As filed with the Securities and Exchange Commission on June 17, 1997
File No. 333-23271
File No. 811-08091
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [ ]
Pre-Effective Amendment No. _1_ [X]
Post-Effective Amendment No. ___ [ ]
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [ ]
AMENDMENT NO. 1 [X]
THE PRUDENTIAL DISCOVERY SELECT GROUP VARIABLE CONTRACT ACCOUNT
(Exact Name of Registrant)
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
(Name of Depositor)
2 Gateway Center , 18th Floor
Newark, NJ 07102-5096
Depositor's Telephone Number: (201) 367-1215
Peter T. Scott, Esq.
Assistant General Counsel
The Prudential Insurance Company Of America
C/O Prudential Investments
30 Scranton Office Park
Scranton, PA 18507-1789
(Name and Address of Agent for Service of Process)
Copy to:
Stephen E. Roth, Esquire
Sutherland, Asbill & Brennan, L.L.P.
1275 Pennsylvania Avenue, N.W.
Washington, D.C. 20004-2404
Approximate Date of Proposed Public Offering: As soon as practicable after the
effective date of the registration statement.
Pursuant to Rule 24f-2 under the Investment Company Act of 1940, the registrant
hereby elects to register an indefinite amount of securities being offered.
<PAGE>
The registrant hereby amends this registration statement on such date or dates
as may be necessary to delay its effective date until the registrant shall file
a further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the registration shall become effective on such
date as the Commission, acting pursuant to Section 8(a), may determine.
<PAGE>
Cross Reference Sheet
Pursuant to Rules 481(a) and 495(a)
Showing location in Part A (prospectus) and Part B (statement of additional
information) of registration statement of information required by Form N-4
PART A
Item of Form N-4 Prospectus Caption
1. Cover Page ..........................Cover Page
2. Definitions .........................Definitions
3. Synopsis ............................Fee Table; Brief Description of the
Contract
4. Condensed Financial
Information .......................Performance Information
5. General
(a) Depositor ......................Prudential Insurance Company of America
(b) Registrant......................Prudential Discovery Select Group
Variable Contract Account
(c) Portfolio Company ..............The Funds
(d) Fund Prospectus ................The Funds
(e) Voting Rights ..................Voting Rights
(f) Administrators .................Prudential Insurance Company of America
6. Deductions and Expenses
(a) General ........................Charges, Fees and Deductions; Brief
Description of the Contract
(b) Sales Load .....................Charges, Fees and Deductions; Brief
Description of the Contract
(c) Special Purchase Plan ..........N/A
(d) Commissions ....................Sale of the Contract and Sales
Commission
(e) Expenses - Registrant ..........Charges, Fees and Deductions; Brief
Description of the Contract
(f) Fund Expenses ..................Charges, Fees and Deductions
(g) Organizational Expenses ........N/A
<PAGE>
7. Contracts
(a) Persons with Rights ............Brief Description of the Contract;
Substitution of Fund Shares; The
Contracts; Voting Rights; Death
Benefit; Modified Procedures
(b) (i) Allocation of
Purchase Payments ..........Brief Description of the Contract;
Allocation of Purchase Payments
(ii) Transfers .................Brief Description of the Contract;
Transfers
(iii) Exchanges ................Transfers
(c) Changes ........................Substitution of Funds; The Contracts;
Modified Procedures;
(d) Inquiries ......................Cover page
8. Annuity Period ......................Brief Description of the Contract;
Effecting an Annuity
9. Death Benefit .......................Death Benefit
10. Purchases and Contract Value
(a) Purchases ......................Brief Description of the Contract;
Allocation of Purchase Payments;
The Accumulation Period; Transfers
(b) Valuation ......................Definitions; The Accumulation Period
(c) Daily Calculation ..............Definitions; The Accumulation Period
(d) Underwriter ....................Sale of the Contract and Sales
Commission
11. Redemptions
(a) - By Owners ....................Brief Description of the Contract;
Transfers; Withdrawals; Effecting An
Annuity; Federal Tax Status
- By Annuitant .................Transfers; Withdrawals; Effecting An
Annuity; Federal Tax Status
(b) Texas ORP ......................Texas Optional Retirement Plan
(c) Check Delay ....................N/A
(d) Lapse ..........................N/A
(e) Free Look ......................The Accumulation Period
12. Taxes ...............................Brief Description of the Contract;
Federal Tax Status
13. Legal Proceedings ...................Legal Proceedings
14. Table of Contents for the Statement
of Additional Information ........Statement of Additional Information
<PAGE>
PART B
Item of Form N-4 Part B Caption
15. Cover Page ..........................Cover Page
16. Table of Contents ...................Table of Contents
17. General Information and
History ...........................N/A
18. Services
(a) Fees and Expenses of
Registrant ....................Charges, Fees and Deductions
(prospectus)
(b) Management Contracts ...........N/A
(c) Custodian ......................N/A
Independent Public
Accountant .....................Expert
(d) Assets of Registrant ...........Prudential Discovery Select Group
Variable Contract Account (prospectus)
(e) Affiliated Persons .............Prudential Insurance Company of America
(prospectus)
(f) Principal Underwriter ..........Sale of the Contract and Sales
Commission (prospectus)
19. Purchase of Securities
Being Offered .....................Sale of the Contract and Sales
Commission (prospectus)
Offering Sales Load ................N/A
20. Underwriters ........................Sale of the Contract and Sales
Commission (prospectus)
21. Calculation of Performance
Data ................................Performance Information; Performance
Information (prospectus)
22. Annuity Payments ....................Effecting An Annuity (prospectus)
23. Financial Statements ................Financial Statements
<PAGE>
PART C -- OTHER INFORMATION
Item of Form N-4 Part C Caption
24. Financial Statements
and Exhibits ........................Financial Statements and Exhibits
(a) Financial Statements ...........(a) Financial Statements
(b) Exhibits .......................(b) Exhibits
25. Directors and Officers
of the Depositor ....................Directors and Officers of Prudential
Insurance Company of America
26. Persons Controlled By or
Under Common Control with the
Depositor or Registrant .............Persons Controlled By or Under Common
Control with the Depositor or
Registrant
27. Number of Contractowners ............Number of Contractholders
28. Indemnification .....................Indemnification
29. Principal Underwriters ..............Principal Underwriter
30. Location of Accounts
and Records .........................Location of Books and Records
31. Management Services .................Management Services
32. Undertakings ........................Undertakings and Representations
Signature Page ......................Signatures
<PAGE>
PART A
PROSPECTUS
<PAGE>
PROSPECTUS
THE PRUDENTIAL DISCOVERY SELECT GROUP VARIABLE CONTRACT ACCOUNT
GROUP VARIABLE ANNUITY CONTRACTS
DISCOVERY SELECT
This prospectus describes the DISCOVERY SELECT(SM) Group Variable Annuity
Contracts*, group variable annuity contracts offered by The Prudential Insurance
Company of America ("Prudential"), a mutual life insurance company, in
connection with retirement arrangements that qualify for federal tax benefits
under sections 401, 403(b), 408 or 457 of the Internal Revenue Code of 1986 and
with non-qualified annuity arrangements.
Contributions made on behalf of Participants may be allocated as the Participant
directs in one or more of the following ways.
o They may be allocated to one or more of twenty-two Subaccounts, each of which
invests in one of the following portfolios of The Prudential Series Fund,
Inc. (the "Prudential Series Fund") or other listed portfolios (collectively,
the "Funds"):
THE PRUDENTIAL SERIES FUND, INC.
<TABLE>
<CAPTION>
<S> <C> <C>
Money Market Portfolio Flexible Managed Portfolio Equity Portfolio
Diversified Bond Portfolio High Yield Bond Portfolio Prudential Jennison Portfolio
Government Income Portfolio Stock Index Portfolio Global Portfolio
Conservative Balanced Portfolio Equity Income Portfolio
- -----------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
<S> <C>
AIM VARIABLE INSURANCE FUNDS, INC. MFS VARIABLE INSURANCE TRUST
AIM V.I. Growth and Income Fund AIM V.I. Value Fund Emerging Growth Series Research Series
JANUS ASPEN SERIES T. ROWE PRICE EQUITY SERIES, INC.
Growth Portfolio International Growth Portfolio Equity Income Portfolio
OCC ACCUMULATION TRUST WARBURG PINCUS TRUST
Managed Portfolio Small Cap Portfolio Post-Venture Capital Portfolio
T. ROWE PRICE INTERNATIONAL SERIES, INC.
International Stock Portfolio
</TABLE>
o They may be allocated to the Guaranteed Interest Account which guarantees a
stipulated rate of interest if held for a specified period of time. This
prospectus does not describe that account and will mention the Guaranteed
Interest Account only where necessary to explain how Prudential Discovery
Select Group Variable Contract Account works.
Continued on next page
----------
PLEASE READ THIS PROSPECTUS AND KEEP IT FOR FUTURE REFERENCE. IT IS ACCOMPANIED
BY A CURRENT PROSPECTUS FOR EACH OF THE FUNDS. 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
C/O Prudential Investments
30 Scranton Office Park
Scranton, PA 18507-1789
Telephone 1-800-458-6333
* DISCOVERY SELECT is a service mark of Prudential.
<PAGE>
Continued from front cover
This prospectus provides information a prospective investor should know before
investing. Additional Information about the Contracts have been filed with the
Securities and Exchange Commission in a Statement of Additional Information,
dated _____________ 1997, which information is incorporated herein by reference,
and is available without charge upon written or oral request directed to the
address or telephone number shown on the cover page.
The accompanying prospectuses for the Funds and the related statements of
additional information describe the investment objectives and risks of investing
in the Funds. Additional Funds and subaccounts may be offered in the
future.
The Contents of the Statement of Additional Information with respect to the
Contracts appear on page__ of this prospectus.
<PAGE>
PROSPECTUS CONTENTS
Page
----
DEFINITIONS OF SPECIAL TERMS USED IN THIS PROSPECTUS.......................
BRIEF DESCRIPTION OF THE CONTRACTS.........................................
FEE TABLE..................................................................
GENERAL INFORMATION ABOUT PRUDENTIAL, PRUDENTIAL DISCOVERY VARIABLE
SELECT GROUP CONTRACT ACCOUNT AND THE INVESTMENT OPTIONS AVAILABLE
UNDER THE CONTRACTS........................................................
Prudential Insurance Company of America..............................
Prudential Discovery Select Group Variable Contract Account..........
The Funds............................................................
Guaranteed Interest Account..........................................
THE CONTRACTS..............................................................
The Accumulation Period .............................................
Allocation of Purchase Payments......................................
Asset Allocation Program.............................................
Transfers............................................................
Dollar Cost Averaging................................................
Auto-Rebalancing.....................................................
Withdrawals..........................................................
Systematic Withdrawal Plan...........................................
Texas Optional Retirement Plan.......................................
Death Benefit........................................................
Discontinuance of Contribution.......................................
Loan Provision.......................................................
Modified Procedures..................................................
CHARGES, FEES AND DEDUCTIONS...............................................
Administrative Charge and Annual Account Charge......................
Charge for Assuming Mortality and Expense Risks......................
Expenses Incurred by the Funds.......................................
Withdrawal Charge....................................................
Limitations on Withdrawal Charge.....................................
Premium Taxes........................................................
FEDERAL TAX STATUS.........................................................
Taxes on Prudential..................................................
Qualified Retirement Arrangements Using the Contracts................
Non-Qualified Arrangements Using the Contracts.......................
Withholding..........................................................
EFFECTING AN ANNUITY.......................................................
Life Annuity with Payments Certain...................................
Annuity Certain......................................................
Joint and Survivor Annuity with Payment Certain......................
Purchasing the Annuity...............................................
OTHER INFORMATION..........................................................
Misstatement of Age or Sex...........................................
Sale of the Contract and Sales Commission............................
i
<PAGE>
Voting Rights........................................................
Substitution of Fund Shares..........................................
Performance Information..............................................
Reports to Participants..............................................
State Regulation.....................................................
Legal Proceedings....................................................
Statement of Additional Information........................................
Additional Information...............................................
Financial Statements.................................................
ii
<PAGE>
DEFINITIONS OF SPECIAL TERMS USED
IN THIS PROSPECTUS
Account - See the Prudential Discovery Select Group Variable Contract Account
(the "Discovery Account") below.
Accumulation Period - The period, prior to the effecting of an annuity, during
which the amount credited to a Participant Account may vary with the investment
performance of any Subaccount of the Discovery Account, or the interest rate
credited under the Guaranteed Interest Account, as selected.
Annuitant - The person or persons, designated by the Participants upon whose
life or lives monthly annuity payments are based after an annuity is effected.
Beneficiary - A person designated by a Participant to receive benefits from
funds held under the Contract.
Business Day - A day on which both the New York Stock Exchange and Prudential
are open for business.
Code - The Internal Revenue Code of 1986, as amended.
Contractholder - The employer, association or trust to which Prudential has
issued a Contract. "You" or "Your" means the Contractholder.
Contracts - The Group Variable Annuity Contracts described in this Prospectus
and offered for use in connection with retirement arrangements that qualify for
federal tax benefits under Sections 401, 403(b), 408 or 457 of the Internal
Revenue Code and with non-qualified annuity arrangements.
Contract Value - The dollar amount held under a Contract.
Employer - Plan Sponsor.
Funds - The Portfolios of the Prudential Series Fund, Inc., AIM Variable
Insurance Funds, Inc., T. Rowe Price Equity Series, Inc., T. Rowe Price
international Series, Inc., Janus Aspen Series, MFS Variable Insurance Trust,
Warburg Pincus Trust, and OCC Accumulation Trust available under the Contract.
General Account - The assets of Prudential other than those allocated to the
Discovery Account or any other separate account of Prudential.
Guaranteed Interest Account - An allocation option under the Contract funded by
Prudential's General Account. It is not part of nor dependent upon the
investment performance of the Discovery Account. This prospectus does not
describe the Guaranteed Interest Account.
Participant - A person who makes contributions, or for whom contributions have
been made, and to whom they remain credited under the Contract.
Participant Account - An account established for each Participant to record the
amount credited to the Participant under the Contract.
Participant Account Value - The dollar amount held in a Participant Account.
Prudential - The Prudential Insurance Company of America. "We," "us," or "our"
means Prudential.
Prudential Discovery Select Group Variable Contract Account - A separate account
of Prudential registered under the Investment Company Act of 1940 as a unit
investment trust, invested through its Subaccounts in shares of the
corresponding Fund Portfolios.
Subaccount - A division of the Discovery Account, the assets of which are
invested in shares of the corresponding portfolio of the Funds.
Unit and Unit Value - A Participant is credited with Units in each Subaccount in
which he invests. The value of these Units changes each Business Day to reflect
the investment results of, and deductions of charges from, the Subaccounts, and
the expenses of the Funds in which the assets of the Subaccounts are invested.
The number of Units credited to a Participant in any Subaccount of the Discovery
Account is determined by dividing the amount of the contribution or transfer
made on his behalf to that Subaccount by the applicable Unit Value for the
Business Day on which the contribution or transfer is received at the address
shown on the
1
<PAGE>
cover of this Prospectus. The number of Units credited to a Participant under
any Subaccount will be reduced by the number of Units canceled as a result of
any transfer or withdrawal by a Participant from that Subaccount.
Valuation Period - The period of time from one determination of the value of the
amount invested in a Subaccount to the next. Such determinations are made when
the net asset values of the Funds are calculated, which is generally at 4:15
p.m. Eastern time on each day during which the New York Stock Exchange and
Prudential are open.
Variable Investment Options - The Subaccounts.
2
<PAGE>
BRIEF DESCRIPTION OF THE CONTRACTS
The Prudential Insurance Company of America ("Prudential") offers the Discovery
Select Group Variable Annuity Contracts for use in connection with retirement
arrangements that qualify for federal tax benefits under Sections 401, 403(b),
408 or 457 of the Internal Revenue Code of 1986 (the "Code") and with
nonqualified annuity arrangements. The Contracts are group annuity contracts and
generally are issued to employers (Contractholders) who make contributions under
them on behalf of their employees. A person for whom contributions have been
made and to whom they remain credited under a Contract is a "Participant."
The value of a Participant's investment depends upon the performance of the
investment option[s]. Currently, there are twenty-two variable investment
options, each of which is called a Subaccount. The assets of each Subaccount are
invested in a corresponding Fund listed beginning on page __. A Participant may
direct contributions made on his or her behalf to one or a combination of
variable investment options as well as the Guaranteed Interest Account. A
separate Participant Account is set up for each Participant. Amounts held under
a Participant Account may be withdrawn, in whole or in part, prior to the
annuity date. The Contract also provides for a death benefit.
Contributions to the Contracts may be made on behalf of a Participant through
payroll deduction arrangements or similar agreements with the Contractholder.
Any other contribution to the Contract must be at least $500, except for
contributions to an Individual Retirement Annuity for a non-working spouse under
Section 408 of the Code (or working spouse who elects to be treated as a
non-working spouse), which must be at least $250. All contributions may be
divided among the Discovery Account and Guaranteed Interest Account that
comprise the Contract. See "The Accumulation Period," pages __ .
Prudential assesses charges under the Contracts for the costs of selling and
distributing the Contracts, for administering the Contracts, and for assuming
mortality and expense risks under the Contracts. A mortality and expense risk
charge equal to an annual rate of 0.15% is deducted from the assets held in the
variable investment options. An administrative charge is also deducted from the
assets held in the variable investment options which charge is equal to an
annual rate of 0.85%. Further details about the administrative charge is found
under Fee Table, page __ and Administrative Fee and Annual Account Charge, page
__.
An additional administrative charge of up to $15, the annual account charge, is
assessed on or about the last day each calendar year and at the time of a full
withdrawal. The annual account charge will be prorated for new Participants on a
monthly basis for their first year of participation. A withdrawal charge may be
imposed upon withdrawals made in the first five years after the initial
contribution made on behalf of a Participant. The maximum withdrawal charge is
5% of the contributions made on behalf of the Participant. A charge against each
of the Fund's assets is also made by the investment adviser for providing
investment advisory and management services. Further detail about charges may be
found under Charges, Fees and Deductions, page __.
Unless restricted by the retirement arrangement under which he is covered, or by
the withdrawal restrictions imposed by federal tax law on tax-deferred annuity
contracts subject to Section 403(b) of the Code and on interests in deferred
compensation plans under Section 457 of the Code, a Participant may withdraw, at
any time, all or part of his Participant Account. See "Withdrawals," pages____.
Withdrawals may be subject to tax under the Internal Revenue Code, including,
under certain circumstances, a 10% penalty tax on premature withdrawals. See
"Federal Tax Status," pages _____. In addition, all or a part of a Participant's
Account may be transferred among the Subaccounts and Guaranteed Interest Account
without the imposition of the withdrawal charge or tax liability.
All written requests, notices, and transfer requests required by the Contracts
(other than withdrawal requests and death benefit claims), should be sent to
Prudential at the address shown on the cover of this Prospectus. Any written
inquiries also should be sent to Prudential at that address. A Participant may
effect the telephone transactions that are permitted by his Program by calling
Prudential at 1-800-458-6333. All written withdrawal requests or death benefit
claims relating to a Participant's interest must be sent to Prudential by one of
the following three means: (1) By U.S. mail to: Prudential Investments, P.O. Box
5410, Scranton, Pennsylvania 18505-5410; (2) Delivery service other than the
U.S. mail (e.g., Federal Express, etc.) sent to our office at the following
address: Prudential Investments, 30 Scranton Office Park, Scranton, Pennsylvania
18507-1789; or (3) Fax to Prudential Investments, Attention: Client Payments at:
(717) 340-4328. A withdrawal request or death benefit claim will be deemed
received in good order by Prudential as of the end of the valuation period
within which all the properly completed forms and other information required by
Prudential to pay such a request or claim (e.g., due proof of death) are
received as specified above. Receipt of a withdrawal request or death benefit
claim in good order is required by Prudential to process the transaction in the
manner explained on pages ________ of this Prospectus. Under certain Contracts,
the Contractholder or a third party acting on their behalf provides
record-keeping services that would otherwise be performed by Prudential. See
"Modified Procedures," page ________.
This Brief Description of the Contracts is intended to provide a broad overview
of the more significant features of the Contracts. More detailed information
will be found in subsequent sections of this prospectus and in the Contracts
document.
3
<PAGE>
FEE TABLE
Participant Transaction Expenses
Sales Charge Imposed on Contributions.................................. None
Maximum Withdrawal Charge (as a percentage of contributions withdrawn):
The Withdrawal Charge Will Be Equal
To The Following Percentage Of The
Years of Contract Participation Contribution Withdrawn
------------------------------- -----------------------------------
First Year 5%
Second Year 4%
Third Year 3%
Fourth Year 2%
Fifth Year 1%
Sixth and Subsequent Years No Charge
Maximum Annual Account Charge.......................................... $15
Discovery Account Annual Expenses
(as a Percentage of average Participant Account Value)
All Subaccounts
---------------
Mortality and Expense Risk Charge .............. 0.15%
Administrative Fee ............................. 0.85%
-----
Total Separate Account Annual Expenses ......... 1.00%
-----
Annual Expenses Of The Funds
(as a percentage of portfolio average net assets)
<TABLE>
<CAPTION>
Total Fund Annual
Investment Expenses (After
Management Other Expense
Fee Expenses Reimbursements)
---------- -------- -----------------
<S> <C> <C> <C>
THE PRUDENTIAL SERIES FUND(1)
Money Market Portfolio ................... 0.40% 0.04% 0.44%
Diversified Bond Portfolio ............... 0.40% 0.05% 0.45%
Government Income Portfolio .............. 0.40% 0.06% 0.46%
Conservative Balanced Portfolio .......... 0.55% 0.04% 0.59%
Flexible Managed Portfolio ............... 0.60% 0.04% 0.64%
High Yield Bond Portfolio ................ 0.55% 0.08% 0.63%
Stock Index Portfolio .................... 0.35% 0.05% 0.40%
Equity Income Portfolio .................. 0.40% 0.05% 0.45%
Equity Portfolio ......................... 0.45% 0.05% 0.50%
Prudential Jennison Portfolio ............ 0.60% 0.06% 0.66%
Global Portfolio ......................... 0.75% 0.17% 0.92%
</TABLE>
4
<PAGE>
Total Fund Annual
Investment Expenses (After
Management Other Expense
Fee Expenses Reimbursements)
----- -------- ----------------
AIM VARIABLE INSURANCE FUNDS, INC.(2)
AIM V.I. Growth and Income Fund .... 0.65% 0.13% 0.78%
AIM V.I. Value Fund................. 0.64% 0.09% 0.73%
JANUS ASPEN SERIES(3)
Growth Portfolio.................... 0.65% 0.04% 0.69%
International Growth Portfolio...... 0.05% 1.21% 1.26%
MFS VARIABLE INSURANCE TRUST(4)
Emerging Growth Series ............. 0.75% 0.25% 1.00%
Research Series..................... 0.75% 0.25% 1.00%
OCC ACCUMULATION TRUST(5)
Managed Portfolio................... 0.80% 0.10% 0.90%
Small Cap Portfolio................ 0.80% 0.22% 1.02%
T. ROWE PRICE(6)
T. Rowe Price Equity Series,
Inc., Equity Income Portfolio....... 0.85% 0.00% 0.85%
T. Rowe Price International
Series, Inc., International Stock
Portfolio .......................... 1.05% 0.00% 1.05%
WARBURG PINCUS TRUST(7)
Post-Venture Capital Portfolio ..... 0.62% 0.78% 1.40%
The purpose of the foregoing tables is to assist Participants in understanding
the expenses that they bear, directly or indirectly relating to the Prudential
Discovery Select Group Variable Contract Account and the Funds. The expenses
relating to the Funds (other than those in the Prudential Series Fund) have been
provided to Prudential by the Funds and have not been independently verified by
Prudential. See the sections on charges in this Prospectus and the accompanying
prospectuses for the Funds.
(1) The Prudential Series Fund. With respect to The Prudential 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.
(2) AIM Variable Insurance Funds, Inc. AIM may from time to time voluntarily
waive or reduce its respective fees. Fee waivers or reductions, other than those
contained in the agreement with the adviser, may be modified or terminated at
any time.
(3) Janus Aspen Series. The fees and expenses for the Janus Aspen Series Growth
Portfolio and International Growth Portfolio in the table above are based on
gross expenses before expense offset arrangements for the fiscal year ended
December 31, 1996, net of fee waivers or reductions from Janus Capital. Janus
Capital has agreed to reduce each Portfolio's advisory fee to the extent such
fee exceeds the effective rate of the Janus retail fund corresponding to such
Portfolio. Janus Capital may terminate this fee reduction or any of the expense
limitations set forth herein at any time upon 90 days' notice to the Trustees of
the Janus Aspen Series. The fees and expenses for the International Growth
Portfolio have been restated to reflect the 1.25% expense limitation in effect
from June 3, 1996 through April 30, 1998. Without fee waivers or reductions, the
Management Fee, Other Expenses and Total Fund Annual Expenses would have been
0.79%, 0.04% and 0.83% for the Growth Portfolio and 1.00%, 1.21% and 2.21% for
the International Growth Portfolio.
(4) MFS Variable Insurance Trust. The Adviser has agreed to bear expenses for
each Series, subject to reimbursement by each Series, such that each Series'
"Other Expenses" shall not exceed 0.25% of the average daily net assets of the
Series during the current fiscal year. See "Information Concerning Shares of
Each Series--Expenses." Otherwise, "Other Expenses" for the Emerging Growth
Series and the Research Series would be 0.41% and 0.73%, respectively, and
"Total Operating Expenses" would be 1.16% and 1.48%, respectively, for these
Series.
5
<PAGE>
(5) OCC Accumulation Trust. The annual expenses of OCC Accumulation Trust
Portfolios (the "Portfolios") as of December 31, 1996 have been restated to
reflect new management fee and expense limitation arrangements in effect as of
May 1, 1996. Additionally, Other Expenses are shown gross of certain expense
offsets afforded the Portfolios which effectively lowered overall custody
expenses. Effective May 1, 1996, the expenses of the Portfolios were
contractually limited by OpCap Advisors so that their respective annualized
operating expenses (net of any expense offsets) do not exceed 1.25% of their
respective average daily net assets. Furthermore, through December 31, 1997, the
annualized operating expenses of the Managed and Small Cap Portfolios will be
voluntarily limited by OpCap Advisors so that annualized operating expenses (net
of any expense offsets) of these Portfolios do not exceed 1.00% of their
respective average daily net assets. Without such contractual and voluntary
expense limitations and without giving effect to any expense offsets, the
Management Fees, Other Expenses and Total Portfolio Annual Expenses incurred for
the fiscal year ended December 31, 1996 would have been: .80%, .10% and .90%,
respectively, for the Managed Portfolio, and .80%, .26% and 1.06%, respectively,
for the Small Cap Portfolio.
(6) T. Rowe Price Equity Series, Inc. and T. Rowe Price International Series,
Inc. With respect to the T. Rowe Price Funds, the Investment Management Fees
include the ordinary expenses of operating the Funds.
(7) Warburg Pincus Trust. With respect to the Warburg Pincus Trust Post-Venture
Capital Portfolio, absent the anticipated waiver of fees by the Fund's
investment adviser and co-administrator, the Investment Management Fee would
equal 1.25%, Other Expenses would equal 0.82%, and Total Fund Annual Expenses
would equal 2.07%. Other Expenses for the Fund 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 Portfolio Operating Expenses to the
limits shown in the table above through December 31, 1997.
Examples of Fees and Expenses
The following examples illustrate the cumulative dollar amount of all the above
expenses that would be incurred on each $1,000 of Participant investment.
o The examples assume a consistent 5% annual return on invested assets.
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o The examples assume that the annual account charge is deducted from the
assets of each Subaccount based on a Participant Account Value of $25,000.
For a term less than 10 years, the expenses shown in Table I describe applicable
charges for withdrawal of an entire Participant Account. THE EXAMPLES SHOULD NOT
BE CONSIDERED TO BE A REPRESENTATION OF PAST OR FUTURE EXPENSES; ACTUAL EXPENSES
INCURRED IN ANY GIVEN YEAR MAY BE MORE OR LESS THAN THOSE SHOWN IN THE EXAMPLES.
TABLE I
If a Participant withdraws his entire Participant Account Value from the
specified Subaccount just prior to the end of the applicable time period, the
Participant would pay the following cumulative expenses on each $1,000 invested.
------
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
The Prudential Series
Fund
Money Market Subaccount... $65 $ 77 $ 92 $179
Diversified Bond Subaccount 65 78 92 180
Government Income
Subaccount................ 65 78 93 181
Conservative Balanced
Subaccount................ 67 82 100 195
Flexible Managed Subaccount 67 84 102 201
High Yield Bond Subaccount 67 83 102 200
Stock Index Subaccount.... 65 76 90 175
Equity Income Subaccount.. 65 78 92 180
Equity Subaccount......... 66 79 95 186
Prudential Jennison
Subaccount................ 67 84 103 203
Global Subaccount......... 70 92 117 231
AIM Variable Insurance
Funds, Inc.
AIM V.I. Growth and Income
Subaccount................ 69 88 110 216
AIM V.I. Value Subaccount. 68 86 107 211
Janus Aspen Series
Growth Subaccount......... 68 85 105 206
International Growth
Subaccount................ 74 102 134 266
MFS Variable Insurance
Trust
Emerging Growth Subaccount 71 95 121 239
Research Subaccount....... 71 95 121 239
OCC Accumulation Trust
Managed Subaccount........ 70 92 116 229
Small Cap Subaccount...... 71 95 122 241
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T. Rowe Price
T Rowe Price Equity Series
Inc., Equity Income
Subaccount................. $69 $ 90 $113 $223
T. Rowe Price International
Series, Inc., International
Stock Subaccount........... 71 96 123 244
Warburg Pincus Trust
Post-Venture Capital Subaccount 75 107 141 280
TABLE II
If a Participant does not withdraw any portion of his Participant Account Value
from the specified Subaccount or use his Participant Account Value to affect an
annuity as of the end of the applicable time period, the Participant would pay
the following cumulative expenses on each $1,000 invested.
------
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
THE PRUDENTIAL SERIES
FUND
Money Market Subaccount... $15 $47 $ 82 $179
Diversified Bond Subaccount 15 48 82 180
Government Income
Subaccount................ 15 48 83 181
Conservative Balanced
Subaccount................ 17 52 90 195
Flexible Managed
Subaccount................ 17 54 92 201
High Yield Bond Subaccount 17 53 92 200
Stock Index Subaccount.... 15 46 80 175
Equity Income Subaccount.. 15 48 82 180
Equity Subaccount......... 16 49 85 186
Prudential Jennison
Subaccount................ 17 54 93 203
Global Subaccount......... 20 62 107 231
AIM VARIABLE INSURANCE
FUNDS, INC.
AIM V.I. Growth and Income
Subaccount.......... 19 58 100 216
AIM V.I. Value Subaccount. 18 56 97 211
JANUS ASPEN SERIES
Growth Subaccount......... 18 55 95 206
International Growth
Subaccount................ 24 72 124 266
MFS VARIABLE INSURANCE
TRUST
Emerging Growth
Subaccount................ 21 65 111 239
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Research Subaccount....... $21 $65 $111 $239
OCC ACCUMULATION TRUST
Managed Subaccount........ 20 62 106 229
Small Cap Subaccount..... 21 65 112 241
T. ROWE PRICE
T. Rowe Price Equity Series,
Inc., Equity Income
Subaccount................ 19 60 103 223
T. Rowe Price International
Series, Inc., International
Stock Subaccount.......... 21 66 113 244
WARBURG PINCUS TRUST
Post-Venture Capital
Subaccount................ 25 77 131 280
Loans taken by a Participant from a Participant Account may be subject to
charges for establishing and maintaining the loan. The examples do not take into
account any deduction for such charges.
GENERAL INFORMATION ABOUT PRUDENTIAL,
THE PRUDENTIAL DISCOVERY SELECT GROUP VARIABLE CONTRACT ACCOUNT AND
THE INVESTMENT OPTIONS AVAILABLE UNDER THE CONTRACT
The Prudential Insurance Company of America
Prudential is a mutual life insurance company incorporated in 1873 under the
laws of the State of New Jersey. Its corporate office is located at Prudential
Plaza, Newark, New Jersey. It has been investing for pension funds since 1928.
Prudential is responsible for the administrative and recordkeeping functions of
the Prudential Discovery Select Group Variable Contract Account and pays the
expenses associated with them. These functions include enrolling Participants,
receiving and allocating contributions, maintaining Participant Accounts,
preparing and distributing confirmations, statements, and reports. The
administrative and recordkeeping expenses borne by Prudential include salaries,
rent, postage, telephone, travel, legal, actuarial and accounting fees, office
equipment, stationery and maintenance of computer and other systems.
Prudential is reimbursed for these administrative and recordkeeping expenses by
the annual account charge and the daily charge against the assets of each
Subaccount for administrative expenses.
THE PRUDENTIAL DISCOVERY SELECT GROUP VARIABLE CONTRACT ACCOUNT
The Prudential Discovery Select Group Variable Contract Discovery Account (the
"Discovery Account") was established on February 11, 1997, under New Jersey law
as a separate investment account. The Discovery Account meets the definition of
a "separate account" under federal securities laws. Prudential is the legal
owner of the assets in the Discovery Account and is obligated to provide all
benefits under the Contracts. Prudential will at all times maintain assets in
the Discovery Account with a total market value at least equal to the reserve
and other liabilities relating to the variable benefits attributable to the
Discovery Account. These assets are segregated from all of Prudential's other
assets and are not chargeable with liabilities arising out of any other business
Prudential conducts. In addition to these assets, the Discovery Account's assets
may include funds contributed by Prudential to commence operation of the
Discovery Account and may include accumulations of the charges Prudential makes
against the Discovery Account. From time
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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 Discovery Account.
The Discovery 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 Discovery Account. For state law purposes, the Discovery Account is
treated as a part or division of Prudential. There are currently twenty-two
Subaccounts within the Discovery Account which invest in corresponding
portfolios of the Funds available under the Contracts. Additional Subaccounts
may be established in the future.
The Funds
The following is a list of each Fund, its investment objectives and its
investment adviser:
THE PRUDENTIAL SERIES FUND, INC.
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. There are no assurances that this
portfolio will maintain a stable net asset value.
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. 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.
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 of established
companies, in proportions believed by the investment advisor 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
advisor to be appropriate for an investor desiring diversification of investment
who is willing to accept a relatively high risk 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 is 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.
Global Portfolio. Long-term growth of capital through investment primarily in
common stock and common stock equivalents of foreign and domestic issues.
Current income, if any, is incidental.
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Prudential is the investment advisor for the assets of each of the portfolios of
the Prudential Series Fund. 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 Prudential 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.
AIM VARIABLE INSURANCE FUNDS, INC.
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.
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
Advisors, Inc. to be undervalued relative to the current or projected earnings
of the companies issuing the securities, or relative market values of assets
owned by the 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.
AIM Advisors, Inc., serves as the investment adviser to the AIM V.I. Growth and
Income Fund and the AIM V.I. Value Fund.
JANUS ASPEN SERIES
Growth Portfolio. A diversified portfolio that seeks long-term growth of capital
by investing primarily in common stocks, with an emphasis on companies with
larger market capitalizations.
International Growth Portfolio. A diversified portfolio that seeks long-term
growth of capital by investing primarily in common stocks of foreign issuers.
Janus Capital Corporation is the investment adviser to the Growth Portfolio and
the International Growth Portfolio and is responsible for the day-to-day
management of the portfolios and other business affairs of the portfolios.
MFS VARIABLE INSURANCE TRUST
Emerging Growth Series. This Series seeks to provide long-term growth of
capital. Dividend and interest income from portfolio securities, if any, is
incidental to the Series' investment objective of long-term growth of capital.
Research Series. The Research Series' investment objective is to provide
long-term growth of capital and future income.
Massachusetts Financial Services Company, a Delaware corporation, is the
investment adviser to each MFS Series.
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<PAGE>
OCC ACCUMULATION TRUST (formerly known as Quest for Value Accumulation Trust)
Managed Portfolio. Growth of capital over time through investment in a portfolio
consisting of common stocks, bonds and cash equivalents, the percentages of
which will vary based on management's assessments of relative investment.
Small Cap Portfolio. Capital appreciation through investment in a diversified
portfolio of equity securities of companies with market capitalizations of under
$1 billion.
OpCap Advisors (formerly known as Quest for Value Advisors, the "OCC Manager")
is responsible for management of the OCC Accumulation Trust's business. Pursuant
to the investment advisory agreement with the OCC Accumulation Trust, and
subject to the authority of the Board of Trustees, the OCC Manager supervises
the investment operation of the Managed Portfolio and the Small Cap Portfolio,
furnishes advice and recommendations with respect to investments, investment
policies and the purchase and sale of securities and provides certain
administrative services for the OCC Accumulation Trust.
T. ROWE PRICE
T. Rowe Price Equity Series, Inc., Equity Income Portfolio. The fund's objective
is to provide substantial dividend income as well as long-term capital
appreciation through investment in common stocks of established companies.
T. Rowe Price International Series, Inc., International Stock Portfolio. The
fund's objective is long-term growth of capital through investment primarily in
common stocks of established, non-U.S. companies.
T. Rowe Price Associates, Inc. is the Investment Manager for the Equity Income
Portfolio and Rowe Price-Fleming International, Inc. is the Investment Manager
for the International Stock Portfolio.
WARBURG PINCUS TRUST
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.
The Warburg Pincus Trust employs Warburg, Pincus Counselors, Inc. as investment
adviser and Abbott Capital Management, L.P. as its sub-investment adviser with
respect to a portion of the Post-Venture Capital Portfolio allocated to private
limited partnerships or other investment funds.
Further information about the Fund portfolios can be found in the accompanying
prospectuses for each Fund.
The investment advisors with respect to the various funds charge a daily
investment management fee as compensation for their services, as set forth in
the table beginning on page __ and as more fully described in the prospectus for
each Fund.
It is conceivable that in the future it may become disadvantageous for both
variable life insurance and variable annuity contract separate accounts to
invest in the same underlying mutual fund. Although neither Prudential, nor the
Funds currently foresees any such disadvantage, the Funds' Boards of Directors
intend to monitor events in order to identify any material conflict between
variable life insurance and variable annuity Contractholders and to determine
what action, if any, should be taken in response thereto. This might force a
Fund to sell securities at disadvantageous prices. Material conflicts could
result from such things as: (1) changes in state insurance law; (2) changes in
federal income tax law; (3) changes in the investment management of any
portfolio of the Funds; or (4) differences between voting instructions given by
variable life insurance and variable annuity Contractholders.
Prudential will be compensated by an affiliate of each of the Funds (other than
those in the Prudential Series Fund) based upon an annual percentage of the
average assets held in the Fund by Prudential under
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<PAGE>
the Contracts. These percentages vary by Fund, and reflect administrative and
other services provided by Prudential.
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 operation is contained in the
accompanying prospectuses for each 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.
GUARANTEED INTEREST ACCOUNT
The Guaranteed Interest Account is a credited interest option available to fund
certain group annuity contracts issued by Prudential. Amounts allocated to the
Guaranteed Interest Account become part of the General Account of Prudential,
which consists of all assets owned by Prudential other than those in the Account
and other separate accounts of Prudential. Subject to applicable law, Prudential
has sole discretion over the investment of the assets of the General Account.
Because of exemptive and exclusionary provisions, interests in the General
Account (which include interests in the Guaranteed Interest Account) are not
registered under the Securities Act of 1933 and the General Account is not
registered as an investment company under the Investment Company Act of 1940.
Accordingly, neither the General Account nor any interests therein are 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 disclosures in
the Prospectus relating to the General Account. Disclosures regarding the
General Account may, however, be subject to certain generally applicable
provisions of the federal securities laws relating to the accuracy and
completeness of statements made in prospectuses.
THE CONTRACTS
Prudential generally issues the Contracts to employers whose employees may
become Participants. Under an IRA, a Participant's spouse may also become a
Participant. A Contract may be issued to an association that represents
employers of employees who become Participants, to an association or union that
represents members that become Participants and to a trustee of a trust with
participating employers whose employees become Participants. Even though an
employer, an association or a trustee is the Contractholder, the Contract
normally provides that Participants shall have the rights and interests under
them that are described in this prospectus. However, when a Contract is used to
fund a deferred compensation plan established under Section 457 of the Internal
Revenue Code, for example, all rights under the Contract are owned by the
employer to whom, or on whose behalf, the Contract is issued. All amounts
becoming payable under the Contract are payable to the employer and are its
exclusive property. For a plan established under Section 457 of the Code, the
employee has no rights or interests under the Contract, including any right or
interest in any Subaccount of the Discovery Account, except as provided in the
employer's plan. This may also be true with respect to certain non-qualified
annuity arrangements.
Also, a particular plan, even if it is not a deferred compensation plan, may
limit a Participant's exercise of certain rights under a Contract. Participants
should check the provisions of their employer's plan or any agreements with the
employer to see if there are any such limitations and, if so, what they are.
THE ACCUMULATION PERIOD
Contributions; Crediting Units; Enrollment Forms; Deduction for Administrative
Expenses.
Contributions to the Contract ordinarily will be made periodically pursuant to a
payroll deduction or similar agreement between the Participant and his employer.
Any contributions to an IRA must be in an amount of no less than $500, except
for contributions to an IRA for a non-working spouse (or working spouse who
elects to be treated as a non-working spouse).
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A Participant designates what portion of the contributions made on his behalf
should be invested in the Subaccounts or the Guaranteed Interest Account. The
Participant may change this designation usually by notifying Prudential at the
address shown on the cover page of this prospectus. Under certain Contracts, an
entity other than Prudential keeps certain records, and Participants under those
Contracts must contact the record-keeper. See "Modified Procedures," page __.
The full amount (100%) of each contribution designated for investment in any
Subaccount is credited to a Participant Account maintained for the Participant.
The number of Units credited to a Participant in a Subaccount is determined by
dividing the amount of the contribution made on his behalf to that Subaccount by
the Subaccount's Unit Value for the business day on which the contribution is
received at the address shown on the cover page of this Prospectus.
The initial contribution made for a Participant will be invested in a Subaccount
no later than two business days after it is received by Prudential, if it is
preceded or accompanied by satisfactory enrollment information. If the
Contractholder submits an initial contribution on behalf of one or more new
Participants that is not preceded or accompanied by satisfactory enrollment
information, then Prudential will allocate such contribution to the Money Market
Subaccount upon receipt, and also will send a notice to the Contractholder that
requests allocation information for each such Participant. If the necessary
enrollment information is not received in response to its initial notice to the
Contractholder, Prudential will deliver up to three additional notices to the
Contractholder at monthly intervals that request such allocation information.
After 105 days have passed from the time that Units of the Money Market
Subaccount were purchased on behalf of Participants who failed to provide the
necessary enrollment information, Prudential will redeem the relevant Units and
pay the proceeds (including earnings thereon) to the Contractholder. Any
proceeds paid to the Contractholder under this procedure may be considered a
prohibited and taxable reversion to the Contractholder under current provisions
of the Internal Revenue Code of 1986, as amended. Similarly, returning proceeds
may cause the Contractholder to violate a requirement under the Employee
Retirement Income Security Act of 1974, as amended, to hold all plan assets in
trust. Both problems may be avoided if the Contractholder arranges to have the
proceeds paid into a qualified trust or annuity contract.
The number of Units of a particular Subaccount credited to a Participant will
not be affected by any subsequent change in the value of those Units, but the
dollar value of a Unit will vary from business day to business day depending
upon the investment experience of the Subaccount. The number of Units credited
to a Participant in a Subaccount will be reduced as the result of any annual
account charge.
The value of a Participant Account in a Subaccount on any particular day is
determined by multiplying the total number of Units credited to the Participant
by the Subaccount's Unit Value on that day.
The Unit Value for each Subaccount was set at $10.00 on the date of commencement
of operations of that Subaccount. The Unit Value for any subsequent business day
is determined as of the end of that day by multiplying the Unit Change Factor
for that day by the Unit Value for the preceding business day.
The Unit Change Factor for a Subaccount for any business day is determined by
dividing the current day net asset value for Fund shares by the net asset value
for shares on the previous business day. This factor is then reduced by a daily
equivalent of the mortality and expense risk fee and the administrative fee. The
value of the assets of a Subaccount is determined by multiplying the number of
Fund shares held by that Subaccount by the net asset value of each share and
adding the value of dividends declared by the Fund but not yet paid.
Allocation of Purchase Payments
A Participant determines how the initial contribution will be allocated among
the Subaccounts by specifying the desired allocation on the application or
enrollment form. A Participant may choose to allocate nothing to a particular
Subaccount. Unless a Participant tells us otherwise, subsequent contributions
will be allocated in the same proportions as the most recent contribution made
by that Participant. A Participant may change the way in which subsequent
contributions are allocated by providing Prudential with proper written
instruction or by telephoning Prudential Investments, 30 Scranton Office Park,
Scranton,
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Pennsylvania 18507-1789 at the toll-free number provided by Prudential, once a
Participant has provided the appropriate identification to effect a telephone
transfer. See Transfers, below.
Asset Allocation Program
An Asset Allocation Program may be available to assist Participants in
determining how to allocate purchase payments. If a Participant chooses to
participate in the program, the Participant may do so by utilizing a form
available in the employee enrollment kit. The form will include a series of
illustrations depicting various asset allocation models based on age and risk
tolerance. In the future, a more comprehensive model based on an internet web
site may be available for use by Participants as well. The Asset Allocation
Program will be available at no charge to the Participant. A Participant is
under no obligation to participate in the program or to invest according to the
program recommendations. A Participant may ignore, in whole or in part, the
investment allocations provided by the program.
The Asset Allocation Program is intended as an aid in making purchase payment
allocations. It is not a guarantee of investment return and there can be no
assurance that any portfolio will attain its investment objectives. A
Participant should consider reviewing his or her investor profile questionnaire
annually, and each time his or her investor profile changes.
Transfers
A Participant may transfer out of an investment option into any combination of
other investment options available under the Contract. The transfer request may
be in dollars, such as a request to transfer $1,000 from one Subaccount or from
the Guaranteed Interest Account, or, in the case of Subaccounts, may be in terms
of a percentage reallocation among Subaccounts. In the latter case, the
percentages must be whole numbers. A Participant may make transfers by proper
written notice to Prudential Investments, or by telephone, once the Participant
has provided appropriate identification to effect a telephone transfer.
If a Contractholder has telephone privileges, each Participant will
automatically be enrolled to use the Telephone Transfer System. A Participant
may decline those privileges on a form supplied by the Contractholder or
Prudential. Prudential has adopted procedures designed to ensure that requests
by telephone are genuine. We will not be held liable for following telephone
instructions we reasonably believe to be genuine. We cannot guarantee that a
Participant will be able to get through to complete a telephone transfer during
peak periods such as periods of drastic economic or market change.
Unless restricted by the retirement arrangement under which a Participant is
covered, upon the receipt by Prudential of a duly completed written transfer
request form or properly authorized telephone transfer request, all or a portion
of the Participant Account in any of the Subaccounts will be transferred to
another Subaccount or from the Guaranteed Interest Account to the Subaccounts.
Transfers from the Guaranteed Interest Account may be restricted. There is no
minimum transfer amount. As of the day the transfer request is received, the
Participant's Subaccount(s) from which the transfer is made will be reduced by
the number of Units obtained by dividing the amount to be transferred by the
Unit Value for that day. If the transfer is made to another Subaccount as of the
same day, the number of Units credited to the Participant in that Subaccount
will be increased by means of a similar calculation. Prudential reserves the
right to limit the frequency of these transfers. All transfers are subject to
the terms and conditions set forth in this Prospectus and in the Contract(s)
covering a Participant.
Different procedures may apply for Contracts under which an entity other than
Prudential provides record keeping services. Although there is presently no
charge for transfers, Prudential reserves the right to impose such charges in
the future. In no event will Dollar Cost Averaging and Auto-Rebalancing
transfers be subject to such charge.
A Contract may include a provision that, upon discontinuance of contributions
for all Participants of an employer covered under a Contract, the Contractholder
may request Prudential to make transfer payments from any of the Subaccounts to
a designated alternate funding agency. If the Contract is used in connection
with certain tax-deferred annuities subject to Section 403(b) of the Code, or
with IRAs, Prudential will
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promptly notify each affected Participant and each beneficiary of a deceased
Participant that such a request has been received. Within thirty days of receipt
of such notice, each recipient may elect in writing on a form approved by
Prudential to have any of his or her Subaccounts transferred to the alternate
funding agency. If he or she does not so elect, his or her investment options
will continue in force under the Contract. If he or she does so elect, his or
her account will be canceled as of a "transfer date" which is the business day
specified in the Contractholder's request or 90 days after Prudential receives
the request, whichever is later. The product of units in the Participant's
Subaccounts immediately prior to cancellation and the appropriate unit value on
the transfer date, less the applicable withdrawal and annual account charges,
will be transferred to the designated funding agency in cash.
Subject to any conditions or limitations regarding transfers contained in the
tax-deferred annuity arrangement under which a Participant is covered, a
Participant can continue to make transfers of all or part of his interest in his
Participant Account among the available investment options offered, and can
transfer directly all or part of his interest in his Participant Account to a
Section 403(b) tax-deferred annuity contract of another insurance company or to
a mutual fund custodial account under Section 403(b)(7).
Contributions may be discontinued for all Participants under a Contract or for
all Participants of an employer covered under the Contract used in connection
with a deferred compensation plan subject to Section 457 of the Code due to
certain circumstances, such as a change in any law or regulation, which would
have an adverse effect on Prudential in fulfilling the terms of the Contract. If
contributions are so discontinued, Prudential may initiate transfer payments
from any Subaccount to an alternate funding agency. The transfer would be made
as described in the paragraph above.
Under certain types of retirement arrangements, the Retirement Equity Act of
1984 requires that in the case of a married Participant, certain requests for
transfer payments other than those described above must include the consent of
the Participant and spouse and must be notarized or witnessed by an authorized
plan representative.
Transfers among Subaccounts will take effect as of the end of the Valuation
Period in which a proper transfer request is received at Prudential Investments.
Dollar Cost Averaging
Additionally, an administrative feature called Dollar Cost Averaging ("DCA") may
be available to Contractholders. This feature allows Participants to transfer
amounts out of the Guaranteed Interest Account or one of the variable investment
options and into one or more other variable investment options. Transfers may be
specific dollar amounts or percentages of the amount in the DCA account at the
time of the transfer. A Participant may ask that transfers be made monthly,
quarterly, semi-annually or annually. A Participant can add to the DCA account
at any time.
Each automatic transfer will take effect in monthly, quarterly, semi-annual or
annual intervals as designated by the Participant. If the New York Stock
Exchange is not open on a transfer date, the transfer will take effect as of the
end of the valuation period which immediately follows that date. Automatic
transfers continue until the amount specified has been transferred, or until the
Participant notifies us and we process a change in allocation or cancellation of
the feature.
Auto-Rebalancing
The Contracts may offer another investment technique in the future that
Participants may find attractive. The Auto-Rebalancing feature will allow
Participants to automatically rebalance subaccount assets at specified intervals
based on percentage allocations that they choose. For example, suppose a
Participant's initial investment allocation of variable investment options is
split 40% and 60%, respectively. Then, due to investment results, that split
changes. A Participant may instruct that those assets be rebalanced to his or
her original or different allocation percentages. Auto-Rebalancing can be
performed on a one-time basis or periodically, as a Participant chooses. A
Participant may select that rebalancing occur in monthly, quarterly, semi-annual
or annual intervals. Rebalancing will take effect as of the end of the valuation
period in the intervals and will continue at those intervals until he or she
notifies us otherwise. If the New York Stock Exchange
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is not open on the rebalancing date, the transfer will take effect as of the end
of the valuation period which immediately follows that date. The Guaranteed
Interest Account cannot participate in this administrative feature.
Withdrawals
Under certain circumstances as described in the retirement arrangement under
which he is covered, a Participant may withdraw at any time all or part of his
Participant Account Value that is attributable to employer contributions or
after-tax Participant contributions, if any.
The Internal Revenue Code imposes restrictions on withdrawals from tax-deferred
annuities subject to Section 403(b) of the Code. Pursuant to Section 403(b)(11)
of the Code, amounts attributable to a Participant's salary reduction
contributions (including the earnings thereon) that are made under a tax
deferred annuity after December 31, 1988 can only be withdrawn (redeemed) when
the Participant attains age 59 1/2, separates from service with his employer,
dies, or becomes disabled (within the meaning of Section 72(m)(7) of the Code).
However, the Code permits the withdrawal at any time of amounts attributable to
tax-deferred annuity salary reduction contributions (excluding the earnings
thereon) that are made after December 31, 1988, in the case of a hardship. If
the arrangement under which a Participant is covered contains a financial
hardship provision, withdrawals can be made in the event of the hardship.
Furthermore, subject to any restrictions upon withdrawals contained in the
tax-deferred annuity arrangement under which a Participant is covered, a
Participant can withdraw at any time all or part of his Participant Account
Value under a predecessor Prudential tax-sheltered annuity contract, as of
December 31, 1988. Amounts earned after December 31, 1988 on the December 31,
1988 balance in a Participant Account attributable to salary reduction
contributions are, however, subject to the Section 403(b)(11) withdrawal
restrictions discussed above.
With respect to retirement arrangements other than tax-deferred annuities
subject to Section 403(b) of the Code, a Participant's right to withdraw at any
time all or part of his Participant Account Value may be restricted by the
retirement arrangement under which he is covered. For example, Code Section 457
plans typically permit withdrawals only upon attainment of age 70 1/2,
separation of service, or for unforeseeable emergencies.
You may specify from which investment options you would like the withdrawal
processed. The withdrawal amount may be specified as a dollar amount or as a
percentage of the Participant Account Value in the applicable Subaccount(s). If
you do not specify from where you would like the withdrawal processed, a partial
withdrawal will be withdrawn proportionally from all investment options.
Only amounts withdrawn from contributions (including full withdrawals) are
subject to a withdrawal charge. For purposes of determining withdrawal charges,
withdrawals are considered as having been made first from contributions. See
Withdrawal Charge, page __. The withdrawal will be effected as of the end of the
Valuation Period in which a proper withdrawal request is received at Prudential
Investments.
Prudential will generally pay the amount of any withdrawal, less any required
tax withholding, within 7 days after we receive a properly completed withdrawal
request. We will adjust a Participant Account to reflect any applicable
withdrawal and/or annual account charge. We may delay payment of any withdrawal
allocable to the Subaccount(s) for a longer period if the disposal or valuation
of the Discovery 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.
Systematic Withdrawal Plan
If permitted by the Internal Revenue Code and the retirement arrangement under
which a Participant is covered, Prudential offers systematic withdrawals as an
administrative privilege. Under a systematic withdrawal arrangement a
Participant may arrange for systematic withdrawals from the Subaccounts and the
Guaranteed Interest Account in which he invests. A Participant may arrange for
systematic withdrawals only if at the time he elects to have such an
arrangement, the balance in his Participant Account is at least
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$5,000. A Participant who has not reached age 59 1/2, however, may not elect a
systematic withdrawal arrangement unless he has first separated from service
with his employer. In addition, the $5,000 minimum balance does not apply to
systematic withdrawals made for the purpose of satisfying minimum distribution
rules.
Federal income tax provisions applicable to the retirement arrangement under
which a Participant is covered may significantly affect the availability of
systematic withdrawals, how they may be made, and the consequences of making
them. Withdrawals by Participants are generally taxable and Participants who
have not reached age 59 1/2 may incur substantial tax penalties. Withdrawals
made after a Participant has attained age 70 1/2 and by beneficiaries must
satisfy certain minimum distribution rules. See "Federal Tax Status,"
pages __ - __.
Systematic withdrawals may be arranged only pursuant to an election on a form
approved by Prudential. Under certain types of retirement arrangements, an
election to arrange for systematic withdrawals by a married Participant must be
consented to in writing by the Participant's spouse, with signatures notarized
or witnessed by an authorized plan representative. The election must specify
that the systematic withdrawals shall be made on a monthly, quarterly,
semi-annual, or annual basis.
All systematic withdrawals shall be effected as of the day of the month
specified by the Contractholder, or, if such day is not a business day, then on
the next succeeding business day. Systematic withdrawals shall continue until
the Participant has withdrawn all of the balance in his Participant Account or
has instructed Prudential in writing to terminate his systematic withdrawal
arrangement. The Participant may elect to make systematic withdrawals in equal
dollar amounts (in which case each withdrawal must be at least $250), unless it
is made to satisfy minimum distribution rules, or over a specified period of
time (at least three years). Where the Participant elects to make systematic
withdrawals over a specified period of time, the amount of each withdrawal --
which will vary, reflecting investment experience during the withdrawal period
- -- will be equal to the sum of the balances then in the Participant Account
divided by the number of systematic withdrawals remaining to be made during the
withdrawal period.
Systematic withdrawals shall be taken first out of the Participant's investment,
if any, in the Guaranteed Interest Account until that amount is exhausted.
Thereafter, systematic withdrawals will be taken pro rata from the Subaccounts.
A Participant may change the frequency, amount or duration of his systematic
withdrawals by submitting a form to Prudential that Prudential will provide to
him upon request. A Participant may make such a change only once during each
calendar year.
A Participant may at any time instruct Prudential to terminate the Participant's
systematic withdrawal arrangement, and no systematic withdrawals will be made
for him after Prudential has received his instruction. A Participant who chooses
to stop making systematic withdrawals may not again make them until the next
calendar year and may be subject to federal tax consequences as a result
thereof.
An arrangement to make systematic withdrawals will not affect any of the
Participant's other rights under the Contracts, including the right to make
withdrawals, and purchase a fixed dollar annuity.
Currently, Prudential does not impose a withdrawal charge upon systematic
withdrawals, however, Prudential may apply a withdrawal charge on systematic
withdrawals where payments are made for less than three years. Prudential
currently permits a Participant who is receiving systematic withdrawals and over
the age of 59 1/2 to make one additional, non-systematic, withdrawal during each
calendar year in an amount that does not exceed 10% of the sum of his balances
in the Account and the Guaranteed Interest Account without the application of
the withdrawal charge.
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Texas Optional Retirement Program
Special rules apply with respect to Contracts covering persons participating in
the Texas Optional Retirement Program ("Texas Program").
Under the terms of the Texas Program, Texas will contribute an amount somewhat
larger than a Participant's contribution. Texas' contributions will be credited
to the Participant Account. Until the Participant begins his second year of
participation in the Texas Program, Prudential will have the right to withdraw
the value of the Units purchased for this account with Texas' contributions. If
the Participant does not commence his second year of Texas Program
participation, the value of those Units representing Texas' contribution will be
withdrawn and returned to the State.
Withdrawal benefits of Contracts issued under the Texas Program are available
only in the event of a Participant's death, retirement or termination of
employment. Participants will not, therefore, be entitled to exercise the right
of withdrawal in order to receive in cash the Participant Account Value credited
to them under the Contract unless one of the foregoing conditions has been
satisfied. The value of a Participant's interest under the Contract may,
however, be transferred to another Prudential contract or contracts of other
carriers approved under the Texas Program during the period of the Participant's
Texas Program participation.
Death Benefit
Upon receipt by Prudential of due proof of a Participant's death and a claim and
payment election submitted on a form approved by Prudential, a death benefit
made up of the balance in the Participant Account (after deduction of any annual
account charges) will be payable to his designated beneficiary. The appropriate
address to which a death benefit claim should be sent is set out on the cover
page of this prospectus. For certain Contracts, a death benefit claim should be
sent to a designated record keeper rather than Prudential.
The death benefit will be paid in one sum as if it were a single withdrawal, as
systematic withdrawals, as an annuity, or a combination of the three, as the
Participant may have directed subject to the minimum distribution rules of Code
Section 401(a)(9) as described below under "Federal Tax Status." If the
Participant has not so directed, the beneficiary may, within any time limit
prescribed by or for the retirement arrangement that covered the Participant,
elect:
a. to receive a one sum cash payment;
b. to have a fixed dollar annuity purchased under the Contract on a specified
date, using the same annuity purchase rate basis that would have applied if
the Participant Account were being used to purchase an annuity for the
Participant;
c. to receive regular payments in accordance with the systematic withdrawal
plan; or
d. a combination of all or any two of (a), (b), and (c).
Unless restricted by the retirement arrangement under which the Participant is
covered, or unless the Participant has elected otherwise, if within one year
after the Participant's death the beneficiary elects to receive a one-sum cash
payment of the entire Participant Account, including the balance in all
Subaccounts in which the Participant has a balance, the total amount made
available to the beneficiary will be the greatest of: (1) the Participant's
Account Value as of the date Prudential receives a death benefit payment
request in good order; (2) the sum of all contributions made to the Participant
Account less withdrawals, transfers and charges; and (3) the greatest of the
Participant's Account Value calculated on
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<PAGE>
every third anniversary of the first contribution made on behalf of the
Participant (accompanied by complete documentation) under the contract, less
subsequent withdrawals, transfers and charges.
Under certain types of retirement arrangements, the Retirement Equity Act of
1984 requires that in the case of a married Participant, a death benefit will be
payable to the Participant's spouse in the form of a "qualified pre-retirement
survivor annuity." A "qualified pre-retirement survivor annuity" is an annuity
for the lifetime of the Participant's spouse in an amount which can be purchased
with no less than 50% of the balance in the Participant Account as of the
Participant's date of death. Under the Retirement Equity Act, the spouse of a
Participant in a retirement arrangement which is subject to these rules may
consent to waive the pre-retirement survivor annuity benefit. Such consent must
acknowledge the effect of waiving the coverage, contain the signatures of the
Participant and spouse and must be notarized or witnessed by an authorized plan
representative. Unless the spouse of a Participant in a Plan which is subject to
these requirements properly consents to the waiver of the benefit, 50% of the
balance in the Participant Account will be paid to such spouse even if the
designated beneficiary is someone other than the spouse. Under these
circumstances, the remaining 50% would be paid to the Participant's designated
beneficiary.
Unless the retirement arrangement that covered the Participant provides
otherwise, a beneficiary who elects to have a fixed-dollar annuity purchased for
himself may choose from among the available forms of annuity. See "Effecting an
Annuity," page __. The beneficiary may elect to purchase an annuity
immediately or at a future date. If an election includes systematic withdrawals,
the beneficiary will have the right to terminate such withdrawals and receive
the remaining balance in the Participant Account in cash (or effect an annuity
with it), or to change the frequency, size or duration of such withdrawals,
subject to the minimum distribution rules. See "Federal Tax Status" section of
this prospectus. If the beneficiary fails to make any election within any time
limit prescribed by or for the retirement arrangement that covered the
Participant, within seven days after the expiration of that time limit, a one
sum cash payment will be made to the beneficiary, after deduction of the annual
account charge. A specific contract may provide that an annuity is payable to
the beneficiary if the beneficiary fails to make an election.
Until a death benefit is paid that results in reducing to zero the balance in
the Participant Account, the Participant Account Value in the Subaccounts and
the Guaranteed Interest Account that make up the Participant Account will be
maintained for the beneficiary in the same manner as they had been for the
Participant, except (i) the beneficiary may make no contributions (ii) no loans
may be taken and (iii) no withdrawal charge will be imposed upon withdrawals.
Discontinuance of Contribution
Contributions on behalf of all Participants under a Contract or for all
Participants of an employer covered under a Contract may be discontinued upon
notice by the Contractholder to Prudential. Contributions under the Contract
will also be discontinued for all Participants covered by a retirement
arrangement that is terminated.
On 90 days' advance notice to the Contractholder, Prudential may elect not to
accept any new Participant, or not to accept further contributions for existing
Participants.
The discontinuance of contributions on a Participant's behalf does not otherwise
affect his or her rights under the Contracts. He may make withdrawals from his
Participant Account -- for transfer, for the purchase of an annuity or for any
other purpose -- just as if contributions were still being made for him or her.
However, if contributions under a Program are not made for a Participant for a
specified period of time (24 months in certain states, 36 months in others) and
the total value of his Participant Accounts is at or below a specified amount
($1,000 in certain states, $2,000 in others), Prudential may, if permitted by
the Code, elect to cancel those Participant Accounts unless prohibited by the
retirement arrangement, and pay the Participant their value (less the annual
account charge) as of the date of cancellation.
Loan Provision
The loans described in this section are generally available to Participants in
401(a) plans and 403(b) programs. The interest rate and other terms and
conditions of the loan may vary from Contract to Contract.
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For plans that are subject to ERISA, it is the responsibility of the Contract
trustee or fiduciary to ensure that the interest rate or other terms and
conditions of the loan comply with all Contract qualification requirements
including the ERISA regulations.
The loans described in this section, which involve the variable investment
options, work as follows. The minimum loan amount is as specified in the
Contract, or if not specified, as determined by Prudential. The maximum loan
amount is the lesser of (a) $50,000, reduced by the highest outstanding balance
of loans during the one year period immediately preceding the date of the loan
or (b) 50% of the value of the Participant's vested interest under a Contract.
In the loan application, the Contractholder (or in certain cases, the
Participant) designates the Subaccount(s) from which the loan amount is
deducted. To repay the loan, the Participant makes periodic payments of interest
plus a portion of the principal. Those payments are invested in the Subaccounts
chosen by the Participant. The Participant may specify the Subaccounts from
which he may borrow and into which repayments may be invested. If the
Participant does not specify the Subaccounts from which the loan amount is
deducted, the loan amount will be deducted from the Participant Account Value in
the Subaccounts.
The maximum loan amount referred to above is imposed by federal tax law. That
limit, however, applies to all loans from any qualified plan of the employer.
Since Prudential cannot monitor a Participant's loan activity relating to other
plans offered to Participants, it is the Participant's responsibility to do so.
Provided that a Participant adheres to these limitations, the loan will not be
treated as a taxable distribution. If, however, the Participant defaults on the
loan by, for example, failing to make required payments, the defaulted loan
amount (as described in loan disclosure information provided to a borrowing
Participant) will be treated as a taxable distribution and Prudential will send
the appropriate tax information to the Participant and the Internal Revenue
Service.
Prudential charges a loan application fee of up to $75, which is deducted from
the Participant Account at the time the loan is initiated. Prudential will not
accept a personal check as payment of the loan application fee. Prudential also
charges up to $25 per year as a loan maintenance fee for recordkeeping and other
administrative services provided in connection with the loan. This charge is
guaranteed not to increase during the term of any loan and is not greater than
the average expected cost of the services required to maintain the loan. This
annualized loan maintenance charge will be prorated based on the number of full
months that the loan is outstanding and is generally deducted quarterly. The
loan maintenance charge will first be made against the Participant Account Value
under the Guaranteed Interest Account (if available). If the Participant is not
invested in the Guaranteed Interest Account, or if the Participant does not have
enough money in such an option to pay the charge, the charge will then be made
against any one or more of the Subaccounts in which the Participant is invested.
Modified Procedures
Under certain Contracts, the Contractholder or a third party acting on their
behalf provides record keeping services that would otherwise be performed by
Prudential. Such Contracts may require procedures somewhat different than those
set forth in this Prospectus. For example, such Contracts may require that
contribution allocation requests, withdrawal requests, and/or transfer requests
be directed to the Contract's record keeper rather than Prudential. The
record-keeper is the Contractholder's agent, not Prudential's agent.
Accordingly, transactions will be processed and priced as of the end of the
valuation period in which Prudential receives appropriate instructions and/or
funds from the record-keeper. Any such different procedures will be set forth in
the Contract.
CHARGES, FEES AND DEDUCTIONS
Administrative Fee and Annual Account Charge
There is an administrative charge to reimburse Prudential for the expenses
incurred in administering the Contracts. This includes such things as issuing
the Contract, establishing and maintaining records, and providing reports to
Contractholders and Participants. This charge is deducted daily from the assets
in each of the Subaccounts at an effective annual rate of 0.85%.
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An annual account charge for recordkeeping and other administrative services is
deducted pro rata from each Participant Account. This annual account charge is
payable to Prudential and is made on the last business day of each calendar year
as long as the Participant still has money invested in the Subaccounts and the
Guaranteed Interest Account. The annual account charge will be pro rated for new
Participants for the first year of their participation, based on the number of
full months remaining in the calendar year after the first contribution is
received. If a Participant Account is canceled before the end of the year, the
charge will be made on the date that Participant Account is canceled (and the
charge will not be pro rated if this occurs during the year in which the first
contribution is made to the Participant Account). The annual account charge will
not be made, however, upon the cancellation of a Participant Account to purchase
an annuity under a Contract if the annuity becomes effective on January 1, of
any year. After a cancellation, the Participant may again participate in the
Contract only as a new Participant and will be subject to a new annual account
charge. Also, the annual account charge will not be made if the Participant's
employer has chosen to pay the charge.
The aggregate annual account charge for each Participant will not be greater
than $15. The charge will first be made against the Participant Account Value
under the Guaranteed Interest Account (if available). If the Participant is not
invested in the Guaranteed Interest Account, or if the Participant does not have
enough money in such an option to pay the charge, the charge will then be made
against any one or more of the Subaccounts in which the Participant is invested.
Charge for Assuming Mortality and Expense Risks
A deduction is made daily from the assets of each of the Subaccounts to
reimburse Prudential for assuming the risk that our estimates of longevity and
of the expenses we expect to incur over the lengthy periods that the Contract
may be in effect will turn out to be incorrect. The charge is made daily at an
annual rate of 0.15% of the assets held in the Subaccounts.
Expenses Incurred by the Funds
The charges and expenses of the Funds are indirectly borne by the Participants.
Details about investment management fees and other underlying fund expenses are
provided in the fee table and in the accompanying prospectuses for the Funds and
the related statements of additional information.
Withdrawal Charge
A withdrawal charge may be made upon full or partial withdrawals. The charge
compensates Prudential for paying all of the expenses of selling and
distributing the Contracts, including sales commissions, printing of
prospectuses, sales administration, preparation of sales literature, and other
promotional activities. No withdrawal charge is imposed whenever earnings are
withdrawn.
The amount of the withdrawal charge imposed upon any withdrawal depends upon the
number of years of a Participant's participation in the Contract, the year in
which the withdrawal is made, and the kind of retirement arrangement that covers
the Participant. Participation in the Contract begins upon the date when the
first contribution on behalf of the Participant, along with enrollment
information in a form satisfactory to Prudential, is received by Prudential.
Such participation ends on the date when the Participant Account under the
Contract is canceled. In the event of such cancellation, Prudential reserves the
right to consider the Participant to be participating in the Contract for a
limited time (currently about one year) for the purposes of calculating any
withdrawal charge on the withdrawal of any future contributions.
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The table below describes the maximum amount of the withdrawal charge.
Withdrawal Charge,
Years of Contract as a Percentage of
Participation Contributions Withdrawn
--------------- -----------------------
First Year ....................... 5%
Second Year ....................... 4%
Third Year ....................... 3%
Fourth Year ....................... 2%
Fifth Year ....................... 1%
Sixth & Subsequent Years ....................... No Charge
The proceeds received by a Participant upon any partial or full withdrawal will
be reduced by the amount of any withdrawal charge. Also, at our discretion, we
may reduce or waive withdrawal charges for certain classes of contracts (e.g.,
contracts exchanged from existing contracts).
Limitations on Withdrawal Charge
We will not impose a withdrawal charge upon contributions withdrawn to purchase
an annuity, to provide a death benefit, pursuant to a systematic withdrawal
plan, to provide a minimum distribution payment, or in cases of financial
hardship or disability retirement as determined pursuant to provisions of the
employer's retirement arrangement. A withdrawal charge will not be imposed upon
withdrawals attributable to roll-over contributions. Further, for all plans
other than IRAs, no withdrawal charge is imposed upon contributions withdrawn
due to resignation or retirement by the Participant or termination of the
Participant by the Contractholder. In addition, no withdrawal charge is imposed
upon contributions withdrawn for any reason after five years of participation
in a Program.
Contributions transferred among the Guaranteed Interest Account and the
Subaccounts are considered to be withdrawals from the Guaranteed Interest
Account or the Subaccount from which the transfer is made, but no withdrawal
charge is imposed upon them. They will, however, be considered as contributions
to the receiving Subaccount or Guaranteed Interest Account for purposes of
calculating any charge imposed upon their subsequent withdrawal from that
investment option.
Loans are considered to be withdrawals from the Subaccounts from which the loan
amount was deducted but are not considered a withdrawal from the Contract.
Therefore, no charge is imposed upon them. The principal portion of any loan
repayment, however, will be treated as a contribution to the receiving
Subaccount for purposes of calculating any charge imposed upon any subsequent
withdrawal. If the Participant defaults on the loan by, for example, failing to
make required payments, the outstanding balance of the loan will be treated as a
withdrawal for purposes of the withdrawal charge. The withdrawal charge will be
withdrawn from the same Subaccounts, and in the same proportions, as the loan
amount was withdrawn. If sufficient funds do not remain in those Subaccounts,
the withdrawal charge will be withdrawn from the Participant's other Subaccounts
and the Guaranteed Interest Account as well.
Premium Taxes
Certain states and other jurisdictions impose premium taxes or similar
assessments upon Prudential, either at the time Contributions are made or when
the Participant's Account Value is surrendered or applied to purchase an
annuity. Prudential reserves the right to deduct an amount from Contributions or
the Participant's Account to cover such taxes or assessments, if any, when
applicable. Various states levy a premium tax, currently ranging from 0.5% to
4.0%, on variable annuity contracts.
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FEDERAL TAX STATUS
The following discussion is based on current law and interpretations which may
change. The discussion is general in nature. It is not intended as tax advice,
nor does it consider any applicable state or other tax laws. A qualified tax
adviser should be consulted for complete information and advice. The following
rules do not generally apply to annuity contracts held by or for non-natural
persons (e.g., corporations). Where a Contract is held by a non-natural person,
unless the Contractholder is a nominee or agent for a natural person (or in
other limited circumstances), the contract will generally not be treated as an
annuity for tax purposes.
Taxes on Prudential
The Discovery Account is not considered a separate taxpayer for purposes of the
Internal Revenue Code. As distinguished from most other registered investment
companies - which are separate taxpayers--the earnings of the Subaccounts
invested in the Funds are taxed as part of the income of Prudential. No charge
is being made currently to those Subaccounts for company federal income taxes.
Prudential will review periodically the question of a charge to the Subaccounts
invested in the Funds for company federal income taxes attributable to the
Contracts. Such a charge may be made in future years for any federal income
taxes attributable to the Contracts.
Qualified Retirement Arrangements Using the Contracts.
The Contracts may be used in connection with qualified pension and profit
sharing plans, plans established by self-employed persons ("Keogh plans"),
simplified employee pension plans ("SEPS"), individual retirement plan accounts
("IRA's") and retirement programs for certain persons known as Section 403(b)
annuity plans.
The provisions of the Code that apply to the retirement arrangements that may be
funded by the Contracts are complex and Participants are advised to consult a
qualified tax adviser. In general, however, assuming that the requirements and
limitations of the provisions of the Code applicable to the particular type of
plan are adhered to by Participants and employers, contributions made under a
retirement arrangement funded by a Contract are deductible (or not includible in
income) up to certain amounts each year. Further, under the retirement programs
with which the Contracts may be used, Federal income tax currently is not
imposed upon the investment income and realized gains earned by the Accounts and
Subaccounts in which the contributions have been invested until a distribution
or withdrawal is received. When a distribution or withdrawal is received, either
as a lump sum, an annuity, or as regular payments in accordance with a
systematic withdrawal arrangement, all or a portion of the distribution or
withdrawal is normally taxable as ordinary income. In some cases, the tax on
lump sum distributions may be limited by a special income-averaging rule. The
effect of Federal income taxation depends largely upon the type of retirement
plan and a generalized description, beyond that given here, is not particularly
useful. Careful review of the provisions of the Code applicable to the
particular type of plan is necessary.
As noted above, withdrawals or distributions are taxable. Furthermore, premature
distributions or withdrawals may be subject to a penalty tax. Participants
contemplating a withdrawal should consult a qualified tax adviser. In addition,
Federal tax laws impose restrictions on withdrawals from Section 403(b)
annuities. Distributions are subject to certain minimum distribution
requirements.
The Contracts may be used in connection with deferred compensation plans that
meet the requirements of Section 457 of the Code. The tax rules for such plans
involve, among other things, limitations on contributions and minimum
distribution requirements. Tax-exempt organizations or governmental employers
considering the use of the Contracts to fund or otherwise provide deferred
compensation to their employees should consult with a qualified tax adviser
concerning the applicability of Section 457 to their plans as well as the
specific requirements. Reference is also made to the discussion below of Section
72(u) of the Code which may be applicable in certain circumstances.
Subject to the exceptions discussed below with respect to Section 403(b) annuity
plans and certain governmental or church plans, distributions from IRA's,
qualified retirement arrangements, and deferred compensation plans that meet the
requirements of Section 457 of the Code, must begin by April 1 of the
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calendar year following the year in which the Participant attains age 70 1/2 or
actual retirement, if later (the "Required Beginning Date"). Distributions from
a Section 403(b) annuity plan attributable to benefits accruing after December
31, 1986 must begin by the Required Beginning Date. The Required Beginning Date
for distributions from a governmental or church plan is the later of April 1 of
the calendar year after the calendar year in which the Participant retires. In
general, distributions that are made after the Required Beginning Date must be
made in the form of an annuity for the life of the Participant or the lives of
the Participant and his designated beneficiary, or over a period that is not
longer than the life expectancy of the Participant or the life expectancies of
the Participant and his designated beneficiary.
Distributions to beneficiaries are also subject to minimum distribution rules.
If a Participant dies before his entire interest in his Participant Account has
been distributed, his remaining interest must be distributed at least as rapidly
as under the method of distribution being used as of the date of death. If the
Participant dies before distributions have begun (or are treated as having
begun) the entire interest in his Participant Account must be distributed by
December 31 of the calendar year containing the fifth anniversary of the
Participant's death. Alternatively, if there is a designated beneficiary, the
designated beneficiary may elect to receive payments beginning no later than
December 31 of the calendar year immediately following the year in which the
Participant dies and continuing for the beneficiary's life or a period not
exceeding the beneficiary's life expectancy (except that with respect to
distributions from a deferred compensation plan subject to Section 457 of the
Code, such period cannot exceed 15 years). Special rules apply to the spouse of
a deceased Participant.
In addition to the above rules, with respect to a deferred compensation plan
subject to Section 457 of the Code, any distribution that is payable over a
period of more than one year can only be made in substantially non-increasing
amounts no less frequently than annually.
An excise tax applies to Participants or beneficiaries who fail to make the
minimum distribution in any calendar year.
Non-qualified Arrangements Using the Contracts.
The Contracts constitute variable annuity contracts. Accordingly, no tax should
be payable by a Participant as a result of any increase in the value of his
share of the investment income and realized gain earned by the Discovery Account
or his Participant Account in which his accumulated premium payments are held.
Generally, amounts are taxed when received, either as an annuity or as a
withdrawal before the annuity starting date. For these purposes, loans against
the Contracts or the pledging of the Contracts are treated as withdrawals.
Amounts withdrawn before the annuity starting date are treated for tax purposes
first as being withdrawals of investment income, rather than withdrawals of
premium payments, until all investment income earned by a Participant's Account
or Subaccount has been withdrawn. Thus, a Participant will be taxed on the
amount he withdraws before he starts receiving annuity payments to the extent
that the cash value of his Contract, unreduced by the withdrawal charge, exceeds
his premium payments.
In addition to the ordinary income tax, the Code further provides that premature
withdrawals that are includible in income will be subject to a penalty tax. The
amount of the penalty is 10 percent of the amount withdrawn that is includible
in income. Some withdrawals will be exempt from the penalty. These include
withdrawals (1) made on or after the date on which the Participant reaches age
59 1/2, (2) made on or after the death of the Participant, (3) attributable to
the Participant becoming disabled (as defined in Code Section 72(m)), (4) in the
form of level annuity payments under a lifetime annuity, or (5) in the form of
substantially equal periodic payments (made at least annually) for the life
expectancy of the Participant or the joint life expectancies of the Participant
and his designated beneficiary.
Different tax rules apply to the receipt of annuity payments or regular payments
in accordance with a systematic withdrawal arrangement by a Participant after
the annuity starting date. A portion of each payment he receives under a
Contract will be treated as a partial return of his post-tax premium payments,
if any, and will not be taxable. The remaining portion of the payment will be
taxed as ordinary income. Exactly how each payment is divided into taxable and
nontaxable portions depends upon (i) the period over which annuity payments are
expected to be received, which in turn is governed by the form of annuity
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selected and, where a lifetime annuity is chosen, by the life expectancy of the
annuitant, payee or, in the case of a joint and survivor life annuity, payees,
or (ii) whether you elect to have regular payments made in accordance with a
systematic withdrawal plan over a fixed period of time or in fixed dollar
amounts. Once a Participant has recovered all his premium payments, the balance
of the annuity payments will be fully taxable.
Certain minimum distribution requirements apply in the case where the
Participant dies before the entire interest in his annuity has been distributed.
Further, certain transfers of an annuity for less than full compensation, e.g.,
certain gifts, will trigger tax on the gain in the Contract.
Special rules under Section 72(u) of the Code apply to the Contracts if held by
a person who is not a natural person and if not covered by one of several
exceptions. Under these rules, if a Contract is held by a corporation,
partnership, trust or similar nonnatural person, the income on the Contract each
year is treated as ordinary income received or accrued that year by the owner of
the Contract. Income on the Contract is the excess of the sum of the net
surrender value of the Contract at the end of the taxable year plus any amounts
distributed for all years over the aggregate amount of premiums paid under the
Contract minus premiums paid and amounts received under the Contract that have
been included in income. Exceptions to these rules include contracts held by a
nonnatural person as an agent for a natural person, contracts acquired by an
estate by reason of the death of the Participant, contracts held under a
qualified pension or profit sharing plan, a Section 403(b) annuity plan or
individual retirement plan (see discussion above) or contracts which provide for
immediate annuities.
Withholding
Generally, under a nonqualified annuity arrangement, or individual retirement
account or individual retirement annuity, unless a Participant elects to the
contrary, any amounts that are received under his Contract that Prudential
reasonably believes are includible in gross income tax for tax purposes will be
subject to withholding to meet Federal income tax obligations. In the absence of
an election by a Participant that Prudential should not do so, it will withhold
from every withdrawal or annuity payment the appropriate percentage of the
amount of the payment that Prudential reasonably believes is subject to
withholding. In addition, certain distributions from qualified plans under
Section 401 or Section 403(b) of the Code, which are not directly rolled over or
transferred to another eligible qualified plan, are subject to a mandatory 20%
withholding for Federal income tax. The 20% withholding requirement does not
apply to: (a) distributions for the life or life expectancy of the Participant,
or joint and last survivor expectancy of the Participant and a designated
beneficiary; or (b) distributions for a specified period of ten years or more;
or (c) distributions which are required as minimum distributions. Accordingly, a
Participant would be well advised to check the Contractholder's retirement
arrangement and consult with appropriate tax advisers regarding the current
state of the law before making a withdrawal. Prudential will provide forms and
instructions concerning withholding. However, amounts that are received under a
Contract used in connection with a plan that is subject to Section 457 of the
Code are treated as wages for Federal income tax purposes and are, thus, subject
to general withholding requirements.
EFFECTING AN ANNUITY
Subject to the restrictions on withdrawals from tax-deferred annuities subject
to Section 403(b) of the Code, and subject to the provisions of the retirement
arrangement that covers him or her, a Participant may elect at any time to have
all or a part of his or her interest in the Participant Account used to purchase
a fixed dollar annuity under the Contracts. The Contracts do not provide for
annuities that vary with the investment results of any Subaccount. Withdrawals
from the Participant Account that are used to purchase a fixed dollar annuity
under the Contracts become part of Prudential's General Account, which supports
insurance and annuity obligations.
In electing to have an annuity purchased, the Participant may select from the
forms of annuity described below, unless the retirement arrangement covering the
Participant provides otherwise. The annuity is purchased on the first day of the
month following receipt by Prudential of proper written notice on a form
approved by Prudential that the Participant has elected to have an annuity
purchased, or on the first day
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of any subsequent month that the Participant designates. The first monthly
annuity payment generally will be made within one month of the date on which the
annuity is purchased.
Under certain types of retirement arrangements, the Retirement Equity Act of
1984 requires that in the case of a married Participant, certain elections of
payouts which are not qualified joint and survivor annuities must include the
consent and signatures of the Participant and his spouse and must be notarized
or witnessed by an authorized plan representative. A "qualified joint and
survivor annuity" is an annuity for the Participant's lifetime with at least 50%
of the amount payable to the Participant continued after the Participant's death
to his or her spouse, if then living.
Once annuity payments begin, the annuitant cannot surrender his or her annuity
benefit and receive a one sum payment in lieu thereof.
The following forms of annuity are available to Participants.
Life Annuity with Payments Certain
This is an immediate annuity payable monthly during the lifetime of the
annuitant with the guarantee that if, at the death of the annuitant, payments
have been made for less than the period certain (which may be 60, 120, 180, or
240 months, as selected by the annuitant), they will be continued during the
remainder of the selected period to his or her beneficiary.
Annuity Certain
This is an immediate annuity payable monthly for a period certain which may be
60, 120, 180, or 240 months, as selected by the annuitant. If the annuitant dies
during the period certain, payments in the same amount the annuitant was
receiving will be continued to his or her beneficiary, but no further payments
are payable after the end of the period certain.
Joint and Survivor Annuity with Payment Certain
This is an immediate annuity payable monthly during the lifetime of the
annuitant with payments continued after his or her death to the contingent
annuitant, if surviving, for the latter's lifetime. Until the selected number of
payments certain have been paid, payments made to the contingent annuitant after
the annuitant's death are the same as those the annuitant was receiving.
Thereafter, the payments continued to the contingent annuitant will be a
percentage of the monthly amount paid to the annuitant such as 33%, 50%, 66%, or
100% as selected by the annuitant (the amounts of each payment made to the
annuitant will be lower as the percentage he or she selects to be paid to the
contingent annuitant is higher). If both the annuitant and the contingent
annuitant die during the period certain (which may be 60, 120, 180, or 240
months, as selected by the annuitant), payments will be continued during the
remainder of the period certain to the properly designated beneficiary.
Other forms of annuity may be available under the Contracts. The retirement
arrangement under which the Participant is covered may restrict the forms of
annuity that a Participant may elect.
If the dollar amount of the first monthly annuity payment is less than the
minimum amount specified in the Contract, or if the beneficiary is other than a
natural person receiving payments in his or her own right, Prudential may elect
to pay the commuted value of the unpaid payments certain in one sum.
Purchasing the Annuity
No withdrawal charge is deducted from contributions withdrawn to purchase an
annuity. If, as a result of a withdrawal to purchase an annuity, the Participant
Account has been reduced to zero, the full annual account charge is deducted,
unless the annuity becomes effective on January 1 of any year. The resulting
amount, less any applicable taxes on annuity considerations, is applied to the
appropriate annuity purchase rate determined in accordance with the schedule in
the Contract at the time the annuity is purchased. However, Prudential may
determine monthly payments from schedules of annuity purchase rates providing
for larger payments than the rates shown in the Contract.
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The schedule of annuity purchase rates in a Contract is guaranteed by Prudential
for ten years from the date the Contract is issued. If at any time after a
Contract has been in effect for ten years, the schedule of annuity purchase
rates is modified, the modification is also guaranteed for ten years. A change
in the schedule of annuity purchase rates used for annuity certain with 180
payments or less, as described above will apply only to amounts added to a
Participant Account after the date of change. A change in any other schedule
will apply to all amounts in a Participant Account.
OTHER INFORMATION
Misstatement of Age or Sex
If an annuitant's stated age or sex (except where unisex rates apply) or both
are incorrect in the Certificate, we will change each benefit and the amount of
each annuity payment to that which the total contributions would have bought for
the correct age and sex. Also, we will adjust for the amount of any overpayments
we have already made.
Sale of the Contract and Sales Commissions
Prudential Investment Management Services LLC ("PIMS"), a wholly-owned direct
subsidiary of Prudential, acts as the principal underwriter of the Contract.
PIMS was organized in 1996 under Delaware law, is registered as a broker and
dealer under the Securities Exchange Act of 1934 and is a member of the National
Association of Securities Dealers, Inc. PIMS' principal business address is 751
Broad Street, Newark, NJ 07102. The Contract is sold by registered
representatives of PIMS who are also authorized by state insurance departments
to do so. The maximum commission that will be paid to the broker-dealer to cover
both the individual representative's commission and other distribution expenses
will not exceed 3.0% of the purchase payment. In addition, trail commissions
based on the size of the Contracts may be paid.
Voting Rights
As stated above, all of the assets held in the Subaccounts of the Discovery
Account are invested in shares of the corresponding 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, as required by law,
Prudential votes the shares of the Funds at any regular and special shareholders
meetings the Funds are required to hold in accordance with voting instructions
received from Participants. The Funds may not hold annual shareholders meetings
when not required to do so under the laws of the state of their incorporation or
the Investment Company Act of 1940. Fund shares for which no timely instructions
from Participants are received, and any shares owned directly or indirectly by
Prudential, are 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, Participants 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 on the
matter, pursuant to the requirements of Rule 18f-2 under the Investment Company
Act of 1940.
The number of Funds shares for which a Participant may give instructions is
determined by dividing the portion of the value of the Participant Account
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
you may give Prudential instructions is determined as of the record date chosen
by the Board of the applicable Fund. We furnish you with proper forms and
proxies to enable you to give these instructions. We reserve the right
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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 we reasonably
disapprove such changes in accordance with applicable federal regulations. If we
do disregard voting instructions, we will advise you of that action and our
reasons for such action in the next annual or semi-annual report.
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 portfolios of the Funds may
become unsuitable for investment by Contractholders and Participants. This may
occur because of investment policy changes, tax law changes, 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.
Performance Information
Performance information for the Subaccounts may appear in advertising and
reports to current and prospective Contractholders and Participants. Performance
information is based on historical investment experience of the Funds, adjusted
to take charges under the Contract into account, and does not indicate or
represent future performance.
Total returns are based on the overall dollar or percentage change in value of a
hypothetical investment over a stipulated period, and assume a surrender of the
Contract at the end of the period. Total return quotations reflect changes in
unit values and the deduction of applicable charges including any applicable
withdrawal charges.
A cumulative total return reflects performance over a stated period of time. An
average annual total return reflects the hypothetical annually compounded return
that would have produced the same cumulative total return if the performance had
been constant over the entire period.
The Money Market Subaccount may advertise its current and effective yield.
Current yield reflects the income generated by an investment in the Subaccount
over a specified seven-day period. Effective yield is calculated in a similar
manner except that income earned is assumed to be reinvested.
Reports or advertising may include comparative performance information,
including, but not limited to: comparisons to market indices; comparisons to
other investments; performance rankings; personalized illustrations of
historical performance; and data presented by analysts or included in
publications.
See Performance Information in the Statement of Additional Information for
recent performance information.
Reports to Participants
Participants will be sent, at least annually, reports showing as of a specified
date the number of units credited to them in the Subaccounts of the Discovery
Account. Each Participant will also be sent annual reports showing the financial
condition of the Discovery Account and the Subaccounts and semi-annual and
annual reports for the Funds.
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State Regulation
Prudential is subject to regulation by the Department of Banking and Insurance
of the State of New Jersey as well as by the insurance departments of all the
other states and jurisdictions in which it does business. Prudential must file
an annual statement in a form promulgated by the National Association of
Insurance Commissioners. This annual statement is reviewed and analyzed by the
New Jersey Department, which makes an independent computation of Prudential's
legal reserve liabilities and statutory apportionments under its outstanding
contracts. New Jersey law requires a quinquennial examination of Prudential to
be made. Examination involves an extensive audit including, but not limited to,
an inventory check of assets, sampling techniques to check the performance by
Prudential of its contracts and an examination of the manner in which divisible
surplus has been apportioned and distributed to policyholders and
Contractholders. This regulation does not involve any supervision or control
over the investment policies of the Subaccounts or over the selection of
investments for them, except for verification of the compliance of Prudential's
investment portfolio with New Jersey law.
The laws of New Jersey also contain special provisions which relate to the
issuance and regulation of contracts on a variable basis. These laws set forth a
number of mandatory provisions which must be included in contracts on a variable
basis and prohibit such contracts from containing other specified provisions. No
variable contract may be issued for delivery in New Jersey prior to the written
acknowledgment by the Department of Insurance of its filing. The Department may
initially disapprove or subsequently withdraw approval of any contract if it
contains provisions which are "unjust, unfair, inequitable, ambiguous,
misleading, likely to result in misrepresentation or contrary to law." Approval
can also be withheld or withdrawn if sales are solicited by communications which
involve misleading or inadequate descriptions of the provisions of the contract.
In addition to the annual statement referred to above, Prudential is required to
file with New Jersey and other states a separate statement with respect to the
operations of all its variable contracts accounts, in a form promulgated by the
National Association of Insurance Commissioners.
Legal Proceedings
On October 28, 1996, Prudential entered into a Stipulation of Settlement in a
multidistrict proceeding involving allegations of various claims relating to
Prudential's life insurance sales practices. (In re Prudential Insurance Company
of America Sales Practices Litigation, D.N.J., MDL No. 1061, Master Docket No.
95-4704 (AMW).) On March 7, 1997, the United States District Court for the
District of New Jersey approved the Stipulation of Settlement as fair,
reasonable and adequate.
Pursuant to the Settlement, Prudential has agreed to provide an alternative
dispute resolution process for class members who believe they were misled
concerning the sale or performance of their life insurance policies. The
Settlement also provides certain no-fault relief. The ultimate cost of the
Settlement will depend on a variety of factors, including the number of
policyowners who participate in the Settlement, the number of policyowners who
are afforded relief and the remediation option they select. The administrative
costs of implementing the Settlement are also subject to a number of complex
uncertainties. In light of the uncertainties attendant to these and other
factors, it is difficult at this time to estimate the ultimate cost of the
Settlement to Prudential.
In addition, a number of actions have been filed against Prudential by
policyowners who have excluded themselves from the settlement; Prudential
anticipates that additional suits may be filed by other policyowners.
Also, in July 9, 1996, a Multi-State Life Insurance Task Force comprised of
insurance regulators from 29 states and the District of Columbia, released a
report on Prudential's activities. As of February 24, 1997, Prudential had
entered into consent orders or agreements with all 50 states and the District of
Columbia to implement a remediation plan, whose terms closely parallel the
Settlement approved in the MDL proceeding, and agreed to a series of payments
allocated to all 50 states and the District of Columbia amounting to a total of
approximately $65 million.
Litigation is subject to many uncertainties, and given the complexity and scope
of these suits, their outcome cannot be predicted.
Accordingly, management is unable to make a meaningful estimate of the amount or
range of loss that could result from an unfavorable outcome of all pending
litigation. It is possible that the results of operations or the cash flow of
Prudential, in particular quarterly or annual periods could be materially
affected by an ultimate unfavorable outcome of certain pending litigation and
regulatory matters. Management believes, however, that the ultimate outcome of
all pending litigation and regulatory matters referred to above should not have
a material adverse effect on Prudential's financial position.
Statement Of Additional Information
The contents of the Statement of Additional Information include:
OTHER INFORMATION CONCERNING THE DISCOVERY ACCOUNT PAGE
Principal Underwriter...................................................
Determination of Subaccount Unit Values.................................
Performance Information.................................................
Comparative Performance Information.....................................
Directors of Prudential ................................................
Officers of Prudential .................................................
Financial Statements of Prudential......................................
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 of the information set forth in the
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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, including the Statement of Additional Information prepared
by Prudential, may also be obtained from Prudential without charge. The
addresses and telephone numbers are set forth on the cover of this Prospectus.
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PART B
STATEMENT OF ADDITIONAL INFORMATION
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
MAY 1, 1997
DISCOVERY SELECT
GROUP VARIABLE ANNUITY CONTRACTS
ISSUED THROUGH
THE PRUDENTIAL DISCOVERY SELECT GROUP
VARIABLE CONTRACT ACCOUNT
The Prudential Insurance Company of America ("Prudential") offers the Discovery
Select Group Variable Annuity Contracts for use in connection with retirement
arrangements that qualify for federal tax benefits under Sections 401, 403(b),
408 or 457 of the Internal Revenue Code of 1986 (the "Code") and with
non-qualified annuity arrangements on a continuous basis. Contributions to the
Contract made on behalf of a Participant may be invested in one or more of the
twenty-two Subaccounts of The Prudential Discovery Select Group Variable
Contract Account as well as the Guaranteed Interest Account. Each Subaccount is
invested in a corresponding Portfolio of The Prudential Series Fund, Inc., AIM
Variable Insurance Funds, Inc., Janus Aspen Series, MFS Variable Insurance
Trust, OCC Accumulation Trust, T. Rowe Price Equity Series, Inc., T. Rowe Price
International Series, Inc. and Warburg Pincus Trust.
This Statement of Additional Information is not a prospectus and should be read
in conjunction with the prospectus, dated _____________, which is available
without charge upon written request to The Prudential Insurance Company of
America at the address below.
TABLE OF CONTENTS
DEFINITIONS.............................................................
OTHER CONTRACT PROVISIONS...............................................
Assignment........................................................
Participation in Divisible Surplus................................
ADMINISTRATION..........................................................
PERFORMANCE INFORMATION.................................................
Annual Average Total Return.......................................
Non-Standard Total Return.........................................
Performance Information...........................................
Total Return......................................................
DIRECTORS OF PRUDENTIAL ................................................
OFFICERS OF PRUDENTIAL .................................................
SALE OF CONTRACTS.......................................................
LEGAL MATTERS ..........................................................
EXPERTS.................................................................
FINANCIAL STATEMENTS....................................................
The Prudential Insurance Company of America
c/o Prudential Investments
30 Scranton Office Park
Scranton, PA 18507-1789
Telephone 1-800-458-6333
<PAGE>
DEFINITIONS
Contracts - The group variable annuity contracts described in the Prospectus and
offered for use in connection with retirement arrangements that qualify for
federal tax benefits under Sections 401, 403(b), 408 or 457 of the Internal
Revenue Code and with non-qualified annuity arrangements.
Funds - The Portfolios of the Prudential Series Fund, Inc., AIM Variable
Insurance Funds, Inc., Janus Aspen Series, MFS Variable Insurance Trust, OCC
Accumulation Trust available under the Contract, T. Rowe Price Equity Series,
Inc., T. Rowe Price International Series, Inc., and Warburg Pincus Trust
Participant - A person who makes contributions, or for whom contributions have
been made, and to whom they remain credited under the Contract.
Participant Account - An account established for each Participant to record the
amount credited to the Participant under the Contract.
Participant Account Value - The dollar amount held in a Participant Account.
Prudential - The Prudential Insurance Company of America. "We," "us," or "our"
means Prudential.
Prudential Discovery Select Group Variable Contract Account - A separate account
of Prudential registered under the Investment Company Act of 1940 as a unit
investment trust (the "Discovery Account"), invested through its Subaccounts in
shares of the corresponding Funds.
Subaccount - A division of the Discovery Account, the assets of which are
invested in shares of the corresponding Funds.
OTHER CONTRACT PROVISIONS
Assignment
Unless contrary to applicable law, the right to any payment under the Contract
is neither assignable nor subject to the claim of any creditor.
Participation in divisible surplus
A mutual life insurance company differs from a stock life insurance company in
that it has no stockholders who are the owners of the enterprise. Accordingly, a
Contractholder of Prudential participates in the divisible surplus of
Prudential, according to the annual determination of Prudential's Board of
Directors as to the portion, if any, of the divisible surplus which has accrued
on the Contracts. In the case of the Contracts described in the prospectus, any
surplus determined to be payable as a dividend is credited to Participants. No
assurance can be given as to the amount of divisible surplus, if any, that will
be available for distribution under these Contracts in the future.
ADMINISTRATION
The assets of each Subaccount of the Discovery Account are invested in a
corresponding Fund. The prospectus and the statement of
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additional information of each Fund describe the investment management and
administration of that Fund. Subject to Prudential's supervision, all of the
investment management services provided to the Prudential Series Fund, Inc. by
Prudential are furnished by its wholly-owned subsidiary, The Prudential
Investment Corporation ("PIC"), pursuant to the service agreement between
Prudential and PIC (the "Service Agreement") which provides that Prudential will
reimburse PIC for its costs and expenses. PIC is registered as an investment
adviser under the Investment Advisers Act of 1940.
Prudential is responsible for the administrative and recordkeeping functions of
the Discovery Account and pays the expenses associated with them. These
functions include enrolling Participants, receiving and allocating
contributions, maintaining Participant Accounts, preparing and distributing
confirmations, statements, and reports. The administrative and recordkeeping
expenses borne by Prudential include salaries, rent, postage, telephone, travel,
legal, actuarial and accounting fees, office equipment, stationery and
maintenance of computer and other systems.
Prudential is reimbursed for these administrative and recordkeeping expenses by
the annual account charge and the daily charge against the assets of each
Subaccount for administrative expenses.
A daily charge is made which is equal to an effective annual rate of 0.85% of
the net assets in each Subaccount. All of this charge is for administrative
expenses not covered by the annual account charge. There is also an annual
account charge for administrative expenses of not greater than $15 assessed
against a Participant Account.
A withdrawal charge is also imposed on certain withdrawals from the Subaccounts
and the Guaranteed Interest Account.
PERFORMANCE INFORMATION
Annual Average Total Return
The Discovery Account may advertise average annual total return information
calculated according to a formula prescribed by the Securities and Exchange
Commission ("SEC"). Average annual total return shows the average annual
percentage increase, or decrease, in the value of a hypothetical contribution
allocated to a Subaccount from the beginning to the end of each specified period
of time. The SEC standardized version of this performance information is based
on an assumed contribution of $1,000 allocated to a Subaccount at the beginning
of each period and full withdrawal of the value of that amount at the end of
each specified period, giving effect to any withdrawal charge and all other
charges and fees applicable under the Contract. This method of calculating
performance further assumes that (i) a $1,000 contribution was allocated to a
Subaccount and (ii) no transfers or additional payments were made. Premium taxes
are not included in the term "charges" for purposes of this calculation. Average
annual total return is calculated by finding the average annual compounded rates
of return of a hypothetical contribution that would compare the Unit Value on
the first day of the specified period to the ending redeemable value at the end
of the period according to the following formula:
T = (ERV/C) 1/n - 1
Where T equals average annual total return, where ERV (the ending redeemable
value) is the value at the end of the applicable period of a hypothetical
contribution of $1,000 made at the beginning of the applicable period, where C
equals a hypothetical contribution of $1,000, and
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where n equals the number of years.
Non-Standard Total Return
In addition to the standardized average annual total return information
described above, we may present total return information computed on bases
different from that standardized method. The Discovery Account may present total
return information computed on the same basis as the standardized method except
that charges deducted from the hypothetical contribution will not include any
withdrawal charge. Consistent with the long-term investment and retirement
objectives of the Contract, this total return presentation assumes investment in
the Contract continues beyond the period when the withdrawal charge applies. The
total return percentage under this non-standardized method will be higher than
that resulting from the standardized method.
The Discovery Account may also present actual aggregate total return figures for
various periods, reflecting the cumulative change in value of an investment in
the Discovery Account for the specified period.
Performance Information
The tables below provide performance information for each Subaccount for
specified periods ending December 31, 1996. For the periods prior to the date
the Subaccounts commenced operations, performance information for the Contracts
will be calculated based on the performance of the Funds and the assumption that
the Subaccounts were in existence for the same periods as those indicated for
the Funds, with the level of Contract charges that were in effect at the
inception of the Subaccounts (this is referred to as "hypothetical performance
data"). This information does not indicate or represent future performance.
Total Return
Total returns quoted in sales literature or advertisements reflect all aspects
of a Subaccount's return. Average annual returns are calculated by determining
the growth or decline in value of a hypothetical historical investment in the
Subaccount over a stated period of time, and then calculating the annually
compounded percentage rate that would have produced the same result if the rate
of growth or decline had been constant over the period. Contractholders and
Participants should recognize that average annual returns represent averaged
returns rather than actual year-to-year performance.
The respective Funds in which the Subaccounts invest had performance history
prior to the Subaccounts' inception. Performance information covering those
periods reflects a hypothetical performance as if the Funds were available under
the Discovery Account at that time, using the charges applicable to the
Contracts.
Table 1 below assumes a hypothetical investment of $1,000 at the beginning of
the period via the Subaccount investing in the applicable Fund and withdrawal of
the investment on 12/31/96. The rates of return thus reflect the mortality and
expense risk fee (the administrative fee, the withdrawal charge and a pro rata
portion of the annual account charge).
- 4 -
<PAGE>
TABLE 1 -- SUBACCOUNT STANDARDIZED "HYPOTHETICAL" AVERAGE
ANNUAL TOTAL RETURN
<TABLE>
<CAPTION>
Three Five Ten From Date
One Year Years Years Years Established
Ended Ended Ended Ended Through
Fund Portfolio Date Established 12/31/96 12/31/96 12/31/96 12/31/96 12/31/96
- -------------- ---------------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
The Prudential Series Fund, Inc.
Money Market Subaccount ..................... 6/1/83 (.87) 3.03 3.13 4.85 5.47
Diversified Bond Subaccount ................. 6/7/83 (1.78) 4.67 6.12 7.44 8.63
Government Income Subaccount ................ 5/1/89 (3.86) 2.87 5.28 N/A 7.47
Conservative Balanced Subaccount ............ 5/13/83 5.72 6.97 7.84 8.54 9.27
Flexible Managed Subaccount ................. 5/13/83 6.41 8.45 9.43 9.86 10.48
High Yield Bond Subaccount .................. 2/16/87 4.70 5.83 10.53 N/A 7.25
Stock Index Subaccount ...................... 10/19/87 16.25 17.30 13.48 N/A 15.16
Equity Income Subaccount .................... 2/19/88 15.24 9.70 12.04 N/A 12.46
Equity Subaccount ........................... 6/6/83 11.45 14.57 15.65 N/A 13.65
Prudential Jennison Subaccount .............. 5/1/95 8.21 N/A N/A 13.65 20.17
Global Subaccount ........................... 9/19/88 13.32 7.63 11.45 N/A 9.48
AIM Variable Insurance Funds, Inc. .............
AIM V.I. Growth and Income Subaccount ....... 5/2/94 13.66 N/A N/A N/A 17.30
AIM V.I. Value Subaccount ................... 5/5/93 8.42 15.62 N/A N/A 17.03
Janus Aspen Series
Growth Subaccount ........................... 9/13/93 12.17 14.61 N/A N/A 14.53
International Growth Subaccount ............. 5/2/94 28.23 N/A N/A N/A 17.52
MPS Variable Insurance Trust
Emerging Growth Subaccount .................. 7/24/95 10.78 N/A N/A N/A 20.84
Research Subaccount ......................... 7/24/95 16.03 N/A N/A N/A 19.57
OCC Accumulation Trust (Note 2)
Managed Subaccount .......................... 8/1/88 16.45 20.17 17.64 N/A 18.75
Small Cap Subaccount ........................ 8/1/88 12.57 8.55 13.09 N/A 13.46
T. Rowe Price
T. Rowe Price Equity Series, Inc.,
Equity Income Subaccount ................... 3/31/94 13.29 N/A N/A N/A 19.83
T. Rowe Price International Series,
Inc., International Stock Subaccount ....... 3/31/94 8.48 N/A N/A N/A 7.87
Warburg Pincus Trust
Post-Venture Capital Subaccount ............. 9/30/96 N/A N/A N/A N/A (23.65)
</TABLE>
- ----------
Note 1: This table assumes deferred sales charges.
Note 2: Based on results of the Quest for Value Accumulation Trust and its
predecessor. On September 16, 1994, an investment company which had
commenced operations on August 1, 1988, then called Quest for Value
Accumulation Trust (the "Old Trust"), was effectively divided into two
investment funds -- the Old Trust and the present Quest for Value
Accumulation Trust (the "Present Trust") -- at which time the Present
Trust commenced operations.
Tables 2 and 3 below show annual average total return and cumulative total
return, respectively, on the same assumptions as Table 1 except that the value
in the Subaccount is not withdrawn at the end of the period or is withdrawn to
affect an annuity. The rates of return shown below reflect the mortality and
expense risk fee and the administrative fee.
- 5 -
<PAGE>
TABLE 2 -- SUBACCOUNT "HYPOTHETICAL" AVERAGE TOTAL RETURN
ASSUMING NO WITHDRAWAL
<TABLE>
<CAPTION>
From Date
Three Five Ten Portfolio
One Year Years Years Years Established
Ended Ended Ended Ended Through
Fund Portfolio Date Established 12/31/96 12/31/96 12/31/96 12/31/96 12/31/96
- -------------- ---------------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
The Prudential Series Fund, Inc.
Money Market Subaccount ...................... 6/1/83 4.19 3.98 3.32 4.86 5.47
Diversified Bond Subaccount .................. 6/7/83 3.28 5.59 6.28 7.44 8.64
Government Income Subaccount ................. 5/1/89 1.20 3.83 5.45 N/A 7.47
Conservative Balanced Subaccount ............. 5/13/83 10.78 7.86 8.00 8.54 9.28
Flexible Managed Subaccount .................. 5/13/83 11.47 9.31 9.58 9.86 10.48
High Yield Bond Subaccount ................... 2/16/87 9.76 6.73 10.67 N/A 7.25
Stock Index Subaccount ....................... 10/19/87 21.31 18.04 13.61 N/A 15.17
Equity Income Subaccount ..................... 2/19/88 20.30 10.54 12.17 N/A 12.47
Equity Subaccount ............................ 6/6/83 16.51 15.34 15.76 13.65 13.52
Prudential Jennison Subaccount ............... 5/1/95 13.27 N/A N/A N/A 22.30
Global Subaccount ............................ 9/19/88 18.38 8.50 11.59 N/A 9.49
AIM Variable Insurance Funds, Inc. .............
AIM V.I. Growth and Income Subaccount ........ 5/2/94 18.72 N/A N/A N/A 18.17
AIM V.I. Value Subaccount .................... 5/5/93 13.48 16.38 N/A N/A 17.40
Janus Aspen Series
Growth Subaccount ............................ 9/13/93 17.23 15.39 N/A N/A 14.99
International Growth Subaccount .............. 5/2/94 33.29 N/A N/A N/A 18.39
MPS Variable Insurance Trust
Emerging Growth Subaccount ................... 7/24/95 15.84 N/A N/A N/A 23.42
Research Subaccount .......................... 7/24/95 21.09 N/A N/A N/A 22.16
OCC Accumulation Trust (Note 2)
Managed Subaccount ........................... 8/1/88 21.51 20.87 17.75 N/A 18.76
Small Cap Subaccount ......................... 8/1/88 17.63 9.41 13.21 N/A 13.46
T. Rowe Price
T. Rowe Price Equity Series, Inc.,
Equity Income Subaccount .................... 3/31/94 18.35 N/A N/A N/A 20.64
T. Rowe Price International Series, Inc.,
International Stock Subaccount .............. 3/31/94 13.54 N/A N/A N/A 8.84
Warburg Pincus Trust
Post-Venture Capital Subaccount .............. 9/30/96 N/A N/A N/A N/A (5.88)
</TABLE>
- ----------
Note 1: This table assumes deferred sales charges.
Note 2: Based on results of the Quest for Value Accumulation Trust and its
predecessor. On September 16, 1994, an investment company which had
commenced operations on August 1, 1988, then called Quest for Value
Accumulation Trust (the "Old Trust"), was effectively divided into two
investment funds -- the Old Trust and the present Quest for Value
Accumulation Trust (the "Present Trust") -- at which time the Present
Trust commenced operations.
- 6 -
<PAGE>
TABLE 3 -- SUBACCOUNT "HYPOTHETICAL" CUMULATIVE TOTAL RETURN
ASSUMING NO WITHDRAWAL
<TABLE>
<CAPTION>
Three Five Ten From Date
One Year Years Years Years Established
Ended Ended Ended Ended Through
Fund Portfolio Date Established 12/31/96 12/31/96 12/31/96 12/31/96 12/31/96
- -------------- ---------------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
The Prudential Series Fund, Inc.
Money Market Subaccount ...................... 6/1/83 4.19 12.44 17.76 60.75 106.28
Diversified Bond Subaccount .................. 6/7/83 3.28 17.74 35.67 105.16 207.95
Government Income Subaccount ................. 5/1/89 1.20 11.94 30.44 N/A 73.83
Conservative Balanced Subaccount ............. 5/13/83 10.78 25.50 46.97 127.15 235.49
Flexible Managed Subaccount .................. 5/13/83 11.47 30.66 58.09 156.40 288.70
High Yield Bond Subaccount ................... 2/16/87 9.76 21.61 66.10 N/A 99.74
Stock Index Subaccount ....................... 10/19/87 21.31 64.54 89.39 N/A 267.02
Equity Income Subaccount ..................... 2/19/88 20.30 35.11 77.72 N/A 183.72
Equity Subaccount ............................ 6/6/83 16.51 53.50 108.07 260.00 459.92
Prudential Jennison Subaccount ............... 5/1/95 13.27 N/A N/A N/A 40.00
Global Subaccount ............................ 9/19/88 18.38 27.76 73.12 N/A 111.91
AIM Variable Insurance Funds, Inc. .............
AIM V.I. Growth and Income Subaccount ........ 5/2/94 18.72 N/A N/A N/A 56.13
AIM V.I. Value Subaccount .................... 5/5/93 13.48 57.68 N/A N/A 19.87
Janus Aspen Series
Growth Subaccount ............................ 9/13/93 17.23 53.68 N/A N/A 58.58
International Growth Subaccount .............. 5/2/94 33.29 N/A N/A N/A 56.92
MPS Variable Insurance Trust
Emerging Growth Subaccount ................... 7/24/95 15.84 N/A N/A N/A 35.43
Research Subaccount .......................... 1/24/95 21.09 N/A N/A N/A 33.44
OCC Accumulation Trust (Note 2)
Managed Subaccount ........................... 8/1/88 21.51 76.67 126.55 N/A 325.33
Small Cap Subaccount ......................... 8/1/88 17.63 31.00 86.13 N/A 189.71
T. Rowe Price
T. Rowe Price Equity Series, Inc.,
Equity Income Subaccount .................... 3/31/94 18.35 N/A N/A N/A 67.71
T. Rowe Price International Series, Inc.,
International Stock Subaccount .............. 3/31/94 13.54 N/A N/A N/A 26.29
Warburg Pincus Trust
Post-Venture Capital Subaccount .............. 9/30/96 N/A N/A N/A N/A (1.52)
</TABLE>
- ----------
Note 1: This table assumes deferred sales charges.
Note 2: Based on results of the Quest for Value Accumulation Trust and its
predecessor. On September 16, 1994, an investment company which had
commenced operations on August 1, 1988, then called Quest for Value
Accumulation Trust (the "Old Trust"), was effectively divided into two
investment funds -- the Old Trust and the present Quest for Value
Accumulation Trust (the "Present Trust") -- at which time the Present
Trust commenced operations.
MONEY MARKET SUBACCOUNT YIELD
The "yield" and "effective yield" figures for the Money Market Subaccount shown
below were calculated using historical investment returns of the Money Market
Portfolio of the Prudential Series fund. All fees, expenses and charges
associated with the DISCOVERY SELECT Annuity and the Series Fund have been
reflected.
The "yield" and "effective yield" of the Money Market Subaccount for the seven
days ended December 31, 1996 were ____% and ____%, respectively.
The yield is computed by determining the net change, exclusive of capital
changes, in the value of a hypothetical pre-existing account having a balance of
one accumulation unit of the Money Market Subaccount at the beginning of the
period, subtracting a hypothetical charge reflecting deductions from contract
owner accounts, and dividing the difference by the value of the subaccount at
the beginning of the base period to obtain the base period return, and then
multiplying the base period return by (365/7), with the resulting figure carried
to the nearest ten-thousandth of 1%.
The deduction referred to above consists of the 0.15% charge for mortality and
expense risks and the 0.85% charge for administration. It does not reflect the
withdrawal charge.
The effective yield is obtained by taking the base period return, adding 1,
raising the sum to a power equal to 365 divided by 7, and subtracting 1 from the
result, according to the following formula: Effective Yield--((base period
return +1)365/7)-1.
The yield on amounts held in the Money Market Subaccount will fluctuate on a
daily basis. Therefore, the stated yields for any given period are not an
indication of future yields.
COMPARATIVE PERFORMANCE INFORMATION
Reports or advertising may include comparative performance information,
including, but not limited to: (1) comparisons to market indices such as the
Dow Jones Industrial Average, the Standard & Poor's 500 Index, the Value Line
Composite Index, the Russell 2000 Index, the Morgan Stanley World Index, the
Lehman Brothers bond indices; (2) comparisons to other investments, such as
certificates of deposit; (3) performance rankings assigned by services such as
Morningstar, Inc. and Variable Research and Data Services (VARDS), and Lipper
Analytical Services, Inc.; (4) data presented by analysts such as Dow Jones,
A.M. Best, The Bank Rate Monitor National Index; and (5) data in publications
such as The Wall Street Journal, Times, Forbes, Barrons, Fortune, Money
Magazine, and Financial World.
- 7 -
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
DIRECTORS
FRANKLIN E. AGNEW, Director since 1994 (current term expires April, 2000).
Member, Committee on Dividends; Member, Finance 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. and John Wiley & Sons, Inc. Age 62. Address:
One Mellon Bank Center, Suite 2120, Pittsburgh, PA 15219.
FREDERICK K. BECKER, Director since 1994 (current term expires April, 1999).
Member, Auditing Committee, Member, Committee on Business Ethics. President,
Wilentz Goldman and Spitzer (law firm) since 1989, with firm since 1960. Age 61.
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. Vice Chairman,
Bell Atlantic Corporation. President, Bell Atlantic Corporation from 1993 to
1995. President New Jersey Bell 1989 to 1993. Mr. Cullen is also a director of
Johnson& Johnson. Age 54. Address: 1310 North Court House Road, 11th Floor,
Alexandria, VA 22201.
CAROLYNE K. DAVIS, Director since 1989 (current term expires April, 1997).
Member, Finance Committee; Member Committee on Business Ethics; Member,
Compensation Committee. National and International Health Care Advisor, Ernst &
Young since 1985. Dr. Davis is also a director of Merck & Co., Inc., Beckman
Instruments, Inc., Pharmaceutical Marketing Services, Inc. and Science
Applications International Corporation. Age 65. Address: 1225 Connecticut
Avenue, N.W., Washington, DC 20036.
ROGER A. ENRICO, Director since 1994 (current term expires April, 1998). Member,
Committee on Nominations; Member, Compensation Committee. CEO PepsiCo, Inc.
since 1996. Vice Chairman, PepsiCo, Inc. from 1993 to 1996. Chairman and CEO,
Pepsi Co. Worldwide Food, from 1991 to 1993. President and CEO, Pepsi Co.
Worldwide Beverage from 1986-1991. Mr. Enrico is also a director of Dayton
Hudson Corporation and A.H.Belo Corporation. Age 52. Address: 14841 North Dallas
Parkway, Dallas, TX, 75240.
ALLAN D. GILMOUR, Director since 1995 (current term expires April, 1999).
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
USWest, Inc., Whirlpool Corporation and The Dow Chemical Company. Age 62.
Address: 751 Broad Street, Newark, NJ 07102.
WILLIAM H. GRAY, III, Director since 1991 (current term expires April, 2000).
Member, Finance Committee; Member, Committee on Nominations. 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 Warner-Lambert Co., Chase
Manhattan Corp., Municipal Bond Investors Assurance Corp., Westinghouse Electric
Corp., Union Pacific Corp., Lotus Development Corp., and Rockwell International
Corp. Age 55. Address: 8260 Willow Oaks Corp. Drive, Fairfax, VA 22031.
JON F. HANSON, Director since 1991 (current term expires April, 1997). Member,
Finance Committee; Member, Committee on Dividends. Chairman, Hampshire
Management Co. since 1976. Mr. Hanson is also a director of United Water
Resources. Age 60. Address: 235 Moore Street, Suite 200, Hackensack, NJ 07601.
GLEN H. HINER, JR., Director since 1997. Chairman and Chief Executive Officer,
Owens Corning. Age 62. Address: One Owens Corning Parkway, Toledo, OH 43659.
CONSTANCE J. HORNER, Director since 1994 (current term expires April, 1998).
Member, Auditing Committee; Member, Committee on Nominations. Guest Scholar, The
Brookings Institution since 1993. Assistant to the President and Director of
Presidential Personnel, U.S. Government, 1991-1992. Deputy Secretary, Department
of Health & Human Services from 1989 to 1991. Ms. Horner is also a director of
Pfizer, Inc., Ingersoll-Rand Company and Foster Wheeler Corporation. Age 55.
Address: 1775 Massachusetts Ave., N.W. Washington, D.C. 20036-2188.
GAYNOR N. KELLEY, Director.--Former Chairman and Chief Executive Officer, The
Perkins Elmer Corporation. Age 65. Address: 751 Broad Street, Newark, NJ
07102-3777.
BURTON G. MALKIEL, Director since 1978 (current term expires April, 1998).
Chairman, Finance Committee; Member, Executive Committee; Member, Committee on
Nominations. Professor, Princeton University, since 1988. Dr. Malkiel is also a
director of The Jeffrey Co., Vanguard Group, Inc., Amdahl Corporation, Baker
Fentress & Company, and Southern New England Telecommunications Co. Age 64.
Address: 110 Fisher Hall, Prospect Avenue, Princeton University, 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 54. Address: 751 Broad
Street, Newark, NJ 07102-3777.
- 8 -
<PAGE>
IDA F.S. SCHMERTZ, Director. Principal, Investment Strategies International. Age
62. Address: 90 Riverside Drive, New York, NY 10024.
CHARLES R. SITTER, Director since 1995 (current term expires April, 1999).
Member, Committee on Dividends. President, Exxon Corporation from 1993 to 1996.
Mr. Sitter began his career with Exxon in 1957; he is currently a director of
Exxon. Age 66. Address: 5959 Las Colinas Boulevard, Irving, TX 75039.
DONALD L. STAHELI, Director since 1995 (current term expires April, 1999).
Member, Compensation Committee. Chairman and Chief Executive Officer,
Continental Grain Company since 1994. Mr. Staheli was Chairman of Continental
Grain from 1988 to 1994. Age 65. Address: 277 Park Avenue, New York, NY 10172.
RICHARD M. THOMSON, Director since 1976 (current term expires April, 2000).
Chairman, Compensation Committee; Member, Committee on Nominations, Member,
Executive Committee. Chairman of the Board and Chief Executive Officer, The
Toronto-Dominion Bank since 1978. Mr. Thomson is also a director of CGC, Inc.,
Eaton's of Canada, Ltd., INCO, Ltd., The Thomson Corp. National Retail Credit
Services Limited, TEC Leaseholds Limited, Thomglen Corporation and S.C. Johnson
& Son, Ltd. Age 63. Address: P.O. Box 1, Toronto-Dominion Centre, Toronto,
Ontario, M5K 1A2, Canada.
JAMES A. UNRUH, Director since 1996 (current term expires April, 2000). Chairman
and Chief Executive Officer of Unisys Corporation since 1990. Mr. Unruh is also
a director of Ameritech Corporation. Age 56. Address: Township Line & Union
Meeting Roads, Blue Bell, PA 19424.
P. ROY VAGELOS, M.D., Director since 1989 (current term expires April, 1997).
Chairman, Auditing Committee; Member, Committee on Dividends; Member, Executive
Committee. Chairman, Regeneron Pharmaceuticals since 1995. Chairman and Chief
Executive Officer, Merck & Co., Inc. from 1986 to 1994. Dr. Vagelos is also a
director of Pepsi Co., Inc., The Estee Lauder Companies Inc. and McDonnell
Douglas Corp. Age 67. Address: One Crossroads Drive, Bedminster, NJ 07921.
STANLEY C. VAN NESS, Director since 1990 (current term expires April, 2002).
Chairman, Committee on Business Ethics; Member, Auditing Committee; Member,
Executive Committee. Attorney, Picco Herbert Kennedy (law firm) from 1990.
Partner of Jamieson, Moore, Peskin & Spicer from 1984 to 1990. Mr. Van Ness is
also a director of Jersey Central Power & Light Company. Age 63. Address: One
State Street Square, Suite 1000, Trenton, NJ 08607-1388.
PAUL A. VOLCKER, Director since 1988 (current term expires April, 2000). Member,
Committee on Dividends; Member, Committee on Nominations. Chairman, James D.
Wolfensohn, Inc. since 1988; Chief Executive Officer, James D. Wolfensohn, Inc.
since 1995. Chairman, J. Rothschild, Wolfensohn & Co. from 1992 to 1995. Mr
Volcker is also a director of Fuji-Wolfensohn International, Nestle, S.A., UAL
Corp. and the Board of Governors, American Stock Exchange. Age 69. Address: 599
Lexington Avenue, New York, NY 10022.
JOSEPH H. WILLIAMS, Director since 1994 (current term expires April, 1998).
Member, Auditing Committee; Member, Committee on Dividends. Chairman of the
Board, The Williams Companies since 1994. Chairman & Chief Executive Officer,
The Williams Companies 1979-1993. Mr. Williams is also a director of Flint
Industries and The Orvis Company. Age 63. Address: One Williams Center, Tulsa,
OK 74102.
- 9 -
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
PRINCIPAL OFFICERS
ARTHUR F. RYAN, Chairman, Chief Executive Officer, and President since 1994. Age
54.
E. MICHAEL CAULFIELD, Chief Executive Officer, Prudential Investments since
1996; Chief Executive Officer, Money Management Group since 1995; 1989-92
Managing Director. Age 50.
MICHELE S. DARLING, Executive Vice President, Human Resources. Age 43.
ROBERT GOLDEN, Executive Vice President, Corporate Operations & Systems, since
1997. Age __.
RODGER LAWSON, Executive Vice President, Marketing and Planning. Age 50.
MARK B. GRIER, Chief Financial Officer since 1995. Age 44.
JOHN V. SCICUTELLA, Chief Executive Officer, Individual Insurance Group, since
1997; Executive Vice President, Operations and Systems, since 1995. Age 48.
R. BROCK ARMSTRONG, Senior Vice President, Individual Insurance Development. Age
50.
MARTIN BERKOWITZ, Senior Vice President and Comptroller since 1995. Age 48.
WILLIAM M. BETHKE, President, Capital Markets Group, Senior Vice President since
1986. Age 49.
LEO J. CORBETT, Senior Vice President, Individual Insurance Marketing. Age 48.
MARK R. FETTING, President, Prudential Retirement Services. Age 42.
WILLIAM D. FRIEL, Senior Vice President and Chief Information Officer since
1993; 1988-92: Vice President. Age 57.
JAMES R. GILLEN, Senior Vice President and General Counsel since 1984. Age 59.
BRUCE J. GOODMAN, Chief Executive Officer, Prudential Service Company, Senior
Vice President since 1993. Age 55.
JONATHAN M. GREENE, President, Investment Management, Prudential Investments.
Age 53.
JEAN D. HAMILTON, President, Diversified Group. Age 50.
RONALD JOELSON, Senior Vice President, Guaranteed Products. Age 39.
IRA J. KLEINMAN, Executive Vice President, International Insurance Group; Senior
Vice President since 1992; 1978-92: Vice President. Age 49.
DONALD C. MANN, Senior Vice President, Community Resources; Senior Vice
President since 1990; 1985-90: Vice President. Age 54.
NEIL A. McGUINNESS, Senior Vice President, Marketing, Prudential Investments.
Age 50.
PRISCILLA A. MYERS, Senior Vice President, Audit, Compliance and Investigation
since 1995. Age 47.
RICHARD O. PAINTER, President, Prudential Insurance& Financial Services since
1995. Age 49.
KIYOFUMI SAKAGUCHI, President, International Insurance Group since 1995. Age 54.
GREGORY W. SCOTT, Chief Financial Officer, Prudential Healthcare Group since
1995. Age 43.
BRIAN M. STORMS, President, Mutual Funds and Annuities, Prudential Investments
since 1996. Age 42.
ROBERT J. SULLIVAN, Senior Vice President, Sales, Prudential Investments. Age
58.
SUSAN L. BLOUNT, Vice President and Secretary since 1995. Age 39.
C. EDWARD CHAPLIN, Vice President and Treasurer since 1995. Age 40.
- 10 -
<PAGE>
SALE OF THE CONTRACTS
Prudential offers the Contracts on a continuous basis through Corporate Office,
regional home office and group sales office employees in those states in which
the Contracts may be lawfully sold. It may also offer the Contracts through
licensed insurance brokers and agents, or through appropriately registered
direct or indirect subsidiary(ies) of Prudential, provided clearances to do so
are obtained in any jurisdiction where such clearances may be necessary.
LEGAL MATTERS
All matters relating to New Jersey law pertaining to the Contracts, including
the validity of the Contracts and Prudential's authority to issue the Contracts,
have been passed upon by Peter T. Scott, Assistant General Counsel of
Prudential. Sutherland, Asbill & Brennan, L.L.P. of Washington, D.C. has
provided advice on certain matters relating to the federal securities laws.
EXPERTS
The financial statements in this prospectus for the year ended December 31, 1996
have been audited by Price Waterhouse LLP, independent accountants, as stated
in their report appearing herein, and are included in reliance upon the report
of such firm given upon their authority as experts in accounting and auditing.
Price Waterhouse LLP's principal business address is 1177 Avenue of the
Americas, New York, New York 10036.
The financial statements in this report for years ended December 31, 1995 and
December 31, 1994 have been audited by Deloitte & Touche LLP, independent
auditors, as stated in their reports appearing herein, and are included in
reliance upon the reports of such firm given upon their authority as experts in
accounting and auditing. Deloitte & Touche LLP's principal business address is
Two Hilton Court, Parsippany, New Jersey 07054-0319.
On March 12, 1996, Deloitte & Touche LLP was dismissed as the independent
accountants of Prudential. There have been no disagreements with Deloitte &
Touche LLP on any matter of accounting principles or practices, financial
statement disclosure or auditing scope or procedure which, if not resolved to
the satisfaction of the accountant, would have caused them to make reference to
the matter in their reports.
FINANCIAL STATEMENTS
As of the date of this SAI, the Discovery Account had not yet commenced
operations, had no assets or liabilities and no income. Accordingly, it has no
financial statements for prior periods.
The statutory financial statements of Prudential included herein should be
distinguished from the financial statements of the Discovery Account, and should
be considered only as bearing upon the ability of Prudential to meet its
obligations under the Contracts.
- 11 -
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Policyholders of
The Prudential Insurance Company of America
We have audited the accompanying statement of admitted assets, liabilities and
surplus (statutory basis) of The Prudential Insurance Company of America as of
December 31, 1996, and the related statements of operations and changes in
surplus (statutory basis), and of cash flows (statutory basis) for the year then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
As described in Note 1, these financial statements were prepared in conformity
with accounting practices prescribed or permitted by the New Jersey Department
of Insurance, which practices differ from generally accepted accounting
principles. The effects on the financial statements of the variances between the
statutory basis of accounting and generally accepted accounting principles,
although not reasonably determinable, are presumed to be material.
In our opinion, because of the effects of the matters referred to in the
preceding paragraph, the financial statements referred to above do not present
fairly, in conformity with generally accepted accounting principles, the
financial position of The Prudential Insurance Company of America at December
31, 1996, and the results of its operations and its cash flows for the year then
ended.
Also, in our opinion, the financial statements referred to above present fairly,
in all material respects, the admitted assets, liabilities and surplus of The
Prudential Insurance Company of America at December 31, 1996, and the results of
its operations and its cash flows for the year then ended, on the basis of
accounting described in Note 1.
/s/ PRICE WATERHOUSE, LLP
New York, New York
March 10, 1997
- 12 -
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
The Prudential Insurance Company of America
Newark, New Jersey
We have audited the accompanying statement of admitted assets, liabilities and
surplus--statutory basis of The Prudential Insurance Company of America as of
December 31, 1995, and the related statements of operations and changes in
surplus--statutory basis, and cash flows--statutory basis for each of the two
years in the period ended December 31, 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our report dated March 1, 1996, we expressed an opinion that the 1995 and
1994 financial statements, prepared using accounting practices prescribed and
permitted by the New Jersey Department of Insurance, presented fairly, in all
material respects, the financial position of The Prudential Insurance Company of
America as of December 31, 1995 and 1994, and the results of its operations and
its cash flows for the years then ended in conformity with generally accepted
accounting principles. As described in Note 1 to these financial statements,
pursuant to the pronouncements of the Financial Accounting Standards Board, the
1995 and 1994 financial statements of The Prudential Insurance Company of
America, prepared using accounting practices prescribed or permitted by
insurance regulators (statutory financial statements) are no longer considered
presentations in conformity with generally accepted accounting principles. The
effects on the financial statements of the differences between the statutory
basis of accounting and generally accepted accounting principles are material
and are also described in Note 1. Accordingly, our present opinion on the
presentation of the 1995 and 1994 financial statements in accordance with
generally accepted accounting principles, as presented herein, is different from
that expressed in our previous report.
In our opinion, because of the effects of the matter discussed in the third
paragraph, the financial statements referred to above do not present fairly, in
conformity with generally accepted accounting principles, the admitted assets,
liabilities and surplus of the Company as of December 31, 1995, and its
operations, changes in surplus and its cash flows for each of the two years in
the period ended December 31, 1995.
However, in our opinion, the financial statements referred to above present
fairly, in all material respects, the admitted assets, liabilities and surplus
of The Prudential Insurance Company of America as of December 31, 1995, and the
results of its operations, changes in surplus and its cash flows for each of the
two years in the period then ended, on the basis of accounting described in Note
1.
Also, as described in Note 1 to the financial statements, these financial
statements were prepared on an unconsolidated statutory basis of accounting,
which differs from the 1995 and 1994 financial statements prepared for general
distribution on a consolidated statutory basis of accounting, both of which
differ from generally accepted accounting principles. The financial statements
for 1995 and 1994 have been restated on an unconsolidated statutory basis of
accounting adopted in 1996 for purposes of general distribution. Further, these
financial statements differ from the previously issued unconsolidated statutory
financial statements because certain permitted financial statement presentation
practices are no longer being used.
/s/ DELOITTE & TOUCHE LLP
Parsippany, New Jersey
March 1, 1996, except for Note 1A,
as to which the date is March 10, 1997
- 13 -
<PAGE>
<TABLE>
<CAPTION>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
STATEMENTS OF ADMITTED ASSETS, LIABILITIES AND SURPLUS (STATUTORY BASIS)
- ------------------------------------------------------------------------------------------------------------------------------------
DECEMBER 31,
1996 1995
-------- --------
(In Millions)
<S> <C> <C>
ASSETS
Bonds ............................................................................ $ 75,006 $ 77,494
Preferred stock .................................................................. 239 396
Common stock ..................................................................... 7,076 6,133
Mortgage loans on real estate .................................................... 17,039 20,280
Real estate ...................................................................... 2,094 2,488
Policy loans and premium notes ................................................... 6,023 6,208
Cash and short-term investments .................................................. 5,982 4,803
Other invested assets ............................................................ 2,591 3,304
-------- --------
TOTAL CASH AND INVESTED ASSETS ................................................... 116,050 121,106
Premiums due and deferred ........................................................ 1,925 1,917
Accrued investment income ........................................................ 1,640 1,688
Other assets ..................................................................... 1,208 1,120
Assets held in separate accounts ................................................. 57,797 53,903
-------- --------
TOTAL ASSETS ..................................................................... $178,620 $179,734
======== ========
LIABILITIES AND SURPLUS
LIABILITIES
Policy liabilities and insurance reserves:
Future policy benefits and claims ............................................ $ 87,582 $ 93,346
Unearned premiums ............................................................ 619 624
Policy dividends ............................................................. 1,878 1,893
Policyholder account balances ................................................ 7,968 7,966
Notes payable and other borrowings ............................................... 763 807
Asset valuation reserve .......................................................... 2,682 2,705
Federal income tax payable ....................................................... 729 1,278
Other liabilities ................................................................ 9,588 9,191
Liabilities related to separate accounts ......................................... 57,436 53,256
-------- --------
TOTAL LIABILITIES ................................................................ 169,245 171,066
-------- --------
CONTINGENCIES (NOTE 11)
SURPLUS
Capital notes .................................................................... 985 984
Special surplus fund ............................................................. 1,268 1,274
Unassigned surplus ............................................................... 7,122 6,410
-------- --------
TOTAL SURPLUS .................................................................... 9,375 8,668
-------- --------
TOTAL LIABILITIES AND SURPLUS .................................................... $178,620 $179,734
======== ========
</TABLE>
SEE NOTES TO STATUTORY FINANCIAL STATEMENTS
- 14 -
<PAGE>
<TABLE>
<CAPTION>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
STATEMENTS OF OPERATIONS AND CHANGES IN SURPLUS (STATUTORY BASIS)
- ------------------------------------------------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31,
1996 1995 1994
(In Millions)
<S> <C> <C> <C>
REVENUE
Premiums and annuity considerations .................................... $ 20,674 $ 21,088 $ 23,612
Net investment income .................................................. 8,677 8,637 7,387
Other income ........................................................... 571 363 367
-------- -------- --------
TOTAL REVENUE .......................................................... 29,922 30,088 31,366
-------- -------- --------
BENEFITS AND EXPENSES
Death benefits ......................................................... 2,943 2,858 2,798
Annuity benefits ....................................................... 3,582 3,495 3,354
Disability benefits .................................................... 5,630 5,765 5,201
Other benefits ......................................................... 806 853 845
Surrender benefits and fund withdrawals ................................ 11,844 12,538 11,714
Net (decrease) increase in reserves .................................... (1,572) (2,178) 1,251
Commissions ............................................................ 477 535 610
Other expenses ......................................................... 2,690 2,650 3,727
-------- -------- --------
TOTAL BENEFITS AND EXPENSES ............................................ 26,400 26,516 29,500
-------- -------- --------
Operating income before dividends and income taxes ..................... 3,522 3,572 1,866
Dividends to policyholders ............................................. 2,526 2,464 2,290
-------- -------- --------
Operating income (loss) before income taxes ............................ 996 1,108 (424)
Income tax provision ................................................... 51 590 453
-------- -------- --------
INCOME (LOSS) FROM OPERATIONS .......................................... 945 518 (877)
NET REALIZED CAPITAL GAINS (LOSSES) .................................... 457 (183) (24)
-------- -------- --------
NET INCOME (LOSS) ..................................................... $ 1,402 $ 335 $ (901)
======== ======== ========
SURPLUS
SURPLUS, BEGINNING OF YEAR ............................................. 8,668 7,449 8,004
Net income (loss) ...................................................... 1,402 335 (901)
Change in net unrealized capital gains (losses) ........................ 191 661 (51)
Change in non-admitted assets .......................................... (206) 717 82
Change in asset valuation reserve ...................................... 11 (694) 653
Other changes, net ..................................................... (691) 200 (338)
-------- -------- --------
SURPLUS, END OF YEAR ................................................... $ 9,375 $ 8,668 $ 7,449
======== ======== ========
</TABLE>
SEE NOTES TO STATUTORY FINANCIAL STATEMENTS
- 15 -
<PAGE>
<TABLE>
<CAPTION>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
STATEMENTS OF CASH FLOWS (STATUTORY BASIS)
- ------------------------------------------------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31,
1996 1995 1994
--------- --------- ---------
(In Millions)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Premiums and annuity considerations ...................................... $ 20,669 $ 21,030 $ 23,635
Net investment income .................................................... 8,629 8,511 7,261
Other income received .................................................... 599 479 502
Separate account transfers ............................................... 1,183 1,002 (494)
Benefits and claims paid ................................................. (24,952) (25,524) (24,403)
Policyholders' dividends paid ............................................ (2,453) (2,393) (2,594)
Federal income taxes (paid) received ..................................... (230) (847) 179
Other operating expenses ................................................. (4,224) (3,738) (3,636)
--------- --------- ---------
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES ...................... (779) (1,480) 450
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from investments sold, matured, or repaid
Bonds ............................................................... 119,195 93,178 80,668
Stocks .............................................................. 4,328 2,985 4,263
Mortgage loans on real estate ....................................... 3,140 4,997 4,205
Real estate ......................................................... 537 573 935
Net gains (losses) on cash and short-term investments ............... 13 (9) (5)
Miscellaneous proceeds .............................................. 2,128 3,707 2,671
Payments for investments acquired
Bonds ............................................................... (118,009) (101,018) (81,677)
Stocks .............................................................. (6,029) (2,199) (2,312)
Mortgage loans on real estate ....................................... (1,841) (2,810) (3,282)
Real estate ......................................................... (120) (425) (194)
Miscellaneous applications .......................................... (718) (1,213) (1,275)
Net (tax) benefit on capital gains and losses ............................ (622) 107 (275)
--------- --------- ---------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES ...................... 2,002 (2,127) 3,722
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Net (repayments of) proceeds from borrowed money ......................... (44) 123 1
Net proceeds from the issuance of capital notes .......................... 0 686 0
--------- --------- ---------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES ..................... (44) 809 1
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND SHORT-TERM INVESTMENTS ............... 1,179 (2,798) 4,173
Cash and short-term investments, beginning of year ....................... 4,803 7,601 3,428
--------- --------- ---------
CASH AND SHORT-TERM INVESTMENTS, END OF YEAR ............................. $ 5,982 $ 4,803 $ 7,601
========= ========= =========
</TABLE>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest payments of $253 million, $144 million and $85 million were made during
1996, 1995 and 1994, respectively.
SEE NOTES TO STATUTORY FINANCIAL STATEMENTS
- 16 -
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO STATUTORY FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1. ACCOUNTING POLICIES AND PRINCIPLES
A. Business and basis of presentation - The statutory financial
statements include the accounts of The Prudential Insurance Company of
America ("the Company"), a mutual life insurance company. The
activities of the Company include a broad range of financial services,
including life and health insurance, asset management, and investment
advisory services.
These financial statements were prepared on an unconsolidated
statutory basis of accounting, which differs from the 1995 and 1994
financial statements prepared for general distribution on a
consolidated statutory basis of accounting, both of which differ from
generally accepted accounting principles ("GAAP"). The financial
statements for 1995 and 1994 have been restated on an unconsolidated
statutory basis of accounting adopted in 1996 for purposes of general
distribution. Certain reclassifications have been made to the 1995 and
1994 financial statement amounts to conform to the 1996 presentation.
The Company, domiciled in the State of New Jersey, prepares its
statutory financial statements in accordance with accounting practices
prescribed or permitted by the New Jersey Department of Banking and
Insurance ("the Department"). Prescribed statutory accounting
practices include publications of the National Association of
Insurance Commissioners ("NAIC"), state laws, regulations, and general
administrative rules. Permitted statutory accounting practices
encompass all accounting practices not so prescribed. The financial
statements are substantially the same as those included in the
Statutory Annual Statement except for certain reclassifications and
adjustments. These financial statements differ from those filed with
the Department in that changes to estimated income and premium taxes
applicable to prior periods, which are recorded as direct charges or
credits to surplus in the Annual Statement, have been included in the
"Income tax provision" and "Other expenses" in the Statements of
Operations and Changes in Surplus. This item has the net effect of
increasing (decreasing) net income by $396 million, ($143) million and
$6 million in 1996, 1995 and 1994, respectively.
Pursuant to the Financial Accounting Standards Board Interpretation
No. 40 "Applicability of Generally Accepted Accounting Principles to
Mutual Life Insurance and Other Enterprises," as amended, which is
effective for 1996 financial statements, statutory accounting
practices ("SAP") are no longer considered GAAP for mutual life
insurance companies. SAP differs from GAAP primarily as follows:
(a) the Commissioner's Reserve Valuation Method ("CRVM") is used for the
majority of individual insurance reserves under SAP, whereas for
individual insurance, policyholder liabilities are generally
established using the net level premium method under GAAP. Policy
assumptions used in the estimation of policyholder liabilities are
generally prescribed under SAP, but are based upon actual company
experience under GAAP;
(b) for investment-type contracts that do not contain mortality or
morbidity risk and universal life-type contracts, cash receipts are
recorded as premiums and reserves are established using prescribed
reserving methods under SAP. Under GAAP, premium from investment-type
and universal life-type contracts are generally recognized as
deposits. Revenues from these contracts represent amounts assessed
against policyholders and are reported in the period of assessment;
(c) policy acquisition costs are expensed when incurred under SAP rather
than being deferred and charged against earnings over the periods
covered by the related policies;
(d) deferred income taxes are not recorded for the tax effect of temporary
differences between book and tax basis of assets and liabilities under
SAP;
(e) certain "non-admitted assets" must be excluded under SAP through a
charge against surplus, e.g. fixed assets, prepaid pensions and
impaired investments;
(f) investments in the common stock of the Company's wholly-owned
subsidiaries are accounted for using the equity method under SAP
rather than consolidated;
(g) bonds are carried at amortized cost under SAP rather than categorized
as "held to maturity", "available for sale", or "trading". Under GAAP,
bonds classified as "available for sale" and "trading" are carried at
market value;
(h) certain reclassifications would be required with respect to the
balance sheet and statement of cash flows under SAP;
(i) the Asset Valuation Reserve ("AVR") and Interest Maintenance Reserve
("IMR") are required for life insurance companies under SAP.
The following is a summary of accounting practices permitted by the
state of New Jersey and reflected in these financial statements:
o Prescribed statutory accounting practices require Department
approval of each and every interest payment at the time of
payment in order to classify the Company's Capital Notes as a
component of surplus. Otherwise, such notes are required to be
classified as a liability. Interest payments on $300 million in
Capital Notes issued in 1993 are pre-approved by the Department,
and permitted to be classified in surplus.
o The Company sells synthetic guaranteed interest contracts
("GICs") containing minimum investment related guarantees on
qualified pension plan assets. The assets are owned by the
trustees of such plans, who invest the assets
- 17 -
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO STATUTORY FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
under the terms of investment guidelines agreed to with the
Company. The investment related guarantees may include a minimum
rate of return on the underlying assets and/or a guarantee of
liquidity to meet plan cash flow requirements. The Company, with
the approval of the Department, reports both the plan liabilities
associated with the synthetic GICs and the trust assets
supporting this potential liability. In addition, the Company
files detailed schedules of trust assets and related statements
with the Department. Currently, prescribed statutory accounting
practices do not address accounting for synthetic GICs.
o The Company establishes guaranty fund liabilities for the
insolvencies of certain life insurance companies. The liabilities
are established net of estimated premium tax credits and federal
income tax. Prescribed statutory accounting practices do not
address the establishment of liabilities for guaranty fund
assessments.
B. Divestiture - On July 31, 1996, Prudential sold a substantial portion
of its Canadian Branch business to the London Life Insurance Company
("London Life"). The transaction was structured as an assumption
reinsurance transaction, whereby London Life assumed total liabilities
of the Canadian Branch equal to $3,146 million as well as a related
amount of total assets equal to $3,040 million. A net gain of $138
million was recorded for this transaction.
C. Use of estimates - The preparation of financial statements in
conformity with SAP requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenue and expenses
during the reported period. Actual results could differ from those
estimates.
D. Investments - Bonds, which consist of long-term bonds, are stated
primarily at amortized cost.
Preferred stock is generally valued at amortized cost.
Common Stock is carried at fair value. Investments in subsidiaries,
which are included in "Common stock", are accounted for using the
equity method. The subsidiaries' change in net assets, excluding
capital contributions and distributions, is included in "Net
investment income." The subsidiaries are engaged principally in the
businesses of life and health insurance, property and casualty
insurance, group health care, securities brokerage, asset management,
investment advisory services, retail banking and real estate and
brokerage.
Mortgage loans on real estate are stated primarily at unpaid principal
balances.
Real estate, except for real estate acquired in satisfaction of debt,
is carried at cost less accumulated straight-line depreciation,
encumbrances and permanent impairments in value. Properties acquired
in satisfaction of debt are valued at lower of depreciated cost or
fair value less disposition costs.
Policy loans and premium notes are stated at unpaid principal
balances.
Cash includes cash on hand, amounts due from banks and money market
instruments. Short term investments, including highly liquid debt
instruments purchased with an original maturity of twelve months or
less, are stated at amortized cost, which approximates fair value.
Other invested assets primarily include the Company's investment in
joint ventures and other forms of partnerships. These investments are
accounted for using the equity method where the Company has the
ability to exercise significant influence over the operating and
financial policies of the entity. The cost method is used for all
other assets.
Derivatives used in asset/liability risk management activities, which
support life and health insurance and annuity contracts, are recorded
at either fair value or statement value, depending upon the underlying
instrument, with unrealized gains and losses recorded in "Change in
net unrealized capital gains (losses)." Upon termination of
derivatives, the interest-related gains and losses are amortized
through the IMR.
E. Separate accounts - These assets and liabilities, reported at
estimated fair value, represent segregated funds invested for pension
and other clients. Investment risks associated with fair value changes
are generally borne by the clients, except to the extent of minimum
guarantees made by the Company with respect to certain accounts.
F. Revenue recognition of insurance income and related expenses - Life
premiums are recognized as income over the premium paying period of
the related policies. Annuity considerations are recognized as revenue
when received. Health premiums are earned ratably over the terms of
the related insurance and reinsurance contracts or policies. Expenses
incurred in connection with acquiring new insurance business,
including such acquisition costs as sales commissions, are charged to
operations as incurred.
- 18 -
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO STATUTORY FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
G. Policyholder dividends - Substantially all of the policies issued by
the Company are participating. The amount of dividends to be paid to
policyholders is determined annually by the Company's Board of
Directors. The aggregate amount of policyholders' dividends is related
to actual interest, mortality, morbidity, and expense experience for
the year and judgment as to the appropriate level of statutory surplus
to be retained by the Company. Dividends declared by the Board of
Directors which have not been paid are included in "Policy dividends".
2. POLICY LIABILITIES AND INSURANCE RESERVES
A. For life insurance and annuities, future policy benefits and claims
include estimates of benefits and associated settlement expenses on
reported claims and those which are incurred but not reported.
Activity in the liability for unpaid claims and claim adjustment
expenses for accident and health business, which is included in
"Future policy benefits and claims", is as follows:
1996 1995 1994
------- ------- -------
(In Millions)
Balance at January 1 $ 2,636 $ 2,440 $ 2,416
Less reinsurance recoverables 15 23 15
------- ------- -------
Net balance at January 1 2,621 2,417 2,401
------- ------- -------
Incurred related to:
Current year 5,734 5,759 5,398
Prior years (87) 42 (87)
------- ------- -------
Total incurred 5,647 5,801 5,311
------- ------- -------
Paid related to:
Current year 4,135 4,028 3,856
Prior years 1,467 1,569 1,439
------- ------- -------
Total paid 5,602 5,597 5,295
------- ------- -------
Net balance at December 31 2,666 2,621 2,417
Plus reinsurance recoverables 10 15 23
------- ------- -------
Balance at December 31 $ 2,676 $ 2,636 $ 2,440
======= ======= =======
As a result of changes in reserve estimates for insured events of
prior years, the provision for claims and claim adjustment expenses
changed by ($87) million and $42 million in 1996 and 1995,
respectively, due to changes in claim cost trends and changed by ($87)
million in 1994 because of faster-than-expected shrinkage in the
indemnity health business.
B. Reserves for individual life insurance are calculated using various
methods, interest rates and mortality tables, which produce reserves
that meet the aggregate requirements of state laws and regulations.
Approximately 39% of individual life insurance reserves are determined
using the net level premium method, or by using the greater of the net
level premium reserve or the policy cash value. About 52% of
individual life insurance reserves are calculated according to CRVM
or methods which compare CRVM to policy cash values. The remaining
reserves include universal life reserves which are equal to the
greater of the policyholder account value less the unamortized expense
allowance and the policy cash value, or are for supplementary benefits
whose reserves are calculated using methods, interest rates and tables
appropriate for the benefit provided.
For group life insurance, about 56% of the reserves are associated
with extended death benefits. These reserves are primarily calculated
using modified group tables at various interest rates. The remainder
are unearned premium reserves (calculated using the 1960
Commissioner's Standard Group Table), reserves for group life fund
accumulations and other miscellaneous reserves.
Reserves for deferred individual annuity contracts are determined
using the Commissioner's Annuity Reserve Valuation Method. These
account for 72% of the individual annuity reserves. The remaining
reserves are equal to the present value of future payments with the
annuity mortality table and interest rates based on the date of issue
or maturity as appropriate.
Reserves for other deposit funds or other liabilities with life
contingencies reflect the contract deposit account or experience
accumulation for the contract and any purchased annuity reserves.
Accident and health reserves represent the present value of the future
potential payments, adjusted for contingencies and interest. The
remaining material reserves for active life reserves and unearned
premiums are valued using the preliminary term method, gross premium
valuation method, or a pro rata portion of gross premiums. Reserves
are also held for amounts not yet due on hospital benefits and other
coverages.
- 19 -
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO STATUTORY FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
The reserve for guaranteed interest contracts, deposit funds and other
liabilities without life contingencies equal either the present value
of future payments discounted at the guaranteed rate or the fund
value.
Policyholders, at their discretion, may withdraw funds from their
annuity policies. At December 31, 1996 and 1995, approximately 55% of
total annuity actuarial reserves and deposit liabilities of $92,536
million and $95,092 million, respectively, were not subject to
discretionary withdrawal.
3. INCOME TAXES
The Company and its domestic subsidiaries file a consolidated federal income
tax return. The Internal Revenue Code (the "Code") taxes the Company on its
operating income after dividends to policyholders. In calculating this tax,
the Code requires the capitalization and amortization of policy acquisition
expenses.
The Code also imposes an "equity tax" on mutual life insurance companies
which, in effect, imposes an additional amount of taxable income to the
Company. "Income tax provision" includes an estimate for the total equity tax
to be paid with respect to the year. Income from sources outside the United
States is taxed under applicable foreign statutes.
The Internal Revenue Service (the "Service") has completed an examination of
the consolidated federal income tax return through 1989. The Service is
examining the years 1990 through 1992. Discussions are being held with the
Service with respect to proposed adjustments. However, management believes
there are adequate defenses against, or sufficient reserves to provide for,
such adjustments.
4. INVESTED ASSETS
A. Bonds and stocks - The Company invests in both investment grade and
non-investment grade public and private bonds. The Securities
Valuation Office of the NAIC rates the bonds held by insurers for
regulatory purposes and classifies investments into six categories
ranging from highest quality bonds to those in or near default. The
lowest three NAIC categories represent primarily high-yield securities
and are defined by the NAIC as including any security with a public
agency rating equivalent to B+ or B1 or less. Securities in these
lowest three categories approximated 2.8% and 1.0%, of the Company's
bonds at December 31, 1996, 1995, respectively.
The following tables provide additional information relating to bonds
and preferred stock as of December 31:
<TABLE>
<CAPTION>
1996
-------------------------------------------------------
GROSS GROSS ESTIMATED
CARRYING UNREALIZED UNREALIZED FAIR
AMOUNT GAINS LOSSES VALUE
------- ------- ------ -------
Bonds (In Millions)
<S> <C> <C> <C> <C>
U.S. Treasury securities and obligations of
U.S. government corporations and agencies $ 9,504 $ 353 $ 74 $ 9,783
Obligations of U.S. states and their
political subdivisions 206 7 6 207
Foreign government bonds 2,420 133 11 2,542
Corporate securities 57,282 2,625 323 59,584
Mortgage-backed securities 5,594 131 15 5,710
------- ------- ------- -------
Total $75,006 $ 3,249 $ 429 $77,826
======= ======= ======= =======
Preferred Stock
Redeemable $ 142 $ 3 $ 6 $ 139
Non-redeemable 97 23 0 120
------- ------- ------- -------
Total $ 239 $ 26 $ 6 $ 259
======= ======= ======= =======
</TABLE>
- 20 -
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO STATUTORY FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1995
--------------------------------------------------
GROSS GROSS
CARRYING UNREALIZED UNREALIZED FAIR
AMOUNT GAINS LOSSES VALUE
------- ------- ------- -------
Bonds (In Millions)
<S> <C> <C> <C> <C>
U.S. Treasury securities and obligations of
U.S. government corporations and agencies $15,715 $ 1,392 $ 1 $17,106
Obligations of U.S. states and their
political subdivisions 214 22 1 235
Foreign government bonds 3,196 260 1 3,455
Corporate securities 54,411 4,609 97 58,923
Mortgage-backed securities 3,958 241 8 4,191
------- ------- ------- -------
Total $77,494 $ 6,524 $ 108 $83,910
======= ======= ======= =======
Preferred Stock
Redeemable $ 304 $ 16 $ 4 $ 316
Non-redeemable 92 2 0 94
------- ------- ------- -------
Total $ 396 $ 18 $ 4 $ 410
======= ======= ======= =======
</TABLE>
The carrying amount and estimated fair value of bonds at December 31,
1996, categorized by contractual maturity, are shown below. Actual
maturities may differ from contractual maturities because borrowers
may prepay obligations with or without call or prepayment penalties.
CARRYING ESTIMATED
AMOUNT FAIR VALUE
-------- ----------
(In Millions)
Due in one year or less $ 1,999 $ 2,012
Due after one year through five years 19,125 19,445
Due after five years through ten years 19,406 20,081
Due after ten years 28,882 30,578
------- -------
69,412 72,116
------- -------
Mortgage-backed securities 5,594 5,710
------- -------
Total $75,006 $77,826
======= =======
Proceeds from the sale and maturity of bonds during 1996, 1995 and
1994 were $119,195 million, $93,178 million and $80,668 million,
respectively. Gross gains of $1,516 million, $1,913 million and $618
million and gross losses of $988 million, $782 million and $1,841
million were realized on such sales during 1996, 1995 and 1994,
respectively. Realized gains and losses are determined using the
specific identification method.
B. Mortgage loans on real estate - Mortgage loans on real estate at
December 31 are as follows:
1996 1995
------------------ ------------------
CARRYING PERCENT CARRYING PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL
------ -------- ------ --------
(In Millions)
Commercial and agricultural loans:
In good standing $15,546 91.3% $17,649 87.0%
In good standing
with structured terms 809 4.7% 966 4.8%
Past due 90 days or more 229 1.3% 144 0.7%
In process of foreclosure 68 0.4% 157 0.8%
Residential loans 387 2.3% 1,364 6.7%
------- ----- ------- -----
Total $17,039 100.0% $20,280 100.0%
======= ===== ======= =====
At December 31, 1996, the Company's mortgage loans on real estate were
collateralized by the following property types: office buildings
(34%), retail stores (22%), residential properties (2%), apartment
complexes (18%), industrial buildings (11%), agricultural properties
(9%) and other commercial properties (4%). The maximum percentage of
any one loan to the value of collateral at the time of the loan,
exclusive of insured, guaranteed, purchase money mortgages or
mortgages supported by high credit leases is 80%. The mortgage loans
are geographically dispersed throughout the United States and
- 21 -
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO STATUTORY FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
Canada with the largest concentrations in California (26%) and New
York (8%). Included in these balances are mortgage loans with
affiliated joint ventures of $560 million and $653 million at December
31, 1996 and 1995, respectively.
C. Real estate - Real estate at December 31 was as follows:
1996 1995
------ ------
(In Millions)
Investment real estate $1,201 $1,484
Properties occupied by the Company 525 533
Properties acquired in
satisfaction of debt 368 471
------ ------
Total $2,094 $2,488
====== ======
Accumulated depreciation on real estate was $808 million and $853
million at December 31, 1996 and 1995, respectively.
D. Other invested assets - Other invested assets of $2,591 million and
and $3,304 million as of December 31, 1996 and 1995, respectively,
principally include the Company's net equity in joint ventures and
other forms of partnerships. The Company's share of net income from
other invested assets was $283 million, $240 million and $348 million
for 1996, 1995 and 1994, respectively.
E. Investment in subsidiaries - Included in "Common stock" is the
Company's investment in subsidiaries of $4,610 million and $4,328
million at December 31, 1996 and 1995, respectively. Included in "Net
investment income" for 1996, 1995 and 1994 is $370 million, $143
million and $(936) million, respectively, attributable to
undistributed income (loss) of subsidiaries.
In October 1995, the Company completed the sale of Prudential
Reinsurance Holdings, Inc., through an initial public offering of
common stock. As a result of the sale, an after-tax gain of $72
million was recorded in 1995.
In March 1995, the Company announced its intention to sell its
mortgage banking unit. On January 26, 1996, the Company entered into a
definitive agreement to sell substantially all the assets of
Prudential Home Mortgage Company, Inc. ("PHMC") and it also
liquidated certain mortgage-backed securities and extended warehouse
loans. In 1995, PHMC recorded an after-tax loss of $98 million which
includes operating gains and losses, asset write downs, and other
costs directly related to the sale. The Company continues to have
discussions with prospective buyers for the sale of the remaining
assets.
F. Net unrealized capital gains (losses) - Changes in net unrealized
capital gains (losses), which result principally from changes in the
differences between cost and carrying amounts of invested assets, were
$191 million and $661 million for the years ended December 31, 1996
and 1995, respectively, and are reflected in "Unassigned surplus."
G. Asset valuation reserve and interest maintenance reserve - These
reserves are required for life insurance companies under NAIC
requirements. The AVR is calculated based on a statutory formula and
is designed to mitigate the effect of valuation and credit-related
losses on unassigned surplus. The IMR captures realized capital gains
and losses, net of tax, resulting from changes in the general level of
interest rates. These gains and losses are amortized into net
investment income utilizing grouped amortization schedules over the
expected remaining life of the investments sold. At December 31, 1996,
AVR is comprised of 68% for bonds, stocks, and short-term investments;
17% for mortgage loans on real estate; and 15% for real estate and
other invested assets. The IMR balance at December 31, 1996 and 1995
was $1,365 million and $1,163 million, respectively, and is recorded
in "Other liabilities". During 1996, 1995 and 1994, $327 million, $766
million and ($910) million, respectively, of net realized capital
gains (losses) were deferred and $126 million, $82 million and $102
million, respectively, was amortized and included in income.
H. Restricted assets and special deposits - Assets in the amounts of $941
million and $5,072 million at December 31, 1996 and 1995,
respectively, were on deposit with governmental authorities or
trustees as required by law. Assets valued at $2,994 million and
$3,121 million at December 31, 1996 and 1995, respectively, were
maintained as compensating balances or pledged as collateral for bank
loans and other financing agreements. Letter stock or other securities
restricted as to sale amounted to $720 million in 1996 and $354
million in 1995.
I. Loan backed and structured securities - A retrospective method is
employed to recalculate the values of the loan backed and structured
securities holdings with the exception of interest only bonds. Each
acquisition lot was reviewed to recalculate the effective yield. The
recalculated effective yield was used to derive a book value as if the
new yield were applied at the time of acquisition. Outstanding
principal
- 22 -
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO STATUTORY FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
factors from the time of acquisition to adjustment date were used to
calculate the prepayment history for all applicable securities.
Conditional prepayment rates, computed with life to date factor
histories and weighted average maturities, were used to affect the
calculation of projected payments for pass through, interest only and
principal only security types. Interest only bond adjustments are
developed on a prospective basis with adjustments made for permanent
impairments if needed.
J. Securities lending is a program whereby the Company loans securities
to third parties, primarily major brokerage firms. As of December 31,
1996 and 1995, the estimated fair values of loaned securities were
$6,362 million and $5,939 million respectively. Company and NAIC
policies require a minimum of 102% and 105% of the fair value of the
domestic and foreign loaned securities, respectively, to be separately
maintained as collateral for the loans. Cash collateral received is
invested in short-term investments. The offsetting collateral
liability as of December 31, 1996 and 1995 is $4,813 million and
$3,625 million, respectively. Non-cash collateral is not reflected in
the Statements of Admitted Assets, Liabilities and Surplus.
5. EMPLOYEE BENEFIT PLANS
A. Pension plans - The Company has several defined benefit pension plans,
which cover substantially all of its employees. Benefits are generally
based on career average earnings and credited length of service. The
Company's funding policy for U.S. plans is to contribute annually the
amount necessary to satisfy the Internal Revenue Service contribution
guidelines.
Employee pension benefit plan status is as follows:
1996 1995
------- -------
(In Millions)
Actuarial present value of benefit obligation:
Vested benefit obligation $(3,878) $(3,270)
======= =======
Accumulated benefit obligation $(4,174) $(3,572)
======= =======
Projected benefit obligation $(4,989) $(4,330)
Plan assets at fair value 7,326 6,688
------- -------
Plan assets in excess of projected
benefit obligation 2,337 2,358
Unrecognized transition amount (769) (904)
Unrecognized prior service cost 356 199
Unrecognized net gain (916) (753)
------- -------
Prepaid pension cost $ 1,008 $ 900
======= =======
Plan assets consist primarily of equity securities, bonds, real estate
and short-term investments, of which $5,668 million and $4,788 million
are included in separate account assets and liabilities at December
31, 1996 and 1995, respectively.
The components of the net periodic pension benefit for 1996, 1995 and
1994 are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
(In Millions)
<S> <C> <C> <C>
Service cost $ 119 $ 110 $ 141
Interest cost 336 371 293
Actual return on assets (720) (1,249) 62
Net amortization and deferral 57 604 (633)
Net curtailment gains and special termination benefits 63 0 156
------ ------ ------
Net periodic pension benefit $ (145) $ (164) $ 19
====== ====== ======
</TABLE>
The net increase to surplus relating to the Company's pension plans is
$37 million, $30 million and $0 million in 1996, 1995 and 1994,
respectively, which considers the changes in the non-admitted prepaid
pension asset of $108 million, $134 million and ($19) million,
respectively.
The accounting assumptions used by the Company were:
AS OF SEPTEMBER 30,
------------------------
1996 1995 1994
------ ------ ------
Discount rate 7.75% 7.50% 8.50%
Rate of increase in compensation levels 4.50% 4.50% 5.50%
Expected long-term rate of return on assets 9.50% 9.00% 9.00%
The Company maintains non-qualified supplemental retirement plans
providing benefits that may not be paid from the Company's two
qualified plans since qualified plans have limits imposed by Section
415 and 401(a)(17) of the Code. One of these plans also provides
certain participants with a subsidized early retirement benefit.
- 23 -
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO STATUTORY FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
B. Postretirement benefits - The Company provides certain life insurance
and health care benefits for its retired employees. Substantially all
of the Company's employees may become eligible to receive these
benefits if they retire after age 55 with at least 10 years of
service.
Postretirement benefits are accounted for in accordance with
prescribed NAIC policy. The Company has elected to amortize its
transition obligation over 20 years. During 1996, 1995 and 1994,
funding of its postretirement benefit obligations totaled $35 million,
$47 million and $31 million, respectively.
The postretirement benefit plan status is as follows:
SEPTEMBER 30,
------------------
1996 1995
---- ----
(In Millions)
Accumulated postretirement benefit obligation for:
Retirees $(1,418) $(1,465)
Fully eligible active plan participants (35) (103)
Plan assets at fair value 1,341 1,309
------- -------
Funded status (112) (259)
Unrecognized transition amount 355 378
Unrecognized net gain (177) (19)
------- -------
Prepaid postretirement benefit cost $ 66 $ 100
======= =======
Plan assets consist of group and individual variable life insurance
policies, group life and health contracts and short-term investments,
of which $1,003 million and $990 million are included in the separate
account assets and liabilities at December 31, 1996 and 1995,
respectively.
Net periodic postretirement benefit cost for 1996, 1995 and 1994
includes the following components:
1996 1995 1994
----- ----- -----
(In Millions)
Service cost $ 24 $ 30 $ 36
Interest cost 115 117 107
Actual return on plan assets (104) (144) (98)
Amortization of transition obligation 22 22 23
Other 12 49 52
----- ----- -----
Net periodic postretirement benefit cost $ 69 $ 74 $ 120
===== ===== =====
The net reduction to surplus relating to the Company's postretirement
benefit plans is $35 million, $46 million, and $30 million in 1996,
1995 and 1994, respectively, which considers the changes in the
prepaid postretirement benefit cost of $34 million, $28 million and
$90 million in 1996 , 1995 and 1994, respectively.
The assumptions used for the postretirement benefit plan were:
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30,
---------------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Discount rate 7.75% 7.50% 8.50%
Expected long-term rate of return on plan assets 9.00% 8.00% 9.00%
Rate of increase in compensation levels 4.50% 4.50% 5.50%
Health care cost trend rates 8.50-12.50% 8.90-13.30% 9.10-13.90%
Ultimate health care cost trend rate at 2006 5.00% 5.00% 6.00%
</TABLE>
A 1% increase in health care cost trend rates would increase the
September 30, 1996 accumulated postretirement benefit obligation and
service/interest costs by $115 million and $12 million, respectively.
C. Postemployment benefits - The Company accrues for postemployment
benefits primarily for life and health benefits provided to former or
inactive employees who are not retirees. The net accumulated liability
for these benefits at December 31, 1996 and 1995 was $99 million and
$96 million, respectively.
- 24 -
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO STATUTORY FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
6. NOTES PAYABLE AND OTHER BORROWINGS
Notes payable and other borrowings consisted of the following at December
31:
Short-term: 1996 1995
---- ----
(In Millions)
Notes payable to affiliate $ 99 $ 0
Current portion of long term
notes payable 11 128
---- ----
$110 $128
Long-Term: 1996 1995
---- ----
8.173% note due 2002 $249 $249
7.501% note due 1999 248 248
5.0819% note due 2004 56 66
12.00% note due 1999 0 16
Secured demand note
due 1998 100 100
---- ----
653 679
---- ----
Total principal repayments and accrued interest $763 $807
==== ====
Scheduled principal repayments as of December 31, 1996, are as
follows: $110 million in 1997, $100 million in 1998, $239 million in
1999, $0 in 2000, $0 in 2001 and $294 million thereafter.
7. SURPLUS
A. Capital notes - The Company issues Capital Notes that are subordinate
in right of payment to policy claims, prior claims and senior
indebtedness. A summary of the outstanding Capital Notes as of
December 31, 1996 is as follows:
PRINCIPAL CARRYING INTEREST MATURITY
ISSUE DATE (PAR) AMOUNT RATE DATE
- ---------- --------- -------- -------- --------
(In Millions)
April 28, 1993 $ 300 $ 299 6.875% April 15, 2003
July 1, 1995 350 340 8.300% July 1, 2025
July 1, 1995 250 246 7.650% July 1, 2007
July 15, 1995 100 100 8.100% July 15, 2015
------- -----
Total $ 1,000 $ 985
======= =====
B. Special surplus fund - In accordance with the requirements of various
states, a special surplus fund has been established for contingency
reserves of $1,268 million and $1,274 million as of December 31, 1996
and 1995, respectively.
C. Non-admitted assets - Non-admitted assets were $1,367 million and
$1,167 million as of December 31, 1996 and 1995, respectively.
8. FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair values presented below have been determined using available
information and reasonable valuation methodologies. Considerable judgment
is applied in interpreting data to develop the estimates of fair value.
Accordingly, such estimates presented may not be realized in a current
market exchange. The use of different market assumptions and/or estimation
methodologies could have a material effect on the estimated fair values.
The following methods and assumptions were used in calculating the fair
values. (For all other financial instruments, the carrying value is a
reasonable estimate of fair value.)
Bonds and preferred stock - Fair values for bonds and preferred stock,
other than private placement securities, are based on quoted market
prices or estimates from independent pricing services. Fair values for
private placement securities are estimated using a discounted cash
flow model which considers the current market spreads between the U.S.
Treasury yield curve and corporate bond yield curve, adjusted for the
type of issue, its current credit quality and its remaining average
life. The fair value of certain non-performing private placement
securities is based on amounts provided by state regulatory
authorities.
Common stock - Fair value of unaffiliated common stock is based on
quoted market prices, where available, or prices provided by state
regulatory authorities.
- 25 -
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO STATUTORY FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
Mortgage loans on real estate - The fair value of residential
mortgages is based on recent market trades or quotes, adjusted where
necessary for differences in risk characteristics. The fair value of
the commercial mortgage and agricultural loan portfolio is primarily
based upon the present value of the scheduled cash flows discounted at
the appropriate U.S. Treasury rate, adjusted for the current market
spread for a similar quality mortgage. For certain non-performing and
other loans, fair value is based upon the value of the underlying
collateral.
Policy loans and premium notes - The estimated fair value of policy
loans is calculated using a discounted cash flow model based upon
current U.S. Treasury rates and historical loan repayments.
Derivative financial instruments - The fair value of swap agreements
is estimated based on the present value of future cash flows under the
agreements discounted at the applicable zero coupon U.S. Treasury rate
and swap spread. The fair value of forwards, futures and options is
estimated based on market quotes for a transaction with similar terms.
The fair value of loan commitments is derived by comparing the
contractual future stream of fees with such fee streams adjusted to
reflect current market rates that would be applicable to instruments
of similar type, maturity and credit standing.
Investment-type insurance contract liabilities - Fair values for the
Company's investment-type insurance contract liabilities are estimated
using a discounted cash flow model, based on interest rates currently
being offered for similar contracts. Carrying amounts are included in
"Future policy benefits and claims."
Notes payable and other borrowings - The estimated fair value of notes
payable is derived using discount rates based on the borrowing rates
currently available to the Company for debt with similar terms and
remaining maturities.
The following table discloses the carrying amounts and estimated fair
values of the Company's financial instruments at December 31:
<TABLE>
<CAPTION>
1996 1995
---- ----
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
------ ---------- ------ ----------
(In Millions)
FINANCIAL ASSETS:
<S> <C> <C> <C> <C>
Bonds $75,006 $77,826 $77,494 $83,910
Preferred stock 239 259 396 410
Common stock * 2,466 2,466 1,805 1,805
Mortgage loans on real estate 17,039 17,364 20,280 20,839
Policy loans and premium notes 6,023 5,942 6,208 6,452
Short-term investments 5,817 5,817 4,633 4,633
Cash 165 165 170 170
Assets held in separate accounts 57,797 57,797 53,903 53,903
Derivative financial instruments 9 16 15 64
FINANCIAL LIABILITIES:
Investment-type insurance
contracts 30,194 30,328 34,799 35,720
Notes payable and other borrowings 763 794 807 829
Liabilities related to separate accounts 57,436 57,436 53,256 53,256
Derivative financial instruments 60 63 94 108
</TABLE>
* Excludes investments in subsidiaries of $4,610 million and $4,328 million
at December 31, 1996 and 1995, respectively.
- 26 -
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO STATUTORY FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
9. DERIVATIVE AND OFF-BALANCE SHEET CREDIT-RELATED INSTRUMENTS
A. Derivative financial instruments - Derivatives include swaps,
forwards, futures, options and fixed-rate loan commitments subject to
market risk, all of which are used by the Company in the normal course
of business in activities other than trading. The Company does not
issue or hold derivatives for trading purposes. This classification is
based on management's intent at the time of contract inception and
throughout the life of the contract. The Company uses derivatives
primarily for asset/liability risk management and to reduce exposure
to interest rate, currency and other market risks. Of those
derivatives held at December 31,1996, 35% of the notional amounts
consisted of interest rate derivatives and 65% consisted of foreign
currency derivatives.
The tables below summarize the Company's outstanding positions on a
gross basis before netting pursuant to rights of offset, qualifying
master netting agreements with counterparties or collateral
arrangements at December 31:
<TABLE>
<CAPTION>
DERIVATIVE FINANCIAL INSTRUMENTS
1996 1995
---- ----
(In Millions)
CARRYING ESTIMATED CARRYING ESTIMATED
NOTIONAL AMOUNT FAIR VALUE NOTIONAL AMOUNT FAIR VALUE
-------- ------ ---------- -------- ------ ----------
<S> <C> <C> <C> <C> <C> <C>
Swaps:
Assets $ 159 $ 1 $ 6 $ 418 $ (1) $ 32
Liabilities 479 50 53 371 76 79
Forwards:
Assets 453 8 8 235 13 17
Liabilities 980 9 9 1,074 13 13
Futures:
Assets 0 0 0 683 5 5
Liabilities 399 1 1 864 5 7
Options:
Assets 175 0 0 195 0 0
Liabilities 0 0 0 3 0 0
Loan Commitments:
Assets 164 0 2 122 (2) 10
Liabilities 9 0 0 532 0 9
------ ------ ------ ------ ------ ------
Total:
Assets $ 951 $ 9 $ 16 $1,653 $ 15 $ 64
====== ====== ====== ====== ====== ======
Liabilities $1,867 $ 60 $ 63 $2,844 $ 94 $ 108
====== ====== ====== ====== ====== ======
</TABLE>
B. Off-balance sheet credit-related instruments - During the normal
course of its business, the Company utilizes financial instruments
with off-balance sheet credit risk such as commitments, financial
guarantees and letters of credit. Commitments include variable rate
commitments to purchase and sell mortgage loans and the unfunded
portion of commitments to fund investments in private placement
securities. The Company also provides financial guarantees incidental
to other transactions and letters of credit that guarantee the
performance of customers to third parties. These credit-related
financial instruments have off-balance sheet credit risk because only
their origination fees, if any, and accruals for probable losses, if
any, are recognized until the obligation under the instrument is
fulfilled or expires. These instruments can extend for several years
and expirations are not concentrated in any period. The Company seeks
to control credit risk associated with these instruments by limiting
credit, maintaining collateral where customary and appropriate, and
performing other monitoring procedures.
The notional amount of these instruments, which represents the
Company's maximum exposure to credit loss from other parties'
non-performance, was $785 million and $1,254 million at December 31,
1996 and 1995, respectively. Because many of these amounts expire
without being advanced in whole or in part, the notional amounts do
not represent future cash flows.
The estimated fair value of these instruments, which represents the
Company's current exposure to credit loss from other parties'
non-performance, was $8 million and $56 million at December 31, 1996
and 1995, respectively.
10. RELATED PARTY TRANSACTIONS
A. Service agreements - The Company has entered into service agreements
with various subsidiaries. Under these agreements, the Company
furnishes services of officers and employees and provides supplies,
use of equipment, office space, and makes payment to
- 27 -
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO STATUTORY FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
third parties for general expenses, state and local taxes. The
agreements obligate the subsidiaries to reimburse the Company for the
approximate cost of providing such services. The amounts receivable
from subsidiaries, reported in "Other assets" at December 31, 1996 and
1995, were $490 million and $509 million, respectively. The
subsidiaries also furnish similar services to the Company in
connection with such agreements. The amount payable to subsidiaries,
reported in "Other liabilities" at December 31, 1996 was $87 million.
There was no outstanding balance at December 31, 1995.
Certain of the Company's group health care subsidiaries provide health
insurance to certain employees of the Company. Enrollment contract
costs reported in "Other expenses" were $126 million, $111 million and
$104 million for the years ended December 31, 1996, 1995 and 1994,
respectively.
The Company purchases corporate owned life insurance policies from one
of its life insurance subsidiaries for certain employees. The premium
charged for these policies reported in "Other expenses" was $3
million, $12 million and $12 million for the years ended December 31,
1996, 1995 and 1994, respectively. The cash value associated with
these policies was $118 million and $102 million at December 31,
1996 and 1995, respectively.
Certain of the Company's subsidiaries perform services for the Company
in connection with the Company's obligations under investment advisory
or subadvisory agreements. The costs incurred in connection with
performing such services, primarily reported in "Other expenses," were
$145 million, $327 million and $342 million for the years ended
December 31, 1996, 1995 and 1994, respectively. The Company also
provides these services to subsidiaries in connection with such
agreements. The investment advisory fees received from affiliates by
the Company, reported in "Other income" were $161 million, $92 million
and $110 million for the years ended December 31, 1996, 1995 and 1994,
respectively.
The Company borrows short-term funds from Prudential Funding
Corporation ("Funding"), a wholly owned subsidiary. The interest
expense for these borrowings was $131 million, $66 million and $21
million for the years ended December 31, 1996, 1995 and 1994,
respectively. The outstanding balance at December 31, 1996 was $99
million. There was no outstanding balance at December 31, 1995.
B. Net worth maintenance agreement - The Company has entered into a
support agreement with Funding under which it agrees to maintain
Funding's tangible net worth, including subordinated debt, at not less
than $1.00. As of December 31, 1996, the tangible net worth of Funding
was $44 million. Since the inception of the agreement, no support
payments have been required.
11. CONTINGENCIES
The Company is reviewing its obligations under certain managed care
arrangements for possible failure to comply with contractual and regulatory
requirements. It is the opinion of management that appropriate reserves
have been established in accordance with applicable accounting standards to
provide for appropriate reimbursements to customers.
Various lawsuits against the Company have arisen in the course of the
Company's business. In certain of these matters, large and/or indeterminate
amounts are sought.
Twenty-six purported class actions and over 280 individual actions are
pending against the Company on behalf of those persons who purchased life
insurance policies allegedly because of deceptive sales practices engaged
in by the Company and its insurance agents in violation of state and
federal laws. The Company anticipates additional suits may be filed by
individuals who opted out of the class action settlement described below.
The sales practices alleged to have occurred are contrary to Company
policy. Some of these cases seek very substantial damages while others seek
unspecified compensatory, punitive and treble damages. The Company intends
to defend these cases vigorously.
A Multi-State Life Insurance Task Force (the "Task Force"), comprised of
insurance regulators from 29 states and the District of Columbia, was
created to conduct a review of sales and marketing practices throughout the
life insurance industry. As the largest life insurance company in the
United States, the Company was the initial focus of the Task Force
examination. On July 9, 1996, the Task Force released its report on the
Company's activities. In it, the Task Force found that some sales of life
insurance policies made by the Company were improper. The report criticizes
the Company's training, oversight, discipline and compliance programs
related to insurance sales. Based on these findings, the Task Force
recommended, and the Company agreed to, a series of fines allocated to all
50 states and the District of Columbia amounting to a total of $35 million.
In addition, the Task Force recommended a remediation program pursuant to
which the Company would offer relief to policyowners who purchased 10.7
million whole life insurance policies in the United States from the Company
from 1982 through 1995. In subsequent negotiations with several states, the
Company agreed to pay additional amounts aggregating approximately $30
million by way of fine, reimbursement of investigation expenses and costs
associated with outreach to residents of Florida and California.
On October 28, 1996, the Company entered into a Stipulation of Settlement
with attorneys for the plaintiffs in the class actions consolidated in a
Multi-District Litigation involving alleged improprieties in connection
with the Company's sale of whole life
- 28 -
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO STATUTORY FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
insurance policies from 1982 through 1995. Pursuant to the proposed
settlement, the Company has agreed to provide certain enhancements and
changes to the remediation program previously accepted by the Multi-State
Task Force, including some additional remedies. In addition, the Company
agreed that a minimum cost of $410 million (which was recorded in the
Statement of Operations and Changes in Surplus) would be incurred in
providing remedies to policyowners under the program, and agreed to certain
other payments and guarantees. Under the terms of the guarantees, the
Company has agreed that the average cost per remedy will not be less than
$2,364 for up to 330,000 claims remedied. For claims remedied in excess of
330,000, the Company has not guaranteed an average cost per remedy. The
Company has also agreed to provide additional compensation to be
distributed by formula that will range in an aggregate amount from $50
million to $300 million depending on the total number of claims remedied.
The Company cannot predict how many claims ultimately will be remedied. The
Company has also recorded in the Statement of Operations and Changes in
Surplus, its estimate of the minimum administrative costs related to the
remediation program. As of March 5, 1997, all 50 states and the District of
Columbia have directed the Company to offer a remediation plan based on the
program accepted by the Task Force and containing many of the enhancements
of the class action settlement.
Also on October 28, 1996, the U.S. District Court of the District of New
Jersey, in which the Multi-District Litigation is pending, conditionally
certified a class for settlement purposes and scheduled a hearing on the
fairness, reasonableness and adequacy of the proposed settlement. This
hearing was held on February 24, 1997. On March 7, 1997, the Court
rendered its decision approving the settlement. The owners of approximately
23,000 policies have taken steps to exclude themselves from the class
action and are not bound by the settlement.
To date, the Company has mailed packages to 8.5 million policyowners
eligible for the remediation program, informing policyowners in all 50
states and the District of Columbia of their rights under the program. The
deadline for electing to participate in the Alternative Dispute Resolution
Process ("ADR") or Basic Claim Relief is June 1, 1997. Policyowners who
believe that they were misled can file a claim through the ADR.
Policyowners who do not believe they were misled, or who do not wish to
file a claim under the ADR, may choose from several options available under
Basic Claim Relief, such as preferred rate premium loans, or the purchase
of enhanced annuities, mutual fund shares or life insurance policies.
It is not possible on any reliable basis to estimate how many policyowners
will participate in the settlement. The cost of the settlement is dependent
upon complex and varying factors, including the number of policyowners that
participate in the settlement, the relief options chosen and the ultimate
dollar value of the settlement. The administrative costs to the Company of
remediation of policyowner claims are also subject to a number of complex
uncertainties in addition to the unknown quantity and cost of policyowner
claims. In light of the uncertainties attendant to these and other factors,
management is unable to make a reasonable estimate of the ultimate cost of
the remediation program to the Company.
A purported class action was brought against the Company and certain
subsidiaries alleging common law fraud, negligent misrepresentation and
violations of the New Jersey RICO statute arising out of the plaintiffs'
purchase of certain subordinated mortgage pass-through securities and
seeking compensatory and punitive damages and injunctive relief. The
Company will deny the substantive allegations of the complaint in its
answer and will vigorously defend the suit. The case is at a preliminary
stage, and management is not now in a position to predict the outcome or
effect of the litigation.
Litigation is subject to many uncertainties, and given the complexity and
scope of these suits, their outcome cannot be predicted. It is also not
possible to predict the likely results of any regulatory inquiries or their
effect on litigation which might be initiated in response to widespread
media coverage of these matters. Accordingly, management is unable to make
a meaningful estimate of the amount or range of loss that could result from
an unfavorable outcome of all pending litigation and the regulatory
inquiries. It is possible that the results of operations or the cash flow
of the Company, in particular quarterly or annual periods, could be
materially affected by an ultimate unfavorable outcome of certain pending
litigation and regulatory matters. Management believes, however, that the
ultimate outcome of all pending litigation and regulatory matters referred
to above should not have a material adverse effect on the Company's
financial position, after consideration of applicable reserves.
In 1993, Prudential Securities, Inc. ("PSI"), a subsidiary of Prudential,
entered into an agreement with the Securities and Exchange Commission, the
National Association of Securities Dealers, Inc., and state securities
commissions whereby PSI agreed to pay $330 million into a settlement fund
to pay eligible claims on certain limited partnership matters. Under this
agreement, if partnership matter claims exceed the established settlement
fund, PSI is obligated to pay such additional claims. The agreement also
required PSI to take measures to enhance the adequacy of its sales
practices compliance controls.
In October 1994, the United States Attorney for the Southern District of
New York (the "U.S. Attorney") filed a complaint against PSI in connection
with its sale of certain limited partnerships. Simultaneously, PSI entered
into an agreement to comply with certain conditions for a period of three
years, and to pay an additional $330 million into the settlement fund. At
the end of the three year period, assuming PSI has fully complied with the
terms of the agreement, the U.S. Attorney will institute no further action.
In the opinion of management, PSI is in compliance with all provisions of
the aforementioned agreements.
- 29 -
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO STATUTORY FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
The Company has entered into a reinsurance agreement with The Prudential
Life Insurance Company, Ltd., a wholly owned subsidiary, under which it has
agreed to reinsure certain individual life insurance policies through a
yearly renewable term contract. The reinsurance assumed premiums and
reserves for 1996 were $27 million and $17 million, respectively.
The Company as a result of the sale of Prudential Reinsurance Inc. (a PRUCO
Inc. subsidiary), agreed to guarantee up to $775 million of Gibraltar
Casualty Company (a Prudential subsidiary) obligations with respect to a
Stop Loss Agreement and PRUCO Inc.'s (a Prudential subsidiary) payment
obligations under an Indemnity Agreement, subject to maximum aggregate
payments of $400 million. The maximum aggregate payments under the
Prudential Guarantee of the Gibraltar Casualty Company obligations will be
reduced in certain circumstances to take account of payments made and
collateral provided in respect of the guaranteed obligations. The Stop Loss
Agreement is intended to mitigate the impact on Prudential Reinsurance Inc.
of adverse development of loss reserves, as of June 30, 1995, of up to $375
million of the first $400 million of adverse development. The Company has
recorded a loss reserve of $175 million as of December 31, 1996.
Gibraltar Casualty Company and other property and casualty insurance
subsidiaries receive claims under expired contracts which assert alleged
injuries and/or damages relating to or resulting from toxic torts, toxic
waste and other hazardous substances. The liabilities for such claims
cannot be estimated by traditional reserving techniques. As a result of
judicial decisions and legislative actions, the coverage afforded under
these contracts may be expanded beyond their original terms. Extensive
litigation between insurers and insureds over these issues continues and
the outcome is not predictable. In establishing the unpaid claim reserves
for these losses, management considered the available information and
established these reserves in accordance with applicable accounting
standards. However, given the expansion of coverage and liability by the
courts and legislatures in the past, and potential for other unfavorable
trends in the future, the ultimate cost of these claims could increase from
the levels currently established.
The Company and a number of other insurers (the "Consortium") entered into
a Reinsurance and Participation Agreement ("the Agreement") with MBL Life
Assurance Corporation ("MBLLAC") and others, under which the Company and
the other insurers agreed to reinsure certain payments to be made to
contractholders by MBLLAC in connection with the plan of rehabilitation of
Mutual Benefit Life Insurance Company. Under the Agreement, the Consortium,
subject to certain terms and conditions, will indemnify MBLLAC for the
ultimate net loss sustained by MBLLAC on each contract subject to the
Agreement. The ultimate net loss represents the amount by which the
aggregate required payments exceed the fair market value of the assets
supporting the covered contracts at the time such payments are due. The
Company's share of any net loss is 30.55%. The Company has determined that
it does not expect to make any payments to MBLLAC under the agreement. The
Company concluded this after testing a wide range of potentially adverse
scenarios during the rehabilitation period for MBLLAC.
******
- 30 -
<PAGE>
PART C
OTHER INFORMATION
<PAGE>
PART C
OTHER INFORMATION
Item 24. Financial statements and Exhibits
(a) The following financial statements are included in Part B:
Financial Statements of Registrant - Not applicable.
Financial Statements of Depositor - The Prudential Insurance Company of
America.
(b) Exhibits
1. Resolution adopted by the Board of Directors of The Prudential
Insurance Company of America on February 11, 1997
establishing the Prudential Discovery Select Group
Variable Contract Account (the "Discovery Account").
2. Not applicable.
3(a). Principal Underwriting Contract.
3(b). Broker-dealer sales agreement.
4(a). Form of Group Annuity Contract for The Prudential Insurance
Company of America.
5(a). Not applicable.
5(b). Form of Participant enrollment form (including acknowledgment
of restrictions on redemption imposed by I.R.C. Section
403(b)).
6. Copy of certificate of incorporation and by-laws of The
Prudential Insurance Company of America.
7. Not applicable.
8(a). Participation Agreement between The Prudential Insurance
Company of America and AIM Variable Insurance Funds, Inc.
8(b). Participation Agreement between The Prudential Insurance
Company of America and T. Rowe Price Equity Series, Inc.
8(c). Participation Agreement between The Prudential Insurance
Company of America and Janus Aspen Series.
C-1
<PAGE>
8(d). Participation Agreement between The Prudential Insurance
Company of America and MFS Variable Insurance Trust.
8(e). Participation Agreement between The Prudential Insurance
Company of America and OCC Accumulation Trust.
8(f). Participation Agreement between The Prudential Insurance
Company of America and Warburg Pincus Trust.
9. Consent and opinion of Peter T. Scott, Assistant General
Counsel, The Prudential Insurance Company of America, as to
the legality of the securities being registered.
10(a).Consent of Price Waterhouse, LLP, Independent Auditors.
10(b).Consent of Sutherland, Asbill & Brennan, L.L.P.
10(c).Powers of Attorney for Glen H. Hiner, Gaynor N. Kelley,
Ida F.S. Schwartz.
10(d).Powers of Attorney.(1)
11. Not applicable.
12. Not applicable.
13. Schedule for Computation of Performance Quotations.
Item 25. DIRECTORS AND OFFICERS OF THE DEPOSITOR
Information about the Directors and Executive Officers of Prudential,
Registrant's depositor, appears under the heading of "Directors and Officers of
Prudential" in the Statement of Additional information (Part B of this
Registration Statement).
- ----------
(1) Incorporated herein by reference to the registrant's initial Registration
Statement filed with the Securities and Exchange Commission on March 13,
1997 (File No. 333-23271).
C-2
<PAGE>
Item 26. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH THE DEPOSITOR OR
REGISTRANT
Registrant is a separate account of The Prudential Insurance Company of America,
a mutual life insurance company organized under the laws of the State of New
Jersey. The subsidiaries of Prudential are as shown on the Organization Chart on
pages following.
In addition to the subsidiaries shown on the Organization Chart, Prudential
holds all of the voting securities of Prudential's Gibraltar Fund, Inc., a
Maryland corporation, in three of its separate accounts. Prudential also holds
directly and in three of its separate accounts, shares of The Prudential Series
Fund, Inc., a Maryland corporation. The balance of the shares of The Prudential
Series, Inc. are held in separate accounts of Pruco Life insurance Company and
Pruco Life Insurance Company of New Jersey, wholly-owned subsidiaries of
Prudential. All of the separate accounts referred to above are unit investment
trusts registered under the Investment Company Act of 1940. Prudential's
Gibraltar Fund, Inc. and The Prudential Series Fund, Inc. are registered as
open-end, diversified management Investment companies under the investment
Company Act of 1940. The shares of these investment companies are voted in
accordance with the instructions of persons having interests in the unit
investment trusts, and Prudential, Pruco Life Insurance Company and Pruco Life
Insurance Company of New Jersey vote the shares they hold directly in the same
manner that they vote the shares that they hold in their separate accounts.
Registrant may also be deemed to be under common control with The Prudential
Variable Contract Account-2, The Prudential Variable Contract Account-10, and
The Prudential Variable Contract Account-11, separate accounts of Prudential
registered as open-end, diversified management investment companies under the
investment Company Act of 1940.
The Prudential is a mutual insurance company. Its financial statements have been
prepared in conformity with generally accepted accounting principles, which
include statutory accounting practices prescribed or permitted by state
regulatory authorities for insurance companies.
C-3
<PAGE>
<TABLE>
<CAPTION>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA AND ITS SUBSIDIARIES
The Prudential Insurance Company of America
<S> <C> <C>
Fine Homes, L.P. (1) (see page 2 for Direct and Indirect subs)
Gibraltar Casualty Company
Health Ventures Partner, Inc.
HSG Health Systems Group Limited
Industrial Trust Company
Jennison Associates Capital Corp. JACC Services Corp.
PGR Advisors I, Inc.
Clive Discount Company Limited Clivco Nominees Limited
Clive Agency Bond Broking Limited
Clivwell Securities Limited
PRICOA Capital Group Limited
PRICOA Funding Limited PRICOA Investment Company
PRICOA Property Investment Management Northern Retail Properties (General
Limited Partner) Limited
PIC Holdings Limited PRICOA P.I.M. (Regulated) Limited
TransEuropean Properties
(General Partner) Limited
TransEuropean Properties
(General Partner) II Limited
Varsity Fund (General Partner) Limited
PRICOA Realty Group Limited
PIC Realty Canada Limited
PREMISYS Real Estate Services, Inc. PREMISYS Real Estate Services, Inc. of
Colorado (2)
PRICOA Vida, Sociedad Anonima de Seguros y PRICOA Invest, Sociedad Anonima, S.G.C.
Reaseguros (3)
PRICOA, Vita S.p.A.
PRUCO, Inc. (see pages 3-6 for Direct and Indirect subs)
Pruco Life Insurance Company Pruco Life Insurance Company of New Jersey
The Prudential Life Insurance Company of
Arizona
Prudential Direct Advisers, Inc.
Prudential Direct Distributors, Inc.
Prudential Fund Management Canada Limited
Prudential Global Funding, Inc. Prudential-Bache Capital Funding (Swaps)
Limited
Prudential Homes Corporation Prudential Texas Residential Services
Corporation
Prudential Mortgage Asset Corporation
Prudential Mortgage Asset Corporation II
Prudential Mutual Fund Management, Inc. (4)
Prudential of America General Insurance OTIP/RAEO Insurance Company, Inc. (5)
Company (Canada)
Prudential of America Life Insurance Company
(Canada) (6)
Prudential Private Placement Investors, Inc.
Prudential Realty Securities II, Inc. (7)
Prudential Select Holdings, Inc. Prudential Select Life Insurance Company
of America
Prudential Service Bureau, Inc.
PruLease, Inc.
PruServicos Participacoes, S.A. (8)
Residential Services Corporation of America (see page 2 for Direct and Indirect subs)
Prudential HealthCare and Life Insurance
Company of America
The Prudential Investment Corporation (see page 7 for Direct and Indirect subs)
The Prudential Life Insurance Company of
Korea, Ltd.
The Prudential Life Insurance Company, Ltd.
The Prudential Real Estate Affiliates, Inc. (see page 2 for Direct and Indirect subs)
U.S. High Yield Management Company
- ------------------
</TABLE>
(1) Fine Homes, L.P. is a partnership which owns subsidiaries.
(2) PREMISYS Real Estate Services, Inc. of Colorado is 80% owned by PREMISYS
Real Estate Services, Inc. and 20% owned by Peter Coakley.
(3) PRUCO, Inc. owns 26 shares ([less-than]1%) of PRICOA Vida, Sociedad Anonima
de Seguros y Reaseguros.
(4) Prudential Mutual Fund Management, Inc. is 85% owned by Prudential
Securities Incorporated and 15% owned by The Prudential.
(5) OTIP/RAEO Insurance Company, Inc. is 95% owned by Prudential of America
General Insurance Company (Canada) and 5% owned by OTIP Insurance Brokers,
Inc.
(6) Prudential of America Life Insurance Company (Canada) is 75% owned by The
Prudential and 25% owned by PPI Financial Group, Ltd.
(7) Prudential Realty Securities II, Inc. is 87% owned by The Prudential and
13% owned by PRUCO, Inc.
(8) PRUCO, Inc. owns 1 share ([less-than]1%) of PruServicos Participacoes, S.A.
6/30/95
C-4
<PAGE>
<TABLE>
<CAPTION>
The Prudential Insurance Company of America
<S> <C> <C>
Major Escrow Corp.
ML/MSB Acquisition, Inc.
PRICOA Relocation Management, Ltd.
PRS Escrow Services, Inc.
Fine Homes, L.P. Prudential Community Interaction Consulting, Inc.
(from p. 1) Prudential New York Homes Corporation
Prudential Oklahoma Homes Corporation
Prudential Relocation Mangagement Company of
Canada Ltd.
Prudential Resources Management Asia, Limited
The Relocation Funding Corporation of America
Residential Lender's Service, Inc. Lender's Service Title Agency, Inc.
Services Private Label Mortgage Services Corporation
Corporation Residential Information Services, Inc.
of America Securitized Asset Sales, Inc.
(from p. 1) Securitized Asset Services Corporation
The Prudential Home Mortgage Company, Inc. The Prudential Home Mortgage Securities
The Prudential Prudential Referral Services, Inc. Company, Inc.
Real Estate The Prudential Real Estate Financial Services of The Prudential Real Estate Financial Services of
Affiliates, Inc. America, Inc. Long Island, Inc.
(from p. 1)
</TABLE>
C-5
<PAGE>
The Prudential Insurance Company of America
<TABLE>
<S> <C> <C> <C>
Capital Agricultural Property Services, Inc.
Flor-Ag Corporation
GIB Laboratories, Inc.
P.G. Realty, Inc.
PIC Realty Corporation
Pruco Securities Corporation
Prudential Agricultural Credit, Inc.
Prudential Capital and Investment Services, Inc. (See Pages 4-6 for Direct and
Prudential Dental Maintenance Indirect subs)
Organization, Inc.
Prudential Direct, Inc.
Prudential Equity Investors, Inc.
Prudential Funding Corporation
Prudential Health Care Plan, Inc.
Prudential Health Care Plan of California, Inc.
Prudential Health Care Plan of Connecticut, Inc.
Prudential Health Care Plan of Georgia, Inc.
Prudential Health Care Plan of New York, Inc.
PRUCO, Prudential Holdings, Inc.
Inc. (1) Prudential Institutional Fund Management, Inc.
(from p. 1) Prudential Commercial Insurance Company
Prudential Property and Casualty Insurance Prudential General Insurance Company
Company Prudential Insurance Brokerage, Inc.
The Prudential Lloyds (3)
The Prudential Property and Casualty
General Agency, Inc.
The Prudential Property and Casualty
Insurance Company of New Jersey
Prudential Realty Partnerships, Inc.
Prudential Realty Securities, Inc.
Prudential Realty Securities II, Inc. (2)
Prudential Reinsurance Holdings, Inc. Prudential Reinsurance Company Le Rocher Reinsurance, Ltd.
Prudential National Insurance
Company
Prudential Retirement Services, Inc.
Prudential Trust Company PTC Services, Inc.
Prudential Uniformed Services
Administrators, Inc.
The Prudential Bank and Trust Company PBT Mortgage Corporation
The Prudential Savings Bank, F.S.B.
</TABLE>
- -------------------
(1) PRUCO, Inc. owns 1 share ([less-than]1%) of PruServicos Participacoes,
S.A.
(2) Prudential Realty Securities II, Inc. is 87% owned by The Prudential and
13% owned by PRUCO, Inc.
(3) The Prudential Lloyds is controlled by Prudential Property and Casualty
Insurance Company by virtue of a trust agreement with each (3) underwriter.
C-6
<PAGE>
<TABLE>
<CAPTION>
The Prudential Insurance Company of America
PRUCO, Inc.
Prudential Capital and Investment Services, Inc. (from p.3)
<S> <C> <C> <C>
Lapine Holding Lapine Technology Corporation
Company (1)
Bache Insurance Agency of Arkansas, Inc.
Bache Insurance Agency of Louisiana, Prudential-Bache Securities
Inc. (Germany) Inc.
BraeLoch Successor Corporation (See page 5 for Direct and
Indirect subs)
PB Bullion Company, Inc.
PB Services (U.K.)
PGR Advisors, Inc.
Prudential-Bache Agriculture Inc.
Prudential-Bache Capital Funding
(Australia) Limited
Prudential-Bache Capital Funding BV Audley Finance BV
Prudential-Bache Energy Corp.
Prudential-Bache Energy Production Inc.
Prudential-Bache Holdings Inc. Prudential-Bache Partners Inc.
Prudential-Bache International Bank S.A.
Prudential-Bache International (U.K.) (See page 6 for Direct and
Limited Indirect subs)
Prudential-Bache Investor Services Inc.
Prudential-Bache Investor Services II, Inc.
Prudential Prudential-Bache Leasing Inc.
Securities Prudential-Bache Minerals Inc.
Group Inc. Prudential-Bache Program Services Inc.
Prudential-Bache Properties, Inc.
Prudential-Bache Real Estate, Inc.
Prudential-Bache Securities (Australia) (See page 5 for Direct Subs)
Limited
Prudential-Bache Trade Services Inc. PB Trade Ltd.
Prudential-Bache Forex (Hong
Kong) Limited
Prudential-Bache Forex (USA) Prudential-Bache Forex (U.K.)
Inc. Limited
Prudential-Bache Transfer Agent
Services, Inc.
Prudential Securities Incorporated (See page 6 for Direct and
Indirect subs)
Prudential Securities Lease Holding Inc.
Prudential Securities Municipal
Derivatives, Inc.
Prudential Securities Realty Funding
Corporation
Prudential Securities Secured Financing
Corporation
Prudential Securities Structured Assets, P-B Finance Ltd.
Inc.
R&D Funding Corp.
Seaport Futures Management, Inc.
Special Situations Management Inc.
- -----------------
</TABLE>
(1) Lapine Holding Company is 66.7% owned by Prudential Capital and Investment
Services, Inc., 28.3% owned by Kyocera Corp. and 5% owned by Kyocera (Hong
Kong) Ltd.
C-7
<PAGE>
<TABLE>
<CAPTION>
The Prudential Insurance Company of America
PRUCO, Inc.
Prudential Capital and Investment Services, Inc.
<S> <C> <C> <C>
BraeLoch
Successor
Corporation
(from p. 4) BraeLoch Holdings, Inc.
Prudential Prudential-Bache Bache Nominees, Ltd.
Securities Securities Corcarr Funds Management
Group, Inc. (Australia) Limited
Limited Corcarr Management Pty
(from p. 4) Limited
Corcarr Nominees Pty Limited
Corcarr Superannuation Pty
Limited
Divsplit Nominees Pty Limited
PruBache Nominees Pty
Limited
Graham Graham Depository Company II
Resources, Inc. Graham Energy, Ltd.
Graham Exploration, Ltd.
Graham Royalty, Ltd. Graham Production Company
Graham Securities Corporation
</TABLE>
C-8
<PAGE>
The Prudential Insurance Company of America
PRUCO, Inc.
Prudential Capital and Investment Services, Inc.
Prudential Securities Group, Inc.
<TABLE>
<CAPTION>
<S> <C> <C>
Prudential Bache International Clive Discount Holdings International Limited
(U.K.) Limited (from p. 4) Page & Gwyther Holdings Limited
Page & Gwyther Limited
Prudential-Bache Capital Funding (Equities)
Limited Circle (Nominees) Limited
Prudential-Bache Capital Funding (Gilts) Limited
Prudential-Bache Capital Funding (Money
Brokers) Limited
Prudential-Bache (Futures) Limited
Prudential Securities Bache & Co. (Lebanon) S.A.L.
Incorporated (from p. 4) Bache & Co. S.A. de C.V. (Mexico)
Bache Halsey Stuart Shields (Antilles) N.V.
Bache Insurance Agency, Incorporated
Bache Insurance of Arizona Inc.
Bache Insurance of Kentucky, Inc.
Bache Shields Securities Corporation
Banom Corporation
Gelfand, Quinn & Associates, Inc.
P-B Holding Japan Inc. Prudential Securities (Japan) Limited
Prudential-Bache Futures Asia Pacific Ltd.
Prudential-Bache Futures (Hong Kong) Limited
Prudential-Bache Nominees (Hong Kong) Limited
Prudential-Bache Securities Asia Pacific Ltd.
Prudential-Bache Securities (Belgium) Inc.
Prudential-Bache Securities (Espana) S.A.
Prudential-Bache Securities (France) S.A.
Prudential-Bache Securities (Holland) Inc. Prudential-Bache Securities
(Holland) N.V.
Prudential-Bache Securities (Hong Kong) Limited
Prudential-Bache Securities (Luxembourg) Inc.
Prudential-Bache Securities (Monaco) Inc.
Prudential-Bache Securities (Switzerland) Inc.
Prudential-Bache Securities (U.K.) Inc. Shields Model Roland Company
Prudential Mutual Fund Management, Inc. (1) Prudential Mutual Fund
Distributors, Inc.
Prudential Mutual Fund Services, Inc.
Prudential Securities (Chile) Inc.
Prudential Securities CMO Issuer Inc.
Prudential Securities Futures Management, Inc.
Prudential Securities (South America) Incorporated Prudential Securities (Argentina)
Incorporated
Prudential Securities (Uruguay) S.A.
Shields Model Roland Securities Incorporated
Wexford Clearing Services Corporation
</TABLE>
- --------------
(1) Prudential Mutual Fund Management, Inc. is 85% owned by Prudential
Securities Incorporated and 15% owned by The Prudential.
C-9
<PAGE>
The Prudential Insurance Company of America
The Prudential Investment Corporation (from p. 1)
<TABLE>
<CAPTION>
<S> <C>
Gateway Holdings, S.A. Amicus Investment Company
Global Income Fund Management
Company, S.A.
Global Series Fund II Management
Company, S.A.
Jennison Long Bond Management Company
PAEC Management Company
Prudential Asset Sales and Syndications, Inc.
Prudential Home Building Investors, Inc.
PruSupply, Inc. PruSupply Capital Assets, Inc.
CSI Asset Management, Inc.
Enhanced Investment Technologies, Inc.
Mercator Asset Management, Inc.
PCM International, Inc.
Prudential Asset Management Company, Inc. Prudential Asia Investments Limited (1)
Prudential Asset Management Company
Securities Corporation
Prudential Timber Investments, Inc. (2)
The Prudential Investment Advisory Company, Ltd.
The Prudential Property Company, Inc.
The Prudential Realty Advisors, Inc.
TRGOAG Company, Inc.
</TABLE>
<TABLE>
<S> <C> <C> <C>
PAMA (Indonesia) Limited (4)
PAMA (Singapore) Private Limited
PruAsia DBS Limited (3) Prudential Asset Management
Asia Hong Kong Limited
P.T. PAMA Ventura Indonesia (5)
Prudential Asset Management
Asia Limited (BVI)
S.J. Bedding B.V. Simmons Bedding & Furniture (HK) Simmons Asia Simmons (Southeast Asia)
Ltd. (6) Limited (7) Private Limited
Prudential Asia Fund Management Limited (BVI) Simmons Co., Limited
Prudential Asia Fund
Management Limited
Prudential Asia Fund
Managers (HK) Limited
</TABLE>
- --------------
(1) The Prudential Asset Management Company, Inc. and Prudential Securities
Group, Inc. each own 50% of preferred stock and The Prudential Asset
Management Company, Inc. owns 100% common stock.
(2) The Prudential owns 6 shares (100%) of preferred stock in Prudential Timber
Investments, Inc.
(3) PruAsi DBS Limited is 50% owned by Prudential Asia Investments Limited and
50% owned by DBS, Inc.
(4) PAMA (Indonesia) Limited is 75% owned by Prudential Asset Management Asia
Limited (BVI), 15% owned by BDNI and 10% by IFC.
(5) P.T. PAMA Ventura Indonesia is 65% owned by Prudential Asset Management
Asia Limited (BVI), 20% owned by BDNI and 15% by IFC.
(6) Simmons Co. Limited and Simmons Bedding & Furniture (HK) Ltd. are 66.24%
owned by S.J. Bedding B.V. and 6.8% owned by Simmons U.S.A., 15% owned by
others and 12% by management.
(7) Simmons Asia Limited is 90% owned by Simmons Bedding & Furniture (HK) Ltd.
and 10% owned by Simmons U.S.A.
C-10
<PAGE>
06/30/95
SHORT DESCRIPTION OF EACH SUBSIDIARY
A. SUBSIDIARIES OF THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
1. FINE HOMES, L.P. (A Limited Partnership) (99% owned by Prudential, the
limited partner, and 1% owned by Prudential Homes Corporation, the general
partner) (See Section C for direct and indirect subsidiaries)
A limited partnership to hold real estate related subsidiaries.
2. GIBRALTAR CASUALTY COMPANY (Incorporated in Delaware) (100%)
Previously wrote unusual and non-standard property and casualty risks on a
Surplus Line basis. The company is currently servicing policies that it had
issued, but is not actively seeking new business.
3. HEALTH VENTURES PARTNER, INC. (Incorporated in Illinois) (100%)
Operates as a general partner of the joint venture Rush Prudential Health
Plans.
4. HSG HEALTH SYSTEMS GROUP LIMITED (Incorporated in Canada) (100%)
Provides consulting and administrative services to corporate fitness
facilities and wellness programs in Canada.
5. INDUSTRIAL TRUST COMPANY (Incorporated in Prince Edward Island, Canada)
(100%)
Holds a permit to operate as a trust and loan company in Prince Edward
Island. Currently inactive.
6. JENNISON ASSOCIATES CAPITAL CORP. (Incorporated in New York) (100%)
Provides institutional clients (employee benefit plans, endowments,
foundations, etc.) with discretionary management of portfolios investing in
stocks and bonds and acts as an advisor to The Prudential Institutional
Fund.
6a. JACC SERVICES CORP. (Incorporated in New York) (Owned by Jennison
Associates Capital Corp.) (100%)
Provides computer and accounting support necessary to handle portfolio
accounting and reporting.
7. PGR ADVISORS I, INC. (Incorporated in Delaware) (100%)
A general partner which provides management, advisory, and administrative
services to Global Realty Advisors, a Bermudian partnership that acts as
investment manager to the Prudential Global Real Estate Investment
Programme. Also ownes Global Realty Advisors (Bermuda) Limited, a Bermuda
limited liability company which acts as an investment manager to The South
East Asia Property Company Limited and to Seaprime Investments Pte Ltd. (an
unaffiliated entity).
C-11
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8. PIC HOLDINGS LIMITED (Incorporated in U.K.) (100%) (See section B for
direct and indirect subsidiaries)
Acts as a holding company to house the operating entities of Clive Discount
Company Limited., Clivco Nominees Limited, Clive Agency Bond Broking
Limited, Clivwell Securities Limited, PRICOA Capital Group Limited, PRICOA
Funding Limited, PRICOA Investment Company, PRICOA Property Investment
Management Limited., PRICOA P.I.M. (Regulated) Limited, TransEuropean
Properties (General Partner) Limited, Northern Retail Properties (General
Partner) Limited, TransEuropean Properties (General Partner) II Limited,
Varsity Fund (General Partner) Limited and PRICOA Realty Group Limited.
9. PIC REALTY CANADA LIMITED (Incorporated in Canada) (100%)
Owns, develops, operates, manages and leases real estate in Canada.
10. PREMISYS REAL ESTATE SERVICES, INC. (Incorporated in Pennsylvania) (100%)
Provides real estate properties/facilities management for The Prudential
and third parties and advisory services with respect to activities of this
type.
10a. PREMISYS REAL ESTATE SERVICES INC. OF COLORADO (Incorporated in Colorado)
(Owned by Premisys Real Estate Services, Inc.) (80%)
Provides real estate management and related services to unrelated third
parties in Colorado.
11. PRICOA VIDA, SOCIEDAD ANONIMA DE SEGUROS Y REASEGUROS (Incorporated in
Spain) (Less than 1% owned by PRUCO, Inc. and The Prudential Investment
Corporation. The remainder is owned by The Prudential)
Conducts individual life, group pension and group life business in Spain.
11a. PRICOA INVEST, SOCIEDAD ANONIMA, S.G.C. (Incorporated in Spain) (100% owned
by PRICOA Vida Sociedad Anonima de Seguros y Reaseguros)
Licensed to engage in third party investment management and actuarial
consulting in Spain.
12. PRICOA VITA S.P.A. (Incorporated in Italy) (100%)
Organized to sell life insurance and related financial products within
Italy.
13. PRUCO, INC. (Incorporated in New Jersey) (100%) (See Section F for direct
and indirect subsidiaries)
A holding company for other subsidiaries.
14. PRUCO LIFE INSURANCE COMPANY (Incorporated in Arizona) (100%)
Conducts individual life insurance and single pay deferred annuity business
in all states except New York. In addition, the Company markets individual
life insurance through it's branch office in Taiwan.
14a. PRUCO LIFE INSURANCE COMPANY OF NEW JERSEY (Incorporated in New Jersey)
(Owned by Pruco Life Insurance Company) (100%)
Issues a product line corresponding to that of Pruco Life Insurance Company
in the states of New Jersey and New York.
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14b. THE PRUDENTIAL LIFE INSURANCE COMPANY OF ARIZONA (Incorporated in Arizona)
(Owned by Pruco Life Insurance Company) (100%)
A company licensed to sell life insurance in the state of Arizona.
15. PRUDENTIAL DIRECT ADVISERS, INC. (Incorporated in New Jersey) (100%)
Acts as the general partner and manages the affairs of the Prudential
Direct Advisers, L.P.
16. PRUDENTIAL DIRECT DISTRIBUTORS, INC. (Incorporated in New Jersey) (100%)
Serves as the distributor of mutual funds and related no-load products
managed or advised by the Prudential Direct Advisers, L.P.
17. PRUDENTIAL FUND MANAGEMENT CANADA LIMITED (Incorporated in Canada) (100%)
Manages and distributes mutual funds in Canada.
18. PRUDENTIAL GLOBAL FUNDING, INC. (Incorporated in Delaware) (100%)
Provides interest rate and currency swaps and other derivative products.
19. PRUDENTIAL-BACHE CAPITAL FUNDING (SWAPS) LIMITED (Incorporated in Canada)
(Owned by Prudential Global Funding, Inc.) (100%)
In liquidation.
20. PRUDENTIAL HOMES CORPORATION (Incorporated in New York) (100%)
Acts as the sole general partner of Fine Homes, L.P. and Prudential
Residential Services, Limited Partnership. It also acts as one of the two
general partners of The Prudential Relocation Management, Limited
Partnership.
20a. PRUDENTIAL TEXAS RESIDENTIAL SERVICES CORPORATION (Incorporated in Texas)
(Owned by Prudential Homes Corporation) (100%)
Acts as one of the two general partners of The Prudential Relocation
Management, Limited Partnership.
21. PRUDENTIAL MORTGAGE ASSET CORPORATION (Incorporated in Delaware) (100%)
Involved in the purchase and sale of mortgage related assets, mortgage
loans and mortgage pass-through certificates.
22. PRUDENTIAL MORTGAGE ASSET CORPORATION II (Incorporated in Delaware) (50%)
Inactive.
23. PRUDENTIAL MUTUAL FUND MANAGEMENT, INC. (Incorporated in Delaware) (15%
owned by The Prudential and 85% owned by Prudential Securities
Incorporated)
Mutual fund management company.
24. PRUDENTIAL OF AMERICA GENERAL INSURANCE COMPANY (CANADA) (Incorporated in
Canada) (100%)
Provides automobile and homeowner insurance in Canada.
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24a. OTIP/RAEO INSURANCE COMPANY, INC. (Incorporated in Canada) (95% owned by
Prudential of America General Insurance Company [Canada])
Provides automobile and homeowner insurance in Canada. This company markets
its products to those employed in the education sector.
25. PRUDENTIAL OF AMERICA LIFE INSURANCE COMPANY (CANADA) (Incorporated in
Canada) (75%)
Markets specialized life insurance products to the upper income segment of
the Canadian market place.
26. PRUDENTIAL PRIVATE PLACEMENT INVESTORS, INC. (Incorporated in New Jersey)
(100%)
Serves as General Partner to a newly formed partnership, Prudential Private
Placement Investors, L.P. ("PPPI, LP"), a Delaware Limited Partnership. It
is anticipated that PPPI, LP will provide investment advisory services to
pension plans and other institutional investors.
27. PRUDENTIAL REALTY SECURITIES II, INC. (Incorporated in Delaware) (87% owned
by The Prudential and 13% owned by PRUCO, Inc.)
Issues bonds secured by real estate mortgages.
28. PRUDENTIAL SELECT HOLDINGS, INC. (Incorporated in Delaware) (100%)
A holding company for the Prudential Select Life Insurance Company of
America.
29. PRUDENTIAL SELECT LIFE INSURANCE COMPANY OF AMERICA (Incorporated in
Minnesota) (Owned by Prudential Select Holdings, Inc.) (100%)
Intends to sell universal life insurance products to upper income and high
net worth individuals and corporations in all states except New York.
30. PRUDENTIAL SERVICE BUREAU, INC. (Incorporated in Kentucky) (100%)
Provides administrative services for employee benefits packages (i.e. COBRA
and FLEX) and pays medical and dental claims.
31. PRULEASE, INC. (Incorporated in Delaware) (100%)
Has an investment portfolio of loans, leases, and other forms of financing.
32. PRUSERVICOS PARTICIPACOES, S.A. (Incorporated in Brazil) (Less than 1%
owned by PRUCO, Inc. The remainder owned by The Prudential Insurance
Company of America.)
A holding company owning preferred shares, having certain limited voting
rights, representing 49 percent of the share capital of
Atlantica-Prudential Participacoes S.A., which in turn owns approximately
95 percent of the share capital of Prudential-Atlantica Companhia
Brasileria de Seguros, a Brazilian property and casualty insurer.
33. RESIDENTIAL SERVICES CORPORATION OF AMERICA (Incorporated in Delaware)
(100%) (See Section D for direct and indirect subsidiaries)
A company which engages in the activities of its direct wholly owned
subsidiaries: Lender's Service, Inc., Private Label Mortgage Services
Corporation, Securitized Asset Sales, Inc., Securitized Asset Services
Corporation, The Prudential Home Mortgage Company, Inc., Residential
Information Services, Inc. and their subsidiaries.
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34. PRUDENTIAL HEALTHCARE AND LIFE INSURANCE COMPANY OF AMERICA (Incorporated
in New Jersey) (100%)
A life insurance company which presently is qualified only in New Jersey.
It has not yet commenced as an insurance business.
35. THE PRUDENTIAL INVESTMENT CORPORATION (Incorporated in New Jersey) (100%)
(See Section H for direct and indirect subsidiaries)
Has responsibility for the investment business of The Prudential. It in
turn owns all the outstanding stock of Gateway Holdings, S.A., Prudential
Asset Sales and Syndications, Inc., Prudential Home Building Investors,
Inc., PruSupply, Inc., The Prudential Asset Management Company, Inc.,
Prudential Investment Advisory Company, Ltd., TRGOAG Company, Inc., The
Prudential Property Company, Inc., and The Prudential Realty Advisors, Inc.
36. THE PRUDENTIAL LIFE INSURANCE COMPANY OF KOREA, LTD. (Incorporated in
Korea) (100%)
Organized to sell life insurance products within Korea.
37. THE PRUDENTIAL LIFE INSURANCE COMPANY, LTD. (Incorporated in Japan) (100%)
Organized to sell traditional and variable life insurance products within
Japan.
38. THE PRUDENTIAL REAL ESTATE AFFILIATES, INC. (Incorporated in Delaware)
(100%) (See Section E for direct and indirect subsidiaries)
Offers franchises to independently owned residential real estate brokers.
39. U.S. HIGH YIELD MANAGEMENT COMPANY (Incorporated in New Jersey) (100%)
Provides management services (through the Capital Markets Group) to the
U.S. High Yield Fund, a high yield corporate bond fund organized in
Luxembourg.
B. SUBSIDIARIES OF PIC HOLDINGS LIMITED
1. Clive Discount Company Limited (Incorporated in U.K.) (Owned by PIC
Holdings Limited) (100%)
Operates as a discount house in the London market.
1a. CLIVCO NOMINEES LIMITED (Incorporated in the U.K.) (Owned by Clive Discount
Company Limited) (100%)
Inactive.
1b. CLIVE AGENCY BOND BROKING LIMITED (Incorporated in U.K.) (Owned by Clive
Discount Company Limited) (100%)
Identifies attractive investment opportunities in the business of brokering
Government Bonds in the United Kingdom and continental Europe.
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2. CLIVWELL SECURITIES LIMITED (Incorporated in U.K.) (Owned by PIC Holdings
Limited) (100%)
An investment company which consists of Mithras Investment Trust holdings
and an 8.5% interest in a real estate investment trust which holds a
leasehold interest in a 12 story commercial building in London, England.
3. PRICOA CAPITAL GROUP LIMITED (Incorporated in U.K.) (Owned by PIC Holdings
Limited) (100%)
Identifies attractive investment opportunities in the United Kingdom and
continental Europe.
4. PRICOA FUNDING LIMITED (Incorporated in U.K.) (Owned by PIC Holdings
Limited) (100%)
A finance company borrowing capital from The Prudential, and lending the
capital to its subsidiary company PRICOA Investment Company to fund its
investment activities.
4a. PRICOA INVESTMENT COMPANY (Incorporated in U.K.) (Owned by PRICOA Funding
Limited) (100%)
To identify attractive investment opportunities in the United Kingdom and
continental Europe for sale to, or managed on behalf of, third party
clients.
5. PRICOA PROPERTY INVESTMENT MANAGEMENT LIMITED (Incorporated in U.K.) (Owned
by PIC Holdings Limited) (100%)
Provides investment management and investment advisory services to
international institutional clients who invest in U.K. and continental
European real estate.
5a. NORTHERN RETAIL PROPERTIES (GENERAL PARTNER) LIMITED (Incorporated in U.K.)
(Owned by PRICOA Property Investment Management Limited) (100%)
Serves as general partner to Northern Retail Property Ltd. Partnership. A
U.K. limited partnership whose principle activity is investment in three
retail units in northern Britain.
5b. PRICOA P. I. M. (REGULATED) LIMITED (Incorporated in the U.K.) (Owned by
PRICOA Property Investment Management Limited) (100%)
Provides investment management and investment advisory services to
international institutional clients who invest in U.K. and continental
European real estate.
5c. TRANSEUROPEAN PROPERTIES (GENERAL PARTNER) LIMITED (Incorporated in the
U.K.) (Owned by PRICOA Property Investment Management Limited) (100%)
Serves as general partner to TransEuropean Property Limited Partnership, a
U.K. limited partnership. The principal activity of TransEuropean Property
Limited Partnership is investment in European property.
5d. TRANSEUROPEAN PROPERTIES (GENERAL PARTNER) II LIMITED (Incorporated in the
U.K.) (Owned by PRICOA Property Investment Management Limited) (100%)
Will serve as the general partner to TransEuropean Property Limited
Partnership II, a partnership formed to invest in European real estate.
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5e. VARSITY FUND (GENERAL PARTNER) LIMITED (Incorporated in the U.K.) (100%
owned by PRICOA Property Investment Management Limited)
Formed to serve as general partner of a limited partnership investing in
U.K. college and university student accommodations. The plans for this fund
changed, and this entity is currently "on the shelf" and not being used.
6. PRICOA REALTY GROUP LIMITED (Incorporated in U.K.) (Owned by PIC Holdings
Limited) (100%)
Provides international real estate services to PGR Advisors I, Inc. in
connection with the Prudential Global Real Estate Programme, and provides
The Prudential with a presence in London to monitor developments and
identify attractive investment opportunities in European property markets,
as well as identifying investment opportunities in other international
markets.
C. SUBSIDIARIES OF FINE HOMES, L.P.
Subsidiaries C.1 through C.9 are 100% owned by Prudential Residential
Services, Limited Partnership ("PRS LP").
1. MAJOR ESCROW CORP. (Incorporated in California) (100%)
Inactive.
2. ML/MSB ACQUISITION, INC. (Incorporated in Delaware) (100%)
Acts as the general partner of Moran, Stahl & Boyer, L.P.
3. PRICOA RELOCATION MANAGEMENT, LTD. (Incorporated in U.K.) (100%)
Involved in the relocation consulting business.
4. PRS ESCROW SERVICES, INC. (Incorporated in California) (100%)
Inactive.
5. PRUDENTIAL COMMUNITY INTERACTION CONSULTING, INC. (Incorporated in
Delaware) (100%)
Consulting activities involving community relations for Prudential
Resources Management's corporate clients with facilities which have had or
might have an adverse environmental impact on surrounding communities.
6. PRUDENTIAL NEW YORK HOMES CORPORATION (Incorporated in New York) (100%)
General partner of Moran, Stahl & Boyer, a New York general partnership and
Prudential Relocation Management, a New York general partnership.
7. PRUDENTIAL OKLAHOMA HOMES CORPORATION (Incorporated in Oklahoma) (100%)
Inactive.
8. PRUDENTIAL RELOCATION MANAGEMENT COMPANY OF CANADA LTD. (Incorporated in
Ontario, Canada) (100%)
Involved in the relocation business.
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9. PRUDENTIAL RESOURCES MANAGEMENT ASIA, LIMITED (Incorporated in Hong Kong)
(100%)
Provides relocation services in Asia - on-site center for Goldman Sachs in
Hong Kong.
10. THE RELOCATION FUNDING CORPORATION OF AMERICA (Incorporated in California)
(100%)
Involved in the relocation business.
D. SUBSIDIARIES OF RESIDENTIAL SERVICES CORPORATION OF AMERICA
1. LENDER'S SERVICE, INC. (Incorporated in Delaware) (100%)
Obtains residential mortgage appraisals on behalf of mortgage lenders,
provides title agency services, and manages the provision of closing
services.
1a. LENDER'S SERVICE TITLE AGENCY, INC. (Incorporated in Ohio) (Owned by
Lender's Service, Inc.) (100%)
Acts as a title agent in the state of Ohio.
2. PRIVATE LABEL MORTGAGE SERVICES CORPORATION (Incorporated in Delaware)
(100%)
Provides residential mortgage loan underwriting and origination services to
other companies for a fee.
3. RESIDENTIAL INFORMATION SERVICES, INC. (Incorporated in Delaware) (100%)
Serves as the sole general partner of Residential Information Services
Limited Partnership, which provides technology and information services to
mortgage banking industry.
4. SECURITIZED ASSET SALES, INC. (Incorporated in Delaware) (100%)
Registrant of new rent-a-shelf business and sells public and private
mortgage-backed securities.
5. SECURITIZED ASSET SERVICES CORPORATION (Incorporated in New Jersey) (100%)
Services and administers mortgage loans and related real property and
provides security administration services.
6. THE PRUDENTIAL HOME MORTGAGE COMPANY, INC. (Incorporated in New Jersey)
(100%)
Finances residential mortgage loans, through direct origination and
purchases, services and sells residential mortgage loans, and engages in
other residential mortgage banking activities.
6a. THE PRUDENTIAL HOME MORTGAGE SECURITIES COMPANY, INC. (Incorporated in
Delaware) (Owned by The Prudential Home Mortgage Company, Inc.) (100%)
Issues public and private mortgage-backed securities.
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E. SUBSIDIARIES OF THE PRUDENTIAL REAL ESTATE AFFILIATES, INC.
1. PRUDENTIAL REFERRAL SERVICES, INC. (Incorporated in Delaware) (100%)
Operates a residential real estate referral network.
2. THE PRUDENTIAL REAL ESTATE FINANCIAL SERVICES OF AMERICA, INC.
(Incorporated in California) (100%)
Inactive.
2a. THE PRUDENTIAL REAL ESTATE FINANCIAL SERVICES OF LONG ISLAND, INC.
(Incorporated in California) (Owned by The Prudential Real Estate Financial
Services of America, Inc.) (100%)
Inactive.
F. SUBSIDIARIES OF PRUCO, INC.
1. CAPITAL AGRICULTURAL PROPERTY SERVICES, INC. (Incorporated in Delaware)
(100%)
Provides management and real estate brokerage services for agricultural
properties of The Prudential and others.
2. FLOR-AG CORPORATION (Incorporated in Florida) (100%)
Engages primarily in the purchase, development, operation, lease and sale
of farmland in Florida.
3. GIB LABORATORIES, INC. (Incorporated in New Jersey) (100%)
Provides clinical bioanalytical services to The Prudential, as well as to
other insurance companies and industries in the United States
and Canada.
4. P.G. REALTY, INC. (Incorporated in Nebraska) (100%)
Engages primarily in the purchase, development, operation, lease and sale
of farmland in Nebraska.
5. PIC REALTY CORPORATION (Incorporated in Delaware) (100%)
Engages in the business of owning, developing, operating, managing, and
leasing real estate property in the United States either directly or
through participation in joint venture partnerships.
6. PRUCO SECURITIES CORPORATION (Incorporated in New Jersey) (100%)
Acts as a registered securities broker-dealer, licensed in every state,
Washington D.C. and Guam. Serves primarily as the medium through which
registered agents of The Prudential sell Prudential Securities Incorporated
mutual funds and offer variable products from Pruco Life and The
Prudential.
7. PRUDENTIAL AGRICULTURAL CREDIT, INC. (Incorporated in Tennessee) (100%)
Provides a broad range of financial services to agriculture, including farm
real estate mortgages, short term financing and equipment leasing.
C-19
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8. PRUDENTIAL CAPITAL AND INVESTMENT SERVICES, INC. (Incorporated in Delaware)
(100%) (See Section G for direct and indirect subsidiaries)
A holding company for other subsidiaries.
9. PRUDENTIAL DENTAL MAINTENANCE ORGANIZATION, INC. (Incorporated in Texas)
(100%
A Dental Maintenance Organization which serves the state of Texas.
10. PRUDENTIAL DIRECT, INC. (Incorporated in Georgia) (100%)
Provides direct response and direct marketing services to The Prudential
and its subsidiaries.
11. PRUDENTIAL EQUITY INVESTORS, INC. (Incorporated in New York) (100%)
As a registered investment advisor, it makes private equity investments
through Limited Partnerships comprised of institutional investors including
The Prudential.
12. PRUDENTIAL FUNDING CORPORATION (Incorporated in New Jersey) (100%)
Serves as a financing company for The Prudential and its subsidiaries.
Funds are obtained primarily through the issuance of commercial paper,
private placement medium term notes, Eurobonds, Eurocommercial paper,
Euro-medium term notes and master notes.
13. PRUDENTIAL HEALTH CARE PLAN, INC. (Incorporated in Texas) (100%)
A federally-qualified Health Maintenance Organization which serves the New
Jersey; Houston, Dallas, San Antonio, Austin and El Paso, Texas; Nashville
and Memphis, Tennessee; Chicago, Illinois; Jacksonville, Tampa, Orlando and
South Florida, Florida; Richmond, Virginia; St. Louis and Kansas City,
Missouri; Columbus, Cleveland and Cincinnati, Ohio; Charlotte, and
Raleigh/Durham/Chapel Hill, North Carolina; Denver, Colorado; Oklahoma City
and Tulsa, Oklahoma; Baltimore, Maryland; Washington, D.C.; Philadelphia,
Pennsylvania; Kansas City, Kansas; Little Rock, Arkansas; Massachusetts and
Indiana areas.
14. PRUDENTIAL HEALTH CARE PLAN OF CALIFORNIA, INC. (Incorporated in
California) (100%)
A Health Maintenance Organization which serves the California area.
15. PRUDENTIAL HEALTH CARE PLAN OF CONNECTICUT, INC. (Incorporated in
Connecticut) (100%)
A Health Maintenance Organization which serves the Connecticut area.
16. PRUDENTIAL HEALTH CARE PLAN OF GEORGIA, INC. (Incorporated in Georgia)
(100%)
A Health Maintenance Organization which serves the Georgia area.
17. PRUDENTIAL HEALTH CARE PLAN OF NEW YORK, INC. (Incorporated in New York)
(100%)
A Health Maintenance Organization which serves the New York area.
18. PRUDENTIAL HOLDINGS, INC. (Incorporated in Delaware) (100%)
A holding company that does not currently hold any other companies.
C-20
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19. PRUDENTIAL INSTITUTIONAL FUND MANAGEMENT, INC. (Incorporated in
Pennsylvania) (100%)
A registered investment advisor which manages a series of mutual funds. The
funds are offered to institutional investors, principally
employer-sponsored defined contribution plans.
20. PRUDENTIAL PROPERTY AND CASUALTY INSURANCE COMPANY (Incorporated in
Indiana) (100%)
Provides dwelling, fire, automobile, homeowners or personal catastrophe
insurance for all states except New Jersey.
20a. PRUDENTIAL COMMERCIAL INSURANCE COMPANY (Incorporated in Delaware) (Owned
by Prudential Property and Casualty Insurance Company) (100%)
Writes automobile insurance and various commercial coverage in many states.
The company's contract as a servicing carrier, for the New Jersey
Automobile Full Insurance Underwriting Association, expired in March, 1989.
The company will continue to service claims during the run-off period.
20b. PRUDENTIAL GENERAL INSURANCE COMPANY (Incorporated in Delaware) (Owned by
Prudential Property and Casualty Insurance Company) (100%)
Provides coverage for preferred homeowners and private passenger
automobiles in many states.
20c. PRUDENTIAL INSURANCE BROKERAGE, INC. (Incorporated in Arizona) (Owned by
Prudential Property and Casualty Insurance Company) (100%)
Acts as an insurance broker and agency in many states.
20d. THE PRUDENTIAL LLOYDS (Incorporated in Texas) (100% owned by Prudential
Property and Casualty Insurance Company by virtue of a trust agreement with
each underwriter.)
A Lloyds insurer authorized to transact fire and casualty insurance
business within the State of Texas.
20e. THE PRUDENTIAL PROPERTY AND CASUALTY GENERAL AGENCY, INC. (Incorporated in
Texas) (Owned by Prudential Property and Casualty Insurance Company) (100%)
Acts as Managing General Agency in the state of Texas.
21. THE PRUDENTIAL PROPERTY AND CASUALTY INSURANCE COMPANY OF NEW JERSEY
(Incorporated in New Jersey) (100%)
Writes automobile, homeowner and personal catastrophe liability lines of
business in the state of New Jersey.
22. PRUDENTIAL REALTY PARTNERSHIPS, INC. (Incorporated in Delaware) (100%)
Acts as a general partner in limited partnerships which own real estate.
23. PRUDENTIAL REALTY SECURITIES, INC. (Incorporated in Delaware) (100%)
Issues zero coupon bonds secured by residential mortgages.
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24. PRUDENTIAL REALTY SECURITIES II, INC. (Incorporated in Delaware) (87% owned
by The Prudential and 13% owned by PRUCO, Inc.)
Issues bonds secured by real estate mortgages.
25. PRUDENTIAL REINSURANCE HOLDINGS, INC. (Incorporated in Delaware) (100%)
A holding company which is the sole owner of Prudential Reinsurance
Company.
25a. PRUDENTIAL REINSURANCE COMPANY (Incorporated in Delaware) (Owned by
Prudential Reinsurance Holdings, Inc.) (100%)
Writes substantially all types of property and casualty reinsurance.
25b. LE ROCHER REINSURANCE LTD. (Incorporated in U.K.) (Owned by Prudential
Reinsurance Company) (100%)
Engages in the property and casualty reinsurance business, principally in
Europe.
25c. PRUDENTIAL NATIONAL INSURANCE COMPANY (Incorporated in Arizona) (Owned by
Prudential Reinsurance Company) (100%)
Writes commercial property and casualty insurance in the alternative risk
market.
26. PRUDENTIAL RETIREMENT SERVICES, INC. (Incorporated in New Jersey) (100%)
Acts as the broker-dealer which distributes securities on behalf of
Prudential Defined Contribution Services. These securities consist of
shares of the Prudential Institutional Fund and four registered separate
accounts of The Prudential.
27. PRUDENTIAL TRUST COMPANY (Incorporated in Pennsylvania) (100%)
Responsible for the management of assets in trust of certain employee
benefit trusts and other tax exempt trusts.
27a. PTC SERVICES, INC. (Incorporated in New Jersey) (Owned by Prudential Trust
Company) (100%)
Oversees the activities of investment advisers who manage certain assets
held in trust by Prudential Trust Company.
28. PRUDENTIAL UNIFORMED SERVICES ADMINISTRATORS, INC. (Incorporated in
Oklahoma) (100%)
Established to administer CHAMPUS (Civilian Health and Medical Program of
Uniformed Service) Insurance for all CHAMPUS eligibles in the states of
Texas, Oklahoma, Arkansas and Louisiana. Currently inactive.
29. THE PRUDENTIAL BANK AND TRUST COMPANY (Incorporated in Georgia) (100%)
Operates as a Georgia chartered commercial bank, it issues credit cards,
and provides commercial, home equity and consumer loans and deposit
products (other than demand deposits) on a national basis, and trust
services in selected states.
29a. PBT MORTGAGE CORPORATION (Incorporated in Georgia) (Owned by The Prudential
Bank and Trust Company) (100%)
As a wholly-owned subsidiary of The Prudential Bank and Trust Company, it
holds home equity loans in various states.
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30. THE PRUDENTIAL SAVINGS BANK, F.S.B. (Incorporated in Georgia) (100%)
Operating as a federal savings bank, it provides commercial and consumer
loans and deposit products in the state of Georgia. It also originates home
equity loans and offers deposit products on a national basis.
G. SUBSIDIARIES OF PRUDENTIAL CAPITAL AND INVESTMENT SERVICES, INC.
1. LAPINE HOLDING COMPANY (Incorporated in Delaware) (67%)
Holding company for Lapine Technology Corporation.
2. LAPINE TECHNOLOGY CORPORATION (Incorporated in California) (Owned by Lapine
Holding Company) (100%)
Inactive.
3. PRUDENTIAL SECURITIES GROUP INC. (Incorporated in Delaware) (PRUCO, Inc.
owns 100% Series B common stock and Prudential Capital & Investment
Services, Inc. owns 100% Series A common stock.)
A holding company.
4. BACHE INSURANCE AGENCY OF ARKANSAS, INC. (Incorporated in Arkansas) (Owned
by Prudential Securities Group Inc.) (100%)
Insurance agent in the state of Arkansas.
5. BACHE INSURANCE AGENCY OF LOUISIANA, INC. (Incorporated in Louisiana)
(Owned by Prudential Securities Group Inc.) (100%)
Insurance agent in the state of Louisiana. Holding company for
Prudential-Bache Securities (Germany) Inc.
6. PRUDENTIAL-BACHE SECURITIES (GERMANY) INC. (Incorporated in Delaware)
(Owned by Bache Insurance Agency of Louisiana, Inc.) (100%)
Correspondent of Prudential Securities Incorporated in Germany.
7. BRAELOCH SUCCESSOR CORPORATION (Incorporated in Delaware) (Owned by
Prudential Securities Group Inc.) (100%)
Owns Braeloch Holdings Inc. which is an oil and gas company engaged in
partnership management, oil and gas property management, and gas marketing
and transportation.
8. BRAELOCH HOLDINGS INC. (Incorporated in Delaware) (Owned by BraeLoch
Successor Corporation) (100%)
Holding company.
9. GRAHAM RESOURCES, INC. (Incorporated in Delaware) (Owned by BraeLoch
Holdings Inc.) (100%)
Holding company for all partnership management and administration
activities.
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10. GRAHAM DEPOSITORY COMPANY II (Incorporated in Delaware) (Owned by Graham
Resources, Inc.) (100%)
Growth Fund depository company.
11. GRAHAM ENERGY, LTD. (Incorporated in Louisiana) (Owned by Graham Resources,
Inc.) (100%)
General Partner in Growth Fund and related products involved primarily in
the investment in oil and gas related companies and assets.
12. GRAHAM EXPLORATION, LTD. (Incorporated in Louisiana) (Owned by Graham
Resources, Inc.) (100%)
General Partner in various limited and general partnerships involved in
exploratory oil and gas operations.
13. GRAHAM ROYALTY, LTD. (Incorporated in Louisiana) (Owned by Graham
Resources, Inc.) (100%)
General Partner of Prudential-Bache Energy Income Funds. Named operator of
oil and gas properties.
14. GRAHAM PRODUCTION COMPANY (Incorporated in Delaware) (Owned by Graham
Royalty, Ltd.) (100%)
Inactive.
15. GRAHAM SECURITIES CORPORATION (Incorporated in Delaware) (Owned by Graham
Resources, Inc.) (100%)
In liquidation.
16. PB BULLION COMPANY, INC. (Incorporated in Delaware) (Owned by Prudential
Securities Group Inc.) (100%)
Purchases metals for resale to processors, fabricators, and other dealers.
17. PB SERVICES (U.K.) (Incorporated in U.K.) (Owned by Prudential Securities
Group Inc.) (100%)
Holds unsecured subordinated loan stock for Prudential-Bache International
(U.K) Limited.
18. PGR ADVISORS, INC. (Incorporated in Delaware) (Owned by Prudential
Securities Group Inc.) (100%)
Vehicle utilized in home office relocation.
19. PRUDENTIAL-BACHE AGRICULTURE INC. (Incorporated in Delaware) (Owned by
Prudential Securities Group Inc.) (100%)
Inactive.
20. PRUDENTIAL-BACHE CAPITAL FUNDING (AUSTRALIA) LIMITED (Incorporated in
Australia) (Owned by Prudential Securities Group Inc.) (100%)
Dealer in fixed interest securities.
C-24
<PAGE>
21. PRUDENTIAL-BACHE CAPITAL FUNDING BV (Incorporated in The Netherlands)
(Owned by Prudential Securities Group Inc.) (100%)
Management company for special purpose vehicle (Audley Finance BV).
21a. AUDLEY FINANCE BV (Incorporated in Haarlem, The Netherlands) (Owned by
Prudential-Bache Capital Funding BV) (100%)
Investment vehicle.
22. PRUDENTIAL-BACHE ENERGY CORP. (Incorporated in Delaware) (Owned by
Prudential Securities Group Inc.) (100%)
Inactive.
23. PRUDENTIAL-BACHE ENERGY PRODUCTION INC. (Incorporated in Delaware) (Owned
by Prudential Securities Group Inc.) (100%)
Inactive.
24. PRUDENTIAL-BACHE HOLDINGS INC. (Incorporated in Delaware) (Owned by
Prudential Securities Group Inc.) (100%)
Holding company for Prudential-Bache Partners Inc.
25. PRUDENTIAL-BACHE PARTNERS INC. (Incorporated in Nevada) (Owned by
Prudential-Bache Holdings Inc.) (100%)
Insurance agent in the State of Nevada; general partner to employee
investment partnership.
26. PRUDENTIAL-BACHE INTERNATIONAL BANK S.A. (Incorporated in Luxembourg)
(Owned by Prudential Securities Group Inc.) (100%)
Private banking institution providing secured loan and deposit facilities
and investment services brokerage for retail and institutional clients.
27. PRUDENTIAL-BACHE INTERNATIONAL (UK) LIMITED (Incorporated in U.K.) (Owned
by Prudential Securities Group Inc.) (100%)
Holding & service company for U.K. subsidiaries.
28. CLIVE DISCOUNT HOLDINGS INTERNATIONAL LIMITED (Incorporated in U.K.) (Owned
by Prudential-Bache International [UK] Limited) (100%)
Inactive.
29. PAGE & GWYTHER HOLDINGS LIMITED (Incorporated in U.K.) (Owned by
Prudential-Bache International [UK] Limited) (100%)
Inactive.
30. PAGE & GWYTHER LIMITED (Incorporated in U.K.) (Owned by Prudential-Bache
International [U.K.] Limited) (100%)
Inactive.
C-25
<PAGE>
31. PRUDENTIAL-BACHE CAPITAL FUNDING (EQUITIES) LIMITED (Incorporated in U.K.)
(Owned by Prudential-Bache International (UK) Limited) (100%)
London Stock Exchange broker and group custodian services.
32. CIRCLE (NOMINEES) LIMITED (Incorporated in U.K.) (Owned by Prudential-Bache
Capital Funding [Equities] Limited) (100%)
To hold stock for Prudential Capital Funding (Equities) Limited and
Prudential Securities' customers in nominee name.
33. PRUDENTIAL-BACHE CAPITAL FUNDING (GILTS) LIMITED (Incorporated in U.K.)
(Owned by Prudential-Bache International [UK] Limited) (100%)
Inactive.
34. PRUDENTIAL-BACHE CAPITAL FUNDING (MONEY BROKERS) LIMITED (Incorporated in
U.K.) (Owned by Prudential-Bache International [UK] Limited) (100%)
London Stock Exchange money broker.
35. PRUDENTIAL-BACHE (FUTURES) LIMITED (Incorporated in England) (Owned by
Prudential-Bache International [U.K.] Limited) (100%)
Broker/trader in financial futures and commodities.
36. PRUDENTIAL-BACHE INVESTOR SERVICES INC. (Incorporated in Delaware) (Owned
by Prudential Securities Group Inc.) (100%)
Serves as assignor limited partner for public deals offered by the
Specialty Finance Department.
37. PRUDENTIAL-BACHE INVESTOR SERVICES II, INC. (Incorporated in Delaware)
(Owned by Prudential Securities Group Inc.) (100%)
Serves as an assignor limited partner for public deals offered by the
Specialty Finance Department.
38. PRUDENTIAL-BACHE LEASING INC. (Incorporated in Delaware) (Owned by
Prudential Securities Group Inc.) (100%)
Inactive.
39. PRUDENTIAL-BACHE MINERALS INC. (Incorporated in Delaware) (Owned by
Prudential Securities Group Inc.) (100%)
Acts as co-general partner in the Prudential Securities/Barrick Gold
Acquisition Fund (a limited partnership).
40. PRUDENTIAL-BACHE PROGRAM SERVICES INC. (Incorporated in New York) (Owned by
Prudential Securities Group Inc.) (100%)
Issuer of puts in municipal bond offerings underwritten by Prudential
Securities Incorporated.
41. PRUDENTIAL-BACHE PROPERTIES, INC. (Incorporated in Delaware) (Owned by
Prudential Securities Group Inc.) (100%)
Monitors syndicated private placements of investments in real estate and
acts as general partner for real estate and other limited partnerships.
C-26
<PAGE>
42. PRUDENTIAL-BACHE REAL ESTATE, INC. (Incorporated in Delaware) (Owned by
Prudential Securities Group Inc.) (100%)
Inactive.
43. PRUDENTIAL-BACHE SECURITIES (AUSTRALIA) LIMITED (Incorporated in Australia)
(Owned by Prudential Securities Group Inc.) (100%)
Stock brokerage.
44. BACHE NOMINEES LTD. (Incorporated in Australia) (Owned by Prudential-Bache
Securities [Australia] Limited) (100%)
Nominee company for the fixed income department.
45. CORCARR FUNDS MANAGEMENT LIMITED (Incorporated in Australia) (Owned by
Prudential-Bache Securities [Australia] Limited) (100%)
Inactive.
46. CORCARR MANAGEMENT PTY LIMITED (Incorporated in Australia) (Owned by
Prudential-Bache Securities [Australia] Limited) (100%)
Inactive.
47. CORCARR NOMINEES PTY LIMITED (Incorporated in Australia) (Owned by
Prudential-Bache Securities [Australia] Limited) (100%)
Nominee company for the safe custody of clients' scrip.
48. CORCARR SUPERANNUATION PTY LIMITED (Incorporated in Australia) (Owned by
Prudential-Bache Securities [Australia] Limited) (100%)
Inactive.
49. DIVSPLIT NOMINEES PTY LIMITED (Incorporated in Australia) (Owned by
Prudential-Bache Securities [Australia] Limited) (100%)
Nominee company for the protection of client dividends, new issues and
takeovers.
50. PRUBACHE NOMINEES PTY. LTD. (Incorporated in Australia) (50% Owned by
Prudential-Bache Securities [Australia] Limited and 50% owned
by Corcarr Nominees Pty. Limited, as trustee for Prudential-Bache
Securities (Australia) Limited)
Nominee/custodian for clients of Prudential-Bache Securities (Australia)
Limited and Prudential Securities Incorporated.
51. PRUDENTIAL-BACHE TRADE SERVICES INC. (Incorporated in Delaware) (Owned by
Prudential Securities Group Inc.) (100%)
Holding company for PB Trade Ltd., and Prudential-Bache Forex (USA) Inc.
52. PB TRADE LTD. (Incorporated in U.K.) (Owned by Prudential-Bache Trade
Services Inc.) (100%)
Inactive.
C-27
<PAGE>
53. PRUDENTIAL-BACHE FOREX (USA) INC. (Incorporated in Delaware) (Owned by
Prudential-Bache Trade Services Inc.) (100%)
To engage in the foreign exchange business; holding company for
Prudential-Bache Forex (Hong Kong) Limited and Prudential-Bache Forex
(U.K.) Limited.
54. PRUDENTIAL-BACHE FOREX (HONG KONG) LIMITED (Incorporated in Hong Kong)
(Owned by Prudential-Bache Forex [USA] Inc.) (100%)
Foreign exchange.
55. PRUDENTIAL-BACHE FOREX (U.K.) LIMITED (Incorporated in U.K.) (Owned by
Prudential-Bache Forex [USA] Inc.) (100%)
Foreign exchange.
56. PRUDENTIAL-BACHE TRANSFER AGENT SERVICES, INC. (Incorporated in New York)
(Owned by Prudential Securities Group Inc.) (100%)
Acts as a transfer agent for limited partnerships sponsored by Prudential
Securities Group Inc. or sold by Prudential Securities Incorporated.
57. PRUDENTIAL SECURITIES INCORPORATED (Incorporated in Delaware) (Owned by
Prudential Securities Group Inc.) (100%)
Securities and commodity broker-dealer, underwriter.
58. BACHE & CO. (LEBANON) S.A.L. (Incorporated in Lebanon) (Owned by Prudential
Securities Incorporated) (100%)
Inactive.
59. BACHE & CO. S.A. DE C.V. (MEXICO) (Incorporated in Mexico) (96% owned by
Prudential Securities Incorporated 4% owned by other individuals)
Inactive.
60. BACHE HALSEY STUART SHIELDS (ANTILLES) N.V. (Incorporated in The
Netherlands Antilles) (Prudential Securities Incorporated) (100%)
Inactive.
61. BACHE INSURANCE AGENCY, INCORPORATED (Incorporated in Massachusetts) (Owned
by Prudential Securities Incorporated) (100%)
Insurance agent in Massachusetts.
62. BACHE INSURANCE OF ARIZONA INC. (Incorporated in Arizona) (Owned by
Prudential Securities Incorporated) (100%)
Inactive.
63. BACHE INSURANCE OF KENTUCKY, INC. (Incorporated in Kentucky) (Owned by
Prudential Securities Incorporated) (100%)
Insurance agent in Kentucky.
C-28
<PAGE>
64. BACHE SHIELDS SECURITIES CORPORATION (Incorporated in Delaware) (Owned by
Prudential Securities Incorporated) (100%)
Inactive.
65. BANOM CORPORATION (Incorporated in New York) (Owned by Prudential
Securities Incorporated) (100%)
Inactive.
66. GELFAND, QUINN & ASSOCIATES INC. (Incorporated in Ohio) (Owned by
Prudential Securities Incorporated) (100%)
Inactive.
67. P-B HOLDING JAPAN INC. (Incorporated in Delaware) (Owned by Prudential
Securities Incorporated) (100%)
Holding company of Prudential Securities (Japan) Ltd.
68. PRUDENTIAL SECURITIES (JAPAN) LIMITED (Incorporated in Delaware) (Owned by
P-B Holding Japan Inc.) (100%)
Service affiliate of Prudential Securities Incorporated; registered
broker-dealer.
69. PRUDENTIAL-BACHE FUTURES ASIA PACIFIC LTD. (Incorporated in Delaware)
(Owned by Prudential Securities Incorporated) (100%)
To introduce customers to Prudential Securities for futures transactions on
U.S. Exchanges and execute futures orders on the behalf of Prudential
Securities on SIMEX.
70. PRUDENTIAL-BACHE FUTURES (HONG KONG) LIMITED (Incorporated in Hong Kong)
(Owned by Prudential Securities Incorporated) (100%)
Non-active clearing member of the Hong Kong Futures Exchange.
71. PRUDENTIAL-BACHE NOMINEES (HONG KONG) LIMITED (Incorporated in Hong Kong)
(Owned by Prudential Securities Incorporated) (100%)
Acting as a nominee company for Hong Kong equities.
72. PRUDENTIAL-BACHE SECURITIES ASIA PACIFIC LTD. (Incorporated in New York)
(Owned by Prudential Securities Incorporated) (100%)
Service affiliate of Prudential Securities Incorporated in Singapore.
73. PRUDENTIAL-BACHE SECURITIES (BELGIUM) INC. (Incorporated in Delaware)
(Owned by Prudential Securities Incorporated) (100%)
Service affiliate of Prudential Securities Incorporated in Belgium.
74. PRUDENTIAL-BACHE SECURITIES (ESPANA) S.A. (Incorporated in Spain) (Owned by
Prudential Securities Incorporated) (100%)
Service affiliate of Prudential Securities Incorporated in Spain.
75. PRUDENTIAL-BACHE SECURITIES (FRANCE) S.A. (Incorporated in France) (Owned
by Prudential Securities Incorporated) (100%)
Service affiliate of Prudential Securities Incorporated in France.
C-29
<PAGE>
76. PRUDENTIAL-BACHE SECURITIES (HOLLAND) INC. (Incorporated in Delaware)
(Owned by Prudential Securities Incorporated) (100%)
Service affiliate of Prudential Securities Incorporated in Holland.
77. PRUDENTIAL-BACHE SECURITIES (HOLLAND) N.V. (Incorporated in Holland) (Owned
by Prudential-Bache Securities [Holland] Inc.) (100%)
Inactive.
78. PRUDENTIAL-BACHE SECURITIES (HONG KONG) LIMITED (Incorporated in Hong Kong)
(Owned by Prudential Securities Incorporated) (100%)
Service affiliate of Prudential Securities Incorporated in Hong Kong.
79. PRUDENTIAL-BACHE SECURITIES (LUXEMBOURG) INC. (Incorporated in Delaware)
(Owned by Prudential Securities Incorporated) (100%)
Service affiliate of Prudential Securities Incorporated in Luxembourg.
80. PRUDENTIAL-BACHE SECURITIES (MONACO) INC. (Incorporated in New York) (Owned
by Prudential Securities Incorporated) (100%)
Service affiliate of Prudential Securities Incorporated in Monaco.
81. PRUDENTIAL-BACHE SECURITIES (SWITZERLAND) INC. (Incorporated in Delaware)
(Owned by Prudential Securities Incorporated) (100%)
Service affiliate of Prudential Securities Incorporated in Switzerland.
82. PRUDENTIAL-BACHE SECURITIES (U.K.) INC. (Incorporated in Delaware) (Owned
by Prudential Securities Incorporated) (100%)
Service affiliate of Prudential Securities Incorporated in the U.K.
82a. SHIELDS MODEL ROLAND COMPANY (Incorporated in U.K.) (Owned by
Prudential-Bache Securities (U.K.) Inc.) (100%
Inactive.
83. PRUDENTIAL MUTUAL FUND MANAGEMENT, INC. (Incorporated in Delaware) (15%
owned by The Prudential and 85% owned by Prudential Securities Incorporated
Mutual fund management company.
84. PRUDENTIAL MUTUAL FUND DISTRIBUTORS, INC. (Incorporated in Delaware) (Owned
by Prudential Mutual Fund Management, Inc.) (100%)
Principal underwriter and distributor of mutual funds.
85. PRUDENTIAL MUTUAL FUND SERVICES, INC. (Incorporated in New Jersey) (Owned
by Prudential Mutual Fund Management, Inc.) (100%)
Mutual fund transfer agent and shareholder services company.
86. PRUDENTIAL SECURITIES (CHILE) INC. (Incorporated in Delaware) (Owned by
Prudential Securities Incorporated) (100%)
Inactive.
C-30
<PAGE>
87. PRUDENTIAL SECURITIES CMO ISSUER INC. (Incorporated in Delaware) (Owned by
Prudential Securities Incorporated) (100%)
Ownership of Delaware Business Trust utilized by Mortgage Finance Unit to
facilitate CALI Transaction.
88. PRUDENTIAL SECURITIES FUTURES MANAGEMENT INC. (Incorporated in Delaware)
(Owned by Prudential Securities Incorporated) (100%)
1) General partner of a limited partnership with assets invested in
commodities, futures contracts and commodity-related products and 2)
Commodities and futures contract business.
89. PRUDENTIAL SECURITIES (SOUTH AMERICA) INCORPORATED (Incorporated in
Delaware) (Owned by Prudential Securities Incorporated) (100%)
Holding company for Prudential Securities (Argentina) Incorporated and
Prudential Securities (Uruguay) S.A.
90. PRUDENTIAL SECURITIES (ARGENTINA) INCORPORATED (Incorporated in Delaware)
(Owned by Prudential Securities [South America] Incorporated) (100%)
Service affiliate of Prudential Securities Incorporated in Argentina.
91. PRUDENTIAL SECURITIES (URUGUAY) S.A. (Incorporated in Uruguay) (Owned by
Prudential Securities [South America] Incorporated) (100%)
Service affiliate of Prudential Securities Incorporated in Uruguay.
92. SHIELDS MODEL ROLAND SECURITIES INCORPORATED (Incorporated in New York)
(Owned by Prudential Securities Incorporated) (100%)
Inactive.
93. WEXFORD CLEARING SERVICES CORPORATION (Incorporated in Delaware) (Owned by
Prudential Securities Incorporated) (100%)
Inactive.
94. PRUDENTIAL SECURITIES LEASE HOLDING INC. (Incorporated in New York) (Owned
by Prudential Securities Group Inc.) (100%)
Owns IBM computers and leases them to Prudential Securities Incorporated.
95. PRUDENTIAL SECURITIES MUNICIPAL DERIVATIVES, INC. (Incorporated in
Delaware) (Owned by Prudential Securities Group Inc.) (100%)
Serves as a general partner in a limited partnership structure providing
floating rate & inverse floating rate municipal securities.
96. PRUDENTIAL SECURITIES REALTY FUNDING CORPORATION (Incorporated in Delaware)
(Owned by Prudential Securities Group Inc.) (100%)
Purchase and sale of residential first mortgage whole loans, including
purchase and sales under repurchase agreements. Sales may be in whole loan,
participation certificates, agency or securitized format.
C-31
<PAGE>
97. PRUDENTIAL SECURITIES SECURED FINANCING CORPORATION (Incorporated in
Delaware) (Owned by Prudential Securities Group Inc.) (100%)
Purchase and securitization of mortgages and other assets.
98. PRUDENTIAL SECURITIES STRUCTURED ASSETS, INC. (Incorporated in Ohio) (Owned
by Prudential Securities Group Inc.) (100%)
Inactive.
99. P-B FINANCE LTD. (Incorporated in The Cayman Islands) (Owned by Prudential
Securities Structured Assets, Inc) (100%)
Finances commodity margin calls, both original and variation, and does
other financing transactions for a select group of international and
domestic customers.
100. R&D FUNDING CORP. (Incorporated in Delaware) (Owned by Prudential
Securities Group Inc.) (100%)
Acts as a general partner in research and development partnerships.
101. SEAPORT FUTURES MANAGEMENT, INC. (Incorporated in Delaware) (Owned by
Prudential Securities Group Inc.) (100%)
1) General partner of limited partnership with assets invested in
commodities, futures contracts and commodity-related products, 2)
Commodities and futures contracts business.
102. SPECIAL SITUATIONS MANAGEMENT INC. (Incorporated in Delaware) (Owned by
Prudential Securities Group Inc.) (100%)
Inactive.
H. SUBSIDIARIES OF THE PRUDENTIAL INVESTMENT CORPORATION
1. GATEWAY HOLDINGS, S.A. (Incorporated in Luxembourg) (100%)
A financial holding company which owns Luxembourg registered investment
management companies. Gateway Holdings, S.A. is the parent of Amicus
Investment Company, Global Income Fund Management Company, S.A., Global
Series Fund II Management Company, S.A., Jennison Long Bond Management
Company, and PAEC Management Company.
2. AMICUS INVESTMENT COMPANY (Incorporated in the Cayman Islands) (Owned by
Gateway Holdings, S.A.) (100%)
Provides promotion and sponsorship functions for the Amicus Equity Fund, an
open-ended investment trust established under the jurisdiction of the
Cayman Islands.
3. GLOBAL INCOME FUND MANAGEMENT COMPANY, S.A. (Incorporated in Luxembourg)
(Owned by Gateway Holdings, S.A.) (100%)
Acts as the management company for Global Income Fund, an investment fund
organized in Luxembourg.
C-32
<PAGE>
4. GLOBAL SERIES FUND II MANAGEMENT COMPANY, S.A. (Incorporated in Luxembourg)
(Owned by Gateway Holdings, S.A.) (100%)
Acts as the management company for Global Series Fund II, an investment
fund organized in Luxembourg.
5. JENNISON LONG BOND MANAGEMENT COMPANY (Incorporated in Luxembourg) (Owned
by Gateway Holdings, S.A.) (100%)
Acts as the management company for Jennison Long Bond Fund, an investment
fund organized in Luxembourg. The Fund invests in a diversified portfolio
of securities issued or guaranteed by the U.S. Government of which units of
the fund are offered privately to Japanese institutional investors through
PIC's Japan representative office in Tokyo.
6. PAEC MANAGEMENT COMPANY (Incorporated in Luxembourg) (Owned by Gateway
Holdings, S.A.) (100%)
Inactive.
7. PRUDENTIAL ASSET SALES AND SYNDICATIONS, INC. (Incorporated in Delaware)
(100%)
Registered broker/dealer which engages in the investment banking business.
Also responsible for the syndication or sale of Prudential originated
private placement deals.
8. PRUDENTIAL HOME BUILDING INVESTORS, INC. (Incorporated in New Jersey)
(100%)
Acts as the general partner of a limited partnership, Prudential Home
Building Advisors, L.P. Through this partnership it provides investment
advisory services in a portfolio of residential land improvement and/or
single family home construction projects.
9. PRUSUPPLY, INC. (Incorporated in Delaware) (100%)
Serves as an inventory facility, holding investments pending sale for
Prudential Asset Sales and Syndications, Inc. Enters into contracts for the
supply of fossil fuel and other inventory.
10. PRUSUPPLY CAPITAL ASSETS, INC. (Incorporated in New Jersey) (Owned by
PruSupply, Inc.) (100%)
Serves as a capital base for the syndication activity of Prudential Asset
Sales and Syndications, Inc. It will hold, invest, and reinvest stocks,
bonds, etc. to support the borrowing capacity of PruSupply, Inc.
11. THE PRUDENTIAL ASSET MANAGEMENT COMPANY, INC. (Incorporated in New Jersey)
(100%)
Provides various record keeping, benefit payment, and plan consulting
services to The Prudential and its clients. It also acts as a solicitor on
behalf of affiliates who are investment advisors.
12. CSI ASSET MANAGEMENT, INC. (Incorporated in Delaware) (Owned by The
Prudential Asset Management Company, Inc.) (100%)
Provides institutional clients (primarily state and municipal employee
benefit plans) with discretionary management of portfolios investing in
U.S. stocks and bonds.
C-33
<PAGE>
13. ENHANCED INVESTMENT TECHNOLOGIES, INC. (Incorporated in New Jersey) (Owned
by The Prudential Asset Management Company, Inc.) (100%)
Provides investment advisory services to institutional clients using
domestic index portfolios.
14. MERCATOR ASSET MANAGEMENT, INC. (Incorporated in Florida) (Owned by The
Prudential Asset Management Company, Inc.) (100%)
Serves as an investment advisor with a focus on global and international
investing for institutional clients.
15. PCM INTERNATIONAL, INC. (Incorporated in New Jersey) (Owned by The
Prudential Asset Management Company, Inc.) (100%)
Serves as an investment advisor with a focus on global and international
investing for institutional clients.
16. PRUDENTIAL ASIA INVESTMENTS LIMITED (Incorporated in the British Virgin
Islands) (Common stock 100% owned by The Prudential Asset Management
Company, Inc. and preferred stock 50% owned by The Prudential Asset
Management Company, Inc. and 50% owned by Prudential Securities Group Inc.)
A holding company for subsidiaries engaged in investment management,
merchant banking, portfolio management and direct investment activities in
the Far East.
17. PRUASIA DBS LIMITED (Incorporated in Hong Kong) (Owned by Prudential Asia
Investments Limited) (50%)
Provides corporate finance services in the Far East.
18. PRUDENTIAL ASIA FUND MANAGEMENT LIMITED (BVI) (Incorporated in the British
Virgin Islands) (Owned by Prudential Asia Investments Limited) (100%)
A holding company for Prudential Asia Fund Management Limited and
Prudential Asia Fund Managers (HK) Limited and engages in portfolio
investment management and advisory services with a concentration on
publicly traded securities.
19. PRUDENTIAL ASIA FUND MANAGEMENT LIMITED (Incorporated in Hong Kong) (Owned
by Prudential Asia Fund Management Limited [BVI]) (100%)
Provides investment advisory activities in the United States.
20. PRUDENTIAL ASIA FUND MANAGERS (HK) LIMITED (Incorporated in Hong Kong)
(Owned by Prudential Asia Fund Management Limited [BVI]) (100%)
Provides investment advisory activities in Hong Kong.
21. PRUDENTIAL ASSET MANAGEMENT ASIA LIMITED (BVI) (Incorporated in the British
Virgin Islands) (Owned by Prudential Asia Investments Limited) (100%)
Makes direct investments and provides investment advisory services in
China, Taiwan, Korea, Japan, Australia and New Zealand.
22. PAMA (INDONESIA) LIMITED (Incorporated in the British Virgin Islands)
(Owned by Prudential Asset Management Asia Limited (BVI)) (75%)
Engaged in the management and operation of PT PAMA Indonesia, an Indonesian
Venture Capital Company, and a unit trust which makes direct investments in
Indonesian companies.
C-34
<PAGE>
23. PAMA (SINGAPORE) PRIVATE LIMITED (Incorporated in Singapore) (Owned by
Prudential Asset Management Asia Limited [BVI]) (100%)
Engaged in direct investments, corporate finance and portfolio management
activities in Singapore.
24. PRUDENTIAL ASSET MANAGEMENT ASIA HONG KONG LIMITED (Incorporated in
Hong Kong) (Owned by Prudential Asset Management Asia Limited [BVI]) (100%)
Engaged in direct investments and portfolio management activities in Hong
Kong.
25. P.T. PAMA VENTURA INDONESIA (Incorporated in Indonesia) (Owned by
Prudential Asset Management Asia Limited [BVI]) (65%)
An Indonesian Venture Capital Company which invests directly in Indonesian
companies or in a trust that invests in Indonesian companies.
26. SJ BEDDING B.V. (Incorporated in the Netherlands) (Owned by Prudential Asia
Investments Limited) (100%)
A holding company for Prudential Asia Investments Limited's investment in
the shares of Simmons Co., Limited.
27. SIMMONS BEDDING AND FURNITURE (HK) LIMITED (Incorporated in Hong Kong)
(Owned by SJ Bedding BV) (66.24%)
Collectively with its affiliates engages in the manufacturing, sales and
distribution of bedding products, furniture and accessories in Japan, Hong
Kong, Singapore and Macau.
28. SIMMONS ASIA LIMITED (Incorporated in the British Virgin Islands) (Owned by
Simmons Bedding & Furniture [HK] Limited) (90%)
Engages in the business of licensing Simmons related trademarks and
technology in Asia Pacific countries other than those covered by Simmons
Co., Limited.
29. SIMMONS (SOUTHEAST ASIA) PRIVATE LIMITED (Incorporated in Singapore) (Owned
by Simmons Asia Limited) (100%)
Carries out manufacturing and distribution activities of the bedding
products, furniture and accessories in Singapore.
30. SIMMONS CO., LIMITED (Incorporated in Japan) (Owned by SJ Bedding B.V.)
(66.24%)
A holding company for Simmons Bedding and Furniture (HK) Limited.
31. PRUDENTIAL ASSET MANAGEMENT COMPANY SECURITIES CORPORATION (Incorporated in
Delaware) (Owned by The Prudential Asset Management Company, Inc.) (100%)
Markets to institutional clients investment products developed by other
Prudential affiliates that must be sold by an SEC registered broker-dealer
with a membership in the NASD.
32. PRUDENTIAL TIMBER INVESTMENTS, INC. (Incorporated in New Jersey) (100% of
common stock owned by The Prudential Asset Management Company, Inc.) (100%
of preferred stock owned by The Prudential Insurance Company of America.)
Provides timber investment management services to institutional clients.
Acquires and manages commercial timber properties with the goal of
generating competitive returns.
C-35
<PAGE>
33. THE PRUDENTIAL INVESTMENT ADVISORY COMPANY, LTD. (Incorporated in Japan)
(100%)
Provides investment management services to Japanese institutional investors
and for Prudential's General Account with respect to Japanese and global
securities.
34. THE PRUDENTIAL PROPERTY COMPANY, INC. (Incorporated in New Jersey) (100%)
Inactive.
35. THE PRUDENTIAL REALTY ADVISORS, INC. (Incorporated in New Jersey) (100%)
Provides advice and administrative services to others with respect to the
ownership, sale, and management of real property.
36. TRGOAG COMPANY, INC. (Incorporated in Delaware) (100%)
Organized to own interests in oil and gas properties.
C-36
<PAGE>
Item 27. Number of Contractholders
Not applicable.
Item 28. Indemnification
The Prudential Directors' and Officers' Liability and Corporation Reimbursement
Insurance Program, purchased by Prudential from Aetna Casualty & Surety Company,
CNA Insurance Companies, Lloyds of London, Great American Insurance Company,
Reliance Insurance Company, Corporate Officers & Directors Assurance Ltd.,
A.C.E. Insurance Company, Ltd., XL Insurance Company, Ltd., and Zurich-American
Insurance Company, provides reimbursement for "Loss" (as defined in the
policies) which the Company pays as indemnification to its directors or officers
resulting from any claim for any actual or alleged act, error, misstatement,
misleading statement, omission, or breach of duty by persons in the discharge of
their duties in their capacities as directors or officers of Prudential, any of
its subsidiaries, or certain investment companies affiliated with Prudential.
Coverage is also provided to the individual directors or officers for such Loss,
for which they shall not be indemnified. Loss essentially is the legal liability
on claims against a director or officer, including adjudicated damages,
settlements and reasonable and necessary legal fees and expenses incurred in
defense of adjudicatory proceedings and appeals therefrom. Loss does not include
punitive or exemplary damages or the multiplied portion of any multiplied damage
award, criminal or civil fines or penalties imposed by law, taxes or wages, or
matters which are uninsurable under the law pursuant to which the policies are
construed.
There are a number of exclusions from coverage. Among the matters excluded are
Losses arising as the result of (1) claims brought about or contributed to by
the criminal or fraudulent acts or omissions or the willful violation of any law
by a director or officer, (2) claims based on or attributable to directors or
officers gaining personal profit or advantage to which they were not legally
entitled, and (3) claims arising from actual or alleged performance of, or
failure to perform, services as, or in any capacity similar to, an investment
adviser, investment banker, underwriter, broker or dealer, as those terms are
defined in the Securities Act of 1933, the Securities Exchange Act of 1934, the
Investment Advisers Act of 1940, the Investment Company Act of 1940, any rules
or regulations thereunder, or any similar federal, state or local statute, rule
or regulation.
The limit of coverage under the Program for both individual and corporate
reimbursement coverage is $150,000,000. The retention for corporate
reimbursement coverage is $10,000,000 per loss.
The relevant provisions of New Jersey law permitting or requiring
indemnification, New Jersey being the state of organization of Prudential, can
be found in Section 14A:3-5 of the New Jersey Statutes Annotated. The text of
Prudential's by-law 26, which relates to indemnification of officers and
directors, is incorporated by reference to Exhibit (8)(ii) to this Registration
Statement.
Insofar as indemnification for liability arising under the Securities Act of
1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
of 1933 and is, therefore, unenforceable. In the event that a claim for
C-37
<PAGE>
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 Securities
Act of 1933 and will be governed by the final adjudication of such issue.
Item 29. Principal Underwriter
(a) Prudential Investment Management Services LLC ("PIMS") an indirect
wholly owned subsidiary of Prudential, acts as the principal
underwriter for the registrant and also for The Prudential Variable
Contract Account-2, The Prudential Variable Contract Account-10, and
The Prudential Variable Contract Account-11, which are registered as
open-end management investment companies under the Investment Company
Act of 1940. It also acts as principal underwriter for The Prudential
Variable Contract Account-24 and The Prudential Variable Contract
GI-2, which are registered as unit investment trusts under the
Investment Company Act of 1940.
(b)(1)The following table sets forth certain information regarding the
officers and directors of PIMS:
Name and Principal Business Position and Offices
Address with Underwriter
--------------------------- --------------------
Ascherl, Mary S. Law Department
Caulfield, Edward M. President
Cavanaugh, Mary L. Assistant Secretary
Chaplin, C. Edward Treasurer
Dorsey, Michael T. Law Department/Secretary
Fetting, Mark R. Executive Vice President
Forrester, Kim E. Assistant Comptroller
Greene, Jonathan M. Executive Vice President
Hamilton, Jean D. Executive Vice President
Hiller, Jeffery Chief Operating Officer
Hobbs, John Howard Executive Vice President
Joelson, Ronald P. Executive Vice President
McGuire, Carl L.* Vice President
Storms, Brian M. Executive Vice President
Strangfeld, John Executive Vice President
Toma, James J. Vice President
Williamson, Michael G.* Chief Financial Officer/
Comptroller/VP
* Principal business address is: c/o Prudential Investments
30 Scranton Office Park
Scranton, PA 18507
c)
Name of Net Underwriting
Principal Discounts and Compensation Brokerage
Underwriter Commissions on Redemption Commissions
----------- ---------------- ------------- -----------
Not applicable.
Item 30. Location of Accounts and Records
The names and addresses of the persons who maintain physical possession of the
accounts, books and documents required to be maintained by Section 31(a) of the
Investment Company Act of 1940 and the rules thereunder are:
The Prudential Insurance Company of America
and The Prudential Investment Corporation
Prudential Plaza
Newark, New Jersey 07102-3777
The Prudential Insurance Company of America
and The Prudential Investment Corporation
Gateway Buildings Two, Three and Four
100 Mulberry Street
Newark, New Jersey 07102
The Prudential Insurance Company of America and
The Prudential Investment Corporation
56 North Livingston Avenue
Roseland, New Jersey 07088
The Prudential Insurance Company of America
c/o Prudential Investments
30 Scranton Office Park
Scranton, Pennsylvania 18507-1789
The Prudential Insurance Company of America
c/o The Prudential Asset Management Company, Inc.
71 Hanover Road
Florham Park, New Jersey 07932
Investors Fiduciary Trust Company
127 West 10th Street
Kansas City, Missouri 64105
Item 31. Management Services
None
Item 32. Undertakings
The Registrant hereby undertakes:
(a) to file a post-effective amendment to this registration statement as
frequently as is necessary to ensure that the audited financial statements
in this registration statement are never more than 16 months old for so
long as payments under the variable annuity Contracts may be accepted,
unless otherwise permitted.
(b) to include either (1) as part of any enrollment form to purchase a contract
offered by the prospectus, a space that an applicant can check to request a
Statement of Additional Information, or (2) a post card or similar written
communication affixed to or included in
C-38
<PAGE>
the prospectus that the applicant can remove to send for a Statement of
Additional Information.
(c) To deliver any Statement of Additional Information and any financial
statements required to be made available under this Form promptly upon
written or oral request.
(d) Prudential Insurance Company of America hereby represents that the fees
and charges deducted under the Contract, in the aggregate, are reasonable
in relation to the services rendered, the expenses expected to be
incurred, and the risks assumed by Prudential Insurance Company of
America.
403(b) ANNUITIES
The Registrant intends to rely on the no-action response dated November
28, 1988, from Ms. Angela C. Goelzer of the Commission staff to the American
Council of Life Insurance concerning the redeemability of Section 403(b) annuity
contracts and the Registrant has complied with the provisions of paragraphs
(1)-(4) thereof.
TEXAS ORP
The Registrant intends to offer Contracts to Participants in the Texas
Optional Retirement Program. In connection with that offering, Rule 6c-7 of the
Investment Company Act of 1940 is being relied upon and paragraphs (a)-(d) of
that Section will be complied with.
C-39
<PAGE>
SIGNATURES
As required by the Securities Act of 1933 and the Investment Company Act of
1940, the Registrant and the Depositor have duly caused this Registration
Statement to be signed on their behalf, in the City of Newark, and the State of
New Jersey on this 16th day of June, 1997.
The Prudential Discovery Variable Contract Account
(Registrant)
By: The Prudential Insurance Company of America
(Depositor)
By: /s/ PETER T. SCOTT
---------------------------
Peter T. Scott
Assistant General Counsel
---------------------------
(Signature and Title)
As required by the Securities Act of 1933, this Registration Statement has been
signed by the following persons in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
*/s/ ARTHUR F. RYAN Chairman of the Board, June 16, 1997
- ------------------------- President and Chief
Arthur F. Ryan Executive Officer
*/s/ GARNETT L. KEITH, JR. Vice Chairman and Director June 16, 1997
- -------------------------
Garnett L. Keith, Jr.
*/s/ MARK B. GRIER Senior Vice President June 16, 1997
- -------------------------- and Comptroller and
Mark B. Grier Principal Financial
Officer
*/s/ FRANKLIN E. AGNEW Director June 16, 1997
- -------------------------
Franklin E. Agnew
*/s/ FREDERIC K. BECKER Director June 16, 1997
- -------------------------
Frederic K. Becker
*/s/ WILLIAM W. BOESCHENSTEIN Director June 16, 1997
- -------------------------
William W. Boeschenstein
C-40
<PAGE>
*/s/ LISLE C. CARTER, JR. Director June 16, 1997
- -------------------------
Lisle C. Carter, Jr.
*/s/ JAMES G. CULLEN Director June 16, 1997
- -------------------------
James G. Cullen
*/s/ CAROLYNE K. DAVIS Director June 16, 1997
- -------------------------
Carolyne K. Davis
*/s/ ROGER A. ENRICO Director June 16, 1997
- -------------------------
Roger A. Enrico
*/s/ ALLAN D. GILMOUR Director June 16, 1997
- -------------------------
Allan D. Gilmour
*/s/ WILLIAM H. GRAY, III Director June 16, 1997
- -------------------------
William H. Gray, III
*/s/ JON F. HANSON Director June 16, 1997
- -------------------------
Jon F. Hanson
*/s/ CONSTANCE J. HORNER Director June 16, 1997
- -------------------------
Constance J. Horner
*/s/ ALLEN F. JACOBSON Director June 16, 1997
- -------------------------
Allen F. Jacobson
*/s/ BURTON G. MALKIEL Director June 16, 1997
- -------------------------
Burton G. Malkiel
Director June 16, 1997
- -------------------------
Charles R. Sitter
Director June 16, 1997
- -------------------------
Donald L. Staheli
*/s/ RICHARD M. THOMSON Director June 16, 1997
- -------------------------
Richard M. Thomson
*/s/ JAMES A. UNRUH Director June 16, 1997
- -------------------------
James A. Unruh
*/s/ P. ROY VAGELOS, M.D. Director June 16, 1997
- -------------------------
P. Roy Vagelos, M.D.
*/s/ STANLEY C. VAN NESS Director June 16, 1997
- -------------------------
Stanley C. Van Ness
C-41
<PAGE>
*/s/ PAUL A. VOLCKER Director June 16, 1997
- -------------------------
Paul A. Volcker
*/s/ JOSEPH H. WILLIAMS Director June 16, 1997
- -------------------------
Joseph H. Williams
*By: /s/ PETER T. SCOTT
-------------------------
(Attorney-in-Fact)
C-42
<PAGE>
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
1. Resolution adopted by the Board of Directors of The Prudential
Insurance Company of America on February 11, 1997
establishing the Prudential Discovery Select Group
Variable Contract Account (the "Discovery Account").
2. Not applicable.
3(a). Principal Underwriting Contract.
3(b). Broker-dealer sales agreement.
4(a). Form of Group Annuity Contract for The Prudential Insurance
Company of America.
5(a). Not applicable.
5(b). Form of Participant enrollment form (including acknowledgment
of restrictions on redemption imposed by I.R.C. Section
403(b)).
6. Copy of certificate of incorporation and by-laws of The
Prudential Insurance Company of America.
7. Not applicable.
8(a). Participation Agreement between The Prudential Insurance
Company of America and AIM Variable Insurance Funds, Inc.
8(b). Participation Agreement between The Prudential Insurance
Company of America and T. Rowe Price Equity Series, Inc.
8(c). Participation Agreement between The Prudential Insurance
Company of America and Janus Aspen Series.
8(d). Participation Agreement between The Prudential Insurance
Company of America and MFS Variable Insurance Trust.
8(e). Participation Agreement between The Prudential Insurance
Company of America and OCC Accumulation Trust.
8(f). Participation Agreement between The Prudential Insurance
Company of America and Warburg Pincus Trust.
9. Consent and opinion of Peter T. Scott, Assistant General Counsel,
The Prudential Insurance Company of America, as to the legality of
the securities being registered.
10(a). Consent of Price Waterhouse, LLP, Independent Auditors.
10(b). Consent of Sutherland, Asbill & Brennan, L.L.P.
10(c). Powers of Attorney for Glen H. Hiner, Gaynor N. Kelley,
Ida F.S. Schwartz.
10(d). Powers of Attorney.(1)
11. Not applicable.
12. Not applicable.
13. Schedule for Computation of Performance Quotations.
- ----------
(1) Incorporated herein by reference to the registrant's initial Registration
Statement filed with the Securities and Exchange Commission on March 13,
1997 (File No. 333-23271).
February 28, 1997
I hereby certify that the following resolution was passed at a meeting of the
Finance Committee of the Board of Directors of the Prudential Insurance Company
of America held on February 11, 1997 at which meeting a quorum was present:
Resolved that, subject to the approval of the Commissioner of Insurance of New
Jersey, and to such conditions as said Commissioner may impose, pursuant to
Section 17B:28-7 of the Revised Statutes of New Jersey, a commingled separate
account be established, to be designated the Prudential Discovery Select Group
Variable Contract Account -##. This account will be registered as a unit
investment trust under the Investment Company Act of 1940 and will invest in
selected portfolios within the Prudential Series Fund Inc., an open-end
management investment company registered under the Investment Company Act of
1940, as hereinafter provided, and in the shares of certain open-end management
investment companies not affiliated with Prudential or its subsidiaries. The
Account will be used for the variable portion of combination fixed and variable
group annuity contracts under which portion the values vary to reflect the
investment results of said Account.
Further resolved, that the Company shall receive and hold in the Account amounts
arising from (1) group variable contracts sold in connection with retirement
arrangements that qualify for certain federal tax benefits and (ii) such other
assets of the Company as the proper officers of the Company may deem prudent and
appropriate to have invested on the same manner as the assets applicable to its
reserve liability under variable contracts funded in the Account, and such
amounts, together with dividends, interest and gains produced thereby shall be
invested and reinvested, subject to the rights of the holders of such variable
contracts, in shares of the Prudential Series Fund, Inc., an open-end management
investment company, or in shares of certain open-end management investment
companies not affiliated with Prudential or its subsidiaries which have entered
into participation agreements with Prudential; and
Further resolved, that the proper officers of the Company be and they hereby are
authorized to sign and file, or cause to be filed, with the Securities and
Exchange Commission a registration statement on behalf of the Account, as
registrant, under the Investment Company Act of 1940, and, on behalf of the
Company as issuer, a registration statement, including the financial statements
and schedules, exhibits and form of prospectus required as a part thereof, for
the registration under the Securities Act of 1933 of the offering and sale of
the group variable contracts funded in the Account to the extent they represent
participating interests in the Account, and to pay the registration fees
required in connection therewith; and
Further resolved, that the proper officers of the Company are authorized and
directed to sign and file, or cause to be filed, such amendment or amendments of
such Investment Company Act registration and Securities Act registration
statement as they may find necessary or desirable from time to time; and
<PAGE>
Further resolved, that the signature of any director or officer required by law
to affix his or her signature to any such Investment Company Act registration
exemption application and Securities Act registration, or to any amendment
thereof, may be affixed by said director or officer personally, or by an
attorney in fact duly constituted in writing by said director or officer to sign
his name thereto; and
Further resolved, that the Secretary of the Company is appointed agent of the
Company to receive any and all notices and communications from the Securities
and Exchange Commission relating to such Investment Company Act registration,
exemption application and Securities Act registration and any and all amendments
thereof; and
Further resolved, that the proper officers of the Company be and they hereby are
authorized to take whatever steps may be necessary or desirable to comply with
such laws and regulations of the several states as may be applicable to the sale
of the group variable contracts funded in the Account; and
Further resolved, that the proper officers of the Company be and they hereby are
authorized, in the name and on behalf of the Company, to execute and deliver
such corporate documents and certificates and to take such further action as may
be necessary or desirable including but not limited to, the payment of
applicable fees, in order to effectuate the purposes of the foregoing
resolutions or any of them.
Susan L. Blount
Vice President and Secretary
BROKER AGREEMENT
This agreement is made on (date) between
("Broker")
AND
Prudential Investment Management Services LLC ("PIMS")
A. Authorization to Broker
(1) PIMS hereby authorizes Broker during the term of this Agreement to
sell, distribute and re-sell units of the products (collectively, the
"Products") listed on Attachment 1, which are sold by PIMS to eligible
plan sponsors and their employees. Broker hereby accepts such
authorization on the terms set forth herein.
B. Obligations of Broker
(1) Broker represents that it is a registered broker/dealer under the
Securities and Exchange Act of 1934 and is a member of the National
Association of Securities Dealers, Inc. (the "NASD"). Broker represents
and agrees that: (a) it will abide by the Rules of Fair Practice of the
NASD; and (b) all of its agents who will be soliciting applications for
products distributed by PIMS are registered representatives with the
NASD and appropriately licensed by any state in which the agent
conducts business.
(2) Broker agrees to use its best efforts to solicit applications for
the Products that are acceptable to PIMS. Broker shall, during the term
of this Agreement, engage in the following activities:
(a) Utilize only those prospectuses, statements of additional
information, advertising material, literature and sales
literature that has been provided by PIMS. If Broker wishes to
use any other material, (i) it must be approved by PIMS, and
(ii) Broker is responsible for securing required regulatory
approvals.
(b) Establish and maintain a system to supervise the
activities of each registered representative and associated
person that is reasonably designed to achieve compliance with
applicable Federal and State Securities laws and regulations,
including the rules of the NASD. PIMS will have no supervisory
responsibility for the registered representatives and
associated persons of Broker.
(3) As to the offer and sale of shares of the Prudential Mutual Funds (the
"Fund"), Broker agrees:
(a) To offer and sell shares of the Fund only at their net
asset value, in accordance with the current Prospectus and
Statement of Additional Information of the Fund. All
redemptions of shares will be made at their net asset value,
in accordance with the current Prospectus and Statement of
Additional Information of the Fund.
<PAGE>
(b) To purchase shares of the Fund from PIMS or only from
Broker's customers.
(c) To purchase shares of the Fund from PIMS only for the
purpose of covering purchase orders already received or for
Broker's bona fide investment.
(d) Broker will promptly advise PIMS of all unconditional
purchase and redemption orders for shares of the Fund received
by Broker.
(e) Broker will not offer or sell any of the shares of the
Fund except under circumstances that will result in full
compliance with all applicable Federal and State securities
laws, and in connection with sales and offers to sell shares
of the Fund, Broker will furnish to each person to whom any
such sale or offer is made a copy of the then applicable
current Prospectus.
(f) No person is authorized to make any representations
concerning shares of the Fund except those contained in the
current Prospectus and printed information issued by the Fund
or by PIMS as information supplemental to the Prospectus.
(g) Broker acknowledges that the Fund has the right to suspend
the sale of its shares and that the redemption of shares or
payment may be suspended in each case as permitted by law.
C. Obligation of PIMS
PIMS shall supply prospectuses, reasonable quantities of supplemental
sales literature, sales bulletins, and additional information with
respect to the Products, as issued. Any printed information furnished
by PIMS other than the then current Prospectus and the Statement of
Additional Information, periodic reports and proxy solicitation
materials for the Products are the sole responsibility of PIMS and not
the responsibility of the issuers (including the Fund), and Broker
agrees that the issuers (including the Fund) shall have no liability or
responsibility to Broker in these respects, unless expressly assumed in
connection therewith.
D. Broker's Compensation (Expenses)
Compensation shall be determined in accordance with the terms of
Selling & Service Commission Memoranda applicable at the time of a sale
of the Products by Broker. Broker shall bear all costs and expenses
incurred in connection with its activities hereunder.
E. Complaints and Investigations
Broker and PIMS agree to cooperate fully in any insurance or securities
regulatory investigation or proceeding or judicial proceeding arising
in connection with the products marketed, sold, or serviced under this
Agreement.
F. Term of Agreement
(1) This Agreement shall become effective as of the date first written
above and shall continue in force for one year from its effective date
and thereafter shall automatically be renewed every year for a further
one year period; provided that either party may unilaterally terminate
this Agreement, without payment of any penalty, upon ten (10) days'
written
<PAGE>
notice to the other party of its intention to do so. The notice
shall be deemed to have been given on the date on which it was either
delivered personally to the other party or any officer or partner
thereof, or was mailed postpaid, return receipt requested, or
transmitted via facsimile copier with acknowledgment received, to his
or its address as shown below.
(2) Upon termination of the Agreement, all authorizations, rights and
obligations shall cease except for the agreements contained in Section
E hereof and the indemnities set forth in Section G hereof.
G. Exculpation: Indemnity
(1) Broker shall be held to the exercise of reasonable care in
carrying out the provisions of this Agreement.
(2) PIMS shall be under no liability to Broker except for lack of good
faith and for obligations expressly assumed by PIMS herein. Nothing
herein contained, however, shall be deemed to be a condition,
stipulation or provision binding any persons acquiring any security to
waive compliance with any provision of the Securities Act of 1933, or
of the rules and regulations of the Securities and Exchange Commission
or to relieve the parties hereto from any liability arising from the
Securities Act of 1933.
(3) Broker agrees to indemnify, defend and hold harmless PIMS and any
of its affiliates and any director, officer, employee or controlling
persons of such for any legal or other expense or other expenses or
liabilities reasonably incurred by PIMS or such director, officer,
employee or controlling person in connection with investigating,
defending or paying for any loss, claim, damage, liability, or action
which arises our of or is based upon:
(a) Any unauthorized use of sales materials or any verbal or
written misrepresentations or any sales practices alleged or
found to be in violation of any law, concerning the Products
sold by Broker hereunder or its agents, employees or
associated persons;
(b) Claims by the employees, agents or associated persons of
Broker against PIMS for commissions, service fees, development
allowances or other compensation or remuneration of any type;
and,
(c) The failure of Broker, its officers, employees, agents or
associated persons to comply with the provisions of this
Agreement. This indemnity agreement will be in addition to any
liability which broker may otherwise have.
H. Assignability
This Agreement shall not be assigned by either party without the
written consent of the other.
I. Governing Law
This Agreement shall be construed and interpreted in accordance with
the laws of the State of New Jersey, as at the time in effect and the
applicable provisions of the Investment Company Act of 1940. To the
extent that the applicable law of the State of New Jersey, or
<PAGE>
any of the provisions herein, conflict with the applicable provisions
of the Investment Company Act of 1940, the latter shall control.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the day and year first above written.
Prudential Investment Management Broker
Services LLC Address
Gateway Center Two
100 Mulberry Street
Newark, NJ 07102
Telephone Number (201) 367-1215 Telephone Number
Facsimile Number (201) 367-8084 Facsimile Number
By: By:
<PAGE>
ATTACHMENT 1 TO BROKER AGREEMENT
dated
and between
Broker
AND
Prudential Investment Management Services LLC ("PIMS")
1. MEDLEY Program
2. Prudential Mutual Funds
3. Discovery Select Program
THE PRUDENTIAL
INSURANCE COMPANY
OF AMERICA
agrees to pay the benefits provided under this Contract in accordance with and
subject to its terms.
Contractholder:
Plan:
Effective Date:
Jurisdiction: Florida
Contract Number:
THE PRUDENTIAL INSURANCE COMPANY
OF AMERICA
- -------------------------------- -------------------------------------
Title: Chairman of the Board and
Chief Executive Officer
Date: _________________________ _____________________________________
Secretary
Attest:________________________________
Date: _________________________________
You may call the Prudential toll-free telephone number to present inquiries or
obtain information about coverage and to provide assistance in resolving
complaints.
1-800-
GROUP ANNUITY CONTRACT
THIS CONTRACT CONTAINS A MARKET VALUE ADJUSTMENT FORMULA. THE APPLICATION OF
THIS FORMULA MAY RESULT IN A DOWNWARD ADJUSTMENT IN CASH VALUES. SECTIONS 6.2
AND 6.3 IDENTIFY WHEN CASH VALUES ARE AVAILABLE WITHOUT THE APPLICATION OF THE
MARKET VALUE ADJUSTMENT FORMULA.
CONTRIBUTIONS TO THIS GROUP ANNUITY CONTRACT MAY BE INVESTED IN SEPARATE
INVESTMENT ACCOUNTS. ALL BENEFIT PAYMENTS PROVIDED UNDER THIS CONTRACT THAT ARE
BASED ON THE INVESTMENT RESULTS OF A SEPARATE INVESTMENT ACCOUNT ARE VARIABLE,
SUBJECT TO GAIN OR LOSS, AND ARE NOT GUARANTEED AS TO A FIXED DOLLAR AMOUNT.
THE INITIAL INTEREST RATE IS GUARANTEED ONLY FOR A LIMITED PERIOD OF TIME.
DC-403-97
<PAGE>
<TABLE>
<CAPTION>
DEFINITIONS Page WITHDRAWALS Page
- ----------- ---- ----------- ----
<S> <C> <C> <C>
1.0 Annual Account Charge _____________1 6.1 Withdrawals ________________________________8
1.1 Beneficiary _______________________1 6.2 Withdrawals for Benefit Payments ___________9
1.2 Business Day ______________________1 6.3 Withdrawals at Termination
1.3 Code ______________________________1 of Contract ______________________________9
1.4 Competing Fund ____________________1 6.4 Participant Withdrawals Subject to a Market
1.5 Contractholder ____________________1 Value Adjustment _________________________10
1.6 Contractholder Account ____________1
1.7 Contractholder Fixed Account ______1 FORMS OF BENEFITS
-----------------
1.8 Contractholder Variable Account ___2
1.9 Contributions _____________________2 7.1 General ____________________________________11
1.10 Effective Annual Rate _____________2 7.2 Terms of Payment of Annuities ______________11
1.11 Good Order ________________________2 7.3 Certificates _______________________________11
1.12 Participant _______________________2 7.4 Minimum Death Benefit ______________________11
1.13 Participant Account _______________2
1.14 Plan ______________________________2 TERMINATION OF CONTRACT
-----------------------
1.15 Plan Investment Fund ______________2
1.16 Prudential ________________________2 8.1 Sixty Day Termination ______________________12
1.17 Rate Segment ______________________3 8.2 Termination for Cause ______________________12
1.18 Separate Account __________________3 8.3 Effect of Termination ______________________12
1.19 Subaccount ________________________3 8.4 Partial Contract Termination _______________13
1.20 Transfer Payments _________________3
1.21 Transfer Request __________________3 CHANGES
-------
1.22 Unit ______________________________3
1.23 Unit Value ________________________3 9.1 Changes by Agreement _______________________13
1.24 Withdrawal ________________________3 9.2 Changes by Prudential ______________________13
1.25 Withdrawal Date ___________________3 9.3 Persons Empowered to Act for Us ____________13
1.26 Withdrawal Value __________________4
GENERAL TERMS
-------------
RELATIONSHIP BETWEEN PLAN
AND CONTRACT 10.1 Communications ____________________________13
- -------------------------
10.2 Place of Payment __________________________14
2.1 General Understanding _____________4 10.3 Information - Records _____________________14
2.2 Statutory Requirements ____________4 10.4 Misstatements _____________________________14
2.3 Conditions ________________________4 10.5 Beneficiary _______________________________14
10.6 Small Annuities and Amounts;
CONTRIBUTIONS AND CONTRACTHOLDER ACCOUNT Natural Persons _________________________14
- ----------------------------------------
10.7 Divisible Surplus _________________________14
3.1 Contributions _____________________4 10.8 Limit on Assignment _______________________15
3.2 Participant Account Segments ______4 10.9 Plan Changes ______________________________15
3.3 Contractholder Fixed Account 10.10 Entire Contract ___________________________15
Interest Rates __________________5 10.11 Governing Law _____________________________15
3.4 Contributions from Prior Prudential 10.12 Interest on Benefit Payments ______________15
Fixed Account Contracts _________5 10.13 Contractholder ____________________________15
3.5 Contractholder Variable
Account _________________________5 DEFERRED SALES CHARGES
----------------------
3.6 Reports ___________________________5
11.1 Deferred Sales Charges ____________________16
VARIABLE INVESTMENT OPTIONS
- --------------------------- APPENDIX A - SEPARATE INVESTMENT ACCOUNTS
-----------------------------------------
4.1 Separate Accounts _________________6
4.2 Subaccounts _______________________6
4.3 Voting Rights _____________________6
4.4 Modification of Separate SCHEDULES
Accounts and Subaccounts ________7 ---------
TRANSFER PAYMENTS Schedule A. Forms of Annuity which may be
- ----------------- Purchased
Schedule B. Life - Payment Certain Annuity
Schedule C. Life - Contingent Annuity
5.1 Transfer Payments to Plan
Investment Funds ________________7 Schedule D. Payment Certain Annuity
5.2 Transfer Payment Terms ____________8
</TABLE>
<PAGE>
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SECTION 1- DEFINITIONS
1.0 ANNUAL ACCOUNT CHARGE
If we provide services under an administrative services agreement, we
will assess an Annual Account Charge on or about the last day of each
calendar year for each Participant for whom an account is maintained in
connection with this Contract. This charge will not exceed $30 each
calendar year per Participant. This charge will be deducted directly
from funds maintained under this Contract, unless paid directly by the
Contractholder. The Annual Account Charge will be prorated for new
Participants on a monthly basis for their first year of participation.
1.1 BENEFICIARY
A person designated by a Participant to receive benefits from funds
held under this Contract.
1.2 BUSINESS DAY
A day on which the New York Stock Exchange and Prudential are open for
business.
1.3 CODE
The Internal Revenue Code of 1986, as amended, or any of the
corresponding provisions of prior or subsequent United States revenue
laws.
1.4 COMPETING FUND
An investment option available under the Plan that is primarily
comprised of high quality fixed income securities with an average
duration of less than or equal to 4.5 years. For purposes of the
Contract, Competing Funds include but are not limited to the
______________ Funds.
1.5 CONTRACTHOLDER
The holder of the Contract as shown on the cover page, its successors
and assigns. "You" or "your" means the Contractholder.
1.6 CONTRACTHOLDER ACCOUNT
An account that is equal to the sum of the Contractholder Fixed Account
and Contractholder Variable Account.
1.7 CONTRACTHOLDER FIXED ACCOUNT
An account that is equal to the sum of all Contributions earning a
guaranteed rate of interest under Section 3.3 of this Contract plus
interest credits, less all Withdrawals, Transfer Payments, fees and
charges. There are no required Contributions to the Contractholder
Fixed Account.
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1.8 CONTRACTHOLDER VARIABLE ACCOUNT
An account that is equal to the dollar amount of all Units in the
separate accounts or Subaccounts in which you invest, less any fees or
charges.
1.9 CONTRIBUTIONS
Payments you make to us as described in Section 3.1. We will grant a
period of 31 days for the payment of any required Contributions under
this Contract.
1.10 EFFECTIVE ANNUAL RATE
A method of crediting interest where the annualized income is expressed
as a compound annual rate of interest. An amount invested for a full
year would increase by the Effective Annual Rate.
1.11 GOOD ORDER
An instruction received by us, utilizing such forms as we may require,
that is sufficiently complete and clear that we do not need to exercise
any discretion to follow such instruction.
1.12 PARTICIPANT
A natural person on whose behalf funds are contributed or maintained
under the Plan.
1.13 PARTICIPANT ACCOUNT
The dollar value of funds maintained for each person in accordance with
the terms of the Plan. The Participant Account may be invested in the
fixed interest option through the Contractholder Fixed Account, or the
variable separate account options through the Contractholder Variable
Account.
1.14 PLAN
A plan or program adopted by you that provides Participants with
coverage under an annuity contract intended to meet the requirements of
Section 403(b) of the Code. The program may be subject to the Employee
Retirement Income Security Act of 1974 (ERISA). The Plan is mentioned
for reference purposes only and is shown on the cover page. "Plan"
shall include such other plans of the Contractholder or plans
maintained for other companies as the parties agree. The terms of this
Contract shall apply separately with respect to each plan maintained
thereunder. We are not a party to the Plan.
1.15 PLAN INVESTMENT FUND
An investment fund available under the Plan as of the Effective Date or
of which we are later notified.
1.16 PRUDENTIAL
The Prudential Insurance Company of America. "We," "us," or "our" means
Prudential.
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1.17 RATE SEGMENT
A section of the Contractholder Fixed Account that credits the same
rate of interest for the same time period for Contributions and
accumulated interest thereon.
1.18 SEPARATE ACCOUNT
An account established by Prudential and maintained primarily for one
or more group or individual annuity contracts.
1.19 SUBACCOUNT
A subdivision of a Separate Account, the assets of which are invested
in a corresponding portfolio of a fund or portfolio of securities.
1.20 TRANSFER PAYMENTS
An amount transferred by or on behalf of Participants between Plan
Investment Funds.
1.21 TRANSFER REQUEST
A request by you or your designee pursuant to elections by
Participants, received in Good Order to transfer amounts to or from a
Plan Investment Fund.
1.22 UNIT
You are credited with Units in each Separate Account or Subaccount in
which you invest. The number of Units credited to the account is
determined by dividing each Contribution made to a Separate Account or
Subaccount by the applicable Unit Value for the Business Day on which
the Contribution is received by us in Good Order.
1.23 UNIT VALUE
The dollar value of an interest in a Separate Account or Subaccount.
The Unit Value of each Separate Account or Subaccount will be
determined each Business Day, and will measure the value of the
Separate Account's or Subaccount's assets minus its outstanding
liabilities, fees and expenses. The Unit Value is determined before
giving effect to additions to and withdrawals or transfers from a
Separate Account or Subaccount for that day.
1.24 WITHDRAWAL
A payment from the Contractholder Account that is not a Transfer
Payment.
1.25 WITHDRAWAL DATE
The Business Day we receive written notice from you in Good Order to
make a Withdrawal as provided in Section 6.
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1.26 WITHDRAWAL VALUE
The dollar value withdrawn from the account, less any charges or fees
incurred.
================================================================================
SECTION 2 - RELATIONSHIP BETWEEN PLAN AND CONTRACT
2.1 GENERAL UNDERSTANDING
You will make Contributions as provided in this Contract. However, the
existence of this Contract does not cause us to be a party to or a
fiduciary of the Plan. We make no representation and assume no
liability as to the sufficiency of Contributions or the Contractholder
Account for the benefits to be provided under the Plan. You are solely
responsible for the selection of this Contract as a suitable funding
vehicle for the Plan.
2.2 STATUTORY REQUIREMENTS
This Contract is issued in conjunction with a tax-deferred annuity
plan/program qualified under Section 403(b) of the Code. We reserve the
right to administer this Contract in accordance with the provisions of
Code Section 403(b), its regulations and rules, the eligible rollover
distribution rules of Code Section 401(a)(31), the minimum distribution
requirements of Code Section 403(b)(10), the elective deferral limits
of Code Section 402(g), the withdrawal restrictions imposed by Code
Section 403(b)(11), and other applicable provisions of the Code. This
Contract and any Participant Accounts are nonassignable and
nontransferable except in the event of a loan or Qualified Domestic
Relations Order.
2.3 CONDITIONS
The continuation of this Contract is conditioned upon there being no
change in the Plan or its investment policy that, in our judgment,
would materially disrupt the level of Contributions or increase
Withdrawals compared to prior periods.
================================================================================
SECTION 3 - CONTRIBUTIONS AND CONTRACTHOLDER ACCOUNT
3.1 CONTRIBUTIONS
You will remit as Contributions to this Contract all or a portion of
funds contributed to the Plan unless we agree otherwise in writing or
unless such remittance is to end according to the terms of this
Contract. Contributions may include rollovers of amounts held by
Participants under other tax-qualified retirement plans or funds
transferred from Plan Investment Funds. You may direct that
Contributions be allocated to the Contractholder Fixed Account and/or
the Contractholder Variable Account. Participant elective deferrals to
this Contract, for any tax year, may not exceed the limitations imposed
by Code Sections 401(a)(30) and 402(g).
3.2 PARTICIPANT ACCOUNT SEGMENTS
We may maintain the fixed interest portion of Participant Accounts in
two or more Rate Segments. The dollar value of any Segment is equal to
the sum of all Contributions and interest credited to it, less all
Withdrawals and Transfer Payments withdrawn from it.
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3.3 CONTRACTHOLDER FIXED ACCOUNT INTEREST RATES
We will notify you in advance of each interest rate we set under this
Contract. Each interest rate is an Effective Annual Rate.
(a) CURRENT QUARTERLY INTEREST RATE
All Contributions received during the current calendar quarter will be
allocated to the same Rate Segment and will be credited with interest
at the current quarterly interest rate. This rate is set prior to the
beginning of each calendar quarter, and remains in effect on all
Contributions received during that quarter throughout the remainder of
the current calendar year and all of the following calendar year.
(b) RENEWAL INTEREST RATE
After the expiration of a current quarterly interest rate, we will set
a renewal interest rate for that Rate Segment to apply to Contributions
(and interest thereon) that previously were credited that current
quarterly interest rate. We may set one renewal interest rate to
replace each expiring current quarterly interest rate. The renewal
interest rate will be reset by us periodically.
(c) PORTFOLIO INTEREST RATE
As an alternative to the above Sections 3.3 (a) and (b), you may, prior
to the inception of the Contract, choose to have a single interest rate
apply to all amounts contributed to this Contract. This rate may be
changed quarterly or annually by mutual agreement.
(d) CONTRACTUAL ANNUAL MINIMUM INTEREST RATE
Each interest rate set under Section 3.3 for the years shown below will
not be less than the following:
Calendar Year Rate
------------- ----
1997 and each year thereafter 3.0%
3.4 CONTRIBUTIONS FROM PRIOR PRUDENTIAL FIXED ACCOUNT CONTRACTS
If you contribute amounts to the Contractholder Fixed Account from the
fixed rate investment of a predecessor Prudential group annuity
contract, such amounts will be invested within Rate Segments that
correspond to the investment segments or portions, if any, under the
prior contract.
3.5 CONTRACTHOLDER VARIABLE ACCOUNT
Contributions to the Contractholder Variable Account may be made to any
of the Separate Accounts or Subaccounts listed in Appendix A.
3.6 REPORTS
We will make a report to you of the financial activity within the
Contractholder Account on a quarterly basis or more frequently by
mutual agreement.
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================================================================================
SECTION 4 - VARIABLE INVESTMENT OPTIONS
4.1 SEPARATE ACCOUNTS
The Separate Accounts in which this Contract participates, and their
primary investments, are described in Appendix A. Assets held in each
Separate Account, except assets representing Prudential surplus, if
any, are not chargeable with liabilities arising out of any other
business of Prudential. The total market value of the assets held in
each Separate Account at all times will be at least equal to the total
reserve liability required by law for all payments or values which vary
in dollar amount to reflect the investment results of each Separate
Account.
To the extent that applicable laws and regulations permit, investments
for each Separate Account will be free of all limitations applicable to
other investments by Prudential. Prudential restricts use of its
Separate Accounts to certain plans. These plans include those which
meet the requirements for qualification under Section 403(b) of the
Code. If, at any time, we are informed that your Plan does not meet
applicable requirements, we will (1) notify you and (2) cancel your
Contractholder Variable Account. The dollar value of your canceled
account will, within seven Business Days thereafter, be transferred to
you, your trustee, or the financial institution that you designate.
After that, no Contributions may be made to the Separate Account under
this Contract until the Plan again satisfies applicable qualification
requirements.
4.2 SUBACCOUNTS
A Separate Account may consist of Subaccounts. The income, gains and
losses, realized or unrealized, from the assets allocated to a
Subaccount are credited to or charged against each Subaccount, without
regard to other income, gains or losses of Prudential.
Those Subaccounts currently available under this Contract are listed in
Appendix A. Each Subaccount invests exclusively in shares of a
corresponding fund or a portfolio of securities. Shares of a fund are
purchased and redeemed for a Subaccount at their net asset value. Any
amounts of income, dividends and gains distributed from the shares of a
fund are reinvested in additional shares of that fund at net asset
value.
The dollar amounts of values and benefits of this Contract provided by
a Separate Account vary as a function of the investment performance of
the Subaccounts. You bear the investment risk for Subaccount value in
the selected Subaccounts.
4.3 VOTING RIGHTS
Certain Separate Accounts hold securities that have voting rights. We
normally exercise these rights. However, we reserve the right to
solicit Contractholders for instruction as to how to vote some or all
of the securities in these accounts.
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4.4 MODIFICATION OF SEPARATE ACCOUNTS AND SUBACCOUNTS
We may from time to time change material features of, or close, certain
Separate Accounts or Subaccounts. Any changes will be made only if
permitted by applicable law and regulations. If any change may have a
material impact on Contractholders or Participants, we will obtain the
approval of Contractholders and Participants of the changes and the
approval of any appropriate regulatory authority.
Specifically, we may combine Separate Accounts or Subaccounts, provide
additional Subaccounts or substitute a Subaccount for another, change
the investment managers or management style of a Separate Account or
Subaccount, transfer part or all of the assets of a Separate Account or
Subaccount to another Separate Account or Subaccount, and make any
changes necessary to comply with, or obtain and continue any exemptions
from the Investment Company Act of 1940 (the 1940 Act).
================================================================================
SECTION 5 - TRANSFER PAYMENTS
5.1 TRANSFER PAYMENTS TO PLAN INVESTMENT FUNDS
You may, pursuant to elections by Participants, subject to any
restrictions in the Plan, direct us to make Transfer Payments among
Subaccounts or from the Contractholder Fixed Account or Contractholder
Variable Account to any Plan Investment Fund made available under the
Plan. Transfers will be made under the terms of Section 5.1(a), unless
you request, and we agree, to allow transfers under the terms of
Sections 5.1(b) and 5.1(c). If we are not provided sufficient
information to effectively administer transfers under Sections 5.1(b)
and 5.1(c), we will reinstate the terms of Section 5.1(a) upon written
notice.
Prudential may, upon notice to the Contractholder and Participants,
limit the frequency of transfers to at least one per month. The action
will take effect on the date of the notice.
(a) Transfers From Contractholder's Fixed Account
A Participant may transfer an amount from the Fixed Account to
another investment option made available under the Plan, subject
to the following conditions:
In any one year, a Participant may transfer 20% of his Fixed
Account balance, as measured as of the first day of the year,
without a market value adjustment. The amount transferred in
excess of 20% of such balance will be transferred subject to the
adjustment described in Section 6.4.
(b) DIRECT TRANSFERS TO A COMPETING FUND
Transfer Payments directly between the Contractholder Fixed
Account under this Contract and a Competing Fund as defined in
Section 1.4 may not be made without Prudential's consent.
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(c) INDIRECT TRANSFERS TO A COMPETING FUND
Indirect transfers between the Contractholder Fixed Account under
this Contract and a Competing Fund may be made, provided the
amount to be transferred is first transferred to a fund which is
not a Competing Fund and such amount is held in a non-Competing
Fund for a period of at least 90 days before being transferred to
a Competing Fund. Amounts transferred from the Contractholder
Fixed Account to a non-Competing Fund may be transferred back into
the Contractholder Fixed Account after 90 days.
In the event of unusual volatility in the financial markets, Prudential
may, in its discretion, eliminate or reduce the 90-day restriction of
this Section 5.1(c) for all Contractholders within this class of
contracts. The 90-day provision may be prospectively reinstated by
Prudential upon written notice to the Contractholder.
We reserve the right, upon 30 days notice and in our sole discretion,
to determine whether any investment option under the Plan is or becomes
a Competing Fund as defined in Section 1.4 of the Contract. We also may
upon 30 days notice, in order to protect the financial interests of
other group annuity Contractholders with similar transfer rights,
require that transfers be made under Section 5.1(a) instead of 5.1(b)
and (c). We may also waive transfer restrictions to accommodate asset
allocation programs offered by Prudential. Any such action will be made
uniformly for all similarly situated Contractholders.
5.2 TRANSFER PAYMENT TERMS
Transfer Payments may be made from the Contractholder Fixed Account and
the Contractholder Variable Account. Transfer Payments from the
Contractholder Fixed Account will be made on a pro-rata basis from all
Rate Segments. Each payment will be in full settlement of our liability
for the Transfer Payment. Transfer Payments from the Contractholder
Fixed Account will be effective on the Business Day we receive the
Transfer Request in Good Order. Transfer Payments from the
Contractholder Variable Account will be at the Unit Value of the
applicable Separate Account or Subaccount(s) at the close of the
Business Day we receive the Transfer Request in Good Order.
You agree to provide for the recordkeeping of investment funds
available under the Plan on a Participant-level basis, and to furnish
us with such information as we may reasonably require in connection
with Transfer Requests. We reserve the right to monitor the
Participant-level investment activity in order to enforce these
transfer provisions. We will notify you immediately upon receipt of a
Transfer Request that is inconsistent with the Transfer Payment
conditions then in effect.
We may, upon notice to you, limit the frequency of Transfer Payments.
This action will take effect on the date of the notice. Any such limit
will allow transfers on a quarterly basis or more frequently by mutual
agreement.
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================================================================================
SECTION 6 - WITHDRAWALS
6.1 WITHDRAWALS
You may make Withdrawals from the Contract. Withdrawals from the
Contractholder Fixed Account for purposes listed in Sections 6.2 and
6.3 will not be subject to the market value adjustment described in
Section 6.4. However, Withdrawals for these purposes may be subject to
a market value adjustment if, at the time you request the Withdrawal,
the terms of your Plan are materially different from the terms or
manner of administration in effect on this Contract's effective date,
and such amendment or change adversely affects our rights or
liabilities under this Contract. Withdrawals will be made on a pro-rata
basis from all Rate Segments.
If more than one employer participates in the Plan, and Contributions
are discontinued for one employer, Withdrawals of funds attributable to
that employer may be made under any option available within this
section.
You may make Withdrawals to pay expenses of the Plan. Such Withdrawals
will not be subject to any market value adjustment.
6.2 WITHDRAWALS FOR BENEFIT PAYMENTS
We will make payments to the Contractholder to provide benefits
permitted under the terms of the Plan. Such benefit payments may be
made for reasons of a Participant's retirement, termination of
employment, death, disability, hardship, loans (if applicable), or
in-service withdrawal after age 59 1/2. Benefits may also include such
other payments made pursuant to the Plan provisions as agreed to by us
in accordance with our existing administrative practices. The amount of
a benefit payment will be the amount certified by you as necessary to
fulfill a benefit payment request of a Participant. You agree to supply
us with documentation to support benefit payments on request. We will
also make minimum distribution payments to Participants consistent with
Section 401(a)(9) of the Code. Loans made available to a Participant
under this Contract will be made in accordance with the terms provided
in the Plan. Prudential will administer loans in conformity with the
Code and ERISA.
6.3 WITHDRAWALS AT TERMINATION OF CONTRACT
You may, in conjunction with a termination of the Contract as described
in Section 8, make a Withdrawal of the entire balance of the
Contractholder Fixed Account after the deduction of any applicable
Deferred Sales Charges over a five-year period. During the five-year
payout period, interest will be added to the Contractholder Fixed
Account at the end of each day on the amount of the Contractholder
Fixed Account at the end of the preceding day at an Effective Annual
Rate determined on the Withdrawal Date. This rate is determined by
multiplying the dollar amount of each Rate Segment by the interest rate
that applies to that segment, adding the products, dividing the sum by
the total dollar amount of all segments and subtracting 0.50%.
Alternatively, at your election, Prudential can reset the interest rate
annually throughout the payout period as provided under Section 3.3
with no 0.50% reduction. In no event will the interest paid under this
Section be less than 3.0% per annum.
We will pay one-fifth of the balance of the then-current Contractholder
Fixed Account on the first Business Day following the first anniversary
of the Withdrawal Date. We will pay one-fourth of the then-current
Contractholder Fixed Account as of the second anniversary of the
Withdrawal Date. We will pay one-third of the then-current
Contractholder Fixed Account as of the third anniversary of the
Withdrawal Date. We will pay one-half of the then-current
Contractholder Account as of the fourth anniversary of the Withdrawal
Date. We will pay the remainder of the then-current Contractholder
Account as of the fifth anniversary of the Withdrawal Date. We will
make all payments to you or to any institution or account you
9
<PAGE>
designate. At your request, we may provide monthly payments or
quarterly payments in lieu of annual payments. Alternatively,
Prudential may pay the Withdrawal amount in 60 monthly or 20 quarterly
amounts.
We will make all payments from the Contractholder Variable Account to
you or to an institution or account you designate. We will usually pay
the entire balance of the Contractholder Variable Account within seven
Business Days after receipt of a Good Order request for a Withdrawal at
termination of the Contract. However, we can postpone such payments if:
1. the New York Stock Exchange is closed, other than customary
weekend and holiday closing, or trading on the exchange is
restricted as determined by the Securities and Exchange
Commission (SEC);
2. the SEC permits, by an order, the postponement for the
protection of Contractholders; or
3. the SEC determines that an emergency exists that would make
the disposal of securities held in the Contractholder Variable
Account, or the determination of their value, not reasonably
practicable.
6.4 PARTICIPANT WITHDRAWALS SUBJECT TO A MARKET VALUE ADJUSTMENT
Withdrawals by Participants from the Contractholder Fixed Account that
are not governed by the provisions of Section 6.2 may be made at any
time permitted under the Plan. These Withdrawals will be paid within 10
Business Days of our receipt of your written request in Good Order.
However, under certain emergency conditions, we may reserve the right
to defer payments under this Section for a period of up to 180 days (or
such shorter period as may be required by state law).
The amount withdrawn under this Section and paid to the Participant
shall be equal to the Withdrawal request increased or decreased by the
market value adjustment (MVA), reduced by any applicable deferred sales
charges as described in Section 11.
The market value of the amount withdrawn from the Contractholder Fixed
Account will be calculated using the formula described in this
paragraph. A separate market value adjustment is determined for each
Rate Segment. The interest rate applicable to each such Rate Segment is
compared to the interest rate credited for new Contributions in the
current quarter. If a Portfolio Interest Rate is in effect under
Section 3.3 of this Contract, the Portfolio Rate is compared to
Prudential's current quarterly new guaranteed interest rate. The market
value adjustment for a Rate Segment is calculated by subtracting the
interest rate for new Contributions from the interest rate credited to
that Rate Segment and multiplying that result by a factor of 3.0. In no
event will the market value adjustment exceed 0.00% unless Prudential
has notified the Contractholder prior to the inception of the Contract
that the market value adjustment may exceed 0.00%. In no event will the
application of the market value adjustment cause a Withdrawal from the
Contractholder Fixed Account to be less than the Contributions
withdrawn, accrued at an interest rate of 3.00%. Each market value
adjustment is then applied to the dollars withdrawn from the
corresponding Rate Segment. The market value of the amount withdrawn
from the Contractholder Fixed Account is equal to the sum of the market
values of the amount withdrawn from each Rate Segment. The market value
adjustment factor may be changed in accordance with Section 9.2.
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In the event that a Participant Withdrawal is made as a result of a
communication of the Contractholder or Employer received by the
Participant, which communication in Prudential's reasonable judgment
advises Participants to transfer or withdraw their funds held under
this Contract, the Withdrawal will be treated as a Withdrawal at
Contract termination under Section 6.3. If a participant communication
is not provided to Prudential upon written request, Prudential reserves
the right to consider the communication as one which advises
Participants to transfer or withdraw their funds held under this
Contract.
================================================================================
SECTION 7 - FORMS OF BENEFITS
7.1 GENERAL
You may request that we pay amounts that are withdrawn for benefit
payments under Section 6.2 in any of the following forms, to the extent
not contrary to the terms of the Plan:
(a) a lump sum;
(b) any annuity form described in Schedule A; or
(c) any other settlement method or combination of methods to
which we consent.
Withdrawals must be made in accordance with Code Section 403(b)(10) and
the regulations thereunder. Any benefit payments made will meet the
requirements of Code Section 403(b)(10) and the Regulations issued
thereunder, unless the Plan provides otherwise.
7.2 TERMS OF PAYMENT OF ANNUITIES
If a Participant elects an annuity pursuant to Section 7.1(b), the
amount withdrawn will be applied to purchase an annuity in accordance
with Schedule A. The monthly amount of annuity is determined from the
schedule of purchase rates for that annuity. Any payments made in
annuity form will be governed by the terms of the annuity certificate.
7.3 CERTIFICATES
We will deliver to you for issuance to each Participant for whom an
annuity is purchased under this Contract, a certificate summarizing the
amount and terms of such annuity. Certificates are not a part of this
Contract.
7.4 MINIMUM DEATH BENEFIT
Any lump sum death payment from this Contract made to a Beneficiary
within one year of the Participant's death will be equal to the
greatest of : (1) the Participant's Account value as of the date
Prudential receives a death benefit payment request in Good Order; (2)
the sum of all contributions made to the Participant's Account less
withdrawals, transfers and charges; and (3) the greatest of the
Participant's Account value calculated on every third anniversary of
the first contribution made on behalf of the Participant less any
withdrawals, transfers and charges (accompanied by completed
documentation) under the Contract.
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SECTION 8 - TERMINATION OF CONTRACT
8.1 SIXTY DAY TERMINATION
This Contract may be terminated by either party by providing the other
party 60 days written notice. The Contract termination date will be
established as the first Business Day occurring 60 calendar days
following receipt of the notice of termination. The parties may agree
to a different termination date.
8.2 TERMINATION FOR CAUSE
We may terminate this Contract after a reason for termination occurs by
giving you 30 days written notice. Reasons for our termination are:
(a) You fail to meet any of your obligations under this
Contract or under any related agreement.
(b) The Plan is no longer a qualified plan under the Code.
(c) The Plan is terminated.
(d) You no longer have any obligations under the Plan.
(e) You, your agency, or your trustee take an action
which, in our reasonable determination, materially
and adversely affects our rights and obligations
under this Contract.
(f) You reject a change or an amendment to this Contract
proposed by us under Section 9.1 or 9.2.
8.3 EFFECT OF TERMINATION
You may make no further Contributions or Transfer Payments after a
contract termination date is established, unless we agree otherwise.
Death benefits and previously purchased annuities will continue to be
paid. Benefit Withdrawals, including the purchase of annuities if we
agree, may be made from the Contractholder Fixed Account after the
contract termination date. Benefit withdrawals from the Contractholder
Variable Account will continue to be made after the Contract
termination date. The Contractholder Fixed Account will be distributed
under the terms of Section 6.3 and will be subject to the Deferred
Sales Charges of Section 11.1.
Withdrawals upon termination are subject to any limitations or
restrictions that appear elsewhere in this Contract.
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8.4 PARTIAL CONTRACT TERMINATION
If, through a divestiture or other corporate restructuring, employees
of an employer cease to be eligible to participate in the Plan, you may
partially terminate this Contract and request that we issue a new
contract to a successor plan. Any such contract is subject to any terms
and conditions mutually agreed to. Section 8.3 applies to amounts
subject to partial termination.
================================================================================
SECTION 9 - CHANGES
9.1 CHANGES BY AGREEMENT
This Contract may be changed at any time by agreement between the
parties. The changes will be effective upon notice. Any change made to
this Contract will be consistent with applicable state and federal law.
No changes will be made that would adversely affect an annuity benefit
for a Participant which is attributable to contributions already made
to the Contract.
9.2 CHANGES BY PRUDENTIAL
We may change this Contract if we, in our discretion, deem it
appropriate to conform to the requirements of any law or regulation. We
reserve the right to periodically update the annuity purchase rates,
and, upon 30 days notice to you, to change the method for determining
the market value adjustment Any change to the market value adjustment
will apply only to contributions made on or after the age of the
change.
No modifications or amendments to this Contract may affect the terms of
any annuity purchased prior to the effective date of the modification
or amendment. The annuity purchase rates will not be modified or
amended (i) during the first year that the Contract is in effect, or
(ii) more than once in any 12 month period; and (iii) may not be less
favorable to you than the annuity purchase rates we offer to any other
Contractholder in the same class as this Contract.
9.3 PERSONS EMPOWERED TO ACT FOR US
No agent or other person except one of the following Prudential
officers may change this Contract or bind us.
Chairman of the Board and Actuary
Chief Executive Officer Associate Actuary
President Secretary
Vice President Assistant Secretary
================================================================================
SECTION 10 - GENERAL TERMS
10.1 COMMUNICATIONS
All communications under this Contract shall be in writing. They will
be addressed to you at your principal office, or at such other address
as you may communicate to us. Communications to us should be addressed
to Prudential, c/o Prudential Investments, 30 Scranton Office Park,
Scranton, Pennsylvania 18507-1789, or at such other address as we may
communicate.
13
<PAGE>
10.2 PLACE OF PAYMENT
All payments to us under this Contract shall be payable at our office
described above or at an address or to a representative we specify by
notice to you.
10.3 INFORMATION - RECORDS
You agree to furnish all information which we may reasonably require
for the administration of this Contract. You also agree to provide to
us any applicable administrative agreements pertaining to recordkeeping
or servicing of Participant Accounts. We will not be liable for the
fulfillment of any obligations in any way dependent upon information
unless and until we receive the information in a form satisfactory to
us, which includes receiving information in Good Order where
appropriate. Information furnished to us may be corrected for
demonstrated errors unless we have already acted to our prejudice by
relying on the information. Except for the corrections, information
furnished to us will be regarded as conclusive.
10.4 MISSTATEMENTS
If there has been a misstatement as to any annuitant, we will not pay
more than that which should be paid based on the correct information.
Any overpayment will, together with interest, be deducted from future
payments. Any underpayment will, together with interest, be paid
immediately upon receipt of the corrected information. The interest
rate credited or charged under this section will be 3.0%.
10.5 BENEFICIARY
You may, if permitted by law, direct that we pay any benefit under this
Contract directly to the Beneficiary of a Participant or other
designated payee. Payments in annuity form will be governed by the
annuity certificate.
10.6 SMALL ANNUITIES AND AMOUNTS; NATURAL PERSONS
To the extent consistent with the terms of the Plan and Code Section
411(a)(11) as applicable, if the total monthly amount of the annuity
that would otherwise be purchased on behalf of any person, or any
series of payments under this Contract, is less than $50, we may make a
single sum payment in lieu of purchasing such annuity or making such
series of payments. The single sum paid will be equal to the amount
that would otherwise be applied to purchase such annuity. The single
sum paid in lieu of a stream of payments will be equal to the value of
the series of payments discounted at interest from each payment due
date to the date of the single sum payment. The discount interest rate
will be the interest rate in the schedule of annuity purchase rates
used to establish the series of payments.
If the payee is not a natural person and a series of payments is
payable, we may choose to make a payment in one sum.
14
<PAGE>
10.7 DIVISIBLE SURPLUS
The portion, if any, of our divisible surplus accruing under this
Contract will be determined annually by our Board of Directors and
credited to the Contractholder Accounts as determined by the Board. It
is unlikely that any divisible surplus will accrue upon this Contract.
No annuity under this Contract will be taken into account in the
determination of any divisible surplus to be credited to this Contract.
10.8 LIMIT ON ASSIGNMENT
Your rights and responsibilities under this Contract may not be
assigned without our written consent.
10.9 PLAN CHANGES
This Contract applies to the terms of the Plan in effect on the
Effective Date of this Contract. You shall furnish us a copy of the
Plan, any proposed amendment or any change to the Plan, its operation,
or its investment policy, and any communications by you to the
Participants concerning investments available through the Plan.
10.10 ENTIRE CONTRACT
This document constitutes the entire Contract between us.
10.11 GOVERNING LAW
This Contract will be construed according to the laws of the
jurisdiction set forth on the cover page.
10.12 INTEREST ON BENEFIT PAYMENTS
Any benefit payment we make under Section 6.2 that is not made within
10 Business Days of the receipt in Good Order of a request for such
payment will be credited with interest in the same rate and manner as
provided in Section 3.3, or as required by state insurance or Federal
securities law. We reserve the right to credit interest on benefit
payments paid within 10 Business Days for all Contractholders within
this class of contracts.
10.13 CONTRACTHOLDER
We will normally conduct business only with you. We will be entitled to
rely on any acts or omissions by you pursuant to the terms of this
Contract.
Either party may from time to time, delegate to an agency or trustee
certain administrative powers and responsibilities under this Contract.
No party is bound to recognize any such delegation until it has
received notice of it. The notice must specify those powers and
responsibilities and include evidence of acceptance by the agency. On
and after the date of receipt of the notice, the notified party will
deal with the agency with respect to those powers and responsibilities
and will be entitled to rely on any action taken or omitted by the
agency with respect thereto in the same manner as if dealing with the
party to the Contract. Either party may give notice to the other party
of a subsequent delegation to another agency of specified powers and
responsibilities.
15
<PAGE>
================================================================================
SECTION 11 - DEFERRED SALES CHARGES
11.1 DEFERRED SALES CHARGE
Transfers made to another Plan Investment Fund not available under this
Contract on behalf of Participants, if applicable, and Withdrawals made
under Section 6 on behalf of Participants (other than those made under
Section 6.2) are subject to Deferred Sales Charges. The amount of a
Transfer Payment or Withdrawal subject to a Deferred Sales Charge shall
be the amount requested less the Deferred Sales Charge determined from
the following table. However, if the entire dollar amount held on
behalf of a Participant under the Contractholder Fixed Account is
withdrawn, the amount paid will not be less than the Contributions made
into that option for the Participant reduced by previous Withdrawals
and transfers.
Withdrawals or Transfer Payments made in the years indicated, counting
from the first day an amount was contributed on behalf of a Participant
under this or a predecessor Prudential Contract, will have the
following Deferred Sales Charge, measured as a percentage of
Contributions withdrawn:
0 - 1 year 7%
1 - 2 years 6%
2 - 3 years 5%
3 - 4 years 4%
4 - 5 years 3%
5 - 6 years 2%
6 - 7 years 1%
After 7 years 0%
Deferred Sales Charges do not apply to amounts withdrawn in excess of
the Participant's Contributions under this Contract. No charge is
imposed upon rollover contributions, contributions withdrawn due to the
Participant's termination of employment, death, financial hardship or
disability retirement.
Withdrawals are deemed to be made first from contributions and then
earnings. Withdrawals from the Contractholder Fixed Account will be
made on a pro-rata basis from all Rate Segments applicable to a
Participant under the Contract.
Payment to the Participant ordinarily will be made within seven days of
our receipt of a properly completed payment request. If any Withdrawal
payment under this section is not made within 10 Business Days,
interest on the delayed payment will be credited (starting as of the
first day following receipt of the Withdrawal request) at the rate
applicable to new Contributions under Section 3.3 on the date the
Withdrawal request is received.
16
<PAGE>
================================================================================
APPENDIX A - SEPARATE INVESTMENT ACCOUNTS
Contributions paid to the Contractholder Variable Account may be invested in the
following Prudential Variable Separate Accounts: Prudential Variable Contract
Account 10 (VCA-10), Prudential Variable Contract Account 11 (VCA-11) and
Prudential Variable Contract Account 24 (VCA-24).
VCA-10, VCA-11, and VCA-24 are registered under the Investment Company Act of
1940. These three accounts are part of Prudential's MEDLEY Program. Participants
selecting these accounts must receive a MEDLEY Prospectus prior to investing.
The operations of VCA-10 and VCA-11 are supervised by the Prudential VCA-10 and
VCA-11 Committees, respectively. Committee members are elected by the persons
having VCA-10 and VCA-11 voting rights, as described in the Prospectus.
The investments held in VCA-10 are composed primarily of common stocks. The
investments held in VCA-11 are composed primarily of money market instruments.
Prudential invests and reinvests the assets held in VCA-10 and VCA-11 in
accordance with the investment objectives and policies established for those
accounts and described in the Prospectus.
The investments held in VCA-24 are composed primarily of shares of The
Prudential Series Fund, Inc. ("PSF"), an open-end management investment company
(commonly known as a "Mutual Fund") registered under the Investment Company Act
of 1940. VCA-24 is divided into subaccounts, each of which is invested only in a
corresponding portfolio of PSF. The portfolios of PSF in which the subaccounts
are currently invested are:
VCA-24 SUBACCOUNT PSF PORTFOLIO
VCA-24-B: Diversified Bond Subaccount Diversified Bond Portfolio
VCA-24-S: Equity Subaccount Equity Portfolio
VCA-24-AM: Flexible Managed Subaccount Flexible Managed Portfolio
VCA-24-CM: Conservative Balanced Subaccount Conservative Balanced
Portfolio
VCA-24-SI: Stock Index Subaccount Stock Index Portfolio
VCA-24-GE: Global Subaccount Global Portfolio
VCA-24-GS: Government Income Government Income
Subaccount Portfolio
17
<PAGE>
The investment strategy and other features of each PSF portfolio in which these
VCA-24 subaccounts invest are as described in the Prospectus. The selection of
VCA-24 subaccounts and PSF portfolios may change. Any such change will be
described in the Prospectus.
TABLE OF MANAGEMENT FEES
- ----------------------------------------------------------------------
OPTION EFFECTIVE ANNUAL RATE
- ----------------------------------------------------------------------
VCA-10 0.25%
- ----------------------------------------------------------------------
VCA-11 0.25%
- ----------------------------------------------------------------------
VCA-24
- ----------------------------------------------------------------------
Diversified Bond Portfolio 0.40%
- ----------------------------------------------------------------------
Equity Portfolio 0.45%
- ----------------------------------------------------------------------
Flexible Managed Portfolio 0.60%
- ----------------------------------------------------------------------
Conservative Balanced Portfolio 0.55%
- ----------------------------------------------------------------------
Stock Index Portfolio 0.35%
- ----------------------------------------------------------------------
Global Portfolio 0.75%
- ----------------------------------------------------------------------
Government Income Portfolio 0.40%
- ----------------------------------------------------------------------
The administrative charge for each investment option listed above is the
equivalent of the effective annual rate of 0.75% of each corresponding
portfolio.
Prudential invests and reinvests the assets held in each Subaccount in
accordance with the investment objectives and policies established for it and
described in the Prospectus.
VCA-10, VCA-11 and VCA-24 were established pursuant to resolutions adopted by
Prudential's Board of Directors. The resolutions provide that these accounts are
to be used for contracts which state that certain payments and values under them
will vary to reflect the investment results of the accounts.
Contributions paid to the Contractholder Variable Account may be invested in the
Prudential Long Term Growth Account 2 (VCA-2). The VCA-2 Variable Account will
invest primarily in common stocks selected with the objective of long term
growth, taking into account both income and capital appreciation. The investment
management fee is at the annual rate of 0.125%. Mortality and expense charges
are at an annual rate of 0.375%. Participants selecting this account must
receive a Prospectus prior to investing.
18
<PAGE>
Contributions paid to the Contractholder Variable Account may be invested in the
Subaccounts of the Prudential Discovery Select Group Variable Contract Account
("the Discovery Account"). This variable separate account, sponsored by
Prudential Insurance Company of America, is currently divided into 22
Subaccounts. Any income and realized or unrealized gains and losses in a
Subaccount are credited to or charged against that Subaccount without regard to
income, gains, or losses in other Subaccounts.
Eleven Subaccounts invest in portfolios of the Prudential Series Fund. These
portfolios include Money Market, Government Income, Diversified Bond, Equity,
High Yield Bond, Stock Index, Equity Income, Prudential Jennison, Global,
Conservative Balanced and Flexible Managed Portfolios. The Subaccounts of the
Discovery Account also invest in other underlying Fund portfolios. These include
the AIM V.I. Growth and Income Fund, the AIM V.I. Value Fund, the Janus Aspen
Series Growth Portfolio, the Janus Aspen Series Growth Portfolio, the MFS
Emerging Growth Series, the MFS Research Series, the OCC Accumulation Managed
Portfolio, the OCC Accumulation Small Cap Portfolio, the T. Rowe Price Equity
Income Portfolio, the T. Rowe Price International Stock Portfolio, and the
Warburg Pincus Post-Venture Capital Portfolio.
The investment strategy of each Subaccount is described in the Prospectus. The
choice of Subaccounts may change. Any such change will be described in the
Prospectus.
The administrative charge for each Subaccount in the Discovery Account will not
exceed an effective annual rate of 1.10%. This charge is deducted daily from the
assets in each of the Subaccounts. This charge is for the issuing of the
Contract, establishing and maintaining records, and providing reports to the
Contractholder and the Participants. Prudential may impose a lower
administrative charge for certain classes of contractholders that meet minimum
size requirements (for example, assets exceeding $25 million or plans with 500
or more Participants). In addition, Prudential may impose a lower administrative
charge for any contractholder in Prudential's MEDLEY group annuity program for
whom Prudential is providing administrative services as of June 1, 1997 that
exchanges their MEDLEY contract(s) for a Discovery Select contract to reflect
the reduced set-up, recordkeeping and administrative costs incurred by
Prudential. Any reductions in administrative charges will be available on a
uniform basis to similarly-situated contractholders.
Mortality risk and expense charges are deducted daily at an effective annual
rate of not more than 0.15% of the assets held in the Subaccounts. Participants
selecting from any of the Subaccounts in the Discovery Account must receive a
Prospectus prior to investing.
19
<PAGE>
================================================================================
SCHEDULE A - FORMS OF ANNUITY WHICH MAY BE PURCHASED
Form of Payment Payable Applicable Schedule
----------------------- -------------------
1. Life - Payment Certain Annuity. Use Schedule B
2. Life - Contingent Annuity. Use Schedule C
3. Payment Certain Annuity. Use Schedule D
We may provide monthly amounts of annuity larger than those shown in the
following schedules for annuities purchased during any period we specify.
Annuity purchase rates for other forms of annuity to which we consent will be
furnished on request.
The annuity purchase rates under this contract will be no less favorable to a
Participant than used under other Prudential group annuity contracts of this
Class.
The forms of annuities which may be purchased are fixed dollar annuities which
are guaranteed by Prudential. The amount of fixed annuity payments depends only
on the form and duration of the annuity selected, the dollar amount applied to
purchase the form of annuity, the age of the Annuitant and the annuity purchase
rates in Schedules B, C and D. The amount of the fixed annuity payments does not
depend on the performance of the Discovery Account or any Subaccount.
AVAILABLE FORMS OF ANNUITIES
Life annuities and Payment Certain annuities are available under this Contract.
A Life form of annuity is one payable at least during the lifetime of the person
(referred to as the "Annuitant") for whom it was purchased. Depending on the
existence and nature of any payment payable after the death of the Annuitant, a
Life annuity will be either a Life-Payment Certain or a Life-Contingent annuity.
A Payment Certain form of annuity may be payable for a period less than the
lifetime of the Annuitant. The terms of payment for each form of annuity are
described below.
Life-Payment Certain Annuity:
The first monthly payment of a Life-Payment Certain annuity is payable
as of the date the annuity is purchased. Monthly payments are payable
on the first day of each month thereafter throughout the Annuitant's
remaining lifetime. If the Annuitant dies before the number of annuity
payments made equals the number of Payments Certain applicable to him,
monthly annuity payments will continue to be made to the Annuitant's
Beneficiary until the total number of payments is so equal. The number
of Payments Certain is established when the annuity is purchased and
may be 60, 120, 180, 240, or any other number accepted by Prudential.
20
<PAGE>
Life-Contingent Annuity:
The first monthly payment of a Life-Contingent annuity is payable on
the date the annuity is purchased. Monthly payments are payable on the
first day of each month thereafter throughout the Annuitant's remaining
lifetime. If the Annuitant dies before the death of his Contingent
Annuitant, monthly payments will continue to the Contingent Annuitant
throughout the Contingent Annuitant's remaining lifetime. The amount of
each monthly Contingent Annuity payment will be a percentage of the
monthly annuity payment payable before the Annuitant's death. The
percentage is established when the annuity is purchased and may be
33 1/3%, 50%, 66 2/3%, or 100%, or any other percentage we accept.
Payment Certain Annuity:
The first monthly payment of a Payment Certain annuity is payable on
the date the annuity is purchased. Monthly payments are payable on the
first day of each month thereafter until the total number of Payments
Certain specified when the annuity was purchased has been paid. The
number of payments may be 60, 120, 180, 240 or any other number we
accept. If the Annuitant dies before his Beneficiary, monthly annuity
payments will continue to be made to the Beneficiary until the number
of payments specified by the Annuitant has been made.
Other forms of annuity may be provided with our consent.
Variable Annuity (VCA-2 Only)
Assets in VCA-2 may also be used for the purchase of a variable
annuity. In electing to have a variable annuity effected, the
Participant may select from the available forms of annuity described in
the VCA-2 Prospectus. If a variable annuity is purchased, the annuitant
will receive the value of a fixed number of annuity units each month.
Changes in the value of such Units and thus the amounts of the monthly
annuity payments, will reflect investment gains and losses.
21
<PAGE>
================================================================================
ANNUITY SCHEDULES
The schedules show the monthly amount of annuity purchased per $10,000, after
deduction of any taxes on annuity premiums that may apply.
The amounts of annuity for other ages of the Annuitant or Contingent Annuitant
will be provided upon request.
The actuarial basis for the rates shown in Schedules B-D is:
Mortality: The Prudential Insurance Company of America 1950 Group Annuity
Valuation Table of Mortality with an enhanced rating in age
according to year of birth. The annual rate of mortality improvement
is a one-year reduction in age for each 5 years the person is alive
after 1895, measured on an annual basis. The Annuitant's age is
their age on the date of purchase.
Interest: The interest rate applicable on the date of purchase is 3.00%.
Loading: Loading in the rates is 8.00% of the gross purchase price shown for
each schedule.
- --------------------------------------------------------------------------------
SCHEDULE B - LIFE - PAYMENT CERTAIN ANNUITY (120 PAYMENTS CERTAIN)
Monthly Amount
If the date the annuity is purchased is in:
AGE AT COMMENCEMENT
OF ANNUITY
1997 1998 2000 2005
---- ---- ---- ----
60 $40.29 $40.14 $39.85 $39.16
65 45.23 45.04 44.68 43.79
70 51.51 51.28 50.82 49.69
- --------------------------------------------------------------------------------
22
<PAGE>
- --------------------------------------------------------------------------------
SCHEDULE C - LIFE - CONTINGENT ANNUITY
Monthly Amount
If Annuitant and Contingent Annuitant have same date of
birth. If the date the annuity is purchased is in:
AGE AT
COMMENCEMENT
OF ANNUITY 1997 1998 2000 2005
- ---------- ---- ---- ---- ----
If specified percentage to Contingent Annuitant is 100%:
60 $35.09 $34.99 $34.78 $34.28
65 38.81 38.67 38.39 37.71
70 43.91 43.71 43.32 42.38
If specified percentage to Contingent Annuitant is 50%:
60 $37.73 $37.60 $37.34 $36.73
65 42.26 42.09 41.75 40.92
70 48.43 48.19 47.71 46.58
SCHEDULE D - PAYMENT CERTAIN ANNUITY
Monthly Amount
If the date the annuity is purchased is in:
NUMBER OF
PAYMENTS
CERTAIN 1997 1998 2000 2005
- ------- ---- ---- ---- ----
60 $164.73 $164.73 $164.73 $164.73
120 88.45 88.45 88.45 88.45
180 63.20 63.20 63.20 63.20
- --------------------------------------------------------------------------------
23
DISCOVERY SELECT(R) PROGRAM
REQUEST FOR ENROLLMENT
ENROLLMENT INSTRUCTIONS
1. Please read the form carefully and note the General Enrollment Provisions
below.
2. Please complete the statistical data at the top of the form carefully,
printing legibly in the boxes. All information requested is necessary and
Prudential will treat it as completely confidential.
3. Please note that the date you fill in as the "Beginning Date" in the box
headed "Contribution Data" may not be the date when the first contribution
made on your behalf is received by Prudential. It may take up to 30 days
after we receive an enrollment form before your employer's payroll records
are adjusted so that the contribution may be transmitted. Your actual
Beginning Date will be the date on which Prudential receives the initial
contribution made on your behalf.
4. Ask the Enrolling Representative or Program Representative assisting you in
your enrollment to explain fully the effect of your election concerning the
allocation of contributions between the various investment accounts.
5. Please complete the enclosed Beneficiary Designation form.
GENERAL ENROLLMENT PROVISIONS
1. The directions you have given for investing your contributions will remain
in effect until changed by your request by either written notice or
telephone exchange (if your plan permits) to Prudential. Forms for a change
in investment options will be provided by Prudential upon request.
2. The number shown on this form refers to the plan number assigned to your
group plan under Prudential's Guaranteed Interest Account and/or the
Variable Investment Accounts.
3. The identification number of your accounts under the Program will be your
Social Security Number and the assigned plan number. The effective date of
your coverage under Prudential's Guaranteed Interest Account and/or the
Variable Investment Accounts will be the date as of which the first
contribution on your behalf is applied under such account(s).
IMPORTANT NOTICE
PLEASE COMPLETE THIS ENROLLMENT FORM AND THE ENCLOSED BENEFICIARY DESIGNATION
FORM.
It is very important that you complete and sign the Enrollment and Beneficiary
Designation Forms and return it to us as promptly as possible. We will not
accept any contributions before we have a properly completed and signed
Enrollment and Beneficiary Designation Forms.
Prudential
30 Scranton Office Park
Scranton, PA 18507-1789
Ed. 06/97
<PAGE>
<TABLE>
<CAPTION>
REQUEST FOR ENROLLMENT IN THE DISCOVERY SELECT PROGRAM
1. PARTICIPANT DATA (PLEASE PRINT) FO 30
Plan No: ................... Plan Name: .......................................
Sub Plan No: .... .... .... ....
(if applicable)
Social Security No: .............. - ........ - .................
First Name: MI: Last Name:
........................... ....... ......................................
Address:
...............................................................................
City: ................................................. State: .............
<S> <C>
Zip Code: .............. - .......... Daytime Telephone Number: ........ - ........ - ...................
Area Code
<S> <C> <C>
Date of Birth: .............................. Date Employed: ................................ Sex: ..........
MO DAY YEAR MO DAY YEAR M F
- -----------------------------------------------------------------------------------------------------------------------------------
2. CONTRIBUTION DATA
<S> <C> <C>
Amount Per Pay Period: Beginning Date: Rollover Amount:
$............ . ....... ...... ...... ...... $............ . .......
- -----------------------------------------------------------------------------------------------------------------------------------
3. INVESTMENT OPTIONS
Until further notice, my contributions should be invested as follows:
<S> <C> <C> <C>
Guaranteed Interest ..........% AIM V.I. Growth and Income Fund ..........%
Money Market Portfolio ..........% AIM V.I. Value Fund ..........%
Diversified Bond Portfolio ..........% Janus Aspen Series Growth Portfolio ..........%
High Yield Bond Portfolio ..........% Janus Aspen Series Int'l Growth Portfolio ..........%
Stock Index Portfolio ..........% MFS Emerging Growth Series ..........%
Equity Income Portfolio ..........% MFS Research Series ..........%
Equity Portfolio ..........% OCC Accumulation Managed Portfolio ..........%
Prudential Jennison Portfolio ..........% OCC Accumulation Small Cap Portfolio ..........%
Global Portfolio ..........% T. Rowe Price Equity Income Portfolio ..........%
Flexible Managed Portfolio ..........% T. Rowe Price International Stock Portfolio ..........%
Conservative Balanced Portfolio ..........% Warburg Pincus Post-Venture Capital Portfolio ..........%
Government Income Portfolio ..........% ..........%
Please use whole numbers only - Total must equal 100%.
- -----------------------------------------------------------------------------------------------------------------------------------
4. BENEFICIARY DESIGNATION - Please refer to the enclosed Beneficiary Designation Form which must be completed.
- -----------------------------------------------------------------------------------------------------------------------------------
5. PARTICIPANT AUTHORIZATION
I understand that if I am participating in a Tax Deferred Annuity Program,
contributions must be remitted by my Employer pursuant to programs for the
purchase of annuities qualifying under Section 403(b)(1) of the Internal Revenue
Code of 1986 as amended.
Certain restrictions may apply to the exchange provisions under the Group
Annuity Contract.
I authorize my employer to make payroll deductions as I have indicated. I
understand that upon enrollment, if my plan allows, I will automatically have
telephone privileges to perform transactions via the Prudential Voice Response
System. I can elect to decline these privileges by submitting a Telephone
Privilege Declination Form, which can be obtained by calling Prudential's
toll-free number in the plan highlights.
<S> <C>
Participant's Signature________________________________________________________ Date_____________________________________
- -----------------------------------------------------------------------------------------------------------------------------------
6. ENROLLING REPRESENTATIVE AUTHORIZATION
....................................................... ..... ..... .....................
PLEASE PRINT last name and initials of Representative Number
______________________________________________________________________________________ _________________________________________
Signature of Enrolling Representative Date
- -----------------------------------------------------------------------------------------------------------------------------------
7. FORM DIRECTION
COPIES: Detach pink copy for your records, yellow copy to Enrolling
Representative, and send the completed white copy of this form to:
Prudential Investments [LOGO] PRUDENTIAL
30 Scranton Office Park INVESTMENTS
Scranton, PA 18507-1789
Ed. 6/97
</TABLE>
COPY TO COME
25
PARTICIPATION AGREEMENT
BY AND AMONG
AIM VARIABLE INSURANCE FUNDS, INC.,
A I M DISTRIBUTORS, INC.,
PRUDENTIAL INSURANCE COMPANY OF AMERICA,
ON BEHALF OF ITSELF AND
ITS SEPARATE ACCOUNTS,
AND
PRUDENTIAL INVESTMENT MANAGEMENT SERVICES, L.L.C.
<PAGE>
TABLE OF CONTENTS
DESCRIPTION PAGE
- ----------- ----
Section 1. Available Funds ............................................ 2
1.1 Availability .............................................. 2
1.2 Addition, Deletion or Modification of Funds ............... 2
1.3 No Sales to the General Public ............................ 2
Section 2. Processing Transactions .................................... 3
2.1 Timely Pricing and Orders ................................. 3
2.2 Timely Payments ........................................... 3
2.3 Applicable Price .......................................... 4
2.4 Dividends and Distributions ............................... 4
2.5 Book Entry ................................................ 4
Section 3. Costs and Expenses ......................................... 4
3.1 General ................................................... 4
3.2 Registration .............................................. 4
3.3 Other (Non-Sales-Related) ................................. 5
3.4 Other(Sales-Related) ...................................... 5
3.5 Parties To Cooperate ...................................... 5
Section 4. Legal Compliance ........................................... 6
4.1 Tax Laws .................................................. 6
4.2 Insurance and Certain Other Laws .......................... 8
4.3 Securities Laws ........................................... 8
4.4 Notice of Certain Proceedings and Other Circumstances ..... 9
4.5 Prudential and the Underwriter To Provide Documents;
Information About AVIF .................................... 10
4.6 AVIF or AIM To Provide Documents; Information
About Prudential and the Underwriter ...................... 11
Section 5. Mixed and Shared Funding ................................... 12
5.1 General ................................................... 12
5.2 Disinterested Directors ................................... 12
5.3 Monitoring for Material Irreconcilable Conflicts .......... 13
5.4 Conflict Remedies ......................................... 13
5.5 Notice to Prudential ...................................... 15
5.6 Information Requested by Board of Directors ............... 15
5.7 Compliance with SEC Rules ................................. 15
5.8 Other Requirements ........................................ 15
i
<PAGE>
DESCRIPTION PAGE
- ----------- ----
Section 6. Termination ................................................ 15
6.1 Events of Termination ..................................... 15
6.2 Notice Requirement for Termination ........................ 17
6.3 Funds To Remain Available ................................. 17
6.4 Survival of Warranties and Indemnifications ............... 17
6.5 Continuance of Agreement for Certain Purposes ............ 18
Section 7. Parties To Cooperate Respecting Termination ................ 18
Section 8. Assignment ................................................. 18
Section 9. Notices .................................................... 18
Section 10. Voting Procedures ......................................... 19
Section 11. Foreign Tax Credits ....................................... 20
Section 12. Indemnification ........................................... 20
12.1 Of AVIF and AIM by Prudential and the Underwriter ........ 20
12.2 Of Prudential and the Underwriter by AVIF and AIM ........ 22
12.3 Effect of Notice ......................................... 24
12.4 Successors ............................................... 25
Section 13. Applicable Law ............................................ 25
Section 14. Execution in Counterparts ................................. 25
Section 15. Severability .............................................. 25
Section 16. Rights Cumulative ......................................... 25
Section 17. Headings .................................................. 25
ii
<PAGE>
PARTICIPATION AGREEMENT
THIS AGREEMENT, made and entered into as of the ______ day of , 1997
("Agreement"), by and among AIM Variable Insurance Funds, Inc., a Maryland
corporation ("AVIF"); A I M Distributors, Inc., a Delaware corporation ("AIM");
Prudential Insurance Company of America ("Prudential"), a New Jersey life
insurance company, on behalf of itself and each of its segregated asset accounts
listed in Schedule A hereto, as the parties hereto may amend from time to time
(each, an "Account," and collectively, the "Accounts"); and Prudential
Investment Management Services, L.L.C. ("PIMS"), a New Jersey corporation and
the principal underwriter of the Contracts and Policies referred to below
("Underwriter") (collectively, the "Parties").
WITNESSETH THAT:
WHEREAS, AVIF is registered with the Securities and Exchange Commission
("SEC") as an open-end management investment company under the Investment
Company Act of 1940, as amended (the "1940 Act"); and
WHEREAS, AVIF currently consists of nine separate series ("Series"), shares
("Shares") of each of which are registered under the Securities Act of 1933, as
amended (the "1933 Act") and are currently sold to one or more separate accounts
of life insurance companies to fund benefits under variable annuity contracts;
and
WHEREAS, AVIF will make Shares of each Series listed on Schedule A hereto
as the Parties hereto may amend from time to time (each a "Fund"; reference
herein to "AVIF" includes reference to each Fund, to the extent the context
requires) available for purchase by the Accounts; and
WHEREAS, AIM is a broker-dealer registered with the SEC under the
Securities Exchange Act of 1934 (the "1934 Act") and a member in good standing
of the National Association of Securities Dealers, Inc. ("NASD"); and
WHEREAS, AIM currently serves as the distributor for the Shares; and
WHEREAS, Prudential will be the issuer of certain variable annuity
contracts ("Contracts") and/or variable life insurance policies ("Policies") as
set forth on Schedule A hereto, as the Parties hereto may amend from time to
time, which Contracts and Policies (hereinafter collectively, the "Policies"),
if required by applicable law, will be registered under the 1933 Act; and
WHEREAS, Prudential will fund the Policies through the Accounts, each of
which may be divided into two or more subaccounts ("Subaccounts"; reference
herein to an "Account" includes reference to each Subaccount thereof to the
extent the context requires); and
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WHEREAS, Prudential will serve as the depositor of the Accounts, each of
which is registered as a unit investment trust investment company under the 1940
Act (or exempt therefrom), and the security interests deemed to be issued by the
Accounts under the Policies will be registered as securities under the 1933 Act
(or exempt therefrom); and
WHEREAS, to the extent permitted by applicable insurance laws and
regulations, Prudential intends to purchase Shares in one or more of the Funds
on behalf of the Accounts to fund the Policies; and
WHEREAS, the Underwriter is a broker-dealer registered with the SEC under
the 1934 Act and a member in good standing of the NASD;
NOW, THEREFORE, in consideration of the mutual benefits and promises
contained herein, the Parties hereto agree as follows:
SECTION 1. AVAILABLE FUNDS
1.1 AVAILABILITY.
AVIF will make Shares of each Fund available to Prudential for purchase and
redemption at net asset value and with no sales charges, subject to the terms
and conditions of this Agreement. The Board of Directors of AVIF may refuse to
sell Shares of any Fund to any person, or suspend or terminate the offering of
Shares of any Fund if such action is required by law or by regulatory
authorities having jurisdiction or if in the sole discretion of the Directors
acting in good faith and in light of their fiduciary duties under federal and
any applicable state laws, such action is deemed in the best interests of the
shareholders of such Fund.
1.2 ADDITION, DELETION OR MODIFICATION OF FUNDS.
The Parties hereto may agree, from time to time, to add other Funds to
provide additional funding media for the Policies, or to delete, combine, or
modify existing Funds, by amending Schedule A hereto. Upon such amendment to
Schedule A, any applicable reference to a Fund, AVIF, or its Shares herein shall
include a reference to any such additional Fund. Schedule A, as amended from
time to time, is incorporated herein by reference and is a part hereof.
1.3 NO SALES TO THE GENERAL PUBLIC.
AVIF represents and warrants that Shares of each Fund have been and will be
sold only to those entities listed under Section 817(h)(4) of the Code and the
regulations thereunder, as such Code Section and the regulations may be amended
from time to time.
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SECTION 2. PROCESSING TRANSACTIONS
2.1 TIMELY PRICING AND ORDERS.
(a) AVIF or its designated agent will use its best efforts to provide
Prudential with the net asset value per Share for each Fund by 5:30 p.m. Central
Time on each Business Day. As used herein, "Business Day" shall mean any day on
which (i) the New York Stock Exchange is open for regular trading, and (ii) AVIF
calculates the Fund's net asset value.
(b) Prudential will use the data provided by AVIF each Business Day
pursuant to paragraph (a) immediately above to calculate Account unit values and
to process transactions that receive that same Business Day's Account unit
values. Prudential will perform such Account processing the same Business Day,
and will place corresponding orders to purchase or redeem Shares with AVIF by
9:00 a.m. Central Time the following Business Day; provided, however, that AVIF
shall provide additional time to Prudential in the event that AVIF is unable to
meet the 5:30 p.m. time stated in paragraph (a) immediately above. Such
additional time shall be equal to the additional time that AVIF takes to make
the net asset values available to Prudential.
(c) Each order to purchase or redeem Shares will separately describe the
amount of Shares of each Fund to be purchased, redeemed or exchanged and will
not be netted; provided, however, with respect to payment of the purchase price
by Prudential and of redemption proceeds by AVIF, Prudential and AVIF shall net
purchase and redemption orders with respect to each Fund and shall transmit one
(1) net payment per Fund in accordance with Section 2.2, below. Each order to
purchase or redeem Shares shall also specify whether the order results from
purchase payments, surrenders, partial withdrawals, routine withdrawals of
charges, or requests for other transactions under Policies (collectively,
"Policy transactions").
(d) If AVIF provides materially incorrect Share net asset value
information, Prudential shall be entitled to an adjustment to the number of
Shares purchased or redeemed to reflect the correct net asset value per Share.
Any material error in the calculation or reporting of net asset value per Share,
dividend or capital gain information shall be reported promptly upon discovery
to Prudential.
2.2 TIMELY PAYMENTS.
Prudential will wire payment for net purchases to a custodial account
designated by AVIF by 1:00 p.m. Central Time on the same day as the order for
Shares is placed, to the extent practicable. AVIF will wire payment for net
redemptions to an account designated by Prudential by 1:00 p.m. Central Time on
the same day as the Order is placed, to the extent practicable, but in any event
within five (5) calendar days after the date the order is placed in order to
enable Prudential to pay redemption proceeds within the time specified in
Section 22(e) of the 1940 Act or such shorter period of time as may be required
by law.
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2.3 APPLICABLE PRICE.
(a) Share purchase and redemption orders that result from Policy
transactions and that Prudential receives prior to the close of regular trading
on the New York Stock Exchange on a Business Day will be executed at the net
asset values of the appropriate Funds next computed after receipt by AVIF or its
designated agent of the orders. For purposes of this Section 2.3(a), the
Underwriter shall be the designated agent of AVIF for receipt of orders relating
to Policy transactions on each Business Day and receipt by such designated agent
shall constitute receipt by AVIF; provided, that AVIF receives notice of such
orders by 9:00 a.m. Central Time on the next following Business Day or such
later time as computed in accordance with Section 2.1(b) hereof
(b) All other Share purchases and redemptions by Prudential will be
effected at the net asset values of the appropriate Funds next computed after
receipt by AVIF or its designated agent of the order therefor, and such orders
will be irrevocable.
2.4 DIVIDENDS AND DISTRIBUTIONS.
AVIF will furnish notice promptly to Prudential of any income dividends or
capital gain distributions payable on the Shares of any Fund. Prudential hereby
elects to reinvest all dividends and capital gains distributions in additional
Shares of the corresponding Fund at the ex-dividend date net asset values until
Prudential otherwise notifies AVIF in writing, it being agreed by the Parties
that the ex-dividend date and the payment date with respect to any dividend or
distribution will be the same Business Day. Prudential reserves the right to
revoke this election and to receive all such income dividends and capital gain
distributions in cash.
2.5 BOOK ENTRY.
Issuance and transfer of AVIF Shares will be by book entry only. Stock
certificates will not be issued to Prudential. Shares ordered from AVIF will be
recorded in an appropriate title for Prudential, on behalf of its Account.
SECTION 3. COSTS AND EXPENSES
3.1 GENERAL.
Except as otherwise specifically provided herein, each Party will bear all
expenses incident to its performance under this Agreement.
3.2 REGISTRATION.
(a) AVIF will bear the cost of its registering as a management investment
company under the 1940 Act and registering its Shares under the 1933 Act, and
keeping such registrations current and effective; including, without limitation,
the preparation of and filing with
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the SEC of Forms N-SAR and Rule 24f-2 Notices with respect to AVIF and its
Shares and payment of all applicable registration or filing fees with respect to
any of the foregoing.
(b) Prudential will bear the cost of registering, to the extent required,
each Account as a unit investment trust under the 1940 Act and registering units
of interest under the Policies under the 1933 Act and keeping such registrations
current and effective; including, without limitation, the preparation and filing
with the SEC of Forms N-SAR and Rule 24f-2 Notices with respect to each Account
and its units of interest and payment of all applicable registration or filing
fees with respect to any of the foregoing.
3.3 OTHER (NON-SALES-RELATED).
(a) AVIF will bear, or arrange for others to bear, the costs of preparing,
filing with the SEC and setting for printing AVIF's prospectus, statement of
additional information and any amendments or supplements thereto (collectively,
the "AVIF Prospectus"), periodic reports to shareholders, AVIF proxy material
and other shareholder communications.
(b) Prudential will bear the costs of preparing, filing with the SEC and
setting for printing each Account's prospectus, statement of additional
information and any amendments or supplements thereto (collectively, the
"Account Prospectus"), any periodic reports to Policy owners, annuitants or
participants under the Policies (collectively, "Participants"), voting
instruction solicitation material, and other Participant communications.
(c) Prudential or the Underwriter will print in quantity and deliver to
existing Participants the documents described in Section 3.3(b) above and the
documents provided by AVIF in camera ready or computer diskette form pursuant to
Section 4.6(b) hereof. The costs of printing in quantity and delivering to
existing Participants such documents will be borne by Prudential.
3.4 OTHER (SALES-RELATED).
The Underwriter will bear the expenses of distributing Fund Shares and the
Policies. These expenses would include by way of illustration, but are not
limited to, the costs of printing and distributing to offerees the AVIF
Prospectus and periodic reports of AVIF. These costs would also include the
costs of preparing, printing, and distributing sales literature and advertising
relating to the Funds, as well as filing such materials with, and obtaining
approval from, the SEC, the NASD, any state insurance regulatory authority, and
any other appropriate regulatory authority, to the extent required.
3.5 PARTIES TO COOPERATE.
Each Party agrees to cooperate with the others, as applicable, in arranging
to print, mail and/or deliver, in a timely manner, combined or coordinated
prospectuses or other materials of AVIF and the Accounts.
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SECTION 4. LEGAL COMPLIANCE
4.1 TAX LAWS.
(a) AVIF represents and warrants that each Fund is currently qualified as a
regulated investment company ("RIC") under Subchapter M of the Internal Revenue
Code of 1986, as amended (the "Code"), and represents that it will qualify and
maintain qualification of each Fund as a RIC. AVIF will notify Prudential
immediately upon having a reasonable basis for believing that a Fund has ceased
to so qualify or that it might not so qualify in the future.
(b) AVIF represents that it will comply and maintain each Fund's compliance
with the diversification requirements set forth in Section 817(h) of the Code
and Section 1.817-5(b) of the regulations under the Code. AVIF will notify
Prudential immediately upon having a reasonable basis for believing that a Fund
has ceased to so comply or that a Fund might not so comply in the future.
(c) Prudential agrees that if the Internal Revenue Service ("IRS") asserts
in writing in connection with any governmental audit or review of Prudential or,
to Prudential's knowledge, of any Participant, that any Fund has failed to
comply with the diversification requirements of Section 817(h) of the Code or
Prudential otherwise becomes aware of any facts that could give rise to any
claim against AVIF or its affiliates as a result of such a failure or alleged
failure:
(i) Prudential shall promptly notify AVIF of such assertion or
potential claim;
(ii) Prudential shall consult with AVIF as to how to minimize any
liability that may arise as a result of such failure or alleged failure;
(iii) Prudential shall use its best efforts to minimize any liability
of AVIF or its affiliates resulting from such failure, including, without
limitation, demonstrating, pursuant to Treasury Regulations Section
1.817-5(a)(2), to the Commissioner of the IRS that such failure was
inadvertent;
(iv) Prudential shall permit AVIF, its affiliates and their legal and
accounting advisors to participate in any conferences, settlement
discussions or other administrative or judicial proceeding or contests
(including judicial appeals thereof) with the IRS, any Participant or any
other claimant regarding any claims that could give rise to liability to
AVIF or its affiliates as a result of such a failure or alleged failure;
(v) any written materials to be submitted by Prudential to the IRS,
any Participant or any other claimant in connection with any of the
foregoing proceedings or contests (including, without limitation, any such
materials to be submitted to the
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IRS pursuant to Treasury Regulations Section 1817-5(a)(2)), (a) shall be
provided by Prudential to AVIF (together with any supporting information or
analysis) at least ten (10) business days' prior to the day on which such
proposed materials are to be submitted, and (b) shall not be submitted by
Prudential to any such person without the express written consent of AVIF
which shall not be unreasonably withheld;
(vi) Prudential shall provide AVIF or its affiliates and their
accounting and legal advisors with such cooperation as AVIF shall
reasonably request (including, without limitation, by permitting AVIF and
its accounting and legal advisors to review the relevant books and records
of Prudential) in order to facilitate review by AVIF or its advisors of any
written submissions provided to it pursuant to the preceding clause or its
assessment of the validity or amount of any claim against its arising from
such a failure or alleged failure;
(vii) Prudential shall not with respect to any claim of the IRS or any
Participant that would give rise to a claim against AVIF or its affiliates
(a) compromise or settle any claim, (b) accept any adjustment on audit, or
(c) forego any allowable administrative or judicial appeals, without the
express written consent of AVIF or its affiliates, which shall not be
unreasonably withheld, provided that Prudential shall not be required,
after exhausting all administrative penalties, to appeal any adverse
judicial decision unless AVIF or its affiliates shall have provided an
opinion of independent counsel to the effect that a reasonable basis exists
for taking such appeal; and provided further that the costs of any such
appeal shall be borne equally by the Parties hereto; and
(viii) AVIF and its affiliates shall have no liability as a result of
such failure or alleged failure if Prudential fails to comply with any of
the foregoing clauses (i) through (vii), and such failure could be shown to
have materially contributed to the liability.
Should AVIF or any of its affiliates refuse to give its written consent to
any compromise or settlement of any claim or liability hereunder, Prudential
may, in its discretion, authorize AVIF or its affiliates to act in the name of
Prudential in, and to control the conduct of, such conferences, discussions,
proceedings, contests or appeals and all administrative or judicial appeals
thereof; and in that event AVIF or its affiliates shall bear the fees and
expenses associated with the conduct of the proceedings that it is so authorized
to control; provided that in no event shall Prudential have any liability
resulting from AVIF's refusal to accept the proposed settlement or compromise
with respect to any failure caused by AVIF. As used in this Agreement, the term
"affiliates" shall have the same meaning as "affiliated person" as defined in
Section 2(a)(3) of the 1940 Act.
(d) Prudential represents and warrants that the Policies currently are and
will be treated as annuity, endowment, or life insurance contracts under
applicable provisions of the Code and that it will maintain such treatment;
Prudential will notify AVIF immediately upon having a
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reasonable basis for believing that any of the Policies have ceased to be so
treated or that they might not be so treated in the future.
(e) Prudential represents and warrants that each Account is a "segregated
asset account" and that interests in each Account are offered exclusively
through the purchase of or transfer into a "variable contract," within the
meaning of such terms under Section 817 of the Code and the regulations
thereunder. Prudential will continue to meet such definitional requirements, and
it will notify AVIF immediately upon having a reasonable basis for believing
that such requirements have ceased to be met or that they might not be met in
the future.
4.2 INSURANCE AND CERTAIN OTHER LAWS.
(a) AVIF and AIM will use their best efforts to comply with any applicable
state insurance laws or regulations, to the extent specifically requested in
writing by Prudential.
(b) Prudential represents and warrants that (i) it is an insurance company
duly organized, validly existing and in good standing under the laws of the
State of New Jersey and has full corporate power, authority and legal right to
execute, deliver and perform its duties and comply with its obligations under
this Agreement, (ii) it has legally and validly established and maintains each
Account as a segregated asset account under the New Jersey Insurance Code and
the regulations thereunder, and (iii) the Policies comply in all material
respects with all other applicable federal and state laws and regulations.
(c) AVIF represents and warrants that it is a corporation duly organized,
validly existing, and in good standing under the laws of the State of Maryland
and has full power, authority, and legal right to execute, deliver, and perform
its duties and comply with its obligations under this Agreement.
(d) AIM represents and warrants that it is a Delaware corporation duly
organized, validly existing, and in good standing under the laws of the State of
Delaware and has full power, authority and right to execute, deliver and perform
its duties and comply with its obligations under this Agreement.
(e) The Underwriter represents and warrants that it is a New Jersey
corporation duly organized, validly existing, and in good standing under the
laws of the State of New Jersey and has full power, authority, and legal right
to execute, deliver, and perform its duties and comply with its obligations
under this Agreement.
4.3 SECURITIES LAWS.
(a) Prudential and the Underwriter represent and warrant that (i) interests
in each Account pursuant to the Policies will be registered under the 1933 Act
to the extent required by the 1933 Act, (ii) the Policies will be duly
authorized for issuance and sold in compliance with all applicable federal and
state laws, including, without limitation, the 1933 Act, the 1934 Act, the 1940
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Act and New Jersey law, (iii) each Account is and will remain registered under
the 1940 Act, to the extent required by the 1940 Act, (iv) each Account does and
will comply in all material respects with the requirements of the 1940 Act and
the rules thereunder, to the extent required, (v) each Account's 1933 Act
registration statement relating to the Policies, together with any amendments
thereto, will at all times comply in all material respects with the requirements
of the 1933 Act and the rules thereunder, (vi) Prudential will amend the
registration statement for its Policies under the 1933 Act and for its Accounts
under the 1940 Act from time to time as required in order to effect the
continuous offering of its Policies or as may otherwise be required by
applicable law, and (vii) each Account Prospectus will at all times comply in
all material respects with the requirements of the 1933 Act and the rules
thereunder.
(b) AVIF and AIM represent and warrant that (i) Shares sold pursuant to
this Agreement will be registered under the 1933 Act to the extent required by
the 1933 Act and duly authorized for issuance and sold in compliance with
Maryland law, (ii) AVIF is and will remain registered under the 1940 Act to the
extent required by the 1940 Act, (iii) AVIF will amend the registration
statement for its Shares under the 1933 Act and itself under the 1940 Act from
time to time as required in order to effect the continuous offering of its
Shares, (iv) AVIF does and will comply in all material respects with the
requirements of the 1940 Act and the rules thereunder, (v) AVIF's 1933 Act
registration statement, together with any amendments thereto, will at all times
comply in all material respects with the requirements of the 1933 Act and rules
thereunder, and (vi) AVIF Prospectus will at all times comply in all material
respects with the requirements of the 1933 Act and the rules thereunder.
(c) AVIF will register and qualify its Shares for sale in accordance with
the laws of any state or other jurisdiction if and to the extent reasonably
deemed advisable by AVIF.
4.4 NOTICE OF CERTAIN PROCEEDINGS AND OTHER CIRCUMSTANCES.
(a) AVIF and/or AIM will immediately notify Prudential of (i) the issuance
by any court or regulatory body of any stop order, cease and desist order, or
other similar order with respect to AVIF's registration statement under the 1933
Act or AVIF Prospectus, (ii) any request by the SEC for any amendment to such
registration statement or AVIF Prospectus, (iii) the initiation of any
proceedings for that purpose or for any other purpose relating to the
registration or offering of AVIF's Shares, or (iv) any other action or
circumstances that may prevent the lawful offer or sale of Shares of any Fund in
any state or jurisdiction, including, without limitation, any circumstances in
which (a) such Shares are not registered and, in all material respects, issued
and sold in accordance with applicable state and federal law, or (b) such law
precludes the use of such Shares as an underlying investment medium of the
Policies issued or to be issued by Prudential. AVIF will make every reasonable
effort to prevent the issuance, with respect to any Fund, of any such stop
order, cease and desist order or similar order and, if any such order is issued,
to obtain the lifting thereof at the earliest possible time.
(b) Prudential and the Underwriter will immediately notify AVIF of (i) the
issuance by any court or regulatory body of any stop order, cease and desist
order, or other similar
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order with respect to each Account's registration statement under the 1933 Act
relating to the Policies or each Account Prospectus, (ii) any request by the SEC
for any amendment to such registration statement or Account Prospectus, (iii)
the initiation of any proceedings for that purpose or for any other purpose
relating to the registration or offering of each Account's interests pursuant to
the Policies, or (iv) any other action or circumstances that may prevent the
lawful offer or sale of said interests in any state or jurisdiction, including,
without limitation, any circumstances in which said interests are not registered
and, in all material respects, issued and sold in accordance with applicable
state and federal law. Prudential will make every reasonable effort to prevent
the issuance of any such stop order, cease and desist order or similar order
and, if any such order is issued, to obtain the lifting thereof at the earliest
possible time.
4.5 PRUDENTIAL AND THE UNDERWRITER TO PROVIDE DOCUMENTS: INFORMATION
ABOUT AVIF.
(a) Prudential or the Underwriter will provide to AVIF or its designated
agent at least one (1) complete copy of all SEC registration statements, Account
Prospectuses, reports, any preliminary and final voting instruction solicitation
material, applications for exemptions, requests for no-action letters, and all
amendments to any of the above, that relate to each Account or the Policies,
contemporaneously with the filing of such document with the SEC or other
regulatory authorities.
(b) The Underwriter will provide to AVIF or its designated agent at least
one (1) complete copy of each piece of sales literature or other promotional
material in which AVIF or any of its affiliates is named, at least five (5)
business days' prior to its use or such shorter period as the Parties hereto
may, from time to time, agree upon. No such material shall be used if AVIF or
its designated agent objects to such use within five (5) business days after
receipt of such material or such shorter period as the Parties hereto may, from
time to time, agree upon. AVIF hereby designates its investment adviser as the
entity to receive such sales literature or other promotional material, until
such time as AVIF appoints another designated agent by giving notice to
Prudential in the manner required by Section 9 hereof.
(c) Neither Prudential, the Underwriter, nor any of their respective
affiliates will give any information or make any representations or statements
on behalf of or concerning AVIF or its affiliates in connection with the sale of
the Policies other than (i) the information or representations contained in the
registration statement, including the AVIF Prospectus contained therein,
relating to Shares, as such registration statement and AVIF Prospectus may be
amended from time to time; or (ii) in reports or proxy materials for AVIF; or
(iii) in sales literature or other promotional material approved by AVIF, except
with the express written permission of AVIF.
(d) Prudential and the Underwriter shall adopt and implement procedures
reasonably designed to ensure that information concerning AVIF and its
affiliates that is intended for use only by brokers or agents selling the
Policies (i.e., information that is not intended for distribution to
Participants or offerees) ("broker only materials") is so used, and neither AVIF
nor
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any of its affiliates shall be liable for any losses, damages or expense
relating to the improper use of such broker only materials.
4.6 AVIF OR AIM TO PROVIDE DOCUMENTS: INFORMATION ABOUT PRUDENTIAL AND THE
UNDERWRITER.
(a) AVIF will provide to Prudential at least one (1) complete copy of all
SEC registration statements, AVIF Prospectuses, reports, any preliminary and
final proxy material, applications for exemptions, requests for no-action
letters, and all amendments to any of the above, that relate to AVIF or the
Shares of a Fund, contemporaneously with the filing of such document with the
SEC or other regulatory authorities.
(b) AVIF will provide to Prudential or the Underwriter camera ready or
computer diskette copies of all AVIF Prospectuses, proxy materials, periodic
reports to shareholders and other materials required by law to be sent to
Participants who have allocated any Policy value to a Fund. AVIF will provide
such copies to Prudential or the Underwriter in a timely manner so as to enable
Prudential or the Underwriter, as the case may be, to print and distribute such
materials within the time required by law to be furnished to Participants.
(c) AIM will provide to Prudential or its designated agent at least one (1)
complete copy of each piece of sales literature or other promotional material in
which Prudential, the Underwriter or any of their respective affiliates is
named, or that refers to the Policies, at least five (5) business days' prior to
its use or such shorter period as the Parties hereto may, from time to time,
agree upon. No such material shall be used if Prudential or its designated agent
objects to such use within five (5) business days after receipt of such material
or such shorter period as the Parties hereto may, from time to time, agree upon.
Prudential shall receive all such sales literature or other promotional
material, until such time as it appoints a designated agent by giving notice to
AVIF in the manner required by Section 9 hereof.
(d) Neither AVIF nor any of its affiliates will give any information or
make any representations or statements on behalf of or concerning Prudential,
the Underwriter, each Account, or the Policies other than (i) the information or
representations contained in the registration statement, including each Account
Prospectus contained therein, relating to the Policies, as such registration
statement and Account Prospectus may be amended from time to time; or (ii) in
reports or voting instruction materials for each Account; or (iii) in sales
literature or other promotional material approved by Prudential or its
affiliates, except with the express written permission of Prudential.
(e) AIM shall adopt and implement procedures reasonably designed to ensure
that information concerning Prudential, the Underwriter, and their respective
affiliates that is intended for use only by brokers or agents selling the
Policies (i.e., information that is not intended for distribution to
Participants or offerees) ("broker only materials") is so used, and neither
Prudential, the Underwriter, nor any of their respective affiliates shall be
liable for any losses, damages or expense relating to the improper use of such
broker only materials.
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4.7 DEFINITION OF SALES LITERATURE OR OTHER PROMOTIONAL MATERIAL.
For purposes of this Section 4.7, the phrase "sales literature or other
promotional material" includes, but is not limited to, advertisements (such as
material published, or designed for use in, a newspaper, magazine, or other
periodical, radio, television, telephone or tape recording, video tape display,
signs or billboards, motion pictures, or other public media), sales literature
(i.e., any written communication distributed or made generally available to
customers or the public, including brochures, circular, research reports, market
letters, form letters, seminar texts, reprints or excerpts of any other
advertisement, sales literature, or published articles), educational or training
materials or other communications distributed or made generally available to
some or all agents or employees, prospectuses, statements of additional
information, shareholder reports, and proxy materials and any other material
constituting sales literature of advertising under NASD rules, the 1940 Act or
the 1933 Act.
SECTION 5. MIXED AND SHARED FUNDING
5.1 GENERAL.
AVIF has received an order from the SEC exempting it from certain
provisions of the 1940 Act and rules thereunder so that AVIF may be available
for investment by certain other entities, including, without limitation,
separate accounts funding variable life insurance contracts, separate accounts
of insurance companies unaffiliated with Prudential, and trustees of qualified
pension and retirement plans (collectively, "Mixed and Shared Funding"). The
Parties recognize that the SEC has imposed terms and conditions for such orders
that are substantially identical to many of the provisions of this Section 5.
Sections 5.2 through 5.8 below shall apply, if and only if AVIF continues to
implement Mixed and Shared Funding, pursuant to such an exemptive order or
otherwise. AVIF hereby notifies Prudential that it may be appropriate to include
in the prospectus pursuant to which a Policy is offered disclosure regarding the
potential risks of Mixed and Shared Funding.
5.2 DISINTERESTED DIRECTORS.
AVIF agrees that its Board of Directors shall at all times consist of
directors a majority of whom (the "Disinterested Directors") are not interested
persons of AVIF within the meaning of Section 2(a)(19) of the 1940 Act and the
rules thereunder and as modified by any applicable orders of the SEC, except
that if this condition is not met by reason of the death, disqualification, or
bona fide resignation of any director, then the operation of this condition
shall be suspended (a) for a period of forty-five (45) days if the vacancy or
vacancies may be filled by the Board, (b) for a period of sixty (60) days if a
vote of shareholders is required to fill the vacancy or vacancies, or (c) for
such longer period as the SEC may prescribe by order upon application.
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5.3 MONITORING FOR MATERIAL IRRECONCILABLE CONFLICTS.
AVIF agrees that its Board of Directors will monitor for the existence of
any material irreconcilable conflict between the interests of the Participants
in all separate accounts of life insurance companies utilizing AVIF
("Participating Insurance Companies"), including each Account, and participants
in all qualified retirement and pension plans investing in AVIF ("Participating
Plans"). Prudential agrees to inform the Board of Directors of AVIF of the
existence of or any potential for any such material irreconcilable conflict of
which it is aware. The concept of a "material irreconcilable conflict" is not
defined by the 1940 Act or the rules thereunder, but the Parties recognize that
such a conflict may arise for a variety of reasons, including, without
limitation:
(a) an action by any state insurance or other regulatory authority;
(b) a change in applicable federal or state insurance, tax or
securities laws or regulations, or a public ruling, private letter ruling,
no-action or interpretative letter, or any similar action by insurance, tax
or securities regulatory authorities;
(c) an administrative or judicial decision in any relevant proceeding;
(d) the manner in which the investments of any Fund are being managed;
(e) a difference in voting instructions given by variable annuity
contract and variable life insurance contract Participants or by
Participants of different Participating Insurance Companies;
(f) a decision by a Participating Insurance Company to disregard the
voting instructions of Participants; or
(g) a decision by a Participating Plan to disregard the voting
instructions of Plan participants.
Consistent with the SEC's requirements in connection with exemptive orders
of the type referred to in Section 5.1 hereof, Prudential will assist the Board
of Directors in carrying out its responsibilities by providing the Board of
Directors with all information reasonably necessary for the Board of Directors
to consider any issue raised, including information as to a decision by
Prudential to disregard voting instructions of Participants.
5.4 CONFLICT REMEDIES.
(a) It is agreed that if it is determined by a majority of the members of
the Board of Directors or a majority of the Disinterested Directors that a
material irreconcilable conflict exists, Prudential will, if it is a
Participating Insurance Company for which a material irreconcilable conflict is
relevant, at its own expense and to the extent reasonably practicable (as
determined by a majority
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of the Disinterested Directors), take whatever steps are necessary to remedy or
eliminate the material irreconcilable conflict, which steps may include, but are
not limited to:
(i) withdrawing the assets allocable to some or all of the Accounts
from AVIF or any Fund and reinvesting such assets in a different investment
medium, including another Fund of AVIF, or submitting the question whether
such segregation should be implemented to a vote of all affected
Participants and, as appropriate, segregating the assets of any particular
group (e.g., annuity Participants, life insurance Participants or all
Participants) that votes in favor of such segregation, or offering to the
affected Participants the option of making such a change; and
(ii) establishing a new registered investment company of the type
defined as a "management company" in Section 4(3) of the 1940 Act or a new
separate account that is operated as a management company.
(b) if the material irreconcilable conflict arises because of Prudential's
decision to disregard Participant voting instructions and that decision
represents a minority position or would preclude a majority vote, Prudential may
be required, at AVIF's election, to withdraw each Account's investment in AVIF
or any Fund. No charge or penalty will be imposed as a result of such
withdrawal. Any such withdrawal must take place within six (6) months after AVIF
gives notice to Prudential that this provision is being implemented, and until
such withdrawal AVIF shall continue to accept and implement orders by Prudential
for the purchase and redemption of Shares of AVIF.
(c) if a material irreconcilable conflict arises because a particular state
insurance regulator's decision applicable to Prudential conflicts with the
majority of other state regulators, then Prudential will withdraw each Account's
investment in AVIF within six (6) months after AVIF's Board of Directors informs
Prudential that it has determined that such decision has created a material
irreconcilable conflict, and until such withdrawal AVIF shall continue to accept
and implement orders by Prudential for the purchase and redemption of Shares of
AVIF.
(d) Prudential agrees that any remedial action taken by it in resolving any
material irreconcilable conflict will be carried out at its expense and with a
view only to the interests of Participants.
(e) For purposes hereof, a majority of the Disinterested Directors will
determine whether or not any proposed action adequately remedies any material
irreconcilable conflict. In no event, however, will AVIF or any of its
affiliates be required to establish a new funding medium for any Policies.
Prudential will not be required by the terms hereof to establish a new funding
medium for any Policies if an offer to do so has been declined by vote of a
majority of Participants materially adversely affected by the material
irreconcilable conflict.
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5.5 NOTICE TO PRUDENTIAL.
AVIF will promptly make known in writing to Prudential the Board of
Directors' determination of the existence of a material irreconcilable conflict,
a description of the facts that give rise to such conflict and the implications
of such conflict.
5.6 INFORMATION REQUESTED BY BOARD OF DIRECTORS.
Prudential and AVIF (or its investment adviser) will at least annually
submit to the Board of Directors of AVIF such reports, materials or data as the
Board of Directors may reasonably request so that the Board of Directors may
fully carry out the obligations imposed upon it by the provisions hereof or any
exemptive application filed with the SEC to permit Mixed and Shared Funding, and
said reports, materials and data will be submitted at any reasonable time deemed
appropriate by the Board of Directors. All reports received by the Board of
Directors of potential or existing conflicts, and all Board of Directors actions
with regard to determining the existence of a conflict, notifying Participating
Insurance Companies and Participating Plans of a conflict, and determining
whether any proposed action adequately remedies a conflict, will be properly
recorded in the minutes of the Board of Directors or other appropriate records,
and such minutes or other records will be made available to the SEC upon
request.
5.7 COMPLIANCE WITH SEC RULES.
If at any time during which AVIF is serving as an investment medium for
variable life insurance Policies, 1940 Act Rules 6e-3(T) or, if applicable, 6e-2
are amended or Rule 6e-3 is adopted to provide exemptive relief with respect to
Mixed and Shared Funding, AVIF agrees that it will comply with the terms and
conditions thereof and that the terms of this Section 5 shall be deemed modified
if and only to the extent required in order also to comply with the terms and
conditions of such exemptive relief that is afforded by any of said rules that
are applicable.
5.8 OTHER REQUIREMENTS.
AVIF will require that each Participating Insurance Company and
Participating Plan enter into an agreement with AVIF that contains in substance
the same provisions as are set forth in Sections 4.1(b), 4.1(d), 4.3(a), 4.4(b),
4.5(a), 5, and 10 of this Agreement.
SECTION 6. TERMINATION
6.1 EVENTS OF TERMINATION.
Subject to Section 6.4 below, this Agreement will terminate as to a Fund:
(a) at the option of AVIF or Prudential upon the approval by (i) a
majority of the Disinterested Directors, or (ii) a majority vote of the
Shares of the affected Fund that are held in
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the corresponding Subaccount of an Account (pursuant to the procedures set
forth in Section 10 of this Agreement for voting Shares in accordance with
Participant instructions); provided, however, that the approvals described
in clauses (i) and (ii) above shall not be required if (1) the aggregate
account value under the Policies is less than one million dollars
($1,000,000,000) at the date the notice of termination is delivered, and
(2) thirty-six (36) full calendar months have expired following the date
the first Policy invested in any Fund; or
(b) at the option of AVIF or AIM upon institution of formal
proceedings against Prudential or its affiliates by the NASD, the SEC, any
state insurance regulator or any other regulatory body regarding
Prudential's obligations under this Agreement or related to the sale of the
Policies, the operation of each Account, or the purchase of Shares, if, in
each case, AVIF or AIM reasonably determines that such proceedings, or the
facts on which such proceedings would be based, have a material likelihood
of imposing material adverse consequences on the Fund with respect to which
the Agreement is to be terminated; or
(c) at the option of Prudential upon institution of formal proceedings
against AVIF, its principal underwriter, or its investment adviser by the
NASD, the SEC, or any state insurance regulator or any other regulatory
body regarding AVIF's obligations under this Agreement or related to the
operation or management of AVIF or the purchase of AVIF Shares, if, in each
case, Prudential reasonably determines that such proceedings, or the facts
on which such proceedings would be based, have a material likelihood of
imposing material adverse consequences on Prudential, or the Subaccount
corresponding to the Fund with respect to which the Agreement is to be
terminated; or
(d) at the option of any Party in the event that (i) the Fund's Shares
are not registered and, in all material respects, issued and sold in
accordance with any applicable federal or state law, or (ii) such law
precludes the use of such Shares as an underlying investment medium of the
Policies issued or to be issued by Prudential; or
(e) upon termination of the corresponding Subaccount's investment in
the Fund pursuant to
Section 5 hereof; or
(f) at the option of Prudential if the Fund ceases to qualify as a
'RIC under Subchapter M of the Code or under successor or similar
provisions, or if Prudential reasonably believes that the Fund may fail to
so qualify; or
(g) at the option of Prudential if the Fund fails to comply with
Section 817(h) of the Code or with successor or similar provisions, or if
Prudential reasonably believes that the Fund may fail to so comply; or
(h) at the option of AVIF or AIM if the Policies issued by Prudential
cease to qualify as annuity contracts or life insurance contracts under the
Code (other than by reason of the Fund's noncompliance with Section 817(h)
or Subchapter M of the Code) or if interests in an
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<PAGE>
Account under the Policies are not registered, where required, and, in all
material respects, are not issued or sold in accordance with any applicable
federal or state law; or
(i) upon another Party's material breach of any provision of this
Agreement; or
(j) at the option of either party upon six (6) months' advance written
notice.
6.2 NOTICE REQUIREMENT FOR TERMINATION.
No termination of this Agreement will be effective unless and until the
Party terminating this Agreement gives prior written notice to the other Party
to this Agreement of its intent to terminate, and such notice shall set forth
the basis for such termination. Furthermore:
(a) in the event that any termination is based upon the provisions of
Sections 6.1(a) or 6.1(e) hereof, such prior written notice shall be given
at least six (6) months in advance of the effective date of termination
unless a shorter time is required by law or is agreed to by the Parties
hereto;
(b) in the event that any termination is based upon the provisions of
Sections 6.1(b) or 6.1(c) hereof; such prior written notice shall be given
at least ninety (90) days in advance of the effective date of termination
unless a shorter time is required by law or is agreed to by the Parties
hereto; and
(c) in the event that any termination is based upon the provisions of
Sections 6.1(d), 6.1(f), 6.1(g), 6.1(h) or 6.1(i) hereof, such prior
written notice shall be given as soon as possible after the terminating
Party learns of the event causing termination to be required.
6.3 FUNDS TO REMAIN AVAILABLE.
Except (a) as necessary to implement Participant-initiated transactions,
(b) as required by state insurance laws or regulations, (c) as required pursuant
to Section 5 of this Agreement, or (d) with respect to any Fund as to which this
Agreement has terminated pursuant to Section 6.1 hereof, Prudential shall not
(i) redeem AVIF Shares attributable to the Policies (as opposed to AVIF Shares
attributable to Prudential's assets held in each Account), or (ii) prevent
Participants from allocating payments to or transferring amounts from a Fund
that was otherwise available under the Policies, until six (6) months after
Prudential shall have notified AVIF of its intention to do so.
6.4 SURVIVAL OF WARRANTIES AND INDEMNIFICATIONS.
All warranties and indemnifications will survive the termination of this
Agreement.
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6.5 CONTINUANCE OF AGREEMENT FOR CERTAIN PURPOSES.
If any Party terminates this Agreement with respect to any Fund pursuant to
Sections 6.1(b), 6.1(c), 6.1(d), 6.1(f), 6.1(g), 6.1(h) or 6.1(i) hereof, this
Agreement shall nevertheless continue in effect as to any Shares of that Fund
that are outstanding as of the date of such termination (the "Initial
Termination Date"). This continuation shall extend to the date as of which an
Account owns no Shares of the affected Fund.
SECTION 7. PARTIES TO COOPERATE RESPECTING TERMINATION
The Parties hereto agree to cooperate and give reasonable assistance to one
another in taking all necessary and appropriate steps for the purpose of
ensuring that an Account owns no Shares of a Fund after the Final Termination
Date with respect thereto, or, in the case of a termination pursuant to Section
6.1(a), the termination date specified in the notice of termination. Such steps
may include combining the affected Account with another Account, substituting
other mutual fund shares for those of the affected Fund, or otherwise
terminating participation by the Policies in such Fund.
SECTION 8. ASSIGNMENT
This Agreement may not be assigned by any Party, except with the written
consent of each other Party.
SECTION 9. NOTICES
Notices and communications required or permitted by Section 2 hereof will
be given by means mutually acceptable to the Parties concerned. Each other
notice or communication required or permitted by this Agreement will be given to
the following persons at the following addresses and facsimile numbers, or such
other persons, addresses or facsimile numbers as the Party receiving such
notices or communications may subsequently direct in writing:
AIM VARIABLE INSURANCE FUNDS, INC.
11 Greenway Plaza, Suite 100
Houston, Texas 77046
Facsimile: (713) 993-9185
Attn: Nancy L. Martin, Esq.
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<PAGE>
A I M DISTRIBUTORS, INC.
11 Greenway Plaza, Suite 100
Houston, Texas 77046
Facsimile: (713) 993-9185
Attn: Nancy L. Martin, Esq.
PRUDENTIAL INSURANCE COMPANY OF AMERICA
30 Scranton Office Park
Scranton, Pennsylvania 18507-1789
Facsimile: (717) 341-6334
Attn: Peter Scott, Esq.
PRUDENTIAL INVESTMENT MANAGEMENT SERVICES, L.L.C.
751 Broad Street, 21st Floor
Newark, New Jersey 07102
Facsimile: (201)643-5520
Attn: Michael Dorsey, Esq.
SECTION 10. VOTING PROCEDURES
Subject to the cost allocation procedures set forth in Section 3 hereof
Prudential will distribute all proxy material furnished by AVIF to Participants
to whom pass-through voting privileges are required to be extended and will
solicit voting instructions from Participants. Prudential will vote Shares in
accordance with timely instructions received from Participants. Prudential will
vote Shares that are (a) not attributable to Participants to whom pass-through
voting privileges are extended, or (b) attributable to Participants, but for
which no timely instructions have been received, in the same proportion as
Shares for which said instructions have been received from Participants, so long
as and to the extent that the SEC continues to interpret the 1940 Act to require
pass through voting privileges for Participants. Neither Prudential nor any of
its affiliates will in any way recommend action in connection with or oppose or
interfere with the solicitation of proxies for the Shares held for such
Participants. Prudential reserves the right to vote shares held in any Account
in its own right, to the extent permitted by law. Prudential shall be
responsible for assuring that each of its Accounts holding Shares calculates
voting privileges in a manner consistent with that of other Participating
Insurance Companies or in the manner required by any Mixed and Shared Funding
exemptive order that AVIF may obtain in the future. AVIF will notify Prudential
of any changes of interpretations or amendments to any Mixed and Shared Funding
exemptive order it obtains in the future.
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SECTION 11. FOREIGN TAX CREDITS
AVIF agrees to consult in advance with Prudential concerning any decision
to elect or not to elect pursuant to Section 853 of the Code to pass through the
benefit of any foreign tax credits to its shareholders.
SECTION 12. INDEMNIFICATION
12.1 OF AVIF AND AIM BY PRUDENTIAL AND THE UNDERWRITER.
(a) Except to the extent provided in Sections 12.1(b) and 12.1(c), below,
Prudential and the Underwriter each agree to indemnify and hold harmless AVIF,
its affiliates (including AIM), and each of their respective directors and
officers, and each person, if any, who controls AVIF or its affiliates
(including AIM) within the meaning of Section is of the 1933 Act (collectively,
the "Indemnified Parties" for purposes of this Section 12.1) against any and all
losses, claims, damages, liabilities (including amounts paid in settlement with
the written consent of Prudential) or actions in respect thereof (including, to
the extent reasonable, legal and other expenses), to which the Indemnified
Parties may become subject under any statute, regulation, at common law or
otherwise, insofar as such losses, claims, damages, liabilities or actions are
related to the sale or acquisition of AVIF's Shares and:
(i) arise out of or are based upon any untrue statement or alleged
untrue statement of any material fact contained in any Account's 1933 Act
registration statement, any Account Prospectus, the Policies, or sales
literature or advertising for the Policies (or any amendment or supplement
to any of the foregoing), or arise out of or are based upon the omission or
the alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading;
provided, that this agreement to indemnify shall not apply as to any
Indemnified Party if such statement or omission or such alleged statement
or omission was made in reliance upon and in conformity with information
furnished to Prudential or the Underwriter by or on behalf of AVIF for use
in any Account's 1933 Act registration statement, any Account Prospectus,
the Policies, or sales literature or advertising or otherwise for use in
connection with the sale of Policies or Shares (or any amendment or
supplement to any of the foregoing); or
(ii) arise out of or as a result of any other statements or
representations (other than statements or representations contained in
AVIF's 1933 Act registration statement, AVIF Prospectus, sales literature
or advertising of AVIF, or any amendment or supplement to any of the
foregoing, not supplied for use therein by or on behalf of Prudential or
the Underwriter and on which such persons have reasonably relied) or the
negligent, illegal or fraudulent conduct of Prudential, the Underwriter or
their respective affiliates or persons under their control (including,
without limitation, their employees and "Associated Persons," as that term
is defined
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in paragraph (m) of Article I of the NASD's By-Laws), in connection with
the sale or distribution of the Policies or Shares; or
(iii) arise out of or are based upon any untrue statement or alleged
untrue statement of any material fact contained in AVIF's 1933 Act
registration statement, AVIF Prospectus, sales literature or advertising of
AVIF, or any amendment or supplement to any of the foregoing, or the
omission or alleged omission to state therein a material fact required to
be stated therein or necessary to make the statements therein not
misleading if such a statement or omission was made in reliance upon and in
conformity with information furnished to AVIF or AIM by or on behalf of
Prudential, the Underwriter or their respective affiliates for use in
AVIF's 1933 Act registration statement, AVIF Prospectus, sales literature
or advertising of AVIF, or any amendment or supplement to any of the
foregoing; or
(iv) arise as a result of any failure by Prudential or the Underwriter
to perform the obligations, provide the services and furnish the materials
required of them under the terms of this Agreement, or any material breach
of any representation and/or warranty made by Prudential or the Underwriter
in this Agreement or arise out of or result from any other material breach
of this Agreement by Prudential or the Underwriter; or
(v) arise as a result of failure by the Policies issued by Prudential
to qualify as life insurance, endowment, or annuity contracts under the
Code, otherwise than by reason of any Fund's failure to comply with
Subchapter M or Section 817(h) of the Code.
(b) Neither Prudential nor the Underwriter shall be liable under this
Section 12.1 with respect to any losses, claims, damages, liabilities or actions
to which an Indemnified Party would otherwise be subject by reason of willful
misfeasance, bad faith, or gross negligence in the performance by that
Indemnified Party of its duties or by reason of that Indemnified Party's
reckless disregard of obligations or duties (i) under this Agreement, or (ii) to
AVIF or AIM.
(c) Neither Prudential nor the Underwriter shall be liable under this
Section 12.1 with respect to any action against an Indemnified Party unless AVIF
or AIM shall have notified Prudential or the Underwriter in writing within a
reasonable time after the summons or other first legal process giving
information of the nature of the action shall have been served upon such
Indemnified Party (or after such Indemnified Party shall have received notice of
such service on any designated agent), but failure to notify Prudential or the
Underwriter of any such action shall not relieve Prudential or the Underwriter
from any liability which it may have to the Indemnified Party against whom such
action is brought otherwise than on account of this Section 12.1. Except as
otherwise provided herein, in case any such action is brought against an
Indemnified Party, Prudential or the Underwriter shall be entitled to
participate, at its own expense, in the defense of such action and also shall be
entitled to assume the defense thereof; with counsel approved by the Indemnified
Party named in the action, which approval shall not be unreasonably withheld.
After
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notice from Prudential or the Underwriter to such Indemnified Party of its
election to assume the defense thereof; the Indemnified Party will cooperate
fully with Prudential and shall bear the fees and expenses of any additional
counsel retained by it, and Prudential will not be liable to such Indemnified
Party under this Agreement for any legal or other expenses subsequently incurred
by such Indemnified Party independently in connection with the defense thereof,
other than reasonable costs of investigation.
12.2 OF PRUDENTIAL AND THE UNDERWRITER BY AVIF AND AIM.
(a) Except to the extent provided in Sections 4. l(c)(vii), 12.2(d),
12.2(e) and 12.2(f), below, AVIF and AIM each agree to indemnify and hold
harmless Prudential, the Underwriter, their respective affiliates, and each of
their respective directors and officers, and each person, if any, who controls
Prudential, the Underwriter, or their respective affiliates within the meaning
of Section 15 of the 1933 Act (collectively, the Indemnified Parties" for
purposes of this Section 12.2) against any and all losses, claims, damages,
liabilities (including amounts paid in settlement with the written consent of
AVIF and AIM) or actions in respect thereof (including, to the extent
reasonable, legal and other expenses), to which the Indemnified Parties may
become subject under any statute, regulation, at common law, or otherwise,
insofar as such losses, claims, damages, liabilities or actions are related to
the sale or acquisition of AVIF's Shares and:
(i) arise out of or are based upon any untrue statement or alleged
untrue statement of any material fact contained in AVIF's 1933 Act
registration statement, AVIF Prospectus or sales literature or advertising
of AVIF (or any amendment or supplement to any of the foregoing), or arise
out of or are based upon the omission or the alleged omission to state
therein a material fact required to be stated therein or necessary to make
the statements therein not misleading; provided, that this agreement to
indemnify shall not apply as to any Indemnified Party if such statement or
omission or such alleged statement or omission was made in reliance upon
and in conformity with information furnished to AVIF or its affiliates by
or on behalf of Prudential or its affiliates for use in AVIF's 1933 Act
registration statement, AVIF Prospectus, or in sales literature or
advertising (or any amendment or supplement to any of the foregoing); or
(ii) arise out of or as a result of any other statements or
representations (other than statements or representations contained in any
Account's 1933 Act registration statement, any Account Prospectus, sales
literature or advertising for the Policies, or any amendment or supplement
to any of the foregoing, not supplied for use therein by or on behalf of
AVIF or its affiliates and on which such persons have reasonably relied) or
the negligent, illegal or fraudulent conduct of AVIF, its affiliates or
persons under their control (including, without limitation, their employees
and "Associated Persons"), in connection with the sale or distribution of
AVIF Shares; or
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(iii) arise out of or are based upon any untrue statement or alleged
untrue statement of any material fact contained in any Account's 1933 Act
registration statement, any Account Prospectus, sales literature or
advertising covering the Policies, or any amendment or supplement to any of
the foregoing, or the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the
statements therein not misleading, if such statement or omission was made
in reliance upon and in conformity with information furnished to
Prudential, the Underwriter, or their respective affiliates by or on behalf
of AVIF or AIM for use in any Account's 1933 Act registration statement,
any Account Prospectus, sales literature or advertising covering the
Policies, or any amendment or supplement to any of the foregoing; or
(iv) arise as a result of any failure by AVIF or AIM to perform the
obligations, provide the services and furnish the materials required of it
under the terms of this Agreement, or any material breach of any
representation and/or warranty made by AVIF or AIM in this Agreement or
arise out of or result from any other material breach of this Agreement by
AVIF or AIM.
(b) Except to the extent provided in Sections 4. l(c)(vii), 12.2(d),
12.2(e) and 12.2(f) hereof; AVIF and AIM each agree to indemnify and hold
harmless the Indemnified Parties from and against any and all losses, claims,
damages, liabilities (including amounts paid in settlement thereof with, except
as set forth in Section 12.2(c) below, the written consent of AVIF and AIM) or
actions in respect thereof (including, to the extent reasonable, legal and other
expenses) to which the Indemnified Parties may become subject directly or
indirectly under any statute, at common law or otherwise, insofar as such
losses, claims, damages, liabilities or actions directly or indirectly result
from or arise out of the failure of any Fund to operate as a regulated
investment company in compliance with (i) Subchapter M of the Code and
regulations thereunder, or (ii) Section 817(h) of the Code and regulations
thereunder, including, without limitation, any income taxes and related
penalties, rescission charges, liability under state law to Participants
asserting liability against Prudential or the Underwriter pursuant to the
Policies, the costs of any ruling and closing agreement or other settlement with
the IRS, and the cost of any substitution by Prudential of Shares of another
investment company or portfolio for those of any adversely affected Fund as a
funding medium for each Account that Prudential reasonably deems necessary or
appropriate as a result of the noncompliance.
(c) The written consent of AVIF and AIM referred to in Section 12.2(b)
above shall not be required with respect to amounts paid in connection with any
ruling and closing agreement or other settlement with the IRS.
(d) Neither AVIF nor AIM shall be liable under this Section 12.2 with
respect to any losses, claims, damages, liabilities or actions to which an
Indemnified Party would otherwise be subject by reason of willful misfeasance,
bad faith, or gross negligence in the performance by that Indemnified Party of
its duties or by reason of such Indemnified Party's reckless disregard of its
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obligations and duties (i) under this Agreement, or (ii) to Prudential, each
Account, the Underwriter or Participants.
(e) Neither AVIF nor AIM shall be liable under this Section 12.2 with
respect to any action against an Indemnified Party unless the Indemnified Party
shall have notified AVIF or AIM in writing within a reasonable time after the
summons or other first legal process giving information of the nature of the
action shall have been served upon such Indemnified Party (or after such
Indemnified Party shall]] have received notice of such service on any designated
agent), but failure to notify AVIF or AIM of any such action shall not relieve
AVIF or AIM from any liability which it may have to the Indemnified Party
against whom such action is brought otherwise than on account of this Section
12.2. Except as otherwise provided herein, in case any such action is brought
against an Indemnified Party, AVIF or AIM will be entitled to participate, at
its own expense, in the defense of such action and also shall be entitled to
assume the defense thereof (which shall include, without limitation, the conduct
of any ruling request and closing agreement or other settlement proceeding with
the IRS), with counsel approved by the Indemnified Party named in the action,
which approval shall not be unreasonably withheld. After notice from AVIF or AIM
to such Indemnified Party of its election to assume the defense thereof, the
Indemnified Party will cooperate fully with AVIF and shall bear the fees and
expenses of any additional counsel retained by it, and AVIF will not be liable
to such Indemnified Party under this Agreement for any legal or other expenses
subsequently incurred by such Indemnified Party independently in connection with
the defense thereof other than reasonable costs of investigation.
(f) In no event shall either AVIF or AIM be liable under the
indemnification provisions contained in this Agreement to any individual or
entity, including, without limitation, Prudential, the Underwriter, or any other
Participating Insurance Company or any Participant, with respect to any losses,
claims, damages, liabilities or expenses that arise out of or result from (i) a
breach of any representation, warranty, and/or covenant made by Prudential or
the Underwriter hereunder or by any Participating Insurance Company under an
agreement containing substantially similar representations, warranties and
covenants, (ii) the failure by Prudential or any Participating Insurance Company
to maintain its segregated asset account (which invests in any Fund) as a
legally and validly established segregated asset account under applicable state
law and as a duly registered unit investment trust under the provisions of the
1940 Act (unless exempt therefrom), or (iii) the failure by Prudential or any
Participating Insurance Company to maintain its variable annuity and/or variable
life insurance contracts (with respect to which any Fund serves as an underlying
funding vehicle) as life insurance, endowment or annuity contracts under
applicable provisions of the Code.
12.3 EFFECT OF NOTICE.
Any notice given by the indemnifying Party to an Indemnified Party referred
to in Sections 12.1(c) or 12.2(e) above of participation in or control of any
action by the indemnifying Party will in no event be deemed to be an admission
by the indemnifying Party of liability, culpability or responsibility, and the
indemnifying Party will remain free to contest liability with respect to the
claim among the Parties or otherwise.
24
<PAGE>
12.4 SUCCESSORS.
This Agreement shall be binding on successors of any Party who shall be
entitled, among other things, to the benefits of the indemnification contained
in this Section 12.
12.5 ASSIGNMENTS.
This Agreement shall not be assigned by any party hereto without the prior
written consent of all the parties, which consent shall not be unreasonably
withheld.
SECTION 13. APPLICABLE LAW
This Agreement will be construed and the provisions hereof interpreted
under and in accordance with Maryland law, without regard for that state's
principles of conflict of laws.
SECTION 14. EXECUTION IN COUNTERPARTS
This Agreement may be executed simultaneously in two or more counterparts,
each of which taken together will constitute one and the same instrument.
SECTION 15. SEVERABILITY
If any provision of this Agreement is held or made invalid by a court
decision, statute, rule or otherwise, the remainder of this Agreement will not
be affected thereby.
SECTION 16. RIGHTS CUMULATIVE
The rights, remedies and obligations contained in this Agreement are
cumulative and are in addition to any and all rights, remedies and obligations,
at law or in equity, that the Parties are entitled to under federal and state
laws.
SECTION 17. HEADINGS
The Table of Contents and headings used in this Agreement are for purposes
of reference only and shall not limit or define the meaning of the provisions of
this Agreement.
_______________________________________________
25
<PAGE>
IN WITNESS WHEREOF, the Parties have caused this Agreement to be executed
in their names and on their behalf by and through their duly authorized officers
signing below.
AIM VARIABLE INSURANCE FUNDS, INC.
Attest: By:
--------------------------- ------------------------------
Nancy L. Martin Name:
Assistant Secretary ------------------------------
Title:
------------------------------
A I M DISTRIBUTORS, INC.
Attest: By:
--------------------------- -------------------------------
Nancy L. Martin Name:
Assistant Secretary -------------------------------
Title:
-------------------------------
PRUDENTIAL INSURANCE COMPANY OF
AMERICA, on behalf of itself and its
separate accounts
Attest: By:
--------------------------- -------------------------------
Name: Name:
--------------------------- -------------------------------
Title: Title:
--------------------------- --------------------------------
PRUDENTIAL INVESTMENT MANAGEMENT
SERVICES, L.L.C.
Attest: By:
--------------------------- -------------------------------
Name: Name:
--------------------------- -------------------------------
Title: Title:
--------------------------- --------------------------------
26
<PAGE>
SCHEDULE "A"
FUNDS AVAILABLE UNDER THE POLICIES
AIM V.I. Capital Appreciation Fund
AIM V.I. Diversified Income Fund
AIM V I. Global Utilities Fund
AIM V.I. Government Securities Fund
AIM V.I. Growth Fund
AIM V.I. Growth and Income Fund
AIM V.I. International Equity Fund
AIM V.I. Value Fund
SEPARATE ACCOUNTS UTILIZING THE FUNDS
Prudential Discovery Select Group Variable Contract Account,
established February 11, 1997
POLICIES FUNDED BY THE SEPARATE ACCOUNTS
Discovery Select Group Annuity Contract
27
PARTICIPATION AGREEMENT
AMONG
T. ROWE PRICE INTERNATIONAL SERIES, INC.,
T. ROWE PRICE EQUITY SERIES, INC.,
T. ROWE PRICE INVESTMENT SERVICES, INC.,
AND
PRUDENTIAL LIFE INSURANCE COMPANY OF AMERICA
THIS AGREEMENT, made and entered into as of this 25th day of April, 1997 by
and among Prudential Life Insurance Company of America (hereinafter, the
"Company"), a New Jersey insurance company, on its own behalf and on behalf of
each segregated asset account of the Company set forth on Schedule A hereto as
may be amended from time to time (each account hereinafter referred to as the
"Account"), and the undersigned funds, each, a corporation organized under the
laws of Maryland (each hereinafter referred to as the "Fund") and T. Rowe Price
Investment Services, Inc. (hereinafter the "Underwriter"), a Maryland
corporation.
WHEREAS, the Fund engages in business as an open-end management investment
company and is or will be available to act as the investment vehicle for
separate accounts established for variable life insurance and variable annuity
contracts (the "Variable Insurance Products") to be offered by insurance
companies which have entered into participation agreements with the Fund and
Underwriter (hereinafter "Participating Insurance Companies"); and
WHEREAS, the beneficial interest in the Fund is divided into several series
of shares, each designated a "Portfolio" and representing the interest in a
particular managed portfolio of securities and other assets; and
WHEREAS, the Fund has obtained an order from the Securities and Exchange
Commission ("SEC") granting Participating Insurance Companies and variable
annuity and variable life insurance separate accounts exemptions from the
provisions of sections 9(a), 13(a), 15(a), and 15(b) of the Investment Company
Act of 1940, as amended, (hereinafter the "1940 Act") and Rules 6e-2(b)(15) and
6e-3(T) (b)(15) thereunder, to the extent necessary to permit shares of the Fund
to be sold to and held by variable annuity and variable life insurance separate
accounts of both affiliated and unaffiliated life insurance companies
(hereinafter the "Shared Funding Exemptive Order"); and
WHEREAS, the Fund is registered as an open-end management investment
company under the 1940 Act and shares of the Portfolios are registered under the
Securities Act of 1933, as amended (hereinafter the "1933 Act"); and
<PAGE>
-2-
WHEREAS, T. Rowe Price Associates, Inc. and Rowe Price-Fleming
International, Inc. (each hereinafter referred to as the "Adviser") are each
duly registered as an investment adviser under the Investment Advisers Act of
1940, as amended, and any applicable state securities laws; and
WHEREAS, the Company has issued or will issue certain variable life
insurance or variable annuity contracts (including any certificates thereunder)
supported wholly or partially by the Account (the "Contracts"), and said
Contracts are listed in Schedule A hereto, as it may be amended from time to
time by mutual written agreement; and
WHEREAS, the Account is duly established and maintained as a segregated
asset account, established by resolution of the Board of Directors of the
Company, on the date shown for such Account on Schedule A hereto, to set aside
and invest assets attributable to the aforesaid Contracts; and
WHEREAS, the Company has registered or will register the Account as a unit
investment trust under the 1940 Act or will not register the Account in proper
reliance upon an exclusion from registration under the 1940 Act; and
WHEREAS, the Underwriter is registered as a broker dealer with the SEC
under the Securities Exchange Act of 1934, as amended (hereinafter the "1934
Act"), and is a member in good standing of the National Association of
Securities Dealers, Inc. (hereinafter "NASD"); and
WHEREAS, to the extent permitted by applicable insurance laws and
regulations, the Company intends to purchase shares in the Portfolios listed in
Schedule A hereto, as it may be amended from time to time by mutual written
agreement (the "Designated Portfolios") on behalf of the Account to fund the
aforesaid Contracts, and the Underwriter is authorized to sell such shares to
unit investment trusts such as the Account at net asset value;
NOW, THEREFORE, in consideration of their mutual promises, the Company, the
Fund and the Underwriter agree as follows:
ARTICLE I. SALE OF FUND SHARES
1.1 The Underwriter agrees to sell to the Company those shares of the
Designated Portfolios which the Account orders, executing such orders on a daily
basis at the net asset value next computed after receipt by the Fund or its
designee of the order for the shares of the Designated Portfolios.
1.2 The Fund agrees to make shares of the Designated Portfolios available
for purchase at the applicable net asset value per share by the Company and the
Account on those days on which the Fund calculates its net asset value pursuant
to rules of the SEC, and the Fund shall use its best efforts to calculate such
net asset value on each day which the New York Stock Exchange is open for
trading. Notwithstanding the foregoing, the Board of Directors of the Fund
(hereinafter the "Board") may refuse to sell shares of any Designated Portfolio
to any person, or suspend or terminate the offering of shares of any Designated
Portfolio if such action is required by law or by regulatory authorities having
jurisdiction, or is, in the sole discretion of the Board acting in good faith
and in
<PAGE>
-3-
light of their fiduciary duties under federal and any applicable state laws,
necessary in the best interests of the shareholders of such Designated
Portfolio.
1.3 The Fund and the Underwriter agree that shares of the Fund will be sold
only to Participating Insurance Companies and their separate accounts as
provided under Section 817(h)(4) of the Internal Revenue Code of 1986, as
amended (the "Code"). No shares of any Designated Portfolios will be sold to the
general public. The Fund and the Underwriter will not sell Fund shares to any
insurance company or separate account unless an agreement containing provisions
substantially the same as Articles I and VII of this Agreement is in effect to
govern such sales.
1.4 The Fund agrees to redeem, on the Company's request, any full or
fractional shares of the Designated Portfolios held by the Company, executing
such requests on a daily basis at the net asset value next computed after
receipt by the Fund or its designee of the request for redemption, except that
the Fund reserves the right to suspend the right of redemption or postpone the
date of payment or satisfaction upon redemption consistent with Section 22(e) of
the 1940 Act and any sales thereunder, and in accordance with the procedures and
policies of the Fund as described in the then current prospectus.
1.5 For purposes of Sections 1.1 and 1.4, the Company shall be the designee
of the Fund for receipt of purchase and redemption orders from the Account, and
receipt by such designee shall constitute receipt by the Fund; provided that the
Company receives the order by 4:00 p.m. Baltimore time and the Fund receives
notice of such order by 9:30 a.m. Baltimore time on the next following Business
Day. "Business Day" shall mean any day on which the New York Stock Exchange is
open for trading and on which the Fund calculates its net asset value pursuant
to the rules of the SEC.
1.6 The Company agrees to purchase and redeem the shares of each Designated
Portfolio offered by the then current prospectus of the Fund and in accordance
with the provisions of such prospectus.
1.7 The Company shall pay for Fund shares on the next Business Day after
receipt of an order to purchase Fund shares. Payment shall be in federal funds
transmitted by wire by 4:00 p.m. Baltimore time. If payment in Federal Funds for
any purchase is not received or is received by the Fund after 4:00 p.m.
Baltimore time on such Business Day, the Company shall promptly, upon the Fund's
request, reimburse the Fund for any charges, costs, fees, interest or other
expenses incurred by the Fund in connection with any advances to, or borrowings
or overdrafts by, the Fund, or any similar expenses incurred by the Fund, as a
result portfolio transactions effected by the Fund based upon such purchase
request. For purposes of Section 2.8 and 2.9 hereof, upon receipt by the Fund of
the federal funds so wired, such funds shall cease to be the responsibility of
the Company and shall become the responsibility of the Fund.
1.8 Issuance and transfer of the Fund's shares will be by book entry only.
Stock certificates will not be issued to the Company or any Account. Shares
ordered from the Fund will be recorded in an appropriate title for each Account
or the appropriate subaccount of each Account.
1.9 The Fund shall furnish same day notice (by wire or telephone, followed
by written confirmation) to the Company of any income, dividends or capital gain
distributions payable on the Designated Portfolios' shares. Any material error
in the income dividend, or capital gain distribution
<PAGE>
-4-
information shall be reported to the Company promptly upon discovery. The
Company hereby elects to receive all such income, dividends, and capital gain
distributions as are payable on Designated Portfolio shares in additional shares
of that Portfolio. The Company reserves the right to revoke this election and to
receive all such income dividends and capital gain distributions in cash. The
Fund shall notify the Company of the number of shares so issued as payment of
such dividends and distributions. The Fund shall use its best efforts to furnish
advance notice of the day such dividends and distributions are expected to be
paid.
1.10 The Fund shall make the net asset value per share for each Designated
Portfolio available to the Company on a daily basis as soon as reasonably
practical after the net asset value per share is calculated (normally by 6:30
p.m. Baltimore time) and shall use its best efforts to make such net asset value
per share available by 7 p.m. Baltimore time. If the net asset value is
materially incorrect through no fault of the Company, the Company on behalf of
each Account, shall be entitled to an adjustment to the number of shares
purchased or redeemed to reflect the correct net asset value in accordance with
Fund procedures. Any material error in the net asset value shall be reported to
the Company promptly upon discovery. Any administrative or other costs or losses
incurred for correcting underlying Contract owner accounts shall be at Company's
expense.
1.11 The Parties hereto acknowledge that the arrangement contemplated by
this Agreement is not exclusive; the Fund's shares may be sold to other
insurance companies (subject to Section 1.3 and Article VI hereof) and the cash
value of the Contracts may be invested in other investment companies.
ARTICLE II. REPRESENTATIONS AND WARRANTIES
2.1 The Company represents and warrants that the Contracts are or will be
registered under the 1933 Act or that the Contracts are not registered because
the are properly exempt from registration under the 1933 Act or will be offered
exclusively in transactions that are properly exempt from registration under the
1933 Act. The Company further represents and warrants that the Contracts will be
issued and sold in compliance in all material respects with all applicable
federal and state laws and that the sale of the Contracts shall comply in all
material respects with state insurance suitability requirements. The Company
further represents and warrants that it is an insurance company duly organized
and in good standing under applicable law and that it has legally and validly
established the Account prior to any issuance or sale thereof as a segregated
asset account under the New Jersey insurance laws and has registered or, prior
to any issuance or sale of the Contracts, will register the Account as a unit
investment trust in accordance with the provisions of the 1940 Act to serve as a
segregated investment account for the Contracts or that it has not registered
the Account in proper reliance upon an exclusion from registration under the
1940 Act.
2.2 The Fund represents and warrants that Fund shares sold pursuant to this
Agreement shall be registered under the 1933 Act, duly authorized for issuance
and sold in compliance with the laws of the state of New Jersey and all
applicable federal and state securities laws and that the Fund is and shall
remain registered under the 1940 Act. The Fund shall amend the Registration
Statement for its shares under the 1933 Act and the 1940 Act from time to time
as required in order to effect the continuous offering of its shares. The Fund
shall register and qualify the shares for sale in accordance with the laws of
the various states only if and to the extent deemed advisable by the Fund or the
Underwriter.
<PAGE>
-5-
2.3 The Fund currently does not intend to make any payments to finance
distribution expenses pursuant to Rule 12b- 1 under the 1940 Act, although it
may make such payments in the future. To the extent that it decides to finance
distribution expenses pursuant to Rule 12b-l, the Fund will undertake to have a
Board, a majority of whom are not interested persons of the Fund, formulate and
approve any plan pursuant to Rule 12b-l under the 1940 Act to finance
distribution expenses.
2.4 The Fund makes no representations as to whether any aspect of its
operations, including but not limited to, investment policies, fees and
expenses, complies with the insurance and other applicable laws of the various
states, except that the Fund represents that the Fund's investment policies,
fees and expenses are and shall at all times remain in compliance with the laws
of the state of New Jersey to the extent required to perform this Agreement.
2.5 The Fund represents that it is lawfully organized and validly existing
under the laws of the State of Maryland and that it does and will comply in all
material respects with the 1940 Act.
2.6 The Underwriter represents and warrants that it is a member in good
standing of the NASD and is registered as a broker-dealer with the SEC. The
Underwriter further represents that it will sell and distribute the Fund shares
in accordance with the laws of the State of New Jersey and any applicable state
and federal securities laws.
2.7 The Underwriter represents and warrants that the Adviser is and shall
remain duly registered under all applicable federal and state securities laws
and that the Adviser shall perform its obligations for the Fund in compliance in
all material respects with the laws of the State of New Jersey and any
applicable state and federal securities laws.
2.8 The Fund and the Underwriter represent and warrant that all of their
directors, officers, employees, investment advisers and other individuals or
entities dealing with the money and/or securities of the Fund are and shall
continue to be at all times covered by a blanket fidelity bond or similar
coverage for the benefit of the Fund in an amount not less than the minimum
coverage as required currently by Rule 17g-l of the 1940 Act or related
provisions as may be promulgated from time to time. The aforesaid bond shall
include coverage for larceny and embezzlement and shall be issued by a reputable
bonding company.
2.9 The Company represents and warrants that all of its directors,
officers, employees, and other individuals/entities employed or controlled by
the Company dealing with the money and/or securities of the Fund are covered by
a blanket fidelity bond or similar coverage in an amount not less than $5
million. The aforesaid bond includes coverage for larceny and embezzlement and
is issued by a reputable bonding company. The Company agrees that any amounts
received under such bond in connection with claims that arise from the
arrangements described in this Agreement will be held by the Company for the
benefit of the Fund. The Company agrees to make all reasonable efforts to see
that this bond or another bond containing these provisions is always in effect,
and agrees to notify the Fund and the Underwriter in the event that such
coverage no longer applies. The Company agrees to exercise its best efforts to
ensure that other individuals/entities not employed or controlled by the Company
and dealing with the money and/or securities of the Fund maintain a similar bond
or coverage in a reasonable amount.
<PAGE>
-6-
ARTICLE III. PROSPECTUSES. STATEMENTS OF ADDITIONAL INFORMATION
AND PROXY STATEMENTS: VOTING
3.1 The Underwriter shall provide the Company (at the Company's expense)
with as many copies of the Fund's current prospectus (describing only the
Designated Portfolios listed on Schedule A) as the Company may reasonably
request. If requested by the Company in lieu thereof, the Fund shall provide
such documentation (including a final copy of the new prospectus as set in type
or on a diskette, at the Fund's expense) and other assistance as is reasonably
necessary in order for the Company (at the Company's expense) once each year (or
more frequently if the prospectus for the Fund is amended) to have the
prospectus (which shall include an offering memorandum, if any) for the
Contracts, prospectuses for other mutual funds in which the Contracts may be
invested, and the Fund's prospectus printed together in one document.
3.2 The Fund's prospectus shall state that the current Statement of
Additional Information ("SAI") for the Fund is available from the Company (or,
in the Fund's discretion, from the Fund), and the Underwriter (or the Fund), at
its expense, shall print, or otherwise reproduce, and provide a copy of such SAI
free of charge to the Company for itself and for any owner of a Contract who
requests such SAI.
3.3 The Fund, at its expense, shall provide the Company with copies of its
proxy material, reports to shareholders, and other communications to
shareholders in such quantity as the Company shall reasonably require for
distributing to Contract owners in the Fund. The Underwriter (at the Company's
expense) shall provide the Company with copies of the Fund's annual and
semi-annual reports to shareholders in such quantity as the Company shall
reasonably request for use in connection with offering the Variable Contracts
issued by the Company. If requested by the Company in lieu thereof, the
Underwriter shall provide such documentation (which may include a final copy of
the Fund's annual and semi-annual reports as set in type or on diskette) and
other assistance as is reasonably necessary in order for the Company (at the
Company's expense) to print such shareholder communications for distribution to
Contract owners.
3.4 The Company shall:
(i) solicit voting instructions from Contract owners;
(ii) vote the Fund shares in accordance with instructions received
from Contract owners; and
(iii) vote Fund shares for which no instructions have been received in
the same proportion as Fund shares of such Designated Portfolio
for which instructions have been received,
so long as and to the extent that the SEC continues to interpret the 1940 Act to
require pass-through voting privileges for variable contract owners or to the
extent otherwise required by law. The Company reserves the right to vote Fund
shares held in any segregated asset account in its own right, to the extent
permitted by law.
<PAGE>
-7-
3.5 Participating Insurance Companies shall be responsible for assuring
that each of their separate accounts participating in a Designated Portfolio
calculates voting privileges as required by the Shared Funding Exemptive Order
and consistent with any reasonable standards that the Fund may adopt.
3.6 The Fund will comply with all provisions of the 1940 Act requiring
voting by shareholders, and in particular the Fund will either provide for
annual meetings or comply with Section 16(c) of the 1940 Act (although the Fund
is not one of the trusts described in Section 16(c) of that Act) as well as with
Sections 16(a) and, if and when applicable, 16(b). Further, the Fund will act in
accordance with the SEC's interpretation of the requirements of Section 16(a)
with respect to periodic elections of directors or trustees and with whatever
rules the SEC may promulgate with respect thereto.
ARTICLE IV. SALES MATERIAL AND INFORMATION
4.1 The Company shall furnish, or shall cause to be furnished, to the Fund
or its designee, each piece of sales literature or other promotional material
that the Company develops or uses and in which the Fund (or a Portfolio thereof)
or the Adviser or the Underwriter is named, at least ten calendar days prior to
its use. No such material shall be used if the Fund or its designee reasonably
object to such use within ten calendar days after receipt of such material. The
Fund or its designee reserves the right to reasonably object to the continued
use of such material, and no such material shall be used if the Fund or its
designee so object.
4.2 The Company shall not give any information or make any representations
or statements on behalf of the Fund or concerning the Fund in connection with
the sale of the Contracts other than the information or representations
contained in the registration statement or prospectus or SAI for the Fund
shares, as such registration statement and prospectus or SAI may be amended or
supplemented from time to time, or in reports or proxy statements for the Fund,
or in sales literature or other promotional material approved by the Fund or its
designee or by the Underwriter, except with the permission of the Fund or the
Underwriter or the designee of either.
4.3 The Fund, Underwriter, or its designee shall furnish, or shall cause to
be furnished, to the Company, each piece of sales literature or other
promotional material in which the Company, and/or its Account, is named at least
ten calendar days prior to its use. No such material shall be used if the
Company reasonably objects to such use within ten calendar days after receipt of
such material. The Company reserves the right to reasonably object to the
continued use of such material and no such material shall be used if the Company
so objects.
4.4. The Fund and the Underwriter shall not give any information or make
any representations on behalf of the Company or concerning the Company, the
Account, or the Contracts other than the information or representations
contained in a registration statement, prospectus, or SAI for the Contracts, as
such registration statement, prospectus or SAI may be amended or supplemented
from time to time, or in published reports for the Account which are in the
public domain or approved by the Company for distribution to Contract owners, or
in sales literature or other promotional material approved by the Company or its
designee, except with the permission of the Company.
<PAGE>
-8-
4.5 The Fund will provide to the Company at least one complete copy of all
registration statements, prospectuses, SAIs, reports, proxy statements, sales
literature and other promotional materials, applications for exemptions,
requests for no-action letters, and all amendments to any of the above, that
relate to the Fund or its shares, contemporaneously with the filing of such
document(s) with the SEC or other regulatory authorities.
4.6 The Company will provide to the Fund at least one complete copy of all
registration statements, prospectuses, SAIs, reports, solicitations for voting
instructions, sales literature and other promotional materials, applications for
exemptions, requests for no-action letters, and all amendments to any of the
above, that relate to the Contracts or the Account, contemporaneously with the
filing of such document(s) with the SEC or other regulatory authorities.
4.7 For purposes of this Article IV, the phrase "sales literature and other
promotional materials" includes, but is not limited to, any of the following
that refer to the Fund or any affiliate of the Fund: advertisements (such as
material published, or designed for use in, a newspaper, magazine, or other
periodical, radio, television, telephone or tape recording, videotape display,
signs or billboards, motion pictures, or other public media), sales literature
(I.E., any written communication distributed or made generally available to
customers or the public, including brochures, circulars, reports, market
letters, form letters, seminar texts, reprints or excerpts of any other
advertisement, sales literature, or published article), educational or training
materials or other communications distributed or made generally available to
some or all agents or employees, and registration statements, prospectuses,
SAIs, shareholder reports, proxy materials, and any other communications
distributed or made generally available with regard to the Funds.
ARTICLE V. FEES AND EXPENSES
5.1 The Fund and the Underwriter shall pay no fee or other compensation to
the Company under this Agreement, except that if the Fund or any Portfolio
adopts and implements a plan pursuant to Rule 12b-1 to finance distribution
expenses, then the Underwriter may make payments to the Company or to the
underwriter for the Contracts if and in amounts agreed to by the Underwriter in
writing, and such payments will be made out of existing fees otherwise payable
to the Underwriter, past profits of the Underwriter, or other resources
available to the Underwriter. No such payments shall be made directly by the
Fund. Currently, no such payments are contemplated.
5.2 All expenses incident to performance by the Fund under this Agreement
shall be paid by the Fund, except as otherwise provided herein. The Fund shall
see to it that all its shares are registered and authorized for issuance in
accordance with applicable federal law and, if and to the extent deemed
advisable by the Fund, in accordance with applicable state laws prior to their
sale. The Fund shall bear the expenses for the cost of registration and
qualification of the Fund's shares, preparation and filing of the Fund's
prospectus and registration statement, proxy materials and reports, setting the
prospectus in type, setting in type and printing the proxy materials and reports
to shareholders (including the costs of printing a prospectus that constitutes
an annual report), the preparation of all statements and notices required by any
federal or state law, and all taxes on the issuance or transfer of the Fund's
shares.
<PAGE>
-9-
5.3 The Company shall bear the expenses of printing the Fund's prospectus
(in accordance with 3.1) and of distributing the Fund's prospectus, proxy
materials, and reports to Contract owners and prospective Contract owners.
ARTICLE VI. DIVERSIFICATION AND QUALIFICATION
6.1 Subject to the Company's maintaining the treatment of the Contracts as
life insurance, endowment, or annuity contracts under applicable provisions of
the Code and the regulations issued thereunder (or any successor provisions),
the Fund will invest its assets in such a manner as to ensure that the Contracts
will be treated as annuity, endowment, or life insurance contracts, whichever is
appropriate, under the Code and the regulations issued thereunder (or any
successor provisions). Without limiting the scope of the foregoing, the Fund
will comply with Section 817(h) of the Code and Treasury Regulation ss.1.817-5,
and any Treasury interpretations thereof, relating to the diversification
requirements for variable annuity, endowment, or life insurance contracts, and
any amendments or other modifications or successor provisions to such Section or
Regulations. In the event of a breach of this Article VI by the Fund, it will
take all reasonable steps (a) to notify the Company of such breach and (b) to
adequately diversify the Fund so as to achieve compliance within the grace
period afforded by Regulation 817.5.
6.2 The Fund represents that it is or will be qualified as a Regulated
Investment Company under Subchapter M of the Code, and that it will make every
effort to maintain such qualification (under Subchapter M or any successor or
similar provisions) and that it will notify the Company immediately upon having
a reasonable basis for believing that it has ceased to so qualify or that it
might not so qualify in the future.
6.3 Subject to the Fund's compliance with Section 817(h) of the Code and
Treasury Regulation ss. 1.817-5, and any Treasury interpretations thereof;
relating to the diversification requirements for variable annuity, endowment, or
life insurance contracts, any amendments or other modifications or successor
provisions to such Sections or Regulations, the Company represents that the
Contracts are currently, and at the time of issuance shall be, treated as life
insurance, endowment contracts, or annuity insurance contracts, under applicable
provisions of the Code, and that it will make every effort to maintain such
treatment, and that it will notify the Fund and the Underwriter immediately upon
having a reasonable basis for believing the Contracts have ceased to be so
treated or that they might not be so treated in the fixture. The Company agrees
that any prospectus offering a contract that is a "modified endowment contract"
as that term is defined in Section 7702A of the Code (or any successor or
similar provision), shall identify such contract as a modified endowment
contract.
ARTICLE VII. POTENTIAL CONFLICTS.
7.1 The Board will monitor the Fund for the existence of any material
irreconcilable conflict between the interests of the contract owners of all
separate accounts investing in the Fund. An irreconcilable material conflict may
arise for a variety of reasons, including: (a) an action by any state insurance
regulatory authority; (b) a change in applicable federal or state insurance,
tax, or securities laws or regulations, or a public ruling, private letter
ruling, no-action or interpretative letter, or any similar action by insurance,
tax, or securities regulatory authorities; (c) an administrative or judicial
decision in any relevant proceeding; (d) the manner in which the
<PAGE>
- 10 -
investments of any Portfolio are being managed; (e) a difference in voting
instructions given by variable annuity contract and variable life insurance
contract owners; or (f) a decision by an insurer to disregard the voting
instructions of contract owners. The Board shall promptly inform the Company if
it determines tat an irreconcilable material conflict exists and the
implications thereof.
7.2. The Company will report any potential or existing conflicts of which
it is aware to the Board. The Company will assist the Board in carrying out its
responsibilities under the Shared Funding Exemptive Order, by providing the
Board with all information reasonably necessary for the Board to consider any
issues raised. This includes, but is not limited to, an obligation by the
Company to inform the Board whenever Contract owner voting instructions are
disregarded.
7.3 If it is determined by a majority of the Board, or a majority of its
disinterested members, that a material irreconcilable conflict exists, the
Company and other Participating Insurance Companies shall, at their expense and
to the extent reasonably practicable (as determined by a majority of the
disinterested Board members), take whatever steps are necessary to remedy or
eliminate the irreconcilable material conflict, up to and including: (1),
withdrawing the assets allocable to some or all of the separate accounts from
the Fund or any Portfolio and reinvesting such assets in a different investment
medium, including (but not limited to) another Portfolio of the Fund, or
submitting the question whether such segregation should be implemented to a vote
of all affected contract owners and, as appropriate, segregating the assets of
any appropriate group (I.E., annuity contract owners, life insurance contract
owners, or variable contract owners of one or more Participating Insurance
Companies) that votes in favor of such segregation, or offering to the affected
contract owners the option of making such a change; and (2), establishing a new
registered management investment company or managed separate account.
7.4 If a material irreconcilable conflict arises because of a decision by
the Company to disregard contract owner voting instructions and that decision
represents a minority position or would preclude a majority vote, the Company
may be required, at the Fund's election, to withdraw the affected Account's
investment in the Fund and terminate this Agreement with respect to such Account
provided, however, that such withdrawal and termination shall be limited to the
extent required by the foregoing material irreconcilable conflict as determined
by a majority of the disinterested members of the Board. Any such withdrawal and
termination must take place within six (6) months after the Fund gives written
notice that this provision is being implemented, and until the end of that six
month period the Fund shall continue to accept and implement orders by the
Company for the purchase (and redemption) of shares of the Fund.
7.5 If a material irreconcilable conflict arises because a particular state
insurance regulator's decision applicable to the Company conflicts with the
majority of other state regulators, then the Company will withdraw the affected
Account's investment in the Fund and terminate this Agreement with respect to
such Account within six months after the Board informs the Company in writing
that it has determined that such decision has created an irreconcilable material
conflict; provided, however, that such withdrawal and termination shall be
limited to the extent required by the foregoing material irreconcilable conflict
as determined by a majority of the disinterested members of the Board. Until the
end of the foregoing six month period, the Fund shall continue to accept and
implement orders by the company for the purchase (and redemption) of shares of
the Fund.
<PAGE>
- 11 -
7.6 For purposes of Section 7.3 through 7.6 of this Agreement, a majority
of the disinterested members of the Board shall determine whether any proposed
action adequately remedies any irreconcilable material conflict, but in no event
will the Fund be required to establish a new funding medium for the Contracts.
The Company shall not be required by Section 7.3 to establish a new funding
medium for the Contract if an offer to do so has been declined by vote of a
majority of Contract owners materially adversely affected by the irreconcilable
material conflict. In the event that the Board determines that any proposed
action does not adequately remedy any irreconcilable material conflict, then the
Company will withdraw the Account's investment in the Fund and terminate this
Agreement within six (6) months after the Board informs the Company in writing
of the foregoing determination; provided, however, that such withdrawal and
termination shall be limited to the extent required by any such material
irreconcilable conflict as determined by a majority of the disinterested members
of the Board.
7.7 If and to the extent Rule 6e-2 and Rule 6e-3(T) are amended, or Rule
6e-3 is adopted, to provide exemptive relief from any provision of the 1940 Act
or the rules promulgated thereunder with respect to mixed or shared funding (as
defined in the Shared Funding Exemptive Order) on terms and conditions
materially different from those contained in the Shared Funding Exemptive Order,
then (a) the Fund and/or the Participating Insurance Companies, as appropriate,
shall take such steps as may be necessary to comply with Rules 6e-2 and 6e-3(T),
as amended, and Rule 6e-3, as adopted, to the extent such rules are applicable;
and (b) Sections 3.4, 3.5, 3.6, 7.1, 7.2, 7.3, 7.4, and 7.5 of this Agreement
shall continue in effect only to the extent that terms and conditions
substantially identical to such Sections are contained in such Rule(s) as so
amended or adopted.
ARTICLE VIII. INDEMNIFICATION
8.1 INDEMNIFICATION BY THE COMPANY
8.1(a). The Company agrees to indemnify and hold harmless the Fund and
the Underwriter and each of their officers and directors and each person, if
any, who controls the Fund or the Underwriter within the meaning of Section 15
of the 1933 Act (collectively, the "Indemnified Parties" for purposes of this
Section 8.1) against any and all losses, claims, damages, liabilities (including
amounts paid in settlement with the written consent of the Company) or
litigation (including legal and other expenses), to which the Indemnified
Parties may become subject under any statute or regulation, at common law or
otherwise, insofar as such losses, claims, damages, liabilities or expenses (or
actions in respect thereof) or settlements are related to the sale or
acquisition of the Fund's shares or the Contracts and:
(i) arise out of or are based upon any untrue statements or alleged
untrue statements of any material fact contained in the
Registration Statement, prospectus (which shall include an
offering memorandum, if any), or statement of additional
information for the Contracts or contained in the Contracts or
sales literature or other promotional material for the Contracts
(or any amendment or supplement to any of the foregoing), or
arise out of or are based upon the omission or the alleged
omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not
misleading, provided that this agreement to indemnify shall not
apply as to any Indemnified Party if such statement or omission
or such
<PAGE>
- 12 -
alleged statement or omission was made in reliance upon and in
conformity with information furnished to the Company by or on
behalf of the Fund for use in the Registration Statement,
prospectus or statement of additional information for the
Contracts or in the Contracts or sales literature (or any
amendment or supplement) or other-wise for use in connection with
the sale of the Contracts or Fund shares; or
(ii) arise out of or as a result of statements or representations
(other than statements or representations contained in the
Registration Statement, prospectus or sales literature or other
promotional material of the Fund not supplied by the Company or
persons under its control) or wrongful conduct of the Company or
persons under its authorization or control, with respect to the
sale or distribution of the Contracts or Fund Shares; or
(iii) arise out of any untrue statement or alleged untrue statement of
a material fact contained in a Registration Statement,
prospectus, or sales literature or other promotional material of
the Fund or any amendment thereof or supplement thereto or the
omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements
therein not misleading if such a statement or omission was made
in reliance upon information furnished to the Fund by or on
behalf of the Company; or
(iv) arise as a result of any material failure by the Company to
provide the services and furnish the materials under the terms of
this Agreement (including a failure, whether unintentional or in
good faith or other-wise, to comply with the qualification
requirements specified in Article VI of this Agreement); or
(v) arise out of or result from any material breach of any
representation and/or warranty made by the Company in this
Agreement or arise out of or result from any other material
breach of this Agreement by the Company,
as limited by and in accordance with the provisions of Sections 8.1(b) and
8.1(c) hereof
8.1(b). The Company shall not be liable under this indemnification
provision with respect to any losses, claims, damages, liabilities or litigation
to which an Indemnified Party would other-wise be subject by reason of such
Indemnified Party's willful misfeasance, bad faith, or gross negligence in the
performance of such Indemnified Party's duties or by reason of such Indemnified
Party's reckless disregard of its obligations or duties under this Agreement.
8.1(c). The Company shall not be liable under this indemnification
provision with respect to any claim made against an Indemnified Party unless
such Indemnified Party shall have notified the Company in writing within a
reasonable time after the summons or other first legal process giving
information of the nature of the claim shall have been served upon such
Indemnified Party (or after such Indemnified Party shall have received notice of
such service on any designated agent), but failure to notify the Company of any
such claim shall not relieve the Company from any liability which it may have to
the Indemnified Party against whom such action is brought otherwise
<PAGE>
- 13 -
than on account of this indemnification provision. In case any such action is
brought against an Indemnified Party, the Company shall be entitled to
participate, at its own expense, in the defense of such action. The Company also
shall be entitled to assume the defense thereof, with counsel satisfactory to
the party named in the action and to settle the claim at its own expense;
provided, however, that no such settlement shall, without the Indemnified
Parties' written consent include any factual stipulation referring to the
Indemnified Parties or their conduct. After notice from the Company to such
party of the Company's election to assume the defense thereof, the Indemnified
Patty shall bear the fees and expenses of any additional counsel retained by it,
and the Company will not be liable to such party under this Agreement for any
legal or other expenses subsequently incurred by such party independently in
connection with the defense thereof other than reasonable costs of
investigation.
8.1(d). The Indemnified Parties will promptly notify the Company of
the commencement of any litigation or proceedings against them in connection
with the issuance or sale of the Fund Shares or the Contracts or the operation
of the Fund.
8.2 INDEMNIFICATION BY THE UNDERWRITER
8.2(a). The Underwriter agrees to indemnify and hold harmless the
Company and each of it directors and officers and each person, if any, who
controls the Company within the meaning of Section 15 of the 1933 Act
(collectively, the "Indemnified Parties" for purposes of this Section 8.2)
against any and all losses, claims, damages, liabilities (including amounts paid
in settlement with the written consent of the Underwriter) or litigation
(including legal and other expenses) to which the Indemnified Parties may become
subject under any statute or regulation, at common law or otherwise, insofar as
such losses, claims, damages, liabilities or expenses (or actions in respect
thereof) or settlements are related to the sale or acquisition of the Fund's
shares or the Contracts; and
(i) arise out of or are based upon any untrue statement or alleged
untrue statement of any material fact contained in the
Registration Statement or prospectus or SAI or sales literature
or other promotional material of the Fund (or any amendment or
supplement to any of the foregoing), or arise out of or are based
upon the omission or the alleged omission to state therein a
material fact required to be stated therein or necessary to make
the statements therein not misleading, provided that this
agreement to indemnify shall not apply as to any Indemnified
Party if such statement or omission or such alleged statement or
omission was made in reliance upon and in conformity with
information furnished to the Underwriter or Fund by or on behalf
of the Company for use in the Registration Statement or
prospectus for the Fund or in sales literature (or any amendment
or supplement) or otherwise for use in connection with the sale
of the Contracts or Fund shares; or
(ii) arise out of or as a result of statements or representations
(other than statements or representations contained in the
Registration Statement, prospectus or sales literature or other
promotional material for the
<PAGE>
- 14 -
Contracts not supplied by the Underwriter or persons under its
control) or wrongful conduct of the Fund or Underwriter or
persons under their control, with respect to the safe or
distribution of the Contracts or Fund shares; or
(iii) arise out of any untrue statement or alleged untrue statement of
a material fact contained in a Registration Statement, prospectus
or sales literature or other promotional material covering the
Contracts, or any amendment thereof or supplement thereto, or the
omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statement
or statements therein not misleading, if such statement or
omission was made in reliance upon information furnished shed to
the Company by or on behalf of the Fund; or
(iv) arise as a result of any failure by the Fund to provide the
services and furnish the materials under the terms of this
Agreement (including a failure, whether unintentional or in good
faith or otherwise, to comply with the diversification and other
qualification requirements specified in Article VI of this
Agreement); or
(v) arise out of or result from any material breach of any
representation and/or warranty made by the Underwriter in this
Agreement or arise out of or result from any other material
breach of this Agreement by the Underwriter;
as limited by and in accordance with the provisions of Sections 8.2(b)
and 8.2(c) hereof.
8.2(b). The Underwriter shall not be liable under this indemnification
provision with respect to any losses, claims, damages, liabilities or litigation
to which an Indemnified Party would otherwise be subject by reason of such
Indemnified Party's willful misfeasance, bad faith, or gross negligence in the
performance or such Indemnified Party's duties or by reason of such Indemnified
Party's reckless disregard of obligations and duties under this Agreement or to
the Company or the Account, whichever is applicable.
8.2(c). The Underwriter shall not be liable under this indemnification
provision with respect to any claim made against an Indemnified Party unless
such Indemnified Patty shall have notified the Underwriter in writing within a
reasonable time after the summons or other first legal process giving
information of the nature of the claim shall have been served upon such
Indemnified Party (or after such Indemnified Party shall have received notice of
such service on any designated agent), but failure to notify the Underwriter of
any such claim shall not relieve the Underwriter from any liability which it may
have to the Indemnified Party against whom such action is brought other-wise
than on account of this indemnification provision. In case any such action is
brought against the Indemnified Party, the Underwriter will be entitled to
participate, at its own expense, in the defense thereof The Underwriter also
shall be entitled to assume the defense thereof, with counsel satisfactory to
the party named in the action and to settle the claim at its own expense;
provided, however, that no such settlement shall, without the Indemnified
Parties' written consent,
<PAGE>
- 15 -
include any factual stipulation referring to the Indemnified Parties or their
conduct. After notice from the Underwriter to such party of the Underwriter's
election to assume the defense thereof, the Indemnified Party shall bear the
fees and expenses of any additional counsel retained by it, and the Underwriter
will not be liable to such party under this Agreement for any legal or other
expenses subsequently incurred by such party independently in connection with
the defense thereof other than reasonable costs of investigation.
8.2(d). The Company agrees promptly to notify the Underwriter of the
commencement of any litigation or proceedings against it or any of its officers
or directors in connection with the issuance or sale of the Contracts or the
operation of the Account.
8.3 INDEMNIFICATION BY THE FUND
8.3(a). The Fund agrees to indemnify and hold harmless the Company and
each of its directors and officers and each person, if any, who controls the
Company within the meaning of Section 15 of the 1933 Act (collectively, the
"Indemnified Parties" for purposes of this Section 8.3) against any and all
losses, claims, expenses, damages, liabilities (including amounts paid in
settlement with the written consent of the Fund) or litigation (including legal
and other expenses) to which the Indemnified Parties may be required to pay or
may become subject under any statute or regulation, at common law or other-wise,
insofar as such losses, claims, expenses, damages, liabilities or expenses (or
actions in respect thereof) or settlements, are related to the operations of the
Fund and:
(i) arise as a result of any failure by the Fund to provide the
services and furnish the materials under the terms of this
Agreement (including a failure, whether unintentional or in good
faith or otherwise, to comply with the diversification and other
qualification requirements specified in Article VI of this
Agreement); or
(ii) arise out of or result from any maternal breach of any
representation and/or warranty made by the Fund in this Agreement
or arise out of or result from any other material breach of this
Agreement by the Fund;
as limited by and in accordance with the provisions of Sections 8.3(b)
and 8.3(c) hereof
8.3(b). The Fund shall not be liable under this indemnification
provision with respect to any losses, claims, damages, liabilities or litigation
to which an Indemnified Party would otherwise be subject by reason of such
Indemnified Party's willful misfeasance, bad faith, or gross negligence in the
performance of such Indemnified Party's duties or by reason of such Indemnified
Party's reckless disregard of obligations and duties under this Agreement or to
the Company, the Fund, the Underwriter or the Account, whichever is applicable.
8.3(c). The Fund shall not be liable under this indemnification
provision with respect to any claim made against an Indemnified Party unless
such Indemnified Party shall have notified the Fund in writing within a
reasonable time after the summons or other first legal process giving
information of the nature of the claim shall have been served upon such
Indemnified Party (or after
<PAGE>
- 16 -
such Indemnified Party shall have received notice of such service on any
designated agent), but failure to notify the Fund of any such claim shall not
relieve the Fund from any liability which it may have to the Indemnified Party
against whom such action is brought otherwise than on account of this
indemnification provision. In case any such action is brought against the
Indemnified Parties, the Fund will be entitled to participate, at its own
expense, in the defense thereof. The Fund also shall be entitled to assume the
expense thereof, with counsel satisfactory to the party named in the action and
to settle the claim at its own expense; provided, however, that no such
settlement shall, without the Indemnified Parties' written consent, include any
factual stipulation referring to the Indemnified Parties or their conduct. After
notice from the Fund to such party of the Fund's election to assume the defense
thereof, the Indemnified Party shall bear the fees and expenses of any
additional counsel retained by it, and the Fund will not be liable to such party
under this Agreement for any legal or other expenses subsequently incurred by
such party independently in connection with the defense thereof other than
reasonable costs of investigation.
8.3(d). The Company and the Underwriter agree promptly to notify the
Fund of the commencement of any litigation or proceeding against it or any of
its respective officers or directors in connection with the Agreement, the
issuance or sale of the Contracts, the operation of the Account, or the sale or
acquisition of shares of the Fund.
ARTICLE IX. APPLICABLE LAW
9.1 This Agreement shall be construed and the provisions hereof interpreted
under and in accordance with the laws of the State of Maryland.
9.2 This Agreement shall be subject to the provisions of the 1933, 1934 and
1940 Acts, and the rules and regulations and rulings thereunder, including such
exemptions from those statutes, rules and regulations as the SEC may grant
(including, but not limited to, any Shared Funding Exemptive Order) and the
terms hereof shall be interpreted and construed in accordance therewith.
ARTICLE X. TERMINATION
10.1 This Agreement shall continue in full force and effect until the first
to occur of:
(a) termination by any party, for any reason with respect to some or
all Designated Portfolios, by six (6) months' advance written
notice delivered to the other parties; or
(b) termination by the Company by written notice to the Fund and the
Underwriter with respect to any Designated Portfolio based upon
the Company's determination that shares of the Fund are not
reasonably available to meet the requirements of the Contracts;
provided that such termination shall apply only to the Designated
Portfolio not reasonably available; or
(c) termination by the Company by written notice to the Fund and the
Underwriter in the event any of the Designated Portfolio's shares
are not registered, issued or sold in accordance with applicable
state and/or federal
<PAGE>
- 17 -
law or such law precludes the use of such shares as the
underlying investment media of the Contracts issued or to be
issued by the Company; or
(d) termination by the Fund or Underwriter in the event tat formal
administrative proceedings are instituted against the Company by
the NASD, the SEC, the Insurance Commissioner or like official of
any state or any other regulatory body regarding the Company's
duties under this Agreement or related to the sale of the
Contracts, the operation of any Account, or the purchase of the
Fund shares, provided, however, that the Fund or Underwriter
determines in its sole judgment exercised in good faith, that any
such administrative proceedings will have a material adverse
effect upon the ability of the Company to perform its obligations
under this Agreement; or
(e) termination by the Company in the event that formal
administrative proceedings are instituted against the Fund or
Underwriter by the NASD, the SEC, or any state securities or
insurance department or any other regulatory body, provided,
however, that the Company determines in its sole judgment
exercised in good faith, that any such administrative proceedings
will have a material adverse effect upon the ability of the Fund
or Underwriter to perform its obligations under this Agreement;
or
(f) termination by the Company by written notice to the Fund and the
Underwriter with respect to any Designated Portfolio in the event
that such Designated Portfolio ceases to qualify as a Regulated
Investment Company under Subchapter M or fails to comply with the
Section 817(h) diversification requirements specified in Article
VI hereof, or if the Company reasonably believes that such
Designated Portfolio may fail to so qualify or comply; or
(g) termination by the Fund or Underwriter by written notice to the
Company in the event that the Contracts fail to meet the
qualifications specified in Section 6.3 hereof; or
(h) termination by either the Fund or the Underwriter by written
notice to the Company, if either one or both of the Fund or the
Underwriter respectively, shall determine, in their sole judgment
exercised in good faith, that the Company has suffered a material
adverse change in its business, operations, financial condition,
or prospects since the date of this Agreement or is the subject
of material adverse publicity; or
(i) termination by the Company by written notice to the Fund and the
Underwriter, if the Company shall determine, in its sole judgment
exercised in good faith, that the Fund or the Underwriter has
suffered a material adverse change in its business, operations,
financial condition or prospects since the date of this Agreement
or is the subject of material adverse publicity; or
(j) termination by any party upon the other party's material breach
of any provision of this Agreement.
<PAGE>
- 18 -
10.2 EFFECT OF TERMINATION. Notwithstanding any termination of this
Agreement, the Fund and the Underwriter shall, at the option of the Company,
continue to make available additional shares of the Fund pursuant to the terms
and conditions of this Agreement, for all Contracts in effect on the effective
date of termination of this Agreement (hereinafter referred to as "Existing
Contracts"). Specifically, the owners of the Existing Contracts may be permitted
to reallocate investments in the Fund, redeem investments in the Fund and/or
invest in the Fund upon the making of additional purchase payments under the
Existing Contracts. The parties agree that this Section 10.2 shall not apply to
any termination under Article VII and the effect of such Article VII termination
shall be governed by Article VII of this Agreement. The parties further agree
that this Section 10.2 shall not apply to any termination under Section 10.1(g)
of this Agreement.
10.3 Notwithstanding any termination of this Agreement, each party's
obligation under Article VIII to indemnify the other parties shall survive.
10.4 Any successor by law of the parties hereto shall be entitled to the
benefits of the indemnification provisions contained in Article VIII.
ARTICLE XI. NOTICES
Any notice shall be sufficiently given when sent by registered or certified
mail to the other party at the address of such party set forth below or at such
other address as such party may from time to time specify in writing to the
other party.
If to the Fund:
T. Rowe Price Associates, Inc.
100 East Pratt Street
Baltimore, Maryland 21202
Attention: Henry H. Hopkins, Esq.
If to the Company:
Prudential Life Insurance Company of America
30 Scranton Office Park
Scranton, Pennsylvania 18507-1789
Attention: Peter Scott
If to Underwriter:
T. Rowe Price Investment Services
100 East Pratt Street
Baltimore, Maryland 21202
Attention: Henry H. Hopkins, Esq.
<PAGE>
- 19 -
ARTICLE XII. MISCELLANEOUS
12.1 All persons dealing with the Fund must look solely to the property of
such Fund, and in the case of a series company, the respective Designated
Portfolio listed on Schedule A hereto as though such Designated Portfolio had
separately contracted with the Company and the Underwriter for the enforcement
of any claims against the Fund. The parties agree that neither the Board,
officers, agents or shareholders assume any personal liability or responsibility
for obligations entered into by or on behalf of the Fund.
12.2 Subject to the requirements of legal process and regulatory authority,
each party hereto shall treat as confidential the names and addresses of the
owners of the Contracts and all information reasonably identified as
confidential in writing by any other party hereto and, except as permitted by
this Agreement, shall not disclose, disseminate or utilize such names and
addresses and other confidential information without the express written consent
of the affected party until such time as such information may come into the
public domain.
12.3 The captions in this Agreement are included for convenience of
reference only and in no way define or delineate any of the provisions hereof or
other-wise affect their construction or effect.
12.4 This Agreement may be executed simultaneously in two or more
counterparts, each of which taken together shall constitute one and the same
instrument.
12.5 If any provision of this Agreement shall be held or made invalid by a
court decision, statute, rule or otherwise, the remainder of the Agreement shall
not be affected thereby.
12.6 Each party hereto shall cooperate with each other party and all
appropriate governmental authorities (including without limitation the SEC, the
NASD, and state insurance regulators) and shall permit such authorities
reasonable access to its books and records in connection with any investigation
or inquiry relating to this Agreement or the transactions contemplated hereby.
Notwithstanding the generality of the foregoing, each party hereto further
agrees to furnish the New Jersey Insurance Commissioner with any information or
reports in connection with services provided under this Agreement which such
Commissioner may request in order to ascertain whether the variable annuity
operations of the Company are being conducted in a manner consistent with New
Jersey variable annuity laws and regulations and any other applicable law or
regulations.
12.7 The rights, remedies and obligations contained in this Agreement are
cumulative and are in addition to any and all rights, remedies, and obligations,
at law or in equity, which the parties hereto are entitled to under state and
federal laws.
12.8 This Agreement or any of the rights and obligations hereunder may not
be assigned by any party without the prior written consent of all parties
hereto.
<PAGE>
- 20 -
IN WITNESS WHEREOF, each of the parties hereto has caused this
Agreement to be executed in its name and on its behalf by its duly authorized
representative and its seal to be hereunder affixed hereto as of the date
specified below.
COMPANY: PRUDENTIAL LIFE INSURANCE COMPANY OF AMERICA
By its authorized officer
By:
----------------------------------------
Title:
Date:
FUND: T. ROWE PRICE INTERNATIONAL SERIES, INC.
By its authorized officer
By:
----------------------------------------
Title: Vice President
Date: April 25, 1997
FUND: T. ROWE PRICE EQUITY SERIES, INC.
By its authorized officer
By:
----------------------------------------
Title: Vice President
Date: April 25, 1997
<PAGE>
- 21 -
UNDERWRITER: T. ROWE PRICE INVESTMENT SERVICES, INC.
By its authorized officer
By:
----------------------------------------
Title: Vice President
Date: April 25, 1997
<PAGE>
<TABLE>
SCHEDULE A
<CAPTION>
Name of Separate Account and Contracts Funded by
Date Established by Board of Directors Separate Account Designated Portfolios
- -------------------------------------- ---------------------- -------------------------------------------------
<S> <C> <C>
Prudential Discovery Discovery Select Group T. ROWE PRICE INTERNATIONAL SERIES. INC.
Select Group Variable Annuity Contract o T. Rowe Price International Stock Portfolio
Contract Account
February 11,1997
T. ROWE PRICE EQUITY SERIES. INC.
o T. Rowe Price Equity Stock Portfolio
</TABLE>
JANUS ASPEN SERIES
FUND PARTICIPATION AGREEMENT
THIS AGREEMENT is made this ____ day of __________, 1997, between JANUS
ASPEN SERIES, an open-end management investment company organized as a Delaware
business trust (the "Trust"), JANUS CAPITAL CORPORATION, a Colorado corporation
(the "Adviser"), and PRUDENTIAL INSURANCE COMPANY OF AMERICA, a life insurance
company organized under the laws of the State of New Jersey (the "Company"), on
its own behalf and on behalf of each segregated asset account of the Company set
forth on Schedule A, as may be amended from time to time (the "Accounts").
W I T N E S S E T H:
WHEREAS, the Trust has registered with the Securities and Exchange
Commission as an open-end management investment company under the Investment
Company Act of 1940, as amended (the "1940 Act"), and has registered the offer
and sale of its shares under the Securities Act of 1933, as amended (the "1933
Act"); and
WHEREAS, the Trust desires to act as an investment vehicle for separate
accounts established for variable life insurance policies and variable annuity
contracts to be offered by insurance companies that have entered into
participation agreements with the Trust (the "Participating Insurance
Companies"); and
WHEREAS, the beneficial interest in the Trust is divided into several
series of shares, each series representing an interest in a particular managed
portfolio of securities and other assets (the "Portfolios"); and
WHEREAS, the Trust has received an order from the Securities and Exchange
Commission granting Participating Insurance Companies and their separate
accounts exemptions from the provisions of Sections 9(a), 13(a), 15(a) and 15(b)
of the 1940 Act, and Rules 6e-2(b)(15) and 6e-3(T)(b)(15) thereunder, to the
extent necessary to permit shares of the Trust to be sold to and held by
variable annuity and variable life insurance separate accounts of both
affiliated and unaffiliated life insurance companies and certain qualified
pension and retirement plans (the "Exemptive Order"); and
WHEREAS, the Company has registered or will register (unless registration
is not required under applicable law) certain variable life insurance policies
and/or variable annuity contracts under the 1933 Act (the "Contracts"); and
WHEREAS, the Company has registered or will register (unless registration
is not required under applicable law) each Account as a unit investment trust
under the 1940 Act; and
<PAGE>
WHEREAS, the Company desires to utilize shares of one or more Portfolios as
an investment vehicle of the Accounts; and
WHEREAS, the Adviser is registered as an investment adviser under the 1940
Act and serves as investment adviser to the Trust;
NOW THEREFORE, in consideration of their mutual promises, the parties agree
as follows:
ARTICLE I
SALE OF TRUST SHARES
1.1 The Trust shall make shares of its Portfolios available to the Accounts
at the net asset value next computed after receipt of such purchase order by the
Trust (or its agent), as established in accordance with the provisions of the
then current prospectus of the Trust. Shares of a particular Portfolio of the
Trust shall be ordered in such quantities and at such times as determined by the
Company to be necessary to meet the requirements of the Contracts. The Trustees
of the Trust (the "Trustees") may refuse to sell shares of any Portfolio to any
person, or suspend or terminate the offering of shares of any Portfolio if such
action is required by law or by regulatory authorities having jurisdiction or
is, in the sole discretion of the Trustees acting in good faith and in light of
their fiduciary duties under federal and any applicable state laws, necessary in
the best interests of the shareholders of such Portfolio.
1.2 The Trust will redeem any full or fractional shares of any Portfolio
when requested by the Company on behalf of an Account at the net asset value
next computed after receipt by the Trust (or its agent) of the request for
redemption, as established in accordance with the provisions of the then current
prospectus of the Trust. The Trust shall make payment for such shares in the
manner established from time to time by the Trust, but in no event shall payment
be delayed for a greater period than is permitted by the 1940 Act.
1.3 For the purposes of Sections 1.1 and 1.2, the Trust hereby appoints the
Company as its agent for the limited purpose of receiving and accepting purchase
and redemption orders resulting from investment in and payments under the
Contracts. Receipt by the Company shall constitute receipt by the Trust provided
that i) such orders are received by the Company in good order prior to the time
the net asset value of each Portfolio is priced in accordance with its
prospectus and ii) the Trust receives notice of such orders by 11:00 a.m. New
York time on the next following Business Day. "Business Day" shall mean any day
on which the New York Stock Exchange is open for trading and on which the Trust
calculates its net asset value pursuant to the rules of the Securities and
Exchange Commission.
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1.4 Purchase orders that are transmitted to the Trust in accordance with
Section 1.3 shall be paid for no later than 12:00 noon New York time on the same
Business Day that the Trust receives notice of the order. Payments shall be made
in federal funds transmitted by wire.
1.5 Issuance and transfer of the Trust's shares will be by book entry only.
Stock certificates will not be issued to the Company or the Account. Shares
ordered from the Trust will be recorded in the appropriate title for each
Account or the appropriate subaccount of each Account.
1.6 The Trust shall furnish prompt notice to the Company of any income
dividends or capital gain distributions payable on the Trust's shares. The
Company hereby elects to receive all such income dividends and capital gain
distributions as are payable on a Portfolio's shares in additional shares of
that Portfolio. The Trust shall notify the Company of the number of shares so
issued as payment of such dividends and distributions.
1.7 The Trust shall make the net asset value per share for each Portfolio
available to the Company on a daily basis as soon as reasonably practical after
the net asset value per share is calculated and shall use its best efforts to
make such net asset value per share available by 6 p.m. New York time. If the
Trust provides the Company with materially incorrect share net asset value
information through no fault of the Company, the Company on behalf of the
separate accounts, shall be entitled to an adjustment to the number of shares
purchased or redeemed to reflect the correct share net asset value. Any material
error in the calculation of net asset value per share, dividend or capital gain
information shall be reported to the Company promptly upon discovery.
1.8 The Trust agrees that its shares will be sold only to Participating
Insurance Companies and their separate accounts and to certain qualified pension
and retirement plans as provided under Section 817(h)(4) of the Internal Revenue
Code of 1986, as amended, and the regulations thereunder ("Code"), to the extent
permitted by the Exemptive Order. No shares of any Portfolio will be sold
directly to the general public. The Company agrees that Trust shares will be
used only for the purposes of funding the Contracts and Accounts listed in
Schedule A, as amended from time to time.
1.9 The Trust agrees that all Participating Insurance Companies shall have
the obligations and responsibilities regarding pass-through voting and conflicts
of interest in Section 2.8 and Article IV of this Agreement.
ARTICLE II
OBLIGATIONS OF THE PARTIES
2.1 The Trust shall prepare and be responsible for filing with the
Securities and Exchange Commission and any state regulators requiring such
filing all shareholder reports,
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notices, proxy materials (or similar materials such as voting instruction
solicitation materials), prospectuses and statements of additional information
of the Trust. The Trust shall bear the costs of registration and qualification
of its shares, preparation and filing of the documents listed in this Section
2.1 and all taxes to which an issuer is subject on the issuance and transfer of
its shares.
2.2 At the option of the Company, the Trust shall either (a) provide the
Company (at the Company's expense) with as many copies of the Trust's current
prospectus, annual report, semi-annual report and other shareholder
communications, including any amendments or supplements to any of the foregoing,
as the Company shall reasonably request; or (b) provide the Company with a
camera ready copy of such documents in a form suitable for printing. The Trust
shall provide the Company with a copy of its statement of additional information
in a form suitable for duplication by the Company. The Trust (at its expense)
shall provide the Company with copies of any Trust-sponsored proxy materials in
such quantity as the Company shall reasonably require for distribution to
Contract owners.
2.3 The Company shall bear the costs of printing and distributing the
Trust's prospectus, statement of additional information, shareholder reports and
other shareholder communications to owners of and applicants for policies for
which the Trust is serving or is to serve as an investment vehicle. The Company
shall bear the costs of distributing proxy materials (or similar materials such
as voting solicitation instructions) to Contract owners. The Company assumes
sole responsibility for ensuring that such materials are delivered to Contract
owners in accordance with applicable federal and state securities laws.
2.4 The Company agrees and acknowledges that the Adviser is the sole owner
of the name and mark "Janus" and that all use of any designation comprised in
whole or part of Janus (a "Janus Mark") under this Agreement shall inure to the
benefit of the Adviser. Except as provided in Section 2.5, the Company shall not
use any Janus Mark on its own behalf or on behalf of the Accounts or Contracts
in any registration statement, advertisement, sales literature or other
materials relating to the Accounts or Contracts without the prior written
consent of the Adviser. Upon termination of this Agreement for any reason, the
Company shall cease all use of any Janus Mark(s) as soon as reasonably
practicable.
2.5 The Company shall furnish, or cause to be furnished, to the Trust or
its designee, a copy of each Contract prospectus or statement of additional
information in which the Trust or the Adviser is named prior to the filing of
such document with the Securities and Exchange Commission. The Company shall
furnish, or shall cause to be furnished, to the Trust or its designee, each
piece of sales literature or other promotional material in which the Trust or
the Adviser is named, at least ten Business Days prior to its use. No such
material shall be used if the Trust or its designee reasonably objects to such
use within ten Business Days after receipt of such material.
2.6 The Company shall not give any information or make any representations
or statements on behalf of the Trust or concerning the Trust or the Adviser in
connection with the
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sale of the Contracts other than information or representations contained in and
accurately derived from the registration statement or prospectus for the Trust
shares (as such registration statement and prospectus may be amended or
supplemented from time to time), reports of the Trust, Trust-sponsored proxy
statements, or in sales literature or other promotional material approved by the
Trust or its designee, except as required by legal process or regulatory
authorities or with the written permission of the Trust or its designee.
2.7 Neither the Trust nor the Adviser shall give any information or make
any representations or statements on behalf of the Company or concerning the
Company, the Accounts or the Contracts other than information or representations
contained in and accurately derived from the registration statement or
prospectus for the Contracts (as such registration statement and prospectus may
be amended or supplemented from time to time), or in materials approved by the
Company for distribution including sales literature or other promotional
materials, except as required by legal process or regulatory authorities or with
the written permission of the Company.
2.8 So long as, and to the extent that the Securities and Exchange
Commission interprets the 1940 Act to require pass-through voting privileges for
variable policyowners, the Company will provide pass-through voting privileges
to owners of policies whose cash values are invested, through the Accounts, in
shares of the Trust. The Trust shall require all Participating Insurance
Companies to calculate voting privileges in the same manner and the Company
shall be responsible for assuring that the Accounts calculate voting privileges
in the manner established by the Trust. With respect to each Account, the
Company will vote shares of the Trust held by the Account and for which no
timely voting instructions from policyowners are received as well as shares it
owns that are held by that Account, in the same proportion as those shares for
which voting instructions are received. The Company and its agents will in no
way recommend or oppose or interfere with the solicitation of proxies for Trust
shares held by Contract owners without the prior written consent of the Trust,
which consent may be withheld in the Trust's sole discretion.
2.9 The Company shall notify the Trust of any applicable state insurance
laws that restrict the Portfolios' investments or otherwise affect the operation
of the Trust and shall notify the Trust of any changes in such laws.
2.10 For purposes of this Article, the phrase "sales literature or other
promotional material" includes, but is not limited to, advertisements (such as
material published, or designed for use in, a newspaper, magazine, or other
periodical, radio, television, telephone or tape recording, video tape display,
signs or billboards, motion pictures, or other public media), sales literature
(i.e., any written communication distributed or made generally available to
customers or the public, including brochures, circulars, research reports,
market letters, form letters, seminar texts, reprints or excerpts of any other
advertisement, sales literature, or published articles,) educational or training
materials or other communications distributed or made generally available to
some or all agents or employees, registration statements, prospectuses,
statements of
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additional information, shareholder reports, and proxy materials and any other
material constituting sales literature or advertising under NASD Rules, the 1940
Act or the 1933 Act.
ARTICLE III
REPRESENTATIONS AND WARRANTIES
3.1 The Company represents and warrants that it is an insurance company
duly organized and in good standing under the laws of the State of New Jersey
and that it has legally and validly established each Account as a segregated
asset account under such law on the date set forth in Schedule A.
3.2 The Company represents and warrants that each Account (1) has been
registered or, prior to any issuance or sale of the Contracts, will be
registered as a unit investment trust in accordance with the provisions of the
1940 Act or, alternatively (2) has not been registered in proper reliance upon
an exclusion from registration under the 1940 Act.
3.3 The Company represents and warrants that the Contracts or interests in
the Accounts (1) are or, prior to issuance, will be registered as securities
under the 1933 Act or, alternatively (2) are not registered because they are
properly exempt from registration under the 1933 Act or will be offered
exclusively in transactions that are properly exempt from registration under the
1933 Act. The Company further represents and warrants that the Contracts will be
issued and sold in compliance in all material respects with all applicable
federal and state laws; and the sale of the Contracts shall comply in all
material respects with state insurance suitability requirements.
3.4 The Trust represents and warrants that it is duly organized and validly
existing under the laws of the State of Delaware.
3.5 The Trust represents and warrants that the Trust shares offered and
sold pursuant to this Agreement will be registered under the 1933 Act and the
Trust shall be registered under the 1940 Act prior to any issuance or sale of
such shares. The Trust shall amend its registration statement under the 1933 Act
and the 1940 Act from time to time as required in order to effect the continuous
offering of its shares. The Trust shall register and qualify its shares for sale
in accordance with the laws of the various states only if and to the extent
deemed advisable by the Trust.
3.6 The Trust represents and warrants that the investments of each
Portfolio will comply with the diversification requirements set forth in Section
8l7(h) of the Code. In the event of a breach of this Article by a Portfolio, the
Portfolio will take all reasonable steps to notify the Company of such breach
and to adequately diversify the Portfolio so as to achieve compliance with the
grace period afforded by Treasury Regulation 1.817-5.
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3.7 The Trust represents that it is currently qualified as a regulated
investment company under Subchapter M of the Code, that it will maintain such
qualification (under Subchapter M or any successor or similar provision) and
that it will notify the Company immediately upon having a reasonable basis for
believing that it has ceased to so qualify or that it might not so qualify in
the future.
ARTICLE IV
POTENTIAL CONFLICTS
4.1 The parties acknowledge that the Trust's shares may be made available
for investment to other Participating Insurance Companies. In such event, the
Trustees will monitor the Trust for the existence of any material irreconcilable
conflict between the interests of the contract owners of all Participating
Insurance Companies. An irreconcilable material conflict may arise for a variety
of reasons, including: (a) an action by any state insurance regulatory
authority; (b) a change in applicable federal or state insurance, tax, or
securities laws or regulations, or a public ruling, private letter ruling,
no-action or interpretative letter, or any similar action by insurance, tax, or
securities regulatory authorities; (c) an administrative or judicial decision in
any relevant proceeding; (d) the manner in which the investments of any
Portfolio are being managed; (e) a difference in voting instructions given by
variable annuity contract and variable life insurance contract owners; or (f) a
decision by an insurer to disregard the voting instructions of contract owners.
The Trustees shall promptly inform the Company if they determine that an
irreconcilable material conflict exists and the implications thereof.
4.2 The Company agrees to promptly report any potential or existing
conflicts of which it is aware to the Trustees. The Company will assist the
Trustees in carrying out their responsibilities under the Exemptive Order by
providing the Trustees with all information reasonably necessary for the
Trustees to consider any issues raised including, but not limited to,
information as to a decision by the Company to disregard Contract owner voting
instructions.
4.3 If it is determined by a majority of the Trustees, or a majority of its
disinterested Trustees, that a material irreconcilable conflict exists that
affects the interests of Contract owners, the Company shall, in cooperation with
other Participating Insurance Companies whose contract owners are also affected,
at its expense and to the extent reasonably practicable (as determined by the
Trustees) take whatever steps are necessary to remedy or eliminate the
irreconcilable material conflict, which steps could include: (a) withdrawing the
assets allocable to some or all of the Accounts from the Trust or any Portfolio
and reinvesting such assets in a different investment medium, including (but not
limited to) another Portfolio of the Trust, or submitting the question of
whether or not such segregation should be implemented to a vote of all affected
Contract owners and, as appropriate, segregating the assets of any appropriate
group (I.E., annuity contract owners, life insurance contract owners, or
variable contract owners of one or more Participating Insurance Companies) that
votes in favor of such segregation, or offering to the affected Contract owners
the option of making such a change; and (b) establishing a new registered
management investment company or managed separate account.
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4.4 If a material irreconcilable conflict arises because of a decision by
the Company to disregard Contract owner voting instructions and that decision
represents a minority position or would preclude a majority vote, the Company
may be required, at the Trust's election, to withdraw the affected Account's
investment in the Trust and terminate this Agreement with respect to such
Account; provided, however that such withdrawal and termination shall be limited
to the extent required by the foregoing material irreconcilable conflict as
determined by a majority of the disinterested Trustees. Any such withdrawal and
termination must take place within six (6) months after the Trust gives written
notice that this provision is being implemented. Until the end of such six (6)
month period, the Trust shall continue to accept and implement orders by the
Company for the purchase and redemption of shares of the Trust.
4.5 If a material irreconcilable conflict arises because a particular state
insurance regulator's decision applicable to the Company conflicts with the
majority of other state regulators, then the Company will withdraw the affected
Account's investment in the Trust and terminate this Agreement with respect to
such Account within six (6) months after the Trustees inform the Company in
writing that it has determined that such decision has created an irreconcilable
material conflict; provided, however, that such withdrawal and termination shall
be limited to the extent required by the foregoing material irreconcilable
conflict as determined by a majority of the disinterested Trustees. Until the
end of such six (6) month period, the Trust shall continue to accept and
implement orders by the Company for the purchase and redemption of shares of the
Trust.
4.6 For purposes of Sections 4.3 through 4.6 of this Agreement, a majority
of the disinterested Trustees shall determine whether any proposed action
adequately remedies any irreconcilable material conflict, but in no event will
the Company be required to establish a new funding medium for the Contracts if
an offer to do so has been declined by vote of a majority of Contract owners
materially adversely affected by the irreconcilable material conflict. In the
event that the Trustees determine that any proposed action does not adequately
remedy any irreconcilable material conflict, then the Company will withdraw the
Account's investment in the Trust and terminate this Agreement within six (6)
months after the Trustees inform the Company in writing of the foregoing
determination; provided, however, that such withdrawal and termination shall be
limited to the extent required by any such material irreconcilable conflict as
determined by a majority of the disinterested Trustees.
4.7 The Company shall at least annually submit to the Trustees such
reports, materials or data as the Trustees may reasonable request so that the
Trustees may fully carry out the duties imposed upon them by the Exemptive
Order, and said reports, materials and data shall be submitted more frequently
if deemed appropriate by the Trustees.
4.8 If and to the extent that Rule 6e-2 and Rule 6e-3(T) are amended, or
Rule 6e-3 is adopted, to provide exemptive relief from any provision of the 1940
Act or the rules promulgated thereunder with respect to mixed or shared funding
(as defined in the Exemptive Order) on terms and conditions materially different
from those contained in the Exemptive Order, then the Trust
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and/or the Participating Insurance Companies, as appropriate, shall take such
steps as may be necessary to comply with Rules 6e-2 and 6e-3(T), as amended, and
Rule 6e-3, as adopted, to the extent such rules are applicable.
ARTICLE V
INDEMNIFICATION
5.1 INDEMNIFICATION BY THE COMPANY. The Company agrees to indemnify and
hold harmless the Trust, the Adviser, and each of their Trustees or Directors,
officers, employees and agents and each person, if any, who controls the Trust
or the Adviser within the meaning of Section 15 of the 1933 Act (collectively,
the "Indemnified Parties" for purposes of this Article V) against any and all
losses, claims, damages, liabilities (including amounts paid in settlement with
the written consent of the Company) or expenses (including the reasonable costs
of investigating or defending any alleged loss, claim, damage, liability or
expense and reasonable legal counsel fees incurred in connection therewith)
(collectively, "Losses"), to which the Indemnified Parties may become subject
under any statute or regulation, or at common law or otherwise, insofar as such
Losses:
(a) arise out of or are based upon any untrue statements or alleged
untrue statements of any material fact contained in a registration
statement or prospectus for the Contracts or in the Contracts themselves or
in sales literature generated or approved by the Company on behalf of the
Contracts or Accounts (or any amendment or supplement to any of the
foregoing) (collectively, "Company Documents" for the purposes of this
Article V), or arise out of or are based upon the omission or the alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, provided that this
indemnity shall not apply as to any Indemnified Party if such statement or
omission or such alleged statement or omission was made in reliance upon
and was accurately derived from written information furnished to the
Company by or on behalf of the Trust or the Adviser for use in Company
Documents or otherwise for use in connection with the sale of the Contracts
or Trust shares; or
(b) arise out of or result from statements or representations (other
than statements or representations contained in and accurately derived from
Trust Documents as defined in Section 5.2(a)) or wrongful conduct of the
Company or persons under its control, with respect to the sale or
acquisition of the Contracts or Trust shares; or
(c) arise out of or result from any untrue statement or alleged untrue
statement of a material fact contained in Trust Documents as defined in
Section 5.2(a) or the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the
statements therein not misleading if such statement or omission was made in
reliance upon and accurately derived from written information furnished to
the Trust or the Adviser by or on behalf of the Company; or
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(d) arise out of or result from any failure by the Company to provide
the services or furnish the materials required under the terms of this
Agreement; or
(e) arise out of or result from any material breach of any
representation and/or warranty made by the Company in this Agreement or
arise out of or result from any other material breach of this Agreement by
the Company
5.2 INDEMNIFICATION BY THE TRUST AND THE ADVISER. The Trust and Adviser
agree to indemnify and hold harmless the Company and each of its directors, the
Adviser, officers, employees and agents and each person, if any, who controls
the Company within the meaning of Section 15 of the 1933 Act (collectively, the
"Indemnified Parties" for purposes of this Article V) against any and all
losses, claims, damages, liabilities (including amounts paid in settlement with
the written consent of the Adviser) or expenses (including the reasonable costs
of investigating or defending any alleged loss, claim, damage, liability or
expense and reasonable legal counsel fees incurred in connection therewith)
(collectively, "Losses"), to which the Indemnified Parties may become subject
under any statute or regulation, or at common law or otherwise, insofar as such
Losses:
(a) arise out of or are based upon any untrue statements or alleged
untrue statements of any material fact contained in the registration
statement or prospectus for the Trust (or any amendment or supplement
thereto), (collectively, "Trust Documents" for the purposes of this Article
V), or arise out of or are based upon the omission or the alleged omission
to state therein a material fact required to be stated therein or necessary
to make the statements therein not misleading, provided that this indemnity
shall not apply as to any Indemnified Party if such statement or omission
or such alleged statement or omission was made in reliance upon and was
accurately derived from written information furnished to the Trust by or on
behalf of the Company for use in Trust Documents or otherwise for use in
connection with the sale of the Contracts or Trust shares; or
(b) arise out of or result from statements or representations (other
than statements or representations contained in and accurately derived from
Company Documents) or wrongful conduct of the Trust or the Adviser or
persons under their control, with respect to the sale or acquisition of the
Contracts or Trust shares; or
(c) arise out of or result from any untrue statement or alleged untrue
statement of a material fact contained in Company Documents or the omission
or alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading if such
statement or omission was made in reliance upon and accurately derived from
written information furnished to the Company by or on behalf of the Trust
or the Adviser; or
(d) arise out of or result from any failure by the Trust or the
Adviser to provide
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the services or furnish the materials required under the terms of this
Agreement; or
(e) arise out of or result from any material breach of any
representation and/or warranty made by the Trust or Adviser in this
Agreement or arise out of or result from any other material breach of this
Agreement by the Trust or the Adviser.
5.3 None of the parties to this Agreement shall be liable under the
indemnification provisions of Sections 5.1 or 5.2, as applicable, with respect
to any Losses incurred or assessed against an Indemnified Party that arise from
such Indemnified Party's willful misfeasance, bad faith or negligence in the
performance of such Indemnified Party's duties or by reason of such Indemnified
Party's reckless disregard of obligations or duties under this Agreement.
5.4 None of the parties to this Agreement shall be liable under the
indemnification provisions of Sections 5.1 or 5.2, as applicable, with respect
to any claim made against an Indemnified Party unless such Indemnified Party
shall have notified the other parties in writing within a reasonable time after
the summons, or other first written notification, giving information of the
nature of the claim shall have been served upon or otherwise received by such
Indemnified Party (or after such Indemnified Party shall have received notice of
service upon or other notification to any designated agent), but failure to
notify the party against whom indemnification is sought of any such claim shall
not relieve that party from any liability which it may have to the Indemnified
Party in the absence of Sections 5.1 and 5.2.
5.5 In case any such action is brought against the Indemnified Parties, the
indemnifying party shall be entitled to participate, at its own expense, in the
defense of such action. The indemnifying party also shall be entitled to assume
the defense thereof, with counsel reasonably satisfactory to the party named in
the action. After notice from the indemnifying party to the Indemnified Party of
an election to assume such defense, the Indemnified Party shall bear the fees
and expenses of any additional counsel retained by it, and the indemnifying
party will not be liable to the Indemnified Party under this Agreement for any
legal or other expenses subsequently incurred by such party independently in
connection with the defense thereof other than reasonable costs of
investigation.
5.6 The indemnifications provided by the parties hereunder are in addition
to any liability the panics may otherwise have.
ARTICLE VI
TERMINATION
6.1 This Agreement may be terminated by any party for any reason by ninety
(90) days advance written notice delivered to the other parties.
6.2 Notwithstanding any termination of this Agreement, the Trust shall, at
the option of the Company, continue to make available additional shares of the
Trust (or any Portfolio)
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pursuant to the terms and conditions of this Agreement for all Contracts in
effect on the effective date of termination of this Agreement, provided that the
Company continues to pay the costs set forth in Section 2.3.
6.3 The provisions of Article V shall survive the termination of this
Agreement, and the provisions of Article IV and Section 2.8 shall survive the
termination of this Agreement as long as shares of the Trust are held on behalf
of Contract owners in accordance with Section 6.2.
ARTICLE VII
NOTICES
Any notice shall be sufficiently given when sent by registered or certified
mail to the other party at the address of such party set forth below or at such
other address as such party may from time to time specify in writing to the
other party.
If to the Trust or the Adviser:
100 Fillmore Street
Denver, Colorado 80206
Attention: General Counsel
If to the Company:
Prudential Insurance Company of America
30 Scranton Office Park
Scranton, Pennsylvania 18507-1789
Attention: Peter Scott
ARTICLE VIII
MISCELLANEOUS
8.1 The captions in this Agreement are included for convenience of
reference only and in no way define or delineate any of the provisions hereof or
otherwise affect their construction or effect.
8.2 This Agreement may be executed simultaneously in two or more
counterparts, each of which taken together shall constitute one and the same
instrument.
8.3 If any provision of this Agreement shall be held or made invalid by a
court decision, statute, rule or otherwise, the remainder of the Agreement shall
not be affected thereby.
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8.4 This Agreement shall be construed and the provisions hereof interpreted
under and in accordance with the laws of State of Colorado.
8.5 The parties to this Agreement acknowledge and agree that all
liabilities of the Trust arising, directly or indirectly, under this Agreement,
of any and every nature whatsoever, shall be satisfied solely out of the assets
of the Trust and that no Trustee, officer, agent or holder of shares of
beneficial interest of the Trust shall be personally liable for any such
liabilities.
8.6 Each party shall cooperate with each other party and all appropriate
governmental authorities (including without limitation the Securities and
Exchange Commission, the National Association of Securities Dealers, Inc., and
state insurance regulators) and shall permit such authorities reasonable access
to its books and records in connection with any investigation or inquiry
relating to this Agreement or the transactions contemplated hereby.
8.7 The rights, remedies and obligations contained in this Agreement are
cumulative and are in addition to any and all rights, remedies and obligations,
at law or in equity, which the parties hereto are entitled to under state and
federal laws.
8.8 The parties to this Agreement acknowledge and agree that this Agreement
shall not be exclusive in any respect.
8.9 Neither this Agreement nor any rights or obligations hereunder may be
assigned by any party without the prior written approval of the other parties.
8.10 No provisions of this Agreement may be amended or modified in any
manner except by a written agreement properly authorized and executed by each
party.
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IN WITNESS WHEREOF, the parties have caused their duly authorized officers
to execute this Participation Agreement as of the date and year first above
written.
PRUDENTIAL INSURANCE COMPANY OF AMERICA
By:
------------------------------------
Name:
Title:
JANUS ASPEN SERIES
By:
------------------------------------
Name:
Title:
JANUS CAPITAL CORPORATION
By:
------------------------------------
Name:
Title:
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SCHEDULE A
SEPARATE ACCOUNTS AND ASSOCIATED CONTRACTS
Name of Separate Account and Contracts Funded
Date Established by Board of Directors By Separate Account
- -------------------------------------- ---------------------------------------
Prudential Discovery Discovery Select Group Annuity Contract
Select Group Variable Account DC-403-97
est. February 11, 1997
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PARTICIPATION AGREEMENT
AMONG
MFS VARIABLE INSURANCE TRUST,
PRUDENTIAL INSURANCE COMPANY OF AMERICA
AND
MASSACHUSETTS FINANCIAL SERVICES COMPANY
THIS AGREEMENT, made and entered into this 11th day of April 1997, by and
among MFS VARIABLE INSURANCE TRUST, a Massachusetts business trust (the
"Trust"), PRUDENTIAL INSURANCE COMPANY OF AMERICA an insurance company organized
under the laws of the state of New Jersey (the "Company"), on its own behalf and
on behalf of each of the segregated asset accounts of the Company set forth in
Schedule A hereto, as may be amended from time to time (the "Accounts"), and
MASSACHUSETTS FINANCIAL SERVICES COMPANY, a Delaware corporation ("MFS").
WHEREAS, the Trust is registered as an open-end management investment
company under the Investment Company Act of 1940, as amended (the "1940 Act"),
and its shares are registered or will be registered under the Securities Act of
1933, as amended (the "1933 Act");
WHEREAS, shares of beneficial interest of the Trust are divided into
several series of shares, each representing the interests in a particular
managed pool of securities and other assets;
WHEREAS, the series of shares of the Trust offered by the Trust to the
Company and the Accounts are set forth on Schedule A attached hereto (each, a
"Portfolio," and, collectively, the "Portfolios");
WHEREAS, MFS is duly registered as an investment adviser under the
Investment Advisers Act of 1940, as amended, and any applicable state securities
law, and is the Trust's investment adviser;
WHEREAS, the Company will issue certain variable annuity and/or variable
life insurance contracts (individually, the "Policy" or, collectively, the
"Policies") which, if required by applicable law, will be registered under the
1933 Act;
WHEREAS, the Accounts are duly organized, validly existing segregated asset
accounts, established by resolution of the Board of Directors of the Company, to
set aside and invest assets attributable to the aforesaid variable annuity
and/or variable life insurance contracts that are allocated to the Accounts (the
Policies and the Accounts covered by this Agreement, and each corresponding
Portfolio covered by this Agreement in which the Accounts invest, is specified
in Schedule A attached hereto as may be modified from time to time);
WHEREAS, the Company has registered or will register the Accounts as unit
investment trusts under the 1940 Act (unless exempt therefrom);
WHEREAS, MFS Fund Distributors, Inc. (the "Underwriter") is registered as a
broker-dealer with the Securities and Exchange Commission (the "SEC") under the
Securities Exchange Act of 1934, as amended (hereinafter the "1934 Act"), and is
a member in good standing of the National Association of Securities Dealers,
Inc. (the "NASD)");
<PAGE>
WHEREAS, Prudential Investment Management Services, L.L.C. ("PIMS"), the
underwriter for the individual variable annuity and the variable life policies,
is registered as a broker-dealer with the SEC under the 1934 Act and is a member
in good standing of the NASD; and
WHEREAS, to the extent permitted by applicable insurance laws and
regulations, the Company intends to purchase shares in one or more of the
Portfolios specified in Schedule A attached hereto (the "Shares") on behalf of
the Accounts to fund the Policies, and the Trust intends to sell such Shares to
the Accounts at net asset value;
NOW, THEREFORE, in consideration of their mutual promises, the Trust, MFS,
and the Company agree as follows:
ARTICLE I. SALE OF TRUST SHARES
1.1. The Trust agrees to sell to the Company those Shares which the
Accounts order (based on orders placed by Policy holders on that Business
Day, as defined below) and which are available for purchase by such
Accounts, executing such orders on a daily basis at the net asset value
next computed after receipt by the Trust or its designee of the order for
the Shares. For purposes of this Section 1.1, the Company shall be the
designee of the Trust for receipt of such orders from Policy owners and
receipt by such designee shall constitute receipt by the Trust; PROVIDED
that the Trust receives notice of such orders by 9:30 a.m. New York time on
the next following Business Day. "Business Day" shall mean any day on which
the New York Stock Exchange, Inc. (the "NYSE") is open for trading and on
which the Trust calculates its net asset value pursuant to the rules of the
SEC.
1.2. The Trust agrees to make the Shares available indefinitely for
purchase at the applicable net asset value per share by the Company and the
Accounts on those days on which the Trust calculates its net asset value
pursuant to rules of the SEC and the Trust shall calculate such net asset
value on each day which the NYSE is open for trading. Notwithstanding the
foregoing, the Board of Trustees of the Trust (the "Board") may refuse to
sell any Shares to the Company and the Accounts, or suspend or terminate
the offering of the Shares if such action is required by law or by
regulatory authorities having jurisdiction or is, in the sole discretion of
the Board acting in good faith and in light of its fiduciary duties under
federal and any applicable state laws, necessary in the best interest of
the Shareholders of such Portfolio.
1.3. The Trust and MFS agree that the Shares will be sold only to insurance
companies which have entered into participation agreements with the Trust
and MFS (the "Participating Insurance Companies") and their separate
accounts, qualified pension and retirement plans and MFS or its affiliates
in accordance with Section 817(h)(4) of the Internal Revenue Code of 1986,
as amended, and the regulations thereunder. The Trust and MFS will not sell
Trust shares to any insurance company or separate account unless an
agreement containing provisions substantially the same as Articles III and
VII of this Agreement is in effect to govern such sales. The Company will
not resell the Shares except to the Trust or its agents.
1.4. The Trust agrees to redeem for cash, on the Company's request, any
full or fractional Shares held by the Accounts (based on orders placed by
Policy holders on that Business Day), executing such requests on a daily
basis at the net asset value next computed after receipt by the Trust or
its designee of the request for redemption. For purposes of this Section
1.4, the Company shall be the designee of the Trust for receipt of requests
for redemption from Policy owners and receipt by such designee shall
constitute receipt by the Trust; provided that the Trust receives notice of
such request for redemption by 9:30 a.m. New York time on the next
following Business Day.
1.5. Each purchase, redemption and exchange order placed by the Company
shall be placed separately for each Portfolio and shall not be netted with
respect to any Portfolio. However, with respect to payment of the purchase
price by the Company and of redemption proceeds by the Trust, the Company
and the Trust
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shall net purchase and redemption orders with respect to each Portfolio and
shall transmit one net payment for all of the Portfolios in accordance with
Section 1.6 hereof
1.6. In the event of net purchases, the Company shall pay for the Shares by
2:00 p.m. New York time on the next Business Day after an order to purchase
the Shares is made in accordance with the provisions of Section 1.1
hereof In the event of net redemptions, the Trust shall pay the redemption
proceeds by 2:00 p.m. New York time on the next Business Day after an order
to redeem the shares is made in accordance with the provisions of Section
1.4. hereof. All such payments shall be in federal funds transmitted by
wire.
1.7. Issuance and transfer of the Shares will be by book entry only. Stock
certificates will not be issued to the Company or the Accounts. The Shares
ordered from the Trust will be recorded in an appropriate title for the
Accounts or the appropriate subaccounts of the Accounts.
1.8. The Trust shall furnish same day notice (by wire or telephone followed
by written confirmation) to the Company of any dividends or capital gain
distributions payable on the Shares. The Company hereby elects to receive
all such dividends and distributions as are payable on a Portfolio's Shares
in additional Shares of that Portfolio. The Trust shall notify the Company
of the number of Shares so issued as payment of such dividends and
distributions.
1.9. The Trust or its custodian shall make the net asset value per share
for each Portfolio available to the Company on each Business Day as soon as
reasonably practical after the net asset value per share is calculated and
shall use its best efforts to make such net asset value per share available
by 6:30 p.m. New York time. In the event that the Trust is unable to meet
the 6:30 p.m. time stared herein, it shall provide additional time for the
Company to place orders for the purchase and redemption of Shares. Such
additional time shall be equal to the additional time which the Trust takes
to make the net asset value available to the Company. If the Trust provides
materially incorrect share net asset value information, the Trust shall
make an adjustment to the number of shares purchased or redeemed for the
Accounts to reflect the correct net asset value per share. Any material
error in the calculation or reporting of net asset value per share,
dividend or capital gains information shall be reported promptly upon
discovery to the Company.
ARTICLE II. CERTAIN REPRESENTATIONS, WARRANTIES AND COVENANTS
2.1. The Company represents and warrants that the Policies are or will be
registered under the 1933 Act or are exempt from or not subject to
registration thereunder, and that the Policies will be issued, sold, and
distributed in compliance in all material respects with all applicable
state and federal laws, including without limitation the 1933 Act, the
Securities Exchange Act of 1934. as amended (the "1934 Act"), and the 1940
Act. The Company further represents and warrants that it is an insurance
company duly organized and in good standing under applicable law and that
it has legally and validly established the Account as a segregated asset
account under applicable law and has registered or, prior to any issuance
or sale of the Policies, will register the Accounts as unit investment
trusts in accordance with the provisions of the 1940 Act (unless exempt
therefrom) to serve as segregated investment accounts for the Policies, and
that it will maintain such registration for so long as any Policies are
outstanding. The Company shall amend the registration statements under the
1933 Act for the Policies and the registration statements under the 1940
Act for the Accounts from time to time as required in order to effect the
continuous offering of the Policies or as may otherwise be required by
applicable law. The Company shall register and qualify the Policies for
sales accordance with the securities laws of the various states only if and
to the extent deemed necessary by the Company.
2.2. The Company represents and warrants that the Policies are currently
and at the time of issuance will be treated as life insurance, endowment or
annuity contract under applicable provisions of the Internal Revenue Code
of 1986, as amended (the "Code"), that it will maintain such treatment and
that it will notify the Trust or MFS immediately upon having a reasonable
basis for believing that the Policies have ceased to be so treated or that
they might not be so treated in the future.
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2.3. The Company represents and warrants that PIMS, the underwriter for the
individual variable annuity and the variable life policies, is a member in
good standing of the NASD and is a registered broker-dealer with the SEC.
The Company represents and warrants that the Company and PIMS will sell and
distribute such policies in accordance in all material respects with all
applicable state and federal securities laws, including without limitation
the 1933 Act, the 1934 Act, and the 1940 Act.
2.4 The Trust and MFS represent and warrant that the Shares sold pursuant
to this Agreement shall be registered under the 1933 Act, duly authorized
for issuance and sold in compliance with the laws of The Commonwealth of
Massachusetts and all applicable federal and state securities laws and that
the Trust is and shall remain registered under the 1940 Act The Trust shall
amend the registration statement for its Shares under the 1933 Act and the
1940 Act from time to time as required in order to effect the continuous
offering of its Shares. The Trust shall register and qualify the Shares for
sale in accordance with the laws of the various states only if and to the
extent deemed necessary by the Trust
2.5. MFS represents and warrants that the Underwriter is a member in good
standing of the NASD and is registered as a broker-dealer with the SEC. The
Trust and MFS represent that the Trust and the Underwriter will sell and
distribute the Shares in accordance in all material respects with all
applicable state and federal securities laws, including without limitation
the 1933 Act, the 1934 Act, and the 1940 Act.
2.6. The Trust represents that it is lawfully organized and validly
existing under the laws of The Commonwealth of Massachusetts and that it
does and will comply in all material respects with the 1940 Act and any
applicable regulations thereunder.
2.7. MFS represents and warrants that it is and shall remain duly
registered under all applicable federal securities laws and that it shall
perform its obligations for the Trust in compliance in all material
respects with any applicable federal securities laws and with the
securities laws of The Commonwealth of Massachusetts. MFS represents and
warrants that it is not subject to state securities laws other than the
securities laws of The Commonwealth of Massachusetts and that it is exempt
from registration as an investment adviser under the securities laws of The
Commonwealth of Massachusetts.
2.8. No less frequently than annually, the Company shall submit to the
Board such reports, material or data as the Board may reasonably request so
that it may carry out fully the obligations imposed upon it by the
conditions contained in the exemptive application pursuant to which the SEC
has granted exemptive relief to permit mixed and shared funding (the "Mixed
and Shared Funding Exemptive Order").
ARTICLE III. PROSPECTUS AND PROXY STATEMENTS; VOTING
3.1. At least annually, the Trust or its designee shall provide the
Company, free of charge, with as many copies of the current prospectus
(describing only the Portfolios listed in Schedule A hereto) for the Shares
as the Company may reasonably request for distribution to existing Policy
owners whose Policies are funded by such Shares. The Trust or its designee
shall provide the Company, at the Company's expense, with as many copies of
the current prospectus for the Shares as the Company may reasonably request
for distribution to prospective purchasers of Policies. If requested by the
Company in lieu thereof, the Trust or its designee shall provide such
documentation (including a "camera ready" copy of the new prospectus as set
in type or, at the request of the Company, as a diskette in the form sent
to the financial printer) and other assistance as is reasonably necessary
in order for the parties hereto once each year (or more frequently if the
prospectus for the Shares is supplemented or amended) to have the
prospectus for the Policies and the prospectus for the Shares printed
together in one document; the expenses of such printing to be apportioned
between (a) the Company and (b) the Trust or its designee in proportion to
the number of pages of the Policy and Shares' prospectuses, taking account
of other relevant factors affecting the expense of printing, such as
covers, columns, graphs and charts; the Trust or its designee to bear the
cost of printing the Shares' prospectus
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<PAGE>
portion of such document for distribution to owners of existing Policies
funded by the Shares and the Company to bear the expenses of printing the
portion of such document relating to the Accounts; PROVIDED, however, that
the Company shall bear all printing expenses of such combined documents
where used for distribution to prospective purchasers or to owners of
existing Policies not funded by the Shares. In the event that the Company
requests that the Trust or its designee provides the Trust's prospectus in
a "camera ready" or diskette format, the Trust shall be responsible for
providing the prospectus in the format in which it or MFS is accustomed to
formatting prospectuses and shall bear the expense of providing the
prospectus in such format (e.g., typesetting expenses), and the Company
shall bear the expense of adjusting or changing the format to conform with
any of its prospectuses.
3.2. The prospectus for the Shares shall state that the statement of
additional information for the Shares is available from the Trust or its
designee. The Trust or its designee, at its expense, shall print and
provide such statement of additional information to the Company (or a
master of such statement suitable for duplication by the Company) for
distribution to any owner of a Policy funded by the Shares. The Trust or
its designee, at the Company's expense, shall print and provide such
statement to the Company (or a master of such statement suitable for
duplication by the Company) for distribution to a prospective purchaser who
requests such statement or to an owner of a Policy not funded by the
Shares.
3.3. The Trust or its designee shall provide the Company free of charge
copies, if and to the extent applicable to the Shares, of the Trust's proxy
materials, reports to Shareholders and other communications to Shareholders
in such quantity as the Company shall reasonably require for distribution
to Policy owners.
3.4. Notwithstanding the provisions of Sections 3.1, 3.2, and 3.3 above, or
of Article V below, the Company shall pay the expense of printing or
providing documents to the extent such cost is considered a distribution
expense. Distribution expenses would include by way of illustration, but
are not limited to, the printing of the Shares' prospectus or prospectuses
for distribution to prospective purchasers or to owners of existing
Policies not funded by such Shares.
3.5. The Trust hereby notifies the Company that it may be appropriate to
include in the prospectus pursuant to which a Policy is offered disclosure
regarding the potential risks of mixed and shared funding.
3.6. If and to the extent required by law, the Company shall:
(a) solicit voting instructions from Policy owners;
(b) vote the Shares in accordance with instructions received from
Policy owners; and
(c) vote the Shares for which no instructions have been received in
the same proportion as the Shares of such Portfolio for which
instructions have been received from Policy owners;
so long as and to the extent that the SEC continues to interpret the 1940
Act to require pass through voting privileges for variable contract owners.
The Company will in no way recommend action in connection with or oppose or
interfere with the solicitation of proxies for the Shares held for such
Policy owners. The Company reserves the right to vote shares held in any
segregated asset account in its own right, to the extent permitted by law.
Participating Insurance Companies shall be responsible for assuring that
each of their separate accounts holding Shares calculates voting privileges
in the manner required by the Mixed and Shared Funding Exemptive Order. The
Trust and MFS will notify the Company of any changes of interpretations or
amendments to the Mixed and Shared Funding Exemptive Order.
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<PAGE>
ARTICLE IV. SALES MATERIAL AND INFORMATION
4.1. The Company shall furnish, or shall cause to be furnished, to the
Trust or its designee, each piece of sales literature or other promotional
material in which the Trust, MFS, any other investment adviser to the
Trust, or any affiliate of MFS are named, at least three (3) Business Days
prior to its use. No such material shall be used if the Trust, MFS, or
their respective designees reasonably objects to such use within three (3)
Business Days after receipt of such material.
4.2. The Company shall not give any information or make any representations
or statement on behalf of the Trust, MFS, any other investment adviser to
the Trust, or any affiliate of MFS or concerning the Trust or any other
such entity in connection with the sale of the Policies other than the
information or representations contained in the registration statement,
prospectus or statement of additional information for the Shares, as such
registration statement, prospectus and statement of additional information
may be amended or supplemented from time to time, or in reports or proxy
statements for the Trust, or in sales literature or other promotional
material approved by the Trust, MFS or their respective designees, except
with the permission of the Trust, MFS or their respective designees. The
Trust, MFS or their respective designees each agrees to respond to any
request for approval on a prompt and timely basis. The Company shall adopt
and implement procedures reasonably designed to ensure that information
concerning the Trust, MFS or any of their affiliates which is intended for
use only by brokers or agents selling the Policies (i.e., information that
is not intended for distribution to Policy holders or prospective Policy
holders) is so used, and neither the Trust, MFS nor any of their affiliates
shall be liable for any losses, damages or expenses relating to the
improper use of such broker only materials.
4.3. The Trust or its designee shall furnish, or shall cause to be
furnished, to the Company or its designee, each piece of sales literature
or other promotional material in which the Company and/or the Accounts is
named, at least three (3) Business Days prior to its use. No such material
shall be used if the Company or its designee reasonably objects to such use
within three (3) Business Days after receipt of such material.
4.4. The Trust and MFS shall not give, and agree that the Underwriter shall
not give, any information or make any representations on behalf of the
Company or concerning the Company, the Accounts, or the Policies in
connection with the sale of the Policies other than the information or
representations contained in a registration statement, prospectus, or
statement of additional information for the Policies, as such registration
statement, prospectus and statement of additional information may be
amended or supplemented from time to time, or in reports for the Accounts,
or in sales literature or other promotional material approved by the
Company or its designee, except with the permission of the Company. The
Company or its designee agrees to respond to any request for approval on a
prompt and timely basis. The parties hereto agree that this Section 4.4. is
neither intended to designate nor otherwise imply that MFS is an
underwriter or distributor of the Policies.
4.5. The Company and the Trust (or its designee in lieu of the Company or
the Trust, as appropriate) will each provide to the other at least one
complete copy of all registration statements, prospectuses, statements of
additional information, reports, proxy statements, sales literature and
other promotional materials, applications for exemptions, requests for
no-action letters, and all amendments to any of the above, that relate to
the Policies, or to the Trust or its Shares. prior to or contemporaneously
with the filing of such document with the SEC or other regulatory
authorities. The Company and the Trust shall also each promptly inform the
other or the results of any examination by the SEC (or other regulatory
authorities) that relates to the Policies, the Trust or its Shares, and the
party that was the subject of the examination shall provide the other party
with a copy of relevant portions of any "deficiency letter" or other
correspondence or written report regarding any such examination.
4.6. The Trust and MFS will provide the Company with as much notice as is
reasonably practicable of any proxy solicitation for any Portfolio, and of
any material change in the Trusts registration statement,
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<PAGE>
particularly any change resulting in change to the registration statement
or prospectus or statement of additional information for any Account. The
Trust and MFS will cooperate with the Company so as to enable the Company
to solicit proxies from Policy owners or to make changes to its prospectus,
statement of additional information or registration statement, in an
orderly manner. The Trust and MFS will make reasonable efforts to attempt
to have changes affecting Policy prospectuses become effective
simultaneously with the annual updates for such prospectuses.
4.7. For purpose of this Article IV and Article VIII, the phrase "sales
literature or other promotional material" includes but is not limited to
advertisements (such as material published, or designed for use in, a
newspaper, magazine, or other periodical, radio, television, telephone or
tape recording, videotape display, signs or billboards, motion pictures, or
other public media), and sales literature (such as brochures, circulars,
reprints or excerpts or any other advertisement, sales literature, or
published articles), distributed or made generally available to customers
or the public, educational or training materials or communications
distributed or made generally available to some or all agents or employees.
ARTICLE V. FEES AND EXPENSES
5.1. The Trust shall pay no fee or other compensation to the Company under
this Agreement, and the Company shall pay no fee or other compensation to
the Trust, except that if the Trust or any Portfolio adopts and implements
a plan pursuant to Rule 12b-l under the 1940 Act to finance distribution
and Shareholder servicing expenses, then, subject to obtaining any required
exemptive orders or regulatory approvals, the Trust may make payments to
the Company or to the underwriter for the Policies if and in amounts agreed
to by the Trust in writing. Each party, however, shall, in accordance with
the allocation of expenses specified in Articles III and V hereof,
reimburse other parties for expense initially paid by one party but
allocated to another party. In addition, nothing herein shall prevent the
parties hereto from otherwise agreeing to perform, and arranging for
appropriate compensation for, other services relating to the Trust and/or
to the Accounts.
5.2. The Trust or its designee shall bear the expenses for the cost of
registration and qualification of the Shares under all applicable federal
and state laws, including preparation and filing of the Trust's
registration statement, and payment of filing fees and registration fees;
preparation and filing of the Trust's proxy materials and reports to
Shareholders; setting in type and printing its prospectus and statement of
additional information (to the extent provided by and as determined in
accordance with Article III above); selling in type and printing the proxy
materials and reports to Shareholders (to the extent provided by and as
determined in accordance with Article III above); the preparation of all
statements and notices required of the Trust by any federal or state law
with respect to its Shares; all taxes on the issuance or transfer of the
Shares; and the costs of distributing the Trust's prospectuses and proxy
materials to owners of Policies funded by the Shares and any expenses
permitted to be paid or assumed by the Trust pursuant to a plan, if any,
under Rule I 2b-1 under the 1940 Act. The Trust shall not bear any
expenses of marketing the Policies.
5.3. The Company shall bear the expenses of distributing the Shares'
prospectus or prospectuses in connection with new sales of the Policies and
of distributing the Trust's Shareholder reports and proxy materials to
Policy owners. The Company shall bear all expenses associated with the
registration, qualification, and filing of the Policies under applicable
federal securities and state insurance laws; the cost of preparing,
printing and distributing the Policy prospectus and statement of additional
information; and the cost of preparing, printing and distributing annual
individual account statements for Policy owners as required by state
insurance laws,
5.4. MFS will quarterly reimburse the Company certain of the administrative
costs and expenses incurred by the Company as a result of operations
necessitated by the beneficial ownership by Policy owners of shares of the
Portfolios of the Trust, equal to 0.15% per annum of the net assets of the
Trust attributable to variable life or variable annuity contracts offered
by Company or its affiliates up to $100 million and 0.20% per
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annum of the net assets of the Trust attributable to such contracts over
$100 million. In no event shall such fee be paid by the Trust, its
shareholders or by the Policy holders.
ARTICLE VI. DIVERSIFICATION AND RELATED LIMITATIONS
6.1. The Trust and MFS represent and warrant that each Portfolio of the
Trust will meet the diversification requirements of Section 817(h)(1) of
the Code and Treas. Reg. 1.817-5, relating to the diversification
requirements for variable annuity, endowment, or life insurance contracts,
as they may be amended from time to time (and any revenue rulings, revenue
proceeds, notices, and other published announcements of the Internal
Revenue Service interpreting these Sections), as if those requirements
applied directly to each such Portfolio. In the event that any Portfolio is
not so diversified at the end of any applicable quarter, the Trust and MFS
will make every effort to (a) adequately diversify the Portfolio so as to
achieve compliance within the grace period afforded by Treas., Reg.
1,817-5 and (b) notify the Company.
6.2 The Trust and MFS represent that each Portfolio of the Trust will elect
to be qualified as a Regulated Investment Company under Subchapter M of the
Code and that every effort will be made to maintain such qualification
(under Subchapter M or any successor or similar provision) and that the
Trust or us designee will notify the Company promptly upon having a
reasonable basis for believing that any Portfolio of the Trust has ceased
to so qualify or that any Portfolio might not so qualify in the future.
ARTICLE VII. POTENTIAL MATERIAL CONFLICTS
7.1. The Trust agrees that the Board, constituted with a majority of
disinterested trustees, will monitor each Portfolio of the Trust for the
existence of any material irreconcilable conflict between the interests of
the. variable annuity contract owners and the variable life insurance
policy owners of the Company and/or affiliated companies ("contract
owners") investing in the Trust. The Board shall have the sole authority to
determine if a material irreconcilable conflict exists, and such
determination shall be binding on the Company only if approved in the form
of a resolution by a majority of the Board, or a majority of the
disinterested trustees of the Board. The Board will give prompt notice of
any such determination to the Company.
7.2. The Company agrees that it will be responsible for assisting the Board
in carrying out its responsibilities under the conditions set forth in the
Trusts exemptive application pursuant to which the SEC has granted the
Mixed and Shared Funding Exemptive Order by providing the Board, as it may
reasonably request, with all information necessary for the Board to
consider any issues raised and agrees that it will be responsible for
promptly reporting any potential or existing conflicts of which it is aware
to the Board including, but not limited to, an obligation by the Company to
inform the Board whenever contract owner voting instructions are disregard.
The Company also agrees that, if a material irreconcilable conflict arises,
it will at its own cost remedy such conflict up to and including (a)
withdrawing the assets allocable to some or all of the Accounts from the
Trust or any Portfolio and reinvesting such assets in a different
investment medium, including (but not limited to) another Portfolio of the
Trust or submitting to a vote of all affected contract owners whether to
withdraw assets from the Trust or any Portfolio and reinvesting such assets
in a different investment medium and, as appropriate, segregating the
assets attributable to any appropriate group of contract owners that votes
in favor of such segregation, or offering to any of the affected contract
owners the option of segregating the assets attributable to their contracts
or policies, and (b) establishing a new registered management investment
company and segregating the assets underlying the Policies, unless a
majority of Policy owners materially adversely affected by the conflict
have voted to decline the offer to establish a new registered management
investment company.
7.3. A majority of the disinterested trustees of the Board shall determine
whether any proposed action by the Company adequately remedies any material
irreconcilable conflict. In the event that the Board determines that any
proposed action does not adequately remedy any material irreconcilable
conflict, the Company will
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withdraw from investment in the Trust each of the Accounts designated by
the disinterested trustees and terminate this Agreement within six (6)
months after the Board informs the Company in writing of the foregoing
determination; PROVIDED, HOWEVER, that such withdrawal and termination
shall be limited to the extent required to remedy any such material
irreconcilable conflict as determined by a majority of the disinterested
trustees of the Board.
7.4. If and to the extent that Rule 6e-2 and Rule 6e-3(T) are amended, or
Rule 6e-3 is adopted, to provide exemptive relief from any provision of the
1940 Act or the rules promulgated thereunder with respect to mixed or
shares funding (as defined in the Mixed and Shared Funding Exemptive Order)
on terms and conditions materially different from those contained in the
Mixed Shared Funding Exemptive Order, then (a) the Trust and/or the
Participating Insurance Companies, as appropriate, shall take such steps as
may be necessary to comply with Rule 6e-2 and 6e-3(T), as amended, and Rule
6e-3, as adopted, to the extent such rules are applicable; and (b) Sections
3.5, 3.6, 7.1, 7.2, 7.3 and 7.4 of this Agreement shall continue in effect
only to the extent that terms and conditions substantially identical to
such Sections are contained in such Rule(s) as so amended or adopted.
ARTICLE VIII. INDEMNIFICATION
8.1. INDEMNIFICATION BY THE COMPANY
The Company agrees to indemnify and hold harmless the Trust, MFS, any
affiliates of MFS, and each of their respective directors/trustees.
officers and each person, if any, who controls the Trust or MFS within the
meaning of Section 15 of the 1933 Act, and any agents or employees of the
foregoing (each an "Indemnified Party," or collectively, the "Indemnified
Parties" for purposes of this Section 8.1) against any and all losses,
claims, damages, liabilities (including amounts paid in settlement with the
written consent of the Company) or expenses (including reasonable counsel
fees) to which an Indemnified Party may become subject under any statute,
regulation, at common law or otherwise, insofar as such losses, claims,
damages, liabilities or expenses (or actions in respect thereof) or
settlements are related to the sale or acquisition of the Shares or the
Policies and:
(a) arise out of or are based upon any untrue statement or alleged
untrue statement of any material fact contained in the
registration statement, prospectus or statement of additional
information for the Policies or contained in the Policies or
sales literature or other promotional material for the Policies
(or any amendment or supplement to any of the foregoing), or
arise out of or are based upon the commission or the alleged
omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not
misleading PROVIDED that this agreement to indemnify shall not
apply as to any Indemnified Party if such statement or omission
or such alleged statement or omission was made in reasonable
reliance upon and in conformity with information furnished to the
Company or its designee by or on behalf of the Trust or MFS for
use in the registration statement, prospectus or statement of
additional information for the Policies or in the Policies or
sales literature or other promotional material (or any amendment
or supplement) or otherwise for use in connection with the sale
of the Policies or Shares; or
(b) arise out of or as a result of statements or representations
(other than statements or representations contained in the
registration statement, prospectus, statement of additional
information or sales literature or other promotional material of
the Trust not supplied by the Company or this designee, or
persons under its control and on which the Company has reasonably
relied) or wrongful conduct of the Company or persons under its
control, with respect to the sale or distribution of the Policies
or Shares; or
-9-
<PAGE>
(c) arise out of any untrue statement or alleged untrue statement of
a material fact contained in the registration statement,
prospectus, statement of additional information, or sales
literature or other promotional literature of the Trust, or any
amendment thereof or supplement thereto, or the omission or
alleged omission to state therein a material fact required to be
stated therein or necessary to make the statement or statements
therein not misleading, if such statement or omission was made in
reliance upon information furnished to the Trust by or on behalf
of the Company; or
(d) arise out of or result from any material breach of any
representation and/or warranty made by the Company in this
Agreement or arise out of or result from any other material
breach of this Agreement by the Company, or
(e) arise as a result of any failure by the Company to provide the
services and furnish the materials under the terms of this
Agreement; as limited by and in accordance with the provisions of
this Article VIII.
8.2. INDEMNIFICATION BY THE TRUST
The Trust agrees to indemnify and hold harmless the Company and each
of its directors and officers and each person, if any, who controls the
Company within the meaning of Section Is of the 1933 Act, and any agents or
employees of the foregoing (each an "Indemnified Party," or collectively,
the "Indemnified Parties" for purposes of this Section 8.2) against any and
all losses, claims, damages, liabilities (including amounts paid in
settlement with the written consent of the Trust) or expenses (including
reasonable counsel fees) to which any Indemnified Party may become subject
under any statute, at common law or otherwise, insofar as such losses,
claims, damages, liabilities or expenses (or actions in respect thereof) or
settlements are related to the sale or acquisition of the Shares or the
Policies and;
(a) arise out of or are based upon any untrue statement or alleged
untrue statement of any material fact contained in the
registration statement, prospectus, statement of additional
information or sales literature or other promotional material of
the Trust (or any amendment or supplement to any of the
foregoing), or arise out of or are based upon the omission or the
alleged omission to state therein a material fact required to be
stated therein or necessary to make the statement therein not
misleading, PROVIDED that this agreement to indemnify shall not
apply as to any Indemnified Party if such statement or omission
or such alleged statement or omission was made in reasonable
reliance upon and in conformity with information furnished to the
Trust, MFS, the Underwriter or their respective designees by or
on behalf of the Company for use in the registration statement,
prospectus or statement of additional information for the Trust
or in sales literature or other promotional material for the
Trust (or any amendment or supplement) or otherwise for use in
connection with the sale of the Policies or Shares; or
(b) arise out of or as a result of statements or representations
(other than statement or representations contained in the
registration statement, prospectus, statement of additional
information or sales literature or other promotional material for
the Policies not supplied by the Trust, MFS, the Underwriter or
any of their respective designees or persons under their
respective control and on which any such entity has reasonably
relied) or wrongful conduct of the Trust or persons under its
control, with respect to the sale or distribution of the Policies
or Shares; or
(c) arise out of or result from any material breach of any
representation and/or warranty made by the Trust in this
Agreement (including a failure, whether unintentional or in good
faith or otherwise, to comply with the diversification
requirements or a failure to qualify as a
-10-
<PAGE>
registered investment company, each as specified in Article VI of
this Agreement) or arise out of or result from any other material
breach of this Agreement by the Trust; or
(d) arise out of or result from the materially incorrect or untimely
calculation or reporting of the daily net asset value per share
or dividend or capital gain distribution rate; or
(e) arise as a result of any failure by the Trust to provide the
services and furnish the materials under the terms of the
Agreement; as limited by and in accordance with the provisions of
this Article VIII.
8.3. In no event shall the Trust be liable under the indemnification
provisions contained in this Agreement to any individual or entity,
including without limitation, the Company, or any Participating Insurance
Company or any Policy holder, with respect to any losses, claims, damages,
liabilities or expenses that arise out of or result from (i) a breach of
any representation, warranty, and/or covenant made by the Company hereunder
or by any Participating Insurance Company under an agreement containing
substantially similar representations, warranties and covenants; (ii) the
failure by the Company or any Participating Insurance Company to maintain
its segregated asset account (which invests in any Portfolio) as a legally
and validly established segregated asset account under applicable state law
and as a duly registered unit investment trust under the provisions of the
1940 Act (unless exempt therefrom); or (iii) the failure by the Company or
any Participating Insurance Company to maintain its variable annuity and/or
variable life insurance contracts (with respect to which any Portfolio
serves as an underlying funding vehicle) as life insurance, endowment or
annuity contracts under applicable provisions of the Code.
8.4. Neither the Company nor the Trust shall be liable under the
indemnification provisions contained in this Agreement with respect to any
losses, claims, damages, liabilities or expenses to which an Indemnified
Party would otherwise be subject by reason of such Indemnified Party's
willful misfeasance, willful misconduct, or gross negligence in the
performance of such Indemnified Party's duties or by reason of such
Indemnified Party's reckless disregard of obligations and duties under this
Agreement.
8.5. Promptly after receipt by an Indemnified Party under this Section 8.5.
of commencement of action, such Indemnified Party will, if a claim in
respect thereof is to be made against the indemnifying party under this
section, notify the indemnifying party of the commencement thereof; but the
omission so to notify the indemnifying party will not relieve it from any
liability which it may have to any Indemnified Party otherwise than under
this section. In case any such action is brought against any Indemnified
Party, and it notified the indemnifying party of the commencement thereof,
the indemnifying party will be entitled to participate therein and, to the
extent that it may wish, assume the defense thereof, with counsel
satisfactory to such Indemnified Party. After notice from the indemnifying
party of its intention to assume the defense of an action, the indemnified
Party shall bear the expenses of any additional counsel obtained by it, and
the indemnifying party shall not be liable to such Indemnified Party under
this section for any legal or other expenses subsequently incurred by such
Indemnified Party in connection with the defense thereof other than
reasonable costs of investigation.
8.6. Each of the parties agrees promptly to notify the other parties of the
commencement of any litigation or proceeding against it or any of its
respective officers, directors, trustees, employees or 1933 Act control
persons in connection with the Agreement, the issuance or sale of the
Policies, the operation of the Accounts, or the sale or acquisition of
Shares.
8.7. A successor by law of the parties to this Agreement shall be entitled
to the benefits of the indemnification contained in this Article VIII. The
indemnification provisions contained in this Article VIII are in addition
to any liability the parties may otherwise have.
-11-
<PAGE>
ARTICLE IX. APPLICABLE LAW
9.1. This Agreement shall be construed and the provisions hereof
interpreted under and in accordance with the laws of The Commonwealth of
Massachusetts.
9.2. This Agreement shall be subject to the provisions of the 1933, 1934
and 1940 Acts, and the rules and regulations and rulings thereunder,
including such exemptions from those statutes, rules and regulations as the
SEC may grant and the terms hereof shall be interpreted and construed in
accordance therewith.
ARTICLE X. NOTICE OF FORMAL PROCEEDINGS
The Trust, MFS, and the Company agree that each such party shall
promptly notify the other parties to this Agreement, in writing, of the
institution of any formal proceedings brought against such party or its
designees by the NASD, the SEC, or any insurance department or any other
regulatory body regarding such party's duties under this Agreement or related to
the sale of the Policies, the operation of the Accounts, or the purchase of the
Shares.
ARTICLE XI. TERMINATION
11.1. This Agreement shall terminate with respect to the Accounts, or one,
some, or all Portfolios:
(a) at the option of any party upon six (6) months' advance written
notice to the other parties; or
(b) at the option of the Company to the extent that the Shares of
Portfolios are not reasonably available to meet the requirements
of the Policies or are not "appropriate funding vehicles" for the
Policies. as reasonably determined by the Company. Without
limiting the generality of the foregoing, the Shares of a
Portfolio would not be "appropriate funding vehicles" if, for
example, such Shares did not meet the diversification or other
requirements referred to in Article VI hereof; or if the Company
would be permitted to disregard Policy owner voting instructions
pursuant to Rule 6e-2 or 6e-3(T) under the 1940 Act. Prompt
notice of the election to terminate for such cause and an
explanation of such cause shall be furnished to the Trust by the
Company; or
(c) at the option of the Trust or MFS upon institution of formal
proceedings against the Company by the NASD, the SEC, or any
insurance department or any other regulatory body regarding the
Company's duties under this Agreement or related to the sale of
the Policies, the operation of the Accounts, or the purchase of
the Shares; or
(d) at the option of the Company upon institution of formal
proceedings against the Trust by the NASD, the SEC, or any state
securities or insurance department or any other regulatory body
regarding the Trust's or MFS' duties under this Agreement or
related to the sale of the Shares; or
(e) at the option of the Company, the Trust or MFS upon receipt of
any necessary regulatory approvals and/or the vote of the Policy
owners having an interest in the Accounts (or any subaccounts) to
substitute the shares of another investment company for the
corresponding Portfolio Shares in accordance with the terms of
the Policies for which those Portfolio Shares had been selected
to serve as the underlying investment media. The Company will
give thirty (30) days' prior written notice to the Trust of the
Date of any proposed vote or other action taken to replace the
Shares; or
-12-
<PAGE>
(f) termination by either the Trust or MFS by written notice to the
Company, if either one or both of the Trust or MFS respectively,
shall determine, in their sole judgment exercised in good faith,
that the Company has suffered a material adverse change in its
business, operations, financial condition, or prospects since the
date of this Agreement or is the subject of material adverse
publicity; or
(g) termination by the Company by written notice to the Trust and
MFS, if the Company shall determine, in its sole judgment
exercised in good faith, that the Trust or MFS has suffered a
material adverse change in this business, operations, financial
condition or prospects since the date of this Agreement or is the
subject of material adverse publicity; or
(h) at the option of any party to this Agreement, upon another
party's material breach of any provision of this Agreement; or
(i) upon assignment of this Agreement, unless made with the written
consent of the parties hereto.
11.2. The notice shall specify the Portfolio or Portfolios, Policies and,
if applicable, the Accounts as to which the Agreement is to be terminated.
11.3. It is understood and agreed that the right of any party hereto to
terminate this Agreement pursuant to Section 11.1(a) may be exercised for
cause or for no cause.
11.4. Except as necessary to implement Policy owner initiated transactions,
or as required by state insurance laws or regulations, the Company shall
not redeem the Shares attributable to the Policies (as opposed to the
Shares attributable to the Company's assets held in the Accounts), and the
Company shall not prevent Policy owners from allocating payments to a
Portfolio that was otherwise available under the Policies, until thirty
(30) days after the Company shall have notified the Trust of its intention
to do so.
11.5. Notwithstanding any termination of this Agreement, the Trust and MFS
shall, at the option of the Company, continue to make available additional
shares of the Portfolios pursuant to the terms and conditions of this
Agreement, for all Policies in effect on the effective date of termination
of this Agreement (the "Existing Policies"), except as otherwise provided
under Article VII of this Agreement. Specifically, without limitation, the
owners of the Existing Policies shall be permitted to transfer or
reallocate investment under the Policies, redeem investments in any
Portfolio and/or invest in the Trust upon the making of additional purchase
payments under the Existing Policies.
11.6. If this Agreement terminates, the parties agree that Article VIII,
and to the extent that all or a portion of the assets of the Accounts
continue to be invested in the Trust, Articles I, II, III, VI and VII, will
remain in effect after termination.
-13-
<PAGE>
ARTICLE XII. NOTICES
Any notice shall be sufficiently given when sent by registered or
certified mail to the other party at the address of such party set forth below
or at such other address as such party may from time to time specify in writing
to the other party.
If to the Trust:
MFS VARIABLE INSURANCE TRUST
500 Boylston Street
Boston, Massachusetts 02116
Attn.: Stephen E. Cavan, Secretary
If to the Company:
PRUDENTIAL INSURANCE COMPANY OF AMERICA
751 Broad Street, 21 Plaza
Newark, NJ 07102-3777
Attn.: Mary L. Cavanaugh,
Deputy Chief Legal Officer
If to MFS:
MASSACHUSETTS FINANCIAL SERVICES COMPANY
500 Boylston Street
Boston, Massachusetts 02116
Attn.: Stephen E. Cavan, General Counsel
ARTICLE XIII. MISCELLANEOUS
13.1. Subject to the requirement of legal process and regulatory
authority, each party hereto shall treat as confidential the names and
addresses of the owners of the Policies and all information reasonably
identified as confidential in writing by any other party hereto and, except
as permitted by this Agreement or as otherwise required by applicable law
or regulation, shall not disclose, disseminate or utilize such names and
addresses and other confidential information without the express written
consent of the affected party until such time as it may come into the
public domain.
13.2. The captions in this Agreement are included for convenience of
reference only and in no way define or delineate any of the provisions
hereof or otherwise affect their construction or effect.
13.3. This Agreement may be executed simultaneously in one or more
counterparts, each of which taken together shall constitute one and the
same instrument.
13.4. If any provision of this Agreement shall beheld or made invalid by a
court decision, statute, rule or otherwise, the remainder of the Agreement
shall not be affected thereby.
13.5. The Schedule attached hereto, as modified from time to time, is
incorporated herein by reference and is part of this Agreement.
-14-
<PAGE>
13.6. Each party hereto shall cooperate with each other party in connection
with inquiries by appropriate governmental authorities (including without
limitation the SEC, the NASD, and state insurance regulators) relating to
this Agreement or the transactions contemplated hereby.
13.7. The rights, remedies and obligations contained in this Agreement are
cumulative and are in addition to any and all rights, remedies and
obligations, at law or in equity, which the parties hereto are entitled to
under state and federal laws.
13.8. A copy of the Trust's Declaration of Trust is on file with the
Secretary of State of The Commonwealth of Massachusetts. The Company
acknowledges that the obligations of or arising out of this instrument are
not binding upon any of the Trust's trustees, officers, employees, agents
or shareholders individually, but are binding solely upon the assets and
property of the Trust in accordance with its proportionate interest
hereunder. The Company further acknowledges that the assets and liabilities
of each Portfolio are separate and distinct and that the obligations of or
arising out of this instrument are binding solely upon the assets or
property of the Portfolio on whose behalf the Trust has executed this
instrument. The Company also agrees that the obligations of each Portfolio
hereunder shall be several and not joint, in accordance with its
proportionate interest hereunder, and the Company agrees not to proceed
against any Portfolio for the obligations of another Portfolio.
IN WITNESS WHEREOF, each of the parties hereto has caused this
Agreement to be executed in its name and on its behalf by its duly authorized
representative and its seal to be hereunder affixed hereto as of the date
specified above.
PRUDENTIAL INSURANCE COMPANY OF AMERICA
By its authorized officer,
By: /s/ DEBRA GOLDBERG
------------------------------------
Title: Vice-President, Marketing
MFS VARIABLE INSURANCE TRUST,
ON BEHALF OF THE PORTFOLIOS
By its authorized officer and not individually
By: /s/ A. KEITH BRODKIN, CHAIRMAN
------------------------------------------
A. Keith Brodkin, Chairman
MASSACHUSETTS FINANCIAL SERVICES COMPANY
By its authorized officer,
By: /s/ ARNOLD D. SCOTT
-----------------------------------------
Arnold D. Scott,
Senior Executive Vice-President
-15-
<PAGE>
<TABLE>
As of April 11, 1997
SCHEDULE A
ACCOUNTS, POLICIES AND PORTFOLIOS
SUBJECT TO THE PARTICIPATION AGREEMENT
<CAPTION>
====================================================================================================================
NAME OF SEPARATE | |
ACCOUNT AND DATE | POLICIES FUNDED | PORTFOLIOS
ESTABLISHED BY BOARD OF DIRECTORS | BY SEPARATE ACCOUNT | APPLICABLE TO POLICIES
==========================================|====================================|====================================
<S> <C> <C>
| |
| |
| |
THE PRUDENTIAL VARIABLE | GROUP VARIABLE UNIVERSAL | MFS BOND SERIES
CONTRACT ACCOUNT GI-2 | LIFE INSURANCE CONTRACT | MFS EMERGING GROWTH SERIES
(EST. 6/24/88) | SERIES #89759 | MFS GROWTH AND INCOME SERIES
| | MFS HIGH INCOME SERIES
| | MFS LIMITED MATURITY SERIES
| | MFS RESEARCH SERIES
| | MFS TOTAL RETURN SERIES
| | MFS UTILITIES SERIES
| | MFS VALUE SERIES
| | MFS WORLD GOVERNMENT SERIES
| |
- ------------------------------------------|------------------------------------|------------------------------------
| |
PRUDENTIAL DISCOVERY | DISCOVERY SELECT | MFS EMERGING GROWTH SERIES
SELECT GROUP VARIABLE | GROUP ANNUITY | MFS RESEARCH SERIES
CONTRACT ACCOUNT | CONTRACT |
(EST. 2/11/97) | |
| |
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
PARTICIPATION AGREEMENT
By and Among
OCC ACCUMULATION TRUST
And
PRUDENTIAL INSURANCE COMPANY OF AMERICA
And
OCC DISTRIBUTORS
THIS AGREEMENT, made and entered into this 1st day of____ 1997 by and among
PRUDENTIAL INSURANCE COMPANY OF AMERICA, a New Jersey Corporation (hereinafter
the "Company"), on its own behalf and on behalf of each separate account of the
Company named in Schedule 1 to this Agreement, as may be amended from time to
time (each account referred to as the "Account"), OCC ACCUMULATION TRUST, an
open-end diversified management investment company organized under the laws of
the State of Massachusetts (hereinafter the "Fund") and OCC DISTRIBUTORS, a
Delaware general partnership (hereinafter the "Underwriter").
WHEREAS, the Fund engages in business as an open-end diversified,
management investment company and was established for the purpose of serving as
the investment vehicle for separate accounts established for variable life
insurance contracts and variable annuity contracts to be offered by insurance
companies which have entered into participation agreements substantially
identical to this Agreement (hereinafter "Participating Insurance Companies");
and
<PAGE>
WHEREAS, beneficial interests in the Fund are divided into several series
of shares, each representing the interest in a particular managed portfolio of
securities and other assets (the "Portfolios"); and
WHEREAS, the Fund has obtained an order from the Securities & Exchange
Commission (alternatively referred to as the "SEC" or the "Commission"), dated
February 22, 1995 (File No.812-9290), granting Participating Insurance Companies
and variable annuity separate accounts and variable life insurance separate
accounts relief from the provisions of Sections 9(a), 13(a), 15(a), and 15(b) of
the Investment Company Act of 1940, as amended, (hereinafter the "1940 Act") and
Rules 6e-2(b)(15) and 6e-3(T)(b)(15) thereunder, to the extent necessary to
permit shares of the Fund to be sold to and held by variable annuity separate
accounts and variable life insurance separate accounts of both affiliated and
unaffiliated Participating Insurance Companies and qualified pension and
retirement plans (hereinafter the "Mixed and Shared Funding Exemptive Order");
and
WHEREAS, the Fund is registered as an open-end management investment
company under the 1940 Act and its shares are registered under the Securities
Act of 1933, as amended (hereinafter the "1933 Act"); and
WHEREAS, the Company has registered or will register certain variable
annuity Contracts (the "Contracts") under the 1933 Act; and
WHEREAS, the Account is a duly organized, validly existing segregated asset
account established by resolution of the Board of Directors of the Company under
the insurance laws of the State of New Jersey, to set aside and invest assets
attributable to the Contracts; and
2
<PAGE>
WHEREAS, the Company has registered the Account as a unit investment trust
under the 1940 Act; and
WHEREAS, the Underwriter is registered as a broker-dealer with the SEC
under the Securities Exchange Act of 1934, as amended (hereinafter the "1934
Act"), and is a member in good standing of the National Association of
Securities Dealers, Inc. (hereinafter "NASD"); and
WHEREAS, to the extent permitted by applicable insurance laws and
regulations, the Company intends to purchase shares in the Portfolios named in
Schedule 2 on behalf of the Account to fund the Contracts and the Underwriter is
authorized to sell such shares to unit investment trusts such as the Account at
net asset value;
NOW, THEREFORE, in consideration of their mutual promises, the Company, the
Fund and the Underwriter agree as follows:
ARTICLE I. SALE OF FUND SHARES
1.1. The Underwriter agrees to sell to the Company those shares of the Fund
which the Company orders on behalf of the Account, executing such orders on a
daily basis at the net asset value next computed after receipt and acceptance by
the Fund or its agent of the order for the shares of the Fund. For purposes of
this Section 1.1, the Company shall be the designee of the Fund for receipt of
such orders from each Account and receipt by such designee shall constitute
receipt by the Fund; provided that the Fund receives notice of such order by
10:00 a.m. Eastern Time on the next following Business Day. "Business Day" shall
mean any day on which
3
<PAGE>
the New York Stock Exchange is open for trading and on which the Fund calculates
its net asset value pursuant to the rules of the SEC.
1.2. The Company shall pay for Fund shares on the next Business Day after
it places an order to purchase Fund shares in accordance with Section 1.1
hereof. Payment shall be in federal funds transmitted by wire.
1.3. The Fund agrees to make its shares available indefinitely for purchase
at the applicable net asset value per share by Participating Insurance Companies
and their separate accounts on those days on which the Fund calculates its net
asset value pursuant to rules of the SEC; provided, however, that the Board of
Trustees of the Fund (hereinafter the "Directors") may refuse to sell shares of
any Portfolio to any person, or suspend or terminate the offering of shares of
any Portfolio if such action is required by law or by regulatory authorities
having jurisdiction or is, in the sole discretion of the Directors, acting in
good faith and in light of their fiduciary duties under federal and any
applicable state laws, necessary in the best interests of the shareholders of
any Portfolio.
1.4. The Fund and the Underwriter agree that shares of the Fund will be
sold only to Participating Insurance Companies and their separate accounts,
qualified pension and retirement plans or such other persons as are permitted
under applicable provisions of the Internal Revenue Code of 1986, as amended,
(the "Internal Revenue Code"), and regulations promulgated thereunder, the sale
to which will not impair the tax treatment currently afforded the contracts. No
shares of any Portfolio will be sold to the general public.
1.5. The Fund and the Underwriter will not sell Fund shares to any
insurance company or separate account unless an agreement containing provisions
substantially the same as
4
<PAGE>
Articles I, III, V, and VII of this Agreement are in effect to govern such
sales. The Fund shall make available upon written request from the Company (i) a
list of all other Participating Insurance Companies and (ii) a copy of the
Participation Agreement executed by any other Participating Insurance Company.
1.6. The Fund agrees to redeem for cash, upon the Company's request, any
full or fractional shares of the Fund held by the Company, executing such
requests on a daily basis at the net asset value next computed after receipt and
acceptance by the Fund or its agent of the request for redemption. For purposes
of this Section 1.6, the Company shall be the designee of the Fund for receipt
of requests for redemption from each Account and receipt by such designee shall
constitute receipt by the Fund; provided the Fund receives notice of request for
redemption by 10:00 a.m. Eastern Time on the next following Business Day.
Payment shall be in federal funds transmitted by wire to the Company's account
as designated by the Company in writing from time to time, on the same Business
Day the Fund receives notice of the redemption order from the Company except
that the Fund reserves the right to delay payment of redemption proceeds, but in
no event may such payment be delayed longer than the period permitted under
Section 22(e) of the 1940 Act. Neither the Fund nor the Underwriter shall bear
any responsibility whatsoever for the proper disbursement or crediting of
redemption proceeds; the Company alone shall be responsible for such action. If
notification of redemption is received after 10:00 a.m. Eastern Time, payment
for redeemed shares will be made on the next following Business Day.
1.7. The Company agrees to purchase and redeem the shares of the Portfolios
named in Schedule 2 offered by the then current prospectus of the Fund in
accordance with the provisions of such prospectus.
5
<PAGE>
1.8. Issuance and transfer of the Fund's shares will be by book entry only.
Stock certificates will not be issued to the Company or any Account. Purchases
and redemption orders for Fund shares will be recorded in an appropriate title
for each Account or the appropriate subaccount of each Account.
1.9. The Fund shall furnish notice as soon as reasonably practicable to the
Company of any income, dividends or capital gain distributions payable on the
Fund's shares. The Company hereby elects to receive all such dividends and
distributions as are payable on the Portfolio shares in the form of additional
shares of that Portfolio. The Company reserves the right to revoke this election
and to receive all such dividends and distributions in cash. The Fund shall
notify the Company of the number of shares so issued as payment of such
dividends and distributions.
1.10. The Fund shall make the net asset value per share for each Portfolio
available to the Company on a daily basis as soon as reasonably practical after
the net asset value per share is calculated and shall use its best efforts to
make such net asset value per share available by 5:30 p.m., Eastern Time, each
business day. If the Fund provides the Company with materially incorrect share
net asset value information through no fault of the Company, the Company on
behalf of the Account shall be entitled to an adjustment to the number of shares
purchased or redeemed to reflect the correct share net asset value. Any material
error in the calculation of net asset value per share, dividend or capital gain
information shall be reported to the Company promptly upon discovery.
6
<PAGE>
ARTICLE II. REPRESENTATIONS AND WARRANTIES
2.1. The Company represents and warrants that the Contracts are or will be
registered under the 1933 Act and that the Contracts will be issued and sold in
compliance with all applicable federal and state laws. The Company further
represents and warrants that it is an insurance company duly organized and in
good standing under applicable law and that it has legally and validly
established each Account as a segregated asset account under applicable state
law and has registered each Account as a unit investment trust in accordance
with the provisions of the 1940 Act to serve as segregated investment accounts
for the Contracts, and that it will maintain such registration for so long as
any Contracts are outstanding. The Company shall amend the registration
statement under the 1933 Act for the Contracts and the registration statement
under the 1940 Act for the Account from time to time as required in order to
effect the continuous offering of the Contracts or as may otherwise be required
by applicable law. The Company shall register and qualify the Contracts for sale
in accordance with the securities laws of the various states only if and to the
extent deemed necessary by the Company.
2.2. The Company represents that it believes that the Contracts are
currently and at the time of issuance will be treated as annuity contracts under
applicable provisions of the Internal Revenue Code and that it will make every
effort to maintain such treatment and that it will notify the Fund and the
Underwriter immediately upon having a reasonable basis for believing that the
Contracts have ceased to be so treated or that they might not be so treated in
the future.
2.3. The Fund represents and warrants that Fund shares sold pursuant
to this Agreement shall be registered under the 1933 Act and duly authorized for
issuance in accordance with applicable law and that the Fund is and shall remain
registered under the 1940 Act for as
7
<PAGE>
long as the Fund shares are sold. The Fund shall amend the registration
statement for its shares under the 1933 Act and the 1940 Act from time to time
as required in order to effect the continuous offering of its shares. The Fund
shall register and qualify the shares for sale in accordance with the laws of
the various states only if and to the extent deemed advisable by the Fund or the
Underwriter.
2.4. The Fund represents that it is currently qualified as a Regulated
Investment Company under Subchapter M of the Internal Revenue Code, and that it
will maintain such qualification (under Subchapter M or any successor or similar
provision) and that it will notify the Company immediately upon having a
reasonable basis for believing that it has ceased to so qualify or that it might
not so qualify in the future.
2.5. The Fund represents that its investment objectives, policies and
restrictions comply with applicable state investment laws as they may apply to
the Fund. The Fund makes no representation as to whether any aspect of its
operations (including, but not limited to, fees and expenses and investment
policies) complies with the insurance laws and regulations of any state. The
Company alone shall be responsible for informing the Fund of any insurance
restrictions imposed by state insurance laws which are applicable to the Fund.
To the extent feasible and consistent with market conditions, the Fund will
adjust its investments to comply with the aforementioned state insurance laws
upon written notice from the Company of such requirements and proposed
adjustments, it being agreed and understood that in any such case the Fund shall
be allowed a reasonable period of time under the circumstances after receipt of
such notice to make any such adjustment.
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2.6. The Fund currently does not intend to make any payments to finance
distribution expenses pursuant to Rule 12b-1 under the 1940 Act or otherwise,
although it may make such payments in the future. To the extent that it decides
to finance distribution expenses pursuant to Rule 12b-1, the Fund undertakes to
have its Board of Trustees, a majority of whom are not interested persons of the
Fund, formulate and approve any plan under Rule 12b-1 to finance distribution
expenses.
2.7. The Underwriter represents and warrants that it is a member in good
standing of the National Association of Securities Dealers, Inc., ("NASD") and
is registered as a broker-dealer with the SEC. The Underwriter further
represents that it will sell and distribute the Fund shares in accordance with
all applicable federal and state securities laws, including without limitation
the 1933 Act, the 1934 Act, and the 1940 Act.
2.8. The Fund represents that it is lawfully organized and validly existing
under the laws of Massachusetts and that it does and will comply with applicable
provisions of the 1940 Act.
2.9. The Underwriter represents and warrants that the Fund's Adviser, OpCap
Advisors, is and shall remain duly registered under all applicable federal and
state securities laws and that the Adviser will perform its obligations to the
Fund in accordance with the laws of Massachusetts and any applicable state and
federal securities laws.
2.10. The Fund and Underwriter represent and warrant that all of their
directors, officers, employees, investment advisers, and other
individuals/entities having access to the funds and/or securities of the Fund
are and continue to be at all times covered by a blanket fidelity bond or
similar coverage for the benefit of the Fund in an amount not less than the
minimal coverage as
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required currently by Rule 17g-(1) of the 1940 Act or related provisions as may
be promulgated from time to time. The aforesaid Bond includes coverage for
larceny and embezzlement and is issued by a reputable bonding company.
2.11. The Company represents and warrants that all of its directors,
officers, employees, investment advisers, and other individuals/entities dealing
with the money and/or securities of the Fund are covered by a blanket fidelity
bond or similar coverage for the benefit of the Fund, in an amount not less than
$5 million. The aforesaid includes coverage for larceny and embezzlement and is
issued by a reputable bonding company. The Company agrees to make all reasonable
efforts to see that this bond or another bond containing these provisions is
always in effect, and agrees to notify the Fund and the Underwriter in the event
that such coverage no longer applies.
ARTICLE III. PROSPECTUSES AND PROXY STATEMENTS; VOTING
3.1. The Underwriter shall provide the Company, at the Company's expense,
with as many copies of the Fund's current prospectus as the Company may
reasonably request for use with prospective contractowners and applicants. The
Underwriter shall print and distribute, at the Fund's or Underwriter's expense,
as many copies of said prospectus as necessary for distribution to existing
contractowners or participants. If requested by the Company in lieu thereof, the
Fund shall provide such documentation including a final copy of a current
prospectus set in type, or, at the request of the Company, as a diskette, at the
Fund's expense and other assistance as is reasonably necessary in order for the
Company at least annually (or more frequently if the Fund prospectus is amended
more frequently) to have the new prospectus for the Contracts,
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prospectuses for other mutual funds in which the Contracts may be invested and
the Fund's new prospectus printed together in one document. In such case the
Fund shall bear its share of expenses as described above.
3.2. The Fund's prospectus shall state that the Statement of Additional
Information for the Fund is available from the Underwriter or alternatively from
the Company (or in the Fund's discretion, the Prospectus shall state that such
Statement is available from the Fund), and the Underwriter (or the Fund) shall
provide such Statement, at its expense, to the Company and to any owner of or
participant under a Contract who requests such Statement or, at the Company's
expense, to any prospective contractowner and applicant who requests such
statement.
3.3. The Fund, at its expense, shall provide the Company with copies of its
proxy material, if any, reports to shareholders and other communications to
shareholders in such quantity as the Company shall reasonably require and shall
bear the costs of distributing them to existing contractowners or participants.
3.4. If and to the extent required by law the Company shall:
(i) solicit voting instructions from contractowners or participants;
(ii) vote the Fund shares held in the Account in accordance with
instructions received from contractowners or participants; and
(iii) vote Fund shares held in the Account for which no timely
instructions have been received, in the same proportion as Fund
shares of such Portfolio for which instructions have been
received from the Company's contractowners or participants;
so long as and to the extent that the SEC continues to interpret the 1940 Act
to require pass through voting privileges for variable contractowners. The
Company reserves the right to vote
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Fund shares held in any segregated asset account in its own right, to the extent
permitted by law. Participating Insurance Companies shall be responsible for
assuring that each of their separate accounts participating in the Fund
calculates voting privileges in a manner consistent with other Participating
Insurance Companies.
3.5. The Fund will comply with all provisions of the 1940 Act requiring
voting by shareholders, and in particular as required, the Fund will either
provide for annual meetings or comply with Section 16(c) of the 1940 Act
(although the Fund is not one of the trusts described in Section 16(c) of that
Act) as well as with Sections 16(a) and, if and when applicable, 16(b). Further,
the Fund will act in accordance with the SEC interpretation of the requirements
of Section 16(a) with respect to periodic elections of directors and with
whatever rules the Commission may promulgate with respect thereto.
ARTICLE IV. SALES MATERIAL AND INFORMATION
4.1. The Company shall furnish, or shall cause to be furnished, to the Fund
or the Underwriter, each piece of sales literature or other promotional material
in which the Fund or the Fund's adviser or the Underwriter is named, at least
ten business days prior to its use. No such material shall be used if the Fund
or the Underwriter reasonably objects in writing to such use within ten business
days after receipt of such material.
4.2. The Company shall not give any information or make any representations
or statements on behalf of the Fund or concerning the Fund in connection with
the sale of the Contracts other than the information or representations
contained in the registration statement or prospectus for the Fund shares, as
such registration statement and prospectus may be amended or
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supplemented from time to time, or in reports or proxy statements for the Fund,
or in sales literature or other promotional material approved by the Fund or by
the Underwriter, except with the permission of the Fund or the Underwriter. The
Fund and the Underwriter agree to respond to any request for approval on a
prompt and timely basis.
4.3. The Fund or the Underwriter shall furnish, or shall cause to be
furnished, to the Company or its designee, each piece of sales literature or
other promotional material in which the Company or its separate account is
named, at least ten business days prior to its use. No such material shall be
used if the Company reasonably objects in writing to such use within ten
business days after receipt of such material.
4.4. The Fund and the Underwriter shall not give any information or make
any representations on behalf of the Company or concerning the Company, each
Account, or the Contracts other than the information or representations
contained in a registration statement or prospectus for the Contracts, as such
registration statement and prospectus may be amended or supplemented from time
to time, or in published reports for each Account which are in the public domain
or approved by the Company for distribution to contractowners or participants,
or in sales literature or other promotional material approved by the Company,
except with the permission of the Company. The Company agrees to respond to any
request for approval on a prompt and timely basis.
4.5. The Fund will provide to the Company at least one complete copy of all
registration statements, prospectuses, statements of additional information,
reports, proxy statements, sales literature and other promotional materials,
applications for exemptions, requests for no-action letters, and all amendments
to any of the above, that relate to the Fund or its shares,
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<PAGE>
contemporaneously with the filing of such document with the SEC or other
regulatory authorities.
4.6. The Company will provide to the Fund at least one complete copy of all
registration statements, prospectuses, statements of additional information,
reports, solicitations for voting instructions, sales literature and other
promotional materials, applications for exemptions, requests for no-action
letters, and all amendments to any of the above, that relate to the Contracts or
each Account, contemporaneously with the filing of such document with the SEC or
other regulatory authorities.
4.7. For purposes of this Article IV, the phrase "sales literature or other
promotional material" includes, but is not limited to, advertisements (such as
material published, or designed for use in, a newspaper, magazine, or other
periodical, radio, television, telephone or tape recording, videotape display,
signs or billboards, motion pictures, or other public media), sales literature
(I.E., any written communication distributed or made generally available to
customers or the public, including brochures, circulars, research reports,
market letters, form letters, seminar texts, reprints or excerpts of any other
advertisement, sales literature, or published article), educational or training
materials or other communications distributed or made generally available to
some or all agents or employees, registration statements, prospectuses,
statements of additional information, shareholder reports, and proxy materials
and any other material constituting sales literature or advertising under NASD
rules, the 1940 Act or the 1933 Act.
ARTICLE V. FEES AND EXPENSES
5.1. The Fund and Underwriter shall pay no fee or other compensation to the
Company under this Agreement, except that if the Fund or any Portfolio adopts
and implements a
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plan pursuant to Rule 12b-l to finance distribution expenses, then, subject to
obtaining any required exemptive orders or other regulatory approvals, the
Underwriter may make payments to the Company or to the underwriter for the
Contracts if and in amounts agreed to by the Under-writer in writing.
Currently, no such payments are contemplated.
5.2. All expenses incident to performance by the Fund of this Agreement
shall be paid by the Fund to the extent permitted by law. All Fund shares will
be duly authorized for issuance and registered in accordance with applicable
federal law and to the extent deemed advisable by the Fund, in accordance with
applicable state law, prior to sale. The Fund shall bear the expenses for the
cost of registration and qualification of the Fund's shares, preparation and
filing of the Fund's prospectus and registration statement, Fund proxy materials
and reports, setting in type, printing and distributing the prospectuses, the
proxy materials and reports to existing shareholders and contractowners, the
preparation of all statements and notices required by any federal or state law,
all taxes on the issuance or transfer of the Fund's shares, and any expenses
permitted to be paid or assumed by the Fund pursuant to a plan, if any, under
Rule 12b-1 under the 1940 Act.
ARTICLE VI. DIVERSIFICATION
6.1. The Fund will at all times invest money from the Contracts in such a
manner as to ensure that the Contracts will be treated as variable contracts
under the Internal Revenue Code and the regulations issued thereunder. Without
limiting the scope of the foregoing, the Fund will comply with Section 817(h) of
the Internal Revenue Code and Treasury Regulation 1.817-5, relating to the
diversification requirements for variable annuity, endowment, or life
15
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insurance contracts and any amendments or other modifications to such Section or
Regulations. In the event of a breach of this Article VI by the Fund, it will
take all reasonable steps (a) to notify the Company of such breach and (b) to
adequately diversify the Fund so as to achieve compliance with the grace period
afforded by Treasury Regulation 1.817-5.
ARTICLE VII. POTENTIAL CONFLICTS
7.1. The Board of Trustees of the Fund (the "Fund Board") will monitor the
Fund for the existence of any material irreconcilable conflict among the
interests of the contractowners of all separate accounts investing in the Fund.
An irreconcilable material conflict may arise for a variety of reasons,
including: (a) an action by any state insurance regulatory authority; (b) a
change in applicable federal or state insurance, tax, or securities laws or
regulations, or a public ruling, private letter ruling, no-action or
interpretative letter, or any similar action by insurance, tax, or securities
regulatory authorities; (c) an administrative or judicial decision in any
relevant proceeding; (d) the manner in which the investments of any Portfolio
are being managed; (e) a difference in voting instructions given by
Participating Insurance Companies or by variable annuity contract and variable
life insurance contractowners; or (f) a decision by an insurer to disregard the
voting instructions of contractowners. The Board shall promptly inform the
Company if it determines that an irreconcilable material conflict exists and the
implications thereof. A majority of the Fund Board shall consist of persons who
are not "interested" persons of the Fund.
7.2. The Company has reviewed a copy of the Mixed and Shared Funding
Exemptive Order, and in particular, has reviewed the conditions to the requested
relief set forth
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therein. As set forth in the Mixed and Shared Funding Exemptive Order, the
Company will report any potential or existing conflicts of which it is aware to
the Fund Board. The Company agrees to assist the Fund Board in carrying out its
responsibilities under the Mixed and Shared Funding Exemptive Order, by
providing the Fund Board with all information reasonably necessary for the Fund
Board to consider any issues raised. This includes, but is not limited to, an
obligation by the Company to inform the Fund Board whenever contractowner voting
instructions are disregarded. The Fund Board shall record in its minutes or
other appropriate records, all reports received by it and all action with regard
to a conflict.
7.3. If it is determined by a majority of the Fund Board, or a majority of
its disinterested Directors, that an irreconcilable material conflict exists,
the Company and other Part-icipating Insurance Companies shall, at their expense
and to the extent reasonably practicable (as determined by a majority of the
disinterested Directors), take whatever steps are necessary to remedy or
eliminate the irreconcilable material conflict, up to and including: (1)
withdrawing the assets allocable to some or all of the separate accounts from
the Fund or any Portfolio and reinvesting such assets in a different investment
medium, including (but not limited to) another Portfolio of the Fund, or
submitting the question whether such segregation should be implemented to a vote
of all affected contractowners and, as appropriate, segregating the assets of
any appropriate group (I.E., variable annuity contractowners or variable life
insurance contractowners, of one or more Participating Insurance Companies) that
votes in favor of such segregation, or offering to the affected contractowners
the option of making such a change, and (2) establishing a new registered
management investment company or managed separate account.
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7.4. If the Company's disregard of voting instructions could conflict with
the majority of contractowner voting instructions, and the Company's judgment
represents a minority position or would preclude a majority vote, the Company
may be required, at the Fund's election, to withdraw the Account's investment in
the Fund and terminate this Agreement with respect to such Account. Any such
withdrawal and termination must take place within 60 days after the Fund gives
written notice to the Company that this provision is being implemented. Until
the end of such 60 day period the Underwriter and Fund shall continue to accept
and implement orders by the Company for the purchase (and redemption) of shares
of the Fund.
7.5. If a particular state insurance regulator's decision applicable to the
Company conflicts with the majority of other state insurance regulators, then
the Company will withdraw the Account's investment in the Fund and terminate
this Agreement with respect to such Account. Any such withdrawal and termination
must take place within 60 days after the Fund gives written notice to the
Company that this provision is being implemented. Until the end of such 60 day
period the Underwriter and Fund shall continue to accept and implement orders by
the Company for the purchase (and redemption) of shares of the Fund.
7.6. For purposes of Sections 7.3 through 7.6 of this Agreement, a majority
of the disinterested members of the Fund Board shall determine whether any
proposed action adequately remedies any irreconcilable material conflict, but in
no event will the Fund or OpCap Advisors be required to establish a new funding
medium for the Contracts. The Company shall not be required by Section 7.3 to
establish a new funding medium for the Contracts if an offer to do so has been
declined by vote of a majority of contractowners materially adversely affected
by the irreconcilable material conflict.
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7.7. The Company shall at least annually submit to the Fund Board such
reports, materials or data as the Fund Board may reasonably request so that the
Fund Board may fully carry out the duties imposed upon it as delineated in the
Mixed and Shared Funding Exemptive Order, and said reports, materials and data
shall be submitted more frequently if deemed appropriate by the Fund Board.
7.8. If and to the extent that Rule 6e-2 and Rule 6e-3 (T) are amended, or
Rule 6e-3 is adopted, to provide exemptive relief from any provision of the Act
or the rules promulgated thereunder with respect to mixed or shared funding (as
defined in the Mixed and Shared Funding Exemptive Order) on terms and conditions
materially different from those contained in the Mixed and Shared Funding
Exemptive Order, (a) the Fund and/or the Participating Insurance Companies, as
appropriate, shall take such steps as may be necessary to comply with Rules 6e-2
and 6e-3 (T), as amended, and Rule 6e-3, as adopted, to the extent such rules
are applicable; and (b) Sections 3.4, 3.5, 7.1, 7.2, 7.3, 7.4, and 7.5 of this
Agreement shall continue in effect only to the extent that terms and conditions
substantially identical to such Sections are contained in such Rule(s) as so
amended or adopted.
ARTICLE III. INDEMNIFICATION
8.1. INDEMNIFICATION BY THE COMPANY
(a) The Company agrees to indemnify and hold harmless the Fund, the
Underwriter, and each of the Fund's or the Underwriter's directors, officers,
employees or agents and each person, if any, who controls or is associated with
the Fund or the Underwriter within the meaning of such terms under the federal
securities laws (collectively, the "indemnified parties" for
19
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purposes of this Section 8.1) against any and all losses, claims, damages,
liabilities (including amounts paid in settlement with the written consent of
the Company) or litigation (including reasonable legal and other expenses), to
which the indemnified parties may become subject under any statute, regulation,
at common law or otherwise, insofar as such losses, claims, damages, liabilities
or expenses (or actions in respect thereof) or settlements:
(i) arise out of or are based upon any untrue statements or alleged
untrue statements of any material fact contained in the
registration statement, prospectus or statement of additional
information for the Contracts or contained in the Contracts or
sales literature or other promotional material for the Contracts
(or any amendment or supplement to any of the foregoing), or
arise out of or are based upon the omission or the alleged
omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not
misleading in light of the circumstances in which they were made;
provided that this agreement to indemnify shall not apply as to
any indemnified party if such statement or omission or such
alleged statement or omission was made in reliance upon and in
conformity with information furnished to the Company by or on
behalf of the Fund for use in the registration statement,
prospectus or statement of additional information for the
Contracts or in the Contracts or sales literature or other
promotional material for the Contracts (or any amendment or
supplement) or otherwise for use in connection with the sale of
the Contracts or Fund shares; or
(ii) arise out of or as a result of statements or representations by
or on behalf of the Company (other than statements or
representations contained in the Fund registration statement,
Fund prospectus, Fund statement of additional information or
sales literature or other promotional material of the Fund not
supplied by the Company or persons under its control) or wrongful
conduct of the Company or persons under its control, with respect
to the sale or distribution of the Contracts or Fund shares; or
(iii) arise out of any untrue statement or alleged untrue statement of
a material fact contained in the Fund registration statement,
Fund prospectus, statement of additional information or sales
literature or other promotional material of the Fund or any
amendment thereof or supplement thereto or the omission or
alleged omission to state
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therein a material fact required to be stated therein or
necessary to make the statements therein not misleading in light
of the circumstances in which they were made, if such a statement
or omission was made in reliance upon and in conformity with
information furnished to the Fund by or on behalf of the Company
or persons under its control; or
(iv) arise as a result of any failure by the Company to provide the
services and furnish the materials or to make any payments under
the terms of this Agreement; or
(v) arise out of any material breach of any representation and/or
warranty made by the Company in this Agreement or arise out of or
result from any other material breach by the Company of this
Agreement;
except to the extent provided in Sections 8.1(b) and 8.3 hereof. This
indemnification shall be in addition to any liability which the Company may
otherwise have.
(b) No party shall be entitled to indemnification if such loss, claim,
damage, liability or litigation is due to the willful misfeasance, bad faith,
gross negligence or reckless disregard of duty by the party seeking
indemnification.
(c) The indemnified parties will promptly notify the Company of the
commencement of any litigation or proceedings against them in connection with
the issuance or sale of the Fund shares or the Contracts or the operation of the
Fund.
8.2. INDEMNIFICATION BY THE UNDERWRITER
(a) The Underwriter, on its own behalf and on behalf of the Fund, agrees to
indemnify and hold harmless the Company and each of its directors, officers,
employees or agents and each person, if any, who controls or is associated with
the Company within the meaning of such terms under the federal securities laws
(collectively, the "indemnified parties" for purposes of this Section 8.2)
against any and all losses, claims, damages, liabilities (including amounts
paid in
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settlement with the written consent of the Underwriter) or litigation (including
reasonable legal and other expenses) to which the indemnified parties may become
subject under any statute, regulation, at common law or otherwise, insofar as
such losses, claims, damages, liabilities or expenses (or actions in respect
thereof) or settlements:
(i) arise out of or are based upon any untrue statement or alleged
untrue statement of any material fact contained in the
registration statement, prospectus or statement of additional
information for the Fund or sales literature or other promotional
material of the Fund (or any amendment or supplement to any of
the foregoing), or arise out of or are based upon the omission or
the alleged omission to state therein a material fact required to
be stated therein or necessary to make the statements therein not
misleading in light of the circumstances in which they were made;
provided that this agreement to indemnify shall not apply as to
any indemnified party if such statement or omission or such
alleged statement or omission was made in reliance upon and in
conformity with information furnished to the Underwriter or Fund
by or on behalf of the Company for use in the registration
statement, prospectus or statement of additional information for
the Fund or in sales literature or other promotional material of
the Fund (or any amendment or supplement thereto) or otherwise
for use in connection with the sale of the Contracts or Fund
shares; or
(ii) arise out of or as a result of statements or representations
(other than statements or representations contained in the
Contracts or in the Contract or Fund registration statement, the
Contract or Fund prospectus, statement of additional information,
or sales literature or other promotional material for the
Contracts or of the Fund not supplied by the Underwriter or the
Fund or persons under the control of the Underwriter or the Fund
respectively) or wrongful conduct of the Underwriter or the Fund
or persons under the control of the Underwriter or the Fund
respectively, with respect to the sale or distribution of the
Contracts or Fund shares; or
(iii) arise out of any untrue statement or alleged untrue statement of
a material fact contained in a registration statement,
prospectus, statement of additional information or sales
literature or other promotional material covering the Contracts
(or any amendment thereof or supplement thereto), or the omission
or alleged omission to state therein a material fact required to
be stated therein or
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necessary to make the statement or statements therein not
misleading in light of the circumstances in which they were made,
if such statement or omission was made in reliance upon and in
conformity with information furnished to the Company by or on
behalf of the Underwriter or the Fund or persons under the
control of the Underwriter or the Fund; or
(iv) arise as a result of any failure by the Fund to provide the
services and furnish the materials under the terms of this
Agreement (including a failure, whether unintentional or in good
faith or otherwise, to comply with the diversification
requirements and procedures related thereto specified in Article
VI of this Agreement); or
(v) arise out of or result from any material breach of any
representation and/or warranty made by the Underwriter or the
Fund in this Agreement or arise out of or result from any other
material breach of this Agreement by the Underwriter or the Fund;
except to the extent provided in Sections 8.2(b) and 8.3 hereof. This
indemnification shall be in addition to any liability which the Underwriter may
otherwise have.
(b) No party shall be entitled to indemnification if such loss, claim,
damage, liability or litigation is due to the willful misfeasance, bad faith,
gross negligence or reckless disregard of duty by the party seeking
indemnification.
(c) The indemnified parties will promptly notify the Underwriter of the
commencement of any litigation or proceedings against them in connection with
the issuance or sale of the Contracts or the operation of the Account.
8.3. INDEMNIFICATION PROCEDURE
Any person obligated to provide indemnification under this Article VIII
("indemnifying party" for the purpose of this Section 8.3) shall not be liable
under the indemnification provisions of this Article VIII with respect to any
claim made against a party
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entitled to indemnification under this Article VIII ("indemnified party" for the
purpose of this Section 8.3) unless such indemnified party shall have notified
the indemnifying party in writing within a reasonable time after the summons or
other first legal process giving information of the nature of the claim shall
have been served upon such indemnified party (or after such party shall have
received notice of such service on any designated agent), but failure to notify
the indemnifying party of any such claim shall not relieve the indemnifying
party from any liability which it may have to the indemnified party against whom
such action is brought under the indemnification provision of this Article VIII,
except to the extent that the failure to notify results in the failure of actual
notice to the indemnifying party and such indemnifying party is damaged solely
as a result of failure to give such notice. In case any such action is brought
against the indemnified party, the indemnifying party will be entitled to
participate, at its own expense, in the defense thereof. The indemnifying party
also shall be entitled to assume the defense thereof, with counsel satisfactory
to the party named in the action. After notice from the indemnifying party to
the indemnified party of the indemnifying party's election to assume the defense
thereof, the indemnified party shall bear the fees and expenses of any
additional counsel retained by it, and the indemnifying party will not be liable
to such party under this Agreement for any legal or other expenses subsequently
incurred by such party independently in connection with the defense thereof
other than reasonable costs of investigation, unless (i) the indemnifying party
and the indemnified party shall have mutually agreed to the retention of such
counsel or (ii) the named parties to any such proceeding (including any
impleaded parties) include both the indemnifying party and the indemnified party
and representation of both parties by the same counsel would be inappropriate
due to actual or potential differing interests between them. The indemnifying
party
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shall not be liable for any settlement of any proceeding effected without its
written consent but if settled with such consent or if there be a final judgment
for the plaintiff, the indemnifying party agrees to indemnify the indemnified
party from and against any loss or liability by reason of such settlement or
judgment.
A successor by law of the parties to this Agreement shall be entitled to
the benefits of the indemnification contained in this Article VIII. The
indemnification provisions contained in this Article VIII shall survive any
termination of this Agreement and shall be in addition to any liability the
parties may otherwise have.
8.4. CONTRIBUTION
In order to provide for just and equitable contribution in circumstances in
which the indemnification provided for in this Article VIII is due in accordance
with its terms but for any reason is held to be unenforceable with respect to a
party entitled to indemnification ("indemnified party" for purposes of this
Section 8.4) pursuant to the terms of this Article VIII, then each party
obligated to indemnify pursuant to the terms of this Article VIII shall
contribute to the amount paid or payable by such indemnified party as a result
of such losses, claims, damages, liabilities and litigations in such proportion
as is appropriate to reflect the relative benefits received by the parties to
this Agreement in connection with the offering of Fund shares to the Account and
the acquisition, holding or sale of Fund shares by the Account, or if such
allocation is not permitted by applicable law, in such proportions as is
appropriate to reflect the relative net benefits referred to above but also the
relative fault of the parties to this Agreement in connection with any actions
that lead to such losses, claims, damages, liabilities or litigations, as well
as any other relevant equitable considerations.
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ARTICLE IX. APPLICABLE LAW
9.1. This Agreement shall be construed and the provisions hereof
interpreted under and in accordance with the laws of the State of New York.
9.2. This Agreement shall be subject to the provisions of the 1933, 1934
and 1940 Acts, and the rules and regulations and rulings thereunder, including
such exemptions from those statutes, rules and regulations as the SEC may grant
(including, but not limited to the Mixed and Shared Funding Exemptive Order) and
the terms hereof shall be interpreted and construed in accordance therewith.
ARTICLE X TERMINATION
10.1. This Agreement shall terminate:
(a) at the option of any party upon 180 days advance written notice to the
other parties unless otherwise agreed in a separate written agreement among the
parties; or
(b) at the option of the Company if shares of the Portfolios delineated in
Schedule 2 are not reasonably available to meet the requirements of the
Contracts as determined by the Company; or
(c) at the option of the Fund upon institution of formal proceedings
against the Company by the NASD, the SEC, the insurance commission of any state
or any other regulatory body regarding the Company's duties under this Agreement
or related to the sale of the Contracts, the administration of the Contracts,
the operation of the Account, or the purchase of
26
<PAGE>
the Fund shares, which would have a material adverse effect on the Company's
ability to perform its obligations under this Agreement; or
(d) at the option of the Company upon institution of formal proceedings
against the Fund or the Underwriter by the NASD, the SEC, or any state
securities or insurance department or any other regulatory body, which would
have a material adverse effect on the Fund's or the Underwriter's ability to
perform its obligations under this Agreement; or
(e) at the option of the Company or the Fund upon receipt of any necessary
regulatory approvals and/or the vote of the contractowners having an interest in
the Account (or any subaccount) to substitute the shares of another investment
company for the corresponding Portfolio shares of the Fund in accordance with
the terms of the Contracts for which those Portfolio shares had been selected to
serve as the underlying investment media. The Company will give 30 days prior
written notice to the Fund of the date of any proposed vote or other action
taken to replace the Fund's shares; or
(f) at the option of the Company or the Fund upon a determination by a
majority of the Fund Board, or a majority of the disinterested Fund Board
members, that an irreconcilable material conflict exists among the interests of
(i) all contractowners of variable insurance products of all separate accounts
or (ii) the interests of the Participating Insurance Companies investing in the
Fund as delineated in Article VII of this Agreement; or
(g) at the option of the Company if the Fund ceases to qualify as a
Regulated Investment Company under Subchapter M of the Internal Revenue Code, or
under any successor or similar provision, or if the Company reasonably believes
that the Fund may fail to so qualify; or
27
<PAGE>
(h) at the option of the Company if the Fund fails to meet the
diversification requirements specified in Article VI hereof; or
(i) at the option of any party to this Agreement, upon another party's
material breach of any provision of this Agreement; or
(j) at the option of the Company, if the Company determines in its sole
judgment exercised in good faith, that either the Fund or the Underwriter has
suffered a material adverse change in its business, operations or financial
condition since the date of this Agreement or is the subject of material adverse
publicity which is likely to have a material adverse impact upon the business
and operations of the Company; or
(k) at the option of the Fund or Underwriter, if the Fund or Underwriter
respectively, shall determine in its sole judgment exercised in good faith, that
the Company has suffered a material adverse change in its business, operations
or financial condition since the date of this Agreement or is the subject of
material adverse publicity which is likely to have a material adverse impact
upon the business and operations of the Fund or Underwriter; or
(l) at the option of the Fund in the event any of the Contracts are not
issued or sold in accordance with applicable federal and/or state law.
Termination shall be effective immediately upon such occurrence without notice.
10.2. NOTICE REQUIREMENT
(a) In the event that any termination of this Agreement is based upon the
provisions of Article VII, such prior written notice shall be given in advance
of the effective date of termination as required by such provisions.
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<PAGE>
(b) In the event that any termination of this Agreement is based upon the
provisions of Sections 10.1(b) - (d) or 10.1(g) - (i), prompt written notice of
the election to terminate this Agreement for cause shall be furnished by the
party terminating the Agreement to the non-terminating parties, with said
termination to be effective upon receipt of such notice by the non-terminating
parties.
(c) In the event that any termination of this Agreement is based upon the
provisions of Sections 10.1(j) or 10.1(k), prior written notice of the election
to terminate this Agreement for cause shall be furnished by the party
terminating this Agreement to the non-terminating parties. Such prior written
notice shall be given by the party terminating this Agreement to the
non-terminating parties at least 30 days before the effective date of
termination.
10.3. It is understood and agreed that the right to terminate this
Agreement pursuant to Section 10.1(a) may be exercised for any reason or for no
reason.
10.4. EFFECT OF TERMINATION
(a) Notwithstanding any termination of this Agreement and subject to
Section 1.3 of this Agreement, the Company may require the Fund and the
Underwriter to continue to make available additional shares of the Fund for so
long after the termination of this Agreement as the Company desires pursuant to
the terms and conditions of this Agreement as provided in paragraph (b) below,
for all Contracts in effect on the effective date of termination of this
Agreement (hereinafter referred to as "Existing Contracts"). Specifically,
without limitation, the owners of the Existing Contracts shall be permitted to
reallocate investments in the Fund, redeem investments in the Fund and/or invest
in the Fund upon the making of additional purchase payments under the Existing
Contracts. The parties agree that this Section 10.4 shall not apply to
29
<PAGE>
any terminations under Article VII and the effect of such Article VII
terminations shall be governed by Article VII of this Agreement.
(b) If shares of the Fund continue to be made available after termination
of this Agreement pursuant to this Section 10.4, the provisions of this
Agreement shall remain in effect except for Section 10.1(a) and thereafter the
Fund, the Underwriter, or the Company may terminate the Agreement, as so
continued pursuant to this Section 10.4, upon written notice to the other party,
such notice to be for a period that is reasonable under the circumstances but,
if given by the Fund or Underwriter, need not be for more than 90 days.
10.5. Except as necessary to implement contractowner initiated or approved
transactions, or as required by state insurance laws or regulations, the Company
shall not redeem Fund shares attributable to the Contracts (as opposed to Fund
shares attributable to the Company's assets held in the Account), and the
Company shall not prevent contractowners from allocating payments to a Portfolio
that was otherwise available under the Contracts, until 90 days after the
Company shall have notified the Fund or Underwriter of its intention to do so.
ARTICLE XI. NOTICES
Any notice shall be deemed duly given only if sent by hand, evidenced by
written receipt or by certified mail, return receipt requested, to the other
party at the address of such party set forth below or at such other address as
such party may from time to time specify in writing to the other party. All
notices shall be deemed given three business days after the date received or
rejected by the addressee.
If to the Fund:
30
<PAGE>
Mr. Bernard H. Garil
President
OpCap Advisors
200 Liberty Street
New York, NY 10281
If to the Company:
Prudential Insurance Company of America
Peter T. Scott, Esq.
30 Scranton Office Park
Scranton, PA 18507-1789
If to the Underwriter:
Mr. Thomas E. Duggan
Secretary
OCC Distributors
200 Liberty Street
New York, NY 10281
ARTICLE XII. MISCELLANEOUS
12.1. All persons dealing with the Fund must look solely to the property of
the Fund for the enforcement of any claims against the Fund as neither the
Directors, officers, agents or shareholders assume any personal liability for
obligations entered into on behalf of the Fund.
12.2. Subject to law and regulatory authority, each party hereto shall
treat as confidential all information reasonably identified as such in writing
by any other party hereto (including without limitation the names and addresses
of the owners of the Contracts) and, except as contemplated by this Agreement,
shall not disclose, disseminate or utilize such confidential information until
such time as it may come into the public domain without the express prior
written consent of the affected party.
31
<PAGE>
12.3. The captions in this Agreement are included for convenience of
reference only and in no way define or delineate any of the provisions hereof or
otherwise affect their construction or effect.
12.4. This Agreement may be executed simultaneously in two or more
counterparts, each of which taken together shall constitute one and the same
instrument.
12.5. If any provision of this Agreement shall be held or made invalid by a
court decision, statute, rule or otherwise, the remainder of the Agreement shall
not be affected thereby.
12.6. This Agreement shall not be assigned by any party hereto without the
prior written consent of all the parties.
12.7. Each party hereto shall cooperate with each other party and all
appropriate governmental authorities (including without limitation the SEC, the
NASD and state insurance regulators) and shall permit each other and such
authorities reasonable access to its books and records in connection with any
investigation or inquiry relating to this Agreement or the transactions
contemplated hereby.
12.8. Each party represents that the execution and delivery of this
Agreement and the consummation of the transactions contemplated herein have been
duly authorized by all necessary corporate or trust action, as applicable, by
such party and when so executed and delivered this Agreement will be the valid
and binding obligation of such party enforceable in accordance with its terms.
12.9. The parties to this Agreement may amend the schedules to this
Agreement from time to time to reflect changes in or relating to the Contracts,
the Accounts or the Portfolios of the Fund.
32
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to
be executed in its name and behalf by its duly authorized representative as of
the date and year first written above.
COMPANY:
PRUDENTIAL INSURANCE COMPANY OF AMERICA
SEAL By:
-----------------------------------
FUND:
OCC ACCUMULATION TRUST
SEAL By:
-----------------------------------
UNDERWRITER:
OCC DISTRIBUTORS
By:
-----------------------------------
33
<PAGE>
SCHEDULE 1
Participation Agreement
Among
OCC Accumulation Trust, Prudential Insurance Company of America
and
OCC Distributors
The following separate accounts of Prudential Insurance Company of America
are permitted in accordance with the provisions of this Agreement to invest in
Portfolios of the Fund shown in Schedule 2:
Prudential Discovery Select Group Variable Contract Account, established
February 11, 1997
<PAGE>
SCHEDULE 2
Participation Agreement
Among
OCC Accumulation Trust, Prudential Insurance Company of America
and
OCC Distributors
The Separate Account(s) shown on Schedule 1 may invest in the following
Portfolios of OCC Accumulation Trust:
Managed Portfolio
Small Cap Portfolio
The Prudential Insurance Company of America
EXECUTION COPY
PARTICIPATION ON AGREEMENT
BY AND AMONG
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
AND
WARBURG, PINCUS TRUST
AND
WARBURG, PINCUS COUNSELLORS, INC.
AND
COUNSELLORS SECURITIES INC.
THIS AGREEMENT, made and entered into this day of _________________, 1997,
by and among The Prudential Insurance Company of America organized under the
laws of the State of New Jersey (the "Company"), on its own behalf and on behalf
of each separate account of the Company named in Schedule 1 to this Agreement as
may be amended from time to time (each account referred to as the "Account"),
Warburg, Pincus Trust, an open-end management investment company and business
trust organized under the laws of the Commonwealth of Massachusetts (the
"Fund"); Warburg, Pincus Counsellors, Inc. a corporation organized under the
laws of the State of Delaware (the "Adviser"); and Counsellors Securities Inc.,
a corporation organized under the laws of the State of New York ("CSI").
WHEREAS, the Fund engages in business as an open-end management investment
company and was established for the purpose of serving as the investment vehicle
for separate accounts established for variable life insurance contracts and
variable annuity contracts to be offered by insurance companies that have
entered into participation agreements similar to this Agreement (the
"Participating Insurance Companies"), and
WHEREAS, beneficial interests in the Fund are divided into several series
of shares, each representing the interest in a particular managed portfolio of
securities and other assets (the "Portfolios"); and
WHEREAS, the Fund has received an order from the Securities and Exchange
Commission (the "SEC") granting Participating Insurance Companies and variable
annuity separate accounts and variable life insurance separate accounts relief
from the provisions of Sections 9(a), 13(a), 15(a), and 15(b) of the Investment
Company Act of 1940, as amended (the "1940 Act"), and Rules 6e-2(b)(l5) and
6e-3(T)(b)(l5) thereunder, to the extent necessary to permit shares of the Fund
to be sold to and held by variable annuity separate accounts and variable life
insurance separate accounts of both affiliated and unaffiliated
<PAGE>
Participating Insurance Companies and qualified pension and retirement plans
outside of the separate account context (the "Mixed and Shared Funding Exemptive
Order"). The parties to this Agreement agree that the conditions or undertakings
specified in the Mixed and Shared Funding Exemptive Order and that may be
imposed on the Company, the Fund, the Adviser and/or CSI by virtue of the
receipt of such order by the SEC will be incorporated herein by reference, and
such parties agree to comply with such conditions and undertakings to the extent
applicable to each such party; and
WHEREAS, the Fund is registered as an open-end management investment
company under the 1940 Act and its shares are registered under the Securities
Act of 1933, as amended (the "1933 Act"); and
WHEREAS, the Company has registered or will register certain variable
annuity contracts (the "Contracts") under the 1933 Act; and
WHEREAS, the Account is a duly organized, validly existing segregated asset
account, established by resolution of the Board of Directors of the Company
under the insurance laws of the State of New Jersey, to set aside and invest
assets attributable to the Contracts; and
WHEREAS, the Company has registered the Account as a unit investment trust
under the 1940 Act; and
WHEREAS, CSI, the Fund's distributor, is registered as a broker-dealer with
the SEC under the Securities Exchange Act of 1934 (the "1934 Act') and is a
member in good standing of the National Association of Securities Dealers, Inc.
(the "NASD"); and
WHEREAS, to the extent permitted by applicable insurance laws and
regulations, the Company intends to purchase shares of the Portfolios named in
Schedule 2, as such schedule may be amended from time to time (the "Designated
Portfolios"), on behalf of the Account to fund the Contracts, and the Fund is
authorized to sell such shares to unit investment trusts such as the Account at
net asset value;
NOW, THEREFORE, in consideration of their mutual promises, the Company, the
Fund, the Adviser and CSI agree as follows:
2
<PAGE>
ARTICLE I. SALE OF FUND SHARES
1.1. The Fund agrees to sell to the Company those shares of the Designated
Portfolios that each Account orders, executing such orders on a daily basis at
the net asset value next computed after receipt and acceptance by the Fund or
its designee of the order for the shares of the Fund. For purposes of this
Section 1.1, the Company will be the designee of the Fund for receipt of such
orders from each Account and receipt by such designee will constitute receipt by
the Fund; provided that the Fund receives notice of such order by 10:00 a.m.
Eastern Time on the next following Business Day ("T+1"). "Business Day" will
mean any day on which the New York Stock Exchange, Inc. (the "NYSE") is open for
trading and on which the Fund calculates its net asset value pursuant to the
rules of the SEC.
1.2. The Company will pay for Fund shares on T+1 in each case that an order to
purchase Fund shares is made in accordance with Section 1.1 above. Payment will
be in federal funds transmitted by wire. This wire transfer will be initiated by
12:00 p.m. Eastern Time.
1.3. The Fund agrees to make shares of the Designated Portfolios available
indefinitely for purchase at the applicable net asset value per share by
Participating Insurance Companies and their separate accounts on those days on
which the Fund calculates its Designated Portfolio net asset value pursuant to
rules of the SEC and the Fund shall use reasonable efforts to calculate such net
asset value on each day the NYSE is open for trading; provided, however, that
the Fund, the Adviser or CSI may refuse to sell shares of any Portfolio to any
person, or suspend or terminate the offering of shares of any Portfolio if such
action is required by law or by regulatory authorities having jurisdiction or
is, in its or their sole discretion acting in good faith, necessary in the best
interests of the shareholders of such Portfolio.
1.4. On each Business Day on which the Fund calculates its net asset value, the
Company will aggregate and calculate the net purchase or redemption orders for
each Account maintained by the Fund in which contract owner assets are invested.
Net orders will only reflect orders that the Company has received prior to the
close of regular trading on the NYSE currently 4:00 p.m., Eastern Time) on that
Business Day. Orders that the Company has received after the close of regular
trading on the NYSE will be treated as though received on the next Business Day.
Each communication of orders by the Company will constitute a representation
that such orders were received by it prior to the close of regular trading on
the NYSE on the Business Day on which the purchase or redemption order is priced
in accordance with Rule 22c-1 under the 1940 Act. Other procedures relating to
the handling of orders will be in accordance with the prospectus and statement
of information of the relevant
3
<PAGE>
Designated Portfolio or with oral or written instructions that CSI or the Fund
will forward to the Company from time to time.
1.5. The Fund agrees that shares of the Fund will be sold only to Participating
Insurance Companies and their separate accounts, qualified pension and
retirement plans or such other persons as are permitted under applicable
provisions of the Internal Revenue Code of 1986, as amended (the "Internal
Revenue Code"), and regulations promulgated thereunder, the sale to which will
not impair the tax treatment currently afforded the Contacts. No shares of any
Portfolio will be sold to the general public except as set forth in this Section
1.5.
1.6. The Fund agrees to redeem for cash, upon the Company's request, any full or
fractional shares of the Fund held by the Company, executing such requests on a
daily basis at the net asset value next computed after receipt and acceptance by
the Fund or its designee of the request for redemption. For purposes of this
Section 1.6, the Company will be the designee of the Fund for receipt of
requests for redemption from each Account and receipt by such designee will
constitute receipt by the Fund, provided the Fund receives notice of request for
redemption by 10:00 a.m. Eastern Time on the next following Business Day.
Payment will be in federal funds transmitted by wire to the Company's account as
designated by the Company in writing from time to time, on the same Business Day
the Fund receives notice of the redemption order from the Company. The Fund
reserves the right to delay payment of redemption proceeds, but in no event may
such payment be delayed longer than the period permitted by the 1940 Act. The
Fund will not bear any responsibility whatsoever for the proper disbursement or
crediting of redemption proceeds; the Company alone will be responsible for such
action, if notification of redemption is received after 10:00 a.m. Eastern Time,
payment for redeemed shares will be made on the next following Business Day.
1.7. The Company agrees to purchase and redeem the shares of the Designated
Portfolios offered by the then current prospectus of the Fund in accordance with
the provisions of such prospectus.
1.8. Issuance and transfer of the Fund's shares will be by book entry only.
Stock certificates will not be issued to the Company or any Account. Purchase
and redemption orders for Fund shares will be recorded in an appropriate title
for each Account or the appropriate subaccount of each Account.
1.9. The Fund will furnish same day notice (by telecopier, followed by written
confirmation) to the Company of the declaration of any income, dividends or
capital gain distributions payable on each Designated Portfolio's shares. The
Company hereby elects to receive all such dividends and distributions as are
payable on the Designated Portfolio shares
4
<PAGE>
in the form of additional shares of that Designated Portfolio. The Fund will
notify the Company of the number of shares so issued as payment of such
dividends and distributions. The Company reserves the right to revoke this
election upon reasonable prior notice to the Fund and to receive all such
dividends and distributions in cash.
1.10. The Fund will make the net asset value per share for each Designated
Portfolio available to the Company on a daily basis as soon as reasonably
practical after the net asset value per share is calculated and will use its
best efforts to make such net asset value per share available by 6:00 p.m.,
Eastern Time, but in no event later than 7:00 p.m., Eastern Time, each Business
Day.
1.11. In the event adjustments are required to correct any error in the
computation of the net asset value of the Fund's shares, the Fund or CSI will
notify the Company as soon as practicable after discovering the need for those
adjustments that result in an aggregate reimbursement of $150 or more to any one
Account maintained by a Designated Portfolio unless notified otherwise by the
Company (or, if lesser, results in an adjustment of $10 or more to each
contractowner's account). Any such notice will state for each day for which an
error occurred the incorrect price, the correct price and, to the extent
communicated to the Fund's shareholders, the reason for the price change. The
Company may send this notice or a derivation thereof (so long as such derivation
is approved in advance by CSI or the Adviser) to contractowners whose accounts
are affected by the price change. The parties will negotiate in good faith to
develop a reasonable method for effecting such adjustments.
ARTICLE II. REPRESENTATIONS AND WARRANTIES
2.1. The Company represents and warrants that the Contracts are or will be
registered under the 1933 Act and that the Contracts will be issued and sold in
compliance with all applicable federal and state laws, including state insurance
suitability requirements. The Company further represents and warrants that it is
an insurance company duly organized and in good standing under applicable law
and that it has legally and validly established each Account as a separate
account under applicable state law and has registered the Account as a unit
investment trust in accordance with the provisions of the 1940 Act to serve as a
segregated investment account for the Contracts, and that it will maintain such
registration for so long as any Contracts are outstanding. The Company will
amend the registration statement under the 1933 Act for the Contracts and the
registration statement under the 1940 Act for the Account from time to time as
required in order to effect the continuous offering of the Contracts or as may
otherwise be required by applicable law. The Company will register and qualify
the Contracts for sale in accordance with the securities laws of the various
states only if and to the extent deemed necessary by the Company.
5
<PAGE>
2.2. The Company represents that the Contracts are currently and at the time of
issuance will be treated as annuity contracts under applicable provisions of the
Internal Revenue Code, and that it will make every effort to maintain such
treatment and that it will notify the Fund and the Adviser immediately upon
having a reasonable basis for believing that the Contracts have ceased to be so
treated or that they might not be so treated in the future.
2.3. The Company represents and warrants that it will not purchase shares of the
Designated Portfolios with assets derived from tax-qualified retirement plans
except, indirectly, through Contacts purchased in connection with such plans.
2.4. The Fund represents and warrants that Fund shares of the Designated
Portfolios sold pursuant to this Agreement will be registered under the 1933 Act
and duly authorized for issuance in accordance with applicable law and that the
Fund is and will remain registered under the 1940 Act for as long as such shares
of the Designated Portfolios are outstanding. The Fund will amend the
registration statement for its shares under the 1933 Act and the 1940 Act from
time to time as required in order to effect the continuous offering of its
shares or as may otherwise be required by applicable law. The Fund will register
and qualify the shares of the Designated Portfolios for sale in accordance with
the laws of the various states only if and to the extent deemed advisable by the
Fund.
2.5. The Fund represents that each Designated Portfolio is currently qualified
as a Regulated Investment Company under Subchapter M of the Internal Revenue
Code and that it will make every effort to maintain such qualification (under
Subchapter M or any successor or similar provision) and that it will notify the
Company immediately upon having a reasonable basis for believing that a
Designated Portfolio has ceased to so qualify or that it might not so qualify in
the future.
2.6. The Fund represents and warrants that in performing the services described
in this Agreement, the Fund will comply with all applicable laws, rules and
regulations. The Fund makes no representation as to whether any aspect of its
operations (including, but not limited to, fees and expenses and investment
policies, objectives and restrictions) complies with the insurance laws and
regulations of any state. The Fund and CSI agree that upon request they will use
their best efforts to furnish the information required by state insurance laws
so that the Company can obtain the authority needed to issue the Contacts in the
various states.
2.7. The Fund currently does not intend to make any payments to finance
distribution expenses pursuant to Rule 12b-l under the 1940 Act, although it
reserves the right to make such payments in the fixture. To the extent that it
decides to finance distribution expenses
6
<PAGE>
pursuant to Rule 12b-1 the Fund undertakes to have its Fund Board formulate and
approve any plan under Rule 12b-1 to finance distribution expenses in accordance
with the 1940 Act.
2.8. The Fund represents that it is lawfully organized and validly existing
under the laws of The Commonwealth of Massachusetts and that it does and will
comply in all material respects with applicable provisions of the 1940 Act.
2.9. CSI represents and warrants that it will distribute the Fund shares of the
Designated Portfolios in accordance with all applicable federal and state
securities laws including, without limitation, the 1933 Act, the 1934 Act and
the 1940 Act.
2.10. CSI represents and warrants that it is and will remain duly registered
under all applicable federal and state securities laws and that it will perform
its obligations for the Fund in accordance in all material respects with any
applicable state and federal securities laws.
2.11. The Fund represents and warrants that all of its trustees, officers,
employees, and other individuals/entities having access to the funds and/or
securities of the Fund are and continue to be at all times covered by a blanket
fidelity bond or similar coverage for the benefit of the Fund in an amount not
less than the minimal coverage as required currently by Rule 17g-(1) of the 1940
Act or related provisions as may be promulgated from time to time. The aforesaid
bond includes coverage for larceny and embezzlement and is issued by a reputable
bonding company. CSI and the Fund's investment advisers represent and warrant
that they are and continue to be at all times covered by policies similar to the
aforesaid bond.
ARTICLE III. PROSPECTUSES AND PROXY STATEMENTS; VOTING
3.1. The Fund or CSI will provide the Company, at the Fund's or its affiliate's
expense, with as many copies of the current Fund prospectus for the Designated
Portfolios as the Company may reasonably request for distribution, at the
Company's expense, to prospective contractowners and applicants. The Fund or CSI
will provide, at the Fund's or its affiliate's expense, as many copies of said
prospectus as necessary for distribution, at the Company's expense, to existing
contractowners. The Fund or CSI will provide the copies of said prospectus to
the Company or to its mailing agent. if requested by the Company, the Fund or
CSI will provide such documentation, including a computer diskette of the
Company's specification or a final copy of a current prospectus set in type at
the Fund's or its affiliate's expense, and such other assistance as is
reasonably necessary in order for the Company at least annually (or more
frequently if the Fund prospectus is amended more frequently) to have the Fund's
prospectus, the prospectus for the Contracts and the prospectuses of other
mutual funds in which assets attributable to the Contracts may be invested
printed together in one
7
<PAGE>
document (the "Multifund Prospectus"), in which case the Fund or its affiliate
will bear its reasonable share of expenses as described above, allocated based
on the proportionate number of pages of the Fund's and other fund's respective
portions of the document.
3.2. The Fund or CSI will provide the Company, at the Fund's or its affiliate's
expense, with as many copies of the statement of additional information as the
Company may reasonably request for distribution, at the Company's expense, to
prospective contractowners and applicants. The Fund or CSI will provide, at the
Fund's or its affiliate's expense, as many copies of said statement of
additional information as necessary for distribution, at the Company's expense,
to any existing contractowner who requests such statement or whenever state or
federal law otherwise requires that such statement be provided. The Fund or CSI
will provide the copies of said statement of additional information to the
Company or to its mailing agent.
3.3. To the extent that the Fund or CSI desires to change (whether by revision
or supplement) any of the information contained in any form of Fund prospectus
or statement of additional information provided to the Company for inclusion in
a Multifund Prospectus, the Company agrees to make such changes within a
reasonable period of time after receipt of a request to make such change from
the Fund or CSI, subject to the following limitation. To the extent that the
Fund is legally required to make a change to a Fund prospectus or statement of
additional information provided to the Company for inclusion in a Multifund
Prospectus, the Company agrees to make any such change as soon as possible
following receipt of the form of revised prospectus and/or statement of
additional information or supplement, as applicable, but in no event later than
five days following receipt. To the extent that the Fund is required by law to
cease selling shares of a Designated Portfolio, the Company agrees to cease
offering shares of the Designated Portfolio until the Fund or CSI notifies the
Company otherwise.
3.4. The Fund or CSI, at the Fund's or its affiliate's expense, will provide the
Company or its mailing agent with copies of its proxy material, if any, reports
to shareholders and other communications to shareholders in such quantity as the
Company will reasonably require. The Company will distribute this proxy
material, reports and other communications to existing contract owners and
tabulate the votes.
3.5. If and to the extent required by law the Company will:
(a) solicit voting instructions from contractowners;
(b) vote the shares of the Designated Portfolios held in the Account in
accordance with instructions received from contractowners; and
8
<PAGE>
(c) vote shares of the Designated Portfolios held in the Account for which
no timely instructions have been received, as well as shares it owns, in the
same proportion as shares of such Designated Portfolio for which instructions
have been received from the Company's contractowners;
so long as and to the extent that the SEC continues to interpret the 1940
Act to require pass-through voting privileges for variable contractowners.
Except as set forth above, the Company reserves the right to vote Fund shares
held in any segregated asset account in its own right, to the extent permitted
by law. The Company will be responsible for assuring that each of its separate
accounts participating in the Fund calculates voting privileges in a manner
consistent with all legal requirements, including the Mixed and Shared Funding
Exemptive Order.
3.6. The Fund will comply with all provisions of the 1940 Act requiring voting
by shareholders, and in particular, the Fund either will provide for annual
meetings (except insofar as the SEC may interpret Section 16 of the 1940 Act not
to require such meetings) or, as the Fund currently intends, will comply with
Section 16(c) of the 1940 Act (although the Fund is not one of the trusts
described in Section 16(c) of that Act) as well as with Sections 16(a) and, if
and when applicable, l6(b). Further, the Fund will act in accordance with the
SEC's interpretation of the requirements of Section 16(a) with respect to
periodic elections of trustees and with whatever rules the SEC may promulgate
with respect thereto.
ARTICLE IV. SALES MATERIAL AND INFORMATION
4.1. CSI will provide the Company on a timely basis with investment performance
information for each Designated Portfolio in which the Company maintains an
Account, including total return for the preceding calendar month and calendar
quarter, the calendar year to date, and the prior one-year, five-year, and ten
year (or life of the Designated Portfolio) periods. The Company may, based on
the SEC mandated information supplied by CSI, prepare communications for
contractowners ("Contractowner Materials"). The Company will provide copies of
all Contractowner Materials concurrently with their first use for CSI's internal
recordkeeping purposes. It is understood that neither CSI nor any Designated
Portfolio will be responsible for errors or omissions in, or the content of,
Contractowner Materials except to the extent that the error or omission resulted
from information provided by or on behalf of CSI or the Designated Portfolio.
Any printed information that is furnished to the Company pursuant to this
Agreement other than each Designated Portfolio's prospectus or statement of
additional information (or information supplemental thereto), periodic reports
and proxy solicitation materials is CSI's sole responsibility and not the
responsibility of any
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Designated Portfolio or the Fund. The Company agrees tat the Portfolios, the
shareholders of the Portfolios and the officers and governing Board of the Fund
will have no liability or responsibility to the Company in these respects.
4.2. The Company will not give any information or make any representations or
statements on behalf of the Fund or concerning the Fund in connection with the
sale of the Contracts other than the information or representations contained in
the registration statement, prospectus or statement of additional information
for Fund shares, as such registration statement, prospectus and statement of
additional information may be amended or supplemented from time to time, or in
reports or proxy statements for the Fund, or in published reports for the Fund
which are in the public domain or approved by the Fund or CSI for distribution,
or in sales literature or other material provided by the Fund, the Adviser or by
CSI, except with permission of CSI. The Company will furnish, or will cause to
be furnished, to the Fund, the Adviser or CSI, each piece of sales literature or
other promotional material in which the Company or its Account is named, at
least ten (10) business days prior to its use. No such sales literature or other
promotional material which requires the permission of CSI prior to use will be
used if CSI reasonably objects to such use within five (5) business days after
receipt.
Nothing in this Section 4.2 will be construed as preventing the Company or
its employees or agents from giving advice on investment in the Fund.
4.3. The Fund, the Adviser and CSI will not give any information or make any
representations or statements on behalf of the Company or concerning the
Company, each Account, or the Contracts other than the information or
representations contained in a registration statement, prospectus or statement
of additional information for the Contracts, as such registration statement,
prospectus and statement of additional information may be amended or
supplemented from time to time, or in published reports for each Account or the
Contracts which are in the public domain or approved by the Company for
distribution to contractowners, or in sales literature or other material
provided by the Company, except with permission of the Company. The Company
agrees to respond to any request for approval on a prompt and timely basis. The
Fund, the Adviser or CSI will furnish, or will cause to be furnished, to the
Company or its designee, each piece of sales literature or other promotional
material in which the Company or its Account is named at least ten (10) business
days prior to its use. No such material will be used if the Company reasonably
objects to such use within five (5) business days after receipt of such
material.
4.4. The Fund will provide to the Company at least one complete copy of all
registration statements, prospectuses, statements of additions information,
reports, proxy statements, sales
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literature and other promotional materials, applications for exemptions,
requests for no-action letters, and all amendments to any of the above, that
relate to the Fund or its shares, contemporaneously with the filing of such
document with the SEC, the NASD or other regulatory authority.
4.5. The Company will provide to the Fund at least one complete copy of all
registration statements, prospectuses, statements of additional information,
reports, solicitations for voting instructions, sales literature and other
promotional materials, applications for exemptions, requests for no action
letters, and all amendments to any of the above, that relate to the Contracts or
each Account, contemporaneously with the filing of such document with the SEC,
the NASD or other regulatory authority.
4.6. For purposes of this Article IV, the phrase "sales literature or other
promotional material" includes, but is not limited to, advertisements (such as
material published, or designed for use in, a newspaper, magazine, or other
periodical, radio, television, telephone or tape recording, videotape display,
signs or billboards, motion pictures, or other public media (e.g., on-line
networks such as the Internet or other electronic messages)), sales literature
(i.e., any written communication distributed or made generally available to
customers or the public, including brochures, circulars, research reports,
market letters, form letters, seminar texts, reprints or excerpts of any other
advertisements sales literature, or published article), educational or training
materials or other communications distributed or made generally available to
some or all agents or employees, registration statements, prospectuses,
statements of additional information, shareholder reports, proxy materials and
any other material constituting sales literature or advertising under the NASD
rules, the 1933 Act or the 1940 Act.
4.7. The Fund and CSI hereby consent to the Company's use of the names Warburg,
Pincus Post-Venture Capital Portfolio, or other Designated Portfolio, and
Warburg, Pincus Counsellors, Inc. in connection with the marketing of the
Contracts, subject to the terms of Sections 4.1 and 4.2 of this Agreement. Such
consent will continue only as long as any Contracts are invested in the relevant
Designated Portfolio.
ARTICLE V. FEES AND EXPENSES
5.1. The Fund, the Adviser and CSI will pay no fee or other compensation to the
Company (other than as set forth in the administrative services letter agreement
between CSI and the Company) except if the Fund or any Designated Portfolio
adopts and implements a plan pursuant to Rule 12b-1 under the 1940 Act to
finance distribution expenses, then, subject to obtaining any required exemptive
orders or other regulatory approvals, the Fund may make
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payments to the Company or to the underwriter for the Contracts if and in
such amounts agreed to by the Fund in writing.
5.2. All expenses incident to performance by the Fund of this Agreement will be
paid by the Fund to the extent permitted by law. The Fund will bear the expenses
for the cost of registration and qualification of the Fund's shares; preparation
and filing of the Fund's prospectus, statement of additional information and
registration statement, proxy materials and reports; setting in type and
printing the Fund's prospectus; setting in type and printing proxy materials and
reports by it to contractowners (including the costs of printing a Fund
prospectus that contains an annual report); the preparation of all statements
and notices required by any federal or state law; all taxes on the issuance or
transfer of the Fund's shares; any expenses permitted to be paid or assumed by
the Fund pursuant to a plan, if any, under Rule 12b-1 under the 1940 Act; and
all other expenses set forth in Article III of this Agreement.
ARTICLE VI. DIVERSIFICATION
6.1. The Adviser will ensure that the Fund will at all times invest money from
the Contracts in such a manner as to ensure that the Contracts will be treated
as variable annuity contracts under the Internal Revenue Code and the
regulations issued thereunder. Without limiting the scope of the foregoing, the
Fund will comply with Section 817(h) of the Internal Revenue Code and Treasury
Regulation 1.817-5, as amended from time to time, relating to the
diversification requirements for variable annuity, endowment, or life insurance
contracts and any amendments or other modifications to such Section or
Regulation. In the event of a breach of this Article VI by the Fund, it will
take all reasonable steps: (a) to notify the Company of such breach; and (b) to
adequately diversify the Fund so as to achieve compliance within the grace
period afforded by Treasury Regulation 1.817-5.
ARTICLE VII. POTENTIAL CONFLICTS
7.1. The Board of Trustees of the Fund (the "Fund Board") will monitor the Fund
for the existence of any irreconcilable material conflict among the interests of
the contractowners of all separate accounts investing in the Fund. An
irreconcilable material conflict may arise for a variety of reasons, including:
(a) an action by any state insurance regulatory authority; (b) a change in
applicable federal or state insurance, tax or securities laws or regulations, or
a public ruling, private letter ruling, no-action or interpretative letter, or
any similar action by insurance, tax or securities regulatory authorities; (c)
an administrative or judicial decision in any relevant proceeding; (d) the
manner in which the investments of any Portfolio are being managed; (e) a
difference in voting instructions given by Participating Insurance Companies
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or by variable annuity and variable life insurance contractowners; or (f) a
decision by an insurer to disregard the voting instructions of contractowners.
The Fund Board will promptly inform the Company if it determines that an
irreconcilable material conflict exists and the implications thereof.
7.2. The Company will report any potential or existing conflicts of which it is
aware to the Fund Board. The Company agrees to assist the Fund Board in carrying
out its responsibilities, as delineated in the Mixed and Shared Funding
Exemptive Order, by providing the Fund Board with all information reasonably
necessary for the Fund Board to consider any issues raised. This includes, but
is not limited to, an obligation by the Company to inform the Fund Board
whenever contractowner voting instructions are to be disregarded. The Company's
responsibilities hereunder will be carried out with a view only to the interest
of contractowners.
7.3. If it is determined by a majority of the Fund Board, or a majority of its
disinterested trustees, that an irreconcilable material conflict exists, the
Company will, at its expense and to the extent reasonably practicable (as
determined by a majority of the disinterested trustees), take whatever steps are
necessary to remedy or eliminate the irreconcilable material conflict, up to and
including: (a) withdrawing the assets allocable to some or all of the Accounts
from the Fund or any Designated Portfolio and reinvesting such assets in a
different investment medium, including (but not limited to) another Portfolio of
the Fund, or submitting the question whether such segregation should be
implemented to a vote of all affected contractowners and, as appropriate,
segregating the assets of any appropriate group (i.e., variable annuity
contractowners or variable life insurance contractowners of one or more
Participating Insurance Companies) that votes in favor of such segregation, or
offering to the affected contractowners the option of making such a change; and
(b) establishing a new registered management investment company or managed
separate account
7.4. If a material irreconcilable conflict arises because of a decision by the
Company to disregard contractowner voting instructions, and the Company's
judgment represents a minority position or would preclude a majority vote, the
Company may be required, at the Fund's election, to withdraw the affected
subaccount of the Account's investment in the Fund and terminate this Agreement
with respect to such subaccount; provided, however, that such withdrawal and
termination will be limited to the extent required by the foregoing
irreconcilable material conflict as determined by a majority of the
disinterested trustees of the Fund Board. No charge or penalty will be imposed
as a result of such withdrawal.
7.5. If a material irreconcilable conflict arises because a particular state
insurance regulator's decision applicable to the Company conflicts with the
majority of other state
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insurance regulators, then the Company will withdraw the affected subaccount of
the Account's investment in the Fund and terminate this Agreement with respect
to such subaccount; provided, however, that such withdrawal and termination will
be limited to the extent required by the foregoing irreconcilable material
conflict as determined by a majority of the disinterested directors of the Fund
Board. No charge or penalty will be imposed as a result of such withdrawal.
7.6. For purposes of Sections 7.3 through 7.6 of this Agreement, a majority of
the disinterested members of the Fund Board will determine whether any proposed
action adequately remedies any irreconcilable material conflict, but in no event
will the Fund or the Adviser (or any other investment adviser to the Fund) be
required to establish a new funding medium for the Contracts. The Company will
not be required by Section 7.3 to establish a new funding medium for the
Contracts if an offer to do so has been declined by vote of a majority of
contractowners materially affected by the irreconcilable material conflict.
7.7. The Company will at least annually submit to the Fund Board such reports,
materials or data as the Fund Board may reasonably request so that the Fund
Board may fully carry out the duties imposed upon it as delineated in the Mixed
and Shared Funding Exemptive Order, and said reports, materials and data will be
submitted more frequently if deemed appropriate by the Fund Board.
7.8. If and to the extent that Rule 6e-2 and Rule 6e-3(T) are amended, or Rule
6e-3 is adopted, to provide exemptive relief from any provision of the 1940 Act
or the rules promulgated thereunder with respect to mixed or shared funding (as
defined in the Mixed and Shared Funding Exemptive Order) on terms and conditions
materially different from those contained in the Mixed and Shared Funding
Exemptive Order, then: (a) the Fund and/or the Participating Insurance
Companies, as appropriate, will take such steps as may be necessary to comply
with Rules 6e-2 and 6e-3(T), as amended, and Rule 6e-3, as adopted, to the
extent such rules are applicable; and (b) Sections 3.5, 3.6, 7.1, 7.2, 7.3, 7.4,
and 7.5 of this Agreement will continue in effect only to the extent that terms
and conditions substantially identical to such Sections are contained in such
Rule(s) as so amended or adopted.
ARTICLE VIII. INDEMNIFICATION
8.1. INDEMNIFICATION BY THE COMPANY
(a) The Company agrees to indemnify and hold harmless the Fund, the
Adviser, CSI, and each person, if any, who controls or is associated with the
Fund, the Adviser or CSI within the meaning of such terms under the federal
securities laws and any director, trustee,
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officer, partner, employee or agent of the foregoing (collectively, the
"Indemnified Parties" for purposes of this Section 8.1) against any and all
losses, claims, expenses, damages, liabilities (including amounts paid in
settlement with the written consent of the Company) or litigation (including
reasonable legal and other expenses), to which the Indemnified Parties may
become subject under any statute, regulation, at common law or otherwise,
insofar as such losses, claims, damages, liabilities or expenses (or actions in
respect thereof) or settlements:
(1) arise out of or are based upon any untrue statements or alleged
untrue statements of any material fact contained in the registration statement,
prospectus or statement of additional information for the Contracts or contained
in the Contracts or sales literature or other promotional material for the
Contracts (or any amendment or supplement to any of the foregoing), including
any prospectuses or statements of additional information of the Fund to which
the Company has made any changes to the information provided to the Company or
arise out of or are based upon the omission or the alleged omission to state
therein a material fact required to be stated or necessary to make such
statements not misleading in light of the circumstances in which they were made;
provided that this agreement to indemnify will not apply as to any Indemnified
Party if such statement or omission or such alleged statement or omission was
made in reliance upon and in conformity with written information furnished to
the Company by the Fund, the Adviser or CSI for use in the registration
statement, prospectus or statement of additional information for the Contracts
or in the Contracts or sales literature (or any amendment or supplement) or
otherwise for use in connection with the sale of the Contracts or Fund shares;
or
(2) arise out of or as a result of statements or representations by
or on behalf of the Company or wrongful conduct of the Company or persons under
its control, with respect to the sale or distribution of the Contracts or Fund
shares (other than statements or representations contained in the Fund
registration statement, Fund prospectus, Fund statement of additional
information, sales literature or other promotional material of the Fund not
supplied by the Company or persons under its control); or
(3) arise out of any untrue statement or alleged untrue statement of
a material fact contained in the Fund registration statement, prospectus,
statement of additional information or sales literature or other promotional
material of the Fund (or amendment or supplement) or the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make such statements not misleading in light of the circumstances
in which they were made, if such a statement or omission was made in reliance
upon and in conformity with information finished to the Fund by or on behalf of
the Company or persons under its control; or
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<PAGE>
(4) arise as a result of any failure by the Company to provide the
services and furnish the materials under the terms of this Agreement; or
(5) arise out of any material breach of any representation and/or
warranty made by the Company in this Agreement or arise out of or result from
any other material breach by the Company of this Agreement, including, but not
limited to, a failure to comply with the provisions of Section 3.3;
except to the extent provided in Sections 8.1(b) and 8.3 hereof. This
indemnification will be in addition to any liability that the Company otherwise
may have.
(b) No party will be entitled to indemnification under Section 8.1(a) to
the extent such loss, claim, damage, liability or litigation is due to the
willful misfeasance, bad faith, or gross negligence in the performance of such
party's duties under this Agreement, or by reason of such party's reckless
disregard of its obligations or duties under this Agreement by the party seeking
indemnification.
(c) The indemnified Parties promptly will notify the Company of the
commencement of any litigation, proceedings, complaints or actions by regulatory
authorities against them in connection with the issuance or sale of the Fund
shares or the Contracts or the operation of the Fund.
8.2. INDEMNIFICATION BY THE ADVISER, THE FUND AND CSI
(a) The Adviser, the Fund and CSI, in each case solely to the extent
relating to such party's responsibilities hereunder, agree to indemnify and hold
harmless the Company and each person, if any, who controls or is associated with
the Company within the meaning of such terms under the federal securities laws
and any director, trustee, officer, partner, employee or agent of the foregoing
(collectively, the "Indemnified Parties" for purposes of this Section 8.2)
against any and all losses, claims, expenses, damages, liabilities (including
amounts paid in settlement with the written consent of the Adviser) or
litigation (including reasonable legal and other expenses) to which the
indemnified Parties may become subject under any statute, regulation, at common
law or otherwise, insofar as such losses, claims, damages, liabilities or
expenses (or actions in respect thereof) or settlements:
(1) arise out of or are based upon any untrue statement or alleged
untrue statement of any material fact contained in the registration statement,
prospectus or statement of additional information for the Fund or sales
literature or other promotional material of the Fund (or any amendment or
supplement to any of the foregoing) or arise out of or are based
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upon the omission or the alleged omission to state therein a material fact
required to be stated or necessary to make such statements not misleading in
light of the circumstances in which they were made (in each case substantially
as transmitted to you by the Fund or CSI), provided that this agreement to
indemnify will not apply as to any Indemnified Party if such statement or
omission or such alleged statement or omission was made in reliance upon and in
conformity with information furnished to the Adviser, CSI or the Fund by or on
behalf of the Company for use in the registration statement, prospectus or
statement of additional information for the Fund or in sales literature of the
Fund (or any amendment or supplement thereto) or otherwise for use in connection
with the sale of the Contracts or Fund shares; or
(2) arise out of or as a result of statements or representations or
wrongful conduct of the Adviser, the Fund or CSI or persons under the control of
the Adviser, the Fund or CSI respectively, with respect to the sale of the Fund
shares (other than statements or representations contained in a registration
statement, prospectus, statement of additional information, sales literature or
other promotional material covering the Contracts not supplied by CSI or persons
under its control); or
(3) arise out of any untrue statement or alleged untrue statement of a
material fact contained in a registration statement, prospectus, statement of
additional information or sales literature or other promotional material
covering the Contracts (or any amendment or supplement thereto), or the omission
or alleged omission to state therein a material fact required to be stated or
necessary to make such statement or statements not misleading in light of the
circumstances in which they were made, if such statement or omission was made in
reliance upon and in conformity with written information furnished to the
Company by the Adviser, the Fund or CSI or persons under the control of the
Adviser, the Fund or CSI; or
(4) arise as a result of any failure by the Fund, the Adviser or CSI to
provide the services and furnish the materials under the terms of this Agreement
(including a failure, whether unintentional or in good faith or otherwise, to
comply with the diversification requirements and procedures related thereto
specified in Article VI of this Agreement); or
(5) arise out of or result from any material breach of any representation
and/or warranty made by the Adviser, the Fund or CSI in this Agreement, or arise
out of or result from any other material breach of this Agreement by the Adviser
the Fund or CSI;
except to the extent provided in Sections 8.2(b) and 8.3 hereof. These
indemnifications will be in addition to any liability that the Fund, Adviser or
CSI otherwise may have.
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(b) No party will be entitled to indemnification under Section 8.2(a) to
the extent such loss, claim, damage, liability or litigation is due to the
willful misfeasance, bad faith, or gross negligence in the performance of such
party's duties under this Agreement, or by reason of such party's reckless
disregard of its obligations or duties under this Agreement by the party seeking
indemnification.
(c) The Indemnified Parties will promptly notify the Adviser, the Fund and
CSI of the commencement of any litigation, proceedings, complaints or actions by
regulatory authorities against them in connection with the issuance or sale of
the Contracts or the operation of the account.
8.3. INDEMNIFICATION PROCEDURE
Any person obligated to provide indemnification under this Article VIII
("Indemnifying Party" for the purpose of this Section 8.3) will not be liable
under the indemnification provisions of this Article VIII with respect to any
claim made against a party entitled to indemnification under this Article VIII
("Indemnified Party" for the purpose of this Section 8.3) unless such
Indemnified Party will have notified the Indemnifying Party in writing within a
reasonable time after the summons or other first legal process giving
information of the nature of the claim will have been served upon such
Indemnified Party (or after such party will have received notice of such service
on any designated agent), but failure to notify the Indemnifying Party of any
such claim will not relieve the Indemnifying Party from any liability which it
may have to the Indemnified Party against whom such action is brought otherwise
than on account of the indemnification provision of this Article VIII, except to
the extent that the failure to notify results in the failure of actual notice to
the Indemnifying Party and such Indemnifying Party is damaged solely as a result
of failure to give such notice. In case any such action is brought against the
Indemnified Party, the Indemnifying Party will be entitled to participate, at
its own expense, in the defense thereof. The Indemnifying Party also will be
entitled to assume the defense thereof, with counsel satisfactory to the party
named in the action. After notice from the Indemnifying Party to the Indemnified
Party of the Indemnifying Party's election to assume the defense thereof, the
Indemnified Party will bear the fees and expenses of any additional counsel
retained by it, and the Indemnifying Party will not be liable to such party
under this Agreement for any legal or other expenses subsequently incurred by
such party independently in connection with the defense thereof other than
reasonable costs of investigation, unless: (a) the Indemnifying Party and the
Indemnified Party will have mutually agreed to the retention of such counsel; or
(b) the named parties to any such proceeding (including any impleaded parties)
include both the Indemnifying Party and the Indemnified Party and representation
of both parties by the
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same counsel would be inappropriate due to actual or potential differing
interests between them. The Indemnifying Party will not be liable for any
settlement of any proceeding effected without its written consent but if settled
with such consent or if there is a final judgment for the plaintiff, the
Indemnifying Party agrees to indemnify the Indemnified Party from and against
any loss or liability by reason of such settlement or judgment. A successor by
law of the parties to this Agreement will be entitled to the benefits of the
indemnification contained in this Article VIII. The indemnification provisions
contained in this Article VIII will survive any termination of this Agreement.
ARTICLE IX. APPLICABLE LAW
9.1. This Agreement will be construed and the provisions hereof interpreted
under and in accordance with the laws of the State of New York.
9.2. This Agreement will be subject to the provisions of the 1933 Act, the 1934
Act and the 1940 Act, and the rules and regulations and rulings thereunder,
including such exemptions from those statutes, rules and regulations as the SEC
may grant (including, but not limited to, the Mixed and Shared Funding Exemptive
Order) and the terms hereof will be interpreted and construed in accordance
therewith.
ARTICLE X. TERMINATION
10.1. This Agreement will terminate:
(a) at the option of any party, with or without cause, with respect to some
or all of the Designated Portfolios, upon ninety (90) days' advance written
notice to the other parties; or
(b) at the option of the Company, upon receipt of the Company's written
notice by the other parties, with respect to any Designated Portfolio if shares
of the Designated Portfolio are not reasonably available to meet the
requirements of the Contacts as determined in good faith by the Company; or
(c) at the option of the Company, upon receipt of the Company's written
notice by the other parties, with respect to any Designated Portfolio in the
event any of the Designated Portfolio's shares are not registered, issued or
sold in accordance with applicable state and/or Federal law or such law
precludes the use of such shares as the underlying investment media of the
Contracts issued or to be issued by Company; or
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(d) at the option of the Fund, upon receipt of the Fund's written notice by
the other parties, upon institution of formal proceedings against the Company by
the NASD, the SEC, the insurance commission of any state or any other regulatory
body regarding the Company's duties under this Agreement or related to the sale
of the Contracts, the administration of the Contracts, the operation of the
Account, or the purchase of the Fund shares, provided that the Fund determines
in its sole judgment, exercised in good faith, that any such proceeding would
have a material adverse effect on the Company's ability to perform its
obligations under this Agreement; or
(e) at the option of the Company, upon receipt of the Company's written
notice by the other parties, upon institution of formal proceedings against the
Fund, Adviser or CSI by the NASD, the SEC, or any state securities or insurance
department or any other regulatory body, provided that the Company determines in
its sole judgment, exercised in good faith, that any such proceeding would have
a material adverse effect on the Fund's, Adviser's or CSI's ability to perform
its obligations under this Agreement; or
(f) at the option of the Company, upon receipt of the Company's written
notice by the other parties, with respect to any Designated Portfolio if the
Designated Portfolio ceases to quality as a Regulated Investment Company under
Subchapter M of the Internal Revenue Code, or under any successor or similar
provision, or if the Company reasonably and in good faith believes that the
Designated Portfolio may fail to so qualify; or
(g) at the option of the Company, upon receipt of the Company's written
notice by the other parties, with respect to any Designated Portfolio if the
Designated Portfolio fails to meet the diversification requirements specified in
Article VI hereof or if the Company reasonably and in good faith believes the
Designated Portfolio may fail to meet such requirements; or
(h) at The option of any party to this Agreement, upon written notice to
the other parties, upon another party's material breach of any provision of this
Agreement which material breach is not cured within thirty (30) days of said
notice; or
(i) at the option of the Company, if the Company determines in its sole
judgment exercised in good faith, that either the Fund, the Adviser or CSI has
suffered a material adverse change in its business, operations or financial
condition since the date of this Agreement or is the subject of material adverse
publicity which is likely to have a material adverse impact upon the business
and operations of the Company, such termination to be
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effective sixty (60) days' after receipt by the other parties of written
notice of the election to terminate; or
(j) at the option of the Fund or CSI, if the Fund or CSI respectively,
determines in its sole judgment exercised in good faith, that the Company has
suffered a material adverse change in its business, operations or financial
condition since the date of this Agreement or is the subject of material adverse
publicity which is likely to have a material adverse impact upon the business
and operations of the Fund or the Adviser, such termination to be effective
sixty (60) days' after receipt by the other parties of written notice of the
election to terminate; or
(k) at the option of the Company or the Fund upon receipt of any necessary
regulatory approvals and/or the vote of the contractowners having an interest in
the Account (or any subaccount) to substitute the shares of another investment
company for the corresponding Designated Portfolio shares of the Fund in
accordance with the terms of the Contracts for which those Designated Portfolio
shares had been selected to serve as the underlying investment media. The
Company will give sixty (60) days' prior written notice to the Fund of the date
of any proposed vote or other action taken to replace the Fund's shares; or
(l) at the option of the Company or the Fund upon a determination by a
majority of the Fund Board, or a majority of the disinterested Fund Board
members, that an irreconcilable material conflict exists among the interests of:
(1) all contractowners of variable insurance products of all separate accounts;
or (2) the interests of the Participating Insurance Companies investing in the
Fund as set forth in Article VII of this Agreement; or
(m) at the option of the Fund in the event any of the Contracts are not
issued or sold in accordance with applicable federal and/or state law.
Termination will be effective immediately upon such occurrence without notice.
10.2. NOTICE REQUIREMENT
Except as specified in Section 10.1(m), no termination of this Agreement
will be effective unless and until the party terminating this Agreement gives
prior written notice to all other parties of its intent to terminate, which
notice will set forth the basis for the termination.
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10.3. EFFECT OF TERMINATION
In the event of any termination of this Agreement other than pursuant to
subsection (d), (j), (l) or (m) of Section 10.1, the Fund and CSI will, at the
option of the Company, continue to make available additional shares of the Fund
pursuant to the terms and conditions of this Agreement, for all Contacts in
effect on the effective date of termination of this Agreement (hereinafter
referred to as "Existing Contracts.") Specifically, without limitation, the
owners of the Existing Contracts will be permitted to reallocate investments in
the Designated Portfolios (as in effect on such date), redeem investments in the
Designated Portfolios and/or invest in the Designated Portfolios upon the making
of additional purchase payments under the Existing Contacts.
10.4. SURVIVING PROVISIONS
Notwithstanding any termination of this Agreement, each party's obligations
under Article VIII to indemnity other parties will survive and not be affected
by any termination of this Agreement. In addition, each party's obligations
under Section 12.6 will survive and not be affected by any termination of this
Agreement. Finally, with respect to Existing Contracts, all provisions of this
Agreement also will survive and not be affected by any termination of this
Agreement.
ARTICLE XI. NOTICES
11.1. Any notice will be deemed duly given when sent by registered or certified
mail to the other party at the address of such party set forth below or at such
other address as such party may from time to time specify in writing to the
other parties.
If to the Company: If to the Fund, the Adviser and/or CSI:
30 Scranton Office Park 466 Lexington Avenue
Scranton, PA 18507-1789 10th Floor
New York, NY 10017
Attn: Peter T. Scott Attn: Eugene P. Grace
Senior Vice President
ARTICLE XII. MISCELLANEOUS
12.1. The Fund, the Adviser and CSI acknowledge that the identities of the
customers of the Company or any of its affiliates (collectively the "Company
Protected Parties" for purposes of this Section 12.1), information maintained
regarding those customers, and all computer
22
<PAGE>
programs and procedures or other information developed or used by the Company
Protected Parties or any of their employees or agents in connection with the
Company's performance of its duties under this Agreement are the valuable
property of the Company Protected Parties. The Fund, the Adviser and CSI agree
that if they come into possession of any list or compilation of the identities
of or other information about the Company Protected Parties' customers, or any
other information or property of the Company Protected Parties, other than such
information as is publicly available or as may be independently developed or
compiled by the Fund, the Adviser or CSI from information supplied to them by
the Company Protected Parties' customers who also maintain accounts directly
with the Fund, the Adviser or CSI, the Fund, the Adviser and CSI will hold such
information or property in confidence and refrain from using, disclosing or
distributing any of such information or other property except: (a) with the
Company's prior written consent; or (b) as required by law or judicial process.
The Company acknowledges that the identities of the customers of the Fund, the
Adviser, CSI or any of their affiliates (collectively the "Adviser Protected
Parties" for purposes of this Section 12.1), information maintained regarding
those customers, and all computer programs and procedures or other information
developed or used by the Adviser Protected Parties or any of their employees or
agents in connection with the Fund's, the Adviser's or CSI's performance of
their respective duties under this Agreement are the valuable property of the
Adviser Protected Parties. The Company agrees that if it comes into possession
of any list or compilation of the identities of or other information about the
Adviser Protected Parties' customers, or any other information or property of
the Adviser Protected Parties, other than such information as is publicly
available or as may be independently developed or compiled by the Company from
information supplied to them by the Adviser Protected Parties' customers who
also maintain accounts directly with the Company, the Company will hold such
information or property in confidence and refrain from using' disclosing or
distributing any of such information or other property except: (a) with the
Fund's, the Adviser's or CSI's prior written consent; or (b) as required by law
or judicial process. Each party acknowledges that any breach of the agreements
in this Section 12.1 would result in immediate and irreparable harm to the other
parties for which there would be no adequate remedy at law and agree that in the
event of such a breach, the other parties will be entitled to equitable relief
by way of temporary and permanent injunctions, as well as such other relief as
any court of competent jurisdiction deems appropriate.
12.2. The captions in this Agreement are included for convenience of reference
only and in no way define or delineate any of the provisions hereof or otherwise
affect their construction or effect.
12.3. This Agreement may be executed simultaneously in two or more counterparts,
each of which taken together will constitute one and the same instrument.
23
<PAGE>
12.4. If any provision of this Agreement will be held or made invalid by a court
decision, statute, rule or otherwise, the remainder of the Agreement will not be
affected thereby.
12.5. This Agreement will not be assigned by any party hereto without the prior
written consent of all the parties.
12.6. Each party to this Agreement will maintain all records required by law,
including records detailing the services it provides. Such records will be
preserved, maintained and made available to the extent required by law and in
accordance with the 1940 Act and the rules thereunder. Each party to this
Agreement will cooperate with each other party and all appropriate governmental
authorities (including without limitation the SEC, the NASD and state insurance
regulators) and will permit each other and such authorities reasonable access to
its books and records in connection with any investigation or inquiry relating
to this Agreement or the transactions contemplated hereby. Upon request by the
Fund or CSI, the Company agrees to promptly make copies or, if required,
originals of all records pertaining to the performance of services under this
Agreement available to the Fund or CSI, as the case may be. The Fund agrees that
the Company will have the right to inspect, audit and copy all records
pertaining to the performance of services under this Agreement pursuant to the
requirements of any state insurance department. Each party also agrees to
promptly notify the other parties if it experiences any difficulty in
maintaining the records in an accurate and complete manner. This provision will
survive termination of this Agreement.
12.7. Each party represents that the execution and delivery of this Agreement
and the consummation of the transactions contemplated herein have been duly
authorized by all necessary corporate or board action, as applicable, by such
party and when so executed and delivered this Agreement will be the valid and
binding obligation of such party enforceable in accordance with its terms.
12.8. The parties to this Agreement acknowledge and agree that all liabilities
of the Fund arising, directly or indirectly, under this agreement, will be
satisfied solely out of the assets of the Fund and that no trustee, officer,
agent or holder of shares of beneficial interest of the Fund will be personally
liable for any such liabilities. No Portfolio or series of the Fund will be
liable for the obligations or liabilities of any other Portfolio or series.
12.9. The parties to this Agreement may amend the schedules to this Agreement
from time to time to reflect changes in or relating to the Contracts, the
Accounts or the Designated Portfolios of the Fund or other applicable terms of
this Agreement.
24
<PAGE>
12.10. The rights, remedies and obligations contained in this Agreement are
cumulative and are in addition to any and all rights.
IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement
to be executed in its name and behalf by its duly authorized representative and
its seal to be hereunder affixed hereto as of the date specified below.
THE PRUDENTIAL INSURANCE
COMPANY OF AMERICA
SEAL By:
----------------------------------
Name:
---------------------------------
Title:
--------------------------------
ATTEST: By:
-------------------------
WARBURG, PINCUS TRUST
SEAL By:
----------------------------------
Name:
---------------------------------
Title:
--------------------------------
WARBURG, PINCUS COUNSELLORS, INC.
SEAL By:
----------------------------------
Name:
---------------------------------
Title:
--------------------------------
COUNSELLORS SECURITIES INC.
SEAL By:
----------------------------------
Name:
---------------------------------
Title:
--------------------------------
ATTEST: By:
-------------------------
25
<PAGE>
SCHEDULE 1
PARTICIPATION AGREEMENT
BY AND AMONG
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
AND
WARBURG, PINCUS TRUST
AND
WARBURG, PINCUS COUNSELLORS, INC.
AND
COUNSELLORS SECURITIES INC.
The following separate accounts of The Prudential Insurance Company of America
are permitted in accordance with the provisions of this Agreement to invest in
Designated Portfolios of the Fund shown in Schedule 2:
Prudential Discovery Select Group Variable Contract Account
established February 11, 1997
_________________, 1997
26
<PAGE>
SCHEDULE 2
PARTICIPATION AGREEMENT
BY AND AMONG
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
AND
WARBURG, PINCUS TRUST
AND
WARBURG, PINCUS COUNSELLORS, INC.
AND
COUNSELLORS SECURITIES INC.
The Separate Account(s) shown on Schedule 1 may invest in the following
Designated Portfolio(s) of the Warburg, Pincus Trust:
Post-Venture Capital Portfolio
_________________, 1997
27
June 6, 1997
Prudential Insurance Company
of America
751 Broad Street
Newark, New Jersey 07102-2992
Gentlemen:
In my capacity as Assistant General Counsel of Prudential Insurance Company of
America, I have reviewed the establishment of the Prudential Discovery Select
Group Variable Annuity Account ("the Account") on February 11, 1997 by the
Finance Committee of the Board of Directors of Prudential as a separate account
for assets applicable to certain variable annuity contracts, pursuant to the
provisions of Section 17B:28-7 of the Revised Statutes of New Jersey.
I was responsible for oversight of the preparation and review of the
Registration Statement and Exchange Commission (Registration Number 811-08091)
under the Securities Act of 1933 for the registration of certain variable
annuity contracts issued with respect to the Account.
I am of the following opinion:
(1) Prudential was duly organized under the laws 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 variable annuity
contracts is not chargeable with liabilities arising out of any other
business Prudential may conduct.
(4) The variable annuity contracts 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/ Peter T. Scott
-------------------------
Assistant General Counsel
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Statement of Additional Information
constituting part of this Pre-Effective Amendment No. 1 to the Registration
Statement on Form N-4 (the "Registration Statement") of our report dated March
10, 1997, relating to the statutory financial statements of The Prudential
Insurance Company of America, which appears in such Statement of Additional
Information. We also consent to the reference to us under the heading "Experts"
in the Statement of Additional Information.
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York 10036
June 12, 1997
June 11, 1997
VIA EDGARLINK
- -------------
Board of Directors
The Prudential Insurance Company of America
751 Broad Street
Newark, NJ 07102
Ladies and Gentlemen:
We hereby consent to the reference to our name under the caption "Legal
Matters" in the Statement of Additional Information filed as part of
Pre-Effective Amendment No. 1 to the registration statement on Form N-4 for the
Prudential Discovery Select Group Variable Contract Account (File No.
333-23271). In giving this consent, we do not admit that we are in the category
of persons whose consent is required under Section 7 of the Securities Act of
1933.
Very truly yours,
SUTHERLAND, ASBILL & BRENNAN, L.L.P.
By: /s/ STEPHEN E. ROTH
------------------------------------
Stephen E. Roth
POWER OF ATTORNEY
Know all men by these presents:
That I, GLEN H. HINER, of TOLEDO, OH., a member of the Board of Directors
of The Prudential Insurance Company of America, do hereby make, constitute and
appoint as my true and lawful attorneys in fact SUSAN L. BLOUNT, THOMAS C.
CASTANO, THOMAS A. EARLY, THOMAS J. LOFTUS, BERNARD V. PETERSON, CLIFFORD
KIRSCH, PETER T. SCOTT and C. CHRISTOPHER SPRAGUE or any of them severally for
me and in my name, place and stead to sign, where applicable: Annual Reports of
Form 10-K, registration statements on the appropriate forms prescribed by the
Securities and Exchange Commission, and any other periodic documents and reports
required under the Investment Company Act of 1940, the Securities Act of 1933
and all amendments thereto executed on behalf of The Prudential Insurance
Company and filed with the Securities and Exchange Commission for the following:
The Prudential Variable Contract Account-2 and group variable annuity
contracts, to the extent they represent participating interests in said
Account;
The Prudential Variable Contract Account-10 and group annuity
contracts, to the extent they represent participating interests in said
Account;
The Prudential Variable Contract Account-11 and group annuity
contracts, to the extent they represent participating interests in said
Account;
The Prudential Variable Contract Account-24 and group annuity
contracts, to the extent they represent participating interests in said
Account;
The Prudential Variable Contract Real Property Account and individual
variable life insurance and annuity contracts, to the extent they represent
participating interests in said Account;
Prudential's Investment Plan Account and Systematic Investment Plan
Contracts, to the extent they represent participating interests in said
Account, and shares of the Common Stock of Prudential's Gibraltar Fund;
Prudential's Annuity Plan Account and Variable Annuity Contracts, to the
extent they represent participating interests in said Account, and shares
of the Common Stock of Prudential's Gibraltar Fund;
Prudential's Annuity Plan Account-2 and Variable Annuity
Contracts, to the extent they represent participating interests in said
Account, and shares of the Common Stock of Prudential's Gibraltar Fund;
The Prudential Individual Variable Contract Account and Individual Variable
Annuity Contracts, to the extent they represent participating interests in
said Account;
<PAGE>
The Prudential Qualified Individual Variable Contract Account and
Individual Variable Annuity Contracts, to the extent they represent
participating interests in said Account;
The Prudential Variable Appreciable Account and Variable Life Insurance
Contracts, to the extent they represent participating interests in said
Account;
The Prudential Variable Life Insurance Account and Variable Life Insurance
Contracts, to the extent they represent participating interests in said
Account;
The Prudential Variable Contract Account GI-2 and Group Variable Life
Insurance Contracts, to the extent they represent participating interests
in said Account;
The Prudential Discovery Select Group Variable Contract Account and group
annuity contracts, to the extent they represent participating interests in
said Account;
IN WITNESS WHEREOF, I have hereunto set my hand this 19th day of March,
1997.
/s/ GLEN H. HINER
------------------------------------
Glen H. Hiner
State of Ohio )
) ss
County of Lucas )
On this 19th day of March, 1997, before me personally appeared Glen H.
Hiner, to me known to me to be the person mentioned and described in and who
executed the foregoing instrument and duly acknowledged to me that (s)he
executed the same.
/s/ JEANNETTE M. IMM
------------------------------------
Jeannette M. Imm
Notary Public
My commission expires:
JEANNETTE M. IMM
Notary Public, State of Ohio
My Commission Expires June 27, 1998
<PAGE>
POWER OF ATTORNEY
Know all men by these presents:
That I, GAYNOR N. KELLEY, of 1448 N. LAKE SHORE DR., CHICAGO, IL., a member
of the Board of Directors of The Prudential Insurance Company of America, do
hereby make, constitute and appoint as my true and lawful attorneys in fact
SUSAN L. BLOUNT, THOMAS C. CASTANO, THOMAS A. EARLY, THOMAS J. LOFTUS, BERNARD
V. PETERSON, CLIFFORD KIRSCH, PETER T. SCOTT and C. CHRISTOPHER SPRAGUE or any
of them severally for me and in my name, place and stead to sign, where
applicable: Annual Reports of Form 10-K, registration statements on the
appropriate forms prescribed by the Securities and Exchange Commission, and any
other periodic documents and reports required under the Investment Company Act
of 1940, the Securities Act of 1933 and all amendments thereto executed on
behalf of The Prudential Insurance Company and filed with the Securities and
Exchange Commission for the following:
The Prudential Variable Contract Account-2 and group variable annuity
contracts, to the extent they represent participating interests in said
Account;
The Prudential Variable Contract Account-10 and group annuity
contracts, to the extent they represent participating interests in said
Account;
The Prudential Variable Contract Account-11 and group annuity
contracts, to the extent they represent participating interests in said
Account;
The Prudential Variable Contract Account-24 and group annuity
contracts, to the extent they represent participating interests in said
Account;
The Prudential Variable Contract Real Property Account and individual
variable life insurance and annuity contracts, to the extent they represent
participating interests in said Account;
Prudential's Investment Plan Account and Systematic Investment Plan
Contracts, to the extent they represent participating interests in said
Account, and shares of the Common Stock of Prudential's Gibraltar Fund;
Prudential's Annuity Plan Account and Variable Annuity Contracts, to the
extent they represent participating interests in said Account, and shares
of the Common Stock of Prudential's Gibraltar Fund;
Prudential's Annuity Plan Account-2 and Variable Annuity
Contracts, to the extent they represent participating interests in said
Account, and shares of the Common Stock of Prudential's Gibraltar Fund;
The Prudential Individual Variable Contract Account and Individual Variable
Annuity Contracts, to the extent they represent participating interests in
said Account;
<PAGE>
The Prudential Qualified Individual Variable Contract Account and
Individual Variable Annuity Contracts, to the extent they represent
participating interests in said Account;
The Prudential Variable Appreciable Account and Variable Life Insurance
Contracts, to the extent they represent participating interests in said
Account;
The Prudential Variable Life Insurance Account and Variable Life Insurance
Contracts, to the extent they represent participating interests in said
Account;
The Prudential Variable Contract Account GI-2 and Group Variable Life
Insurance Contracts, to the extent they represent participating interests
in said Account;
The Prudential Discovery Select Group Variable Contract Account and group
annuity contracts, to the extent they represent participating interests in
said Account;
IN WITNESS WHEREOF, I have hereunto set my hand this 7th day of May,
1997.
/s/ GAYNOR N. KELLEY
------------------------------------
Gaynor N. Kelley
State of Illinois )
) ss
County of Cook )
On this 7th day of May, 1997, before me personally appeared Gaynor N.
Kelley, to me known to me to be the person mentioned and described in and who
executed the foregoing instrument and duly acknowledged to me that (s)he
executed the same.
/s/ BARBARA GAYLE
------------------------------------
Barbara Gayle
Notary Public
My commission expires: 1/3/99
BARBARA GAYLE
Notary Public, State of Illinois
My Commission Expires January 3, 1999
<PAGE>
POWER OF ATTORNEY
Know all men by these presents:
That I, IDA F.S. SCHWARTZ, of INVESTMENT STRATEGIES INTERNATIONAL, a member
of the Board of Directors of The Prudential Insurance Company of America, do
hereby make, constitute and appoint as my true and lawful attorneys in fact
SUSAN L. BLOUNT, THOMAS C. CASTANO, THOMAS A. EARLY, THOMAS J. LOFTUS, BERNARD
V. PETERSON, CLIFFORD KIRSCH, PETER T. SCOTT and C. CHRISTOPHER SPRAGUE or any
of them severally for me and in my name, place and stead to sign, where
applicable: Annual Reports of Form 10-K, registration statements on the
appropriate forms prescribed by the Securities and Exchange Commission, and any
other periodic documents and reports required under the Investment Company Act
of 1940, the Securities Act of 1933 and all amendments thereto executed on
behalf of The Prudential Insurance Company and filed with the Securities and
Exchange Commission for the following:
The Prudential Variable Contract Account-2 and group variable annuity
contracts, to the extent they represent participating interests in said
Account;
The Prudential Variable Contract Account-10 and group annuity
contracts, to the extent they represent participating interests in said
Account;
The Prudential Variable Contract Account-11 and group annuity
contracts, to the extent they represent participating interests in said
Account;
The Prudential Variable Contract Account-24 and group annuity
contracts, to the extent they represent participating interests in said
Account;
The Prudential Variable Contract Real Property Account and individual
variable life insurance and annuity contracts, to the extent they represent
participating interests in said Account;
Prudential's Investment Plan Account and Systematic Investment Plan
Contracts, to the extent they represent participating interests in said
Account, and shares of the Common Stock of Prudential's Gibraltar Fund;
Prudential's Annuity Plan Account and Variable Annuity Contracts, to the
extent they represent participating interests in said Account, and shares
of the Common Stock of Prudential's Gibraltar Fund;
Prudential's Annuity Plan Account-2 and Variable Annuity
Contracts, to the extent they represent participating interests in said
Account, and shares of the Common Stock of Prudential's Gibraltar Fund;
The Prudential Individual Variable Contract Account and Individual Variable
Annuity Contracts, to the extent they represent participating interests in
said Account;
<PAGE>
The Prudential Qualified Individual Variable Contract Account and
Individual Variable Annuity Contracts, to the extent they represent
participating interests in said Account;
The Prudential Variable Appreciable Account and Variable Life Insurance
Contracts, to the extent they represent participating interests in said
Account;
The Prudential Variable Life Insurance Account and Variable Life Insurance
Contracts, to the extent they represent participating interests in said
Account;
The Prudential Variable Contract Account GI-2 and Group Variable Life
Insurance Contracts, to the extent they represent participating interests
in said Account;
The Prudential Discovery Select Group Variable Contract Account and group
annuity contracts, to the extent they represent participating interests in
said Account;
IN WITNESS WHEREOF, I have hereunto set my hand this 4th day of June,
1997.
/s/ IDA F.S. SCHWARTZ
------------------------------------
Ida F.S. Schwartz
State of New York )
) ss
County of New York )
On this 4th day of June, 1997, before me personally appeared Ida F.S.
Schwartz, to me known to me to be the person mentioned and described in and who
executed the foregoing instrument and duly acknowledged to me that (s)he
executed the same.
/s/ JOANNE MURPHY
------------------------------------
Joanne Murphy
Notary Public
My commission expires: 4/2/98
JOANNE MURPHY
Notary Public, State of New York
No. 4964762
Qualified in Nassau County
Commission Expires April 2, 1998
DISCOVERY SELECT
WARBURG PINCUS (OUTSIDE)
POST- VENTURE CAPITAL
1.00 BP
Post Ven Cap (Warburg)
<TABLE>
<CAPTION>
0.25
years
1 MONTH * 3 MONTHS YTD INCEPTION
12/31/96 11/30/96 9/30/96 9/30/96 9/30/96
-------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
DEFERRED SALES CHARGE (DSC) 5.00% 5.00% 5.00% 5.00%
UNIT VALUE 0.98483667 0.97435175 1.00000000 1.00000000 1.00000000
UNITS 1026.323399 1000 1000 1000
INITIAL INVESTMENT $ 1,000 $ 1,000 $ 1,000 $ 1,000
CUMULATIVE ASSETS $ 1,010.76 $ 984.84 $ 984.84 $ 984.84
WITHOUT DSC:
Annualized Return (Table 2) -5.88%
Cumulative Return (Table 3) 1.08% -1.52% -1.52% -1.52%
ACCOUNT CHARGE (AAC) $ 0.60
WITH DSC:
Annnualized Return (Table 1) -23.65%
Cumulative Return -3.98% -6.58% -6.58% -6.58%
</TABLE>
* 11/29/96 uv used
<PAGE>
DISCOVERY SELECT
T. ROWE PRICE (OUTSIDE)
INTERNATIONAL STOCK
1.00 BP
T Rowe Int'l
<TABLE>
<CAPTION>
2.76
years
1 MONTH * 3 MONTHS YTD ** 1 YEAR ** INCEPTION
12/31/96 11/30/96 9/30/96 12/31/95 12/31/95 3/31/94
-------- -------- ------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
DEFERRED SALES CHARGE (DSC) 5.00% 5.00% 5.00% 5.00% 3.00%
UNIT VALUE 1.26285372 1.25493456 1.20958402 1.11224491 1.11224491 1.00000000
UNITS 796.8542997 826.7304986 899.0825591 899.0825591 1000
INITIAL INVESTMENT $ 1,000 $ 1,000 $ 1,000 $ 1,000 $ 1,000
CUMULATIVE ASSETS $ 1,006.31 $ 1,044.04 $ 1,135.41 $ 1,135.41 $ 1,262.85
WITHOUT DSC:
Annualized Return (Table 2) 13.54% 8.84%
Cumulative Return (Table 3) 0.63% 4.40% 13.54% 13.54% 26.29%
ACCOUNT CHARGE (AAC)
$ 0.60
WITH DSC:
Annnualized Return (Table 1) 8.48% 7.87%
Cumulative Return -4.43% -0.66% 8.48% 8.48% 23.23%
</TABLE>
* 11/29/96 uv used
** 12/29/95 uv used
<PAGE>
DISCOVERY SELECT
T. ROWE PRICE (OUTSIDE)
EQUITY INCOME
1.00 BP
T Rowe Equity Inc
<TABLE>
<CAPTION>
2.76
years
1 MONTH * 3 MONTHS YTD ** 1 YEAR ** INCEPTION
12/31/96 11/30/96 9/30/96 12/31/95 12/31/95 3/31/94
-------- -------- ------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
DEFERRED SALES CHARGE (DSC) 5.00% 5.00% 5.00% 5.00% 3.00%
UNIT VALUE 1.67714801 1.69092956 1.56525807 1.41711985 1.41711985 1.00000000
UNITS 591.3906905 638.8722851 705.6566175 705.6566175 1000
INITIAL INVESTMENT $ 1,000 $ 1,000 $ 1,000 $ 1,000 $ 1,000
CUMULATIVE ASSETS $ 991.85 $ 1,071.48 $ 1,183.49 $ 1,183.49 $ 1,677.15
WITHOUT DSC:
Annualized Return (Table 2) 18.35% 20.64%
Cumulative Return (Table 3) -0.82% 7.15% 18.35% 18.35% 67.71%
ACCOUNT CHARGE (AAC)
$ 0.60
WITH DSC:
Annnualized Return (Table 1) 13.29% 19.83%
Cumulative Return -5.88% 2.09% 13.29% 13.29% 64.65%
</TABLE>
* 11/29/96 uv used
** 12/29/95 uv used
<PAGE>
DISCOVERY SELECT
MFS (OUTSIDE)
RESEARCH SERIES
1.00 BP
MFS Research
<TABLE>
<CAPTION>
1.44
years
1 MONTH * 3 MONTHS YTD ** 1 YEAR ** INCEPTION
12/31/96 11/30/96 9/30/96 12/31/95 12/31/95 7/24/95
-------- -------- ------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
DEFERRED SALES CHARGE (DSC) 5.00% 5.00% 5.00% 5.00% 4.00%
UNIT VALUE 1.33437295 1.35866284 1.27357846 1.10196181 1.10196181 1.00000000
UNITS 736.0177747 785.1891591 907.4724649 907.4724649 1000
INITIAL INVESTMENT $ 1,000 $ 1,000 $ 1,000 $ 1,000 $ 1,000
CUMULATIVE ASSETS $ 982.12 $ 1,047.74 $ 1,210.91 $ 1,210.91 $ 1,334.37
WITHOUT DSC:
Annualized Return (Table 2) 21.09% 22.16%
Cumulative Return (Table 3) -1.79% 4.77% 21.09% 21.09% 33.44%
ACCOUNT CHARGE (AAC)
$ 0.60
WITH DSC:
Annnualized Return (Table 1) 16.03% 19.57%
Cumulative Return -6.85% -0.29% 16.03% 16.03% 29.38%
</TABLE>
* 11/29/96 uv used
** 12/29/95 uv used
<PAGE>
DISCOVERY SELECT
MFS (OUTSIDE)
EMERGING GROWTH SERIES
1.00 BP
MFS Emerging
<TABLE>
<CAPTION>
1.44
years
1 MONTH * 3 MONTHS YTD ** 1 YEAR ** INCEPTION
12/31/96 11/30/96 9/30/96 12/31/95 12/31/95 7/24/95
-------- -------- ------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
DEFERRED SALES CHARGE (DSC) 5.00% 5.00% 5.00% 5.00% 4.00%
UNIT VALUE 1.35426974 1.41836541 1.38110135 1.16907834 1.16907834 1.00000000
UNITS 705.036934 724.0598237 855.3746706 855.3746706 1000
INITIAL INVESTMENT $ 1,000 $ 1,000 $ 1,000 $ 1,000 $ 1,000
CUMULATIVE ASSETS $ 954.81 $ 980.57 $ 1,158.41 $ 1,158.41 $ 1,354.27
WITHOUT DSC:
Annualized Return (Table 2) 15.84% 23.42%
Cumulative Return (Table 3) -4.52% -1.94% 15.84% 15.84% 35.43%
ACCOUNT CHARGE (AAC)
$ 0.60
WITH DSC:
Annnualized Return (Table 1) 10.78% 20.84%
Cumulative Return -9.58% -7.00% 10.78% 10.78% 31.37%
</TABLE>
* 11/29/96 uv used
** 12/29/95 uv used
<PAGE>
DISCOVERY SELECT
JANUS (OUTSIDE)
ASPEN INTENATIONAL GROWTH
1.00 BP
JA Int'l Growth
<TABLE>
<CAPTION>
2.67
years
1 MONTH * 3 MONTHS YTD ** 1 YEAR ** INCEPTION
12/31/96 11/30/96 9/30/96 12/31/95 12/31/95 5/2/94
-------- -------- ------- -------- -------- ------
<S> <C> <C> <C> <C> <C> <C>
DEFERRED SALES CHARGE (DSC) 5.00% 5.00% 5.00% 5.00% 3.00%
UNIT VALUE 1.56923882 1.55957816 1.46738540 1.17730866 1.17730866 1.00000000
UNITS 641.199028 681.4842236 849.3949242 849.3949242 1000
INITIAL INVESTMENT $ 1,000 $ 1,000 $ 1,000 $ 1,000 $ 1,000
CUMULATIVE ASSETS $ 1,006.19 $ 1,069.41 $ 1,332.90 $ 1,332.90 $ 1,569.24
WITHOUT DSC:
Annualized Return (Table 2) 33.29% 18.39%
Cumulative Return (Table 3) 0.62% 6.94% 33.29% 33.29% 56.92%
ACCOUNT CHARGE (AAC)
$ 0.60
WITH DSC:
Annnualized Return (Table 1) 28.23% 17.52%
Cumulative Return -4.44% 1.88% 28.23% 28.23% 53.86%
</TABLE>
* 11/29/96 uv used
** 12/29/95 uv used
<PAGE>
DISCOVERY SELECT
JANUS (OUTSIDE)
ASPEN GROWTH
1.00 BP
JA Growth
<TABLE>
<CAPTION>
1 MONTH * 3 MONTHS YTD **
12/31/96 11/30/96 9/30/96 12/31/95
<S> <C> <C> <C> <C>
DEFERRED SALES CHARGE (DSC) 5.00% 5.00% 5.00%
UNIT VALUE 1.58580652 1.60760691 1.55125060 1.35270953
UNITS 622.0426112 644.6411689 739.2570081
INITIAL INVESTMENT $ 1,000 $ 1,000 $ 1,000
CUMULATIVE ASSETS $ 986.44 $ 1,022.28 $ 1,172.32
WITHOUT DSC:
Annualized Return (Table 2)
Cumulative Return (Table 3) -1.36% 2.23% 17.23%
ACCOUNT CHARGE (AAC)
$ 0.60
WITH DSC:
Annnualized Return (Table 1)
Cumulative Return -6.42% -2.83% 12.17%
</TABLE>
3.30
years
1 YEAR ** 3 YEAR INCEPTION
12/31/95 12/31/93 9/13/93
DEFERRED SALES CHARGE (DSC) 5.00% 3.00% 2.00%
UNIT VALUE 1.35270953 1.03188186 1.00000000
UNITS 739.2570081 969.1031878 1000
INITIAL INVESTMENT $ 1,000 $ 1,000 $ 1,000
CUMULATIVE ASSETS $ 1,172.32 $ 1,536.81 $ 1,585.81
WITHOUT DSC:
Annualized Return (Table 2) 17.23% 15.39% 14.99%
Cumulative Return (Table 3) 17.23% 53.68% 58.58%
ACCOUNT CHARGE (AAC)
$
WITH DSC:
Annnualized Return (Table 1) 12.17% 14.61% 14.53%
Cumulative Return 12.17% 50.62% 56.52%
* 11/29/96 uv used
** 12/29/95 uv used
<PAGE>
DISCOVERY SELECT
AIM (OUTSIDE)
V.I. GROWTH & INCOME
1.00 BP
AIM G&I
<TABLE>
<CAPTION>
2.67
years
1 MONTH * 3 MONTHS YTD ** 1 YEAR ** INCEPTION
12/31/96 11/30/96 9/30/96 12/31/95 12/31/95 5/2/94
-------- -------- ------- -------- -------- ------
<S> <C> <C> <C> <C> <C> <C>
DEFERRED SALES CHARGE (DSC) 5.00% 5.00% 5.00% 5.00% 3.00%
UNIT VALUE 1.56125873 1.57957890 1.47827745 1.31508237 1.31508237 1.00000000
UNITS 633.08012 676.4630009 760.4086427 760.4086427 1000
INITIAL INVESTMENT $ 1,000 $ 1,000 $ 1,000 $ 1,000 $ 1,000
CUMULATIVE ASSETS $ 988.40 $ 1,056.13 $ 1,187.19 $ 1,187.19 $ 1,561.26
WITHOUT DSC:
Annualized Return (Table 2) 18.72% 18.17%
Cumulative Return (Table 3) -1.16% 5.61% 18.72% 18.72% 56.13%
ACCOUNT CHARGE (AAC)
$ 0.60
WITH DSC:
Annnualized Return (Table 1) 13.66% 17.30%
Cumulative Return -6.22% 0.55% 13.66% 13.66% 53.07%
</TABLE>
* 11/29/96 uv used
** 12/29/95 uv used
<PAGE>
DISCOVERY SELECT
AIM (OUTSIDE)
V.I. VALUE
1.00 BP
AIM Value
<TABLE>
<CAPTION>
1 MONTH * 3 MONTHS YTD **
12/31/96 11/30/96 9/30/96 12/31/95
-------- -------- ------- --------
<S> <C> <C> <C> <C>
DEFERRED SALES CHARGE (DSC) 5.00% 5.00% 5.00%
UNIT VALUE 1.79867507 1.80068253 1.68653997 1.58501021
UNITS 555.344978 592.9299144 630.9107624
INITIAL INVESTMENT $ 1,000 $ 1,000 $ 1,000
CUMULATIVE ASSETS $ 998.89 $ 1,066.49 $ 1,134.80
WITHOUT DSC:
Annualized Return (Table 2)
Cumulative Return (Table 3) -0.11% 6.65% 13.48%
ACCOUNT CHARGE (AAC)
$ 0.60
WITH DSC:
Annnualized Return (Table 1)
Cumulative Return -5.17% 1.59% 8.42%
</TABLE>
3.66
years
1 YEAR ** 3 YEAR INCEPTION
12/31/95 12/31/93 5/5/93
-------- -------- ------
DEFERRED SALES CHARGE (DSC) 5.00% 3.00% 2.00%
UNIT VALUE 1.58501021 1.14067818 1.00000000
UNITS 630.9107624 876.6714552 1000
INITIAL INVESTMENT $ 1,000 $ 1,000 $ 1,000
CUMULATIVE ASSETS $ 1,134.80 $ 1,576.85 $ 1,798.68
WITHOUT DSC:
Annualized Return (Table 2) 13.48% 16.38% 17.40%
Cumulative Return (Table 3) 13.48% 57.68% 79.87%
ACCOUNT CHARGE (AAC)
$
WITH DSC:
Annnualized Return (Table 1) 8.42% 15.62% 17.03%
Cumulative Return 8.42% 54.62% 77.81%
* 11/29/96 uv used
** 12/29/95 uv used
<PAGE>
DISCOVERY SELECT
OPCAP ADVISORS
OCC ACCUMULATION TRUST SMALL CAP
1.00 BP
OCC Small Cap
<TABLE>
<CAPTION>
1 MONTH * 3 MONTHS YTD **
12/31/96 11/30/96 9/30/96 12/31/95
-------- -------- ------- --------
<S> <C> <C> <C> <C>
DEFERRED SALES CHARGE (DSC) 5.00% 5.00% 5.00%
UNIT VALUE 2.89714080 2.83803324 2.72721957 2.46289143
UNITS 352.356691 366.6738135 406.02683
INITIAL INVESTMENT $ 1,000 $ 1,000 $ 1,000
CUMULATIVE ASSETS $ 1,020.83 $ 1,062.31 $ 1,176.32
WITHOUT DSC:
Annualized Return (Table 2)
Cumulative Return (Table 3) 2.08% 6.23% 17.63%
ACCOUNT CHARGE (AAC)
$ 0.60
WITH DSC:
Annnualized Return (Table 1)
Cumulative Return -2.98% 1.17% 12.57%
<CAPTION>
8.42
years
1 YEAR ** 3 YEAR 5 YEAR INCEPTION
12/31/95 12/31/93 12/31/91 8/1/88
-------- -------- -------- ------
<S> <C> <C> <C> <C>
DEFERRED SALES CHARGE (DSC) 5.00% 3.00% 1.00% 0.00%
UNIT VALUE 2.46289143 2.21153101 1.55652729 1.00000000
UNITS 406.02683 452.1754366 642.4558094 1000
INITIAL INVESTMENT $ 1,000 $ 1,000 $ 1,000 $ 1,000
CUMULATIVE ASSETS $ 1,176.32 $ 1,310.02 $ 1,861.28 $ 2,897.14
WITHOUT DSC:
Annualized Return (Table 2) 17.63% 9.41% 13.21% 13.46%
Cumulative Return (Table 3) 17.63% 31.00% 86.13% 189.71%
ACCOUNT CHARGE (AAC)
WITH DSC:
Annnualized Return (Table 1) 12.57% 8.55% 13.09% 13.46%
Cumulative Return 12.57% 27.94% 85.07% 189.65%
* 11/29/96 uv used
** 12/29/95 uv used
</TABLE>
<PAGE>
DISCOVERY SELECT
OPCAP ADVISORS
OCC ACCUMULATION TRUST MANAGED
1.00 BP
OCC Managed
<TABLE>
<CAPTION>
1 MONTH * 3 MONTHS YTD **
12/31/96 11/30/96 9/30/96 12/31/95
-------- -------- ------- --------
<S> <C> <C> <C> <C>
DEFERRED SALES CHARGE (DSC) 5.00% 5.00% 5.00%
UNIT VALUE 4.25333569 4.26633678 3.96737495 3.50028016
UNITS 234.393123 252.0558335 285.6914173
INITIAL INVESTMENT $ 1,000 $ 1,000 $ 1,000
CUMULATIVE ASSETS $ 996.95 $ 1,072.08 $ 1,215.14
WITHOUT DSC:
Annualized Return (Table 2)
Cumulative Return (Table 3) -0.30% 7.21% 21.51%
ACCOUNT CHARGE (AAC)
$ 0.60
WITH DSC:
Annnualized Return (Table 1)
Cumulative Return -5.36% 2.15% 16.45%
<CAPTION>
8.42
years
1 YEAR ** 3 YEAR 5 YEAR INCEPTION
12/31/95 12/31/93 12/31/91 8/1/88
-------- -------- -------- ------
<S> <C> <C> <C> <C>
DEFERRED SALES CHARGE (DSC) 5.00% 3.00% 1.00% 0.00%
UNIT VALUE 3.50028016 2.40751369 1.87741165 1.00000000
UNITS 285.6914173 415.3662777 532.6482341 1000
INITIAL INVESTMENT $ 1,000 $ 1,000 $ 1,000 $ 1,000
CUMULATIVE ASSETS $ 1,215.14 $ 1,766.69 $ 2,265.53 $ 4,253.34
WITHOUT DSC:
Annualized Return (Table 2) 21.51% 20.87% 17.75% 18.76%
Cumulative Return (Table 3) 21.51% 76.67% 126.55% 325.33%
ACCOUNT CHARGE (AAC)
WITH DSC:
Annnualized Return (Table 1) 16.45% 20.17% 17.64% 18.75%
Cumulative Return 16.45% 73.61% 125.49% 325.27%
</TABLE>
* 11/29/96 uv used
** 12/29/95 uv used
<PAGE>
DISCOVERY SELECT
(INTERNAL)
PRUDENTIAL JENNISON
1.00 BP
Pru Jenn
<TABLE>
<CAPTION>
1.67
years
1 MONTH * 3 MONTHS YTD ** 1 YEAR ** INCEPTION
12/31/96 11/30/96 9/30/96 12/31/95 12/31/95 5/1/95
-------- -------- ------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
DEFERRED SALES CHARGE (DSC) 5.00% 5.00% 5.00% 5.00% 4.00%
UNIT VALUE 1.41218574 1.45474677 1.36037118 1.24671537 1.24671537 1.00873747
UNITS 687.40486 735.0934912 802.1077016 802.1077016 991.338212
INITIAL INVESTMENT $ 1,000 $ 1,000 $ 1,000 $ 1,000 $ 1,000
CUMULATIVE ASSETS $ 970.74 $ 1,038.09 $ 1,132.73 $ 1,132.73 $ 1,399.95
WITHOUT DSC:
Annualized Return (Table 2) 13.27% 22.30%
Cumulative Return (Table 3) -2.93% 3.81% 13.27% 13.27% 40.00%
ACCOUNT CHARGE (AAC)
$ 0.60
WITH DSC:
Annnualized Return (Table 1) 8.21% 20.17%
Cumulative Return -7.99% -1.25% 8.21% 8.21% 35.94%
</TABLE>
* 11/29/96 uv used
** 12/29/95 uv used
<PAGE>
DISCOVERY SELECT
(INTERNAL)
EQUITY
1.00 BP
Equity
<TABLE>
<CAPTION>
1 MONTH * 3 MONTHS YTD ** 1 YEAR **
12/31/96 11/30/96 9/30/96 12/31/95 12/31/95
-------- -------- ------- -------- --------
<S> <C> <C> <C> <C> <C>
DEFERRED SALES CHARGE (DSC) 5.00% 5.00% 5.00% 5.00%
UNIT VALUE 5.59915246 5.61714758 5.19420292 4.80557549 4.80557549
UNITS 178.0263 192.5223206 208.0916223 208.0916223
INITIAL INVESTMENT $ 1,000 $ 1,000 $ 1,000 $ 1,000
CUMULATIVE ASSETS $ 996.80 $ 1,077.96 $ 1,165.14 $ 1,165.14
WITHOUT DSC:
Annualized Return (Table 2) 16.51%
Cumulative Return (Table 3) -0.32% 7.80% 16.51% 16.51%
ACCOUNT CHARGE (AAC)
$ 0.60
WITH DSC:
Annnualized Return (Table 1) 11.45%
Cumulative Return -5.38% 2.74% 11.45% 11.45%
<CAPTION>
13.58
years
3 YEAR 5 YEAR 10 YEAR INCEPTION
12/31/93 12/31/91 12/31/86 6/6/83
-------- -------- -------- ------
<S> <C> <C> <C> <C>
DEFERRED SALES CHARGE (DSC) 3.00% 1.00% 0.00% 0.00%
UNIT VALUE 3.64755618 2.69094541 1.55532978 1.00000000
UNITS 274.1561612 371.6166059 642.9504616 1000
INITIAL INVESTMENT $ 1,000 $ 1,000 $ 1,000 $ 1,000
CUMULATIVE ASSETS $ 1,535.04 $ 2,080.74 $ 3,599.98 $ 5,599.15
WITHOUT DSC:
Annualized Return (Table 2) 15.34% 15.76% 13.65% 13.52%
Cumulative Return (Table 3) 53.50% 108.07% 260.00% 459.92%
ACCOUNT CHARGE (AAC)
WITH DSC:
Annnualized Return (Table 1) 14.57% 15.65% 13.65% 13.52%
Cumulative Return 50.44% 107.01% 259.94% 459.86%
* 11/29/96 uv used
** 12/29/95 uv used
</TABLE>
<PAGE>
DISCOVERY SELECT
(INTERNAL)
STOCK INDEX
1.00 BP
Stk Index
<TABLE>
<CAPTION>
1 MONTH * 3 MONTHS YTD **
12/31/96 11/30/96 9/30/96 12/31/95
-------- -------- ------- --------
<S> <C> <C> <C> <C>
DEFERRED SALES CHARGE (DSC) 5.00% 5.00% 5.00%
UNIT VALUE 2.95915363 3.02279436 2.74154760 2.43929664
UNITS 330.819725 364.7574822 409.9542399
INITIAL INVESTMENT $ 1,000 $ 1,000 $ 1,000
CUMULATIVE ASSETS $ 978.95 $ 1,079.37 $ 1,213.12
WITHOUT DSC:
Annualized Return (Table 2)
Cumulative Return (Table 3) -2.11% 7.94% 21.31%
ACCOUNT CHARGE (AAC)
$ 0.60
WITH DSC:
Annnualized Return (Table 1)
Cumulative Return -7.17% 2.88% 16.25%
<CAPTION>
9.21
years
1 YEAR ** 3 YEAR 5 YEAR INCEPTION
12/31/95 12/31/93 12/31/91 10/19/87
-------- -------- -------- ------
<S> <C> <C> <C> <C>
DEFERRED SALES CHARGE (DSC) 5.00% 3.00% 1.00% 0.00%
UNIT VALUE 2.43929664 1.79844288 1.56246867 .80625673
UNITS 409.9542399 556.0365643 640.012833 1,240.29972
INITIAL INVESTMENT $ 1,000 $ 1,000 $ 1,000 $ 1,000
CUMULATIVE ASSETS $ 1,213.12 $ 1,645.40 $ 1,893.90 $ 3,670.24
WITHOUT DSC:
Annualized Return (Table 2) 21.31% 18.04% 13.61% 15.17%
Cumulative Return (Table 3) 21.31% 64.54% 89.39% 267.02%
ACCOUNT CHARGE (AAC)
WITH DSC:
Annnualized Return (Table 1) 16.25% 17.30% 13.48% 15.16%
Cumulative Return 16.25% 61.48% 88.33% 266.96%
</TABLE>
* 11/29/96 uv used
** 12/29/95 uv used
<PAGE>
DISCOVERY SELECT
(INTERNAL)
HIGH YIELD BOND
1.00 BP
Hi Yield Bond
<TABLE>
<CAPTION>
1 MONTH * 3 MONTHS YTD **
12/31/96 11/30/96 9/30/96 12/31/95
-------- -------- ------- --------
<S> <C> <C> <C> <C>
DEFERRED SALES CHARGE (DSC) 5.00% 5.00% 5.00%
UNIT VALUE 1.99740802 1.99418358 1.97514621 1.81986143
UNITS 501.458346 506.291633 549.4923864
INITIAL INVESTMENT $ 1,000 $ 1,000 $ 1,000
CUMULATIVE ASSETS $ 1,001.62 $ 1,011.27 $ 1,097.56
WITHOUT DSC:
Annualized Return (Table 2)
Cumulative Return (Table 3) 0.16% 1.13% 9.76%
ACCOUNT CHARGE (AAC)
$ 0.60
WITH DSC:
Annnualized Return (Table 1)
Cumulative Return -4.90% -3.93% 4.70%
<CAPTION>
9.88
years
1 YEAR ** 3 YEAR 5 YEAR INCEPTION
12/31/95 12/31/93 12/31/91 2/16/87
-------- -------- -------- -------
<S> <C> <C> <C> <C>
DEFERRED SALES CHARGE (DSC) 5.00% 3.00% 1.00% 0.00%
UNIT VALUE 1.81986143 1.64241370 1.20252779 1.00000000
UNITS 549.4923864 608.8599967 831.5816136 1000
INITIAL INVESTMENT $ 1,000 $ 1,000 $ 1,000 $ 1,000
CUMULATIVE ASSETS $ 1,097.56 $ 1,216.14 $ 1,661.01 $ 1,997.41
WITHOUT DSC:
Annualized Return (Table 2) 9.76% 6.73% 10.67% 7.25%
Cumulative Return (Table 3) 9.76% 21.61% 66.10% 99.74%
ACCOUNT CHARGE (AAC)
WITH DSC:
Annnualized Return (Table 1) 4.70% 5.83% 10.53% 7.25%
Cumulative Return 4.70% 18.55% 65.04% 99.68%
</TABLE>
* 11/29/96 uv used
** 12/29/95 uv used
<PAGE>
DISCOVERY SELECT
(INTERNAL)
CONSERVATIVE BALANCED
1.00 BP
Cons Bal'd
<TABLE>
<CAPTION>
1 MONTH * 3 MONTHS YTD ** 1 YEAR **
12/31/96 11/30/96 9/30/96 12/31/95 12/31/95
-------- -------- ------- -------- --------
<S> <C> <C> <C> <C> <C>
DEFERRED SALES CHARGE (DSC) 5.00% 5.00% 5.00% 5.00%
UNIT VALUE 3.46258982 3.48019476 3.31201281 3.12553841 3.12553841
UNITS 287.340241 301.9311994 319.9448763 319.9448763
INITIAL INVESTMENT $ 1,000 $ 1,000 $ 1,000 $ 1,000
CUMULATIVE ASSETS $ 994.94 $ 1,045.46 $ 1,107.84 $ 1,107.84
WITHOUT DSC:
Annualized Return (Table 2) 10.78%
Cumulative Return (Table 3) -0.51% 4.55% 10.78% 10.78%
ACCOUNT CHARGE (AAC)
$ 0.60
WITH DSC:
Annnualized Return (Table 1) 5.72%
Cumulative Return -5.57% -0.51% 5.72% 5.72%
<CAPTION>
13.65
years
3 YEAR 5 YEAR 10 YEAR INCEPTION
12/31/93 12/31/91 12/31/86 5/13/83
-------- -------- -------- ------
<S> <C> <C> <C> <C>
DEFERRED SALES CHARGE (DSC) 3.00% 1.00% 0.00% 0.00%
UNIT VALUE 2.75910601 2.35596252 1.52439163 1.03210236
UNITS 362.4362371 424.4549697 655.9994035 968.896147
INITIAL INVESTMENT $ 1,000 $ 1,000 $ 1,000 $ 1,000
CUMULATIVE ASSETS $ 1,254.97 $ 1,469.71 $ 2,271.46 $ 3,354.89
WITHOUT DSC:
Annualized Return (Table 2) 7.86% 8.00% 8.54% 9.28%
Cumulative Return (Table 3) 25.50% 46.97% 127.15% 235.49%
ACCOUNT CHARGE (AAC)
WITH DSC:
Annnualized Return (Table 1) 6.97% 7.84% 8.54% 9.27%
Cumulative Return 22.44% 45.91% 127.09% 235.43%
</TABLE>
* 11/29/96 uv used
** 12/29/95 uv used
<PAGE>
DISCOVERY SELECT
(INTERNAL)
MONEY MARKET
1.00 BP
Money Mkt
<TABLE>
<CAPTION>
1 MONTH * 3 MONTHS YTD ** 1 YEAR **
12/31/96 11/30/96 9/30/96 12/31/95 12/31/95
-------- -------- ------- -------- --------
<S> <C> <C> <C> <C> <C>
DEFERRED SALES CHARGE (DSC) 5.00% 5.00% 5.00% 5.00%
UNIT VALUE 2.06284284 2.05562694 2.04132824 1.97990207 1.97990207
UNITS 486.469593 489.8771204 505.0754859 505.0754859
INITIAL INVESTMENT $ 1,000 $ 1,000 $ 1,000 $ 1,000
CUMULATIVE ASSETS $ 1,003.51 $ 1,010.54 $ 1,041.89 $ 1,041.89
WITHOUT DSC:
Annualized Return (Table 2) 4.19%
Cumulative Return (Table 3) 0.35% 1.05% 4.19% 4.19%
ACCOUNT CHARGE (AAC)
$ 0.60
WITH DSC:
Annnualized Return (Table 1) -0.87%
Cumulative Return -4.71% -4.01% -0.87% -0.87%
<CAPTION>
13.59
years
3 YEAR 5 YEAR 10 YEAR INCEPTION
12/31/93 12/31/91 12/31/86 6/1/83
-------- -------- -------- ------
<S> <C> <C> <C> <C>
DEFERRED SALES CHARGE (DSC) 3.00% 1.00% 0.00% 0.00%
UNIT VALUE 1.83466065 1.75174535 1.28324514 1.00000000
UNITS 545.059927 570.8592291 779.2743326 1000
INITIAL INVESTMENT $ 1,000 $ 1,000 $ 1,000 $ 1,000
CUMULATIVE ASSETS $ 1,124.37 $ 1,177.59 $ 1,607.52 $ 2,062.84
WITHOUT DSC:
Annualized Return (Table 2) 3.98% 3.32% 4.86% 5.47%
Cumulative Return (Table 3) 12.44% 17.76% 60.75% 106.28%
ACCOUNT CHARGE (AAC)
WITH DSC:
Annnualized Return (Table 1) 3.03% 3.13% 4.85% 5.47%
Cumulative Return 9.38% 16.70% 60.69% 106.22%
</TABLE>
* 11/29/96 uv used
** 12/29/95 uv used
<PAGE>
DISCOVERY SELECT
(INTERNAL)
GLOBAL
1.00 BP
Global
<TABLE>
<CAPTION>
1 MONTH * 3 MONTHS YTD **
12/31/96 11/30/96 9/30/96 12/31/95
-------- -------- ------- --------
<S> <C> <C> <C> <C>
DEFERRED SALES CHARGE (DSC) 5.00% 5.00% 5.00%
UNIT VALUE 2.11608856 2.11874349 2.00320677 1.78756961
UNITS 471.977851 499.1995909 559.4187742
INITIAL INVESTMENT $ 1,000 $ 1,000 $ 1,000
CUMULATIVE ASSETS $ 998.75 $ 1,056.35 $ 1,183.78
WITHOUT DSC:
Annualized Return (Table 2)
Cumulative Return (Table 3) -0.13% 5.64% 18.38%
ACCOUNT CHARGE (AAC)
$ 0.60
WITH DSC:
Annnualized Return (Table 1)
Cumulative Return -5.19% 0.58% 13.32%
<CAPTION>
8.29
years
1 YEAR ** 3 YEAR 5 YEAR INCEPTION
12/31/95 12/31/93 12/31/91 9/19/88
-------- -------- -------- -------
<S> <C> <C> <C> <C>
DEFERRED SALES CHARGE (DSC) 5.00% 3.00% 1.00% 0.00%
UNIT VALUE 1.78756961 1.65632832 1.22235413 .99856311
UNITS 559.4187742 603.7450353 818.0935258 1001.43896
INITIAL INVESTMENT $ 1,000 $ 1,000 $ 1,000 $ 1,000
CUMULATIVE ASSETS $ 1,183.78 $ 1,277.58 $ 1,731.16 $ 2,119.13
WITHOUT DSC:
Annualized Return (Table 2) 18.38% 8.50% 11.59% 9.49%
Cumulative Return (Table 3) 18.38% 27.76% 73.12% 111.91%
ACCOUNT CHARGE (AAC)
WITH DSC:
Annnualized Return (Table 1) 13.32% 7.63% 11.45% 9.48%
Cumulative Return 13.32% 24.70% 72.06% 111.85%
</TABLE>
* 11/29/96 uv used
** 12/29/95 uv used
<PAGE>
DISCOVERY SELECT
(INTERNAL)
EQUITY INCOME
1.00 BP
Equity Income
<TABLE>
<CAPTION>
1 MONTH * 3 MONTHS YTD **
12/31/96 11/30/96 9/30/96 12/31/95
-------- -------- ------- --------
<S> <C> <C> <C> <C>
DEFERRED SALES CHARGE (DSC) 5.00% 5.00% 5.00%
UNIT VALUE 2.83724405 2.78870940 2.57433331 2.35856778
UNITS 358.588815 388.4500877 423.9861192
INITIAL INVESTMENT $ 1,000 $ 1,000 $ 1,000
CUMULATIVE ASSETS $ 1,017.40 $ 1,102.13 $ 1,202.95
WITHOUT DSC:
Annualized Return (Table 2)
Cumulative Return (Table 3) 1.74% 10.21% 20.30%
ACCOUNT CHARGE (AAC)
$ 0.60
WITH DSC:
Annnualized Return (Table 1)
Cumulative Return -3.32% 5.15% 15.24%
<CAPTION>
8.88
years
1 YEAR ** 3 YEAR 5 YEAR INCEPTION
12/31/95 12/31/93 12/31/91 2/17/88
-------- -------- -------- -------
<S> <C> <C> <C> <C>
DEFERRED SALES CHARGE (DSC) 5.00% 3.00% 1.00% 0.00%
UNIT VALUE 2.35856778 2.09991438 1.59649518 1.00000000
UNITS 423.9861192 476.2098919 626.3720759 1000
INITIAL INVESTMENT $ 1,000 $ 1,000 $ 1,000 $ 1,000
CUMULATIVE ASSETS $ 1,202.95 $ 1,351.12 $ 1,777.17 $ 2,837.24
WITHOUT DSC:
Annualized Return (Table 2) 20.30% 10.54% 12.17% 12.47%
Cumulative Return (Table 3) 20.30% 35.11% 77.72% 183.72%
ACCOUNT CHARGE (AAC)
WITH DSC:
Annnualized Return (Table 1) 15.24% 9.70% 12.04% 12.46%
Cumulative Return 15.24% 32.05% 76.66% 183.66%
</TABLE>
* 11/29/96 uv used
** 12/29/95 uv used
<PAGE>
DISCOVERY SELECT
(INTERNAL)
GOVERNMENT INCOME
1.00 BP
Gov't Inc
<TABLE>
<CAPTION>
1 MONTH * 3 MONTHS YTD **
12/31/96 11/30/96 9/30/96 12/31/95
-------- -------- ------- --------
<S> <C> <C> <C> <C>
DEFERRED SALES CHARGE (DSC) 5.00% 5.00% 5.00%
UNIT VALUE 1.74107894 1.75893543 1.69455081 1.72039487
UNITS 568.5257019 590.1268903 581.2619053
INITIAL INVESTMENT $ 1,000 $ 1,000 $ 1,000
CUMULATIVE ASSETS $ 989.85 $ 1,027.46 $ 1,012.02
WITHOUT DSC:
Annualized Return (Table 2)
Cumulative Return (Table 3) -1.02% 2.75% 1.20%
ACCOUNT CHARGE (AAC)
$ 0.60
WITH DSC:
Annnualized Return (Table 1)
Cumulative Return -6.08% -2.31% -3.86%
<CAPTION>
7.67
years
1 YEAR ** 3 YEAR 5 YEAR INCEPTION
12/31/95 12/31/93 12/31/91 5/1/89
-------- -------- -------- -------
<S> <C> <C> <C> <C>
DEFERRED SALES CHARGE (DSC) 5.00% 3.00% 1.00% 0.00%
UNIT VALUE 1.72039487 1.55534640 1.33482258 1.00157078
UNITS 581.2619053 642.9435912 749.1632334 998.431683
INITIAL INVESTMENT $ 1,000 $ 1,000 $ 1,000 $ 1,000
CUMULATIVE ASSETS $ 1,012.02 $ 1,119.42 $ 1,304.35 $ 1,738.35
WITHOUT DSC:
Annualized Return (Table 2) 1.20% 3.83% 5.45% 7.47%
Cumulative Return (Table 3) 1.20% 11.94% 30.44% 73.83%
ACCOUNT CHARGE (AAC)
WITH DSC:
Annnualized Return (Table 1) -3.86% 2.87% 5.28% 7.47%
Cumulative Return -3.86% 8.88% 29.38% 73.77%
</TABLE>
* 11/29/96 uv used
** 12/29/95 uv used
<PAGE>
DISCOVERY SELECT
(INTERNAL)
DIVERSIFIED BOND
1.00 BP
Div'd Bond
<TABLE>
<CAPTION>
1 MONTH * 3 MONTHS YTD ** 1 YEAR **
12/31/96 11/30/96 9/30/96 12/31/95 12/31/95
-------- -------- ------- -------- --------
<S> <C> <C> <C> <C> <C>
DEFERRED SALES CHARGE (DSC) 5.00% 5.00% 5.00% 5.00%
UNIT VALUE 3.07947583 3.10546781 2.97782416 2.98174541 2.98174541
UNITS 322.0126761 335.8156648 335.3740385 335.3740385
INITIAL INVESTMENT $ 1,000 $ 1,000 $ 1,000 $ 1,000
CUMULATIVE ASSETS $ 991.63 $ 1,034.14 $ 1,032.78 $ 1,032.78
WITHOUT DSC:
Annualized Return (Table 2) 3.28%
Cumulative Return (Table 3) -0.84% 3.41% 3.28% 3.28%
ACCOUNT CHARGE (AAC)
$ 0.60
WITH DSC:
Annnualized Return (Table 1) -1.78%
Cumulative Return -5.90% -1.65% -1.78% -1.78%
<CAPTION>
13.58
years
3 YEAR 5 YEAR 10 YEAR INCEPTION
12/31/93 12/31/91 12/31/86 6/7/83
-------- -------- -------- ------
<S> <C> <C> <C> <C>
DEFERRED SALES CHARGE (DSC) 3.00% 1.00% 0.00% 0.00%
UNIT VALUE 2.61546305 2.26975622 1.50100776 1.00000000
UNITS 382.3414749 440.5759487 666.219074 1000
INITIAL INVESTMENT $ 1,000 $ 1,000 $ 1,000 $ 1,000
CUMULATIVE ASSETS $ 1,177.41 $ 1,356.74 $ 2,051.61 $ 3,079.48
WITHOUT DSC:
Annualized Return (Table 2) 5.59% 6.28% 7.44% 8.64%
Cumulative Return (Table 3) 17.74% 35.67% 105.16% 207.95%
ACCOUNT CHARGE (AAC)
WITH DSC:
Annnualized Return (Table 1) 4.67% 6.12% 7.44% 8.63%
Cumulative Return 14.68% 34.61% 105.10% 207.89%
</TABLE>
* 11/29/96 uv used
** 12/29/95 uv used
<PAGE>
DISCOVERY SELECT
(INTERNAL)
FLEXIBLE MANAGED
1.00 BP
Flex Mgd
<TABLE>
<CAPTION>
1 MONTH * 3 MONTHS YTD ** 1 YEAR **
12/31/96 11/30/96 9/30/96 12/31/95 12/31/95
-------- -------- ------- -------- --------
<S> <C> <C> <C> <C> <C>
DEFERRED SALES CHARGE (DSC) 5.00% 5.00% 5.00% 5.00%
UNIT VALUE 3.88696233 3.97967821 3.75022194 3.48689393 3.48689393
UNITS 251.276598 266.6508849 286.7881902 286.7881902
INITIAL INVESTMENT $ 1,000 $ 1,000 $ 1,000 $ 1,000
CUMULATIVE ASSETS $ 976.70 $ 1,036.46 $ 1,114.73 $ 1,114.73
WITHOUT DSC:
Annualized Return (Table 2) 11.47%
Cumulative Return (Table 3) -2.33% 3.65% 11.47% 11.47%
ACCOUNT CHARGE (AAC)
$ 0.60
WITH DSC:
Annnualized Return (Table 1) 6.41%
Cumulative Return -7.39% -1.41% 6.41% 6.41%
<CAPTION>
13.62
years
3 YEAR 5 YEAR 10 YEAR INCEPTION
12/31/93 12/31/91 12/31/86 5/22/83
-------- -------- -------- -------
<S> <C> <C> <C> <C>
DEFERRED SALES CHARGE (DSC) 3.00% 1.00% 0.00% 0.00%
UNIT VALUE 2.97497514 2.45865719 1.51595482 1.00000000
UNITS 336.1372621 406.7260791 659.6502675 1000
INITIAL INVESTMENT $ 1,000 $ 1,000 $ 1,000 $ 1,000
CUMULATIVE ASSETS $ 1,306.55 $ 1,580.93 $ 2,564.04 $ 3,886.96
WITHOUT DSC:
Annualized Return (Table 2) 9.31% 9.58% 9.86% 10.48%
Cumulative Return (Table 3) 30.66% 58.09% 156.40% 288.70%
ACCOUNT CHARGE (AAC)
WITH DSC:
Annnualized Return (Table 1) 8.45% 9.43% 9.86% 10.48%
Cumulative Return 27.60% 57.03% 156.34% 288.64%
</TABLE>
* 11/29/96 uv used
** 12/29/95 uv used
