PART A
PROSPECTUS
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PROSPECTUS JUNE 24, 1997
THE PRUDENTIAL DISCOVERY SELECT GROUP VARIABLE CONTRACT ACCOUNT
GROUP VARIABLE ANNUITY CONTRACTS
DISCOVERY SELECT
------------------------
GROUP RETIREMENT ANNUITY
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>
AIM VARIABLE INSURANCE FUNDS, INC.
AIM V.I. Growth and Income Fund AIM V.I. Value Fund
<S> <C>
JANUS ASPEN SERIES MFS VARIABLE INSURANCE TRUST
Growth Portfolio International Growth Portfolio Emerging Growth Series Research Series
OCC ACCUMULATION TRUST T. ROWE PRICE EQUITY SERIES, INC.
Managed Portfolio Small Cap Portfolio Equity Income Portfolio
T. ROWE PRICE INTERNATIONAL SERIES, INC. WARBURG PINCUS TRUST
International Stock Portfolio Post-Venture Capital 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 June 24, 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 27 of this prospectus.
<PAGE>
PROSPECTUS CONTENTS
Page
----
DEFINITIONS OF SPECIAL TERMS USED IN THIS PROSPECTUS....................... 1
BRIEF DESCRIPTION OF THE CONTRACTS......................................... 2
FEE TABLE.................................................................. 4
GENERAL INFORMATION ABOUT PRUDENTIAL, PRUDENTIAL DISCOVERY VARIABLE
SELECT GROUP CONTRACT ACCOUNT AND THE INVESTMENT OPTIONS AVAILABLE
UNDER THE CONTRACTS........................................................ 8
Prudential Insurance Company of America.............................. 8
Prudential Discovery Select Group Variable Contract Account.......... 8
The Funds............................................................ 8
Guaranteed Interest Account.......................................... 11
THE CONTRACTS.............................................................. 11
The Accumulation Period ............................................. 11
Allocation of Purchase Payments...................................... 12
Asset Allocation Program............................................. 12
Transfers............................................................ 13
Dollar Cost Averaging................................................ 14
Auto-Rebalancing..................................................... 14
Withdrawals.......................................................... 14
Systematic Withdrawal Plan........................................... 15
Texas Optional Retirement Plan....................................... 16
Death Benefit........................................................ 16
Discontinuance of Contributions...................................... 17
Loan Provision....................................................... 17
Modified Procedures.................................................. 18
CHARGES, FEES AND DEDUCTIONS............................................... 18
Administrative Fee and Annual Account Charge......................... 18
Charge for Assuming Mortality and Expense Risks...................... 19
Expenses Incurred by the Funds....................................... 19
Withdrawal Charge.................................................... 19
Limitations on Withdrawal Charge..................................... 19
Premium Taxes........................................................ 20
FEDERAL TAX STATUS......................................................... 21
Taxes on Prudential.................................................. 21
Qualified Retirement Arrangements Using the Contracts................ 21
Non-Qualified Arrangements Using the Contracts....................... 22
Withholding.......................................................... 23
EFFECTING AN ANNUITY....................................................... 23
Life Annuity with Payments Certain................................... 23
Annuity Certain...................................................... 23
Joint and Survivor Annuity with Payment Certain...................... 24
Purchasing the Annuity............................................... 24
OTHER INFORMATION.......................................................... 24
Misstatement of Age or Sex........................................... 24
Sale of the Contract and Sales Commission............................ 24
Voting Rights........................................................ 24
Substitution of Fund Shares.......................................... 25
Performance Information.............................................. 25
Reports to Participants.............................................. 26
State Regulation..................................................... 26
Legal Proceedings.................................................... 26
Statement of Additional Information........................................ 27
Additional Information .............................................. 27
i
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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 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.
1
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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 8. 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 11-12.
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 4 and Administrative Fee and Annual Account Charge, page
18.
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 18.
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
14-15. 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," page 21. 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 14-17 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 18.
2
<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.
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, INC.(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, Inc. 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.
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.
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, Inc.
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
6
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1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
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
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, Inc.
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
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.
7
<PAGE>
GENERAL INFORMATION ABOUT PRUDENTIAL,
THE PRUDENTIAL DISCOVERY SELECT GROUP VARIABLE CONTRACT ACCOUNT AND
THE INVESTMENT OPTIONS AVAILABLE UNDER THE CONTRACTS
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 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.
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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.
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.
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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.
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 4 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 the Contracts. These
percentages vary by Fund, and reflect administrative and other services provided
by Prudential.
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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).
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 18.
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.
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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, 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.
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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 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.
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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 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.
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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 19. 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 $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,"
page 21.
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.
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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.
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 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
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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 23. 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 CONTRIBUTIONS
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.
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
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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 fee 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 fee is deducted daily from the assets in
each of the Subaccounts at an effective annual rate of 0.85%.
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
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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.
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 the Contract.
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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 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.
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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
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
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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 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
23
<PAGE>
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.
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
24
<PAGE>
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 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.
25
<PAGE>
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.
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, on July 9, 1996, a Multi-State Life Insurance Task Force comprised of
insurance regulators from 29 states and the District of Columbia, released a
report on Prudential's activities. As of February 24, 1997, Prudential had
entered into consent orders or agreements with all 50 states and the District of
Columbia to implement a remediation plan, whose terms closely parallel the
Settlement approved in the MDL proceeding, and agreed to a series of payments
allocated to all 50 states and the District of Columbia amounting to a total of
approximately $65 million.
Litigation is subject to many uncertainties, and given the complexity and scope
of these suits, their outcome cannot be predicted.
26
<PAGE>
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:
PAGE
----
Definitions............................................................. 2
Other Contract Provisions............................................... 2
Administration.......................................................... 2
Performance Information................................................. 3
Directors of Prudential ................................................ 8
Officers of Prudential ................................................. 10
Sale of Contracts....................................................... 11
Legal Matters........................................................... 11
Experts................................................................. 11
Financial Statements.................................................... 11
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 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 page of this
Prospectus.
27
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
JUNE 24, 1997
DISCOVERY SELECT
------------------------
GROUP RETIREMENT ANNUITY
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(SM) 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 June 24, 1997 which is available
without charge upon written request to The Prudential Insurance Company of
America at the address below.
<PAGE>
TABLE OF CONTENTS
Page
----
DEFINITIONS............................................................. 2
OTHER CONTRACT PROVISIONS............................................... 2
Assignment........................................................ 2
Participation in Divisible Surplus................................ 2
ADMINISTRATION.......................................................... 2
PERFORMANCE INFORMATION................................................. 3
Annual Average Total Return....................................... 3
Non-Standard Total Return......................................... 3
Performance Information........................................... 3
Total Return...................................................... 3
DIRECTORS OF PRUDENTIAL ................................................ 8
OFFICERS OF PRUDENTIAL ................................................. 10
SALE OF CONTRACTS....................................................... 11
LEGAL MATTERS .......................................................... 11
EXPERTS................................................................. 11
FINANCIAL STATEMENTS.................................................... 11
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 additional information
of each Fund describe the investment management and administration of that Fund.
Subject to Prudential's supervision, the investment advisory 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
and, pursuant to a Subadvisory Agreement, by another wholly-owned subsidiary,
Jennison Associates Capital Corp. ("Jennison"), with respect to the management
of the Prudential Jennison Portfolio. Both PIC and Jennison are registered as
investment advisers 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.
2
<PAGE>
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 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.
3
<PAGE>
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).
<TABLE>
<CAPTION>
TABLE 1
SUBACCOUNT STANDARDIZED "HYPOTHETICAL"
AVERAGE ANNUAL TOTAL RETURN
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 ..................... 5/13/83 (.87)% 2.99% 3.09% 4.82% 5.45%
Diversified Bond Subaccount ................. 5/13/83 (1.70) 4.82 6.29 7.27 8.33
Government Income Subaccount ................ 5/1/89 (3.86) 2.98 5.38 N/A 7.62
Conservative Balanced Subaccount ............ 5/13/83 6.45 7.36 8.15 8.80 9.52
Flexible Managed Subaccount ................. 5/13/83 7.45 8.96 9.89 10.21 10.64
High Yield Bond Subaccount .................. 2/23/87 5.22 6.40 11.00 N/A 7.75
Stock Index Subaccount ...................... 10/19/87 16.29 17.31 13.49 N/A 15.21
Equity Income Subaccount .................... 2/19/88 15.47 12.57 13.83 N/A 13.60
Equity Subaccount ........................... 5/13/83 12.28 14.97 16.02 13.99 13.75
Prudential Jennison Subaccount .............. 5/1/95 8.20 N/A N/A N/A 20.14
Global Subaccount ........................... 9/19/88 13.44 7.68 11.47 N/A 9.34
AIM Variable Insurance Funds, Inc.
AIM V.I. Growth and Income Subaccount ....... 5/2/94 13.69 N/A N/A N/A 17.36
AIM V.I. Value Subaccount ................... 5/5/93 8.82 15.73 N/A N/A 17.11
Janus Aspen Series
Growth Subaccount ........................... 9/13/93 12.21 14.61 N/A N/A 14.53
International Growth Subaccount ............. 5/2/94 28.29 N/A N/A N/A 17.52
MFS Variable Insurance Trust
Emerging Growth Subaccount .................. 7/24/95 10.80 N/A N/A N/A 20.90
Research Subaccount ......................... 7/24/95 16.06 N/A N/A N/A 19.59
OCC Accumulation Trust (Note 2)
Managed Subaccount .......................... 8/1/88 16.54 20.51 17.89 N/A 18.97
Small Cap Subaccount ........................ 8/1/88 12.57 8.52 13.23 N/A 13.57
T. Rowe Price
T. Rowe Price Equity Series, Inc.,
Equity Income Subaccount ................... 3/31/94 13.33 N/A N/A N/A 19.86
T. Rowe Price International Series,
Inc., International Stock Subaccount ....... 3/31/94 8.50 N/A N/A N/A 7.84
Warburg Pincus Trust
Post-Venture Capital Subaccount ............. 9/30/96 N/A N/A N/A N/A (6.55)
</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.
4
<PAGE>
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, but do not reflect any withdrawal
charges or the impact of a pro rata portion of the annual account charge.
<TABLE>
<CAPTION>
TABLE 2
SUBACCOUNT "HYPOTHETICAL"
AVERAGE TOTAL RETURN ASSUMING NO WITHDRAWAL
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 ...................... 5/13/83 4.19% 3.98% 3.32% 4.86% 5.48%
Diversified Bond Subaccount .................. 5/13/83 3.36 5.78 6.49 7.30 8.35
Government Income Subaccount ................. 5/1/89 1.20 3.97 5.59 N/A 7.66
Conservative Balanced Subaccount ............. 5/13/83 11.51 8.27 8.34 8.82 9.54
Flexible Managed Subaccount .................. 5/13/83 12.51 9.85 10.07 10.23 10.66
High Yield Bond Subaccount ................... 2/23/87 10.28 7.32 11.17 N/A 7.78
Stock Index Subaccount ....................... 10/19/87 21.35 18.08 13.64 N/A 15.23
Equity Income Subaccount ..................... 2/19/88 20.53 13.40 13.99 N/A 13.62
Equity Subaccount ............................ 5/13/83 17.34 15.77 16.17 14.01 13.76
Prudential Jennison Subaccount ............... 5/1/95 13.26 N/A N/A N/A 22.29
Global Subaccount ............................ 9/19/88 18.50 8.58 11.64 N/A 9.38
AIM Variable Insurance Funds, Inc.
AIM V.I. Growth and Income Subaccount ........ 5/2/94 18.75 N/A N/A N/A 18.26
AIM V.I. Value Subaccount .................... 5/5/93 13.88 16.51 N/A N/A 17.51
Janus Aspen Series
Growth Subaccount ............................ 9/13/93 17.27 15.41 N/A N/A 15.01
International Growth Subaccount .............. 5/2/94 33.35 N/A N/A N/A 18.42
MFS Variable Insurance Trust
Emerging Growth Subaccount ................... 7/24/95 15.86 N/A N/A N/A 23.50
Research Subaccount .......................... 7/24/95 21.12 N/A N/A N/A 22.20
OCC Accumulation Trust (Note 2)
Managed Subaccount ........................... 8/1/88 21.60 21.23 18.02 N/A 18.99
Small Cap Subaccount ......................... 8/1/88 17.63 9.41 13.39 N/A 13.59
T. Rowe Price
T. Rowe Price Equity Series, Inc.,
Equity Income Subaccount .................... 3/31/94 18.39 N/A N/A N/A 20.69
T. Rowe Price International Series, Inc.,
International Stock Subaccount .............. 3/31/94 13.56 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 (1.49)
</TABLE>
- ----------
Note 1: This table assumes no deferred sales charges.
Note 2: Based on results of the Quest for Value Accumulation Trust and its
predecessor. On September 16, 1994, an investment company which had
commenced operations on August 1, 1988, then called Quest for Value
Accumulation Trust (the "Old Trust"), was effectively divided into two
investment funds -- the Old Trust and the present Quest for Value
Accumulation Trust (the "Present Trust") -- at which time the Present
Trust commenced operations.
5
<PAGE>
<TABLE>
<CAPTION>
TABLE 3
SUBACCOUNT "HYPOTHETICAL" CUMULATIVE TOTAL RETURN
ASSUMING NO WITHDRAWAL
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 ...................... 5/13/83 4.19% 12.44% 17.76% 60.75% 107.05%
Diversified Bond Subaccount .................. 5/13/83 3.36 18.37 36.98 102.42 198.91
Government Income Subaccount ................. 5/1/89 1.20 12.41 31.29 N/A 76.14
Conservative Balanced Subaccount ............. 5/13/83 11.51 26.95 49.34 133.10 246.60
Flexible Managed Subaccount .................. 5/13/83 12.51 32.58 61.64 165.15 298.26
High Yield Bond Subaccount ................... 2/23/87 10.28 23.64 69.91 N/A 109.34
Stock Index Subaccount ....................... 10/19/87 21.35 64.70 89.67 N/A 268.97
Equity Income Subaccount ..................... 2/19/88 20.53 45.87 92.58 N/A 210.53
Equity Subaccount ............................ 5/13/83 17.34 55.22 111.71 271.43 480.94
Prudential Jennison Subaccount ............... 5/1/95 13.26 N/A N/A N/A 39.98
Global Subaccount ............................ 9/19/88 18.50 28.04 73.51 N/A 110.16
AIM Variable Insurance Funds, Inc.
AIM V.I. Growth and Income Subaccount ........ 5/2/94 18.75 N/A N/A N/A 56.45
AIM V.I. Value Subaccount .................... 5/5/93 13.88 58.24 N/A N/A 80.50
Janus Aspen Series
Growth Subaccount ............................ 9/13/93 17.27 53.79 N/A N/A 58.70
International Growth Subaccount .............. 5/2/94 33.35 N/A N/A N/A 57.00
MFS Variable Insurance Trust
Emerging Growth Subaccount ................... 7/24/95 15.86 N/A N/A N/A 35.55
Research Subaccount .......................... 7/24/95 21.12 N/A N/A N/A 33.49
OCC Accumulation Trust (Note 2)
Managed Subaccount ........................... 8/1/88 21.60 78.27 129.18 N/A 332.40
Small Cap Subaccount ......................... 8/1/88 17.63 31.00 87.56 N/A 192.53
T. Rowe Price
T. Rowe Price Equity Series, Inc.,
Equity Income Subaccount .................... 3/31/94 18.39 N/A N/A N/A 67.93
T. Rowe Price International Series, Inc.,
International Stock Subaccount .............. 3/31/94 13.56 N/A N/A N/A 26.31
Warburg Pincus Trust
Post-Venture Capital Subaccount .............. 9/30/96 N/A N/A N/A N/A (1.49)
</TABLE>
- ----------
Note 1: This table assumes no deferred sales charges.
Note 2: Based on results of the Quest for Value Accumulation Trust and its
predecessor. On September 16, 1994, an investment company which had
commenced operations on August 1, 1988, then called Quest for Value
Accumulation Trust (the "Old Trust"), was effectively divided into two
investment funds -- the Old Trust and the present Quest for Value
Accumulation Trust (the "Present Trust") -- at which time the Present
Trust commenced operations.
6
<PAGE>
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 4.17% and 4.25%, 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 63. 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 63.
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 66. 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 &
8
<PAGE>
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.
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 64. 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 and Systems, since
1997. Age 50.
RODGER A. 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 A. BERKOWITZ, Senior Vice President and Comptroller since 1995. Age 48.
WILLIAM M. BETHKE, President, Capital Markets Group, Senior Vice President since
1986. Age 50.
LEO J. CORBETT, Senior Vice President, Individual Insurance Marketing. Age 49.
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 58.
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 P. 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 50.
DONALD C. MANN, Senior Vice President, Community Resources; Senior Vice
President since 1990; 1985-90: Vice President. Age 55.
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.
I. EDWARD PRICE, Senior Vice President and Actuary since 1995. Age 54.
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;
17
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO STATUTORY FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(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
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
18
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO STATUTORY FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
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.
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.
19
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO STATUTORY FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
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.
20
<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>
21
<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.
22
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO STATUTORY FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
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 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
23
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO STATUTORY FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
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 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.
24
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO STATUTORY FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
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.
25
<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.
26
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO STATUTORY FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
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.
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.
27
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO STATUTORY FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
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.
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.
28
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO STATUTORY FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
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.
29
<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.
30
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO STATUTORY FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
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 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.
31
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO STATUTORY FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
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 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
32
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO STATUTORY FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
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.
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
33
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO STATUTORY FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
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.
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