> 36,753
<NET-INVESTMENT-INCOME> 125,539
<REALIZED-GAINS-CURRENT> 26,562
<APPREC-INCREASE-CURRENT> 241,021
<NET-CHANGE-FROM-OPS> 868,334
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 1,104,446
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 0
<AVERAGE-NET-ASSETS> 0
<PER-SHARE-NAV-BEGIN> 0
<PER-SHARE-NII> 0
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 0
<EXPENSE-RATIO> 0
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
