<PAGE>
N-4 EL/A
NONE
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON October 16, 1998
File No. 333-23271
File No. 811-08091
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------
FORM N-4
REGISTRATION STATEMENT
under
THE SECURITIES ACT OF 1933
PRE-EFFECTIVE AMENDMENT NO. ___
POST-EFFECTIVE AMENDMENT NO. 3 _X_
REGISTRATION STATEMENT UNDER
THE INVESTMENT COMPANY ACT OF 1940
AMENDMENT NO. 3 _X_
-------------------
THE PRUDENTIAL DISCOVERY SELECT GROUP VARIABLE
CONTRACT ACCOUNT
(Exact Name of Registrant)
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
(Name of Depositor)
3 Gateway Center, 12th Floor
Newark, NJ 07102-5096
Depositor's Telephone Number: (973) 367-1215
--------------------------------------
C. Christopher Sprague, Esq.
Assistant General Counsel
The Prudential Insurance Company of America
213 Washington Street, 16th Floor
Newark, NJ 07102-2992
(Name and Address of Agent for Service of Process)
Copy to:
CHRISTOPHER E. PALMER, ESQ.
Shea & Gardner
1800 Massachusetts Ave., N.W.
Washington, D.C. 20036
-------------------------
It is proposed that this filing will become effective
(check appropriate space):
/ / immediately upon filing pursuant to paragraph (b) of Rule 485
/X/ on October 19, 1998 pursuant to paragraph (b) of Rule 485
/ / 60 days after filing pursuant to paragraph (a) of Rule 485
/ / on pursuant to paragraph (a) of Rule 485
Title of Securities Being Registered: Interests in Group Variable Annuity
Contracts.
<PAGE>
CROSS REFERENCE SHEET
PURSUANT TO RULES 481(a) AND 495(a)
Showing location in Part A (prospectus) and Part B (statement of additional
information) of registration statement of information required by Form N-4
<TABLE>
<CAPTION>
Item of Form N-4 Prospectus Caption
----------------------------------------------- ----------------------------------------
<S> <C> <C> <C> <C>
PART A
1. Cover Page..................................... Cover Page
2. Definitions.................................... Definitions
3. Synopsis....................................... Fee Table; Brief Description of the
Contracts
4. Condensed Financial Information................ Accumulation Unit Values Appendix
5. General
(a) Depositor................................. Prudential Insurance Company of America
(b) Registrant................................ Prudential Discovery Select Group
Variable Contract Account
(c) Portfolio Company......................... The Funds
(d) Fund Prospectus........................... The Funds
(e) Voting Rights............................. Voting Rights
(f) Administrators............................ Prudential Insurance Company of America
6. Deductions and Expenses
(a) General................................... Charges, Fees and Deductions; Brief
Description of the Contract
(b) Sales Load................................ Charges, Fees and Deductions; Brief
Description of the Contract
(c) Special Purchase Plan..................... N/A
(d) Commissions............................... Sale of the Contract and Sales
Commission
(e) Expenses - Registrant..................... Charges, Fees and Deductions; Brief
Description of the Contract
(f) Fund Expenses............................. Charges, Fees and Deductions
(g) Organizational Expenses................... N/A
7. Contracts
(a) Persons with Rights....................... Brief Description of the Contract;
Substitution of Fund Shares; The
Contracts; Voting Rights; Death
Benefit; Modified Procedures
(b) (i) Allocation of Purchase
Payments............... Brief Description of the Contract;
Allocation of Purchase Payments
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
(ii) Transfers................ Brief Description of the Contract;
Transfers
(iii) Exchanges................ Transfers
(c) Changes................................... Substitution of Funds; The Contracts;
Modified Procedures;
(d) Inquiries................................. Cover page
8. Annuity Period................................. Brief Description of the Contract;
Effecting an Annuity
9. Death Benefit.................................. Death Benefit
10. Purchases and Contract Value
(a) Purchases................................. Brief Description of the Contract;
Allocation of Purchase Payments; The
Accumulation Period; Transfers
(b) Valuation................................. Definitions; The Accumulation Period
(c) Daily Calculation......................... Definitions; The Accumulation Period
(d) Underwriter............................... Sale of the Contract and Sales
Commission
11. Redemptions
(a) -- By Owners.............................. Brief Description of the Contract;
Transfers; Withdrawals; Effecting An
Annuity; Federal Tax Status
-- By Annuitant........................... Transfers; Withdrawals; Effecting An
Annuity; Federal Tax Status
(b) Texas ORP................................. Texas Optional Retirement Plan
(c) Check Delay............................... N/A
(d) Lapse..................................... N/A
(e) Free Look................................. The Accumulation Period
12. Taxes.......................................... Brief Description of the Contract;
Federal Tax Status
13. Legal Proceedings.............................. Legal Proceedings
14. Table of Contents for the Statement of
Additional Information......................... Statement of Additional Information
</TABLE>
<TABLE>
<CAPTION>
PART B
Item of Form N-4 Part B Caption
--------------------------------------------------------- ------------------------------------
<S> <C> <C> <C>
15. Cover Page............................................... Cover Page
16. Table of Contents........................................ Table of Contents
17. General Information and History.......................... N/A
18. Services
(a) Fees and Expenses of Registrant............... Charges, Fees and Deductions
(prospectus)
(b) Management Contracts.......................... N/A
(c) Custodian..................................... N/A
Independent Public Accountants................ Expert
(d) Assets of Registrant.......................... Prudential Discovery Select Group
Variable Contract Account
(prospectus)
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C>
(e) Affiliated Persons............................ Prudential Insurance Company of
America (prospectus)
(f) Principal Underwriter......................... Sale of the Contract and Sales
Commission (prospectus)
19. Purchase of Securities Being Offered..................... Sale of the Contract and Sales
Commission (prospectus)
Offering Sales Load...................................... N/A
20. Underwriters............................................. Sale of the Contract and Sales
Commission (prospectus)
21. Calculation of Performance Data.......................... Performance Information; Performance
Information (prospectus)
22. Annuity Payments......................................... Effecting An Annuity (prospectus)
23. Financial Statements..................................... Financial Statements
</TABLE>
<TABLE>
<CAPTION>
PART C -- OTHER INFORMATION
Item of Form N-4 Part C Caption
--------------------------------------------------------- ------------------------------------
<S> <C> <C> <C>
24. Financial Statements and Exhibits........................ Financial Statements and Exhibits
(a) Financial Statements
(b) Exhibits
25. Directors and Officers of the Depositor.................. Directors and Officers of Prudential
Insurance Company of America
26. Persons Controlled By or Under Common
Control with the Depositor or Registrant................. Persons Controlled By or Under
Common Control with the Depositor
or Registrant
27. Number of Contractowners................................. Number of Contractholders
28. Indemnification.......................................... Indemnification
29. Principal Underwriters................................... Principal Underwriter
30. Location of Accounts and Records......................... Location of Books and Records
31. Management Services...................................... Management Services
32. Undertakings............................................. Undertakings and Representations
Signature Page........................................... Signatures
</TABLE>
<PAGE>
PART A
- --------------------------------------------------
<PAGE>
PROSPECTUS OCTOBER 19, 1998
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* (the "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 as amended (the "Code") and with non-qualified defined contribution annuity
arrangements. One of the Contracts (the "Small Plan Contract") is sold
exclusively to retirement plans qualified under Sections 401(k) or 401(a) of the
Code that generally have 100 or fewer participants. Prudential may delegate most
of the administrative services in connection with those Contracts to a third
party recordkeeper (the "Small Plan Contract Recordkeeper").
Contributions made on behalf of Participants may be allocated as the Participant
directs in one or more of the following ways.
- - 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.
Money Market Portfolio
Diversified Bond Portfolio
Government Income Portfolio
Conservative Balanced Portfolio
Flexible Managed Portfolio
High Yield Bond Portfolio
Stock Index Portfolio
Equity Income Portfolio
Equity Portfolio
Prudential Jennison Portfolio
Global Portfolio
- --------------------------------------------------------------------------------
AIM VARIABLE INSURANCE FUNDS, INC.
AIM V.I. Growth and Income Fund AIM V.I. Value Fund
JANUS ASPEN SERIES
Growth Portfolio International Growth Portfolio
OCC ACCUMULATION TRUST
Managed Portfolio Small Cap Portfolio
T. ROWE PRICE INTERNATIONAL SERIES, INC.
International Stock Portfolio
MFS VARIABLE INSURANCE TRUST
Emerging Growth Series Research Series
T. ROWE PRICE EQUITY SERIES, INC.
Equity Income Portfolio
WARBURG PINCUS TRUST
Post-Venture Capital Portfolio
- - 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 the Prudential Discovery
Select Group Variable Contract Account works.
----------------------------------------------
This prospectus provides information a prospective investor should know before
investing. Additional information about the Contracts has been filed with the
Securities and Exchange Commission in a Statement of Additional Information,
dated October 19, 1998, 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 34 of this prospectus.
----------------------------------------------
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
3 Gateway Center, 12th Floor
Newark, NJ 07102-5096
Telephone 1-800-458-6333
* DISCOVERY SELECT is a service mark of Prudential.
<PAGE>
PROSPECTUS CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
DEFINITIONS OF SPECIAL TERMS USED IN THIS PROSPECTUS............................................... 1
BRIEF DESCRIPTION OF THE CONTRACTS................................................................. 2
FEE TABLES......................................................................................... 4
GENERAL INFORMATION ABOUT PRUDENTIAL, PRUDENTIAL DISCOVERY SELECT GROUP VARIABLE CONTRACT ACCOUNT
AND THE INVESTMENT OPTIONS AVAILABLE UNDER THE CONTRACTS......................................... 12
PRUDENTIAL INSURANCE COMPANY OF AMERICA.......................................................... 12
PRUDENTIAL DISCOVERY SELECT GROUP VARIABLE CONTRACT ACCOUNT...................................... 12
THE FUNDS........................................................................................ 12
GUARANTEED INTEREST ACCOUNT...................................................................... 15
THE CONTRACTS...................................................................................... 16
THE ACCUMULATION PERIOD.......................................................................... 16
ALLOCATION OF PURCHASE PAYMENTS.................................................................. 17
ASSET ALLOCATION PROGRAM......................................................................... 17
TRANSFERS........................................................................................ 17
DOLLAR COST AVERAGING............................................................................ 19
AUTO-REBALANCING................................................................................. 19
WITHDRAWALS...................................................................................... 19
SYSTEMATIC WITHDRAWAL PLAN....................................................................... 20
TEXAS OPTIONAL RETIREMENT PLAN................................................................... 21
DEATH BENEFIT.................................................................................... 21
DISCONTINUANCE OF CONTRIBUTIONS.................................................................. 22
LOAN PROVISION................................................................................... 23
MODIFIED PROCEDURES.............................................................................. 24
CHARGES, FEES AND DEDUCTIONS....................................................................... 24
ADMINISTRATIVE FEE AND ANNUAL ACCOUNT CHARGE..................................................... 24
CHARGE FOR ASSUMING MORTALITY AND EXPENSE RISKS.................................................. 24
EXPENSES INCURRED BY THE FUNDS................................................................... 25
WITHDRAWAL CHARGE................................................................................ 25
LIMITATIONS ON WITHDRAWAL CHARGE................................................................. 26
PREMIUM TAXES.................................................................................... 26
FEDERAL TAX STATUS................................................................................. 26
TAXES ON PRUDENTIAL.............................................................................. 27
QUALIFIED RETIREMENT ARRANGEMENTS USING THE CONTRACTS............................................ 27
NON-QUALIFIED ARRANGEMENTS USING THE CONTRACTS................................................... 28
WITHHOLDING...................................................................................... 29
EFFECTING AN ANNUITY............................................................................... 29
LIFE ANNUITY WITH PAYMENTS CERTAIN............................................................... 30
ANNUITY CERTAIN.................................................................................. 30
JOINT AND SURVIVOR ANNUITY WITH PAYMENTS CERTAIN................................................. 30
PURCHASING THE ANNUITY........................................................................... 30
OTHER INFORMATION.................................................................................. 30
MISSTATEMENT OF AGE OR SEX....................................................................... 30
SALE OF THE CONTRACT AND SALES COMMISSIONS....................................................... 31
VOTING RIGHTS.................................................................................... 31
SUBSTITUTION OF FUND SHARES...................................................................... 31
PERFORMANCE INFORMATION.......................................................................... 32
REPORTS TO PARTICIPANTS.......................................................................... 32
STATE REGULATION................................................................................. 32
LEGAL PROCEEDINGS................................................................................ 33
YEAR 2000 COMPLIANCE............................................................................. 33
STATEMENT OF ADDITIONAL INFORMATION.............................................................. 34
ADDITIONAL INFORMATION........................................................................... 34
</TABLE>
i
<PAGE>
DEFINITIONS OF SPECIAL TERMS USED IN THIS
PROSPECTUS
ACCOUNT--See the Prudential Discovery Select Group Variable Contract Account
(the "Discovery Account") below.
ACCUMULATION PERIOD--The period, prior to the effecting of an annuity, during
which the amount credited to a Participant Account may vary with the investment
performance of any Subaccount of the Discovery Account, or the interest rate
credited under the Guaranteed Interest Account, as selected.
ANNUITANT--The person or persons designated by the Participant 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 Code and with
non-qualified annuity arrangements. One of such Contracts is the Small Plan
Contract.
CONTRACT VALUE--The dollar amount held under a Contract.
EMPLOYER--The sponsor of the retirement plan or non-qualified annuity
arrangement.
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 Contracts.
GENERAL ACCOUNT--The assets of Prudential other than those allocated to the
Discovery Account or any other variable separate account of Prudential.
GUARANTEED INTEREST ACCOUNT--An allocation option under the Contract funded by
Prudential's General Account, or under certain Contracts, a separate account. It
is not part of nor dependent upon the investment performance of the Discovery
Account. This Prospectus does not describe in detail the Guaranteed Interest
Account or any separate account funding a guaranteed interest rate option.
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 may change 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 or such other
address that Prudential has specified. 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.
Because of its differing charges, the Small Plan Contract will have a different
Unit Value than the other Contracts.
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 as of 4:15
p.m. Eastern time on each day during which the New York Stock Exchange and
Prudential are open. Currently, the Prudential business unit that receives
transaction requests for the Contracts is open each day on which the New York
Stock Exchange is open.
VARIABLE INVESTMENT OPTIONS--The Subaccounts.
1
<PAGE>
BRIEF DESCRIPTION OF THE CONTRACTS
The Prudential Insurance Company of America ("Prudential") offers the 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, as amended (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
selected 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 12. 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," page 16.
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 with respect to all the Contracts. 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% for Contracts other than the
Small Plan Contract. For the Small Plan Contract, an administrative charge equal
to an annual rate of 1.05% is deducted from the assets held in the variable
investment options. Further details about the administrative charge are found in
the Fee Tables, pages 4 and 5 and Administrative Fee and Annual Account Charge,
page 24.
With respect to Contracts other than the Small Plan Contract, an additional
administrative charge of up to $32 per Participant, the annual account charge,
is assessed on the last Business Day of each calendar year and at the time of a
full withdrawal. This annual account charge will be prorated for new
Participants on a monthly basis for their first year of participation. With
respect to the Small Plan Contract, an annual administrative charge of up to $32
per Participant is assessed either (i) quarterly, on or about 14 days after the
end of each quarter or (ii) annually, on the last Business Day of the calendar
year. This charge is not prorated for new Participants under the Small Plan
Contract.
Under Contracts other than the Small Plan Contract, 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 for
such Contracts is 5% of the contributions made on behalf of the Participant.
Participants in a Small Plan Contract do not pay a withdrawal charge when they
redeem some or all of their Units in the Account or their Participant Account
Value in the Guaranteed Interest Account. Instead, Prudential will assess a
withdrawal charge of up to 5% of the amount of Participant and Employer
contributions that are withdrawn in connection with a full or partial
termination by the Employer of its participation in the Small Plan Contract.
Prudential will impose this withdrawal charge only during the first 5 years
following the effective date of the Small Plan Contract. We will consider an
Employer to have fully or partially terminated its participation in the Small
Plan Contract if it provides Prudential notice of its intent to terminate the
Contract, if the plan terminates or is no longer a qualified plan, or if
Prudential terminates the Contract by reason of the Contractholder failing to
meet its contractual obligations.
A charge against each of the Funds' 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 24.
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," page 19.
Withdrawals may be subject to tax under the
2
<PAGE>
Code, including, under certain circumstances, a 10% penalty tax on premature
withdrawals. See "Federal Tax Status," page 26. In addition, all or a part of a
Participant's Account may be transferred among the Subaccounts and the
Guaranteed Interest Account without the imposition of the withdrawal charge or
tax liability.
The procedures set out in this paragraph apply to Contracts other than the Small
Plan Contract. 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
arrangement 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 19-22 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 24.
The procedures described in this paragraph apply exclusively to the Small Plan
Contracts. Participants under such Contracts must send all written
communications (including written requests to effect a purchase, withdrawal or
other transaction) and death benefit claims to the Small Plan Contract
Recordkeeper at the address provided by Prudential. Participants may effect
certain transactions under their Small Plan Contract, and otherwise communicate
with respect to their Contract, by calling the Small Plan Contract Recordkeeper
at the telephone number provided by Prudential in Participant enrollment
materials. Transactions (including death benefit claims) conveyed to the Small
Plan Contract Recordkeeper will be deemed effective on a given Business Day if
received in good order prior to 4:00 PM Eastern Time on that Business Day. For
purposes of the preceding sentence, "good order" is defined generally as an
instruction received by the Small Plan Contract Recordkeeper that is
sufficiently complete and clear that the Small Plan Contract Recordkeeper does
not need to exercise any discretion to follow such instruction. The Small Plan
Contract Recordkeeper will forward promptly to Prudential transaction requests
and other communications that it receives from Participants in a Small Plan
Contract.
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.
Transaction requests received directly by Prudential in good order on a given
Business Day before the established transaction cutoff time (effective September
1, 1998, 4 PM Eastern Time, or such earlier time that the New York Stock
Exchange may close) will be effective for that Business Day. For purposes of the
preceding sentence, "good order" is defined generally as an instruction received
by Prudential that is sufficiently complete and clear that Prudential does not
need to exercise any discretion to follow such instruction.
3
<PAGE>
FEE TABLE
FOR CONTRACTS OTHER THAN
THE SMALL PLAN CONTRACT
PARTICIPANT TRANSACTION EXPENSES
Sales Charge Imposed on Contributions ..................................... None
Maximum Withdrawal Charge (as a percentage of contributions withdrawn):
<TABLE>
<CAPTION>
THE WITHDRAWAL CHARGE WILL BE EQUAL
TO THE FOLLOWING PERCENTAGE OF THE
YEARS OF CONTRACT PARTICIPATION CONTRIBUTIONS WITHDRAWN
- ------------------------------------------------------------------------------------------------------------
<S> <C>
First Year 5%
Second Year 4%
Third Year 3%
Fourth Year 2%
Fifth Year 1%
Sixth and Subsequent Years No Charge
</TABLE>
Maximum Annual Account Charge .............................................. $32
DISCOVERY ACCOUNT ANNUAL EXPENSES
(AS A PERCENTAGE OF AVERAGE PARTICIPANT ACCOUNT VALUE)
<TABLE>
<CAPTION>
ALL SUBACCOUNTS
- --------------------------------------------------------------------
<S> <C>
Mortality and Expense Risk Charge................................... 0.15%
Administrative Fee.................................................. 0.85%
-----
Total Separate Account Annual Expenses.............................. 1.00%
-----
-----
</TABLE>
4
<PAGE>
FEE TABLE
FOR THE SMALL
PLAN CONTRACT
PARTICIPANT TRANSACTION EXPENSES
Sales Charge Imposed on Contributions ..................................... None
Maximum Withdrawal Charge (as a percentage of contributions withdrawn) in
connection with a full or partial Contract termination:
<TABLE>
<CAPTION>
THE WITHDRAWAL CHARGE WILL BE EQUAL
TO THE FOLLOWING PERCENTAGE OF THE
YEARS CONTRACT HAS BEEN IN EFFECT CONTRIBUTIONS WITHDRAWN
- ------------------------------------------------------------------------------------------------------------
<S> <C>
First Year 5%
Second Year 4%
Third Year 3%
Fourth Year 2%
Fifth Year 1%
Sixth and Subsequent Years No Charge
</TABLE>
Maximum Annual Account Charge .............................................. $32
DISCOVERY ACCOUNT ANNUAL EXPENSES
(AS A PERCENTAGE OF AVERAGE PARTICIPANT ACCOUNT VALUE)
<TABLE>
<CAPTION>
ALL SUBACCOUNTS
- --------------------------------------------------------------------
<S> <C>
Mortality and Expense Risk Charge................................... 0.15%
Administrative Fee.................................................. 1.05%
-----
Total Separate Account Annual Expenses.............................. 1.20%
-----
-----
</TABLE>
5
<PAGE>
ANNUAL EXPENSES OF THE FUNDS
(AS A PERCENTAGE OF PORTFOLIO AVERAGE NET ASSETS)
<TABLE>
<CAPTION>
TOTAL FUND
INVESTMENT ANNUAL EXPENSES
MANAGEMENT OTHER (AFTER EXPENSE
FEE EXPENSES REIMBURSEMENTS)
---------------------------------------
<S> <C> <C> <C>
THE PRUDENTIAL SERIES FUND, INC.(1)
Money Market Portfolio.......................... 0.40% 0.03% 0.43%
Diversified Bond Portfolio...................... 0.40% 0.03% 0.43%
Government Income Portfolio..................... 0.40% 0.04% 0.44%
Conservative Balanced Portfolio................. 0.55% 0.01% 0.56%
Flexible Managed Portfolio...................... 0.60% 0.02% 0.62%
High Yield Bond Portfolio....................... 0.55% 0.02% 0.57%
Stock Index Portfolio........................... 0.35% 0.02% 0.37%
Equity Income Portfolio......................... 0.40% 0.01% 0.41%
Equity Portfolio................................ 0.45% 0.01% 0.46%
Prudential Jennison Portfolio................... 0.60% 0.04% 0.64%
Global Portfolio................................ 0.75% 0.10% 0.85%
AIM VARIABLE INSURANCE FUNDS, INC.(2)
AIM V.I. Growth and Income Fund................. 0.63% 0.06% 0.69%
AIM V.I. Value Fund............................. 0.62% 0.08% 0.70%
JANUS ASPEN SERIES(3)
Growth Portfolio................................ 0.65% 0.05% 0.70%
International Growth Portfolio.................. 0.67% 0.29% 0.96%
MFS VARIABLE INSURANCE TRUST
Emerging Growth Series.......................... 0.75% 0.12% 0.87%
Research Series................................. 0.75% 0.13% 0.88%
OCC ACCUMULATION TRUST(4)
Managed Portfolio............................... 0.80% 0.07% 0.87%
Small Cap Portfolio............................. 0.80% 0.17% 0.97%
T. ROWE PRICE(5)
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(6)
Post-Venture Capital Portfolio.................. 1.07% 0.33% 1.40%
</TABLE>
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. Effective May 1, 1998, the Funds reimburse
AIM in an amount up to 0.25% of the average net asset value of each Fund, for
expenses incurred in providing, or assuring that participating insurance
companies provide, certain administrative services. The fee currently only
applies to the average net asset value of each Fund in excess of the net asset
value of each Fund as calculated on April 30, 1998.
6
<PAGE>
(3) Janus Aspen Series. Management fees for Growth and International Growth
Portfolios reflect a reduced fee schedule effective July 1, 1997. The management
fee for each of these Portfolios reflects the new rate applied to net assets as
of December 31, 1997. Other expenses are based on gross expenses of the shares
before expense offset arrangements for the fiscal year ended December 31, 1997.
The information for each Portfolio is net of fee waivers or reductions from
Janus Capital. Fee reductions for the Growth and International Growth Portfolios
reduce the management fee to the level of the corresponding Janus retail fund.
Other waivers, if applicable, are first applied against the management fee and
then against other expenses. Without such waivers or reductions, the Management
Fee, Other Expenses and Total Operating Expenses for the Shares would have been
0.74%, 0.04% and 0.78% for Growth Portfolio and 0.79%, 0.29% and 1.08% for
International Growth Portfolio respectively. Janus Capital may modify or
terminate the waivers or reductions at any time upon at least 90 days' notice to
the Trustees.
(4) OCC Accumulation Trust. Other Expenses are shown gross of expense offsets
afforded the Portfolios which effectively lowered overall custody expenses.
Total Portfolio Expenses for the Small Cap and Managed Portfolios are limited by
OpCap Advisors so that their respective annualized operating expenses (net of
any expense offsets) do not exceed 1.00% of their respective average daily net
assets. Expenses for the fiscal year ended December 31, 1997 for these
portfolios were below this expense limitation. Expense offsets for each
Portfolio for the fiscal year ended December 31, 1997 amounted to less than one
basis point for each Portfolio.
(5) 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.
(6) Warburg Pincus Trust. The expense figures shown above are based on actual
expenses for fiscal year 1997 including fee waivers and/or expense
reimbursements by the Portfolio's investment adviser and co-administrator. With
respect to the Warburg Pincus Trust Post-Venture Capital Portfolio, absent the
waivers and/or reimbursements, the Investment Management Fee would equal 1.25%,
Other Expenses would equal 0.33%, and Total Fund Annual Expenses would equal
1.58%. 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, 1998.
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.
- The examples assume a consistent 5% annual return on invested assets.
- 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 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.
7
<PAGE>
TABLE I: CONTRACTS OTHER THAN SMALL PLAN CONTRACT
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.
The cumulative expenses shown below would be incurred with respect to a
Participant withdrawal under a Contract other than the Small Plan Contract.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
THE PRUDENTIAL SERIES FUND, INC.
Money Market Subaccount......................... $66 $79 $ 95 $185
Diversified Bond Subaccount..................... 66 79 95 185
Government Income Subaccount.................... 66 80 95 187
Conservative Balanced Subaccount................ 67 83 102 200
Flexible Managed Subaccount..................... 68 85 105 206
High Yield Bond Subaccount...................... 67 84 102 201
Stock Index Subaccount.......................... 65 77 92 179
Equity Income Subaccount........................ 66 79 94 183
Equity Subaccount............................... 66 80 96 189
Prudential Jennison Subaccount.................. 68 86 106 208
Global Subaccount............................... 70 92 117 230
AIM VARIABLE INSURANCE FUNDS, INC.
AIM V.I. Growth and Income Subaccount........... 68 87 108 214
AIM V.I. Value Subaccount....................... 69 87 109 215
JANUS ASPEN SERIES
Growth Subaccount............................... 69 87 109 215
International Growth Subaccount................. 71 95 122 242
MFS VARIABLE INSURANCE TRUST
Emerging Growth Subaccount...................... 70 93 118 233
Research Subaccount............................. 70 93 118 234
OCC ACCUMULATION TRUST
Managed Subaccount.............................. 70 93 118 233
Small Cap Subaccount............................ 71 96 123 243
T. ROWE PRICE
T. Rowe Price Equity Series, Inc., Equity Income
Subaccount.................................... 70 92 117 230
T. Rowe Price International Series, Inc.,
International Stock Subaccount................ 72 98 127 251
WARBURG PINCUS TRUST
Post-Venture Capital Subaccount................. 76 109 144 286
</TABLE>
8
<PAGE>
TABLE II: CONTRACTS OTHER THAN SMALL PLAN CONTRACT
For Contracts other than the Small Plan Contract, if a Participant does not
withdraw any portion of his Participant Account Value from the specified
Subaccount, or he uses his Participant Account Value to effect an annuity as of
the end of the applicable time period, the Participant would pay the following
cumulative expenses on each $1,000 invested.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
THE PRUDENTIAL SERIES FUND, INC.
Money Market Subaccount......................... $16 $49 $ 85 $185
Diversified Bond Subaccount..................... 16 49 85 185
Government Income Subaccount.................... 16 50 85 187
Conservative Balanced Subaccount................ 17 53 92 200
Flexible Managed Subaccount..................... 18 55 95 206
High Yield Bond Subaccount...................... 17 54 92 201
Stock Index Subaccount.......................... 15 47 82 179
Equity Income Subaccount........................ 16 49 84 183
Equity Subaccount............................... 16 50 86 189
Prudential Jennison Subaccount.................. 18 56 96 208
Global Subaccount............................... 20 62 107 230
AIM VARIABLE INSURANCE FUNDS, INC.
AIM V.I. Growth and Income Subaccount........... 18 57 98 214
AIM V.I. Value Subaccount....................... 19 57 99 215
JANUS ASPEN SERIES
Growth Subaccount............................... 19 57 99 215
International Growth Subaccount................. 21 65 112 242
MFS VARIABLE INSURANCE TRUST
Emerging Growth Subaccount...................... 20 63 108 233
Research Subaccount............................. 20 63 108 234
OCC ACCUMULATION TRUST
Managed Subaccount.............................. 20 63 108 233
Small Cap Subaccount............................ 21 66 113 243
T. ROWE PRICE
T. Rowe Price Equity Series, Inc., Equity Income
Subaccount.................................... 20 62 107 230
T. Rowe Price International Series, Inc.,
International Stock Subaccount................ 22 68 117 251
WARBURG PINCUS TRUST
Post-Venture Capital Subaccount................. 26 79 134 286
</TABLE>
9
<PAGE>
TABLE III: SMALL PLAN CONTRACTS
In the event of a full or partial Contract termination, resulting in a
withdrawal from the specified Subaccount just prior to the end of the applicable
time period, each Participant would pay the following cumulative expenses on
each $1,000 invested.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS
------ -------
<S> <C> <C>
THE PRUDENTIAL SERIES FUND, INC.
Money Market Subaccount......................... $68 $85
Diversified Bond Subaccount..................... 68 85
Government Income Subaccount.................... 68 86
Conservative Balanced Subaccount................ 69 89
Flexible Managed Subaccount..................... 70 91
High Yield Bond Subaccount...................... 69 90
Stock Index Subaccount.......................... 67 84
Equity Income Subaccount........................ 68 85
Equity Subaccount............................... 68 86
Prudential Jennison Subaccount.................. 70 92
Global Subaccount............................... 72 98
AIM VARIABLE INSURANCE FUNDS, INC.
AIM V.I. Growth and Income Subaccount........... 70 93
AIM V.I. Value Subaccount....................... 71 94
JANUS ASPEN SERIES
Growth Subaccount............................... 71 94
International Growth Subaccount................. 73 101
MFS VARIABLE INSURANCE TRUST
Emerging Growth Subaccount...................... 72 99
Research Subaccount............................. 72 99
OCC ACCUMULATION TRUST
Managed Subaccount.............................. 72 99
Small Cap Subaccount............................ 73 102
T. ROWE PRICE
T. Rowe Price Equity Series, Inc., Equity Income
Subaccount.................................... 72 98
T. Rowe Price International Series, Inc.,
International Stock Subaccount................ 74 104
WARBURG PINCUS TRUST
Post-Venture Capital Subaccount................. 78 115
</TABLE>
10
<PAGE>
TABLE IV: SMALL PLAN CONTRACTS
If there is no full or partial Contract termination, or the Participant
annuitizes, the Participant would pay the following cumulative expenses on each
$1,000 invested.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS
------ -------
<S> <C> <C>
THE PRUDENTIAL SERIES FUND, INC.
Money Market Subaccount......................... $18 $55
Diversified Bond Subaccount..................... 18 55
Government Income Subaccount.................... 18 56
Conservative Balanced Subaccount................ 19 59
Flexible Managed Subaccount..................... 20 61
High Yield Bond Subaccount...................... 19 60
Stock Index Subaccount.......................... 17 54
Equity Income Subaccount........................ 18 55
Equity Subaccount............................... 18 56
Prudential Jennison Subaccount.................. 20 62
Global Subaccount............................... 22 68
AIM VARIABLE INSURANCE FUNDS, INC.
AIM V.I. Growth and Income Subaccount........... 20 63
AIM V.I. Value Subaccount....................... 21 64
JANUS ASPEN SERIES
Growth Subaccount............................... 21 64
International Growth Subaccount................. 23 71
MFS VARIABLE INSURANCE TRUST
Emerging Growth Subaccount...................... 22 69
Research Subaccount............................. 22 69
OCC ACCUMULATION TRUST
Managed Subaccount.............................. 22 69
Small Cap Subaccount............................ 23 72
T. ROWE PRICE
T. Rowe Price Equity Series, Inc., Equity Income
Subaccount.................................... 22 68
T. Rowe Price International Series, Inc.,
International Stock Subaccount................ 24 74
WARBURG PINCUS TRUST
Post-Venture Capital Subaccount................. 28 85
</TABLE>
Loans taken by a Participant from a Participant Account may be subject to
charges for establishing and maintaining the loan. The examples with respect to
the Contracts do not take into account any deduction for such charges.
The required table of accumulation unit values, which sets out certain
historical information about the value of interests in each Subaccount, appears
in the Appendix to this prospectus on Page 35.
11
<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 751 Broad
Street, Newark, New Jersey. It has been investing for pension funds since 1928.
Prudential is currently considering reorganizing itself into a stock company.
This form of reorganization, known as demutualization, is a complex process that
could take two years to complete. No plan of demutualization has been adopted
yet by Prudential's Board of Directors. Any plan of reorganization adopted by
the Board of Directors would have to be approved by qualified policyholders and
appropriate state insurance regulators. Throughout the process, there will be a
continuing evaluation by the Board of Directors and management of Prudential as
to the desirability of demutualization. The Board of Directors, in its
discretion, may choose not to demutualize or to delay demutualization for a
time.
Prudential generally 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. With
respect to the Small Plan Contracts, Prudential has delegated certain of these
administrative and recordkeeping functions to the Small Plan Contract
Recordkeeper. Currently, the Small Plan Contract Recordkeeper is BISYS Plan
Services, L.P., 323 Norristown Road, Ambler, PA 19002.
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 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 U.S. 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 objective and its
investment adviser:
12
<PAGE>
THE PRUDENTIAL SERIES FUND, INC.
MONEY MARKET PORTFOLIO. The maximum current income that is consistent with
stability of capital and maintenance of liquidity through investment in
high-quality short-term debt obligations. There are no assurances that this
portfolio will maintain a stable net asset value.
DIVERSIFIED BOND PORTFOLIO. A high level of income over the longer term while
providing reasonable safety of capital through investment primarily in readily
marketable intermediate and long-term fixed income securities that provide
attractive yields but do not involve substantial risk of loss of capital through
default.
GOVERNMENT INCOME PORTFOLIO. A high level of income over the longer term
consistent with the preservation of capital through investment primarily in U.S.
Government securities, including intermediate and long-term U.S. Treasury
securities and debt obligations issued by agencies of or instrumentalities
established, sponsored or guaranteed by the U.S. Government. At least 65% of the
total assets of the portfolio will be invested in U.S. Government securities.
CONSERVATIVE BALANCED PORTFOLIO. Achievement of a favorable total investment
return consistent with a portfolio having a conservatively managed mix of money
market instruments, fixed income securities, and common stocks of established
companies, in proportions believed by the investment advisor to be appropriate
for an investor desiring diversification of investment who prefers a relatively
lower risk of loss than that associated with the Flexible Managed Portfolio
while recognizing that this reduces the chances of greater appreciation.
FLEXIBLE MANAGED PORTFOLIO. Achievement of a high total return consistent with
a portfolio having an aggressively managed mix of money market instruments,
fixed income securities, and common stocks, in proportions believed by the
investment advisor to be appropriate for an investor desiring diversification of
investment who is willing to accept a relatively high risk of loss in an effort
to achieve greater appreciation.
HIGH YIELD BOND PORTFOLIO. Achievement of a high total return through
investment in high yield/high risk fixed income securities in the medium to
lower quality ranges.
STOCK INDEX PORTFOLIO. Achievement of investment results that correspond to the
price and yield performance of publicly traded common stocks in the aggregate by
following a policy of attempting to duplicate the price and yield performance of
the Standard & Poor's 500 Composite Stock Price Index.
EQUITY INCOME PORTFOLIO. Both current income and capital appreciation through
investment primarily in common stocks and convertible securities that provide
favorable prospects for investment income returns above those of the Standard &
Poor's 500 Composite Stock Price Index or the New York Stock Exchange Composite
Index.
EQUITY PORTFOLIO. Capital appreciation through investment primarily in common
stocks of companies, including major established corporations as well as smaller
capitalization companies, that appear to offer attractive prospects of price
appreciation that is superior to broadly-based stock indices. Current income, if
any, is incidental.
PRUDENTIAL JENNISON PORTFOLIO. Long-term growth of capital through investment
primarily in equity securities of established companies with above-average
growth prospects. Current income, if any, is incidental.
GLOBAL PORTFOLIO. Long-term growth of capital through investment primarily in
common stock and common stock equivalents of foreign and domestic issuers.
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.
13
<PAGE>
AIM V.I. VALUE FUND. The Fund's investment objective is to achieve long-term
growth of capital by investing primarily in equity securities judged by AIM
Advisors, Inc. to be undervalued relative to the current or projected earnings
of the companies issuing the securities, or relative market values of assets
owned by the companies issuing the securities or relative to the equity market
generally. Income is a secondary objective and would be satisfied principally
from the income (interest and dividends) generated by the common stocks,
convertible bonds and convertible preferred stocks that make up the Fund's
portfolio.
AIM Advisors, Inc. serves as the investment adviser to the AIM V.I. Growth and
Income Fund and the AIM V.I. Value Fund.
JANUS ASPEN SERIES
GROWTH PORTFOLIO. A diversified portfolio that seeks long-term growth of
capital by investing primarily in common stocks, with an emphasis on companies
with larger market capitalizations.
INTERNATIONAL GROWTH PORTFOLIO. A diversified portfolio that seeks long-term
growth of capital by investing primarily in common stocks of foreign issuers.
Janus Capital Corporation is the investment adviser to the Growth Portfolio and
the International Growth Portfolio, and is responsible for the day-to-day
management of the portfolios and other business affairs of the portfolios.
MFS VARIABLE INSURANCE TRUST
EMERGING GROWTH SERIES. This Series seeks to provide long-term growth of
capital. Dividend and interest income from portfolio securities, if any, is
incidental to the Series' investment objective of long-term growth of capital.
RESEARCH SERIES. The Research Series' investment objective is to provide
long-term growth of capital and future income.
Massachusetts Financial Services Company, a Delaware corporation, is the
investment adviser to each MFS Series.
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.
14
<PAGE>
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 6 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.
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
Discovery Account and other variable 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 SEC 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.
Under certain Contracts, amounts allocated to the Guaranteed Interest Account
may be held within one or more guaranteed separate accounts. Interests in such
separate account(s) are not registered under the Securities Act of 1933 and the
separate accounts are not registered as investment companies under the
Investment Company Act of 1940.
15
<PAGE>
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 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 or such other address as may
be communicated by Prudential. Under certain Contracts (including the Small Plan
Contract), an entity other than Prudential keeps certain records, and
Participants under those Contracts must contact the record-keeper. See "Modified
Procedures," page 24.
The full amount (100%) of each contribution designated for investment in any
Subaccount is credited to a Participant Account maintained for the Participant.
Except for the initial contribution, 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 determined as of the end of the Valuation Period during which the
contribution is received by Prudential at the address shown on the cover page of
this Prospectus or such other address as may be communicated in writing by
Prudential.
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 Prudential
Series Fund Money Market Subaccount upon receipt, and also will send a notice to
the Contractholder or its agent that requests allocation information for each
such Participant. If the necessary enrollment information is not received in
response to its initial notice, Prudential will deliver up to three additional
notices to the Contractholder or its agent 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 Code. Similarly, returning proceeds may cause the
Contractholder to violate a requirement under the Employee Retirement Income
Security Act of 1974 ("ERISA"), 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.
16
<PAGE>
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. Because of its
differing charges, the Small Plan Contract will have a different Unit Value than
the other Contracts.
The Unit Change Factor 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. With respect to Contracts other than the Small Plan
Contract, 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. With respect to the Small Plan Contract, Participants may change the
way in which subsequent contributions are allocated by submitting complete
written instructions to the Small Plan Contract Recordkeeper at the address
provided by Prudential. 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 Fund portfolio will attain its investment objectives. A
Participant should consider reviewing his or her investor profile questionnaire
annually, and each time his or her investor profile changes.
TRANSFERS
A Participant may transfer out of an investment option into any combination of
other investment options available under the Contract. Generally, 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. Certain Contracts may
require that transfer requests pertaining to the Guaranteed Interest Account or
the Subaccounts be effected in terms of whole number percentages only, and not
by dollar amount. A Participant may make transfers by proper written notice to
Prudential Investments (or to the Small Plan Contract Recordkeeper, with respect
to such Contracts), or by telephone, internet or telecopy, depending on the
terms of the plan applicable to the Participant.
17
<PAGE>
If a Contractholder chooses 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. The Small
Plan Contract Recordkeeper also has adopted procedures designed to ensure that
requests by telephone are genuine, and similarly disclaims responsibility for
unauthorized telephone transactions and for telephone calls that may not get
through.
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 the applicable Business 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. The Contracts were not designed
for professional market timing organizations or other organizations or
individuals using programmed, large, or frequent transfers. A pattern of
exchanges that coincides with a "market timing" strategy may be disruptive to
the Discovery Account and the Funds and will be discouraged. If such a pattern
were to be found, we may be required to modify the transfer procedures,
including but not limited to, not accepting transfer requests of an agent acting
under a power of attorney on behalf of more than one owner.
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. Dollar Cost Averaging and Auto-Rebalancing transfers may be subject
to a charge.
Certain Contracts, including the Small Plan Contract, may prohibit transfers
from the Guaranteed Interest Account into non-equity investment options that are
characterized in such Contract as "competing" with Prudential's General Account
options with regard to investment characteristics. If such transfers are
precluded, the Contract will further require that amounts transferred from the
Guaranteed Interest Account into non-competing investment options, such as a
Subaccount investing in a stock Fund, may not for 90 days thereafter be
transferred into a "competing" option or back to the Guaranteed Interest
Account.
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 alternate 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
18
<PAGE>
on Prudential in fulfilling the terms of the Contract. If contributions are so
discontinued, Prudential may initiate transfer payments from any Subaccount to
an alternate funding agency. The transfer would be made as described in the
paragraph above.
Under certain types of retirement arrangements, the Retirement Equity Act of
1984 requires that in the case of a married Participant, certain requests for
transfer payments other than those described above must include the consent of
the Participant and spouse and must be notarized or witnessed by an authorized
plan representative.
Transfers among Subaccounts will take effect as of the end of the Valuation
Period in which a proper transfer request is received at Prudential Investments.
DOLLAR COST AVERAGING
Additionally, an administrative feature called Dollar Cost Averaging ("DCA") may
be available to Contractholders. This feature allows Participants to transfer
amounts out of the Guaranteed Interest Account or one of the variable investment
options and into one or more other variable investment options. Transfers may be
in 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 and Prudential are 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. There is currently no charge for this
feature. Prudential would impose such a charge only pursuant to an amendment to
the administrative services agreement, which would have to be agreed to in
writing by both Prudential and the Contractholder.
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 for each applicable interval and will continue at those intervals until
the Participant notifies us otherwise. If the New York Stock Exchange and
Prudential are not open on the rebalancing date, the transfer will take effect
as of the end of the Valuation Period which immediately follows that date. There
is currently no charge for this feature. Prudential would impose such a charge
only pursuant to an amendment to the administrative services agreement, which
would have to be agreed to in writing by both Prudential and the Contractholder.
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 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.
19
<PAGE>
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.
With respect to all Contracts, you may specify from which investment options you
would like the withdrawal processed. The withdrawal amount may be specified as a
dollar amount or as a percentage of the Participant Account Value in the
applicable Subaccount(s). If you do not specify from where you would like the
withdrawal processed, a partial withdrawal will be withdrawn proportionally from
all investment options.
Only amounts withdrawn from contributions (including full withdrawals) may be
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 25. This differs from the treatment of withdrawals for
federal income taxes as described below, where generally, withdrawals are
considered to have been made first from investment income. 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 within 7 days after
we receive a properly completed withdrawal request. We will pay the amount of
any withdrawal requested, less any applicable tax withholding, withdrawal charge
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 Code and the retirement arrangement under which a
Participant is covered, Prudential may offer 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 26.
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,
20
<PAGE>
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.
Certain Contracts may specify that systematic withdrawals be deducted in a
different manner than that described immediately above.
A Participant may change the frequency, amount or duration of his systematic
withdrawals by submitting a form to Prudential that Prudential will provide to
him upon request. A Participant may make such a change only once during each
calendar year.
A Participant may at any time instruct Prudential to terminate the Participant's
systematic withdrawal arrangement, and no systematic withdrawals will be made
for him after Prudential has received his instruction. A Participant who chooses
to stop making systematic withdrawals may not again make them until the next
calendar year and may be subject to federal tax consequences as a result
thereof.
An arrangement to make systematic withdrawals will not affect any of the
Participant's other rights under the Contracts, including the right to make
withdrawals, and purchase a fixed dollar annuity.
Currently, Prudential does not impose a withdrawal charge upon systematic
withdrawals, however, Prudential may apply a withdrawal charge on systematic
withdrawals where payments are made for less than three years. Any such charge
would be imposed only on Contracts other than the Small Plan Contract in
accordance with the withdrawal charge schedule set out in the Fee Table.
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' contributions 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 generally should be sent is set out on
the cover page of this Prospectus. For certain Contracts, such as the Small Plan
Contract, a death benefit claim should be sent to a designated record keeper
rather than Prudential.
With respect to Contracts other than the Small Plan Contract, 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
21
<PAGE>
"Federal Tax Status." With respect to the Small Plan Contract, the death benefit
payment option listed in (d) below may not be available. 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 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 29. 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.
22
<PAGE>
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 Contract.
Generally, 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. With respect to Contracts other than the Small Plan
Contract, the Participant may specify the Subaccounts from which he may borrow
and into which repayments may be invested. With respect to Contracts other than
the Small Plan Contract, if the Participant does not specify the Subaccounts
from which the loan amount is deducted, the loan amount will be deducted pro
rata from the Participant Account Value in the Subaccounts. With respect to the
Small Plan Contract, amounts borrowed are deducted from a Participant's
Subaccounts on a pro rata basis. With respect to such Contracts, amounts repaid
on a loan are applied to a Participant's Subaccounts based on the Participant's
current contribution allocations.
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
imposes an annual charge of up to $60 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.
This annualized loan maintenance charge will be pro rated based on the number of
full months that the loan is outstanding and is generally deducted quarterly.
Under certain Contracts, the loan maintenance fee will be deducted annually.
With respect to Contracts other than the Small Plan Contract, 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.
With respect to the Small Plan Contract, the loan maintenance fee will be
deducted pro rata from each of the Participant's Subaccounts.
23
<PAGE>
MODIFIED PROCEDURES
Under certain Contracts, but not the Small Plan Contract, 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% for Contracts other
than the Small Plan Contract, and at an effective annual rate of 1.05% for the
Small Plan Contracts.
An annual account charge for recordkeeping and other administrative services is
deducted pro rata from each Participant Account or is billed directly to the
Employer. This annual account charge is payable to Prudential and, with respect
to Contracts other than the Small Plan Contract, 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. With respect to the Small
Plan Contract, the annual account charge is assessed either (i) quarterly, on or
about 14 days after the end of each quarter or (ii) annually, on the last
Business Day of the calendar year. With respect to Contracts other than the
Small Plan Contract, 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. With respect to the Small Plan Contract, the annual account charge
will not be pro rated for new Participants. With respect to Contracts other than
the Small Plan Contract, 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.
For all Contracts, the aggregate annual account charge for each Participant will
not be greater than $32. With respect to Contracts other than the Small Plan
Contract, the charge will first be made against the Participant Account Value
under the Guaranteed Interest Account (if available). If the Participant is not
invested in the Guaranteed Interest Account, or if the Participant does not have
enough money in such an option to pay the charge, the charge will then be made
against any one or more of the Subaccounts in which the Participant is invested.
With respect to the Small Plan Contract, the aggregate annual account charge may
be paid directly by the Participant's Employer, or may be deducted from a
Participant's Account Value pro rata from each of the Participant's Subaccounts.
Prudential may waive or eliminate the annual account charge where its costs of
administration are less on account of economies of scale associated with the
amount of the Contractholder's Plan assets and the fact that the Contractholder
itself performs administrative services that Prudential otherwise would perform.
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 for all of the
Contracts.
24
<PAGE>
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 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
With respect to Contracts other than the Small Plan Contract, 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.
With respect to Contracts other than the Small Plan Contract, 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 deducted
with respect to Contracts other than the Small Plan Contract.
<TABLE>
<CAPTION>
WITHDRAWAL CHARGE,
YEARS OF CONTRACT AS A PERCENTAGE OF
PARTICIPATION CONTRIBUTIONS WITHDRAWN
- ----------------------------------------------------------------------------------------------------------
<S> <C>
FIRST YEAR 5%
SECOND YEAR 4%
THIRD YEAR 3%
FOURTH YEAR 2%
FIFTH YEAR 1%
SIXTH YEAR AND SUBSEQUENT NO CHARGE
</TABLE>
The withdrawal charge applicable to the Small Plan Contract is determined in a
different manner from what is described in the preceding paragraphs. Under the
Small Plan Contract, a Participant making a full or partial withdrawal does not
pay the withdrawal charge indicated above. Instead, withdrawal charges under the
Small Plan Contract are triggered only when the Employer to which the Contract
was issued terminates the Contract in whole or in part. Under full termination
of the Contract, the withdrawal charge would be assessed against the Employer
based on the total value of contributions withdrawn under the terminated
Contract. Under a partial termination of the Contract, the withdrawal charge is
assessed only against those assets withdrawn by reason of a specified group,
classification or type of employee leaving the Plan as a result of a corporate
merger, restructuring, or other comparable employer-initiated event. For
example, an Employer may sell a portion of its business that in turn requires
that one-half of its employees commence work for new employer, under a new
qualified retirement plan not covered under the Contract. The withdrawal charge
would be assessed against the Employer based on the total value of contributions
of affected employees withdrawn as a consequence of the partial termination. The
Employer may pass this charge on to affected employees.
Each Participant's Account Value that is withdrawn in connection with such a
full or partial Contract termination may be subject to a withdrawal charge. The
amount of the withdrawal charge varies depending on the number of years that
have elapsed since the Small Plan Contract became effective. Specifically, the
withdrawal charge is equal to 5% of contributions withdrawn during the first
year of the Contract and the charge declines by one percentage each year
thereafter. After five complete years have elapsed from the effective date of
the Small Plan Contract, no such withdrawal charge is deducted. This withdrawal
charge compensates Prudential and its affiliates for the cost associated with
contacting Small Plans and their participants and initially establishing Plan
and participant records.
25
<PAGE>
With respect to all Contracts, the proceeds received by a Participant upon any
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
generally, 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.
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 withdrawal 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.
Prudential may impose withdrawal charges lower than those described above with
respect to Participants under certain Contracts. These lower charges will
reflect Prudential's anticipation that lower sales costs will be incurred, or
less sales services will be performed, with respect to such Contracts due to
economies arising from (1) the utilization of mass enrollment procedures or (2)
the performance of sales functions, which Prudential would otherwise be required
to perform, by the Contractholder, an Employer, or by a third party on their
behalf or (3) an accumulated surplus of charges over expenses under a particular
Contract. Generally, the withdrawal charge is lowered or waived depending on the
amount of local service the Contractholder requires. In addition, the charge may
be lowered if required by state law.
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. Not all states impose premium taxes on annuities; however, the rates
in those that do currently range from 0.5% to 5%.
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.
26
<PAGE>
TAXES ON PRUDENTIAL
The Discovery Account is not considered a separate taxpayer for purposes of the
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 Contracts may also be used in connection with individual retirement
arrangements known as "Roth IRAs." Generally, contributions to a Roth IRA are
subject to certain limits and are not deductible for Federal income tax
purposes. Distributions are generally not taxable for Federal income tax
purposes if they are made after attainment of age 59- 1/2 or for certain other
reasons and if the individual had a Roth IRA in effect for at least five years.
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 traditional
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.
27
<PAGE>
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
28
<PAGE>
income received or accrued that year by the owner of the Contract. Income on the
Contract is the excess of the sum of the net surrender value of the Contract at
the end of the taxable year plus any amounts distributed for all years over the
aggregate amount of premiums paid under the Contract minus premiums paid and
amounts received under the Contract that have been included in income.
Exceptions to these rules include contracts held by a nonnatural person as an
agent for a natural person, contracts acquired by an estate by reason of the
death of the Participant, contracts held under a qualified pension or profit
sharing plan, a Section 403(b) annuity plan or individual retirement plan (see
discussion above) or contracts which provide for immediate annuities.
WITHHOLDING
Generally, under a nonqualified annuity arrangement, or individual retirement
account or individual retirement annuity, unless a Participant elects to the
contrary, any amounts that are received under his Contract that Prudential
reasonably believes are includible in gross income tax for tax purposes will be
subject to withholding to meet Federal income tax obligations. In the absence of
an election by a Participant that Prudential should not do so, it will withhold
from every withdrawal or annuity payment the appropriate percentage of the
amount of the payment that Prudential reasonably believes is subject to
withholding. In addition, certain distributions from qualified plans under
Section 401 or Section 403(b) of the Code, which are not directly rolled over or
transferred to another eligible qualified plan, are subject to a mandatory 20%
withholding for Federal income tax. The 20% withholding requirement does not
apply to: (a) distributions for the life or life expectancy of the Participant,
or joint and last survivor expectancy of the Participant and a designated
beneficiary; or (b) distributions for a specified period of ten years or more;
or (c) distributions which are required as minimum distributions. Accordingly, a
Participant would be well advised to check the Contractholder's retirement
arrangement and consult with appropriate tax advisers regarding the current
state of the law before making a withdrawal. Prudential will provide forms and
instructions concerning withholding. However, amounts that are received under a
Contract used in connection with a plan that is subject to Section 457 of the
Code are treated as wages for Federal income tax purposes and are, thus, subject
to general withholding requirements.
EFFECTING AN ANNUITY
Subject to the restrictions on withdrawals from tax-deferred annuities subject
to Section 403(b) of the Code, and subject to the provisions of the retirement
arrangement that covers him or her, a Participant may elect at any time to have
all or a part of his or her interest in the Participant Account used to purchase
a fixed dollar annuity under the Contracts. The Contracts do not provide for
annuities that vary with the investment results of any Subaccount. Withdrawals
from the Participant Account that are used to purchase a fixed dollar annuity
under the Contracts become part of Prudential's General Account, which supports
insurance and annuity obligations.
In electing to have an annuity purchased, the Participant may select from the
forms of annuity described below, unless the retirement arrangement covering the
Participant provides otherwise. The annuity is purchased on the first day of the
month following receipt by Prudential of proper written notice on a form
approved by Prudential that the Participant has elected to have an annuity
purchased, or on the first day 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.
29
<PAGE>
LIFE ANNUITY WITH PAYMENTS CERTAIN
This is an immediate annuity payable monthly during the lifetime of the
annuitant with the guarantee that if, at the death of the annuitant, payments
have been made for less than the period certain (which may be 60, 120, 180, or
240 months, as selected by the annuitant), they will be continued during the
remainder of the selected period to his or her beneficiary.
ANNUITY CERTAIN
This is an immediate annuity payable monthly for a period certain which may be
60, 120, 180, or 240 months, as selected by the annuitant. If the annuitant dies
during the period certain, payments in the same amount the annuitant was
receiving will be continued to his or her beneficiary, but no further payments
are payable after the end of the period certain.
JOINT AND SURVIVOR ANNUITY WITH PAYMENTS 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.
30
<PAGE>
SALE OF THE CONTRACT AND SALES COMMISSIONS
Prudential Investment Management Services LLC ("PIMS"), a wholly-owned direct
subsidiary of Prudential, acts as the principal underwriter of the Contract.
PIMS was organized in 1996 under Delaware law, is registered as a broker and
dealer under the Securities Exchange Act of 1934, and is a member of the
National Association of Securities Dealers, Inc. PIMS' principal business
address is 751 Broad Street, Newark, NJ 07102. The Contract is sold by
registered representatives of PIMS who are also authorized by state insurance
departments to do so. The maximum commission that will be paid to the
broker-dealer to cover both the individual representative's commission and other
distribution expenses will not exceed 3.0% of the purchase payment. In addition,
trail commissions based on the size of the Contracts may be paid.
VOTING RIGHTS
As stated above, all of the assets held in the Subaccounts of the Discovery
Account are invested in shares of the corresponding Funds. Prudential is the
legal owner of those shares and as such has the right to vote on any matter
voted on at any shareholders meetings of the Funds. However, as required by law,
Prudential votes the shares of the Funds at any regular and special shareholders
meetings the Funds are required to hold in accordance with voting instructions
received from Participants. The Funds may not hold annual shareholders meetings
when not required to do so under the laws of the state of their incorporation or
the Investment Company Act of 1940. Fund shares for which no timely instructions
from Participants are received, and any shares owned directly or indirectly by
Prudential, are voted in the same proportion as shares in the respective
portfolios for which instructions are received. Should the applicable federal
securities laws or regulations, or their current interpretation, change so as to
permit Prudential to vote shares of the Funds in its own right, it may elect to
do so.
Generally, Participants may give voting instructions on matters that would be
changes in fundamental policies and any matter requiring a vote of the
shareholders of the Funds. With respect to approval of the investment advisory
agreement or any change in a portfolio's fundamental investment policy,
Participants participating in such portfolios will vote separately on the
matter, pursuant to the requirements of Rule 18f-2 under the Investment Company
Act of 1940.
The number of Fund 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.
31
<PAGE>
PERFORMANCE INFORMATION
Performance information for the Subaccounts may appear in advertising and
reports to current and prospective Contractholders and Participants. Performance
information is based on historical investment experience of the Funds, adjusted
to take charges under the Contract into account, and does not indicate or
represent future performance.
Total returns are based on the overall dollar or percentage change in value of a
hypothetical investment over a stipulated period, and assume a surrender of the
Contract at the end of the period. Total return quotations reflect changes in
unit values and the deduction of applicable charges including any applicable
withdrawal charges.
A cumulative total return reflects performance over a stated period of time. An
average annual total return reflects the hypothetical annually compounded return
that would have produced the same cumulative total return if the performance had
been constant over the entire period.
The Money Market Subaccount may advertise its current and effective yield.
Current yield reflects the income generated by an investment in the Subaccount
over a specified seven-day period. Effective yield is calculated in a similar
manner except that income earned is assumed to be reinvested.
Reports or advertising may include comparative performance information,
including, but not limited to: comparisons to market indices; comparisons to
other investments; performance rankings; personalized illustrations of
historical performance; and data presented by analysts or included in
publications.
See PERFORMANCE INFORMATION in the Statement of Additional Information for
recent performance information.
REPORTS TO PARTICIPANTS
Participants will be sent, at least annually, reports showing as of a specified
date the number of units credited to them in the Subaccounts of the Discovery
Account. Each Participant will also be sent annual and semi-annual reports for
the applicable 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.
32
<PAGE>
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 and later issued a Final Order and Judgment in the
consolidated class actions before the court, 962 F.Supp. 450 (March 17, 1997, as
amended April 14, 1997). The Court's Final Order and Judgment approving the
class Settlement was appealed to the United States Court of Appeals for the
Third Circuit, which upheld the District Court's approval of the Stipulation of
Settlement on July 23, 1998. As of the date of this prospectus, no further
appeal has been taken.
Pursuant to the Settlement, Prudential has agreed to and has begun to implement
an Alternative Dispute Resolution ("ADR") process for class members who believe
they were misled concerning the sale or performance of their life insurance
policies. Management now has information which allows for computation of a
reasonable estimate of losses associated with ADR claims. Based on this
information, management estimated the cost of remedying policyholder claims in
the ADR process before taxes to be approximately $2.05 billion. While management
believes these to be reasonable estimates based on information currently
available, the ultimate amount of the total cost of remedied policyholder claims
is dependent on complex and varying factors, including actual claims by eligible
policyholders, the relief options chosen and the dollar value of those options.
There are also additional elements of the ADR process which cannot be fully
evaluated at this time (e.g., claims which may be successfully appealed) which
could increase this estimate.
In addition, a number of actions have been filed against Prudential by
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. These agreements are now being implemented through
Prudential's implementation of the class Settlement.
Litigation is subject to many uncertainties, and given the complexity and scope
of these suits, their outcome cannot be predicted. It is also not possible to
predict the likely result 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 regulatory inquiries. It is possible that the results of
operations or the cash flow of Prudential, in particular quarterly or annual
periods, could be materially affected by an ultimate unfavorable outcome of
certain pending litigation and regulatory matters. Management believes, however,
that the ultimate outcome of all pending litigation and regulatory matters
referred to above should not have a material adverse effect on Prudential's
financial position, after consideration of applicable reserves.
YEAR 2000 COMPLIANCE
The benefits and services provided to the Contractholders by Prudential and PIMS
depend on the smooth functioning of their respective computer systems. The year
2000, however, holds the potential for a significant disruption in the operation
of these systems. Many computer programs cannot distinguish the year 2000 from
the year 1900 because of the way in which dates are encoded. Left uncorrected,
the year "00" could cause systems to perform date comparisons and calculations
incorrectly that in turn could compromise the integrity of business records and
lead to serious interruption of business processes.
Prudential, PIMS's ultimate corporate parent, identified this issue as a
critical priority in 1995 and has established quality assurance procedures
including a certification process to monitor and evaluate enterprise-wide
conversion and upgrading of systems for "Year 2000" compliance. Prudential has
also initiated an analysis of potential exposure that could result from the
failure of major service providers such as suppliers, custodians and brokers, to
achieve Year 2000 compliance. Prudential expects to complete its adaptation,
testing and certification
33
<PAGE>
of software for Year 2000 compliance by December 31, 1998. During 1999,
Prudential plans to conduct additional internal testing, to participate in
securities industry-wide test efforts and to complete major service provider
reviews, analysis and contingency planning.
The expenses of Prudential's Year 2000 compliance are allocated across its
various businesses, including those businesses not engaged in providing services
to Contractholders. Accordingly, while the expense is substantial in the
aggregate, it is not expected to have a material impact on Prudential's
abilities to meet its contractual commitments to Contractholders.
Prudential believes that it is well positioned to achieve the necessary
modifications and mitigate Year 2000 risks. However, if such efforts are not
completed on a timely basis, the Year 2000 issue could have a material adverse
impact on Prudential's operations, those of its subsidiary and affiliate
companies and/or the Discovery Account. Moreover, there can be no assurance that
the measures taken by Prudential's external service providers will be sufficient
to avoid any material adverse impact on Prudential's operations and those of its
subsidiary and affiliate companies.
STATEMENT OF ADDITIONAL INFORMATION
The contents of the Statement of Additional Information include:
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Definitions............................................................... 2
Other Contract Provisions................................................. 2
Administration............................................................ 2
Performance Information................................................... 3
Directors of Prudential................................................... 9
Officers of Prudential.................................................... 12
Sale of Contracts......................................................... 14
Legal Matters............................................................. 14
Experts................................................................... 14
Financial Statements of the Discovery Accounts............................ A-1
Consolidated financial statements of The Prudential Insurance Company of
America and subsidiaries................................................ B-1
</TABLE>
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.
34
<PAGE>
APPENDIX
ACCUMULATION UNIT VALUES
THE PRUDENTIAL DISCOVERY SELECT GROUP VARIABLE CONTRACT ACCOUNT
(CONDENSED FINANCIAL INFORMATION)
<TABLE>
<CAPTION>
SUBACCOUNTS
--------------------------------------------------------------------------------------
PRUDENTIAL PRUDENTIAL
PRUDENTIAL PRUDENTIAL SERIES FUND SERIES FUND
SERIES FUND SERIES FUND GOVERNMENT INCOME CONSERVATIVE
MONEY MARKET DIVERSIFIED BOND BALANCED
--------------------------------------------------------------------------------------
01/01/98 7/31/97* 01/01/98 7/31/97* 01/01/98 7/31/97* 01/01/98 7/31/97*
TO TO TO TO TO TO TO TO
06/30/98 12/31/97 06/30/98 12/31/97 06/30/98 12/31/97 06/30/98 12/31/97
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1. Beginning of period
(rounded)............... $ 10.08 $ 10.00 $ 10.07 $ 10.00 $ 10.27 $ 10.00 $ 10.03 $ 10.00
2. End of period
(rounded)............... $ 10.30 $ 10.08 $ 10.47 $ 10.07 $ 10.63 $ 10.27 $ 10.78 $ 10.03
3. Accumulation Units
Outstanding at end of
period.................. 10,308 815 14,806 542 11,894 60 32,037 563
--------------------------------------------------------------------------------------
<CAPTION>
--------------------------------------------------------------------------------------
PRUDENTIAL PRUDENTIAL PRUDENTIAL PRUDENTIAL
SERIES FUND SERIES FUND SERIES FUND SERIES FUND
FLEXIBLE MANAGED HIGH YIELD BOND STOCK INDEX EQUITY INCOME
--------------------------------------------------------------------------------------
01/01/98 7/31/97* 01/01/98 7/31/97* 01/01/98 7/31/97* 01/01/98 7/31/97*
TO TO TO TO TO TO TO TO
06/30/98 12/31/97 06/30/98 12/31/97 06/30/98 12/31/97 06/30/98 12/31/97
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1. Beginning of period
(rounded)............... $ 9.99 $ 10.00 $ 10.37 $ 10.00 $ 10.29 $ 10.00 $ 10.48 $ 10.00
2. End of period
(rounded)............... $ 10.89 $ 9.99 $ 10.86 $ 10.37 $ 12.03 $ 10.29 $ 11.46 $ 10.48
3. Accumulation Units
Outstanding at end of
period.................. 47,281 4,286 9,490 1,952 82,878 1,890 13,346 1,171
--------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
SUBACCOUNTS
--------------------------------------------------------------------------------------
PRUDENTIAL PRUDENTIAL PRUDENTIAL AIM V.I.
SERIES FUND SERIES FUND SERIES FUND GROWTH AND INCOME
EQUITY JENNISON GLOBAL
--------------------------------------------------------------------------------------
01/01/98 7/31/97* 01/01/98 7/31/97* 01/01/98 7/31/97* 01/01/98 7/31/97*
TO TO TO TO TO TO TO TO
06/30/98 12/31/97 06/30/98 12/31/97 06/30/98 12/31/97 06/30/98 12/31/97
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1. Beginning of period
(rounded)............... $ 10.12 $ 10.00 $ 9.87 $ 10.00 $ 8.95 $ 10.00 $ 9.79 $ 10.00
2. End of period
(rounded)............... $ 11.33 $ 10.12 $ 11.86 $ 9.87 $ 10.63 $ 8.95 $ 11.14 $ 9.79
3. Accumulation Units
Outstanding at end of
period.................. 171,922 2,907 22,550 3,111 29,716 1,576 4,006 1,122
--------------------------------------------------------------------------------------
<CAPTION>
--------------------------------------------------------------------------------------
JANUS
JANUS ASPEN
AIM V.I. ASPEN INTERNATIONAL MFS
VALUE GROWTH GROWTH EMERGING GROWTH
--------------------------------------------------------------------------------------
01/01/98 7/31/97* 01/01/98 7/31/97* 01/01/98 7/31/97* 01/01/98 7/31/97*
TO TO TO TO TO TO TO TO
06/30/98 12/31/97 06/30/98 12/31/97 06/30/98 12/31/97 06/30/98 12/31/97
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1. Beginning of period
(rounded)............... $ 9.89 $ 10.00 $ 9.92 $ 10.00 $ 9.44 $ 10.00 $ 9.95 $ 10.00
2. End of period
(rounded)............... $ 11.66 $ 9.89 $ 11.78 $ 9.92 $ 11.49 $ 9.44 $ 12.04 $ 9.95
3. Accumulation Units
Outstanding at end of
period.................. 8,436 1,738 5,756 462 6,414 942 13,089 470
--------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
SUBACCOUNTS
----------------------------------------------------------------
OCC OCC
MFS ACCUMULATION ACCUMULATION TRUST
RESEARCH TRUST MANAGED SMALL CAP
----------------------------------------------------------------
01/01/98 7/31/97* 01/01/98 7/31/97* 01/01/98 7/31/97*
TO TO TO TO TO TO
06/30/98 12/31/97 06/30/98 12/31/97 06/30/98 12/31/97
----------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1. Beginning of period
(rounded)................. $ 9.67 $ 10.00 $ 10.13 $ 10.00 $ 10.20 $ 10.00
2. End of period (rounded).... $ 11.44 $ 9.67 $ 11.20 $ 10.13 $ 10.05 $ 10.20
3. Accumulation Units
Outstanding at end of
period.................... 4,173 779 6,669 2,135 5,799 2,781
----------------------------------------------------------------
* Commencement of Operations
<CAPTION>
----------------------------------------------------------------
T. ROWE PRICE T. ROWE PRICE WARBURG PINCUS
EQUITY INCOME INTERNATIONAL STOCK POST-VENTURE CAPITAL
----------------------------------------------------------------
01/01/98 7/31/97* 01/01/98 7/31/97* 01/01/98 7/31/97*
TO TO TO TO TO TO
06/30/98 12/31/97 06/30/98 12/31/97 06/30/98 12/31/97
----------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1. Beginning of period
(rounded)................. $ 10.54 $ 10.00 $ 8.92 $ 10.00 $ 10.08 $ 10.00
2. End of period (rounded).... $ 11.15 $ 10.54 $ 10.10 $ 8.92 $ 11.37 $ 10.08
3. Accumulation Units
Outstanding at end of
period.................... 4,139 1,704 2,507 216 130 5
----------------------------------------------------------------
* Commencement of Operations
</TABLE>
<PAGE>
Discovery Select Group Retirement Annuity is a variable annuity
issued by The Prudential Insurance Company of America, Newark, NJ.
It is offered through these affiliated Prudential subsidiaries: Prudential
Securities Incorporated;
Pruco Securities Corporation; Prudential Investment Management Services LLC.
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
3 Gateway Center, 12th Floor
Newark, NJ 07102-5096
PRUDENTIAL INVESTMENTS
3 Gateway Center, 12th Floor
Newark, NJ 07102-5096
[LOGO]
DISCOVERY SELECT-SM- is a service mark of Prudential.
RS802B
Cat 62M093P B
DS.PR.001.0697
<PAGE>
SUPPLEMENT DATED OCTOBER 19, 1998 TO PROSPECTUS DATED MAY 1, 1998
THE PRUDENTIAL DISCOVERY SELECT GROUP VARIABLE CONTRACT ACCOUNT
GROUP VARIABLE ANNUITY CONTRACTS
Effective September 1, 1998, any transaction request (other than an initial
contribution made for a Participant) received by Prudential in good order on a
given Business Day before 4 p.m. Eastern time (or such earlier time that the New
York Stock Exchange may close) will be effective for that Business Day. A
transaction request received by Prudential in good order at or after 4 p.m.
Eastern time (or such earlier time that the New York Stock Exchange may close)
will be effective for the next Business Day. An initial contribution made for a
Participant will be priced as described in The Accumulation Period in the May 1,
1998 prospectus ("Prospectus"). For purposes of this paragraph, "good order" is
defined generally as an instruction received by Prudential that is sufficiently
complete and clear that Prudential does not need to exercise any discretion to
follow such instructions.
Effective November 1, 1998, the annual account charge described in the
Prospectus may be up to a maximum of $32 for persons who become Participants on
or after September 1, 1998. Because of this change, the Examples of Fees and
Expenses appearing on pages 7 and 8 of the Prospectus understate the cumulative
expenses incurred on each $1000 invested for those Participants subject to the
$32 charge. To obtain the corrected cumulative expenses, add $1 to each figure
in the 1 Year column, $3 to each figure in the 3 Years column, $4 to each figure
in the 5 Years column, and $8 to each figure in the 10 Years column. Note: Due
to rounding, these corrections may overstate cumulative expenses by $1 in some
cases. In addition, for Participants subject to the $32 charge, the $15 annual
account charge set out in the fee table is not applicable.
With respect to loans, Prudential imposes a loan application fee of up to $75
and a loan maintenance fee of up to $60.
With respect to the Legal Proceedings section of the Prospectus, please note
that on July 23, 1998, the United States Court of Appeals for the Third Circuit
upheld the District Court's approval of the Stipulation of Settlement.
Interim financial statements for the Account appear in the Statement of
Additional Information dated October 19, 1998, which you may obtain without
charge by contacting Prudential.
<PAGE>
ACCUMULATION UNIT VALUES
THE PRUDENTIAL DISCOVERY SELECT GROUP VARIABLE CONTRACT ACCOUNT
(CONDENSED FINANCIAL INFORMATION)
<TABLE>
<CAPTION>
SUBACCOUNTS
--------------------------------------------------------------------------------------------------
PRUDENTIAL PRUDENTIAL
PRUDENTIAL PRUDENTIAL SERIES FUND SERIES FUND
SERIES FUND SERIES FUND GOVERNMENT INCOME CONSERVATIVE BALANCED
MONEY MARKET DIVERSIFIED BOND
--------------------------------------------------------------------------------------------------
01/01/98 7/31/97* 01/01/98 7/31/97* 01/01/98 7/31/97* 01/01/98 7/31/97*
TO TO TO TO TO TO TO TO
06/30/98 12/31/97 06/30/98 12/31/97 06/30/98 12/31/97 06/30/98 12/31/97
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1. Beginning of period
(rounded)................. $10.08 $10.00 $10.07 $10.00 $10.27 $10.00 $10.03 $10.00
2. End of period (rounded).... $10.30 $10.08 $10.47 $10.07 $10.63 $10.27 $10.78 $10.03
3. Accumulation Units
Outstanding at end of
period.................... 10,308 815 14,806 542 11,894 60 32,037 563
--------------------------------------------------------------------------------------------------
<CAPTION>
PRUDENTIAL PRUDENTIAL PRUDENTIAL PRUDENTIAL
SERIES FUND SERIES FUND SERIES FUND SERIES FUND
FLEXIBLE MANAGED HIGH YIELD BOND STOCK INDEX EQUITY INCOME
01/01/98 7/31/97* 01/01/98 7/31/97* 01/01/98 7/31/97* 01/01/98 7/31/97*
TO TO TO TO TO TO TO TO
06/30/98 12/31/97 06/30/98 12/31/97 06/30/98 12/31/97 06/30/98 12/31/97
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1. Beginning of period
(rounded)................. $ 9.99 $10.00 $10.37 $10.00 $10.29 $10.00 $10.48 $10.00
2. End of period (rounded).... $10.89 $ 9.99 $10.86 $10.37 $12.03 $10.29 $11.46 $10.48
3. Accumulation Units
Outstanding at end of
period.................... 47,281 4,286 9,490 1,952 82,878 1,890 13,346 1,171
</TABLE>
<TABLE>
<CAPTION>
SUBACCOUNTS
----------------------------------------------------------------------------------------------
PRUDENTIAL PRUDENTIAL PRUDENTIAL AIM V.I.
SERIES FUND SERIES FUND SERIES FUND GROWTH AND INCOME
EQUITY JENNISON GLOBAL
----------------------------------------------------------------------------------------------
01/01/98 7/31/97* 01/01/98 7/31/97* 01/01/98 7/31/97* 01/01/98 7/31/97*
TO TO TO TO TO TO TO TO
06/30/98 12/31/97 06/30/98 12/31/97 06/30/98 12/31/97 06/30/98 12/31/97
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1. Beginning of period
(rounded)................. $10.12 $10.00 $ 9.87 $10.00 $ 8.95 $10.00 $ 9.79 $10.00
2. End of period (rounded).... $11.33 $10.12 $11.86 $ 9.87 $10.63 $ 8.95 $11.14 $ 9.79
3. Accumulation Units
Outstanding at end of
period.................... 171,922 2,907 22,550 3,111 29,716 1,576 4,006 1,122
----------------------------------------------------------------------------------------------
<CAPTION>
JANUS
JANUS ASPEN MFS
AIM V.I. ASPEN INTERNATIONAL EMERGING
VALUE GROWTH GROWTH GROWTH
01/01/98 7/31/97* 01/01/98 7/31/97* 01/01/98 7/31/97* 01/01/98
TO TO TO TO TO TO TO
06/30/98 12/31/97 06/30/98 12/31/97 06/30/98 12/31/97 06/30/98
<S> <C>
1. Beginning of period
(rounded)................. $ 9.89 $10.00 $ 9.92 $10.00 $ 9.44 $10.00 $ 9.95
2. End of period (rounded).... $11.66 $ 9.89 $11.78 $ 9.92 $11.49 $ 9.44 $12.04
3. Accumulation Units
Outstanding at end of
period.................... 8,436 1,738 5,756 462 6,414 942 13,089
<CAPTION>
7/31/97*
TO
12/31/97
1. Beginning of period
(rounded)................. $10.00
2. End of period (rounded).... $ 9.95
3. Accumulation Units
Outstanding at end of
period.................... 470
</TABLE>
<TABLE>
<CAPTION>
SUBACCOUNTS
---------------------------------------------------------------------------------------------------
OCC OCC
MFS ACCUMULATION ACCUMULATION TRUST SMALL CAP T. ROWE PRICE
RESEARCH TRUST MANAGED EQUITY INCOME
---------------------------------------------------------------------------------------------------
01/01/98 7/31/97* 01/01/98 7/31/97* 01/01/98 7/31/97* 01/01/98
TO TO TO TO TO TO TO
06/30/98 12/31/97 06/30/98 12/31/97 06/30/98 12/31/97 06/30/98
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1. Beginning of period
(rounded)................. $ 9.67 $10.00 $10.13 $10.00 $10.20 $10.00 $10.54
2. End of period (rounded).... $11.44 $ 9.67 $11.20 $10.13 $10.05 $10.20 $11.15
3. Accumulation Units
Outstanding at end of
period.................... 4,173 779 6,669 2,135 5,799 2,781 4,139
---------------------------------------------------------------------------------------------------
* Commencement of Operations
<CAPTION>
T. ROWE PRICE WARBURG PINCUS
INTERNATIONAL STOCK POST-VENTURE CAPITAL
7/31/97* 01/01/98 7/31/97* 01/01/98 7/31/97*
TO TO TO TO TO
12/31/97 06/30/98 12/31/97 06/30/98 12/31/97
<S> <C> <C> <C> <C> <C>
1. Beginning of period
(rounded)................. $10.00 $ 8.92 $10.00 $10.08 $10.00
2. End of period (rounded).... $10.54 $10.10 $ 8.92 $11.37 $10.08
3. Accumulation Units
Outstanding at end of
period.................... 1,704 2,507 216 130 5
* Commencement of Operations
</TABLE>
<PAGE>
SUPPLEMENT DATED OCTOBER 19, 1998 TO PROSPECTUS DATED MAY 1, 1998
THE PRUDENTIAL DISCOVERY SELECT GROUP VARIABLE CONTRACT ACCOUNT
GROUP VARIABLE ANNUITY CONTRACTS
The Prudential Insurance Company of America ("Prudential"), together with its
Discovery Select Group Variable Contract Account (the "Account") issues group
variable annuity contracts (each, a "Contract") to a variety of defined
contribution plans ("Plans"). This supplement describes a Contract (the "Small
Plan Contract") sold exclusively to retirement plans qualified under Sections
401(k) or 401(a) of the Internal Revenue Code that generally have 100 or fewer
participants.
Prudential may delegate most of the administrative services in connection with
the Small Plan Contracts to a third party recordkeeper (the "Small Plan Contract
Recordkeeper"). Currently, the Small Plan Contract Recordkeeper is BISYS Plan
Services, L.P., 323 Norristown Road, Ambler, PA 19002. We describe below the
features of the Small Plan Contract that differ from the other Contracts.
Aspects of the Small Plan Contract that are identical to the other Contracts are
discussed in the May 1, 1998 prospectus (the "Prospectus"), which is included
with this supplement. For example, the Small Plan Contracts have the same
investment options, which are discussed in detail in the Prospectus. Terms that
are capitalized in this Supplement are defined in the Prospectus.
FEES AND CHARGES OF THE SMALL PLAN CONTRACT
- - ASSET-BASED ADMINISTRATIVE CHARGE. For the Small Plan Contract, an
administrative charge equal to an annual rate of 1.05% is deducted from the
assets held in the variable investment options. The comparable charge for the
other Contracts is 0.85%.
- - ANNUAL ACCOUNT CHARGE. For the Small Plan Contract, an annual administrative
charge of up to $32 per Participant is assessed either (i) quarterly, on or
about 14 days after the end of each quarter or (ii) annually, on the last
Business Day of the calendar year. The annual account charge is deducted pro
rata from each of a Participant's Subaccounts, or may be billed directly to
the Employer. This charge is not prorated for new Participants in a Small
Plan Contract. Contracts other than the Small Plan Contract have a similar
$32 charge.
- - WITHDRAWAL CHARGE. Participants in a Small Plan Contract do not pay a
withdrawal charge when they individually redeem some or all of their Units in
the Account or their Participant Account Value in the Guaranteed Interest
Account. Instead, Prudential will assess a withdrawal charge of up to 5% of
the amount of Participant and Employer contributions that are withdrawn in
connection with a full or partial termination by the Employer of its
participation in the Small Plan Contract. Prudential will consider an
Employer to have fully or partially terminated its participation in the Small
Plan Contract if the Employer provides Prudential notice of its intent to
terminate the Contract, if the Plan terminates or is no longer a qualified
plan, or if Prudential terminates the Contract by reason of the
Contractholder failing to meet its contractual obligations.
Under full termination of the Small Plan Contract, the withdrawal charge
would be assessed against the Employer based on the total value of
contributions withdrawn under the terminated Contract. Under a partial
termination of a Small Plan Contract, the withdrawal charge is assessed only
against those assets withdrawn by reason of a specified group,
classification, or type of employee leaving the Plan as a result of a
corporate merger, restructuring, or other comparable employer-initiated
event. For example, an Employer may sell a portion of its business that in
turn requires one-half of its employees to commence work for a new employer,
under a new qualified retirement plan not covered under the Contract. The
<PAGE>
withdrawal charge would be assessed against the Employer based on the total
value of contributions of affected employees withdrawn as a consequence of
the partial termination. The Employer may pass this charge on to affected
employees.
Each Participant's Account Value that is withdrawn in connection with such a
full or partial Contract termination may be subject to a withdrawal charge.
The amount of the withdrawal charge varies depending on the number of years
that have elapsed since the Small Plan Contract became effective.
Specifically, the withdrawal charge is equal to 5% of contributions withdrawn
during the first year of the Small Plan Contract, and the charge declines by
one percentage each year thereafter. After five complete years have elapsed
from the effective date of the Small Plan Contract, no such withdrawal charge
is deducted. This withdrawal charge compensates Prudential and its affiliates
for the costs associated with contacting Small Plans and their participants
and initially establishing Plan and participant records.
Participants in Contracts other than the Small Plan Contract may be subject
to a withdrawal charge for withdrawals that they make individually.
Appearing at the end of this Supplement is a Fee Table for the Small Plan
Contracts, together with Expense Tables that quantify the expenses that a
Small Plan Contract Participant would pay over various time periods.
TRANSACTION PROCEDURES FOR SMALL PLAN CONTRACTS
Participants under a Small Plan Contract must send all written communications
(including written requests to effect a purchase, withdrawal, or other
transaction) and death benefit claims to the Small Plan Contract Recordkeeper at
the address provided by Prudential. Participants may effect certain transactions
under their Small Plan Contract, and otherwise communicate with respect to their
Contract, by calling the Small Plan Contract Recordkeeper at the telephone
number provided by Prudential in Participant enrollment materials. Transactions
(including death benefit claims) conveyed to the Small Plan Contract
Recordkeeper will be deemed effective on a given Business Day if received in
good order prior to 4:00 PM Eastern Time on that Business Day. For purposes of
the preceding sentence, "good order" is defined generally as an instruction
received by the Small Plan Contract Recordkeeper that is sufficiently complete
and clear that the Small Plan Contract Recordkeeper does not need to exercise
any discretion to follow such instruction. The Small Plan Contract Recordkeeper
will forward promptly to Prudential transaction requests and other
communications that it receives from Participants in a Small Plan Contract. The
pricing of an initial contribution is discussed in the Prospectus.
With respect to telephone transactions, Participants should note that the Small
Plan Contract Recordkeeper has adopted procedures designed to ensure that the
caller is not an impostor. Neither the Small Plan Contract Recordkeeper nor
Prudential will be held liable for following telephone instructions that are
reasonably believed to be genuine. The Small Plan Contract Recordkeeper cannot
guarantee that a Participant will be able to get through to complete a telephone
transaction during peak periods, such as periods of drastic economic or market
change.
OTHER UNIQUE FEATURES OF THE SMALL PLAN CONTRACT
- - TRANSFERS. A Participant under a Small Plan Contract may be prohibited from
requesting a transfer measured by dollar amount, and instead may be required
to express the transfer amount in terms of whole number percentages.
The Small Plan Contract also may prohibit transfers from the Guaranteed
Interest Account into non-equity investment options that are characterized in
such Contract as "competing" with Prudential's General Account options with
regard to investment characteristics. If such transfers are precluded, the
Contract will further require that amounts transferred from the Guaranteed
Interest Account into non-competing investment options, such as a Subaccount
investing in a stock Fund, may not for 90 days thereafter be transferred into
a "competing" option or back to the Guaranteed Interest Account.
<PAGE>
- - SYSTEMATIC WITHDRAWALS. Systematic withdrawal privileges may be available
under a Small Plan Contract. If such privileges are available, the manner in
which amounts are deducted to pay the withdrawal may differ from the
procedures used for the other Contracts. No withdrawal charge is paid on
systematic withdrawals made under the Small Plan Contract.
- - DEATH BENEFIT PAYMENT OPTIONS. Under all the Contracts, including the Small
Plan Contract, beneficiaries may receive the death benefit payment in several
forms (e.g., one sum cash payment). However, under the Small Plan Contract, a
beneficiary may not be permitted to receive a death benefit payment that
combines features of the various payment options.
- - LOANS. With respect to the Small Plan Contract, amounts borrowed are deducted
from a Participant's Subaccounts on a pro rata basis. Amounts repaid on a
loan are applied to a Participant's Subaccounts based on the Participant's
current contribution allocation.
The loan maintenance fee of up to $60 discussed in the Prospectus may be
deducted annually under the Small Plan Contract, rather than quarterly. In
addition, Small Plan Contracts stipulate that the loan maintenance fee be
deducted pro rata from each of the Participant's Subaccounts. Prudential
imposes a loan application fee of up to $75.
With respect to the Legal Proceedings section of the Prospectus, please note
that on July 23, 1998, the United States Court of Appeals for the Third Circuit
upheld the District Court's approval of the Stipulation of Settlement.
FEE TABLE
FOR THE SMALL
PLAN CONTRACT
PARTICIPANT TRANSACTION EXPENSES
Sales Charge Imposed on Contributions ..................................... None
Maximum Withdrawal Charge (as a percentage of contributions withdrawn) in
connection with a full or partial Contract termination:
<TABLE>
<CAPTION>
THE WITHDRAWAL CHARGE WILL BE EQUAL
TO THE FOLLOWING PERCENTAGE OF THE
YEARS CONTRACT HAS BEEN IN EFFECT CONTRIBUTIONS WITHDRAWN
<S> <C>
First Year 5%
Second Year 4%
Third Year 3%
Fourth Year 2%
Fifth Year 1%
Sixth and Subsequent Years No Charge
</TABLE>
Maximum Annual Account Charge .............................................. $32
DISCOVERY ACCOUNT ANNUAL EXPENSES
(AS A PERCENTAGE OF AVERAGE PARTICIPANT ACCOUNT VALUE)
<TABLE>
<CAPTION>
ALL SUBACCOUNTS
- --------------------------------------------------------------------
<S> <C>
Mortality and Expense Risk Charge................................... 0.15%
Administrative Fee.................................................. 1.05%
-----
Total Separate Account Annual Expenses.............................. 1.20%
-----
-----
</TABLE>
<PAGE>
EXAMPLES OF FEES AND EXPENSES
The following examples illustrate, for the Small Plan Contracts, the cumulative
dollar amount of all the expenses under the Contract that would be incurred on
each $1000 of Participant investment.
- - The examples assume a consistent 5% annual return on invested assets.
- - 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 EXAMPLES SHOULD NOT BE CONSIDERED TO BE A REPRESENTATION OF PAST OR FUTURE
EXPENSES; ACTUAL EXPENSES MAY BE MORE OR LESS THAN THOSE SHOWN IN THE EXAMPLES.
TABLE I: SMALL PLAN CONTRACTS
In the event of a full or partial Contract termination, resulting in a
withdrawal from the specified Subaccount just prior to the end of the applicable
time period, each Participant would pay the following cumulative expenses on
each $1,000 invested.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS
------ -------
<S> <C> <C>
THE PRUDENTIAL SERIES FUND, INC.
Money Market Subaccount......................... $68 $85
Diversified Bond Subaccount..................... 68 85
Government Income Subaccount.................... 68 86
Conservative Balanced Subaccount................ 69 89
Flexible Managed Subaccount..................... 70 91
High Yield Bond Subaccount...................... 69 90
Stock Index Subaccount.......................... 67 84
Equity Income Subaccount........................ 68 85
Equity Subaccount............................... 68 86
Prudential Jennison Subaccount.................. 70 92
Global Subaccount............................... 72 98
AIM VARIABLE INSURANCE FUNDS, INC.
AIM V.I. Growth and Income Subaccount........... 70 93
AIM V.I. Value Subaccount....................... 71 94
JANUS ASPEN SERIES
Growth Subaccount............................... 71 94
International Growth Subaccount................. 73 101
MFS VARIABLE INSURANCE TRUST
Emerging Growth Subaccount...................... 72 99
Research Subaccount............................. 72 99
OCC ACCUMULATION TRUST
Managed Subaccount.............................. 72 99
Small Cap Subaccount............................ 73 102
T. ROWE PRICE
T. Rowe Price Equity Series, Inc., Equity Income
Subaccount.................................... 72 98
T. Rowe Price International Series, Inc.,
International Stock Subaccount................ 74 104
WARBURG PINCUS TRUST
Post-Venture Capital Subaccount................. 78 115
</TABLE>
<PAGE>
TABLE II: SMALL PLAN CONTRACTS
If there is no full or partial Contract termination, or the Participant
annuitizes, the Participant would pay the following cumulative expenses on each
$1,000 invested.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS
------ -------
<S> <C> <C>
THE PRUDENTIAL SERIES FUND, INC.
Money Market Subaccount......................... $18 $55
Diversified Bond Subaccount..................... 18 55
Government Income Subaccount.................... 18 56
Conservative Balanced Subaccount................ 19 59
Flexible Managed Subaccount..................... 20 61
High Yield Bond Subaccount...................... 19 60
Stock Index Subaccount.......................... 17 54
Equity Income Subaccount........................ 18 55
Equity Subaccount............................... 18 56
Prudential Jennison Subaccount.................. 20 62
Global Subaccount............................... 22 68
AIM VARIABLE INSURANCE FUNDS, INC.
AIM V.I. Growth and Income Subaccount........... 20 63
AIM V.I. Value Subaccount....................... 21 64
JANUS ASPEN SERIES
Growth Subaccount............................... 21 64
International Growth Subaccount................. 23 71
MFS VARIABLE INSURANCE TRUST
Emerging Growth Subaccount...................... 22 69
Research Subaccount............................. 22 69
OCC ACCUMULATION TRUST
Managed Subaccount.............................. 22 69
Small Cap Subaccount............................ 23 72
T. ROWE PRICE
T. Rowe Price Equity Series, Inc., Equity Income
Subaccount.................................... 22 68
T. Rowe Price International Series, Inc.,
International Stock Subaccount................ 24 74
WARBURG PINCUS TRUST
Post-Venture Capital Subaccount................. 28 85
</TABLE>
Loans taken by a Participant from a Participant Account may be subject to
charges for establishing and maintaining the loan. The examples with respect to
the Small Plan Contracts do not take into account any deduction for such
charges.
INTERIM FINANCIAL STATEMENTS FOR THE ACCOUNT APPEAR IN THE STATEMENT OF
ADDITIONAL INFORMATION DATED OCTOBER 19, 1998, WHICH YOU MAY OBTAIN WITHOUT
CHARGE BY CONTACTING PRUDENTIAL.
<PAGE>
PROSPECTUS MAY 1, 1998
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* (the "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 as amended 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.
- - 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.
Money Market Portfolio
Diversified Bond Portfolio
Government Income Portfolio
Conservative Balanced Portfolio
Flexible Managed Portfolio
High Yield Bond Portfolio
Stock Index Portfolio
Equity Income Portfolio
Equity Portfolio
Prudential Jennison Portfolio
Global Portfolio
- --------------------------------------------------------------------------------
AIM VARIABLE INSURANCE FUNDS, INC.
AIM V.I. Growth and Income Fund AIM V.I. Value Fund
JANUS ASPEN SERIES
Growth Portfolio International Growth Portfolio
OCC ACCUMULATION TRUST
Managed Portfolio Small Cap Portfolio
T. ROWE PRICE INTERNATIONAL SERIES, INC.
International Stock Portfolio
MFS VARIABLE INSURANCE TRUST
Emerging Growth Series Research Series
T. ROWE PRICE EQUITY SERIES, INC.
Equity Income Portfolio
WARBURG PINCUS TRUST
Post-Venture Capital Portfolio
- - 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 the Prudential Discovery
Select Group Variable Contract Account works.
----------------------------------------------
This prospectus provides information a prospective investor should know before
investing. Additional information about the Contracts has been filed with the
Securities and Exchange Commission in a Statement of Additional Information,
dated May 1, 1998, 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.
----------------------------------------------
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>
PROSPECTUS CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
DEFINITIONS OF SPECIAL TERMS USED IN THIS PROSPECTUS............................................... 1
BRIEF DESCRIPTION OF THE CONTRACTS................................................................. 2
FEE TABLE.......................................................................................... 4
GENERAL INFORMATION ABOUT PRUDENTIAL, PRUDENTIAL DISCOVERY SELECT GROUP VARIABLE CONTRACT ACCOUNT
AND THE INVESTMENT OPTIONS AVAILABLE UNDER THE CONTRACTS......................................... 9
PRUDENTIAL INSURANCE COMPANY OF AMERICA.......................................................... 9
PRUDENTIAL DISCOVERY SELECT GROUP VARIABLE CONTRACT ACCOUNT...................................... 9
THE FUNDS........................................................................................ 9
GUARANTEED INTEREST ACCOUNT...................................................................... 12
THE CONTRACTS...................................................................................... 13
THE ACCUMULATION PERIOD.......................................................................... 13
ALLOCATION OF PURCHASE PAYMENTS.................................................................. 14
ASSET ALLOCATION PROGRAM......................................................................... 14
TRANSFERS........................................................................................ 14
DOLLAR COST AVERAGING............................................................................ 16
AUTO-REBALANCING................................................................................. 16
WITHDRAWALS...................................................................................... 16
SYSTEMATIC WITHDRAWAL PLAN....................................................................... 17
TEXAS OPTIONAL RETIREMENT PLAN................................................................... 18
DEATH BENEFIT.................................................................................... 18
DISCONTINUANCE OF CONTRIBUTIONS.................................................................. 19
LOAN PROVISION................................................................................... 19
MODIFIED PROCEDURES.............................................................................. 20
CHARGES, FEES AND DEDUCTIONS....................................................................... 20
ADMINISTRATIVE FEE AND ANNUAL ACCOUNT CHARGE..................................................... 20
CHARGE FOR ASSUMING MORTALITY AND EXPENSE RISKS.................................................. 21
EXPENSES INCURRED BY THE FUNDS................................................................... 21
WITHDRAWAL CHARGE................................................................................ 21
LIMITATIONS ON WITHDRAWAL CHARGE................................................................. 22
PREMIUM TAXES.................................................................................... 22
FEDERAL TAX STATUS................................................................................. 22
TAXES ON PRUDENTIAL.............................................................................. 22
QUALIFIED RETIREMENT ARRANGEMENTS USING THE CONTRACTS............................................ 23
NON-QUALIFIED ARRANGEMENTS USING THE CONTRACTS................................................... 24
WITHHOLDING...................................................................................... 25
EFFECTING AN ANNUITY............................................................................... 25
LIFE ANNUITY WITH PAYMENTS CERTAIN............................................................... 25
ANNUITY CERTAIN.................................................................................. 26
JOINT AND SURVIVOR ANNUITY WITH PAYMENTS CERTAIN................................................. 26
PURCHASING THE ANNUITY........................................................................... 26
OTHER INFORMATION.................................................................................. 26
MISSTATEMENT OF AGE OR SEX....................................................................... 26
SALE OF THE CONTRACT AND SALES COMMISSIONS....................................................... 26
VOTING RIGHTS.................................................................................... 27
SUBSTITUTION OF FUND SHARES...................................................................... 27
PERFORMANCE INFORMATION.......................................................................... 27
REPORTS TO PARTICIPANTS.......................................................................... 28
STATE REGULATION................................................................................. 28
LEGAL PROCEEDINGS................................................................................ 28
YEAR 2000 COMPLIANCE............................................................................. 29
STATEMENT OF ADDITIONAL INFORMATION.............................................................. 30
ADDITIONAL INFORMATION........................................................................... 30
</TABLE>
i
<PAGE>
DEFINITIONS OF SPECIAL TERMS USED IN THIS
PROSPECTUS
ACCOUNT--See the Prudential Discovery Select Group Variable Contract Account
(the "Discovery Account") below.
ACCUMULATION PERIOD--The period, prior to the effecting of an annuity, during
which the amount credited to a Participant Account may vary with the investment
performance of any Subaccount of the Discovery Account, or the interest rate
credited under the Guaranteed Interest Account, as selected.
ANNUITANT--The person or persons designated by the Participant 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 Code and with
non-qualified annuity arrangements.
CONTRACT VALUE--The dollar amount held under a Contract.
EMPLOYER--The sponsor of the retirement plan or non-qualified annuity
arrangement.
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 Contracts.
GENERAL ACCOUNT--The assets of Prudential other than those allocated to the
Discovery Account or any other variable separate account of Prudential.
GUARANTEED INTEREST ACCOUNT--An allocation option under the Contract funded by
Prudential's General Account, or under certain Contracts, a separate account. It
is not part of nor dependent upon the investment performance of the Discovery
Account. This Prospectus does not describe in detail the Guaranteed Interest
Account or any separate account funding a guaranteed interest rate option.
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 may change 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 as of 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
<PAGE>
BRIEF DESCRIPTION OF THE CONTRACTS
The Prudential Insurance Company of America ("Prudential") offers the 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, as amended (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
selected 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 9. 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 13-14.
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 are found
under Fee Table, page 4 and Administrative Fee and Annual Account Charge, page
20.
An additional administrative charge of up to $15, the annual account charge, is
assessed on or about the last day of 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 20.
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
16-17. Withdrawals may be subject to tax under the Code, including, under
certain circumstances, a 10% penalty tax on premature withdrawals. See "Federal
Tax Status," page 22. In addition, all or a part of a Participant's Account may
be transferred among the Subaccounts and the 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 arrangement 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
2
<PAGE>
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 16-19 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 20.
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):
<TABLE>
<CAPTION>
THE WITHDRAWAL CHARGE WILL BE EQUAL
TO THE FOLLOWING PERCENTAGE OF THE
YEARS OF CONTRACT PARTICIPATION CONTRIBUTIONS WITHDRAWN
<S> <C>
First Year 5%
Second Year 4%
Third Year 3%
Fourth Year 2%
Fifth Year 1%
Sixth and Subsequent Years No Charge
</TABLE>
Maximum Annual Account Charge .............................................. $15
DISCOVERY ACCOUNT ANNUAL EXPENSES
(AS A PERCENTAGE OF AVERAGE PARTICIPANT ACCOUNT VALUE)
<TABLE>
<CAPTION>
ALL SUBACCOUNTS
- --------------------------------------------------------------------
<S> <C>
Mortality and Expense Risk Charge................................... 0.15%
Administrative Fee.................................................. 0.85%
-----
Total Separate Account Annual Expenses.............................. 1.00%
-----
-----
</TABLE>
4
<PAGE>
ANNUAL EXPENSES OF THE FUNDS
(AS A PERCENTAGE OF PORTFOLIO AVERAGE NET ASSETS)
<TABLE>
<CAPTION>
TOTAL FUND
INVESTMENT ANNUAL EXPENSES
MANAGEMENT OTHER (AFTER EXPENSE
FEE EXPENSES REIMBURSEMENTS)
<S> <C> <C> <C>
---------------------------------------
THE PRUDENTIAL SERIES FUND, INC.(1)
Money Market Portfolio.......................... 0.40% 0.03% 0.43%
Diversified Bond Portfolio...................... 0.40% 0.03% 0.43%
Government Income Portfolio..................... 0.40% 0.04% 0.44%
Conservative Balanced Portfolio................. 0.55% 0.01% 0.56%
Flexible Managed Portfolio...................... 0.60% 0.02% 0.62%
High Yield Bond Portfolio....................... 0.55% 0.02% 0.57%
Stock Index Portfolio........................... 0.35% 0.02% 0.37%
Equity Income Portfolio......................... 0.40% 0.01% 0.41%
Equity Portfolio................................ 0.45% 0.01% 0.46%
Prudential Jennison Portfolio................... 0.60% 0.04% 0.64%
Global Portfolio................................ 0.75% 0.10% 0.85%
AIM VARIABLE INSURANCE FUNDS, INC.(2)
AIM V.I. Growth and Income Fund................. 0.63% 0.06% 0.69%
AIM V.I. Value Fund............................. 0.62% 0.08% 0.70%
JANUS ASPEN SERIES(3)
Growth Portfolio................................ 0.65% 0.05% 0.70%
International Growth Portfolio.................. 0.67% 0.29% 0.96%
MFS VARIABLE INSURANCE TRUST
Emerging Growth Series.......................... 0.75% 0.12% 0.87%
Research Series................................. 0.75% 0.13% 0.88%
OCC ACCUMULATION TRUST(4)
Managed Portfolio............................... 0.80% 0.07% 0.87%
Small Cap Portfolio............................. 0.80% 0.17% 0.97%
T. ROWE PRICE(5)
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(6)
Post-Venture Capital Portfolio.................. 1.07% 0.33% 1.40%
</TABLE>
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. Effective May 1, 1998, the Funds reimburse
AIM in an amount up to 0.25% of the average net asset value of each Fund, for
expenses incurred in providing, or assuring that participating insurance
companies provide, certain administrative services. The fee currently only
applies to the average net asset value of each Fund in excess of the net asset
value of each Fund as calculated on April 30, 1998.
5
<PAGE>
(3) Janus Aspen Series. Management fees for Growth and International Growth
Portfolios reflect a reduced fee schedule effective July 1, 1997. The management
fee for each of these Portfolios reflects the new rate applied to net assets as
of December 31, 1997. Other expenses are based on gross expenses of the shares
before expense offset arrangements for the fiscal year ended December 31, 1997.
The information for each Portfolio is net of fee waivers or reductions from
Janus Capital. Fee reductions for the Growth and International Growth Portfolios
reduce the management fee to the level of the corresponding Janus retail fund.
Other waivers, if applicable, are first applied against the management fee and
then against other expenses. Without such waivers or reductions, the Management
Fee, Other Expenses and Total Operating Expenses for the Shares would have been
0.74%, 0.04% and 0.78% for Growth Portfolio and 0.79%, 0.29% and 1.08% for
International Growth Portfolio respectively. Janus Capital may modify or
terminate the waivers or reductions at any time upon at least 90 days' notice to
the Trustees.
(4) OCC Accumulation Trust. Other Expenses are shown gross of expense offsets
afforded the Portfolios which effectively lowered overall custody expenses.
Total Portfolio Expenses for the Small Cap and Managed Portfolios are limited by
OpCap Advisors so that their respective annualized operating expenses (net of
any expense offsets) do not exceed 1.00% of their respective average daily net
assets. Without such limitation 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, 1997 would have been: .80%, .17%
and .97%, respectively, for the Small Cap Portfolio, and .80%, .07% and .87%,
respectively, for the Managed Portfolio. Expense offsets for each Portfolio for
the fiscal year ended December 31, 1997 amounted to less than one basis point
for each Portfolio.
(5) 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.
(6) Warburg Pincus Trust. The expense figures shown above are based on actual
expenses for fiscal year 1997 including fee waivers and/or expense
reimbursements by the Portfolio's investment adviser and co-administrator. With
respect to the Warburg Pincus Trust Post-Venture Capital Portfolio, absent the
waivers and/or reimbursements, the Investment Management Fee would equal 1.25%,
Other Expenses would equal 0.33%, and Total Fund Annual Expenses would equal
1.58%. 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, 1998.
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.
- The examples assume a consistent 5% annual return on invested assets.
- 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.
6
<PAGE>
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.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
THE PRUDENTIAL SERIES FUND, INC.
Money Market Subaccount......................... $65 $77 $ 91 $178
Diversified Bond Subaccount..................... 65 77 91 178
Government Income Subaccount.................... 65 77 92 179
Conservative Balanced Subaccount................ 66 81 98 192
Flexible Managed Subaccount..................... 67 83 101 199
High Yield Bond Subaccount...................... 67 81 99 193
Stock Index Subaccount.......................... 65 75 88 171
Equity Income Subaccount........................ 65 76 90 176
Equity Subaccount............................... 65 78 93 181
Prudential Jennison Subaccount.................. 67 84 102 201
Global Subaccount............................... 69 90 113 223
AIM VARIABLE INSURANCE FUNDS, INC.
AIM V.I. Growth and Income Subaccount........... 68 85 105 206
AIM V.I. Value Subaccount....................... 68 85 105 207
JANUS ASPEN SERIES
Growth Subaccount............................... 68 85 105 207
International Growth Subaccount................. 71 93 119 235
MFS VARIABLE INSURANCE TRUST
Emerging Growth Subaccount...................... 70 91 114 225
Research Subaccount............................. 70 91 115 226
OCC ACCUMULATION TRUST
Managed Subaccount.............................. 70 91 114 225
Small Cap Subaccount............................ 70 93 119 235
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>
7
<PAGE>
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 effect an
annuity as of the end of the applicable time period, the Participant would pay
the following cumulative expenses on each $1,000 invested.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
THE PRUDENTIAL SERIES FUND, INC.
Money Market Subaccount......................... $15 $47 $ 81 $178
Diversified Bond Subaccount..................... 15 47 81 178
Government Income Subaccount.................... 15 47 82 179
Conservative Balanced Subaccount................ 16 51 88 192
Flexible Managed Subaccount..................... 17 53 91 199
High Yield Bond Subaccount...................... 17 51 89 193
Stock Index Subaccount.......................... 15 45 78 171
Equity Income Subaccount........................ 15 46 80 176
Equity Subaccount............................... 15 48 83 181
Prudential Jennison Subaccount.................. 17 54 92 201
Global Subaccount............................... 19 60 103 223
AIM VARIABLE INSURANCE FUNDS, INC.
AIM V.I. Growth and Income Subaccount........... 18 55 95 206
AIM V.I. Value Subaccount....................... 18 55 95 207
JANUS ASPEN SERIES
Growth Subaccount............................... 18 55 95 207
International Growth Subaccount................. 21 63 109 235
MFS VARIABLE INSURANCE TRUST
Emerging Growth Subaccount...................... 20 61 104 225
Research Subaccount............................. 20 61 105 226
OCC ACCUMULATION TRUST
Managed Subaccount.............................. 20 61 104 225
Small Cap Subaccount............................ 20 63 109 235
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
</TABLE>
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.
The required table of accumulation unit values, which sets out certain
historical information about the value of interests in each subaccount, appears
in the Appendix to this prospectus on Page 31.
8
<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 751 Broad
Street, Newark, New Jersey. It has been investing for pension funds since 1928.
Prudential is currently considering reorganizing itself into a stock company.
This form of reorganization, known as demutualization, is a complex process that
may take two or more years to complete. No plan of demutualization has been
adopted yet by Prudential's Board of Directors. Adoption of a plan of
demutualization would occur only after enactment of appropriate legislation in
New Jersey and would have to be approved by Prudential policyholders and
appropriate state insurance regulators. Throughout the process, there will be a
continuing evaluation by the Board of Directors and management of Prudential as
to the desirability of demutualization. The Board of Directors, in its
discretion, may choose not to demutualize or to delay demutualization for a
time.
Prudential is 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 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 U.S. 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 objective and its
investment adviser:
9
<PAGE>
THE PRUDENTIAL SERIES FUND, INC.
MONEY MARKET PORTFOLIO. The maximum current income that is consistent with
stability of capital and maintenance of liquidity through investment in
high-quality short-term debt obligations. There are no assurances that this
portfolio will maintain a stable net asset value.
DIVERSIFIED BOND PORTFOLIO. A high level of income over the longer term while
providing reasonable safety of capital through investment primarily in readily
marketable intermediate and long-term fixed income securities that provide
attractive yields but do not involve substantial risk of loss of capital through
default.
GOVERNMENT INCOME PORTFOLIO. A high level of income over the longer term
consistent with the preservation of capital through investment primarily in U.S.
Government securities, including intermediate and long-term U.S. Treasury
securities and debt obligations issued by agencies of or instrumentalities
established, sponsored or guaranteed by the U.S. Government. At least 65% of the
total assets of the portfolio will be invested in U.S. Government securities.
CONSERVATIVE BALANCED PORTFOLIO. Achievement of a favorable total investment
return consistent with a portfolio having a conservatively managed mix of money
market instruments, fixed income securities, and common stocks of established
companies, in proportions believed by the investment advisor to be appropriate
for an investor desiring diversification of investment who prefers a relatively
lower risk of loss than that associated with the Flexible Managed Portfolio
while recognizing that this reduces the chances of greater appreciation.
FLEXIBLE MANAGED PORTFOLIO. Achievement of a high total return consistent with
a portfolio having an aggressively managed mix of money market instruments,
fixed income securities, and common stocks, in proportions believed by the
investment advisor to be appropriate for an investor desiring diversification of
investment who is willing to accept a relatively high risk of loss in an effort
to achieve greater appreciation.
HIGH YIELD BOND PORTFOLIO. Achievement of a high total return through
investment in high yield/high risk fixed income securities in the medium to
lower quality ranges.
STOCK INDEX PORTFOLIO. Achievement of investment results that correspond to the
price and yield performance of publicly traded common stocks in the aggregate by
following a policy of attempting to duplicate the price and yield performance of
the Standard & Poor's 500 Composite Stock Price Index.
EQUITY INCOME PORTFOLIO. Both current income and capital appreciation through
investment primarily in common stocks and convertible securities that provide
favorable prospects for investment income returns above those of the Standard &
Poor's 500 Composite Stock Price Index or the New York Stock Exchange Composite
Index.
EQUITY PORTFOLIO. Capital appreciation through investment primarily in common
stocks of companies, including major established corporations as well as smaller
capitalization companies, that appear to offer attractive prospects of price
appreciation that is superior to broadly-based stock indices. Current income, if
any, is incidental.
PRUDENTIAL JENNISON PORTFOLIO. Long-term growth of capital through investment
primarily in equity securities of established companies with above-average
growth prospects. Current income, if any, is incidental.
GLOBAL PORTFOLIO. Long-term growth of capital through investment primarily in
common stock and common stock equivalents of foreign and domestic issuers.
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.
10
<PAGE>
AIM V.I. VALUE FUND. The Fund's investment objective is to achieve long-term
growth of capital by investing primarily in equity securities judged by AIM
Advisors, Inc. to be undervalued relative to the current or projected earnings
of the companies issuing the securities, or relative market values of assets
owned by the companies issuing the securities or relative to the equity market
generally. Income is a secondary objective and would be satisfied principally
from the income (interest and dividends) generated by the common stocks,
convertible bonds and convertible preferred stocks that make up the Fund's
portfolio.
AIM Advisors, Inc. serves as the investment adviser to the AIM V.I. Growth and
Income Fund and the AIM V.I. Value Fund.
JANUS ASPEN SERIES
GROWTH PORTFOLIO. A diversified portfolio that seeks long-term growth of
capital by investing primarily in common stocks, with an emphasis on companies
with larger market capitalizations.
INTERNATIONAL GROWTH PORTFOLIO. A diversified portfolio that seeks long-term
growth of capital by investing primarily in common stocks of foreign issuers.
Janus Capital Corporation is the investment adviser to the Growth Portfolio and
the International Growth Portfolio, and is responsible for the day-to-day
management of the portfolios and other business affairs of the portfolios.
MFS VARIABLE INSURANCE TRUST
EMERGING GROWTH SERIES. This Series seeks to provide long-term growth of
capital. Dividend and interest income from portfolio securities, if any, is
incidental to the Series' investment objective of long-term growth of capital.
RESEARCH SERIES. The Research Series' investment objective is to provide
long-term growth of capital and future income.
Massachusetts Financial Services Company, a Delaware corporation, is the
investment adviser to each MFS Series.
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.
11
<PAGE>
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.
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
Discovery Account and other variable 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 SEC 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.
Under certain Contracts, amounts allocated to the Guaranteed Interest Account
may be held within one or more guaranteed separate accounts. Interests in such
separate account(s) are not registered under the Securities Act of 1933 and the
separate accounts are not registered as investment companies under the
Investment Company Act of 1940.
12
<PAGE>
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 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 20.
The full amount (100%) of each contribution designated for investment in any
Subaccount is credited to a Participant Account maintained for the Participant.
The number of Units credited to a Participant in a Subaccount is determined by
dividing the amount of the contribution made on his behalf to that Subaccount by
the Subaccount's Unit Value for the Business Day on which the contribution is
received at the address shown on the cover page of this Prospectus.
The initial contribution made for a Participant will be invested in a Subaccount
no later than two Business Days after it is received by Prudential, if it is
preceded or accompanied by satisfactory enrollment information. If the
Contractholder submits an initial contribution on behalf of one or more new
Participants that is not preceded or accompanied by satisfactory enrollment
information, then Prudential will allocate such contribution to the Prudential
Series Fund 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 Code. Similarly, returning proceeds may cause the
Contractholder to violate a requirement under the Employee Retirement Income
Security Act of 1974 ("ERISA"), 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.
13
<PAGE>
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 Fund portfolio will attain its investment objectives. A
Participant should consider reviewing his or her investor profile questionnaire
annually, and each time his or her investor profile changes.
TRANSFERS
A Participant may transfer out of an investment option into any combination of
other investment options available under the Contract. The transfer request may
be in dollars, such as a request to transfer $1,000 from one Subaccount or from
the Guaranteed Interest Account, or, in the case of Subaccounts, may be in terms
of a percentage reallocation among Subaccounts. In the latter case, the
percentages must be whole numbers. A Participant may make transfers by proper
written notice to Prudential Investments, or by telephone, internet or telecopy,
depending on the terms of the plan applicable to the Participant.
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
14
<PAGE>
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 the applicable Business 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. The Contracts were not designed
for professional market timing organizations or other organizations or
individuals using programmed, large, or frequent transfers. A pattern of
exchanges that coincides with a "market timing" strategy may be disruptive to
the Discovery Account and the Funds and will be discouraged. If such a pattern
were to be found, we may be required to modify the transfer procedures,
including but not limited to, not accepting transfer requests of an agent acting
under a power of attorney on behalf of more than one owner.
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 alternate 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.
15
<PAGE>
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
in 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 and Prudential are 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 for each applicable interval and will continue at those intervals until
the Participant notifies us otherwise. If the New York Stock Exchange and
Prudential are not open on the rebalancing date, the transfer will take effect
as of the end of the Valuation Period which immediately follows that date.
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 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.
16
<PAGE>
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 21. This differs from the treatment of withdrawals for
federal income taxes as described below, where generally, withdrawals are
considered to have been made first from investment income. 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 within 7 days after
we receive a properly completed withdrawal request. We will pay the amount of
any withdrawal requested, less any applicable tax withholding, withdrawal charge
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 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 22.
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.
17
<PAGE>
An arrangement to make systematic withdrawals will not affect any of the
Participant's other rights under the Contracts, including the right to make
withdrawals, and purchase a fixed dollar annuity.
Currently, Prudential does not impose a withdrawal charge upon systematic
withdrawals, however, Prudential may apply a withdrawal charge on systematic
withdrawals where payments are made for less than three years. Prudential
currently permits a Participant who is receiving systematic withdrawals and over
the age of 59 1/2 to make one additional, non-systematic, withdrawal during each
calendar year in an amount that does not exceed 10% of the sum of his balances
in the Account and the Guaranteed Interest Account without the application of
the withdrawal charge.
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' contributions 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.
18
<PAGE>
Under certain types of retirement arrangements, the Retirement Equity Act of
1984 requires that in the case of a married Participant, a death benefit will be
payable to the Participant's spouse in the form of a "qualified pre-retirement
survivor annuity." A "qualified pre-retirement survivor annuity" is an annuity
for the lifetime of the Participant's spouse in an amount which can be purchased
with no less than 50% of the balance in the Participant Account as of the
Participant's date of death. Under the Retirement Equity Act, the spouse of a
Participant in a retirement arrangement which is subject to these rules may
consent to waive the pre-retirement survivor annuity benefit. Such consent must
acknowledge the effect of waiving the coverage, contain the signatures of the
Participant and spouse and must be notarized or witnessed by an authorized plan
representative. Unless the spouse of a Participant in a Plan which is subject to
these requirements properly consents to the waiver of the benefit, 50% of the
balance in the Participant Account will be paid to such spouse even if the
designated beneficiary is someone other than the spouse. Under these
circumstances, the remaining 50% would be paid to the Participant's designated
beneficiary.
Unless the retirement arrangement that covered the Participant provides
otherwise, a beneficiary who elects to have a fixed-dollar annuity purchased for
himself may choose from among the available forms of annuity. See "Effecting an
Annuity," page 25. 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.
19
<PAGE>
The loans described in this section, which involve the variable investment
options, work as follows. The minimum loan amount is as specified in the
Contract, or if not specified, as determined by Prudential. The maximum loan
amount is the lesser of (a) $50,000, reduced by the highest outstanding balance
of loans during the one year period immediately preceding the date of the loan
or (b) 50% of the value of the Participant's vested interest under a Contract.
In the loan application, the Contractholder (or in certain cases, the
Participant) designates the Subaccount(s) from which the loan amount is
deducted. To repay the loan, the Participant makes periodic payments of interest
plus a portion of the principal. Those payments are invested in the Subaccounts
chosen by the Participant. The Participant may specify the Subaccounts from
which he may borrow and into which repayments may be invested. If the
Participant does not specify the Subaccounts from which the loan amount is
deducted, the loan amount will be deducted pro rata 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. This annualized loan
maintenance charge will be pro rated 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
20
<PAGE>
contribution is made to the Participant Account). The annual account charge will
not be made, however, upon the cancellation of a Participant Account to purchase
an annuity under a Contract if the annuity becomes effective on January 1 of any
year. After a cancellation, the Participant may again participate in the
Contract only as a new Participant and will be subject to a new annual account
charge. Also, the annual account charge will not be made if the Participant's
Employer has chosen to pay the charge.
The aggregate annual account charge for each Participant will not be greater
than $15. The charge will first be made against the Participant Account Value
under the Guaranteed Interest Account (if available). If the Participant is not
invested in the Guaranteed Interest Account, or if the Participant does not have
enough money in such an option to pay the charge, the charge will then be made
against any one or more of the Subaccounts in which the Participant is invested.
Prudential may waive or eliminate the annual account charge under appropriate
circumstances.
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 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.
<TABLE>
<CAPTION>
WITHDRAWAL CHARGE,
YEARS OF CONTRACT AS A PERCENTAGE OF
PARTICIPATION CONTRIBUTIONS WITHDRAWN
<S> <C>
First Year 5%
Second Year 4%
Third Year 3%
Fourth Year 2%
Fifth Year 1%
Sixth Year and Subsequent No charge
</TABLE>
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).
21
<PAGE>
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.
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 withdrawal 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.
Prudential may impose withdrawal charges lower than those described above with
respect to Participants under certain Contracts. These lower charges will
reflect Prudential's anticipation that lower sales costs will be incurred, or
less sales services will be performed, with respect to such Contracts due to
economies arising from (1) the utilization of mass enrollment procedures or (2)
the performance of sales functions, which Prudential would otherwise be required
to perform, by the Contractholder, an Employer, or by a third party on their
behalf or (3) an accumulated surplus of charges over expenses under a particular
Contract. Generally, the withdrawal charge is lowered or waived depending on the
amount of local service the Contractholder requires. In addition, the charge may
be lowered if required by state law.
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. Not all states impose premium taxes on annuities; however, the rates
in those that do currently range from 0.5% to 5%.
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
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
22
<PAGE>
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 Contracts may also be used in connection with individual retirement
arrangements known as "Roth IRAs." Generally, contributions to a Roth IRA are
subject to certain limits and are not deductible for Federal income tax
purposes. Distributions are generally not taxable for Federal income tax
purposes if they are after attainment of age 59- 1/2 or for certain other
reasons and if the individual had a Roth IRA in effect for at least five years.
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 traditional
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.
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
23
<PAGE>
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 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
24
<PAGE>
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.
25
<PAGE>
ANNUITY CERTAIN
This is an immediate annuity payable monthly for a period certain which may be
60, 120, 180, or 240 months, as selected by the annuitant. If the annuitant dies
during the period certain, payments in the same amount the annuitant was
receiving will be continued to his or her beneficiary, but no further payments
are payable after the end of the period certain.
JOINT AND SURVIVOR ANNUITY WITH PAYMENTS 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
26
<PAGE>
maximum commission that will be paid to the broker-dealer to cover both the
individual representative's commission and other distribution expenses will not
exceed 3.0% of the purchase payment. In addition, trail commissions based on the
size of the Contracts may be paid.
VOTING RIGHTS
As stated above, all of the assets held in the Subaccounts of the Discovery
Account are invested in shares of the corresponding Funds. Prudential is the
legal owner of those shares and as such has the right to vote on any matter
voted on at any shareholders meetings of the Funds. However, as required by law,
Prudential votes the shares of the Funds at any regular and special shareholders
meetings the Funds are required to hold in accordance with voting instructions
received from Participants. The Funds may not hold annual shareholders meetings
when not required to do so under the laws of the state of their incorporation or
the Investment Company Act of 1940. Fund shares for which no timely instructions
from Participants are received, and any shares owned directly or indirectly by
Prudential, are voted in the same proportion as shares in the respective
portfolios for which instructions are received. Should the applicable federal
securities laws or regulations, or their current interpretation, change so as to
permit Prudential to vote shares of the Funds in its own right, it may elect to
do so.
Generally, Participants may give voting instructions on matters that would be
changes in fundamental policies and any matter requiring a vote of the
shareholders of the Funds. With respect to approval of the investment advisory
agreement or any change in a portfolio's fundamental investment policy,
Participants participating in such portfolios will vote separately on the
matter, pursuant to the requirements of Rule 18f-2 under the Investment Company
Act of 1940.
The number of Fund 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.
27
<PAGE>
A cumulative total return reflects performance over a stated period of time. An
average annual total return reflects the hypothetical annually compounded return
that would have produced the same cumulative total return if the performance had
been constant over the entire period.
The Money Market Subaccount may advertise its current and effective yield.
Current yield reflects the income generated by an investment in the Subaccount
over a specified seven-day period. Effective yield is calculated in a similar
manner except that income earned is assumed to be reinvested.
Reports or advertising may include comparative performance information,
including, but not limited to: comparisons to market indices; comparisons to
other investments; performance rankings; personalized illustrations of
historical performance; and data presented by analysts or included in
publications.
See PERFORMANCE INFORMATION in the Statement of Additional Information for
recent performance information.
REPORTS TO PARTICIPANTS
Participants will be sent, at least annually, reports showing as of a specified
date the number of units credited to them in the Subaccounts of the Discovery
Account. Each Participant will also be sent annual reports for the Fund.
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 and later issued a Final Order and Judgment in the
consolidated class actions before the court, 962 F.Supp. 450 (March 17, 1997, as
amended April 14, 1997). The Court's Final Order and Judgment approving the
class Settlement has been appealed to the United States Court of Appeals for the
Third Circuit, which held a hearing on January 26, 1998. The Court has not yet
issued a ruling on the appeal.
Pursuant to the Settlement, Prudential has agreed to and has begun to implement
an Alternative Dispute Resolution ("ADR") process for class members who believe
they were misled concerning the sale or performance of their life insurance
policies. Management now has information which allows for computation of a
reasonable estimate of losses associated with ADR claims. Based on this
information, management estimated the cost of
28
<PAGE>
remedying policyholder claims in the ADR process before taxes to be
approximately $2.05 billion. While management believes these to be reasonable
estimates based on information currently available, the ultimate amount of the
total cost of remedied policyholder claims is dependent on complex and varying
factors, including actual claims by eligible policyholders, the relief options
chosen and the dollar value of those options. There are also additional elements
of the ADR process which cannot be fully evaluated at this time (e.g., claims
which may be successfully appealed) which could increase this estimate.
In addition, a number of actions have been filed against Prudential by
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. These agreements are now being implemented through
Prudential's implementation of the class Settlement.
Litigation is subject to many uncertainties, and given the complexity and scope
of these suits, their outcome cannot be predicted. It is also not possible to
predict the likely result 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 regulatory inquiries. It is possible that the results of
operations or the cash flow of Prudential, in particular quarterly or annual
periods, could be materially affected by an ultimate unfavorable outcome of
certain pending litigation and regulatory matters. Management believes, however,
that the ultimate outcome of all pending litigation and regulatory matters
referred to above should not have a material adverse effect on Prudential's
financial position, after consideration of applicable reserves.
YEAR 2000 COMPLIANCE
The benefits and services provided to the Contractholders by Prudential and PIMS
depend on the smooth functioning of their respective computer systems. The year
2000, however, holds the potential for a significant disruption in the operation
of these systems. Many computer programs cannot distinguish the year 2000 from
the year 1900 because of the way in which dates are encoded. Left uncorrected,
the year "00" could cause systems to perform date comparisons and calculations
incorrectly that in turn could compromise the integrity of business records and
lead to serious interruption of business processes.
Prudential, PIMS's ultimate corporate parent, identified this issue as a
critical priority in 1995 and has established quality assurance procedures
including a certification process to monitor and evaluate enterprise-wide
conversion and upgrading of systems for "Year 2000" compliance. Prudential has
also initiated an analysis of potential exposure that could result from the
failure of major service providers such as suppliers, custodians and brokers, to
achieve Year 2000 compliance. Prudential expects to complete its adaptation,
testing and certification of software for Year 2000 compliance by December 31,
1998. During 1999, Prudential plans to conduct additional internal testing, to
participate in securities industry-wide test efforts and to complete major
service provider reviews, analysis and contingency planning.
The expenses of Prudential's Year 2000 compliance are allocated across its
various businesses, including those businesses not engaged in providing services
to Contractholders. Accordingly, while the expense is substantial in the
aggregate, it is not expected to have a material impact on Prudential's
abilities to meet its contractual commitments to Contractholders.
Prudential believes that it is well positioned to achieve the necessary
modifications and mitigate Year 2000 risks. However, if such efforts are not
completed on a timely basis, the Year 2000 issue could have a material adverse
impact on Prudential's operations, those of its subsidiary and affiliate
companies and/or the Discovery Account. Moreover, there can be no assurance that
the measures taken by Prudential's external service providers will be sufficient
to avoid any material adverse impact on Prudential's operations and those of its
subsidiary and affiliate companies.
29
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
The contents of the Statement of Additional Information include:
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Definitions............................................................... 2
Other Contract Provisions................................................. 2
Administration............................................................ 2
Performance Information................................................... 3
Directors of Prudential................................................... 9
Officers of Prudential.................................................... 12
Sale of Contracts......................................................... 14
Legal Matters............................................................. 14
Experts................................................................... 14
Financial Statements of the Discovery Accounts............................ A-1
Consolidated financial statements of The Prudential Insurance Company of
America and subsidiaries................................................ B-1
</TABLE>
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.
30
<PAGE>
APPENDIX
ACCUMULATION UNIT VALUES
THE PRUDENTIAL DISCOVERY SELECT GROUP VARIABLE CONTRACT ACCOUNT
(CONDENSED FINANCIAL INFORMATION)
<TABLE>
<CAPTION>
SUBACCOUNTS
---------------------------------------------------------------------------------------------------
PRUDENTIAL PRUDENTIAL PRUDENTIAL PRUDENTIAL PRUDENTIAL
SERIES PRUDENTIAL SERIES PRUDENTIAL PRUDENTIAL SERIES SERIES SERIES
FUND SERIES FUND FUND SERIES FUND SERIES FUND FUND FUND FUND
MONEY DIVERSIFIED GOVERNMENT CONSERVATIVE FLEXIBLE HIGH YIELD STOCK EQUITY
MARKET BOND INCOME BALANCED MANAGED BOND INDEX INCOME
---------------------------------------------------------------------------------------------------
7/31/97* 7/31/97* 7/31/97* 7/31/97* 7/31/97* 7/31/97* 7/31/97* 7/31/97*
TO TO TO TO TO TO TO TO
12/31/97 12/31/97 12/31/97 12/31/97 12/31/97 12/31/97 12/31/97 12/31/97
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1. Beginning of period
(rounded)................. $10.00 $10.00 $10.00 $10.00 $10.00 $10.00 $10.00 $10.00
2. End of period (rounded).... $10.08 $10.07 $10.27 $10.03 $ 9.99 $10.37 $10.29 $10.48
3. Accumulation Units
Outstanding at end of
period.................... 815 542 60 563 4,286 1,952 1,890 1,171
---------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
SUBACCOUNTS
-----------------------------------------------------------------------------------------------------
PRUDENTIAL PRUDENTIAL PRUDENTIAL JANUS
SERIES SERIES SERIES AIM V.I. JANUS ASPEN MFS
FUND FUND FUND GROWTH AND AIM V.I. ASPEN INTERNATIONAL EMERGING
EQUITY JENNISON GLOBAL INCOME VALUE GROWTH GROWTH GROWTH
-----------------------------------------------------------------------------------------------------
7/31/97* 7/31/97* 7/31/97* 7/31/97* 7/31/97* 7/31/97* 7/31/97* 7/31/97*
TO TO TO TO TO TO TO TO
12/31/97 12/31/97 12/31/97 12/31/97 12/31/97 12/31/97 12/31/97 12/31/97
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1. Beginning of period
(rounded)................. $10.00 $10.00 $10.00 $10.00 $10.00 $10.00 $10.00 $10.00
2. End of period (rounded).... $10.12 $ 9.87 $ 8.95 $ 9.79 $ 9.89 $ 9.92 $ 9.44 $ 9.95
3. Accumulation Units
Outstanding at end of
period.................... 2,907 3,111 1,576 1,122 1,738 462 942 470
-----------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
SUBACCOUNTS
--------------------------------------------------------------------------------------
OCC WARBURG
OCC ACCUMULATION T. ROWE PRICE PINCUS
MFS ACCUMULATION TRUST SMALL T. ROWE PRICE INERNATIONAL POST-VENTURE
RESEARCH TRUST MANAGED CAP EQUITY INCOME STOCK CAPITAL
--------------------------------------------------------------------------------------
7/31/97* 7/31/97* 7/31/97* 7/31/97* 7/31/97* 7/31/97*
TO TO TO TO TO TO
12/31/97 12/31/97 12/31/97 12/31/97 12/31/97 12/31/97
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1. Beginning of period
(rounded)................. $10.00 $10.00 $10.00 $10.00 $10.00 $10.00
2. End of period (rounded).... $ 9.67 $10.13 $10.20 $10.54 $ 8.92 $10.08
3. Accumulation Units
Outstanding at end of
period.................... 779 2,135 2,781 1,704 216 5
--------------------------------------------------------------------------------------
* Commencement of Operations
</TABLE>
<PAGE>
Discovery Select Group Retirement Annuity is a variable annuity
issued by The Prudential Insurance Company of America, Newark, NJ.
It is offered through these affiliated Prudential subsidiaries: Prudential
Securities Incorporated;
Pruco Securities Corporation; Prudential Investment Management Services LLC.
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
751 Broad Street
Newark, NJ 07102-3777
PRUDENTIAL INVESTMENTS
Three Gateway Center, 11th Floor
Newark, NJ 07102-5096
[LOGO]
DISCOVERY SELECT-SM- is a service mark of Prudential.
RS802B
Cat 62M093P B
DS.PR.001.0697
<PAGE>
PART B
- --------------------------------------------------
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
OCTOBER 19, 1998
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 October 19, 1998. Certain portions of
that October 19, 1998 prospectus are incorporated by reference into this
Statement of Additional Information.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
DEFINITIONS.......................................................................... 2
OTHER CONTRACT PROVISIONS............................................................ 2
ASSIGNMENT......................................................................... 2
PARTICIPATION IN DIVISIBLE SURPLUS................................................. 2
ADMINISTRATION....................................................................... 2
PERFORMANCE INFORMATION.............................................................. 3
AVERAGE ANNUAL TOTAL RETURN........................................................ 3
NON-STANDARD TOTAL RETURN.......................................................... 4
PERFORMANCE INFORMATION............................................................ 4
TOTAL RETURN....................................................................... 4
DIRECTORS OF PRUDENTIAL.............................................................. 9
OFFICERS OF PRUDENTIAL............................................................... 12
SALE OF CONTRACTS.................................................................... 14
LEGAL MATTERS........................................................................ 14
EXPERTS.............................................................................. 14
FINANCIAL STATEMENTS OF THE DISCOVERY ACCOUNTS....................................... A-1
CONSOLIDATED FINANCIAL STATEMENTS OF THE PRUDENTIAL INSURANCE COMPANY OF AMERICA AND
SUBSIDIARIES....................................................................... B-1
</TABLE>
The Prudential Insurance Company of America
3 Gateway Center, 12th Floor
Newark, NJ 07102-5096
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. One of such contracts
is the Small Plan Contract described in the Prospectus.
FUNDS--The Portfolios 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.
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. As discussed
in the Prospectus, Prudential is considering reorganizing itself into a stock
company.
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
2
<PAGE>
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 generally 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.
With respect to the Small Plan Contracts, Prudential has delegated certain of
these administrative and recordkeeping functions to the Small Plan Contract
Recordkeeper.
Prudential is reimbursed for these administrative and recordkeeping expenses by
the annual account charge and the daily charge against the assets of each
Subaccount for administrative expenses.
A daily charge is made which is equal to an effective annual rate of 0.85% of
the net assets in each Subaccount (this charge is equal to 1.05% for Small Plan
Contracts). All of this charge is for administrative expenses not covered by the
annual account charge. During 1997 Prudential received $316 for administrative
expenses and for providing management services. There is also an annual account
charge for administrative expenses of not greater than $32 assessed against a
Participant Account. During 1997 Prudential collected $173 in annual account
charges.
A withdrawal charge is also imposed on certain withdrawals from the Subaccounts
and the Guaranteed Interest Account. There were no withdrawal charges imposed in
1997.
PERFORMANCE INFORMATION
AVERAGE ANNUAL TOTAL RETURN
The Discovery Account may advertise average annual total return information
calculated according to a formula prescribed by the U.S. 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:
P(1 + T) to the power of (n) = ERV
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 P
equals a hypothetical contribution of $1,000, and where n equals the number of
years.
3
<PAGE>
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, 1997. This performance information is only
for Contracts other than the Small Plan Contract. For the periods prior to the
date the Subaccounts commenced operations, non-standard 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. Non-standard 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.
4
<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 12/31/97. 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. The performance shown below is only for
Contracts other than the Small Plan Contract.
TABLE 1
SUBACCOUNT STANDARDIZED
AVERAGE ANNUAL TOTAL RETURN
<TABLE>
<CAPTION>
FUND DATE 7/31/97-
PORTFOLIO ESTABLISHED 12/31/97
- --------------------------------------------- ------------ ---------
<S> <C> <C>
The Prudential Series Fund, Inc.
Money Market Subaccount.................... 6/24/97 (3.76)%
Diversified Bond Subaccount................ 6/24/97 (1.49)
Government Income Subaccount............... 6/24/97 0.18
Conservative Balanced Subaccount........... 6/24/97 (0.36)
Flexible Managed Subaccount................ 6/24/97 0.83
High Yield Bond Subaccount................. 6/24/97 1.66
Stock Index Subaccount..................... 6/24/97 4.53
Equity Income Subaccount................... 6/24/97 8.74
Equity Subaccount.......................... 6/24/97 1.93
Prudential Jennison Subaccount............. 6/24/97 3.70
Global Subaccount.......................... 6/24/97 (12.36)
AIM Variable Insurance Funds, Inc.
AIM V.I. Growth and Income Subaccount...... 6/24/97 0.74
AIM V.I. Value Subaccount.................. 6/24/97 (0.11)
Janus Aspen Series
Growth Subaccount.......................... 6/24/97 1.26
International Growth Subaccount............ 6/24/97 (5.83)
MFS Variable Insurance Trust
Emerging Growth Subaccount................. 6/24/97 3.20
Research Subaccount........................ 6/24/97 (1.85)
OCC Accumulation Trust
Managed Subaccount......................... 6/24/97 1.23
Small Cap Subaccount....................... 6/24/97 2.20
T. Rowe Price
T. Rowe Price Equity Series, Inc., Equity
Income Subaccount........................ 6/24/97 5.41
T. Rowe Price International Series, Inc.,
International Stock Subaccount........... 6/24/97 (13.46)
Warburg Pincus Trust
Post-Venture Capital Subaccount............ 6/24/97 4.23
</TABLE>
- --------------
Note 1: This table assumes deferred sales charges.
5
<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
effect 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. The
performance shown in Tables 2 and 3 below is only for Contracts other than the
Small Plan Contract.
TABLE 2
SUBACCOUNT "HYPOTHETICAL"
AVERAGE ANNUAL TOTAL RETURN ASSUMING NO WITHDRAWAL
<TABLE>
<CAPTION>
ONE THREE FIVE TEN FROM DATE
YEAR YEARS YEARS YEARS ESTABLISHED
FUND DATE ENDED ENDED ENDED ENDED THROUGH
PORTFOLIO ESTABLISHED 12/31/97 12/31/97 12/31/97 12/31/97 12/31/97
- --------------------------------------- ----------- ----------- ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
The Prudential Series Fund, Inc.
Money Market Subaccount.............. 5/13/83 3.35% 4.09% 3.44% 4.64% 5.33%
Diversified Bond Subaccount.......... 5/13/83 7.72 9.99 6.81 8.18 8.31
Government Income Subaccount......... 5/1/89 7.85 8.88 6.20 N/A 7.68
Conservative Balanced Subaccount..... 5/13/83 12.83 13.45 9.73 10.09 9.76
Flexible Managed Subaccount.......... 5/13/83 16.31 17.15 12.02 12.23 11.03
High Yield Bond Subaccount........... 2/23/87 7.58 12.23 10.28 9.57 8.19
Stock Index Subaccount............... 10/19/87 32.88 29.80 18.89 16.41 16.85
Equity Income Subaccount............. 2/19/88 32.49 24.36 18.52 N/A 15.41
Equity Subaccount.................... 5/13/83 22.46 23.13 18.05 16.27 14.33
Prudential Jennison Subaccount....... 5/1/95 28.81 N/A N/A N/A 24.70
Global Subaccount.................... 9/19/88 4.20 12.30 13.58 N/A 8.81
AIM Variable Insurance Funds, Inc.
AIM V.I. Growth and Income
Subaccount......................... 5/2/94 23.80 24.89 N/A N/A 19.74
AIM V.I. Value Subaccount............ 5/5/93 22.44 23.42 N/A N/A 18.55
Janus Aspen Series
Growth Subaccount.................... 9/13/93 20.41 22.07 N/A N/A 16.25
International Growth Subaccount...... 5/2/94 15.73 23.43 N/A N/A 17.68
MFS Variable Insurance Trust
Emerging Growth Subaccount........... 7/24/95 19.87 N/A N/A N/A 22.00
Research Subaccount.................. 7/24/95 17.43 N/A N/A N/A 20.22
OCC Accumulation Trust
Managed Subaccount................... 8/1/88 22.41 28.94 19.00 N/A 19.35
Small Cap Subaccount................. 8/1/88 20.65 17.41 13.38 N/A 14.32
T. Rowe Price
T. Rowe Price Equity Series, Inc.,
Equity Income Subaccount........... 3/31/94 27.07 26.10 N/A N/A 22.36
T. Rowe Price International Series,
Inc., International Stock
Subaccount......................... 3/31/94 1.56 8.27 N/A N/A 6.85
Warburg Pincus Trust
Post-Venture Capital Subaccount...... 9/30/96 12.45 N/A N/A N/A 8.51
</TABLE>
- --------------
Note 1: This table assumes no deferred sales charges.
6
<PAGE>
TABLE 3
SUBACCOUNT "HYPOTHETICAL" CUMULATIVE TOTAL RETURN
ASSUMING NO WITHDRAWAL
<TABLE>
<CAPTION>
FROM DATE
ONE THREE FIVE TEN PORTFOLIO
YEAR YEARS YEARS YEARS ESTABLISHED
FUND DATE ENDED ENDED ENDED ENDED THROUGH
PORTFOLIO ESTABLISHED 12/31/97 12/31/97 12/31/97 12/31/97 12/31/97
- ----------------------------------------- ----------- ----------- ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
The Prudential Series Fund, Inc.
Money Market Subaccount................ 5/13/83 3.35% 12.80% 18.44% 57.52% 113.96%
Diversified Bond Subaccount............ 5/13/83 7.72 33.10 39.04 119.60 221.99
Government Income Subaccount........... 5/1/89 7.85 29.12 35.12 N/A 89.98
Conservative Balanced Subaccount....... 5/13/83 12.83 46.09 59.13 161.63 291.07
Flexible Managed Subaccount............ 5/13/83 16.31 60.83 76.47 217.30 363.22
High Yield Bond Subaccount............. 2/23/87 12.64 44.59 64.46 150.12 135.80
Stock Index Subaccount................. 10/19/87 32.88 118.83 137.63 357.65 390.29
Equity Income Subaccount............... 2/19/88 32.49 92.43 133.99 N/A 311.43
Equity Subaccount...................... 5/13/83 22.46 86.80 129.37 351.91 611.41
Prudential Jennison Subaccount......... 5/1/95 28.81 N/A N/A N/A 80.32
Global Subaccount...................... 9/19/88 4.20 41.67 89.09 N/A 118.98
AIM Variable Insurance Funds, Inc.
AIM V.I. Growth and Income
Subaccount........................... 5/2/94 23.80 94.90 N/A N/A 93.68
AIM V.I. Value Subaccount.............. 5/5/93 22.44 88.11 N/A N/A 121.01
Janus Aspen Series
Growth Subaccount...................... 9/13/93 20.41 82.01 N/A N/A 91.09
International Growth Subaccount........ 5/2/94 15.73 88.17 N/A N/A 81.69
MFS Variable Insurance Trust
Emerging Growth Subaccount............. 7/24/95 19.87 N/A N/A N/A 62.48
Research Subaccount.................... 7/24/95 17.43 N/A N/A N/A 56.77
OCC Accumulation Trust
Managed Subaccount..................... 8/1/88 22.41 114.53 138.71 N/A 429.32
Small Cap Subaccount................... 8/1/88 20.65 61.91 87.39 N/A 252.93
T. Rowe Price
T. Rowe Price Equity Series, Inc.,
Equity Income Subaccount............. 3/31/94 27.07 100.66 N/A N/A 113.40
T. Rowe Price International Series,
Inc.,
International Stock Subaccount....... 3/31/94 1.56 26.95 N/A N/A 28.27
Warburg Pincus Trust
Post-Venture Capital Subaccount........ 9/30/96 12.45 N/A N/A N/A 10.77
</TABLE>
- --------------
Note 1: This table assumes no deferred sales charges.
7
<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 Group 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, 1997 were 4.56% and 4.67%, respectively, with respect to
Contracts other than the Small Plan Contract.
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 DIVIDED BY 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.
8
<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; Member Corporate
Governance Committee. Business consultant since 1987. Senior Vice President,
H.J. Heinz from 1971 to 1986. Mr. Agnew is also a director of Bausch & Lomb,
Inc. John Wiley & Sons, Inc. and Erie Plastics Corporation. Age 63. Address: 600
Grant Street, Suite 660, Pittsburgh, PA 15219.
FREDERICK K. BECKER -- Director since 1994 (current term expires April, 1999).
Member, Auditing Committee, Member, Committee on Business Ethics; Member,
Corporate Governance Committee. President, Wilentz Goldman and Spitzer, P.A.
(law firm) since 1989, with firm since 1960. Age 62. Address: 90 Woodbridge
Center Drive, Woodbridge, NJ 07095.
GILBERT F. CASELLAS -- Director since 1998 (current term expires April 2002).
Partner, McConnell Valdes, LLP since 1998. Chairman, U.S. Equal Employment
Opportunity Commission from 1994 to 1998. General Counsel, Department of Air
Force from 1993 to 1994. Mr. Casellas is also a director of the American
Arbitration Association and the Puerto Rican Legal Defense & Education Fund. Age
46. Address: 1717 Pennsylvania Avenue, NW, Suite 625, Washington, DC 20006.
JAMES G. CULLEN -- Director since 1994 (current term expires April, 2001).
Member, Compensation Committee; Member, Committee on Business Ethics. President
& Chief Executive Officer, Telecom Group, Bell Atlantic Corporation, since 1997.
Vice Chairman, Bell Atlantic Corporation from 1995 to 1997. President, Bell
Atlantic Corporation from 1993 to 1995. Mr. Cullen is also a director of Bell
Atlantic Corporation and Johnson & Johnson. Age 55. Address: 1310 North Court
House Road, 11th Floor, Alexandria, VA 22201.
CAROLYNE K. DAVIS -- Director since 1989 (current term expires April, 2001).
Member, Finance Committee; Member Committee on Business Ethics; Member,
Compensation Committee. Independent Health Care Advisor. National and
International Health Care Advisor, Ernst & Young, LLP from 1985 to 1997. Dr.
Davis is also a director of Beckman Instruments, Inc., Merck & Co., Inc.,
Science Applications International Corporation, Minimed Incorporated, and
Beverley Enterprises. Age 65. Address: 751 Broad Street, 23rd Floor, Newark, NJ
07102.
ROGER A. ENRICO -- Director since 1994 (current term expires April, 2002).
Member, Committees on Nominations & Corporate Governance; Member, Compensation
Committee. Chairman and Chief Executive Officer, PepsiCo, Inc. since 1996.
Originally with PepsiCo, Inc. since 1971. Mr. Enrico is also a director of A.M.
Belo Corporation and Dayton Hudson Corporation. Age 53. Address: 700 Anderson
Hill Road, Purchase, NY 10577.
ALLAN D. GILMOUR -- Director since 1995 (current term expires April, 1999).
Member, Finance Committee; Member, Committee on Dividends. Retired since 1995.
Vice Chairman, Ford Motor Company, from 1993 to 1995. Mr. Gilmour originally
joined Ford in 1960. Mr. Gilmour is also a director of Whirlpool Corporation,
USWest, Inc., The Dow Chemical Company and DTE Energy Company. Age 63. Address:
751 Broad Street, 23rd Floor, Newark, NJ 07102.
WILLIAM H. GRAY, III -- Director since 1991 (current term expires April, 2000).
Member, Executive Committee; Member, Finance Committee; Chairman, Committees on
Nominations & Corporate Governance. President and Chief Executive Officer, The
College Fund/UNCF since 1991. Mr. Gray served in Congress from 1979 to 1991. Mr.
Gray is also a director of Chase Manhattan Corporation, The Chase Manhattan
Bank, Lotus Development Corporation, Municipal Bond Investors Assurance
Corporation, Rockwell International Corporation, Union-Pacific Corporation,
Warner-Lambert Company, Westinghouse Electric Corporation, and Electronic Data
Systems. Age 56. Address: 8260 Willow Oaks Corp. Drive, Fairfax, VA 22031-4511.
9
<PAGE>
JON F. HANSON -- Director since 1991 (current term expires April, 2003). Member,
Finance Committee; Member, Committee on Dividends. Chairman, Hampshire
Management Company since 1976. Mr. Hanson is also a director of United Water
Resources, Orange & Rockland Utilities, Inc., and Consolidated Delivery and
Logistics. Age 61. Address: 235 Moore Street, Suite 200, Hackensack, NJ 07601.
GLEN H. HINER, JR. -- Director since 1997. (current term expires April, 2001).
Member, Compensation Committee. Chairman and Chief Executive Officer, Owens
Corning since 1991. Senior Vice President and Group Executive, Plastics Group,
General Electric Company from 1983 to 1991. Mr Hiner is also a director of Dana
Corporation. Age 64. Address: One Owens Corning Parkway, Toledo, OH 43659.
CONSTANCE J. HORNER -- Director since 1994 (current term expires April, 2002).
Member, Auditing Committee; Member, Committees on Nominations & Corporate
Governance. Guest Scholar, The Brookings Institution since 1993. Ms. Horner is
also a director of Foster Wheeler Corporation, Ingersoll-Rand Corporation, and
Pfizer, Inc. Age 55. Address: 1775 Massachusetts Ave., N.W. Washington, D.C.
20036-2188.
GAYNOR N. KELLEY -- Director since 1997 (current term expires April, 2001).
Member, Auditing Committee. Retired since 1996. Former Chairman and Chief
Executive Officer, The Perkins Elmer Corporation from 1990 to 1996. Mr. Kelley
is also a director of Hercules Incorporated, Arrow Electronics, Inc., and
Alliant Techsystems. Age 66. Address: 751 Broad Street, 23rd Floor, Newark, NJ
07102-3777.
BURTON G. MALKIEL -- Director since 1978 (current term expires April, 2002).
Chairman, Finance Committee; Member, Executive Committee; Member, Committee on
Dividends. Professor of Economics, Princeton University, since 1988. Dr. Malkiel
is also a director of Banco Bilbao Vizcaya, Baker Fentress & Company, The
Jeffrey Company. The Southern New England Telecommunications Company, and
Vanguard Group, Inc. Age 65. Address: Princeton University, 110 Fisher Hall,
Prospect Avenue, Princeton, NJ 08544-1021.
ARTHUR F. RYAN -- Chairman of the Board, President and Chief Executive Officer
of Prudential since 1994. President and Chief Operating Officer, Chase Manhattan
Corp. from 1990 to 1994, with Chase since 1972. Age 55. Address: 751 Broad
Street, Newark, NJ 07102.
IDA F.S. SCHMERTZ -- Director since 1997 (current term expires April, 2004).
Member, Finance Committee. Principal, Investment Strategies International since
1994. Age 63. Address: 751 Broad Street, 23rd Floor, Newark, NJ 07102.
CHARLES R. SITTER -- Director since 1995 (current term expires April, 1999).
Member, Finance Committee; Member, Committee on Dividends. Retired since 1996.
President, Exxon Corporation from 1993 to 1996. Mr. Sitter began his career with
Exxon in 1957. Age 67. Address: 5959 Las Colinas Boulevard, Irving, TX
75039-2298.
DONALD L. STAHELI -- Director since 1995 (current term expires April, 1999).
Member, Compensation Committee; Member, Auditing Committee. Retired since 1997.
Chairman and Chief Executive Officer, Continental Grain Company from 1994 to
1997. President and Chief Executive Officer, Continental Grain Company from 1988
to 1994. Mr. Staheli is also director of Bankers Trust Company and Bankers Trust
New York Corporation. Age 66. Address: 39 Locust Street, Suite 204, New Canaan,
CT 06840.
RICHARD M. THOMSON -- Director since 1976 (current term expires April, 2000).
Chairman, Executive Committee; Chairman, Compensation Committee; Member,
Committee on Nominations & Corporate Governance. Chairman of the Board, The
Toronto-Dominion Bank since 1997. Chairman and Chief Executive Officer from 1978
to 1997. Mr. Thomson is also a director of
10
<PAGE>
CGC, Inc., INCO, Limited, S.C. Johnson & Son, Inc., The Thomson Corporation, and
Canadian Occidental Petroleum, Ltd. Age 64. Address: P.O. Box 1,
Toronto-Dominion Centre, Toronto, Ontario, M5K 1A2, Canada.
JAMES A. UNRUH -- Director since 1996 (current term expires April, 2000).
Member, Compensation Committee. Retired since 1997. Chairman and Chief Executive
Officer, Unisys Corporation, from 1990 to 1997. Mr. Unruh is also a director of
Ameritech Corporation. Age 55. Address: Two Bala Plaza, Suite 300, Bala Cynwyd,
PA 19004.
P. ROY VAGELOS, M.D. -- Director since 1989 (current term expires April, 2001).
Chairman, Auditing Committee; Member, Executive Committee; Member, Committees on
Nominations & Corporate Governance. Chairman, Regeneron Pharmaceuticals since
1995. Chairman and Chief Executive Officer, Merck & Co., Inc. from 1986 to 1994.
Dr. Vagelos is also a director of The Estee Lauder Companies, Inc. and PepsiCo.,
Inc. Age 68. Address: One Crossroads Drive, Building A, 3rd Floor, Bedminster,
NJ 07921.
STANLEY C. VAN NESS -- Director since 1990 (current term expires April, 2002).
Chairman, Committee on Business Ethics; Member, Executive Committee; Member,
Auditing Committee. Counselor at Law, Picco Herbert Kennedy (law firm) from
1990. Mr. Van Ness is also a director of Jersey Central Power & Light Company.
Age 63. Address: 22 Chambers Street, Princeton, NJ 08542.
PAUL A. VOLCKER -- Director since 1988 (current term expires April, 2000).
Chairman, Committee on Dividends; Member, Executive Committee; Member, Committee
on Nominations & Corporate Governance. Consultant since 1996. Chairman, James D.
Wolfensohn, Inc. from 1988 to 1996. Chief Executive Officer, James D.
Wolfensohn, Inc. from 1995 to 1996. Mr. Volcker is also a public member of the
Board of Governors of the American Stock Exchange, a member of the Board of
Overseers of TIAA-CREF, and a director of Nestle, S.A., UAL Corporation, and
Bankers Trust New York Corporation. Age 70, Address: 610 Fifth Avenue, Suite
420, New York, NY 10020.
JOSEPH H. WILLIAMS -- Director since 1994 (current term expires April, 2002).
Member, Committee on Dividends; Member, Auditing Committee. Director, The
Williams Companies since 1971. Chairman & Chief Executive Officer, The Williams
Companies from 1979 to 1993. Mr. Williams is also a director of Flint
Industries, The Orvis Company, and MTC Investors, LLC. Age 64. Address: One
Williams Center, Tulsa, OK 74102.
11
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
PRINCIPAL OFFICERS
ARTHUR F. RYAN -- Chairman, President and Chief Executive Officer since 1994;
prior to 1994, President and Chief Operating Officer, Chase Manhattan
Corporation, New York, NY. Age 55.
E. MICHAEL CAULFIELD -- Chief Executive Officer, Prudential Investments since
1996; Chief Executive Officer, Money Management Group from 1995 to 1996; prior
to 1995, President, Prudential Preferred Financial Services. Age 51.
MICHELE S. DARLING -- Executive Vice President Human Resources since 1997; prior
to 1997, Executive Vice President, Canadian Imperial Bank of Commerce, Toronto,
Canada. Age 44.
ROBERT C. GOLDEN -- Executive Vice President Corporate Operations and Systems
since 1997; prior to 1997, Executive Vice President, Prudential Securities, New
York, NY. Age 51.
MARK B. GRIER -- Executive Vice President, Financial Management since 1997;
Chief Financial Officer from 1995 to 1997; prior to 1995, Executive Vice
President, Chase Manhattan Corporation, New York, NY. Age 44.
RODGER A. LAWSON -- Executive Vice President, Marketing and Planning since 1996;
President and CEO, Van Eck Global, New York, NY, from 1994 to 1996; prior to
1994, President and CEO, Global Private Banking, Bankers Trust Company, New
York, NY. Age 50.
KIYOFUMI SAKAGUCHI -- President, International Insurance Group since 1995; prior
to 1995, Chairman and CEO, The Prudential Life Insurance Co., Ltd., Japan. Age
55.
JOHN V. SCICUTELLA -- Chief Executive Officer, Individual Insurance Group since
1997; Executive Vice President Operations and Systems from 1995 to 1997; prior
to 1995, Executive Vice President, Chase Manhattan Corporation. Age 48.
JOHN R. STRANGFELD -- Chief Executive Officer, Private Asset Management Group
(PAMG) since 1998; President, PAMG, from 1996 to 1998; prior to 1996, Senior
Managing Director. Age 44.
JAMES J. AVERY, JR. -- Senior Vice President & Chief Actuary since 1997;
President Prudential Select from 1995 to 1997; prior to 1995, Chief Financial
Officer, Prudential Select. Age 46.
MARTIN A. BERKOWITZ -- Senior Vice President and Comptroller since 1995; prior
to 1995, Senior Vice President and CFO, Prudential Investment Corporation. Age
48.
WILLIAM M. BETHKE -- Chief Investment Officer since 1997; prior to 1997, Senior
Vice President. Age 50.
RICHARD J. CARBONE -- Senior Vice President and Chief Financial Officer since
1997. Controller, Salomon Brothers, New York, NY, from 1995 to 1997; prior to
1995, Controller, Bankers Trust, New York, NY. Age 50.
LEO J. CORBETT -- Senior Vice President, Individual Insurance Marketing since
1997; prior to 1997, Managing Director, Lehman Brothers, New York, NY. Age 49.
THOMAS W. CRAWFORD -- President and Chief Executive Officer, Prudential Property
& Casualty Company since 1995; prior to 1995, President & CEO, Southern Heritage
Insurance Company. Age 55.
MARK R. FETTING -- President, Prudential Retirement Services since 1996; prior
to 1996, President, Prudential Defined Contribution Services. Age 43.
WILLIAM D. FRIEL -- Senior Vice President and Chief Information Officer since
1993. Age 59.
12
<PAGE>
JONATHAN M. GREENE -- President, Investment Management since 1996; prior to
1996, Vice President, T. Rowe Price, Baltimore, MD. Age 54.
JEAN D. HAMILTON -- President, Diversified Group since 1995; prior to 1995,
President, Prudential Capital Group. Age 51.
RONALD P. JOELSON -- Senior Vice President, Guaranteed Products since 1997;
President, Prudential Investments Guaranteed Products from 1996 to 1998; prior
to 1996, Managing Director, Enterprise Planning Unit. Age 40.
IRA J. KLEINMAN -- Executive Vice President, International Insurance Group,
since 1997; prior to 1997, Senior Vice President. Age 51.
NEIL A. MCGUINNESS -- Senior Vice President, Marketing, Prudential Investments,
since 1996; prior to 1996, Managing Director, Putnam Investments, Boston, MA.
Age 51.
PRISCILLA A. MYERS -- Senior Vice President, Audit, Compliance and Investigation
since 1995. Vice President and Auditor from 1989 to 1995. Age 48.
RICHARD O. PAINTER -- President, Prudential Insurance & Financial Services since
1995; prior to 1995, Senior Vice President, New York Life, New York, NY. Age 50.
I. EDWARD PRICE -- Senior Vice President and Actuary since 1995; prior to 1995,
Chief Executive Officer, Prudential International Insurance. Age 55.
BRIAN M. STORMS -- President, Mutual Funds and Annuities, Prudential Investments
since 1996; prior to 1996, Managing Director, Fidelity Investments, Boston. Age
43.
ROBERT J. SULLIVAN -- Senior Vice President, Sales, Prudential Investments since
1997; prior to 1997, Managing Director, Fidelity Investments, Boston. Age 59.
SUSAN J. BLOUNT -- Vice President and Secretary since 1995; prior to 1995,
Assistant General Counsel. Age 40.
C. EDWARD CHAPLIN -- Vice President and Treasurer since 1995; prior to 1995,
Managing Director and Assistant Treasurer. Age 41.
13
<PAGE>
SALE OF THE CONTRACTS
Prudential Investment Management Services LLC ("PIMS"), a subsidiary of
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. During
1997, 1996 and 1995, the aggregate dollar amount of underwriting commissions
paid to and the amounts retained by PIMS were $0, $0, and $0 respectively.
During 1997, 1996 and 1995 PIMS paid $4,710, $0, and $0 respectively to cover
individual representatives' commissions and other distribution expenses.
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 C. Christopher Sprague, Assistant General Counsel of
Prudential. Shea and Gardner of Washington, D.C. has provided advice on certain
matters relating to the federal securities laws.
EXPERTS
The consolidated financial statements in this registration statement for The
Prudential Insurance Company of America for the years ended December 31, 1997
and December 31, 1996 and the financial statements for The Prudential Discovery
Select Group Variable Contract Account for the period July 31, 1997 through
December 31, 1997 have been audited by PricewaterhouseCoopers LLP, independent
accountants, 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. PricewaterhouseCoopers LLP's principal business address
is 1177 Avenue of the Americas, New York, New York 10036.
The consolidated financial statements in this report for The Prudential
Insurance Company of America for the year ended December 31, 1995 have been
audited by Deloitte & Touche LLP, independent auditors, as stated in their
reports appearing herein, and are included in reliance upon the reports of such
firm given upon their authority as experts in accounting and auditing. Deloitte
& Touche LLP's principal business address is Two Hilton Court, Parsippany, New
Jersey 07054-0319.
On March 12, 1996, Deloitte & Touche LLP was replaced as the independent
accountants of Prudential. There have been no disagreements with Deloitte &
Touche LLP on any matter of accounting principles or practices, financial
statement disclosure or auditing scope or procedure which, if not resolved to
the satisfaction of the accountant, would have caused them to make reference to
the matter in their reports.
Also included in this registration statement are certain unaudited financial
statements, which have not been audited by either PricewaterhouseCoopers LLP or
Deloitte & Touche LLP.
FINANCIAL STATEMENTS
The consolidated financial statements for Prudential and subsidiaries 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. Also included herein are certain
financial statements of the Discovery Account.
14
<PAGE>
FINANCIAL STATEMENTS OF THE DISCOVERY ACCOUNTS
STATEMENTS OF NET ASSETS (UNAUDITED)
JUNE 30, 1998
<TABLE>
<CAPTION>
SUBACCOUNTS
------------------------------------------------------------------------------------------------
PRUDENTIAL SERIES PRUDENTIAL SERIES PRUDENTIAL SERIES PRUDENTIAL SERIES
FUND FUND FUND FUND
MONEY MARKET DIVERSIFIED BOND GOVERNMENT INCOME CONSERVATIVE BALANCED
--------------------- --------------------- --------------------- ---------------------
<S> <C> <C> <C> <C>
Investment in Shares at Net
Asset Value [Note 2]. . . $ 105,955 $ 119,757 $ 126,333 $ 318,439
Receivable from the Prudential
Insurance Corp of America -- -- 10 23
Net Receivable (Payable)
for Pending Capital
Transactions . . . . . . . . 234 35,251 71 27,048
--------------------- --------------------- --------------------- ---------------------
NET ASSETS . . . . . . . . . $ 106,189 $ 155,008 $ 126,414 $ 345,510
--------------------- --------------------- --------------------- ---------------------
NET ASSETS REPRESENTING:
Equity of Participant . . $ 106,189 $ 155,008 $ 126,414 $ 345,510
--------------------- --------------------- --------------------- ---------------------
--------------------- --------------------- --------------------- ---------------------
<CAPTION>
-----------------------------------------------------------------------
PRUDENTIAL SERIES PRUDENTIAL SERIES PRUDENTIAL SERIES
FUND FUND FUND
FLEXIBLE MANAGED HIGH YIELD BOND STOCK INDEX
--------------------- --------------------- ---------------------
<S> <C> <C> <C>
Investment in Shares at Net
Asset Value [Note 2]. . . $ 424,017 $ 102,693 $ 792,390
Receivable from the Prudential
Insurance Corp of America 255 -- --
Net Receivable (Payable)
for Pending Capital
Transactions . . . . . . . . 90,836 329 204,881
--------------------- --------------------- ---------------------
NET ASSETS . . . . . . . . . $ 515,108 $ 103,022 $ 997,271
--------------------- --------------------- ---------------------
NET ASSETS REPRESENTING:
Equity of Participant . . $ 515,108 $ 103,022 $ 997,271
--------------------- --------------------- ---------------------
--------------------- --------------------- ---------------------
</TABLE>
<TABLE>
<CAPTION>
SUBACCOUNTS
------------------------------------------------------------------------------------------------
PRUDENTIAL SERIES PRUDENTIAL SERIES PRUDENTIAL SERIES PRUDENTIAL SERIES
FUND FUND FUND FUND
EQUITY INCOME EQUITY JENNISON GLOBAL
--------------------- --------------------- --------------------- ---------------------
<S> <C> <C> <C> <C>
Investment in Shares at Net
Asset Value [Note 2]. . . $ 210,033 $ 1,690,165 $ 266,178 $ 271,956
Receivable from The Prudential
Insurance Company of America -- 1,935 915 112
Net Receivable (Payable)
for Pending Capital
Transactions . . . . . . . . 264 255,902 460 43,721
--------------------- --------------------- --------------------- ---------------------
NET ASSETS . . . . . . . . . $ 210,297 $ 1,948,002 $ 267,553 $ 315,789
--------------------- --------------------- --------------------- ---------------------
NET ASSETS REPRESENTING:
Equity of Participant . . $ 210,297 $ 1,948,002 $ 267,553 $ 315,789
--------------------- --------------------- --------------------- ---------------------
--------------------- --------------------- --------------------- ---------------------
<CAPTION>
-----------------------------------------------------------------------
AIM V.I.
GROWTH AND AIM V.I. JANUS ASPEN
INCOME VALUE GROWTH
--------------------- --------------------- ---------------------
<S> <C> <C> <C>
Investment in Shares at Net
Asset Value [Note 2]. . . $ 45,127 $ 97,846 $ 67,423
Receivable from The Prudential
Insurance Company of America -- 39 128
Net Receivable (Payable)
for Pending Capital
Transactions . . . . . . . . (487) 482 242
--------------------- --------------------- ---------------------
NET ASSETS . . . . . . . . . $ 44,640 $ 98,367 $ 67,793
--------------------- --------------------- ---------------------
NET ASSETS REPRESENTING:
Equity of Participant . . $ 44,640 $ 98,367 $ 67,793
--------------------- --------------------- ---------------------
--------------------- --------------------- ---------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
A-1
<PAGE>
FINANCIAL STATEMENTS OF THE DISCOVERY ACCOUNTS
STATEMENTS OF NET ASSETS (UNAUDITED)
JUNE 30, 1998
<TABLE>
<CAPTION>
SUBACCOUNTS
------------------------------------------------------------------------------------------------
JANUS ASPEN MFS OCC ACCUMULATION OCC ACCUMULATION
INTERNATIONAL EMERGING MFS TRUST
GROWTH GROWTH RESEARCH MANAGED
--------------------- --------------------- --------------------- ---------------------
<S> <C> <C> <C> <C>
Investment in Shares at Net
Asset Value [Note 2]. . . $ 73,243 $ 155,837 $ 47,516 $ 75,418
Receivable from The Prudential
Insurance Company of America 62 956 91 --
Net Receivable (Payable)
for Pending Capital
Transactions . . . . . . . . 374 857 137 (728)
--------------------- --------------------- --------------------- ---------------------
NET ASSETS . . . . . . . . . $ 73,679 $ 157,650 $ 47,744 $ 75,690
--------------------- --------------------- --------------------- ---------------------
NET ASSETS REPRESENTING:
Equity of Participants. . $ 73,679 $ 157,650 $ 47,744 $ 75,690
--------------------- --------------------- --------------------- ---------------------
--------------------- --------------------- --------------------- ---------------------
<CAPTION>
------------------------------------------------------------------------------------------------
OCC ACCUMULATION T. ROWE T. ROWE WARBURG PINCUS
TRUST PRICE PRICE POST-VENTURE
SMALL CAP EQUITY INCOME INTERNATIONAL STOCK CAPITAL
--------------------- --------------------- --------------------- ---------------------
<S> <C> <C> <C> <C>
Investment in Shares at Net
Asset Value [Note 2]. . . $ 58,085 $ 45,195 $ 26,031 $ 1,409
Receivable from The Prudential
Insurance Company of America 82 6 -- --
Net Receivable (Payable)
for Pending Capital
Transactions . . . . . . . . 139 939 (716) 72
--------------------- --------------------- --------------------- ---------------------
NET ASSETS . . . . . . . . . $ 58,306 $ 46,140 $ 26,315 $ 1,481
--------------------- --------------------- --------------------- ---------------------
NET ASSETS REPRESENTING:
Equity of Participants. . $ 58,306 $ 46,140 $ 26,315 $ 1,481
--------------------- --------------------- --------------------- ---------------------
--------------------- --------------------- --------------------- ---------------------
</TABLE>
STATEMENTS OF OPERATIONS
SIX MONTHS ENDED
JUNE 30, 1998 (UNAUDITED)
<TABLE>
<CAPTION>
SUBACCOUNTS
------------------------------------------------------------------------------------------
PRUDENTIAL SERIES PRUDENTIAL SERIES PRUDENTIAL SERIES PRUDENTIAL SERIES
FUND FUND FUND FUND
MONEY MARKET DIVERSIFIED BOND GOVERNMENT INCOME CONSERVATIVE BALANCED
--------------------- --------------------- --------------------- ---------------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME
Ordinary Dividend Distributions . . $ 1,259 $ 598 $ 16 $ 148
--------------------- --------------------- --------------------- ---------------------
Expense [Note 3]
Fees Charged to Participants
for Administrative Purposes and
Mortality and Expense Risk. . . 230 167 12 127
--------------------- --------------------- --------------------- ---------------------
NET INVESTMENT INCOME (LOSS) . . . . . 1,029 431 4 21
--------------------- --------------------- --------------------- ---------------------
NET REALIZED AND UNREALIZED
GAINS/(LOSSES) ON INVESTMENTS
Capital Gains Distributions Received . -- 121 -- 113
Net Realized Gain/(Loss)
on Investments. . . . . . . . . . . -- (1) -- (530)
Net Increase/(Decrease) in Unrealized
Appreciation on Investments . . . . -- 1,272 178 3,276
--------------------- --------------------- --------------------- ---------------------
NET GAIN/(LOSS) ON INVESTMENTS . . . . -- 1,392 178 2,859
--------------------- --------------------- --------------------- ---------------------
NET INCREASE (DECREASE) IN
NET ASSETS RESULTING
FROM OPERATIONS. . . . . . . . . . . . $ 1,029 $ 1,823 $ 182 $ 2,880
--------------------- --------------------- --------------------- ---------------------
--------------------- --------------------- --------------------- ---------------------
<CAPTION>
-------------------------------------------------------------------
PRUDENTIAL SERIES PRUDENTIAL SERIES PRUDENTIAL SERIES
FUND FUND FUND
FLEXIBLE MANAGED HIGH YIELD BOND STOCK INDEX
--------------------- --------------------- ---------------------
<S> <C> <C> <C>
INVESTMENT INCOME
Ordinary Dividend Distributions . . $ 558 $ 1,575 $ 348
--------------------- --------------------- ---------------------
Expense [Note 3]
Fees Charged to Participants
for Administrative Purposes and
Mortality and Expense Risk. . . 387 257 550
--------------------- --------------------- ---------------------
NET INVESTMENT INCOME (LOSS) . . . . . 171 1,318 (202)
--------------------- --------------------- ---------------------
NET REALIZED AND UNREALIZED
GAINS/(LOSSES) ON INVESTMENTS
Capital Gains Distributions Received . 1,148 -- 280
Net Realized Gain/(Loss)
on Investments. . . . . . . . . . . (877) (5) (19)
Net Increase/(Decrease) in Unrealized
Appreciation on Investments . . . . 7,063 57 25,315
--------------------- --------------------- ---------------------
NET GAIN/(LOSS) ON INVESTMENTS . . . . 7,334 52 25,576
--------------------- --------------------- ---------------------
NET INCREASE (DECREASE) IN
NET ASSETS RESULTING
FROM OPERATIONS. . . . . . . . . . . . $ 7,505 $ 1,370 $ 25,374
--------------------- --------------------- ---------------------
--------------------- --------------------- ---------------------
</TABLE>
*Commencement of Operations
SEE NOTES TO FINANCIAL STATEMENTS
A-2
<PAGE>
FINANCIAL STATEMENTS OF THE DISCOVERY ACCOUNTS
STATEMENTS OF OPERATIONS
SIX MONTHS ENDED
JUNE 30, 1998 (UNAUDITED)
<TABLE>
<CAPTION>
SUBACCOUNTS
------------------------------------------------------------------------------------------
PRUDENTIAL SERIES PRUDENTIAL SERIES PRUDENTIAL SERIES PRUDENTIAL SERIES
FUND FUND FUND FUND
EQUITY INCOME EQUITY JENNISON GLOBAL
--------------------- --------------------- --------------------- ---------------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME
Ordinary Dividend Distributions . . $ 869 $ 326 $ 114 $ 100
Expense [Note 3]
Fees Charged to Participants
for Administrative Purposes and
Mortality and Expense Risk. . . . 446 863 555 168
--------------------- --------------------- --------------------- ---------------------
NET INVESTMENT INCOME . . . . . . . . 423 (537) (441) (68)
--------------------- --------------------- --------------------- ---------------------
NET REALIZED AND UNREALIZED
GAINS/(LOSSES) ON INVESTMENTS
Capital Gains Distributions Received . 1,880 381 576 29
Net Realized Gain/(Loss)
on Investments. . . . . . . . . . . (576) (1,526) (1) (1)
Net Increase/(Decrease) in Unrealized
Appreciation on Investments . . . . 7,050 14,102 18,822 5,985
--------------------- --------------------- --------------------- ---------------------
NET GAIN/(LOSS) ON INVESTMENTS . . . . 8,354 12,957 19,397 6,013
--------------------- --------------------- --------------------- ---------------------
NET INCREASE (DECREASE)
IN NET ASSETS
RESULTING FROM OPERATIONS. . . . . . . $ 8,777 $ 12,420 $ 18,956 $ 5,945
--------------------- --------------------- --------------------- ---------------------
--------------------- --------------------- --------------------- ---------------------
<CAPTION>
-------------------------------------------------------------------
AIM V.I. AIM V.I. JANUS ASPEN
GROWTH AND INCOME VALUE GROWTH
--------------------- --------------------- ---------------------
<S> <C> <C> <C>
INVESTMENT INCOME
Ordinary Dividend Distributions . . -- -- $ 4,066
Expense [Note 3]
Fees Charged to Participants
for Administrative Purposes and
Mortality and Expense Risk. . . . 121 182 138
--------------------- --------------------- ---------------------
NET INVESTMENT INCOME . . . . . . . . (121) (182) 3,928
--------------------- --------------------- ---------------------
NET REALIZED AND UNREALIZED
GAINS/(LOSSES) ON INVESTMENTS
Capital Gains Distributions Received . -- -- --
Net Realized Gain/(Loss)
on Investments. . . . . . . . . . . 65 (5) (14)
Net Increase/(Decrease) in Unrealized
Appreciation on Investments . . . . 4,867 8,047 1,321
--------------------- --------------------- ---------------------
NET GAIN/(LOSS) ON INVESTMENTS . . . . 4,932 8,042 1,307
--------------------- --------------------- ---------------------
NET INCREASE (DECREASE)
IN NET ASSETS
RESULTING FROM OPERATIONS. . . . . . . $ 4,811 $ 7,860 $ 5,235
--------------------- --------------------- ---------------------
--------------------- --------------------- ---------------------
</TABLE>
<TABLE>
<CAPTION>
SUBACCOUNTS
------------------------------------------------------------------------------------------
JANUS ASPEN MFS OCC ACCUMULATION
INTERNATIONAL EMERGING MFS TRUST
GROWTH GROWTH RESEARCH MANAGED
--------------------- --------------------- --------------------- ---------------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME
Ordinary Dividend Distributions . . $ 1,276 -- $ 39 $ 362
Expense [Note 3]
Fees Charged to Participants
for Administrative Purposes and
Mortality Expense Risk. . . . . . 170 308 84 193
--------------------- --------------------- --------------------- ---------------------
NET INVESTMENT INCOME (LOSS) . . . . . 1,106 (308) (45) 169
--------------------- --------------------- --------------------- ---------------------
NET REALIZED AND UNREALIZED
GAINS/(LOSSES) ON INVESTMENTS
Capital Gains Distributions Received . -- 789 515 1,419
Net Realized Gain/(Loss)
on Investments. . . . . . . . . . . -- (47) 2 (104)
Net Increase/(Decrease) in Unrealized
Appreciation on Investments . . . . 6,622 10,751 2,017 3,817
--------------------- --------------------- --------------------- ---------------------
NET GAIN/(LOSS) ON INVESTMENTS . . . . 6,622 11,493 2,534 5,132
--------------------- --------------------- --------------------- ---------------------
NET INCREASE/(DECREASE) IN NET
ASSETS RESULTING FROM
OPERATIONS . . . . . . . . . . . . . . $ 7,728 $ 11,185 $ 2,489 $ 5,301
--------------------- --------------------- --------------------- ---------------------
--------------------- --------------------- --------------------- ---------------------
<CAPTION>
------------------------------------------------------------------------------------------
OCC ACCUMULATION T. ROWE T. ROWE WARBURG PINCUS
TRUST PRICE PRICE POST-VENTURE
SMALL CAP EQUITY INCOME INTERNATIONAL STOCK CAPITAL
--------------------- --------------------- --------------------- ---------------------
<S> <C> <C> <C>
INVESTMENT INCOME
Ordinary Dividend Distributions . . $ 197 $ 365 -- --
Expense [Note 3]
Fees Charged to Participants
for Administrative Purposes and
Mortality Expense Risk. . . . . . 213 133 66 2
--------------------- --------------------- --------------------- ---------------------
NET INVESTMENT INCOME (LOSS) . . . . . (16) 232 (66) (2)
--------------------- --------------------- --------------------- ---------------------
NET REALIZED AND UNREALIZED
GAINS/(LOSSES) ON INVESTMENTS
Capital Gains Distributions Received . 2,151 76 -- --
Net Realized Gain/(Loss)
on Investments. . . . . . . . . . . (1,095) (29) (55) --
Net Increase/(Decrease) in Unrealized
Appreciation on Investments . . . . (1,905) 850 3,251 29
--------------------- --------------------- --------------------- ---------------------
NET GAIN/(LOSS) ON INVESTMENTS . . . . (849) 897 3,196 29
--------------------- --------------------- --------------------- ---------------------
NET INCREASE/(DECREASE) IN NET
ASSETS RESULTING FROM
OPERATIONS . . . . . . . . . . . . . . $ (865) $ 1,129 $ 3,130 $ 27
--------------------- --------------------- --------------------- ---------------------
--------------------- --------------------- --------------------- ---------------------
</TABLE>
See Notes to Financial Statements
A-3
<PAGE>
FINANCIAL STATEMENTS OF THE DISCOVERY ACCOUNTS
STATEMENTS OF CHANGES IN NET ASSETS (UNAUDITED)
<TABLE>
<CAPTION>
SUBACCOUNTS
------------------------------------------------------------------------------------------
PRUDENTIAL SERIES FUND PRUDENTIAL SERIES FUND
MONEY MARKET DIVERSIFIED BOND
------------------------------------------------------------------------------------------
SIX MONTHS JULY 31, 1997* SIX MONTHS JULY 31, 1997*
ENDED TO ENDED TO
JUNE 30, 1998 DECEMBER 31, 1997 JUNE 30, 1998 DECEMBER 31, 1997
--------------------- --------------------- --------------------- ---------------------
<S> <C> <C> <C> <C>
NET INCREASE/DECREASE IN NET ASSETS
RESULTING FROM OPERATIONS . . . $ 1,029 $ 51 $ 1,823 $ 11
--------------------- --------------------- --------------------- ---------------------
ACCUMULATION UNIT TRANSACTIONS
Purchase Payments and
Transfers In [Note 7&8] . . . . 215,719 8,212 148,341 5,474
Withdrawals and
Transfers Out [Notes 7&8] . . . (118,799) -- (610) --
Annual Account Charges Deducted
From Participants' Accumulation
Accounts [Note 4] . . . . . . -- (38) (18) (13)
--------------------- --------------------- --------------------- ---------------------
NET INCREASE IN NET ASSETS
RESULTING FROM ACCUMULATION
UNIT TRANSACTIONS . . . . . . . . 96,935 8,174 147,713 5,461
--------------------- --------------------- --------------------- ---------------------
TOTAL INCREASE/(DECREASE) IN
NET ASSETS. . . . . . . . . . . . 97,964 8,225 149,536 5,472
NET ASSETS
Beginning of Period . . . . . . . 8,225 -- 5,472 --
--------------------- --------------------- --------------------- ---------------------
End of Period . . . . . . . . . . $ 106,189 $ 8,225 $ 155,008 $ 5,472
--------------------- --------------------- --------------------- ---------------------
--------------------- --------------------- --------------------- ---------------------
<CAPTION>
------------------------------------------------------------------------------------------
PRUDENTIAL SERIES FUND PRUDENTIAL SERIES FUND
GOVERNMENT INCOME CONSERVATIVE BALANCE
------------------------------------------------------------------------------------------
SIX MONTHS JULY 31, 1997* SIX MONTHS JULY 31, 1997*
ENDED TO ENDED TO
JUNE 30, 1998 DECEMBER 31, 1997 JUNE 30, 1998 DECEMBER 31, 1997
--------------------- --------------------- --------------------- ---------------------
<S> <C> <C> <C> <C>
NET INCREASE/DECREASE IN NET ASSETS
RESULTING FROM OPERATIONS . . . $ 182 $ 7 $ 2,880 ($70)
--------------------- --------------------- --------------------- ---------------------
ACCUMULATION UNIT TRANSACTIONS
Purchase Payments and
Transfers In [Note 7&8] . . . . 125,632 613 338,595 5,755
Withdrawals and
Transfers Out [Notes 7&8] . . . (5) -- (1,616) --
Annual Account Charges Deducted
From Participants' Accumulation
Accounts [Note 4] . . . . . . (15) -- (11) (23)
--------------------- --------------------- --------------------- ---------------------
NET INCREASE IN NET ASSETS
RESULTING FROM ACCUMULATION
UNIT TRANSACTIONS . . . . . . . . 125,612 613 336,968 5,732
--------------------- --------------------- --------------------- ---------------------
TOTAL INCREASE/(DECREASE) IN
NET ASSETS. . . . . . . . . . . . 125,794 620 339,848 5,662
NET ASSETS
Beginning of Period . . . . . . . 620 -- 5,662 --
--------------------- --------------------- --------------------- ---------------------
End of Period . . . . . . . . . . $ 126,414 $ 620 $ 345,510 $ 5,662
--------------------- --------------------- --------------------- ---------------------
--------------------- --------------------- --------------------- ---------------------
</TABLE>
<TABLE>
<CAPTION>
SUBACCOUNTS
-------------------------------------------------------------------------------------------
PRUDENTIAL SERIES FUND PRUDENTIAL SERIES FUND
FLEXIBLE MANAGED HIGH YIELD BOND
-------------------------------------------------------------------------------------------
SIX MONTHS JULY 31, 1997* SIX MONTHS JULY 31, 1997*
ENDED TO ENDED TO
JUNE 30, 1998 DECEMBER 31, 1997 JUNE 30, 1998 DECEMBER 31, 1997
--------------------- --------------------- --------------------- ---------------------
<S> <C> <C> <C> <C>
NET INCREASE/(DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS. . . . $ 7,505 ($412) $ 1,370 $ 40
--------------------- --------------------- --------------------- ---------------------
ACCUMULATION UNIT TRANSACTIONS
Purchase Payments and
Transfers In [Notes 7&8]. . . . 464,670 43,587 81,417 20,242
Withdrawals and
Transfers Out [Notes 7&8] . . . (16) -- (16) --
Annual Account Charges Deducted
From Participants' Accumulation
Accounts [Note 4]. . . . . . . (108) (118) (13) (18)
--------------------- --------------------- --------------------- ---------------------
NET INCREASE IN NET ASSETS
RESULTING FROM ACCUMULATION
UNIT TRANSACTIONS . . . . . . . 464,546 43,469 81,388 20,224
--------------------- --------------------- --------------------- ---------------------
TOTAL INCREASE/(DECREASE) IN
NET ASSETS. . . . . . . . . . . . 472,051 43,057 82,758 20,264
NET ASSETS
Beginning of Period. . . . . . . 43,057 -- 20,264 --
--------------------- --------------------- --------------------- ---------------------
End of Period. . . . . . . . . . $ 515,108 $43,057 $103,022 $20,264
--------------------- --------------------- --------------------- ---------------------
--------------------- --------------------- --------------------- ---------------------
<CAPTION>
------------------------------------------------------------------------------------------
PRUDENTIAL SERIES FUND PRUDENTIAL SERIES FUND
STOCK INDEX EQUITY INCOME
------------------------------------------------------------------------------------------
SIX MONTHS JULY 31, 1997* SIX MONTHS JULY 31, 1997*
ENDED TO ENDED TO
JUNE 30, 1998 DECEMBER 31, 1997 JUNE 30, 1998 DECEMBER 31, 1997
--------------------- --------------------- --------------------- ---------------------
<S> <C> <C> <C> <C>
NET INCREASE/(DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS. . . . $ 25,374 $ 160 $ 8,777 $ 107
--------------------- --------------------- --------------------- ---------------------
ACCUMULATION UNIT TRANSACTIONS
Purchase Payments and
Transfers In [Notes 7&8]. . . . 960,388 19,364 191,755 12,239
Withdrawals and
Transfers Out [Notes 7&8] . . . (7,990) -- (2,486) --
Annual Account Charges Deducted
From Participants' Accumulation
Accounts [Note 4]. . . . . . . (15) (10) (49) (46)
--------------------- --------------------- --------------------- ---------------------
NET INCREASE IN NET ASSETS
RESULTING FROM ACCUMULATION
UNIT TRANSACTIONS . . . . . . . 952,383 19,354 189,220 12,193
--------------------- --------------------- --------------------- ---------------------
TOTAL INCREASE/(DECREASE) IN
NET ASSETS. . . . . . . . . . . . 977,757 19,514 197,997 12,300
NET ASSETS
Beginning of Period. . . . . . . 19,514 -- 12,300 --
--------------------- --------------------- --------------------- ---------------------
End of Period. . . . . . . . . . $ 997,271 $ 19,514 $ 210,297 $ 12,300
--------------------- --------------------- --------------------- ---------------------
--------------------- --------------------- --------------------- ---------------------
</TABLE>
*Commencement of Operations
SEE NOTES TO FINANCIAL STATEMENTS
A-4
<PAGE>
FINANCIAL STATEMENTS OF THE DISCOVERY ACCOUNTS
STATEMENTS OF CHANGES IN NET ASSETS (UNAUDITED)
<TABLE>
<CAPTION>
SUBACCOUNTS
------------------------------------------------------------------------------------------
PRUDENTIAL SERIES FUND PRUDENTIAL SERIES FUND
EQUITY JENNISON
------------------------------------------------------------------------------------------
SIX MONTHS JULY 31, 1997* SIX MONTHS JULY 31, 1997*
ENDED TO ENDED TO
JUNE 30, 1998 DECEMBER 31, 1997 JUNE 30, 1998 DECEMBER 31, 1997
--------------------- --------------------- --------------------- ---------------------
<S> <C> <C> <C> <C>
NET INCREASE/DECREASE IN NET ASSETS
RESULTING FROM OPERATIONS . . . $ 12,420 ($29) $ 18,956 ($435)
--------------------- --------------------- --------------------- ---------------------
ACCUMULATION UNIT TRANSACTIONS
Purchase Payments and
Transfers In [Notes 7&8] . . . 1,971,089 33,778 217,895 35,484
Withdrawals and
Transfers Out [Notes 7&8] . . . (64,927) (4,287) (99) (4,225)
Annual Account Charges Deducted
From Participants' Accumulation
Accounts [Note 4] . . . . . . . (7) (35) (4) (19)
--------------------- --------------------- --------------------- ---------------------
NET INCREASE/DECREASE IN NET ASSETS
RESULTING FROM ACCUMULATION
UNIT TRANSACTIONS . . . . . . . 1,906,155 29,456 217,792 31,240
--------------------- --------------------- --------------------- ---------------------
TOTAL INCREASE/(DECREASE) IN
NET ASSETS . . . . . . . . . . 1,918,575 29,427 236,748 30,805
NET ASSETS
Beginning of Period . . . . . . 29,427 -- 30,805 --
--------------------- --------------------- --------------------- ---------------------
End of Period . . . . . . . . $ 1,948,002 $ 29,427 $ 267,553 $ 30,805
--------------------- --------------------- --------------------- ---------------------
--------------------- --------------------- --------------------- ---------------------
<CAPTION>
------------------------------------------------------------------------------------------
PRUDENTIAL SERIES FUND AIM V.I.
GLOBAL GROWTH AND INCOME
------------------------------------------------------------------------------------------
SIX MONTHS JULY 31, 1997* SIX MONTHS JULY 31, 1997*
ENDED TO ENDED TO
JUNE 30, 1998 DECEMBER 31, 1997 JUNE 30, 1998 DECEMBER 31, 1997
--------------------- --------------------- --------------------- ---------------------
<S> <C> <C> <C> <C>
NET INCREASE/DECREASE IN NET ASSETS
RESULTING FROM OPERATIONS . . . $ 5,945 ($141) $ 4,811 ($57)
--------------------- --------------------- --------------------- ---------------------
ACCUMULATION UNIT TRANSACTIONS
Purchase Payments and
Transfers In [Notes 7&8] . . . 295,733 17,037 29,414 11,089
Withdrawals and
Transfers Out [Notes 7&8] . . . -- (2,785) (607) --
Annual Account Charges Deducted
From Participants' Accumulation
Accounts [Note 4] . . . . . . . -- -- (5) (5)
--------------------- --------------------- --------------------- ---------------------
NET INCREASE/DECREASE IN NET ASSETS
RESULTING FROM ACCUMULATION
UNIT TRANSACTIONS . . . . . . . 295,733 14,252 28,802 11,084
--------------------- --------------------- --------------------- ---------------------
TOTAL INCREASE/(DECREASE) IN
NET ASSETS . . . . . . . . . . 301,678 14,111 33,613 11,027
NET ASSETS
Beginning of Period . . . . . . 14,111 -- 11,027 --
--------------------- --------------------- --------------------- ---------------------
End of Period . . . . . . . . $ 315,789 $ 14,111 $ 44,640 $ 11,027
--------------------- --------------------- --------------------- ---------------------
--------------------- --------------------- --------------------- ---------------------
</TABLE>
<TABLE>
<CAPTION>
SUBACCOUNTS
------------------------------------------------------------------------------------------
AIM V.I. JANUS ASPEN
VALUE GROWTH
------------------------------------------------------------------------------------------
SIX MONTHS JULY 31, 1997* SIX MONTHS JULY 31, 1997*
ENDED TO ENDED TO
JUNE 30, 1998 DECEMBER 31, 1997 JUNE 30, 1998 DECEMBER 31, 1997
--------------------- --------------------- --------------------- ---------------------
<S> <C> <C> <C> <C>
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS . . . $ 7,860 ($424) $ 5,235 ($26)
--------------------- --------------------- --------------------- ---------------------
ACCUMULATION UNIT TRANSACTIONS
Purchase Payments and
Transfers In [Notes 7&8]. . . . 73,872 17,701 58,014 4,652
Withdrawals and
Transfers Out [Notes 7&8] . . . (642) -- (74) --
Annual Account Charges Deducted
From Participants' Accumulation
Accounts [Note 4]. . . . . . . -- -- -- (8)
--------------------- --------------------- --------------------- ---------------------
NET INCREASE IN NET ASSETS
RESULTING FROM ACCUMULATION
UNIT TRANSACTIONS. . . . . . . . 73,230 17,701 57,940 4,644
--------------------- --------------------- --------------------- ---------------------
TOTAL INCREASE/(DECREASE) IN
NET ASSETS . . . . . . . . . . . 81,090 17,277 63,175 4,618
NET ASSETS
Beginning of Period . . . . . . 17,277 -- 4,618 --
--------------------- --------------------- --------------------- ---------------------
End of Period . . . . . . . . . $ 98,367 $ 17,277 $ 67,793 $ 4,618
--------------------- --------------------- --------------------- ---------------------
--------------------- --------------------- --------------------- ---------------------
<CAPTION>
------------------------------------------------------------------------------------------
JANUS ASPEN MFS
INTERNATIONAL GROWTH EMERGING GROWTH
------------------------------------------------------------------------------------------
SIX MONTHS JULY 31, 1997* SIX MONTHS JULY 31, 1997*
ENDED TO ENDED TO
JUNE 30, 1998 DECEMBER 31, 1997 JUNE 30, 1998 DECEMBER 31, 1997
--------------------- --------------------- --------------------- ---------------------
<S> <C> <C> <C> <C>
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS . . . $ 7,728 $ 99 $ 11,185 ($21)
--------------------- --------------------- --------------------- ---------------------
ACCUMULATION UNIT TRANSACTIONS
Purchase Payments and
Transfers In [Notes 7&8]. . . . 57,064 8,806 142,471 4,719
Withdrawals and
Transfers Out [Notes 7&8] . . . (18) -- (704) --
Annual Account Charges Deducted
From Participants' Accumulation
Accounts [Note 4]. . . . . . . -- -- -- --
--------------------- --------------------- --------------------- ---------------------
NET INCREASE IN NET ASSETS
RESULTING FROM ACCUMULATION
UNIT TRANSACTIONS. . . . . . . . 57,046 8,806 141,767 4,719
--------------------- --------------------- --------------------- ---------------------
TOTAL INCREASE/(DECREASE) IN
NET ASSETS . . . . . . . . . . . 64,774 8,905 152,952 4,698
NET ASSETS
Beginning of Period . . . . . . 8,905 -- 4,698 --
--------------------- --------------------- --------------------- ---------------------
End of Period . . . . . . . . . $ 73,679 $ 8,905 $ 157,650 $ 4,698
--------------------- --------------------- --------------------- ---------------------
--------------------- --------------------- --------------------- ---------------------
</TABLE>
*Commencement of Operations
SEE NOTES TO FINANCIAL STATEMENTS
A-5
<PAGE>
FINANCIAL STATEMENTS OF THE DISCOVERY ACCOUNTS
STATEMENTS OF CHANGES IN NET ASSETS (UNAUDITED)
<TABLE>
<CAPTION>
SUBACCOUNTS
------------------------------------------------------------------------------------------
MFS OCC ACCUMULATION
RESEARCH TRUST MANAGED
------------------------------------------------------------------------------------------
SIX MONTHS JULY 31, 1997* SIX MONTHS JULY 31, 1997*
ENDED TO ENDED TO
JUNE 30, 1998 DECEMBER 31, 1997 JUNE 30, 1998 DECEMBER 31, 1997
--------------------- --------------------- --------------------- ---------------------
<S> <C> <C> <C> <C>
NET INCREASE/DECREASE IN NET ASSETS
RESULTING FROM OPERATIONS . . . $ 2,489 ($142) $ 5,301 ($57)
--------------------- --------------------- --------------------- ---------------------
ACCUMULATION UNIT TRANSACTIONS
Purchase Payments and
Transfers In [Notes 7&8]. . . . 37,822 7,711 47,917 21,752
Withdrawals and
Transfers Out [Note 7&8] . . . (125) -- (177) --
Annual Account Charges Deducted
From Participants' Accumulation
Accounts [Note 4]. . . . . . . -- (11) (23) (23)
--------------------- --------------------- --------------------- ---------------------
NET INCREASE IN NET ASSETS
RESULTING FROM ACCUMULATION
UNIT TRANSACTIONS. . . . . . . . 37,697 7,700 47,717 21,729
--------------------- --------------------- --------------------- ---------------------
TOTAL INCREASE/(DECREASE) IN
NET ASSETS . . . . . . . . . . . 40,186 7,558 53,018 21,672
NET ASSETS
Beginning of Period. . . . . . . 7,558 -- 21,672 --
--------------------- --------------------- --------------------- ---------------------
End of Period. . . . . . . . . . $ 47,744 $ 7,558 $ 74,690 $ 21,672
--------------------- --------------------- --------------------- ---------------------
--------------------- --------------------- --------------------- ---------------------
<CAPTION>
------------------------------------------------------------------------------------------
OCC ACCUMULATION T. ROWE PRICE
TRUST SMALL CAP EQUITY INCOME
------------------------------------------------------------------------------------------
SIX MONTHS JULY 31, 1997* SIX MONTHS JULY 31, 1997*
ENDED TO ENDED TO
JUNE 30, 1998 DECEMBER 31, 1997 JUNE 30, 1998 DECEMBER 31, 1997
--------------------- --------------------- --------------------- ---------------------
<S> <C> <C> <C> <C>
NET INCREASE/DECREASE IN NET ASSETS
RESULTING FROM OPERATIONS . . . ($865) $ 368 $ 1,129 $ 572
--------------------- --------------------- --------------------- ---------------------
ACCUMULATION UNIT TRANSACTIONS
Purchase Payments and
Transfers In [Notes 7&8]. . . . 30,799 30,800 27,580 17,463
Withdrawals and
Transfers Out [Note 7&8] . . . -- (2,796) (604) --
Annual Account Charges Deducted
From Participants' Accumulation
Accounts [Note 4]. . . . . . . -- -- -- --
--------------------- --------------------- --------------------- ---------------------
NET INCREASE IN NET ASSETS
RESULTING FROM ACCUMULATION
UNIT TRANSACTIONS. . . . . . . . 30,799 28,004 26,976 17,463
--------------------- --------------------- --------------------- ---------------------
TOTAL INCREASE/(DECREASE) IN
NET ASSETS . . . . . . . . . . . 29,934 28,372 28,105 18,035
NET ASSETS
Beginning of Period. . . . . . . 28,372 -- 18,035 --
--------------------- --------------------- --------------------- ---------------------
End of Period. . . . . . . . . . $ 58,306 $ 28,372 $ 46,140 $ 18,035
--------------------- --------------------- --------------------- ---------------------
--------------------- --------------------- --------------------- ---------------------
</TABLE>
<TABLE>
<CAPTION>
SUBACCOUNTS
------------------------------------------------------------------------------------------
T. Rowe Price Warburg Pincus
International Stock Post-Venture Capital
------------------------------------------------------------------------------------------
SIX MONTHS JULY 31, 1997* SIX MONTHS JULY 31, 1997*
ENDED TO ENDED TO
JUNE 30, 1998 DECEMBER 31, 1997 JUNE 30, 1998 DECEMBER 31, 1997
--------------------- --------------------- --------------------- ---------------------
<S> <C> <C> <C> <C>
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS . . . $ 3,130 $ 3 $ 27 $ 2
--------------------- --------------------- --------------------- ---------------------
ACCUMULATION UNIT TRANSACTIONS
Purchase Payments and
Transfers In [Notes 7&8]. . . . 20,345 1,928 1,407 47
Withdrawals and
Transfers Out [Notes 7&8] . . . (91) -- -- --
Annual Account Charges Deducted
From Participants' Accumulation
Accounts [Note 4] . . . . . . . -- -- -- --
--------------------- --------------------- --------------------- ---------------------
NET INCREASE IN NET ASSETS
RESULTING FROM ACCUMULATION
UNIT TRANSACTIONS. . . . . . . . 20,254 1,928 1,407 47
--------------------- --------------------- --------------------- ---------------------
TOTAL INCREASE/(DECREASE) IN
NET ASSETS . . . . . . . . . . . 23,384 1,931 1,434 49
NET ASSETS
Beginning of Period. . . . . . . 1,931 -- 49 --
--------------------- --------------------- --------------------- ---------------------
End of Period. . . . . . . . . . $ 25,315 $ 1,931 $ 1,483 $ 49
--------------------- --------------------- --------------------- ---------------------
--------------------- --------------------- --------------------- ---------------------
</TABLE>
*Commencement of Operations
SEE NOTES TO FINANCIAL STATEMENTS
A-6
<PAGE>
NOTES TO FINANCIAL STATEMENTS OF THE DISCOVERY ACCOUNT (UNAUDITED)
- -------------------------------------------------------------------------------
NOTE 1: GENERAL
The Prudential Discovery Select Group Variable Contract Account (the
"Discovery Account") was established on February 11, 1997 by The
Prudential Insurance Company of America (Prudential or Company) and
commenced operations on July 31, 1997 under the laws of the State of
New Jersey and meets the definition of a "separate account" under
federal securities laws. 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.
The Discovery Account is used 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 Discovery Account is comprised of 22 Subaccounts. The assets of
each Subaccount are invested in a corresponding Fund listed as
follows:
<TABLE>
<S> <C>
THE PRUDENTIAL SERIES FUND, INC. MFS VARIABLE INSURANCE TRUST
Money Market Portfolio Emerging Growth Series
Diversified Bond Portfolio Research Series
Government Income Portfolio
Conservative Balanced Portfolio OCC ACCUMULATION TRUST
Flexible Managed Portfolio Managed Portfolio
High Yield Bond Portfolio Small Cap Portfolio
Stock Index Portfolio
Equity Income Portfolio T. ROWE PRICE
Equity Portfolio T. Rowe Price Equity Series, Inc.,
Prudential Jennison Portfolio Equity Income Portfolio
Global Portfolio T. Rowe Price International Series, Inc.
International Stock Portfolio
AIM VARIABLE INSURANCE
AIM V.I. Growth and Income Fund WARBURG PINCUS TRUST
AIM V.I. Value Fund Post-Venture Capital Portfolio
JANUS ASPEN SERIES
Growth Portfolio
International Growth Portfolio
</TABLE>
All contractual and other obligations arising under contracts
participating in the Discovery Account are general corporate
obligations of Prudential, although Participants' payments from the
Account will depend upon the investment experience of the Account.
SIGNIFICANT ACCOUNTING POLICIES
Investments--The investments in shares of the Funds are stated at the
net asset value of the respective portfolio.
Security Transactions--Realized gains and losses on security
transactions are reported on an average cost basis. Purchase and sale
transactions are recorded as of the trade date of the security being
purchased or sold.
Distributions Received--Dividend and capital gain distributions
received are invested in additional shares of the Funds and are
recorded on ex-dividend date.
A-7
<PAGE>
NOTES TO FINANCIAL STATEMENTS OF THE DISCOVERY ACCOUNT (UNAUDITED)
- -------------------------------------------------------------------------------
NOTE 2: INVESTMENT INFORMATION
The number of shares of each portfolio of the Fund, the Net Asset
Value (NAV) per share for each portfolio held by the Subaccounts of
the Discovery Account, and the aggregate cost of investments in such
shares as of June 30, 1998 were as follows:
<TABLE>
<CAPTION>
PRUDENTIAL SERIES PRUDENTIAL SERIES PRUDENTIAL SERIES PRUDENTIAL SERIES PRUDENTIAL SERIES
FUND FUND FUND FUND FUND
MONEY MARKET DIVERSIFIED BOND GOVERNMENT INCOME CONSERVATIVE BALANCED FLEXIBLE MANAGED
----------------- ----------------- ----------------- --------------------- -----------------
<S> <C> <C> <C> <C> <C>
Number of Shares 10,596 10,611 10,710 20,062 22,886
------------------------------------------------------------------------------------------------------
NAV per Share $10 $11.29 $11.80 $15.87 $18.53
------------------------------------------------------------------------------------------------------
Cost at 6-30-98 $105,953 $118,496 $126,156 $315,883 $442,296
------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
PRUDENTIAL SERIES PRUDENTIAL SERIES PRUDENTIAL SERIES PRUDENTIAL SERIES PRUDENTIAL SERIES
FUND FUND FUND FUND FUND
HIGH YIELD BOND STOCK INDEX EQUITY INCOME EQUITY JENNISON
----------------- ----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C> <C>
Number of Shares 12,277 22,439 8,724 48,774 12,507
------------------------------------------------------------------------------------------------------
NAV per Share $8.36 $35.31 $24.08 34.65 $21.28
------------------------------------------------------------------------------------------------------
Cost at 6-30-98 $102,673 $767,154 $203,557 $1,676,735 $249,030
------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
PRUDENTIAL SERIES AIM V.I. JANUS ASPEN MFS
FUND GROWTH AND AIM V.I. JANUS ASPEN INTERNATIONAL EMERGING
GLOBAL INCOME VALUE GROWTH GROWTH GROWTH
----------------- ---------- -------- ----------- ------------- --------
<S> <C> <C> <C> <C> <C> <C>
Number of Shares 12,764 2,090 3,966 3,257 3,301 8,012
--------------------------------------------------------------------------------------------------------
NAV per Share $21.30 $ $ $20.66 $22.19 $19.45
--------------------------------------------------------------------------------------------------------
Cost at 6-30-98 $266,568 $40,321 $90,818 $66,135 $66,721 $145,101
--------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
OCC ACCUMULATION OCC ACCUMULATION T. ROWE T. ROWE WARBURG PINCUS
MFS TRUST TRUST PRICE PRICE POST-VENTURE
RESEARCH MANAGED SMALL CAP EQUITY INCOME INTERNATIONAL STOCK CAPITAL
-------- ---------------- ---------------- ------------- ------------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Number of Shares 2,589 1,662 2,310 2,314 1,797 113
--------------------------------------------------------------------------------------------------------
NAV per Share $18.35 $45.37 $25.14 $19.53 $14.49 $12.52
--------------------------------------------------------------------------------------------------------
Cost at 6-30-98 $45,628 $71,646 $59,500 $44,334 $22,814 $1,378
--------------------------------------------------------------------------------------------------------
</TABLE>
NOTE 3: EXPENSES
A daily charge at an effective annual rate of 0.85% of the average
participant account value of each Subaccount of the Discovery Account
is paid to Prudential for administrative expenses not provided by the
annual account charge. A daily charge at an effective annual rate of
0.15% of the average participant account value of each Subaccount of
the Discovery Account is paid to Prudential for assuming mortality and
expense risks under the Contracts.
NOTE 4: ANNUAL ACCOUNT CHARGE
An additional administrative charge of up to $15, the annual account
charge, is paid to Prudential on or about the last day of 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. The charge will first be made
against the Participant Account Value under the guaranteed interest
account (if available). If the Participant is not invested in the
guaranteed interest account, or if the Participant does not have
enough money in such an option to pay the charge, the charge will then
be made against any one or of more the Subaccounts in which the
Participant is invested.
NOTE 5: WITHDRAWAL CHARGE
A withdrawal charge is imposed upon the withdrawal of certain purchase
payments to compensate Prudential for sales and other marketing
expenses. The maximum withdrawal charge is 5% on contributions
withdrawn during the first year of participation. The withdrawal
charge declines by 1% in each subsequent year until it is 0% after the
fifth year. No withdrawal charge is imposed upon contributions
withdrawn for any reason after five years of participation in a
Program. In addition, no withdrawal charge is imposed upon
contributions withdrawn to purchase an annuity under a
A-8
<PAGE>
NOTES TO FINANCIAL STATEMENTS OF THE DISCOVERY ACCOUNT (UNAUDITED)
- --------------------------------------------------------------------------------
Contract, 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.
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
Contract-holder.
NOTE 6: TAXES
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. As a result, the unit value of the
Subaccounts has not been reduced by federal income taxes.
NOTE 7: UNIT TRANSACTIONS
The number of units issued and redeemed during the six months ended
June 30, 1998 and the period 7/31/97 through December 31, 1997 was as
follows:
1998
<TABLE>
<CAPTION>
PRUDENTIAL PRUDENTIAL PRUDENTIAL PRUDENTIAL PRUDENTIAL PRUDENTIAL PRUDENTIAL
SERIES FUND SERIES FUND SERIES FUND SERIES FUND SERIES FUND SERIES FUND SERIES FUND
MONEY DIVERSIFIED GOVERNMENT CONSERVATIVE FLEXIBLE HIGH YIELD STOCK
MARKET BOND INCOME BALANCED MANAGED BOND INDEX
----------- ----------- ----------- ------------ ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Units issued 21,144 14,324 11,836 31,626 42,995 7,539 81,661
-----------------------------------------------------------------------------------------------------
Units redeemed 11,651 60 2 152 1 1 673
-----------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
PRUDENTIAL PRUDENTIAL PRUDENTIAL PRUDENTIAL AIM V.I.
SERIES FUND SERIES FUND SERIES FUND SERIES FUND GROWTH AND AIM V.I. JANUS ASPEN
EQUITY INCOME EQUITY JENNISON GLOBAL INCOME VALUE GROWTH
------------- ----------- ----------- ----------- ---------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Units issued 17,401 174,893 19,458 28,729 2,941 6,757 5,301
------------------------------------------------------------------------------------------------------
Units redeemed 226 5,878 8 589 57 58 6
------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
JANUS ASPEN MFS OCC ACCUMULATION
INTERNATIONAL EMERGING MFS TRUST
GROWTH GROWTH RESEARCH MANAGED
------------- -------- -------- ----------------
<S> <C> <C> <C> <C>
Units issued 5,475 12,680 3,405 4,550
--------------------------------------------------------------------------
Units redeemed 2 62 11 16
--------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
OCC ACCUMULATION T. ROWE T. ROWE WARBURG PINCUS
TRUST PRICE PRICE POST-VENTURE
SMALL CAP EQUITY INCOME INTERNATIONAL STOCK CAPITAL
---------------- -------------- ------------------- --------------
<S> <C> <C> <C> <C>
Units issued 3,019 2,489 2,299 125
--------------------------------------------------------------------------
Units redeemed -- 54 9
--------------------------------------------------------------------------
</TABLE>
1997
<TABLE>
<CAPTION>
PRUDENTIAL PRUDENTIAL PRUDENTIAL PRUDENTIAL PRUDENTIAL PRUDENTIAL PRUDENTIAL
SERIES FUND SERIES FUND SERIES FUND SERIES FUND SERIES FUND SERIES FUND SERIES FUND
MONEY DIVERSIFIED GOVERNMENT CONSERVATIVE FLEXIBLE HIGH YIELD STOCK
MARKET BOND INCOME BALANCED MANAGED BOND INDEX
----------- ------------ ------------ ------------ ------------ ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Units issued 819 543 60 565 4,297 1,954 1,891
------------------------------------------------------------------------------------------------------
Units redeemed 4 1 -- 2 11 2 1
------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
PRUDENTIAL PRUDENTIAL PRUDENTIAL PRUDENTIAL AIM V.I.
SERIES FUND SERIES FUND SERIES FUND SERIES FUND GROWTH AND AIM V.I. JANUS ASPEN
EQUITY INCOME EQUITY JENNISON GLOBAL INCOME VALUE GROWTH
-------------- ------------ ------------ ------------ ---------- -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Units issued 1,175 3,332 3,548 1,890 1,123 1,738 462
------------------------------------------------------------------------------------------------------
Units redeemed 4 425 437 314 1 -- --
------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
JANUS ASPEN MFS OCC ACCUMULATION
INTERNATIONAL EMERGING MFS TRUST
GROWTH GROWTH RESEARCH MANAGED
-------------- -------- -------- -----------------
<S> <C> <C> <C> <C>
Units issued 942 470 780 2,137
--------------------------------------------------------------------------
Units redeemed -- -- 1 2
--------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
OCC ACCUMULATION T. ROWE T. ROWE WARBURG PINCUS
TRUST PRICE PRICE POST-VENTURE
SMALL CAP EQUITY INCOME INTERNATIONAL STOCK CAPITAL
---------------- -------------- -------------------- --------------
<S> <C> <C> <C> <C>
Units issued 3,058 1,704 216 5
--------------------------------------------------------------------------
Units redeemed 277 -- -- --
--------------------------------------------------------------------------
</TABLE>
A-9
<PAGE>
NOTES TO FINANCIAL STATEMENTS OF THE DISCOVERY ACCOUNT (UNAUDITED)
- -------------------------------------------------------------------------------
NOTE 8: PARTICIPANT LOANS
The minimum loan amount is as specified in the Contract, or if not
specified, as determined by Prudential. The maximum loan amount is the
lesser of (a) $50,000, reduced by the highest outstanding balance of
loans during the one year period immediately preceding the date of the
loan or (b) 50% of the value of the Participant's vested interest
under a Contract. In the loan application, the Contractholder (or in
certain cases, the Participant) designates the Subaccount(s) from
which the loan amount is deducted. To repay the loan, the Participant
makes periodic payments of interest plus a portion of the principal.
Those payments are invested in the Subaccounts chosen by the
Participant. The Participant may specify the Subaccounts from which he
may borrow and into which repayments may be invested. If the
Participant does not specify the Subaccounts from which the loan
amount is deducted, the loan amount will be deducted from the
participant account value in 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 also charges up to $25 per year as a loan
maintenance fee for record keeping 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.
The 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, of 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. For the six months ended June 30, 1998 and
the period ended December 31, 1997 the amount of participant loans
that was withdrawn from the Subaccounts is follows:
1998
<TABLE>
<CAPTION>
PRUDENTIAL PRUDENTIAL PRUDENTIAL PRUDENTIAL PRUDENTIAL PRUDENTIAL PRUDENTIAL
SERIES FUND SERIES FUND SERIES FUND SERIES FUND SERIES FUND SERIES FUND SERIES FUND
MONEY DIVERSIFIED GOVERNMENT CONSERVATIVE FLEXIBLE HIGH YIELD STOCK
MARKET BOND INCOME BALANCED MANAGED BOND INDEX
----------- ------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Loans -- -- -- -- -- -- --
------------------------------------------------------------------------------------------------------
Repayments -- -- -- -- -- -- --
------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
PRUDENTIAL PRUDENTIAL PRUDENTIAL PRUDENTIAL AIM V.I.
SERIES FUND SERIES FUND SERIES FUND SERIES FUND GROWTH AND AIM V.I. JANUS ASPEN
EQUITY INCOME EQUITY JENNISON GLOBAL INCOME VALUE GROWTH
-------------- ----------- ------------ ------------ ---------- -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Loans -- -- -- -- -- -- --
------------------------------------------------------------------------------------------------------
Repayments -- 800 800 534 -- -- --
------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
JANUS ASPEN MFS OCC ACCUMULATION
INTERNATIONAL EMERGING MFS TRUST
GROWTH GROWTH RESEARCH MANAGED
-------------- -------- -------- -----------------
<S> <C> <C> <C> <C>
Loans -- -- -- --
----------------------------------------------------------------------------
Repayments -- -- -- --
----------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
OCC ACCUMULATION T. ROWE T. ROWE WARBURG PINCUS
TRUST PRICE PRICE POST-VENTURE
SMALL CAP EQUITY INCOME INTERNATIONAL STOCK CAPITAL
---------------- -------------- -------------------- ---------------
<S> <C> <C> <C> <C>
Loans -- -- -- --
----------------------------------------------------------------------------
Repayments 534 -- -- --
----------------------------------------------------------------------------
</TABLE>
A-10
<PAGE>
NOTES TO FINANCIAL STATEMENTS OF THE DISCOVERY ACCOUNT (UNAUDITED)
- -------------------------------------------------------------------------------
1997
<TABLE>
<CAPTION>
PRUDENTIAL PRUDENTIAL PRUDENTIAL PRUDENTIAL PRUDENTIAL PRUDENTIAL PRUDENTIAL
SERIES FUND SERIES FUND SERIES FUND SERIES FUND SERIES FUND SERIES FUND SERIES FUND
MONEY DIVERSIFIED GOVERNMENT CONSERVATIVE FLEXIBLE HIGH YIELD STOCK
MARKET BOND INCOME BALANCED MANAGED BOND INDEX
------------ ------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Loans -- -- -- -- -- -- --
Repayments -- -- -- -- -- -- --
</TABLE>
<TABLE>
<CAPTION>
PRUDENTIAL PRUDENTIAL PRUDENTIAL PRUDENTIAL AIM V.I.
SERIES FUND SERIES FUND SERIES FUND SERIES FUND GROWTH AND AIM V.I. JANUS ASPEN
EQUITY INCOME EQUITY JENNISON GLOBAL INCOME VALUE GROWTH
-------------- ------------ ------------ ------------ ---------- -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Loans -- 4,171 4,225 2,785 -- -- --
Repayments -- -- -- -- -- -- --
</TABLE>
<TABLE>
<CAPTION>
JANUS ASPEN MFS OCC ACCUMULATION
INTERNATIONAL EMERGING MFS TRUST
GROWTH GROWTH RESEARCH MANAGED
-------------- -------- -------- -----------------
<S> <C> <C> <C> <C>
Loans -- -- -- --
Repayments -- -- -- --
</TABLE>
<TABLE>
<CAPTION>
OCC ACCUMULATION T. ROWE T. ROWE WARBURG PINCUS
TRUST PRICE PRICE POST-VENTURE
SMALL CAP EQUITY INCOME INTERNATIONAL STOCK CAPITAL
---------------- -------------- -------------------- ---------------
<S> <C> <C> <C> <C>
Loans 2,796 -- -- --
Repayments -- -- -- --
</TABLE>
NOTE 10: CONDENSED FINANCIAL INFORMATION
ACCUMULATION UNIT VALUES FOR DISCOVERY ACCOUNT
<TABLE>
<CAPTION>
PRUDENTIAL SERIES FUND
MONEY MARKET 01/01/98 07/31/97*
TO TO
06/30/98 12/31/97
-------- ---------
<S> <C> <C>
Beginning of period (rounded) $10.08 $10.00
End of period (rounded) $10.30 $10.08
Accumulation Units
Outstanding at end of period 10,308 815
PRUDENTIAL SERIES FUND
DIVERSIFIED BOND 01/01/98 07/31/97*
TO TO
06/30/98 12/31/97
-------- ---------
Beginning of period (rounded) $10.07 $10.00
End of period (rounded) $10.47 $10.07
Accumulation Units
Outstanding at end of period 14,806 542
PRUDENTIAL SERIES FUND
GOVERNMENT INCOME 01/01/98 07/31/97*
TO TO
06/30/98 12/31/97
-------- ---------
Beginning of period (rounded) $10.27 $10.00
End of period (rounded) $10.63 $10.27
Accumulation Units
Outstanding at end of period 11,894 60
PRUDENTIAL SERIES FUND
CONSERVATIVE BALANCED 01/01/98 07/31/97*
TO TO
06/30/98 12/31/97
-------- ---------
Beginning of period (rounded) $10.03 $10.00
End of period (rounded) $10.78 $10.03
Accumulation Units
Outstanding at end of period 32,037 563
PRUDENTIAL SERIES FUND
FLEXIBLE MANAGED 01/01/98 07/31/97*
TO TO
06/30/98 12/31/97
-------- ---------
Beginning of period (rounded) $ 9.99 $10.00
End of period (rounded) $10.89 $9.99
Accumulation Units
Outstanding at end of period 47,281 4,286
PRUDENTIAL SERIES FUND
HIGH YIELD BOND 01/01/98 07/31/97*
TO TO
06/30/98 12/31/97
-------- ---------
Beginning of period (rounded) $10.37 $10.00
End of period (rounded) $10.86 $10.37
Accumulation Units
Outstanding at end of period 9,490 1,952
PRUDENTIAL SERIES FUND
STOCK INDEX 01/01/98 07/31/97*
TO TO
06/30/98 12/31/97
-------- ---------
Beginning of period (rounded) $10.29 $10.00
End of period (rounded) $12.03 $10.29
Accumulation Units
Outstanding at end of period 82,878 1,890
PRUDENTIAL SERIES FUND
EQUITY INCOME 01/01/98 07/31/97*
TO TO
06/30/98 12/31/97
-------- ---------
Beginning of period (rounded) $10.48 $10.00
End of period (rounded) $11.46 $10.48
Accumulation Units
Outstanding at end of period 13,346 1,171
</TABLE>
* Commencement of Operations
A-11
<PAGE>
NOTES TO FINANCIAL STATEMENTS OF DISCOVERY ACCOUNT (UNAUDITED)
- --------------------------------------------------------------------------------
NOTE 10 (CONT'D): CONDENSED FINANCIAL INFORMATION
ACCUMULATION UNIT VALUES FOR DISCOVERY ACCOUNT
<TABLE>
<CAPTION>
PRUDENTIAL SERIES FUND
EQUITY 01/01/98 07/31/97*
TO TO
06/30/98 12/31/97
-------- ---------
<S> <C> <C>
Beginning of period (rounded) $10.12 $10.00
End of period (rounded) $11.33 $10.12
Accumulation Units
Outstanding at end of period 171,922 2,907
PRUDENTIAL SERIES FUND
JENNISON 01/01/98 07/31/97*
TO TO
06/30/98 12/31/97
-------- ---------
Beginning of period (rounded) $ 9.87 $10.00
End of period (rounded) $11.86 $ 9.87
Accumulation Units
Outstanding at end of period 22,560 3,111
PRUDENTIAL SERIES FUND
GLOBAL 01/01/98 07/31/97*
TO TO
06/30/98 12/31/97
-------- ---------
Beginning of period (rounded) $ 8.95 $10.00
End of period (rounded) $10.63 $ 8.95
Accumulation Units
Outstanding at end of period 29,716 1,576
AIM V.I.
GROWTH AND INCOME 01/01/98 07/31/97*
TO TO
06/30/98 12/31/97
-------- ---------
Beginning of period (rounded) $ 9.79 $10.00
End of period (rounded) $11.14 $ 9.79
Accumulation Units
Outstanding at end of period 4,006 1,122
AIM V.I.
VALUE 01/01/98 07/31/97*
TO TO
06/30/98 12/31/97
-------- ---------
Beginning of period (rounded) $ 9.89 $10.00
End of period (rounded) $11.66 $ 9.89
Accumulation Units
Outstanding at end of period 8,436 1,738
JANUS ASPEN GROWTH
01/01/98 07/31/97*
TO TO
06/30/98 12/31/97
-------- ---------
Beginning of period (rounded) $ 9.92 $10.00
End of period (rounded) $11.78 $ 9.92
Accumulation Units
Outstanding at end of period 5,756 462
JANUS ASPEN
INTERNATIONAL GROWTH 01/01/98 07/31/97*
TO TO
06/30/98 12/31/97
-------- ---------
Beginning of period (rounded) $ 9.44 $10.00
End of period (rounded) $11.49 $ 9.44
Accumulation Units
Outstanding at end of period 6,414 942
MFS
EMERGING GROWTH 01/01/98 07/31/97*
TO TO
06/30/98 12/31/97
-------- ---------
Beginning of period (rounded) $ 9.95 $10.00
End of period (rounded) $12.04 $ 9.95
Accumulation Units
Outstanding at end of period 13,089 470
MFS
RESEARCH 01/01/98 07/31/97*
TO TO
06/30/98 12/31/97
-------- ---------
Beginning of period (rounded) $ 9.67 $10.00
End of period (rounded) $11.44 $ 9.67
Accumulation Units
Outstanding at end of period 4,173 779
OCC ACCUMULATION TRUST
MANAGED 01/01/98 07/31/97*
TO TO
06/30/98 12/31/97
-------- ---------
Beginning of period (rounded) $10.13 $10.00
End of period (rounded) $11.20 $10.13
Accumulation Units
Outstanding at end of period 6,669 2,135
OCC ACCUMULATION TRUST
SMALL CAP 01/01/98 07/31/97*
TO TO
06/30/98 12/31/97
-------- ---------
Beginning of period (rounded) $10.20 $10.00
End of period (rounded) $10.05 $10.20
Accumulation Units
Outstanding at end of period 5,799 2,781
T. ROWE PRICE
EQUITY INCOME 01/01/98 07/31/97*
TO TO
06/30/98 12/31/97
-------- ---------
Beginning of period (rounded) $10.54 $10.00
End of period (rounded) $11.15 $10.54
Accumulation Units
Outstanding at end of period 4,139 1,704
T. ROWE PRICE
INTERNATIONAL STOCK 01/01/98 07/31/97*
TO TO
06/30/98 12/31/97
-------- ---------
Beginning of period (rounded) $ 8.92 $10.00
End of period (rounded) $10.10 $ 8.92
Accumulation Units
Outstanding at end of period 2,507 216
WARBURG PINCUS
POST-VENTURE CAPITAL 01/01/98 07/31/97*
TO TO
06/30/98 12/31/97
-------- ---------
Beginning of period (rounded) $10.08 $10.00
End of period (rounded) $11.37 $10.08
Accumulation Units
Outstanding at end of period 130 5
</TABLE>
* Commencement of Operations
A-12
<PAGE>
FINANCIAL STATEMENTS OF THE DISCOVERY ACCOUNTS
STATEMENTS OF NET ASSETS
DECEMBER 31, 1997
<TABLE>
<CAPTION>
SUBACCOUNTS
-----------------------------------------------------------------------------------------------------
PRUDENTIAL PRUDENTIAL PRUDENTIAL PRUDENTIAL PRUDENTIAL PRUDENTIAL PRUDENTIAL
SERIES SERIES SERIES SERIES SERIES SERIES SERIES
FUND FUND FUND FUND FUND FUND FUND
MONEY DIVERSIFIED GOVERNMENT CONSERVATIVE FLEXIBLE HIGH YIELD STOCK
MARKET BOND INCOME BALANCED MANAGED BOND INDEX
---------- ----------- ---------- ----------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Investment in Shares at
Net Asset Value [Note 2] $8,033 $5,475 $620 $5,673 $43,165 $20,277 $19,464
Net Receivable (Payable)
for Pending Capital
Transactions 192 (3) -- (11) (108) (13) 50
-------- -------- -------- -------- -------- -------- --------
NET ASSETS $8,225 $5,472 $620 $5,662 $43,057 $20,264 $19,514
-------- -------- -------- -------- -------- -------- --------
NET ASSETS REPRESENTING:
Equity of Participants $8,218 $5,459 $620 $5,648 $42,825 $20,251 $19,450
Equity of The Prudential
Insurance Company of
America 7 13 -- 14 232 13 64
-------- -------- -------- -------- -------- -------- --------
$8,225 $5,472 $620 $5,662 $43,057 $20,264 $19,514
-------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- --------
</TABLE>
<TABLE>
<CAPTION>
SUBACCOUNTS
-----------------------------------------------------------------------------------------------------
PRUDENTIAL
SERIES PRUDENTIAL PRUDENTIAL PRUDENTIAL AIM V.I.
FUND SERIES SERIES SERIES GROWTH
EQUITY FUND FUND FUND AND AIM V.I. JANUS ASPEN
INCOME EQUITY JENNISON GLOBAL INCOME VALUE GROWTH
---------- ---------- ---------- ---------- --------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Investment in Shares at
Net Asset Value [Note 2] $12,314 $29,376 $30,801 $14,111 $11,032 $17,277 $4,618
Receivable from The
Prudential Insurance
Company of America -- 33 -- -- -- -- --
Net Receivable (Payable)
for Pending Capital
Transactions (14) 18 4 -- (5) -- --
-------- -------- -------- -------- -------- -------- --------
NET ASSETS $12,300 $29,427 $30,805 $14,111 $11,027 $17,277 $4,618
-------- -------- -------- -------- -------- -------- --------
NET ASSETS REPRESENTING:
Equity of Participants $12,268 $ 29,427 $30,707 $14,101 $10,978 $17,191 $4,584
Equity of The Prudential
Insurance Company of
America 32 -- 98 10 49 86 34
-------- -------- -------- -------- -------- -------- --------
$12,300 $29,427 $30,805 $14,111 $11,027 $17,277 $4,618
-------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- --------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
A-1
<PAGE>
FINANCIAL STATEMENTS OF THE DISCOVERY ACCOUNTS
STATEMENTS OF NET ASSETS
DECEMBER 31, 1997
<TABLE>
<CAPTION>
SUBACCOUNTS
-----------------------------------------------------------------------------------------------------------
OCC OCC T. ROWE T. ROWE WARBURG
JANUS ASPEN MFS ACCUMULATION ACCUMULATION PRICE PRICE PINCUS
INTERNATIONAL EMERGING MFS TRUST TRUST EQUITY INTERNATIONAL POST-VENTURE
GROWTH GROWTH RESEARCH MANAGED SMALL CAP INCOME STOCK CAPITAL
------------- -------- -------- ------------ ------------ ------ ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Investment in Shares
at Net Asset Value
[Note 2] $8,905 $4,698 $7,550 $21,682 $28,372 $18,017 $1,912 $49
Receivable from The
Prudential Insurance
Company of America -- -- -- -- -- -- 19 --
Net Receivable
(Payable)
for Pending Capital
Transactions -- -- 8 (10) -- 18 -- --
-------- -------- -------- -------- -------- -------- -------- --------
NET ASSETS $8,905 $4,698 $7,558 $21,672 $28,372 $18,035 $1,931 $49
-------- -------- -------- -------- -------- -------- -------- --------
NET ASSETS REPRESENTING:
Equity of Participants $8,890 $4,683 $7,538 $21,640 $28,372 $17,951 $1,931 $49
Equity of The
PrudentialInsurance
Company of America 15 15 20 32 -- 84 -- --
-------- -------- -------- -------- -------- -------- -------- --------
$8,905 $4,698 $7,558 $21,672 $28,372 $18,035 $1,931 $49
-------- -------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- -------- --------
</TABLE>
STATEMENTS OF OPERATIONS
FOR THE PERIOD JULY 31, 1997*
THROUGH DECEMBER 31,1997
<TABLE>
<CAPTION>
SUBACCOUNTS
---------------------------------------------------------------------------------------------
PRUDENTIAL PRUDENTIAL PRUDENTIAL PRUDENTIAL PRUDENTIAL PRUDENTIAL PRUDENTIAL
SERIES SERIES SERIES SERIES SERIES SERIES SERIES
FUND FUND FUND FUND FUND FUND FUND
MONEY DIVERSIFIED GOVERNMENT CONSERVATIVE FLEXIBLE HIGH YIELD STOCK
MARKET BOND INCOME BALANCED MANAGED BOND INDEX
--------- ----------- ---------- ------------ --------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Investment Income
Ordinary Dividend
Distributions $63 $19 $10 $68 $286 $85 $27
Expense [Note 3]
Fees Charged to
Participants for
Administrative Purposes
and Mortality
and Expense Risk 12 3 1 11 50 9 12
-------- -------- -------- -------- -------- -------- --------
NET INVESTMENT INCOME 51 16 9 57 236 76 15
-------- -------- -------- -------- -------- -------- --------
NET REALIZED AND UNREALIZED
GAINS/(LOSSES) ON INVESTMENTS
Capital Gains Distributions
Received -- 7 -- 593 5,693 -- 224
Net Realized Gain/(loss)
on Investments -- (1) -- -- -- -- --
Net Increase/(Decrease)
in Unrealized Appreciation
on Investments -- (11) (2) (720) (6,341) (36) (79)
-------- -------- -------- -------- -------- -------- --------
NET GAIN/(LOSS) ON
INVESTMENTS -- (5) (2) (127) (648) (36) 145
-------- -------- -------- -------- -------- -------- --------
NET INCREASE (DECREASE)
IN NET ASSETS RESULTING
FROM OPERATIONS $51 $11 $7 ($70) ($412) $40 $160
-------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- --------
</TABLE>
*Commencement of Operations
SEE NOTES TO FINANCIAL STATEMENTS
A-2
<PAGE>
FIANCIAL STATEMENTS OF THE DISCOVERY ACCOUNTS
STATEMENTS OF OPERATIONS
FOR THE PERIOD JULY 31, 1997*
THROUGH DECEMBER 31,1997
<TABLE>
<CAPTION>
SUBACCOUNTS
-------------------------------------------------------------------------------------------
PRUDENTIAL PRUDENTIAL PRUDENTIAL PRUDENTIAL
SERIES SERIES SERIES SERIES AIM V.I.
FUND FUND FUND FUND GROWTH AIM V.I. JANUS ASPEN
EQUITY INCOME EQUITY JENNISON GLOBAL AND INCOME VALUE GROWTH
------------- ---------- ---------- ---------- ---------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME
Ordinary Dividend
Distributions $38 $112 $13 $100 $6 $153 $12
Expense [Note 3]
Fees Charged to
Participants for
Administrative
Purposes and
Mortality and
Expense Risk 9 22 41 15 10 29 4
-------- -------- -------- -------- -------- -------- --------
NET INVESTMENT INCOME 29 90 (28) 85 (4) 124 8
-------- -------- -------- -------- -------- -------- --------
NET REALIZED AND UNREALIZED
GAINS/(LOSSES) ON INVESTMENTS
Capital Gains
Distributions Received 654 962 1,908 766 9 469 --
Net Realized Gain/(loss)
on Investments (2) (409) (641) (295) -- -- --
Net Increase/(Decrease)
in Unrealized
Appreciation on
Investments (574) (672) (1,674) (697) (62) (1,017) (34)
-------- -------- -------- -------- -------- -------- --------
NET GAIN/(LOSS) ON
INVESTMENTS 78 (119) (407) (226) (53) (548) (34)
-------- -------- -------- -------- -------- -------- --------
NET INCREASE (DECREASE)
IN NET ASSETS RESULTING
FROM OPERATIONS $107 ($29) ($435) ($141) ($57) ($424) ($26)
-------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- --------
<CAPTION>
SUBACCOUNTS
----------------------------------------------------------------------------------------------------------
OCC OCC T. ROWE T. ROWE WARBURG
JANUS ASPEN MFS ACCUMULATION ACCUMULATION PRICE PRICE PINCUS
INTERNATIONAL EMERGING MFS TRUST TRUST EQUITY INTERNATIONAL POST-VENTURE
GROWTH GROWTH RESEARCH MANAGED SMALL CAP INCOME STOCK CAPITAL
------------- -------- -------- ------------ ------------ ------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME
Ordinary Dividend
Distributions $10 -- -- -- -- $112 $18 --
Expense [Note 3]
Fees Charged to
Participants
for Administrative
Purposes and
Mortality Expense Risk 10 5 13 11 17 30 1 --
-------- -------- -------- -------- -------- -------- -------- --------
NET INVESTMENT INCOME -- (5) (13) (11) (17) 82 17 --
-------- -------- -------- -------- -------- -------- -------- --------
NET REALIZED AND
UNREALIZEDGAINS/
(LOSSES) ON
INVESTMENTS
Capital Gains
Distributions Received -- -- -- -- -- 478 25 --
Net Realized Gain/(loss)
on Investments -- (2) -- -- (106) -- (5) --
Net Increase/(Decrease)
in Unrealized Appreciation
on Investments 99 (14) (129) (46) 491 12 (34) 2
-------- -------- -------- -------- -------- -------- -------- --------
NET GAIN/(LOSS) ON
INVESTMENTS 99 (16) (129) (46) 385 490 (14) 2
-------- -------- -------- -------- -------- -------- -------- --------
NET INCREASE IN NET
ASSETS RESULTING
FROM OPERATIONS $99 ($21) ($142) ($57) $368 $572 $3 $2
-------- -------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- -------- --------
</TABLE>
*Commencement of Operations
SEE NOTES TO FINANCIAL STATEMENTS
A-3
<PAGE>
FINANCIAL STATEMENTS OF THE DISCOVERY ACCOUNTS
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE PERIOD JULY 31, 1997*
THROUGH DECEMBER 31,1997
<TABLE>
<CAPTION>
SUBACCOUNTS
----------------------------------------------------------------------------------------------
PRUDENTIAL PRUDENTIAL PRUDENTIAL PRUDENTIAL PRUDENTIAL PRUDENTIAL PRUDENTIAL
SERIES SERIES SERIES SERIES SERIES SERIES SERIES
FUND FUND FUND FUND FUND FUND FUND
MONEY DIVERSIFIED GOVERNMENT CONSERVATIVE FLEXIBLE HIGH YIELD STOCK
MARKET BOND INCOME BALANCED MANAGED BOND INDEX
--------- ----------- ----------- ------------ --------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $51 $11 $7 ($70) ($412) $40 $160
-------- -------- -------- -------- -------- -------- --------
ACCUMULATION UNIT
TRANSACTIONS
Purchase Payments and
Transfers In [Note 7&8] 8,212 5,474 613 5,755 43,587 20,242 19,364
Withdrawals and
Transfers Out
[Note 7&8] -- -- -- -- -- -- --
Annual Account Charges
Deducted From
Participants'
Accumulation Accounts
[Note 4] (38) (13) -- (23) (118) (18) (10)
-------- -------- -------- -------- -------- -------- --------
NET INCREASE IN NET
ASSETS RESULTING FROM
ACCUMULATION UNIT
TRANSACTIONS 8,174 5,461 613 5,732 43,469 20,224 19,354
-------- -------- -------- -------- -------- -------- --------
TOTAL INCREASE/
(DECREASE) IN NET
ASSETS 8,225 5,472 620 5,662 43,057 20,264 19,514
NET ASSETS
Beginning
of Period -- -- -- -- -- -- --
-------- -------- -------- -------- -------- -------- --------
End of Period $8,225 $5,472 $620 $5,662 $43,057 $20,264 $19,514
-------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- --------
<CAPTION>
SUBACCOUNTS
--------------------------------------------------------------------------------------------
PRUDENTIAL PRUDENTIAL PRUDENTIAL PRUDENTIAL
SERIES SERIES SERIES SERIES AIM V.I.
FUND FUND FUND FUND GROWTH AIM V.I. JANUS ASPEN
EQUITY INCOME EQUITY JENNISON GLOBAL AND INCOME VALUE GROWTH
------------- ---------- ---------- ---------- ---------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
NET INCREASE IN NET
ASSETS
RESULTING FROM
OPERATIONS $107 ($29) ($435) ($141) ($57) ($424) ($26)
-------- -------- -------- -------- -------- -------- --------
ACCUMULATION UNIT
TRANSACTIONS
Purchase Payments
and Transfers In
[Note 7&8] 12,239 33,778 35,484 17,037 11,089 17,701 4,652
Withdrawals and
Transfers Out
[Note 7&8] -- (4,287) (4,225) (2,785) -- -- --
Annual Account
Charges Deducted
From Participants'
Accumulation Accounts
[Note 4] (46) (35) (19) -- (5) -- (8)
-------- -------- -------- -------- -------- -------- --------
NET INCREASE IN NET
ASSETS RESULTING FROM
ACCUMULATION UNIT
TRANSACTIONS 12,193 29,456 31,240 14,252 11,084 17,701 4,644
-------- -------- -------- -------- -------- -------- --------
TOTAL INCREASE/
(DECREASE) IN
NET ASSETS 12,300 29,427 30,805 14,111 11,027 17,277 4,618
NET ASSETS
Beginning
of Period -- -- -- -- -- -- --
-------- -------- -------- -------- -------- -------- --------
End of Period $12,300 $29,427 $30,805 $14,111 $11,027 $17,277 $4,618
-------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- --------
</TABLE>
*Commencement of Operations
SEE NOTES TO FINANCIAL STATEMENTS
A-4
<PAGE>
FINANCIAL STATEMENTS OF THE DISCOVERY ACCOUNTS
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE PERIOD JULY 31, 1997*
THROUGH DECEMBER 31,1997
<TABLE>
<CAPTION>
SUBACCOUNTS
-----------------------------------------------------------------------------------------------------------
OCC OCC T. ROWE T. ROWE WARBURG
JANUS ASPEN MFS ACCUMULATION ACCUMULATION PRICE PRICE PINCUS
INTERNATIONAL EMERGING MFS TRUST TRUST EQUITY INTERNATIONAL POST-VENTURE
GROWTH GROWTH RESEARCH MANAGED SMALL CAP INCOME STOCK CAPITAL
------------- -------- -------- ------------ ------------ ------ ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NET INCREASE IN
NET ASSETS RESULTING
FROM OPERATION $99 ($21) ($142) ($57) $368 $572 $3 $2
-------- -------- -------- -------- -------- -------- -------- --------
ACCUMULATION UNIT
TRANSACTIONS
Purchase Payments
and Transfers In
[Note 7+8] 8,806 4,719 7,711 21,752 30,800 17,463 1,928 47
Withdrawals and
Transfers Out
[Note 7+8] -- -- -- -- (2,796) -- -- --
Annual Account
Charges Deducted
From Participants'
Accumulation
Accounts [Note 4] -- -- (11) (23) -- -- -- --
-------- -------- -------- -------- -------- -------- -------- --------
NET INCREASE IN
NET ASSETS
RESULTING FROM
ACCUMULATION UNIT
TRANSACTIONS 8,806 4,719 7,700 21,729 28,004 17,463 1,928 47
-------- -------- -------- -------- -------- -------- -------- --------
TOTAL INCREASE/
(DECREASE) IN
NET ASSETS 8,905 4,698 7,558 21,672 28,372 18,035 1,931 49
NET ASSETS
Beginning of
Period -- -- -- -- -- -- -- --
-------- -------- -------- -------- -------- -------- -------- --------
End of Period $8,905 $4,698 $7,558 $21,672 $28,372 $18,035 $1,931 $49
-------- -------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- -------- --------
</TABLE>
*Commencement of Operations
SEE NOTES TO FINANCIAL STATEMENTS
A-5
<PAGE>
NOTES TO FINANCIAL STATEMENTS OF THE DISCOVERY ACCOUNT
NOTE 1: GENERAL
The Prudential Discovery Select Group Variable Contract Account (the
"Discovery Account") was established on February 11, 1997 by The
Prudential Insurance Company of America (Prudential or Company) and
commenced operations on July 31, 1997 under the laws of the State of
New Jersey and meets the definition of a "separate account" under
federal securities laws. 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.
The Discovery Account is used 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 Discovery Account is comprised of 22 Subaccounts. The assets of
each Subaccount are invested in a corresponding Fund listed as follows:
THE PRUDENTIAL SERIES FUND, INC. MFS VARIABLE INSURANCE TRUST
Money Market Portfolio Emerging Growth Series
Diversified Bond Portfolio Research Series
Government Income Portfolio OCC ACCUMULATION TRUST
Conservative Balanced Portfolio Managed Portfolio
Flexible Managed Portfolio Small Cap Portfolio
High Yield Bond Portfolio T. ROWE PRICE
Stock Index Portfolio T. Rowe Price Equity Series, Inc.,
Equity Income Portfolio Equity Income Portfolio
Equity Portfolio T. Rowe Price International Series, Inc.
Prudential Jennison Portfolio International Stock Portfolio
Global Portfolio WARBURG PINCUS TRUST
AIM VARIABLE INSURANCE Post-Venture Capital Portfolio
AIM V.I. Growth and Income Fund
AIM V.I. Value Fund
JANUS ASPEN SERIES
Growth Portfolio
International Growth Portfolio
All contractual and other obligations arising under contracts
participating in the Discovery Account are general corporate
obligations of Prudential, although Participants' payments from the
Account will depend upon the investment experience of the Account.
SIGNIFICANT ACCOUNTING POLICIES
Investments--The investments in shares of the Funds are stated at the
net asset value of the respective portfolio.
Security Transactions--Realized gains and losses on security
transactions are reported on an average cost basis. Purchase and sale
transactions are recorded as of the trade date of the security being
purchased or sold.
Distributions Received--Dividend and capital gain distributions
received are invested in additional shares of the Funds and are
recorded on ex-dividend date.
NOTE 2: INVESTMENT INFORMATION
The number of shares of each portfolio of the Fund, the Net Asset
Value (NAV) per share for each portfolio held by the Subaccounts of
the Discovery Account, and the aggregate cost of investments in such
shares as of December 31, 1997 were as follows:
A-6
<PAGE>
NOTES TO FINANCIAL STATEMENTS OF THE DISCOVERY ACCOUNT
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRUDENTIAL PRUDENTIAL PRUDENTIAL PRUDENTIAL PRUDENTIAL
SERIES SERIES SERIES SERIES SERIES
FUND FUND FUND FUND FUND
MONEY DIVERSIFIED GOVERNMENT CONSERVATIVE FLEXIBLE
MARKET BOND INCOME BALANced Managed
---------- ----------- ----------- ------------ ----------
<S> <C> <C> <C> <C> <C>
Number of Shares 803 497 54 379 2,498
NAV per Share $10 $11.02 $11.52 $14.97 $17.28
Cost at 12-31-97 $8,033 $5,486 $622 $6,393 $49,506
<CAPTION>
PRUDENTIAL PRUDENTIAL PRUDENTIAL
SERIES SERIES SERIES PRUDENTIAL PRUDENTIAL
FUND FUND FUND SERIES SERIES
HIGH YIELD STOCK EQUITY FUND FUND
BOND INDEX INCOME EQUITY JENNISON
---------- ----------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Number of Shares 2,490 644 550 946 1,737
NAV per Share $8.14 $30.22 $22.39 $31.07 $17.73
Cost at 12-31-97 $20,313 $19,543 $12,888 $30,048 $32,475
<CAPTION>
PRUDENTIAL
SERIES AIM V.I. JANUS ASPEN MFS
FUND GROWTH AND AIM V.I. JANUS ASPEN INTERNATIONAL EMERGING
GLOBAL INCOME VALUE GROWTH GROWTH GROWTH
---------- ---------- -------- ----------- ------------- --------
<S> <C> <C> <C> <C> <C> <C>
Number of Shares 787 585 829 250 482 291
NAV per Share $17.92 $18.87 $20.83 $18.48 $18.48 $16.13
Cost at 12-31-97 $14,808 $11,094 $18,294 $4,652 $8,806 $4,712
<CAPTION>
OCC OCC T. ROWE T. ROWE
ACCUMULATION ACCUMULATION PRICE PRICE WARBURG PINCUS
MFS TRUST TRUST EQUITY INTERNATIONAL POST-VENTURE
RESEARCH MANAGED SMALL CAP INCOME STOCK CAPITAL
--------- ------------ ------------ ------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Number of Shares 478 512 1,076 969 150 4
NAV per Share $15.80 $42.38 $26.37 $18.59 $12.74 $11.06
Cost at 12-31-97 $7,679 $21,728 $27,881 $18,005 $1,946 $47
</TABLE>
NOTE 3: EXPENSES
A daily charge at an effective annual rate of 0.85% of the average
participant account value of each Subaccount of the Discovery Account
is paid to Prudential for administrative expenses not provided by the
annual account charge. A daily charge at an effective annual rate of
0.15% of the average participant account value of each Subaccount of
the Discovery Account is paid to Prudential for assuming mortality and
expense risks under the Contracts.
NOTE 4: ANNUAL ACCOUNT CHARGE
An additional administrative charge of up to $15, the annual account
charge, is paid to Prudential on or about the last day of 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. The charge will first be made
against the Participant Account Value under the guaranteed interest
account (if available). If the Participant is not invested in the
guaranteed interest account, or if the Participant does not have enough
money in such an option to pay the charge, the charge will then be made
against any one or of more the Subaccounts in which the Participant is
invested.
NOTE 5: WITHDRAWAL CHARGE
A withdrawal charge is imposed upon the withdrawal of certain purchase
payments to compensate Prudential for sales and other marketing
expenses. The maximum withdrawal charge is 5% on contributions
withdrawn during the first year of participation. The withdrawal
charge declines by 1% in each subsequent year until it is 0% after the
fifth year. No withdrawal charge is imposed upon contributions
withdrawn for any reason after five years of participation in a
Program. In addition, no withdrawal charge is imposed upon
contributions withdrawn to purchase an annuity under a Contract, 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. 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 Contract-holder.
A-7
<PAGE>
NOTE 6: TAXES
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. As a result, the unit value of the
Subaccounts has not been reduced by federal income taxes.
NOTE 7: UNIT TRANSACTIONS
The number of units issued and redeemed during the year ended December
31, 1997 was as follows:
1997
<TABLE>
<CAPTION>
PRUDENTIAL PRUDENTIAL PRUDENTIAL PRUDENTIAL PRUDENTIAL PRUDENTIAL PRUDENTIAL
SERIES SERIES SERIES SERIES SERIES SERIES SERIES
FUND FUND FUND FUND FUND FUND FUND
MONEY DIVERSIFIED GOVERNMENT CONSERVATIVE FLEXIBLE HIGH YIELD STOCK
MARKET BOND INCOME BALANCED MANAGED BOND INDEX
---------- ----------- ---------- ------------ ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Units issued 819 543 60 565 4,297 1,954 1,891
Units redeemed 4 1 -- 2 11 2 1
<CAPTION>
PRUDENTIAL PRUDENTIAL PRUDENTIAL PRUDENTIAL
SERIES SERIES SERIES SERIES AIM V.I.
FUND FUND FUND FUND GROWTH AND AIM V.I. JANUS ASPEN
EQUITY INCOME EQUITY JENNISON GLOBAL INCOME VALUE GROWTH
------------- ---------- ---------- ---------- ---------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Units issued 1,175 3,332 3,548 1,890 1,123 1,738 462
Units redeemed 4 425 437 314 1 -- --
<CAPTION>
OCC OCC T. ROWE
JANUS ASPEN MFS ACCUMULATION ACCUMULATION T. ROWE PRICE WARBURG PINCUS
INTERNATIONAL EMERGING MFS TRUST TRUST PRICE INTERNATIONAL POST-VENTURE
GROWTH GROWTH RESEARCH MANAGED SMALL CAP EQUITY INCOME STOCK CAPITAL
------------- -------- -------- ------------ ------------ ------------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Units issued 942 470 780 2,137 3058 1,704 216 5
Units redeemed -- -- 1 2 277 -- -- --
</TABLE>
NOTE 8: PARTICIPANT LOANS
The minimum loan amount is as specified in the Contract, or if not
specified, as determined by Prudential. The maximum loan amount is the
lesser of (a) $50,000, reduced by the highest outstanding balance of
loans during the one year period immediately preceding the date of the
loan or (b) 50% of the value of the Participant's vested interest under
a Contract. In the loan application, the Contractholder (or in certain
cases, the Participant) designates the Subaccount(s) from which the
loan amount is deducted. To repay the loan, the Participant makes
periodic payments of interest plus a portion of the principal. Those
payments are invested in the Subaccounts chosen by the Participant. The
Participant may specify the Subaccounts from which he may borrow and
into which repayments may be invested. If the Participant does not
specify the Subaccounts from which the loan amount is deducted, the
loan amount will be deducted from the participant account value in
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.
A-8
<PAGE>
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 also charges up to $25 per year as a loan
maintenance fee for record keeping 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.
The 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, of 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. For the period ended December 31, 1997 the amount of
participant loans that was withdrawn from the Subaccounts is follows:
1997
<TABLE>
<CAPTION>
PRUDENTIAL PRUDENTIAL PRUDENTIAL PRUDENTIAL PRUDENTIAL PRUDENTIAL PRUDENTIAL
SERIES SERIES SERIES SERIES SERIES SERIES SERIES
FUND FUND FUND FUND FUND FUND FUND
MONEY DIVERSIFIED GOVERNMENT CONSERVATIVE FLEXIBLE HIGH YIELD STOCK
MARKET BOND INCOME BALANCED MANAGED BOND INDEX
--------- ----------- ---------- ------------ ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Loans -- -- -- -- -- -- --
Repayments -- -- -- -- -- -- --
<CAPTION>
PRUDENTIAL PRUDENTIAL PRUDENTIAL PRUDENTIAL
SERIES SERIES SERIES SERIES AIM V.I.
FUND FUND FUND FUND GROWTH AND AIM V.I. JANUS ASPEN
EQUITY INCOME EQUITY JENNISON GLOBAL INCOME VALUE GROWTH
------------- ---------- ---------- ---------- ---------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Loans -- 4,171 4,225 2,785 -- -- --
Repayments -- -- -- -- -- -- --
<CAPTION>
OCC OCC T. ROWE
JANUS ASPEN MFS ACCUMULATION ACCUMULATION T. ROWE PRICE WARBURG PINCUS
INTERNATIONAL EMERGING MFS TRUST TRUST PRICE INTERNATIONAL POST-VENTURE
GROWTH GROWTH RESEARCH MANAGED SMALL CAP EQUITY INCOME STOCK CAPITAL
------------- -------- -------- ------------ ------------ ------------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Loans -- -- -- -- 2,796 -- -- --
Repayments -- -- -- -- -- -- -- --
</TABLE>
A-9
<PAGE>
NOTES TO FINANCIAL STATEMENTS OF DISCOVERY ACCOUNT
NOTE 10: CONDENSED FINANCIAL INFORMATION
ACCUMULATION UNIT VALUES FOR DISCOVERY ACCOUNT
<TABLE>
<CAPTION>
<S> <C> <C> <C>
PRUDENTIAL SERIES FUND PRUDENTIAL SERIES FUND
MONEY MARKET 07/31/97* STOCK INDEX 07/31/97*
to to
12/31/97 12/31/97
-------- --------
Beginning of period (rounded) $10.00 Beginning of period (rounded) $10.00
End of period (rounded) $10.08 End of period (rounded) $10.29
Accumulation Units
Outstanding at end of period 815 Outstanding at end of period 1,890
PRUDENTIAL SERIES FUND 07/31/97* PRUDENTIAL SERIES FUND 07/31/97*
DIVERSIFIED BOND TO EQUITY INCOME to
12/31/97 12/31/97
-------- --------
Beginning of period (rounded) $10.00 Beginning of period (rounded) $10.00
End of period (rounded) $10.07 End of period (rounded) $10.48
Accumulation Units
Outstanding at end of period 542 Outstanding at end of period 1,171
PRUDENTIAL SERIES FUND PRUDENTIAL SERIES FUND
GOVERNMENT INCOME 07/31/97* EQUITY 07/31/97*
to to
12/31/97 12/31/97
-------- --------
Beginning of year (rounded) $10.00 Beginning of year (rounded) $10.00
End of period (rounded) $10.27 End of period (rounded) $10.12
Accumulation Units Accumulation Units
Outstanding at end of period 60 Outstanding at end of period 2,907
PRUDENTIAL SERIES FUND PRUDENTIAL SERIES FUND
CONSERVATIVE BALANCED 07/31/97* JENNISON 07/31/97*
to to
12/31/97 12/31/97
-------- --------
Beginning of year (rounded) $10.00 Beginning of year (rounded) $10.00
End of year (rounded) $10.03 End of period (rounded) $9.87
Accumulation Units Accumulation Units
Outstanding at end of year 563 Outstanding at end of period 3,111
PRUDENTIAL SERIES FUND PRUDENTIAL SERIES FUND
FLEXIBLE MANAGED 07/31/97* GLOBAL 07/31/97*
to to
12/31/97 12/31/97
-------- --------
Beginning of period (rounded) $10.00 Beginning of period (rounded) $10.00
End of period (rounded) $9.99 End of period (rounded) $8.95
Accumulation Units Accumulation Units
Outstanding at end of period 4,286 Outstanding at end of period 1,576
PRUDENTIAL SERIES FUND AIM V.I.
HIGH YIELD BOND 07/31/97* GROWTH AND INCOME 07/31/97*
to to
12/31/97 12/31/97
-------- --------
Beginning of period (rounded) $10.00 Beginning of period (rounded) $10.00
End of period (rounded) $10.37 End of period (rounded) $9.79
Accumulation Units Accumulation Units
Outstanding at end of period 1,952 Outstanding at end of period 1,122
</TABLE>
*Commencement of Operations
A-10
<PAGE>
NOTES TO FINANCIAL STATEMENTS OF DISCOVERY ACCOUNT
NOTE 10 (CONT'D): CONDENSED FINANCIAL INFORMATION
ACCUMULATION UNIT VALUES FOR THE DISCOVERY ACCOUNT
<TABLE>
<CAPTION>
<S> <C> <C> <C>
AIM V.I. OCC ACCUMULATION TRUST
VALUE 07/31/97 MANAGED 07/31/97
to to
12/31/97 12/31/97
-------- --------
Beginning of period (rounded) $10.00 Beginning of period (rounded) $10.00
End of period (rounded)$9.89 End of period (rounded) $10.13
Accumulation Units
Outstanding at end of period 1,738 Outstanding at end of year 2,135
JANUS ASPEN GROWTH OCC ACCUMULATION TRUST
07/31/97 SMALL CAP 07/31/97
to to
12/31/97 12/31/97
-------- --------
Beginning of period (rounded) $10.00 Beginning of period (rounded) $10.00
End of period (rounded) $9.92 End of year (rounded) $10.20
Accumulation Units Accumulation Units
Outstanding at end of period 462 Outstanding at end of year 2,781
JANUS ASPEN T. ROWE PRICE
INTERNATIONAL GROWTH 07/31/97 EQUITY INCOME 07/31/97
to to
12/31/97 12/31/97
-------- --------
Beginning of year (rounded) $10.00 Beginning of year (rounded) $10.00
End of year (rounded) $9.44 End of year (rounded) $10.54
Accumulation Units Accumulation Units
Outstanding at end of year 942 Outstanding at end of year 1,704
MFS T. ROWE PRICE
EMERGING GROWTH 07/31/97 INTERNATIONAL STOCK 07/31/97
to to
12/31/97 12/31/97
-------- --------
Beginning of year (rounded) $10.00 Beginning of year (rounded) $10.00
End of year (rounded) $9.95 End of year (rounded) $8.92
Accumulation Units Accumulation Units
Outstanding at end of year 470 Outstanding at end of year 216
MFS WARBURG PINCUS
RESEARCH 07/31/97 POST-VENTURE CAPITAL 07/31/97
to to
12/31/97 12/31/97
-------- --------
Beginning of year (rounded) $10.00 Beginning of year (rounded) $10.00
End of year (rounded) $9.67 End of year (rounded) $10.08
Accumulation Units
Outstanding at end of year 779 Outstanding at end of year 5
</TABLE>
*Commencement of Operations
A-11
<PAGE>
Report of Independent Accountants
To the Contract Holders of
The Prudential Discovery Select Group Variable Contract Account
and the Board of Directors of
The Prudential Insurance Company of America
In our opinion, the accompanying statements of net assets and the related
statements of operations and of changes in net assets present fairly, in all
material respects, the financial position of Prudential Series Fund Money
Market Subaccount, Prudential Series Fund Diversified Bond Subaccount,
Prudential Series Fund Government Income Subaccount, Prudential Series Fund
Conservative Balanced Subaccount, Prudential Series Fund Flexible Managed
Subaccount, Prudential Series Fund High Yield Bond Subaccount, Prudential
Series Fund Stock Index Subaccount, Prudential Series Fund Equity Income
Subaccount, Prudential Series Fund Equity Subaccount, Prudential Series Fund
Jennison Subaccount, Prudential Series Fund Global Subaccount, AIM V.I. Growth
and Income Subaccount, AIM V.I. Value Subaccount, Janus Aspen Growth
Subaccount, Janus Aspen International Growth Subaccount, MFS Emerging Growth
Subaccount, MFS Research Subaccount, OCC Accumulation Trust Managed Subaccount,
OCC Accumulation Trust Small Cap Subaccount, T. Rowe Price Equity Income
Subaccount, T. Rowe Price International Stock Subaccount and Warburg Pincus
Post-Venture Capital Subaccount (separately managed portfolios of The
Prudential Discovery Select Group Variable Contract Account; the "Account") at
December 31, 1997, and the results of each of their operations and the changes
in each of their net assets for the period July 31, 1997 (commencement of
operations) through December 31, 1997, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Account's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
financial statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of fund shares owned at December 31, 1997 with the transfer agent,
provide a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
New York, New York
February 26, 1998
A-12
REPORT OF INDEPENDENT ACCOUNTANTS
---------------------------------
March 5, 1998
To the Board of Directors and Policyholders of
The Prudential Insurance Company of America
In our opinion, the accompanying consolidated statements of financial position
and the related consolidated statements of operations, of changes in equity and
of cash flows present fairly, in all material respects, the financial position
of The Prudential Insurance Company of America and its subsidiaries at December
31, 1997 and 1996, and the results of their operations and their cash flows for
the years then ended in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audit. We conducted our audits of these statements in
accordance with generally accepted auditing standards which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.
Price Waterhouse LLP
1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
The Prudential Insurance Company of America
Newark, New Jersey
We have audited the accompanying consolidated statements of operations, changes
in equity, and cash flows of The Prudential Insurance Company of America and
subsidiaries for the year ended December 31, 1995. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on the financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such consolidated statements of operations, changes in equity,
and cash flows present fairly, in all material respects, the results of
operations and cash flows of The Prudential Insurance Company of America and
subsidiaries for the year ended December 31, 1995 in conformity with generally
accepted accounting principles.
Deloitte & Touche LLP
June 4, 1997
2
<PAGE>
<TABLE>
<CAPTION>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
DECEMBER 31, 1997 AND 1996 (IN MILLIONS)
1997 1996
----------- -----------
<S> <C> <C>
ASSETS
Fixed maturities:
Available for sale, at fair value (amortized cost, 1997: $71,496; 1996: $64,545) .......... $ 75,270 $ 66,553
Held to maturity, at amortized cost (fair value, 1997: $19,894; 1996: $21,362) ............ 18,700 20,403
Trading account assets, at fair value........................................................ 6,044 4,219
Equity securities, available for sale, at fair value (cost, 1997: $2,376; 1996: $2,103) ..... 2,810 2,622
Mortgage loans on real estate ............................................................... 16,004 17,097
Investment real estate ...................................................................... 1,519 2,586
Policy loans ................................................................................ 6,827 6,692
Securities purchased under agreements to resell ............................................. 8,661 5,347
Cash collateral for borrowed securities ..................................................... 5,047 2,416
Short-term investments ...................................................................... 12,106 9,294
Other long-term investments ................................................................. 3,360 2,995
----------- -----------
Total investments ......................................................................... 156,348 140,224
Cash ........................................................................................ 3,636 2,091
Deferred policy acquisition costs ........................................................... 5,994 6,291
Accrued investment income ................................................................... 1,909 1,828
Receivables from broker-dealer clients ...................................................... 6,273 5,281
Other assets ................................................................................ 11,276 9,990
Separate Account assets ..................................................................... 74,046 63,358
----------- -----------
TOTAL ASSETS .................................................................................. $ 259,482 $ 229,063
=========== ===========
LIABILITIES AND EQUITY
LIABILITIES
Future policy benefits ...................................................................... $ 65,581 $ 63,955
Policyholders' account balances ............................................................. 32,941 36,009
Other policyholders' liabilities ............................................................ 6,659 6,043
Policyholders' dividends .................................................................... 1,269 714
Securities sold under agreements to repurchase .............................................. 12,347 7,503
Cash collateral for loaned securities ....................................................... 14,117 8,449
Short-term debt ............................................................................. 6,774 6,562
Long-term debt .............................................................................. 4,273 3,760
Income taxes payable ........................................................................ 500 1,544
Payables to broker-dealer clients ........................................................... 3,338 3,018
Securities sold but not yet purchased ....................................................... 3,533 1,900
Other liabilities ........................................................................... 14,774 8,238
Separate Account liabilities ................................................................ 73,658 62,845
----------- -----------
TOTAL LIABILITIES ......................................................................... 239,764 210,540
=========== ===========
COMMITMENTS AND CONTINGENCIES (SEE NOTES 12, 13 AND 14)
EQUITY
Retained earnings ........................................................................... 18,051 17,443
Net unrealized investment gains ............................................................. 1,752 1,136
Foreign currency translation adjustments .................................................... (85) (56)
----------- -----------
TOTAL EQUITY .............................................................................. 19,718 18,523
----------- -----------
TOTAL LIABILITIES AND EQUITY .................................................................. $ 259,482 $ 229,063
=========== ===========
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3
<PAGE>
<TABLE>
<CAPTION>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (IN MILLIONS)
1997 1996 1995
------------ ----------- -----------
<S> <C> <C> <C>
REVENUES
Premiums .................................................................... $ 18,534 $ 18,962 $ 19,783
Policy charges and fee income ............................................... 1,828 1,912 1,824
Net investment income ....................................................... 9,863 9,742 10,178
Realized investment gains, net .............................................. 2,187 1,138 1,503
Commissions and other income ................................................ 4,661 4,521 3,952
------------ ----------- -----------
Total revenues ............................................................ 37,073 36,275 37,240
------------ ----------- -----------
BENEFITS AND EXPENSES
Policyholders' benefits ..................................................... 18,208 19,306 19,470
Interest credited to policyholders' account balances ........................ 2,043 2,251 2,739
Dividends to policyholders .................................................. 2,429 2,339 2,317
General and administrative expenses ......................................... 11,926 10,875 10,345
Sales practice remediation costs ............................................ 1,640 410 --
------------ ----------- -----------
Total benefits and expenses ............................................... 36,246 35,181 34,871
------------ ----------- -----------
INCOME FROM OPERATIONS BEFORE INCOME TAXES .................................... 827 1,094 2,369
------------ ----------- -----------
Income taxes
Current ................................................................... (46) 406 1,293
Deferred .................................................................. 263 (390) (167)
------------ ----------- -----------
217 16 1,126
------------ ----------- -----------
NET INCOME .................................................................... $ 610 $ 1,078 $ 1,243
============ =========== ===========
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (IN MILLIONS)
<TABLE>
<CAPTION>
FOREIGN NET
CURRENCY UNREALIZED
RETAINED TRANSLATION INVESTMENT TOTAL
EARNINGS ADJUSTMENTS GAINS EQUITY
--------- ----------- ---------- ---------
<S> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1995 ........................ $ 15,126 $ (42) $ 16 $ 15,100
Net income .................................... 1,243 -- -- 1,243
Change in foreign currency translation
adjustments ................................. -- 18 -- 18
Change in net unrealized investment gains ..... -- -- 2,381 2,381
--------- --------- --------- ---------
BALANCE, DECEMBER 31, 1995 ...................... 16,369 (24) 2,397 18,742
Net income .................................... 1,078 -- -- 1,078
Change in foreign currency translation
adjustments ................................. -- (32) -- (32)
Change in net unrealized investment gains ..... -- -- (1,261) (1,261)
Additional pension liability adjustment ....... (4) -- -- (4)
--------- --------- --------- ---------
BALANCE, DECEMBER 31, 1996 ...................... 17,443 (56) 1,136 18,523
Net income .................................... 610 -- -- 610
Change in foreign currency translation
adjustments ................................. -- (29) -- (29)
Change in net unrealized investment gains ..... -- -- 616 616
Additional pension liability adjustment ....... (2) -- -- (2)
--------- --------- --------- ---------
BALANCE, DECEMBER 31, 1997 ...................... $ 18,051 $ (85) $ 1,752 $ 19,718
========= ========= ========= =========
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (IN MILLIONS)
<TABLE>
<CAPTION>
1997 1996 1995
---------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ..................................................... $ 610 $ 1,078 $ 1,243
Adjustments to reconcile net income to
net cash provided by operating activities:
Realized investment gains, net ............................... (2,187) (1,138) (1,503)
Policy charges and fee income ................................ (258) (208) (201)
Interest credited to policyholders' account balances ......... 2,043 2,128 2,616
Depreciation and amortization ................................ 258 266 398
Other, net ................................................... 4,681 (1,180) (2,628)
Loss (gain) on divestitures .................................. -- (116) 297
Change in:
Deferred policy acquisition costs .......................... 143 (122) (214)
Policy liabilities and insurance reserves .................. 2,477 2,471 2,382
Securities purchased under agreements to resell ............ (3,314) (217) 461
Trading account assets ..................................... (1,825) (433) 2,579
Income taxes receivable/payable ............................ (1,391) (937) 194
Cash collateral for borrowed securities .................... (2,631) (332) 25
Broker-dealer client receivables/payables .................. (672) (607) (420)
Securities sold but not yet purchased ...................... 1,633 251 (225)
Securities sold under agreements to repurchase ............. 4,844 (490) (712)
--------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES ...................... $ 4,411 $ 414 $ 4,292
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from the sale/maturity of:
Fixed maturities, available for sale .......................... $ 123,550 $ 123,368 $ 97,084
Fixed maturities, held to maturity ............................ 4,042 4,268 3,767
Equity securities, available for sale ......................... 2,572 2,162 2,370
Mortgage loans on real estate ................................. 4,299 5,731 5,553
Investment real estate ........................................ 1,842 615 435
Other long-term investments ................................... 5,081 3,203 3,385
Divestitures .................................................. -- 52 790
Payments for the purchase of:
Fixed maturities, available for sale .......................... (129,854) (125,093) (101,197)
Fixed maturities, held to maturity ............................ (2,317) (2,844) (6,803)
Equity securities, available for sale ......................... (2,461) (2,384) (1,391)
Mortgage loans on real estate ................................. (3,363) (1,906) (3,015)
Investment real estate ........................................ (241) (142) (387)
Other long-term investments ................................... (4,148) (2,060) (1,849)
Cash collateral for securities loaned (net) .................... 5,668 2,891 3,471
Short-term investments (net) ................................... (2,848) (1,915) 2,793
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES ...................... $ 1,822 $ 5,946 $ 5,006
--------- --------- ---------
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (IN MILLIONS)
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Policyholders' account deposits ................................ $ 5,020 $ 2,799 $ 2,724
Policyholders' account withdrawals ............................. (9,873) (8,099) (9,164)
Net increase(decrease) in short-term debt ...................... 305 583 (3,077)
Proceeds from the issuance of long-term debt ................... 324 93 763
Repayments of long-term debt ................................... (464) (1,306) (30)
--------- --------- ---------
CASH FLOWS USED IN FINANCING ACTIVITIES ................... (4,688) (5,930) (8,784)
--------- --------- ---------
NET INCREASE IN CASH ............................................. 1,545 430 514
CASH, BEGINNING OF YEAR .......................................... 2,091 1,661 1,147
--------- --------- ---------
CASH, END OF YEAR ................................................ $ 3,636 $ 2,091 $ 1,661
========= ========= =========
SUPPLEMENTAL CASH FLOW INFORMATION:
Income taxes paid ................................................ $ 968 $ 793 $ 430
--------- --------- ---------
Interest paid .................................................... $ 1,243 $ 1,404 $ 1,413
--------- --------- ---------
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS
The Prudential Insurance Company of America and its subsidiaries
(collectively, "the Company") provide insurance and financial services
throughout the United States and many locations worldwide. Principal
products and services provided include life and health insurance, annuities,
pension and retirement related investments and administration, managed
healthcare, property and casualty insurance, securities brokerage, asset
management, investment advisory services and real estate brokerage.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the Prudential
Insurance Company of America, a mutual life insurance company, and its
subsidiaries, and those partnerships and joint ventures in which the Company
has a controlling interest. The consolidated financial statements have been
prepared in accordance with generally accepted accounting principles
("GAAP"). All significant intercompany balances and transactions have been
eliminated.
USE OF ESTIMATES
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the period. Actual results could differ from
those estimates.
INVESTMENTS
FIXED MATURITIES classified as "available for sale" are carried at estimated
fair value. Fixed maturities that the Company has both the positive intent
and ability to hold to maturity are stated at amortized cost and classified
as "held to maturity." The amortized cost of fixed maturities are written
down to estimated fair value when considered impaired and the decline in
value is considered to be other than temporary. Unrealized gains and losses
on fixed maturities "available for sale," net of income tax, the effect on
deferred policy acquisition costs and participating annuity contracts that
would result from the realization of unrealized gains and losses, are
included in a separate component of equity, "Net unrealized investment
gains."
TRADING ACCOUNT ASSETS are carried at estimated fair value.
EQUITY SECURITIES, available for sale, comprised of common and
non-redeemable preferred stock, are carried at estimated fair value. The
associated unrealized gains and losses, net of income tax, the effect on
deferred policy acquisition costs and participating annuity contracts that
would result from the realization of unrealized gains and losses, are
included in a separate component of equity, "Net unrealized investment
gains."
MORTGAGE LOANS ON REAL ESTATE are stated primarily at unpaid principal
balances, net of unamortized discounts and allowance for losses on impaired
loans. Impaired loans are identified by management as loans in which a
probability exists that all amounts due according to the contractual terms
of the loan agreement will not be collected. Impaired loans are measured
based on the present value of expected future cash flows, discounted at the
loan's effective interest rate or the fair value of the collateral, if the
loan is collateral dependent. The Company's periodic evaluation of the
adequacy of the allowance for losses is based on a number of factors,
including past loan loss experience, known and inherent risks in the
portfolio, adverse situations that may affect the borrower's ability to
repay, the estimated value of the underlying collateral, composition of the
loan portfolio, current economic conditions and other relevant factors.
This evaluation is inherently subjective as it requires estimating the
amounts and timing of future cash flows expected to be received on impaired
loans.
Interest received on impaired loans, including loans that were previously
modified in a troubled debt restructuring, is either applied against the
principal or reported as revenue, according to management's judgment as to
the collectibility of principal. Management discontinues the accrual of
interest on impaired loans after the loans are 90 days delinquent as to
principal or interest or earlier when management has serious doubts about
collectibility. When a loan is recognized as
8
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
impaired, any accrued but unpaid interest previously recorded on such loan
is reversed against interest income of the current period. Generally, a loan
is restored to accrual status only after all delinquent interest and
principal are brought current and, in the case of loans where interest has
been interrupted for a substantial period, a regular payment performance has
been established.
INVESTMENT REAL ESTATE, which the Company has the intent to hold for the
production of income, is carried at depreciated cost less any write-downs to
fair value for impairment losses. Depreciation on real estate is computed
using the straight-line method over the estimated lives of the properties.
Real estate to be disposed of is carried at the lower of depreciated cost or
fair value less selling costs and is not depreciated once classified as
such.
POLICY LOANS are carried at unpaid principal balances.
SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL AND SECURITIES SOLD UNDER
AGREEMENTS TO REPURCHASE are carried at the amounts at which the securities
will be subsequently resold or reacquired, including accrued interest, as
specified in the respective agreements. The Company's policy is to take
possession of securities purchased under agreements to resell. The market
value of securities to be repurchased is monitored, and additional
collateral is requested, where appropriate, to protect against credit
exposure.
SECURITIES BORROWED AND SECURITIES LOANED are recorded at the amount of cash
advanced or received. With respect to securities loaned, the Company obtains
collateral in an amount equal to 102% and 105% of the fair value of the
domestic and foreign securities, respectively. The Company monitors the
market value of securities borrowed and loaned on a daily basis with
additional collateral obtained as necessary. Non-cash collateral received is
not reflected in the Consolidated Statements of Financial Position.
Substantially, all the Company's securities borrowed contracts are with
other brokers and dealers, commercial banks and institutional clients.
Substantially, all of the Company's securities loaned are with large
brokerage firms.
These transactions are used to generate net investment income and facilitate
trading activity. These instruments are short-term in nature (usually 30
days or less) and are collateralized principally by U.S. Government and
mortgage-backed securities. The carrying amounts of these instruments
approximate fair value because of the relatively short period of time
between the origination of the instruments and their expected realization.
SHORT-TERM INVESTMENTS, including highly liquid debt instruments purchased
with an original maturity of twelve months or less, are carried at amortized
cost, which approximates fair value.
OTHER LONG-TERM INVESTMENTS primarily represent the Company's investments
in joint ventures and partnerships in which the Company does not have
control and derivatives held for purposes other than trading. Joint venture
and partnership investments are recorded using the equity method of
accounting, reduced for other than temporary declines in value.
REALIZED INVESTMENT GAINS, NET are computed using the specific
identification method. Costs of fixed maturities and equity securities are
adjusted for impairments considered to be other than temporary. Allowances
for losses on mortgage loans on real estate are netted against asset
categories to which they apply and provisions for losses on investments are
included in "Realized investment gains, net." Unrealized gains and losses on
trading account assets are included in "Commissions and other income."
CASH
Cash includes cash on hand, amounts due from banks, and money market
instruments.
DEFERRED POLICY ACQUISITION COSTS
The costs which vary with and that are related primarily to the production
of new insurance business are deferred to the extent such costs are deemed
recoverable from future profits. Such costs include certain commissions,
costs of policy issuance and underwriting, and certain variable field office
expenses. Deferred policy acquisition costs are subject to recoverability
testing at the time of policy issue and loss recognition testing at the end
of each accounting period. Deferred policy acquisition costs are adjusted
for the impact of unrealized gains or losses on investments as if these
gains or losses had been realized, with corresponding credits or charges
included in equity.
9
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
For life insurance, deferred policy acquisition costs are amortized over the
expected life of the contracts (up to 45 years) in proportion to estimated
gross margins based on historical and anticipated future experience, which
is updated periodically. The effect of changes in estimated gross margins is
reflected in earnings in the period they are revised. Policy acquisition
costs related to interest-sensitive products and certain investment-type
products are deferred and amortized over the expected life of the contracts
(periods ranging from 15 to 30 years) in proportion to estimated gross
profits arising principally from investment results, mortality and expense
margins and surrender charges based on historical and anticipated future
experience, updated periodically. The effect of revisions to estimated gross
profits on unamortized deferred acquisition costs is reflected in earnings
in the period such estimated gross profits are revised.
For property and casualty contracts, deferred policy acquisition costs are
amortized over the period in which related premiums are earned. Future
investment income is considered in determining the recoverability of
deferred policy acquisition costs.
For disability insurance, health insurance, group life insurance and most
group annuities, acquisition costs are expensed as incurred.
POLICYHOLDERS' DIVIDENDS
The amount of the dividends to be paid to policyholders is determined
annually by the Company's Board of Directors. The aggregate amount of
policyholders' dividends is related to actual interest, mortality,
morbidity, persistency and expense experience for the year and judgment as
to the appropriate level of statutory surplus to be retained by the Company.
SEPARATE ACCOUNT ASSETS AND LIABILITIES
Separate Account assets and liabilities are reported at estimated fair value
and represent segregated funds which are invested for certain policyholders,
pension fund and other customers. The assets consist of common stocks, fixed
maturities, real estate related securities, real estate mortgage loans and
short-term investments. The assets of each account are legally
segregated and are not subject to claims that arise out of any other
business of the Company. Investment risks associated with market value
changes are generally borne by the customers, except to the extent of
minimum guarantees made by the Company with respect to certain accounts. The
investment income and gains or losses for Separate Accounts generally accrue
to the policyholders and are not included in the Consolidated Statement of
Operations. Mortality, policy administration and surrender charges on the
accounts are included in "Policy charges and fee income."
INSURANCE REVENUE AND EXPENSE RECOGNITION
Premiums from participating insurance policies are generally recognized when
due. Benefits are recorded as an expense when they are incurred. A liability
for future policy benefits is recorded using the net level premium method.
Premiums from non-participating group annuities with life contingencies are
generally recognized when due. For single premium immediate annuities and
structured settlements, premiums are recognized when due with any excess
profit deferred and recognized in a constant relationship to insurance
in-force or, for annuities, the amount of expected future benefit payments.
Amounts received as payment for interest sensitive investment contracts,
deferred annuities and participating group annuities are reported as
deposits to "Policyholders' account balances." Revenues from these contracts
are reflected in "Policy charges and fee income" and consist primarily of
fees assessed during the period against the policyholders' account balances
for mortality charges, policy administration charges, surrender charges and
interest earned from the investment of these account balances. Benefits and
expenses for these products include claims in excess of related account
balances, expenses of contract administration, interest credited and
amortization of deferred policy acquisition costs.
For disability insurance, group life insurance, health insurance and
property and casualty insurance, premiums are recognized over the period to
which the premiums relate in proportion to the amount of insurance
protection provided. Claim and claim adjustment expenses are recognized when
incurred.
10
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FOREIGN CURRENCY TRANSLATION ADJUSTMENTS
Assets and liabilities of foreign operations and subsidiaries reported in
other than U.S. dollars are translated at the exchange rate in effect at the
end of the period. Revenues, benefits and other expenses are translated at
the average rate prevailing during the period. Translation adjustments
arising from the use of differing exchange rates from period to period are
charged or credited directly to equity. The cumulative effect of changes in
foreign exchange rates are included in "Foreign currency translation
adjustments."
COMMISSIONS AND OTHER INCOME
Commissions and other income principally includes securities and
commodities, commission revenues, asset management fees, investment banking
revenue and realized and unrealized gains on trading account assets of the
Company's broker-dealer subsidiary.
DERIVATIVE FINANCIAL INSTRUMENTS
Derivatives include swaps, forwards, futures, options and loan commitments
subject to market risk, all of which are used by the Company in both trading
and other than trading activities. Income and expenses related to
derivatives used to hedge are recorded on the accrual basis as an adjustment
to the carrying amount or to the yield of the related assets or liabilities
over the periods covered by the derivative contracts. Gains and losses
relating to early terminations of interest rate swaps used to hedge are
deferred and amortized over the remaining period originally covered by the
swap. Gains and losses relating to derivatives used to hedge the risks
associated with anticipated transactions are deferred and utilized to adjust
the basis of the transaction once it has closed. If it is determined that
the transaction will not close, such gains and losses are included in
"Realized investment gains, net."
DERIVATIVES HELD FOR TRADING PURPOSES are used in the Company's securities
broker-dealer business and in a limited-purpose swap subsidiary to meet the
risk management needs of its customers by structuring transactions that
allow customers to manage their exposure to interest rates, foreign exchange
rates, indices or prices of securities and commodities and when possible,
matched trading positions are established to minimize risk to the Company.
Derivatives used for trading purposes are recorded at fair value as of the
reporting date. Realized and unrealized changes in fair values are included
in "Commissions and other income" in the period in which the changes occur.
DERIVATIVES HELD FOR PURPOSES OTHER THAN TRADING are primarily used to hedge
or reduce exposure to interest rate and foreign currency risks associated
with assets held or expected to be purchased or sold, and liabilities
incurred or expected to be incurred. Additionally, other than trading
derivatives are used to change the characteristics of the Company's
asset/liability mix consistent with the Company's risk management
activities.
INCOME TAXES
The Company and its domestic subsidiaries file a consolidated federal income
tax return. The Internal Revenue Code (the "Code") limits the amount of
non-life insurance losses that may offset life insurance company taxable
income. The Code also imposes an "equity tax" on mutual life insurance
companies which, in effect, imputes an additional tax to the Company based
on a formula that calculates the difference between stock and mutual
insurance companies' earnings. Income taxes include an estimate for changes
in the total equity tax to be paid for current and prior years. Subsidiaries
operating outside the United States are taxed under applicable foreign
statutes.
Deferred income taxes are generally recognized, based on enacted rates, when
assets and liabilities have different values for financial statement and tax
reporting purposes. A valuation allowance is recorded to reduce a deferred
tax asset to that portion which management believes is more likely than not
to be realized.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1996, the Financial Accounting Standards Board ("FASB") issued the
Statement of Financial Accounting Standards ("SFAS") No. 125, "Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities" ("SFAS
11
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
125"). The statement provides accounting and reporting standards for
transfers and servicing of financial assets and extinguishments of
liabilities and provides consistent standards for distinguishing transfers
of financial assets that are sales from transfers that are secured
borrowings. SFAS 125 became effective January 1, 1997 and is to be applied
prospectively. Subsequent to June 1996, FASB issued SFAS No. 127 "Deferral
of the Effective Date of Certain Provisions of SFAS 125" ("SFAS 127"). SFAS
127 delays the implementation of SFAS 125 for one year for certain
provisions, including repurchase agreements, dollar rolls, securities
lending and similar transactions. The Company will delay implementation
with respect to those affected provisions. Adoption of SFAS 125 has not and
will not have a material impact on the Company's results of operations,
financial condition and liquidity.
In June of 1997, FASB issued SFAS No. 130, "Reporting Comprehensive Income,"
which is effective for years beginning after December 15, 1997. This
statement defines comprehensive income as "the change in equity of a
business enterprise during a period from transactions and other events and
circumstances from non-owner sources, excluding investments by owners and
distributions to owners" and establishes standards for reporting and
displaying comprehensive income and its components in financial statements.
The statement requires that the Company classify items of other
comprehensive income by their nature and display the accumulated balance of
other comprehensive income separately from retained earnings in the equity
section of the Statement of Financial Position. In addition,
reclassification of financial statements for earlier periods must be
provided for comparative purposes.
RECLASSIFICATIONS
Certain amounts in the prior years have been reclassified to conform to
current year presentation.
12
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. INVESTMENTS
FIXED MATURITIES AND EQUITY SECURITIES
The following tables provide additional information relating to fixed
maturities and equity securities (excluding trading account assets) as of
December 31:
<TABLE>
<CAPTION>
1997
------------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
-------------- -------------- -------------- ------------
FIXED MATURITIES AVAILABLE FOR SALE (IN MILLIONS)
<S> <C> <C> <C> <C>
U.S. Treasury securities and obligations of
U.S. government corporations and agencies......... $ 9,755 $ 783 $ -- $ 10,538
Obligations of U.S. states and
their political subdivisions..................... 1,375 93 -- 1,468
Foreign government bonds............................ 3,177 218 17 3,378
Corporate securities................................ 49,997 2,601 144 52,454
Mortgage-backed securities.......................... 6,828 210 5 7,033
Other fixed maturities.............................. 364 35 -- 399
-------------- -------------- -------------- ------------
Total fixed maturities available for sale........... $ 71,496 $ 3,940 $ 166 $ 75,270
============== ============== ============== ============
EQUITY SECURITIES AVAILABLE FOR SALE................ $ 2,376 $ 680 $ 246 $ 2,810
============== ============== ============== ============
<CAPTION>
1997
------------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
-------------- -------------- -------------- ------------
FIXED MATURITIES HELD TO MATURITY (IN MILLIONS)
<S> <C> <C> <C> <C>
U.S. Treasury securities and obligations of
U.S. government corporations and agencies......... $ 88 $ - $ - $ 88
Obligations of U.S. states and
their political subdivisions...................... 152 4 1 155
Foreign government bonds............................ 33 5 - 38
Corporate securities................................ 18,282 1,212 34 19,460
Mortgage-backed securities.......................... 1 - - 1
Other fixed maturities.............................. 144 8 - 152
-------------- -------------- -------------- ------------
Total fixed maturities held to maturity............. $ 18,700 $ 1,229 $ 35 $ 19,894
============== ============== ============== ============
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. INVESTMENTS (CONTINUED)
1996
-------------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
--------------- -------------- -------------- ------------
FIXED MATURITIES AVAILABLE FOR SALE (IN MILLIONS)
<S> <C> <C> <C> <C>
U.S. Treasury securities and obligations of
U.S. government corporations and agencies......... $ 10,618 $ 361 $ 77 $ 10,902
Obligations of U.S. states and
their political subdivisions...................... 1,104 29 2 1,131
Foreign government bonds............................ 2,814 137 12 2,939
Corporate securities................................ 43,593 1,737 284 45,046
Mortgage-backed securities.......................... 6,377 140 21 6,496
Other fixed maturities.............................. 39 1 1 39
--------------- -------------- -------------- ------------
Total fixed maturities available for sale........... $ 64,545 $ 2,405 $ 397 $ 66,553
=============== ============== ============== ============
EQUITY SECURITIES AVAILABLE FOR SALE................ $ 2,103 $ 659 $ 140 $ 2,622
=============== ============== ============== ============
<CAPTION>
1996
-------------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
--------------- -------------- -------------- ------------
FIXED MATURITIES HELD TO MATURITY (IN MILLIONS)
<S> <C> <C> <C> <C>
U.S. Treasury securities and obligations of
U.S. government corporations and agencies......... $ 309 $ 3 $ 6 $ 306
Obligations of U.S. states and
their political subdivisions...................... 7 -- -- 7
Foreign government bonds............................ 162 11 -- 173
Corporate securities................................ 19,886 1,033 82 20,837
Mortgage-backed securities.......................... 26 -- -- 26
Other fixed maturities.............................. 13 -- -- 13
--------------- -------------- -------------- ------------
Total fixed maturities held to maturity............. $ 20,403 $ 1,047 $ 88 $ 21,362
=============== ============== ============== ============
</TABLE>
14
<PAGE>
INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. INVESTMENTS (CONTINUED)
The amortized cost and estimated fair value of fixed maturities by
contractual maturities at December 31, 1997, is shown below:
<TABLE>
<CAPTION>
AVAILABLE FOR SALE HELD TO MATURITY
-------------------------------- ------------------------------
ESTIMATED ESTIMATED
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
-------------- -------------- -------------- ------------
(IN MILLIONS) (IN MILLIONS)
<S> <C> <C> <C> <C>
Due in one year or less....................... $ 1,991 $ 2,011 $ 686 $ 695
Due after one year through five years......... 18,916 19,226 4,496 4,659
Due after five years through ten years........ 16,776 17,494 7,161 7,551
Due after ten years........................... 26,985 29,506 6,356 6,988
Mortgage-backed securities.................... 6,828 7,033 1 1
-------------- -------------- -------------- ------------
Total......................................... $ 71,496 $ 75,270 $ 18,700 $ 19,894
============== ============== ============== ============
</TABLE>
Actual maturities may differ from contractual maturities because issuers have
the right to call or prepay obligations
Proceeds from the repayment of held to maturity fixed maturities during 1997,
1996 and 1995 were $4,042 million, $4,268 million, and $3,767 million,
respectively. Gross gains of $62 million, $78 million, and $27 million, and
gross losses of $1 million, $7 million, and $0.2 million were realized on
prepayment of held to maturity fixed maturities during 1997, 1996 and 1995,
respectively.
Proceeds from the sale of available for sale fixed maturities during 1997,
1996 and 1995 were $120,604 million, $121,910 million and $96,134 million,
respectively. Proceeds from the maturity of available for sale fixed
maturities during 1997, 1996 and 1995 were $2,946 million, $1,458 million,
and $950 million, respectively. Gross gains of $1,310 million, $1,562
million, and $2,052 million and gross losses of $639 million, $1,026 million,
and $941 million were realized on sales and prepayments of available for sale
fixed maturities during 1997, 1996 and 1995, respectively.
Write downs for impairments of fixed maturities which were deemed to be other
than temporary were $13 million, $54 million and $100 million for the years
1997, 1996 and 1995, respectively.
During the year ended December 31, 1997, there were no securities classified
as held to maturity that were sold and two securities so classified were
transferred to the available for sale portfolio. These actions were taken as
a result of a significant deterioration in credit worthiness. The aggregate
amortized cost of the securities transferred was $26 million with gross
unrealized investment gains of $0.5 million charged to "Net unrealized
investment gains."
During the year ended December 31, 1996, one security classified as held to
maturity was sold and two securities so classified were transferred to the
available for sale portfolio. These actions were taken as a result of a
significant deterioration in credit worthiness. The amortized cost of the
security sold was $35 million with a related realized investment loss of $0.7
million; the aggregate amortized cost of the securities transferred was $26
million with gross unrealized investment losses of $6 million charged to "Net
unrealized investment gains."
15
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. INVESTMENTS (CONTINUED)
MORTGAGE LOANS ON REAL ESTATE
The Company's mortgage loans were collateralized by the following property
types at December 31:
<TABLE>
<CAPTION>
1997 1996
--------------------------------- --------------------------------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Office buildings............................... $ 4,692 28.5% $ 6,056 34.4%
Retail stores.................................. 3,078 18.7% 3,676 20.9%
Residential properties......................... 891 5.4% 961 5.4%
Apartment complexes............................ 3,551 21.6% 2,954 16.8%
Industrial buildings........................... 1,958 11.9% 1,807 10.3%
Agricultural properties........................ 1,666 10.1% 1,550 8.8%
Other.......................................... 618 3.8% 608 3.4%
--------------- --------- -------------- ------
Subtotal 16,454 100.0% 17,612 100.0%
========= ======
Allowance for losses........................... (450) (515)
--------------- --------------
Net carrying value............................. $ 16,004 $ 17,097
=============== ==============
</TABLE>
The mortgage loans are geographically dispersed throughout the United
States and Canada with the largest concentrations in California (25.3%) and
New York (8.3%) at December 31, 1997. Included in the above balances are
mortgage loans receivable from affiliated joint ventures of $225 million
and $461 million at December 31, 1997 and 1996, respectively.
Activity in the allowance for losses for all mortgage loans, for the years
ended December 31, is summarized as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---------------- ---------------- ---------------
(IN MILLIONS)
<S> <C> <C> <C>
Allowance for losses, beginning of year.............. $ 515 $ 862 $ 1,004
Additions charged to operations...................... 19 9 6
Release of allowance for losses...................... (60) (256) (32)
Charge-offs, net of recoveries....................... (24) (100) (116)
--------------- ---------------- ---------------
Allowance for losses, end of year.................... $ 450 $ 515 $ 862
================ ================ ===============
</TABLE>
The $60 million, $256 million and $32 million reduction of the mortgage
loan allowance for losses in 1997, 1996 and 1995, respectively, is
primarily attributable to the improved economic climate, changes in the
nature and mix of borrowers and underlying collateral and a significant
decrease in impaired loans consistent with a general decrease in the
mortgage loan portfolio due to prepayments, sales and foreclosures.
16
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. INVESTMENTS (CONTINUED)
Impaired mortgage loans and related allowance for losses at December 31,
are as follows:
<TABLE>
<CAPTION>
1997 1996
----------------- ------------------
(IN MILLIONS)
<S> <C> <C>
Impaired mortgage loans with allowance for losses ............. $ 330 $ 941
Impaired mortgage loans with no allowance for losses .......... 1,303 1,491
Allowance for losses .......................................... (97) (189)
----------------- ------------------
Net carrying value of impaired mortgage loans ................. $ 1,536 $ 2,243
================= ==================
</TABLE>
Impaired mortgage loans with no provision for losses are loans where the
fair value of the collateral or the net present value of the expected
future cash flows related to the loan equals or exceeds the recorded
investment. The average recorded investment in impaired loans before
allowance for losses was $2,102 million, $2,842 million and $4,146 million
during 1997, 1996 and 1995, respectively. Net investment income recognized
on these loans totaled $140 million, $265 million and $415 million for the
years ended December 31, 1997, 1996 and 1995, respectively.
INVESTMENT REAL ESTATE
The Company's "investment real estate" of $1,519 million and $2,586 million
at December 31, 1997 and 1996, respectively, is held through direct
ownership. Of the Company's real estate, $1,490 million and $406 million
consists of commercial and agricultural assets held for disposal at
December 31, 1997 and 1996, respectively. Impairment losses and the
valuation allowances aggregated $40 million, $38 million and $124 million
for the years ended December 31, 1997, 1996 and 1995, respectively, and are
included in "Realized investment gains, net."
RESTRICTED ASSETS AND SPECIAL DEPOSITS
Assets of $2,783 million and $2,453 million at December 31, 1997 and 1996,
respectively, were on deposit with governmental authorities or trustees as
required by certain insurance laws. Additionally, assets valued at $2,352
million at December 31, 1997, were held in voluntary trusts. Of this
amount, $1,801 million related to the multi-state policyholder settlement
as described in Note 14. The remainder relates to trusts established to
fund guaranteed dividends to certain policyholders. The terms of these
trusts provide that the assets are to be used for payment of the designated
settlement and dividend benefits, as the case may be. Assets valued at $741
million and $3,414 million at December 31, 1997 and 1996, respectively,
were maintained as compensating balances or pledged as collateral for bank
loans and other financing agreements. Restricted cash and securities of
$1,835 million and $1,614 million at December 31, 1997, and 1996,
respectively, were included in the consolidated financial statements. The
restricted cash represents funds deposited by clients and funds accruing to
clients as a result of trades or contracts.
OTHER LONG-TERM INVESTMENTS
The Company's "Other long-term investments" of $3,360 million and $2,995
million as of December 31, 1997 and 1996, respectively, are composed of
$1,349 million and $832 million in real estate related interests and $2,011
million and $2,163 million of non-real estate related interests, including
a $149 million net investment in a leveraged lease entered into in 1997.
The Company's share of net income from such entities was $411 million, $245
million, and $326 million for 1997, 1996, and 1995, respectively, and is
reported in "Net investment income."
17
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. INVESTMENTS (CONTINUED)
INVESTMENT INCOME AND INVESTMENT GAINS AND LOSSES
NET INVESTMENT INCOME arose from the following sources for the years ended
December 31:
<TABLE>
<CAPTION>
1997 1996 1995
-------------- -------------- -----------
(IN MILLIONS)
<S> <C> <C> <C>
Fixed maturities-available for sale........................ $ 5,074 $ 4,871 $ 4,774
Fixed maturities-held to maturity.......................... 1,622 1,793 1,717
Trading account assets..................................... 504 444 588
Equity securities-available for sale ...................... 52 81 57
Mortgage loans on real estate.............................. 1,555 1,690 2,075
Real estate ............................................... 565 685 742
Policy loans............................................... 396 384 392
Securities purchased under agreements to resell............ 15 11 19
Receivables from broker-dealer clients..................... 706 579 678
Short-term investments..................................... 697 536 590
Other investment income.................................... 573 725 983
-------------- -------------- -------------
Gross investment income.................................... 11,759 11,799 12,615
Less investment expenses................................... (1,896) (2,057) (2,437)
-------------- -------------- -------------
Net investment income...................................... $ 9,863 $ 9,742 $ 10,178
============== ============== =============
</TABLE>
REALIZED INVESTMENT GAINS, NET, including changes in allowances for losses
and charges for other than temporary reductions in value, for the years
ended December 31, were from the following sources:
<TABLE>
<CAPTION>
1997 1996 1995
-------------- -------------- -----------
(IN MILLIONS)
<S> <C> <C> <C>
Fixed maturities....................................... $ 684 $ 513 $ 1,180
Mortgage loans on real estate ......................... 68 248 67
Investment real estate ................................ 700 76 (19)
Equity securities-available for sale .................. 363 267 400
Other gains (losses)................................... 372 34 (125)
-------------- -------------- -----------
Realized investment gains, net......................... $ 2,187 $ 1,138 $ 1,503
============== ============== ===========
</TABLE>
NET UNREALIZED INVESTMENT GAINS on securities available for sale are
included in the consolidated statement of financial position as a component
of equity, net of tax. Changes in these amounts for the years ended
December 31, are as follows:
<TABLE>
<CAPTION>
1997 1996
----------------- -----------------
(IN MILLIONS)
<S> <C> <C>
Balance, beginning of year................................. $ 1,136 $ 2,397
Changes in unrealized investment
gains(losses) attributable to:
Fixed maturities ....................................... 1,766 (2,892)
Equity securities....................................... (85) 254
Participating group annuity contracts................... (564) 479
Deferred policy acquisition costs....................... (154) 261
Deferred federal income taxes........................... (347) 637
----------------- -----------------
Sub-total............................................... 616 (1,261)
----------------- -----------------
Balance, end of year....................................... $ 1,752 $ 1,136
================= =================
</TABLE>
18
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. INVESTMENTS (CONTINUED)
Based on the carrying value, assets categorized as "non-income producing"
for the year ended December 31, 1997 included in fixed maturities available
for sale, mortgage loans on real estate and other long term investments
totaled $26 million, $93 million and $7 million, respectively.
4. DEFERRED POLICY ACQUISITION COSTS
The balances of and changes in deferred policy acquisition costs as of and
for the years ended December 31, are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
-------------- -------------- -----------
(IN MILLIONS)
<S> <C> <C> <C>
Balance, beginning of year ............................ $ 6,291 $ 6,088 $ 6,403
Capitalization of commissions, sales and issue expenses 1,049 931 919
Amortization and other adjustments..................... (1,192) (989) (783)
Change in unrealized investment gains ................. (154) 261 (451)
-------------- -------------- -----------
Balance, end of year .................................. $ 5,994 $ 6,291 $ 6,088
============== ============== ===========
</TABLE>
5. FUTURE POLICY BENEFITS AND OTHER POLICYHOLDERS' LIABILITIES
FUTURE POLICY BENEFITS at December 31 are as follows:
<TABLE>
<CAPTION>
1997 1996
----------------- -----------------
(IN MILLIONS)
<S> <C> <C>
Life insurance ............................................ $ 46,712 $ 44,118
Annuities ................................................. 15,469 14,828
Other contract liabilities ................................ 3,400 5,009
----------------- -----------------
Future policy benefits .................................... $ 65,581 $ 63,955
================= =================
</TABLE>
Life insurance liabilities include reserves for death and endowment policy
benefits, terminal dividends, premium deficiency reserves and certain health
benefits. Annuity liabilities include reserves for immediate annuities and
non-participating group annuities. Other contract liabilities primarily consist
of unearned premium and benefit reserves for group health products.
The following table highlights the key assumptions generally utilized in
calculating these reserves:
<TABLE>
<CAPTION>
PRODUCT MORTALITY INTEREST RATE ESTIMATION METHOD
- ------------------------- ------------------------ --------------- ------------------------
<S> <C> <C> <C>
Life insurance Generally rates 2.5% to 7.5% Net level premium
guaranteed in calculating based on non-forfeiture
cash surrender values interest rate
Individual immediate 1983 Individual 3.25% to 11.25% Present value of
annuities Annuity Mortality expected future payments
Table with certain based on historical
modifications experience
Group annuities in 1950 Group 3.75% to 17.35% Present value of
payout status Annuity Mortality expected future payments
Table with certain based on historical
modifications experience
Other contract liabilities -- 6.0% to 7.0% Present value of
expected future payments
based on historical
experience
</TABLE>
19
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. FUTURE POLICY BENEFITS AND OTHER POLICYHOLDERS' LIABILITIES (CONTINUED)
For the above categories, premium deficiency reserves are established, if
necessary, when the liability for future policy benefits plus the present
value of expected future gross premiums are insufficient to provide for
expected future policy benefits and expenses. A premium deficiency reserve
has been recorded for the group single premium annuity business, which
consists of limited-payment, long duration, traditional non-participating
annuities. A liability of $1,645 million and $1,320 million is included in
"Future policy benefits" with respect to this deficiency for the years
ended December 31, 1997 and 1996, respectively.
POLICYHOLDERS' ACCOUNT BALANCES at December 31, are as follows:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
(IN MILLIONS)
<S> <C> <C>
Individual annuities........................................ $ 5,695 $ 6,408
Group annuities & guaranteed investment contracts........... 19,053 21,706
Interest-sensitive life contracts........................... 3,160 2,888
Dividend accumulations...................................... 5,033 5,007
--------- ---------
Policyholders' account balances............................. $ 32,941 $ 36,009
========= =========
</TABLE>
Policyholders' account balances for interest-sensitive life and
investment-type contracts are equal to policy account values. The policy
account values represent an accumulation of gross premium payments plus
credited interest less withdrawals, expenses and mortality charges.
Certain contract provisions that determine the policyholder account
balances are as follows:
<TABLE>
<CAPTION>
WITHDRAWAL/
PRODUCT INTEREST RATE SURRENDER CHARGES
----------------------------------- ------------------------ -------------------------------------
<S> <C> <C>
Individual annuities 3.1% to 6.6% 0% to 8% for up to 8 years
Group annuities 5.0% to 12.7% Contractually limited or subject to
market value adjustments
Guaranteed investment contracts 3.9% to 14.34% Subject to market value withdrawal
provisions for any funds withdrawn
other than for benefit responsive and
contractual payments
Interest sensitive life contracts 4.0% to 6.5% Various up to 10 years
Dividend accumulations 3.0% to 4.0%
</TABLE>
20
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. FUTURE POLICY BENEFITS AND OTHER POLICYHOLDERS' LIABILITIES (CONTINUED)
OTHER POLICYHOLDERS' LIABILITIES. The following table provides a
reconciliation of the activity in the liability for unpaid claims and claim
adjustment expense for property and casualty and accident and health
insurance, which is included in "Other policyholder's liabilities" at
December 31:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
(IN MILLIONS)
<S> <C> <C> <C>
Balance at January 1......................................... $ 6,043 $ 5,933 $ 7,983
Less reinsurance recoverables.............................. 563 572 865
---------- ---------- ----------
Net balance at January 1..................................... 5,480 5,361 7,118
---------- ---------- ----------
Incurred related to:
Current year............................................... 10,691 10,281 10,534
Prior years................................................ 11 (91) 141
---------- ---------- ----------
Total incurred............................................... 10,702 10,190 10,675
---------- ---------- ----------
Paid related to:
Current year............................................... 7,415 7,497 7,116
Prior years................................................ 2,651 2,574 2,800
---------- ---------- ----------
Total paid................................................... 10,066 10,071 9,916
---------- ---------- ----------
Less Reinsurance
Segment.................................................... -- -- 2,516
---------- ---------- ----------
Net balance at December 31................................... 6,116 5,480 5,361
Plus reinsurance recoverables.............................. 543 563 572
---------- ---------- ----------
Balance at December 31....................................... $ 6,659 $ 6,043 $ 5,933
========== ========== ==========
</TABLE>
The changes in provision for claims and claim adjustment expenses related
to prior years of $11 million, $(91) million and $141 million in 1997, 1996
and 1995, respectively, are due to such factors as changes in claim cost
trends in healthcare, an accelerated decline in indemnity health business,
and lower than anticipated property and casualty unpaid claims and claim
adjustment expenses.
The other policyholders' liabilities presented above consist primarily of
unpaid claim liabilities which include estimates for liabilities associated
with reported claims and for incurred but not reported claims based, in
part, on the Company's experience. Changes in the estimated cost to settle
unpaid claims are charged or credited to the statement of operations
periodically as the estimates are revised. Accident and health unpaid
claims liabilities for 1997 and 1996 included above are discounted using
interest rates ranging from 6.0% to 7.5%.
21
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. SHORT-TERM AND LONG-TERM DEBT
Debt consists of the following at December 31:
SHORT-TERM DEBT
<TABLE>
<CAPTION>
1997 1996
-------------- --------------
(IN MILLIONS)
<S> <C> <C>
Commercial paper.......................................... $ 4,268 $ 4,511
Notes payable............................................. 2,151 1,614
Current portion of long-term debt......................... 355 437
-------------- --------------
Total short-term debt................................ $ 6,774 $ 6,562
============== ==============
</TABLE>
The weighted average interest rate on outstanding short-term debt was
approximately 6.0% and 5.6% at December 31, 1997 and 1996, respectively.
The Company issues commercial paper primarily to manage operating cash
flows and existing commitments, meet working capital needs and take
advantage of current investment opportunities. Commercial paper borrowings
are supported by various lines of credit.
LONG-TERM DEBT
<TABLE>
<CAPTION>
DESCRIPTION MATURITY DATES RATE 1997 1996
------------------------------------ ----------------- -------------- --------- ----------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Floating rate notes ("FRN") 1998 6.5% $ 40 $ 128
Long term notes 1998 - 2023 4% - 12% 1,194 1,023
Zero coupon notes 1998 - 1999 8.6% (a) 334 365
Australian dollar notes 1997 9% -- 55
Canadian dollar notes 1997 - 1998 7.0% - 9.125% 117 320
Japanese yen notes 1998 - 2000 0.5% - 4.6% 178 90
Swiss francs notes 1998 3.875% 120 103
Canadian dollar FRN 2003 5.89% 96 96
Surplus notes 2003 - 2025 6.875% - 8.3% 986 985
Commercial paper backed by long-term
credit agreements 1,500 1,000
Other notes payable 1998 - 2017 4% - 7.5% 63 32
---------- ----------
Sub-total............................................................................. 4,628 4,197
Less: current portion of long-term debt............................................ (355) (437)
---------- ----------
Total long-term debt.................................................................. $ 4,273 $ 3,760
========== ==========
</TABLE>
(a) The rate shown for zero coupon notes, which do not bear interest,
represents a level yield to maturity.
Payment of interest and principal on the surplus notes of $686 million
issued after 1993 may be made only with the prior approval of the
Commissioner of Insurance of the State of New Jersey.
In order to modify exposure to interest rate and currency exchange rate
movements, the Company utilizes derivative instruments, primarily interest
rate swaps, in conjunction with some of its debt issues. The effect of
these derivative instruments is included in the calculation of the interest
expense on the associated debt, and as a result, the effective interest
rates on the debt may differ from the rates reflected in the tables above.
Floating rates are determined by formulas and may be subject to certain
minimum or maximum rates.
Scheduled principal repayments of long-term debt as of December 31, 1997,
are as follows: $357 million in 1998, $808 million in 1999, $260 million in
2000, $32 million in 2001, $1,814 million in 2002 and $1,379 million
thereafter.
At December 31, 1997, the Company had $8,257 million in lines of credit
from numerous financial institutions of which $5,160 million were unused.
These lines of credit generally have terms ranging from 1 to 5 years.
22
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. EMPLOYEE BENEFIT PLANS
PENSION PLANS
The Company has one funded non-contributory defined benefit pension plan,
which covers substantially all of its employees. The Company also has
several non-contributory non-funded defined benefit plans covering certain
executives. Benefits are generally based on career average earnings and
credited length of service. The Company's funding policy is to contribute
annually an amount necessary to satisfy the Internal Revenue Service
contribution guidelines.
Prepaid and accrued pension costs are included in "Other assets" and "Other
liabilities," respectively, in the Company's consolidated statements of
financial position. The status of these plans as of September 30, adjusted
for fourth quarter activity related to funding activity and contractual
termination benefits is summarized below:
<TABLE>
<CAPTION>
1997 1996
--------------------------------- --------------------------------
ASSETS ACCUMULATED ASSETS ACCUMULATED
EXCEED BENEFITS EXCEED BENEFITS
ACCUMULATED EXCEED ACCUMULATED EXCEED
BENEFITS ASSETS BENEFITS ASSETS
--------------- -------------- -------------- -------------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Actuarial present value of
benefit obligation:
Vested benefit obligation.............. $ (4,129) $ (205) $ (3,826) $ (180)
============ ============ =========== =============
Accumulated benefit obligation......... $ (4,434) $ (226) $ (4,121) $ (198)
============ ============ =========== =============
Projected benefit obligation............. $ (5,238) $ (319) $ (4,873) $ (274)
Plan assets at fair value................ 8,489 -- 7,306 --
------------ ------------ ----------- -------------
Plan assets in excess of (less than)
projected benefit obligation........... 3,251 (319) 2,433 (274)
Unrecognized transition amount........... (662) 1 (769) 1
Unrecognized prior service cost.......... 317 10 356 11
Unrecognized net (gain) loss............. (1,689) 45 (916) 16
Additional minimum liability............. -- (11) -- (10)
Effect of fourth quarter activity........ (67) 4 (98) 4
------------ ------------ ----------- -------------
Prepaid (accrued) pension cost
at December 31......................... $ 1,150 $ (270) $ 1,006 $ (252)
============ ============ =========== =============
</TABLE>
Plan assets consist primarily of equity securities, bonds, real estate and
short-term investments, of which $6,022 million and $5,668 million are
included in Separate Account assets and liabilities at December 31, 1997
and 1996, respectively.
Effective December 31, 1996, The Prudential Securities Incorporated Cash
Balance Plan (the "PSI Plan") was merged into The Retirement System for
United States Employees and Special Agents of The Prudential Insurance
Company of America (the "Prudential Plan"). The name of the merged plan is
The Prudential Merged Retirement Plan ("Merged Retirement Plan"). All of
the assets of the Merged Retirement Plan are available to pay benefits to
participants and their beneficiaries who are covered by the Merged
Retirement Plan. The merger of the plans had no effect on the December 31,
1996 consolidated financial position or results of operations.
During 1996, the Prudential Plan was amended to provide cost of living
adjustments for retirees. The effect of this plan amendment increased
benefit obligations and unrecognized prior service cost by $170 million at
September 30, 1996. In addition, the Prudential Plan was amended to provide
contractual termination benefits to certain plan participants who were
notified between September 15, 1996 and December 31, 1997 that their
employment had been terminated. During 1997, the Prudential Retirement Plan
Document, a component of the Merged Retirement Plan was amended to extend
the contractual termination benefits to December 31, 1998. Costs related to
these amendments are reflected below in contractual termination benefits.
23
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. EMPLOYEE BENEFIT PLANS (CONTINUED)
Net periodic pension income included in "General and administrative
expenses" in the Company's consolidated statement of operations for the
years ended December 31, 1997, 1996 and 1995 include the following
components:
<TABLE>
<CAPTION>
1997 1996 1995
-------------- ------------- --------------
(IN MILLIONS)
<S> <C> <C> <C>
Service cost-benefits earned during the year......... $ 127 $ 140 $ 133
Interest cost on projected benefit obligation........ 376 354 392
Actual return on plan assets......................... (1,693) (748) (1,288)
Net amortization and deferral........................ 1,012 73 629
Contractual termination benefits..................... 30 63 --
-------------- ------------- --------------
Net periodic pension income.......................... $ (148) $ (118) $ (134)
============== ============= ==============
</TABLE>
The assumptions at September 30 used by the Company are to calculate the
projected benefit obligations as of that date and determine the pension
expense for the following fiscal year:
<TABLE>
<CAPTION>
1997 1996 1995
-------------- ------------- --------------
<S> <C> <C> <C>
Discount rate.......................................... 7.25% 7.75% 7.50%
Rate of increase in compensation levels................ 4.50% 4.50% 4.50%
Expected long-term rate of return on plan assets....... 9.50% 9.50% 9.00%
</TABLE>
OTHER POSTRETIREMENT BENEFITS
The Company provides certain life insurance and health care benefits for
its retired employees, their beneficiaries and covered dependents.
Substantially all of the Company's employees may become eligible to receive
benefits if they retire after age 55 with at least 10 years of service, or
under circumstances after age 50 with at least 20 years of continuous
service.
The Company has elected to amortize its transition obligation over 20
years. Post-retirement benefits are funded as considered necessary by
Company management. The Company's funding of its postretirement benefit
obligations totaled $43 million, $38 million and $94 million in 1997, 1996
and 1995, respectively.
In 1995 the Company modified the restrictions on certain post-retirement
plan assets to allow these assets to be used for benefits related to both
active and retired employees. Formerly, these benefits were available only
for retired employees. In connection with this modification, the Company
transferred $120 million from one of these plans in 1995. Of the $120
million transferred, $45 million went to Union Post-Retirement Benefits and
$75 million went to Union Medical Benefits.
24
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. EMPLOYEE BENEFIT PLANS (CONTINUED)
The status of the plan at September 30, adjusted for assets transferred to
the plan in the fourth quarter, is provided below. Accrued post-retirement
benefit costs are included in "Other liabilities" in the Company's
consolidated statement of financial position.
<TABLE>
<CAPTION>
1997 1996
---------- ----------
(IN MILLIONS)
<S> <C> <C>
Accumulated postretirement benefit obligation (APBO):
Retirees.......................................................... $ (1,516) $ (1,423)
Fully eligible active plan participants........................... (36) (35)
Other active plan participants.................................... (576) (544)
--------- ---------
Total APBO..................................................... (2,128) (2,002)
Plan assets at fair value............................................ 1,354 1,313
--------- ---------
Funded status........................................................ (774) (689)
Unrecognized transition amount....................................... 707 787
Unrecognized net gain ............................................... (364) (428)
Effects of fourth quarter activity................................... 33 28
--------- ---------
Accrued postretirement benefit cost at December 31................... $ (398) $ (302)
========= =========
</TABLE>
Plan assets with respect to this coverage consist of group and individual
variable life insurance policies, group life and health contracts, common
stocks, U.S. government securities and short-term investments. Plan assets
include $1,044 million and $1,003 million of Company insurance policies and
contracts at December 31, 1997 and 1996, respectively.
Net periodic postretirement benefit cost included in "General and
administrative expenses" for the years ended December 31, 1997, 1996 and
1995 includes the following components:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ----------- -----------
(IN MILLIONS)
<S> <C> <C> <C>
Service cost.............................................. $ 38 $ 45 $ 44
Interest cost............................................. 149 157 169
Actual return on plan assets.............................. (120) (105) (144)
Net amortization and deferral............................. 70 53 111
----------- ----------- -----------
Net periodic postretirement benefit cost.................. $ 137 $ 150 $ 180
=========== =========== ===========
</TABLE>
The following assumptions at September 30 are used to calculate the APBO as
of that date and determine postretirement benefit expense for the following
fiscal year:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Discount rate............................................. 7.25% 7.75% 7.50%
Rate of increase in compensation levels................... 4.5% 4.5% 4.5%
Expected long-term rate of return on plan assets.......... 9.0% 9.0% 8.0%
Health care cost trend rates.............................. 8.2-11.8% 8.5-12.5% 8.9-13.3%
Ultimate health care cost trend rate after gradual
decrease until 2006....................................... 5.0% 5.0% 5.0%
</TABLE>
25
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. EMPLOYEE BENEFIT PLANS (CONTINUED)
The effect of a 1% increase in health care cost trend rates for each future
year on the following costs at December 31, are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
(IN MILLIONS)
<S> <C> <C> <C>
Accumulated postretirement benefit obligation............ $ (218) $ (207) $ (217)
Service and interest costs............................... 24 25 27
</TABLE>
POSTEMPLOYMENT BENEFITS
The Company accrues postemployment benefits primarily for life and health
benefits provided to former or inactive employees who are not retirees. The
net accumulated liability for these benefits at December 31, 1997 and 1996
was $144 million and $156 million, respectively, and is included in "Other
liabilities."
OTHER EMPLOYEE BENEFITS
The Company sponsors voluntary savings plans for employees (401(k) plans).
The plans provide for salary reduction contributions by employees and
matching contributions by the Company of up to three percent of annual
salary, resulting in $63 million, $57 million, and $61 million of expenses
included in "General and administrative expenses" for 1997, 1996 and 1995,
respectively.
8. INCOME TAXES
The components of income tax expense for the years ended December 31, were
as follows:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
(IN MILLIONS)
<S> <C> <C> <C>
Current tax expense (benefit):
U.S...................................................... $ (158) $ 255 $ 1,189
State and Iocal.......................................... 48 103 38
Foreign.................................................. 64 48 66
--------- --------- ---------
Total.................................................... $ (46) $ 406 $ 1,293
========= ========= =========
Deferred tax expense (benefit):
U.S...................................................... $ 227 $ (442) $ (166)
State and Iocal.......................................... 3 (2) (10)
Foreign.................................................. 33 54 9
--------- --------- ---------
Total.................................................... $ 263 $ (390) $ (167)
========= ========= =========
Total income tax expense................................. $ 217 $ 16 $ 1,126
========= ========= =========
</TABLE>
26
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. INCOME TAXES (CONTINUED)
The Company's income tax expense for the years ended December 31, differs
from the amount computed by applying the expected federal income tax rate
of 35% to income from operations before income taxes for the following
reasons:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
(IN MILLIONS)
<S> <C> <C> <C>
Expected federal income tax expense.......................... $ 290 $ 382 $ 829
Equity tax................................................... (91) (365) 163
State and local income taxes................................. 51 100 28
Tax-exempt interest and dividend received deduction.......... (67) (50) (77)
Other........................................................ 34 (51) 183
-------- -------- --------
Total income tax expense..................................... $ 217 $ 16 $ 1,126
======== ======== ========
</TABLE>
Deferred tax assets and liabilities at December 31, resulted from the items
listed in the following table:
<TABLE>
<CAPTION>
1997 1996
------- --------
(IN MILLIONS)
<S> <C> <C>
Deferred tax assets
Insurance reserves.......................................... $ 1,482 $ 1,316
Policyholder dividends...................................... 250 257
Net operating loss carryforwards............................ 80 268
Depreciation................................................ -- 44
Litigation related reserves................................. 178 297
Employee benefits........................................... 42 10
Other....................................................... 360 329
-------- --------
Deferred tax assets before valuation allowance.............. 2,392 2,521
Valuation allowance......................................... (18) (36)
-------- --------
Deferred tax assets after valuation allowance............... 2,374 2,485
-------- --------
Deferred tax liabilities
Investments................................................. 1,867 1,183
Deferred acquisition costs.................................. 1,525 1,707
Depreciation................................................ 36 --
Other....................................................... 73 110
-------- --------
Deferred tax liabilities.................................... 3,501 3,000
-------- --------
Net deferred tax liability.................................... $ 1,127 $ 515
======== ========
</TABLE>
The Company's income taxes payable of $500 million and $1,544 million
includes a $627 million current income tax receivable at December 31, 1997
and a $1,029 million current income taxes payable at December 31, 1996.
27
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. INCOME TAXES (CONTINUED)
Management believes that based on its historical pattern of taxable income,
the Company will produce sufficient income in the future to realize its net
deferred tax asset after valuation allowance. Adjustments to the valuation
allowance will be made if there is a change in management's assessment of
the amount of the deferred tax asset that is realizable. At December 31,
1997, the Company had state non-life operating loss carryforwards for tax
purposes approximating $800 million.
The Internal Revenue Service (the "Service") has completed an examination
of the consolidated federal income tax return through 1989. The Service has
examined the years 1990 through 1992. Discussions are being held with the
Service with respect to proposed adjustments, however, management believes
there are adequate defenses against, or sufficient reserves to provide for,
such adjustments. The Service has begun their examination of the years 1993
through 1995.
9. EQUITY
RECONCILIATION OF STATUTORY SURPLUS AND NET INCOME
Accounting practices used to prepare statutory financial statements for
regulatory purposes differ in certain instances from GAAP. The following
table reconciles the Company's statutory net income and surplus as of and
for the years ended December 31, determined in accordance with accounting
practices prescribed or permitted by the New Jersey Department of Banking
and Insurance with net income and equity determined using GAAP:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
(IN MILLIONS)
<S> <C> <C> <C>
STATUTORY NET INCOME........................................... $ 1,471 $ 1,402 $ 478
Adjustments to reconcile to net income on a GAAP basis:
Insurance revenues and expenses.............................. 12 (478) (496)
Income taxes................................................. 601 439 (596)
Valuation of investments..................................... (62) 121 --
Realized investment gains.................................... 702 327 1,562
Litigation and other reserves................................ (1,975) (906) --
Other, net................................................... (139) 173 295
-------- -------- --------
GAAP NET INCOME................................................ $ 610 $ 1,078 $ 1,243
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
1997 1996
-------- --------
(IN MILLIONS)
<S> <C> <C>
STATUTORY SURPLUS.............................................. $ 9,242 $ 9,375
Adjustments to reconcile to equity on a GAAP basis:
Deferred policy acquisition costs............................ 5,994 6,291
Valuation of investments..................................... 8,067 5,624
Future policy benefits and policyholder account balances..... (2,906) (1,976)
Non-admitted assets.......................................... 1,643 1,285
Income taxes................................................. (1,070) (654)
Surplus notes................................................ (986) (985)
Other, net................................................... (266) (437)
-------- --------
GAAP EQUITY.................................................... $ 19,718 $ 18,523
======== ========
</TABLE>
28
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. EQUITY (CONTINUED)
The New York State Insurance Department ("Department") recognizes only
statutory accounting for determining and reporting the financial condition
of an insurance company, for determining its solvency under the New York
Insurance Law and for determining whether its financial condition warrants
the payment of a dividend to its policyholders. No consideration is given
by the Department to financial statements prepared in accordance with GAAP
in making such determinations.
10. OPERATING LEASES
The Company and its subsidiaries occupy leased office space in many
locations under various long-term leases and have entered into numerous
leases covering the long-term use of computers and other equipment. At
December 31, 1997, future minimum lease payments under non-cancelable
operating leases are estimated as follows:
(IN MILLIONS)
1998........................................ $ 313
1999........................................ 277
2000........................................ 230
2001........................................ 201
2002........................................ 171
Remaining years after 2002.................. 833
-----------
Total....................................... $ 2,025
===========
Rental expense incurred for the years ended December 31, 1997 and 1996 was
approximately $352 million and $343 million, respectively.
11. DIVESTITURES
In October 1995, the Company completed the sale of its reinsurance segment,
Prudential Reinsurance Holdings, Inc., through an initial public offering
of common stock. As a result of the sale, an after-tax loss of $297 million
was recorded in 1995.
On January 26, 1996, the Company entered into a definitive agreement to
sell substantially all the assets of Prudential Home Mortgage Company, Inc.
It has also liquidated certain mortgage-backed securities and extended
warehouse losses, asset write downs, and other costs directly related to
the planned sale. The Company recorded an after-tax loss in 1995 of $98
million which includes operating gains and losses, asset write downs and
other costs directly related with the planned sale. The net assets of the
mortgage banking segment at December 31, 1995 was $78 million, comprised of
$4,293 million in assets and $4,215 million in liabilities.
On July 31, 1996, the Company sold a substantial portion of its Canadian
Branch business to the London Life Insurance Company ("London Life"). This
transaction was structured as a reinsurance transaction whereby London Life
assumed total liabilities of the Canadian Branch equal to $3,291 million as
well as a related amount of assets equal to $3,205 million. This transfer
resulted in a reduction of policy liabilities of $3,257 million and a
corresponding reduction in invested assets. The Company recognized an
after-tax gain in 1996 of $116 million as a result of this transaction,
recorded in "Realized investment gains, net."
12. FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair values presented below have been determined using available
information and valuation methodologies. Considerable judgment is applied
in interpreting data to develop the estimates of fair value. Accordingly,
such estimates presented may not be realized in a current market exchange.
The use of different market assumptions and/or estimation methodologies
could have a material effect on the estimated fair values. The following
methods and assumptions were used in calculating the fair values (for all
other financial instruments presented in the table, the carrying value
approximates fair value).
29
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
FIXED MATURITIES AND EQUITY SECURITIES
Fair values for fixed maturities and equity securities, other than private
placement securities, are based on quoted market prices or estimates from
independent pricing services. Fair values for private placement securities
are estimated using a discounted cash flow model which considers the
current market spreads between the U.S. Treasury yield curve and corporate
bond yield curve, adjusted for the type of issue, its current credit
quality and its remaining average life. The estimated fair value of certain
non-performing private placement securities is based on amounts estimated
by management.
MORTGAGE LOANS ON REAL ESTATE
The fair value of the mortgage loan portfolio is primarily based upon the
present value of the scheduled future cash flows discounted at the
appropriate U.S. Treasury rate, adjusted for the current market spread for
a similar quality mortgage. For certain non-performing and other loans, the
fair value is based upon the present value of expected future cash flows
discounted at the appropriate U.S. Treasury rate adjusted for current
market spread for a similar quality mortgage.
POLICY LOANS
The estimated fair value of policy loans is calculated using a discounted
cash flow model based upon current U.S. Treasury rates and historical loan
repayments.
DERIVATIVE FINANCIAL INSTRUMENTS
The fair value of swap agreements is estimated based on the present value
of future cash flows under the agreements discounted at the applicable zero
coupon U.S. Treasury rate and swap spread. The fair value of forwards,
futures and options is estimated based on market quotes for a transaction
with similar terms. The fair value of loan commitments is derived by
comparing the contractual stream of fees with such fee streams adjusted to
reflect current market rates that would be applicable to instruments of
similar type, maturity, and credit standing.
POLICYHOLDERS' ACCOUNT BALANCES
Fair values of policyholders' account balances are estimated using
discounted projected cash flows, based on interest rates being offered for
similar contracts, with maturities consistent with those remaining for the
contracts being valued.
DEBT
The estimated fair value of short-term and long-term debt is derived by
using discount rates based on the borrowing rates currently available to
the Company for debt with similar terms and remaining maturities.
30
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
The following table discloses the carrying amounts and estimated fair
values of the Company's financial instruments at December 31:
<TABLE>
<CAPTION>
1997 1996
-------------------------- ------------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
------------ ----------- ------------ --------------
FINANCIAL ASSETS: (IN MILLIONS)
<S> <C> <C> <C> <C>
Other than trading:
- -------------------
Fixed maturities:
Available for sale....................... $ 75,270 $ 75,270 $ 66,553 $ 66,553
Held to maturity......................... 18,700 19,894 20,403 21,362
Equity securities........................... 2,810 2,810 2,622 2,622
Mortgage loans on real estate............... 16,004 17,153 17,097 17,963
Policy loans................................ 6,827 6,994 6,692 6,613
Securities purchased under
agreements to resell .................... 8,661 8,661 5,347 5,347
Cash collateral for borrowed securities..... 5,047 5,047 2,416 2,416
Short-term investments...................... 12,106 12,106 9,294 9,294
Cash ....................................... 3,636 3,636 2,091 2,091
Separate Accounts assets.................... 74,046 74,046 63,358 63,358
Derivative financial instruments............ 24 35 16 32
Trading:
- --------
Trading account assets...................... 6,044 6,044 4,219 4,219
Receivables from broker-dealer clients...... 6,273 6,273 5,281 5,281
Derivative financial instruments............ 979 979 904 904
FINANCIAL LIABILITIES:
Other than trading:
- -------------------
Policyholders' account balances............. 32,941 33,896 36,009 37,080
Securities sold under
agreements to repurchase................. 12,347 12,347 7,503 7,503
Cash collateral for loaned securities....... 14,117 14,117 8,449 8,449
Short-term and long-term debt............... 11,047 11,020 10,322 10,350
Securities sold but not yet purchased....... 3,533 3,533 1,900 1,900
Separate Accounts liabilities............... 73,658 73,658 62,845 62,845
Derivative financial instruments............ 32 47 32 45
Trading:
- --------
Payables to broker-dealer clients........... 3,338 3,338 3,018 3,018
Derivative financial instruments ........... 1,088 1,088 1,120 1,120
</TABLE>
31
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. DERIVATIVE AND OFF-BALANCE SHEET CREDIT-RELATED INSTRUMENTS
DERIVATIVE FINANCIAL INSTRUMENTS
The tables below summarize the Company's outstanding positions by
derivative instrument types as of December 31, 1997 and 1996. The amounts
presented are classified as either trading or other than trading, based on
management's intent at the time of contract inception and throughout the
life of the contract. The table includes the estimated fair values of
outstanding derivative positions only and does not include the changes in
fair values of associated financial and non-financial assets and
liabilities, which generally offset derivative notional amounts. The fair
value amounts presented also do not reflect the netting of amounts pursuant
to right of setoff, qualifying master netting agreements with
counterparties or collateral arrangements.
DERIVATIVE FINANCIAL INSTRUMENTS
DECEMBER 31, 1997
(IN MILLIONS)
<TABLE>
<CAPTION>
TRADING OTHER THAN TRADING TOTAL
------------------------ ----------------------- ------------------------------------
ESTIMATED ESTIMATED CARRYING ESTIMATED
NOTIONAL FAIR VALUE NOTIONAL FAIR VALUE NOTIONAL AMOUNT FAIR VALUE
----------- ----------- ---------- ----------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Swaps:
Assets.............. $ 7,759 $ 394 $ 61 $ -- $ 7,820 $ 395 $ 394
Liabilities......... 6,754 489 13 3 6,767 493 491
Forwards:
Assets.............. 29,511 429 1,031 23 30,542 452 452
Liabilities......... 29,894 459 647 7 30,541 466 466
Futures:
Assets.............. 4,103 51 46 -- 4,149 51 51
Liabilities......... 3,064 50 3,320 21 6,384 71 71
Options:
Assets.............. 6,893 105 239 -- 7,132 105 105
Liabilities......... 4,165 90 5 -- 4,170 90 90
Loan Commitments:
Assets.............. -- -- 317 12 317 -- 12
Liabilities......... -- -- 524 16 524 -- 16
----------- ----------- ---------- ----------- ----------- ---------- -----------
Total:
Assets.............. $ 48,266 $ 979 $ 1,694 $ 35 $ 49,960 $ 1,003 $ 1,014
=========== =========== ========== =========== =========== ========== ===========
Liabilities......... $ 43,877 $ 1,088 $ 4,509 $ 47 $ 48,386 $ 1,120 $ 1,134
=========== =========== ========== =========== =========== ========== ===========
</TABLE>
32
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. DERIVATIVE AND OFF-BALANCE SHEET CREDIT-RELATED INSTRUMENTS (CONTINUED)
DERIVATIVE FINANCIAL INSTRUMENTS
DECEMBER 31, 1997
(IN MILLIONS)
<TABLE>
<CAPTION>
TRADING OTHER THAN TRADING TOTAL
------------------------ ----------------------- ------------------------------------
ESTIMATED ESTIMATED CARRYING ESTIMATED
NOTIONAL FAIR VALUE NOTIONAL FAIR VALUE NOTIONAL AMOUNT FAIR VALUE
----------- ----------- ---------- ----------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Swaps:
Assets.............. $ 8,080 $ 481 $ 398 $ 10 $ 8,478 $ 481 $ 491
Liabilities......... 8,316 756 139 17 8,455 771 773
Forwards:
Assets.............. 24,275 367 489 13 24,764 376 380
Liabilities......... 20,103 308 920 10 21,023 318 318
Futures:
Assets.............. 2,299 24 3 -- 2,302 24 24
Liabilities......... 2,573 30 1,087 6 3,660 36 36
Options:
Assets.............. 2,981 32 2,083 7 5,064 39 39
Liabilities......... 2,653 26 437 12 3,090 27 38
Loan Commitments:
Assets.............. -- -- 163 2 163 -- 2
Liabilities......... -- -- 445 -- 445 -- --
----------- ----------- ---------- ----------- ----------- ---------- -----------
Total:
Assets.............. $ 37,635 $ 904 $ 3,136 $ 32 $ 40,771 $ 920 $ 936
=========== =========== ========== =========== =========== ========== ===========
Liabilities......... $ 33,645 $ 1,120 $ 3,028 $ 45 $ 36,673 $ 1,152 $ 1,165
=========== =========== ========== =========== =========== ========== ===========
</TABLE>
CREDIT RISK
The current credit exposure of the Company's derivative contracts is
limited to the fair value at the reporting date. Credit risk is managed by
entering into transactions with creditworthy counterparties and obtaining
collateral where appropriate and customary. The Company also attempts to
minimize its exposure to credit risk through the use of various credit
monitoring techniques. Approximately 95% of the net credit exposure for the
Company from derivative contracts is with investment-grade counterparties.
Net trading revenues for the years ended December 31, 1997, 1996 and 1995
relating to forwards, futures and swaps were $54 million, $37 million, $(8)
million; $42 million, $32 million, $(11) million; and $110 million, $42
million, $3 million respectively. Net trading revenues for options were not
material. Average fair values for trading derivatives in an asset position
during the years ended December 31, 1997 and 1996 were $1,015 million and
$881 million, respectively, and for derivatives in a liability position
were $1,166 million and $1,038 million, respectively. Of those derivatives
held for trading purposes at December 31, 1997, 52% of the notional amount
consisted of interest rate derivatives, 40% consisted of foreign currency
derivatives, and 8% consisted of equity and commodity derivatives. Of those
derivatives held for purposes other than trading at December 31, 1997, 72%
of notional consisted of interest rate derivatives and 28% consisted of
foreign currency derivatives.
33
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. DERIVATIVE AND OFF-BALANCE SHEET CREDIT-RELATED INSTRUMENTS (CONTINUED)
OFF-BALANCE SHEET CREDIT-RELATED INSTRUMENTS
During the normal course of its business, the Company utilizes financial
instruments with off-balance sheet credit risk such as commitments,
financial guarantees, loans sold with recourse and letters of credit.
Commitments include commitments to purchase and sell mortgage loans, the
unfunded portion of commitments to fund investments in private placement
securities, and unused credit card and home equity lines. The Company also
provides financial guarantees incidental to other transactions and letters
of credit that guarantee the performance of customers to third parties.
These credit-related financial instruments have off-balance sheet credit
risk because only their origination fees, if any, and accruals for probable
losses, if any, are recognized until the obligation under the instrument is
fulfilled or expires. These instruments can extend for several years and
expirations are not concentrated in any period. The Company seeks to
control credit risk associated with these instruments by limiting credit,
maintaining collateral where customary and appropriate, and performing
other monitoring procedures.
The fair value of asset positions in these instruments, which represents
the Company's current exposure to credit loss from other parties'
non-performance, was $1,014 million and $936 million at December 31, 1997
and 1996, respectively.
14. CONTINGENCIES AND LITIGATION
FINANCIAL GUARANTEE AGREEMENT
In connection with the sale in 1995 of its wholly-owned subsidiary
Prudential Reinsurance Company ("Pru Re"), the Company's subsidiary,
Gibraltar Casualty Insurance Company ("Gibraltar") entered into a stop-loss
reinsurance agreement with Pru Re whereby Gibraltar has reinsured up to
$375 million of the first $400 million of aggregate adverse loss
development on reserves recorded by Pru Re at June 30, 1995. Gibraltar also
has entered into several quota share reinsurance arrangements with Pru Re
whereby certain medical malpractice, direct insurance and casualty
reinsurance pool risks previously underwritten by Pru Re prior to June 30,
1995 were ceded to Gibraltar. The Company has guaranteed Gibraltar's
obligations arising under each of these contracts subject to a limit of
$375 million for the stop-loss agreement and $400 million for the other
agreements. Through December 31, 1997, Gibraltar has incurred $285 million
in losses under the stop-loss agreement, including $45 million in 1997.
Gibraltar has paid $165 million to Pru Re under the stop-loss agreement.
The Company has not been required to fund losses arising under the other
arrangements.
ENVIRONMENTAL AND ASBESTOS-RELATED CLAIMS
Certain of the Company's subsidiaries received claims under expired
contracts which assert alleged injuries and/or damages relating to or
resulting from toxic torts, toxic waste and other hazardous substances. The
liabilities for such claims cannot be estimated by traditional reserving
techniques. As a result of judicial decisions and legislative actions, the
coverage afforded under these contracts may be expanded beyond their
original terms. Extensive litigation between insurers and insureds over
these issues continues and the outcome is not predictable. In establishing
the liability for unpaid claims for these losses, management considered the
available information. However, given the expansion of coverage and
liability by the courts and legislatures in the past, and potential for
other unfavorable trends in the future, the ultimate cost of these claims
could increase from the levels currently established.
MANAGED CARE REIMBURSEMENT
In 1997, the Company continued to review its obligations under certain
managed care arrangements for possible failure to comply with contractual
and regulatory requirements. The estimated cost to the Company for these
reimbursements increased by $115 million in 1997, bringing the total
provision to $265 million. As of December 31, 1997, $163 million has been
paid or credited to customers. It is the opinion of management that the
remaining reserves of $102 million at December 31, 1997 represent a
reasonable estimate of remaining reimbursements to customers and other
related costs.
LITIGATION
Various lawsuits against the Company have arisen in the course of the
Company's business. In certain of these matters, large and/or indeterminate
amounts are sought.
Three putative class actions and approximately 677 individual actions were
pending against the Company in the United States as of January 31, 1998
brought on behalf of those persons who purchased life insurance policies
allegedly because of deceptive sales practices engaged in by the Company
and its insurance agents in violation of state and federal laws. The
Company anticipates additional suits may be filed by individuals who opted
out of the class action settlement described below. The sales practices
alleged to have occurred are contrary to Company policy. Some of
34
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. CONTINGENCIES AND LITIGATION (CONTINUED)
these cases seek substantial damages while others seek unspecified
compensatory, punitive and treble damages. The Company intends to defend
these cases vigorously.
A Multi-State Life Insurance Task Force (the "Task Force"), comprised of
insurance regulators from 29 states and the District of Columbia, was
formed in April 1995 to conduct a review of sales and marketing practices
throughout the life insurance industry. As the largest life insurance
company in the United States, the Company was the initial focus of the Task
Force examination. On July 9, 1996, the Task Force released its report on
the Company's activities. The Task Force found that some sales of life
insurance policies by the Company had been improper. Based on the findings,
the Task Force recommended, and the Company agreed to, a series of fines
allocated to all 50 states and the District of Columbia. In addition, the
Task Force recommended a remediation program pursuant to which the Company
would offer relief to the policyowners who were misled when they purchased
permanent life insurance policies in the United States from 1982 to 1995.
On October 28, 1996, the Company entered into a Stipulation of Settlement
with attorneys for the plaintiffs in the consolidated class action lawsuit
pending in a Multi-District Litigation proceeding in the federal court in
New Jersey. The class action suit involved alleged improprieties in
connection with the Company's sale, servicing and operation of permanent
life insurance policies from 1982 through 1995. Pursuant to the settlement,
the Company agreed to provide certain enhancements and changes to the
remediation program previously accepted by the Task Force, including some
additional remedies. In addition, the Company agreed that it would incur a
minimum cost of $410 million in providing remedies to policyowners under
the program and, in specified circumstances, agreed to make certain other
payments and guarantees. Under the terms of the settlement, the Company
agreed to a minimum average cost per remedy of $2,364 for up to 330,000
claims remedied and also agreed to provide additional compensation to be
determined by formula that will range in aggregate amount from $50 million
to $300 million depending on the total number of claims remedied. At the
end of the remediation program's claim evaluation process, the Court will
determine how the additional compensation will be distributed.
The terms of the remediation program described above were enhanced again in
February 1997 pursuant to agreements reached with several states that had
not previously accepted the terms of the program. These changes were
incorporated as amendments to the above-described Stipulation of Settlement
and related settlement documents, and the amended Stipulation of Settlement
was approved as fair to class members by the United States District Court
for the District of New Jersey in March 1997. By that point in time, the
Company had entered into agreements with all 50 states and the District of
Columbia pursuant to which each jurisdiction had accepted the remediation
plan and the Company had agreed to pay approximately $65 million in fines,
penalties and related payments.
The decision of the U.S. District Court to certify a class in the
above-described litigation for settlement purposes only and to approve the
class action settlement as described in the amended Stipulation of
Settlement is presently on appeal to the U.S. Court of Appeals for the
Third Circuit. The appellants claim that the District Court erred in
certifying a class and in finding that the terms of the settlement are fair
to the class.
Pursuant to the state agreements and the amended Stipulation of Settlement,
as approved by the U.S. District Court, the Company initiated its
remediation program in 1997. The Company mailed packages and provided broad
class notice to the owners of approximately 10.7 million policies eligible
to participate in the remediation program, informing them of their rights.
Owners of approximately 21,800 policies elected to be excluded from the
class action settlement. Of those eligible to participate in the
settlement, policyowners who believed they were misled were invited to file
a claim through an Alternative Dispute Resolution ("ADR") process. The ADR
process was established to enable the company to discharge its liability to
the affected policyowners. Policyowners who did not wish to file a claim in
the ADR process were permitted to choose from options available under Basic
Claim Relief, such as preferred rate premium loans, or annuities, mutual
fund shares or life insurance policies that the Company will enhance.
The owners of approximately 1.16 million policies responded to these
notices by indicating an intent to file an ADR claim. All policyholders who
responded were provided an ADR claim form for completion and submission.
Approximately 635,000 claim forms were completed and returned as of January
31, 1998. Management does not believe the number of ADR claims that will be
completed and returned will increase significantly. In addition, the owners
of approximately 510,000 policies indicated an interest in a Basic Claim
Relief remedy. The ADR process requires that individual claim files be
reviewed by one or more independent claim evaluators. Management does not
believe costs associated with providing Basic Claim Relief will be material
to the Company's financial position or results of operations.
35
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. CONTINGENCIES AND LITIGATION (CONTINUED)
In 1996, the Company recorded in its Statement of Operations, the minimum
cost of $410 million as agreed to in the settlement. Management had no
better information available at that time upon which to make a reasonable
estimate of losses. Management now has additional information which allows
for computation of a reasonable estimate of losses associated with ADR
claims. Based on this additional information, in 1997, management had
increased the estimated liability for the cost of remedying policyholder
claims in the ADR process by $1.64 billion before taxes to approximately
$2.05 billion before taxes of which $1.80 billion has been funded in a
settlement trust as described in Note 3. While management believes these
are reasonable estimates based on information currently available, the
ultimate amount of the total cost of remedied policyholder claims is
dependent on complex and varying factors, including actual claims by
eligible policyholders, the relief options chosen and the dollar value of
those options. There are also additional elements of the ADR process which
cannot be fully evaluated at this time (e.g., claims which may be
successfully appealed) which could increase this estimate.
Litigation is subject to many uncertainties, and given the complexity and
scope of these suits, their outcome cannot be predicted. It is also not
possible to predict the likely results of any regulatory inquiries or their
effect on litigation which might be initiated in response to widespread
media coverage of these matters. Accordingly, management is unable to make
a meaningful estimate of the amount or range of loss that could result from
an unfavorable outcome of all pending litigation and the regulatory
inquiries. It is possible that the results of operations or the cash flow
of the Company, in particular quarterly or annual periods, could be
materially affected by an ultimate unfavorable outcome of certain pending
litigation and regulatory matters. Management believes, however, that the
ultimate outcome of all pending litigation and regulatory matters referred
to above should not have a material adverse effect on the Company's
financial position, after consideration of applicable reserves.
The Company and a number of other insurers ("the Consortium") entered into
a Reinsurance and Participation Agreement (the "Agreement") with MBL Life
Assurance Corporation ("MBLLAC") and others, under which the Company and
the other insurers agreed to reinsure certain payments to be made to
contract holders by MBLLAC in connection with the plan of rehabilitation of
Mutual Benefit Life Insurance Company. Under the agreement, the Consortium,
subject to certain terms and conditions, will indemnify MBLLAC for the
ultimate net loss sustained by MBLLAC on each contract subject to the
Agreement. The ultimate net loss represents the amount by which the
aggregate required payments exceed the fair market value of the assets
supporting the covered contracts at the time such payments are due. The
Company's share of any net loss is 30.55%. The Company has determined that
it does not expect to make any payments to MBLLAC under the agreement. The
Company concluded this after testing a wide range of potentially adverse
scenarios during the rehabilitation period for MBLLAC.
15. SUBSEQUENT EVENTS
On February 10, 1998, the Company's Board of Directors authorized
management to take the preliminary steps necessary to allow the Company to
demutualize and become a publicly-traded company. The Company has begun
discussions with the New Jersey Department of Banking and Insurance,
leaders in the New Jersey State Legislature, as well as other key
regulatory agencies around the country. The New Jersey State Legislature
must first pass a law permitting demutualization. The New Jersey Department
of Banking and Insurance, the Company's Board and a majority of
participating policyholders must ultimately approve the Company's plan for
demutualization.
* * * * *
36
<PAGE>
PART C
OTHER INFORMATION
<TABLE>
<S> <C> <C> <C>
Item 24. FINANCIAL STATEMENTS AND EXHIBITS
(a) THE FOLLOWING FINANCIAL STATEMENTS ARE INCLUDED IN PART
B:
Financial Statements of The Prudential Discovery Select
Group Variable Contract Account for the fiscal year
ended December 31, 1997.
Unaudited Statement of Assets & Liabilities as of June
30, 1998 for The Prudential Discovery Select Group
Variable Contract Account.
Unaudited Statement of Operations for The Prudential
Discovery Select Group Variable Contract Account for
the period January 1, 1998 through June 30, 1998.
Unaudited Statement of Changes in Net Assets for The
Prudential Discovery Select Group Variable Contract
Account for the six months ended June 30, 1998, and the
period from July 31, 1997 to December 31, 1997.
Financial Statements of Depositor -- The Prudential
Insurance Company of America.
(b) EXHIBITS
1. Resolution adopted by the Board of Directors of
The Prudential Insurance Company of America on
February 11, 1997 establishing the Prudential
Discovery Select Group Variable Contract Account
(the "Discovery Account"). (Note 2)
2. Not applicable.
3(a). Distribution Agreement. (Note 1)
3(b). Broker-dealer sales agreement. (Note 2)
4(a). Form of Group Annuity Contract offered by The
Prudential Insurance Company of America. (Note 2)
4(b). Form of Group Annuity Contract offered to small
401 plans by The Prudential Insurance Company of
America. (Note 4)
5(a). Not applicable.
5(b). Form of Participant enrollment form (including
acknowledgment of restrictions on redemption
imposed by I.R.C. Section 403(b)). (Note 2)
6(a). Charter of The Prudential Insurance Company of
America, as amended November 14, 1995. (Note 5)
6(b). By-Laws of The Prudential Insurance Company of
America, as amended April 8, 1997. (Note 7)
7. Not applicable.
8(a). Participation Agreement between The Prudential
Insurance Company of America and AIM Variable
Insurance Funds, Inc. (Note 2)
8(b). Participation Agreement between The Prudential
Insurance Company of America and T. Rowe Price
Equity Series, Inc. (Note 2)
8(c). Participation Agreement between The Prudential
Insurance Company of America and Janus Aspen
Series. (Note 2)
</TABLE>
C - 1
<PAGE>
<TABLE>
<S> <C> <C> <C>
8(c)(i). Form of Amendment to Participation Agreement
between The Prudential Insurance Company of
America and Janus Aspen Series. (Note 1)
8(d). Participation Agreement between The Prudential
Insurance Company of America and MFS Variable
Insurance Trust. (Note 2)
8(e). Participation Agreement between The Prudential
Insurance Company of America and OCC Accumulation
Trust. (Note 2)
8(f). Participation Agreement between The Prudential
Insurance Company of America and Warburg Pincus
Trust. (Note 2)
8(g). Retirement Plan Services Outsourcing Agreement
between The Prudential Insurance Company of
America and BISYS Plan Services, L.P. (Note 4)
9. Consent and opinion of C. Christopher Sprague,
Assistant General Counsel, The Prudential
Insurance Company of America, as to the legality
of the securities being registered. (Note 1)
10(a). Consent of PricewaterhouseCoopers LLP, Independent
Accountants. (Note 1)
10(b). Consent of Shea & Gardner. (Note 1)
10(c). Powers of Attorney for Franklin Agnew, Frederick
Becker, Martin Berkowitz, James Cullen, Carolyne
Davis, Roger Enrico, Allan Gilmour, William Gray,
Jon Hanson, Glen Hiner, Constance Horner, Gaynor
Kelley, Burton Malkiel, Arthur Ryan, Ida Schmertz,
Charles Sitter, Donald Staheli, Richard Thomson,
James Unruh, P. Roy Vagelos, Stanley Van Ness,
Paul Volcker, Joseph Williams. (Note 5)
Richard Carbone. (Note 1)
Gilbert F. Casellas, (Note 8)
10(d). Consent of Deloitte & Touche LLP Independent
Auditors. (Note 1)
11. Not applicable.
12. Not applicable.
13. Schedule for Computation of Performance
Calculations. (Note 1)
</TABLE>
- ------------------------
<TABLE>
<S> <C>
(Note 1) Filed herewith.
(Note 2) Incorporated by reference to Pre-Effective Amendment No. 1 to this
Registration Statement, filed June 17, 1997.
(Note 3) Incorporated by reference to Post-Effective Amendment No. 1 to this
Registration Statement, filed April 27, 1998.
(Note 4) Incorporated by reference to Post-Effective Amendment No. 2 to this
Registration Statement, filed August 19, 1998.
(Note 5) Incorporated by reference to Post-Effective Amendment No. 9 to Form S-1,
Registration No. 33-20083, filed April 9, 1998 on behalf of The
Prudential Variable Contract Real Property Account.
</TABLE>
C - 2
<PAGE>
<TABLE>
<S> <C>
(Note 6) Incorporated by reference to Post-Effective Amendment No. 10 to Form
S-1, Registration No. 33-20083, filed April 9, 1997 on behalf of The
Prudential Variable Contract Real Property Account.
(Note 7) Incorporated by reference to Post-Effective Amendment No. 9 to Form N-4,
Registration No. 33-25434, filed February 27, 1995.
(Note 8) Incorporated by reference to Form S-6, Registration No. 333-64957, filed
September 30, 1998 on behalf of The Prudential Variable Appreciable
Account.
</TABLE>
<TABLE>
<S> <C> <C> <C>
Item 25. DIRECTORS AND OFFICERS OF THE DEPOSITOR
Information about the Directors and Executive Officers of Prudential,
Registrant's depositor, appears under the heading of "Directors and
Officers of Prudential" in the Statement of Additional information
(Part B of this Registration Statement).
Item 26. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH THE
DEPOSITOR OR REGISTRANT
Registrant is a separate account of The Prudential Insurance Company
of America, a mutual life insurance company organized under the laws
of the State of New Jersey. The subsidiaries of Prudential and short
descriptions of each are listed under Item 25 to Post-Effective
Amendment No. 34 to the Form N-1A Registration Statement for The
Prudential Series Fund, Inc., Registration No. 2-80896, filed April
24, 1998, the text of which is hereby incorporated.
In addition to the subsidiaries shown on the Organization Chart,
Prudential holds all of the voting securities of Prudential's
Gibraltar Fund, Inc., a Maryland corporation, in three of its separate
accounts. Prudential also holds directly and in three of its separate
accounts, shares of The Prudential Series Fund, Inc., a Maryland
corporation. The balance of the shares of The Prudential Series Fund,
Inc. are held in separate accounts of Pruco Life Insurance Company and
Pruco Life Insurance Company of New Jersey, wholly-owned subsidiaries
of Prudential. All of the separate accounts referred to above are unit
investment trusts registered under the Investment Company Act of 1940.
Prudential's Gibraltar Fund, Inc. and The Prudential Series Fund, Inc.
are registered as open-end, diversified management investment
companies under the Investment Company Act of 1940. The shares of
these investment companies are voted in accordance with the
instructions of persons having interests in the unit investment
trusts, and Prudential, Pruco Life Insurance Company and Pruco Life
Insurance Company of New Jersey vote the shares they hold directly in
the same manner that they vote the shares that they hold in their
separate accounts.
Registrant may also be deemed to be under common control with The
Prudential Variable Contract Account-2, The Prudential Variable
Contract Account-10, and The Prudential Variable Contract Account-11,
separate accounts of Prudential registered as open-end, diversified
management investment companies under the Investment Company Act of
1940.
Prudential is a mutual insurance company. Its financial statements
have been prepared in conformity with generally accepted accounting
principles, which include statutory accounting practices prescribed or
permitted by state regulatory authorities for insurance companies.
Item 27. NUMBER OF CONTRACTHOLDERS
As of August 7, 1998 there were 195 Contractholders of qualified
Contracts offered by the Registrant, and -0- Contractholders of
non-qualified Contracts offered by the Registrant.
Item 28. INDEMNIFICATION
The Registrant, in conjunction with certain affiliates, maintains
insurance on behalf of any person who is or was a trustee, director,
officer, employee, or agent of the Registrant, or who is or was
serving at the request of the Registrant as a trustee, director,
officer, employee or agent of such other affiliated trust or
</TABLE>
C - 3
<PAGE>
<TABLE>
<S> <C> <C> <C>
corporation, against any liability asserted against and incurred by
him or her arising out of his or her position with such trust or
corporation.
New Jersey, being the state of organization of The Prudential
Insurance Company of America ("Prudential"), permits entities
organized under its jurisdiction to indemnify directors and officers
with certain limitations. The relevant provisions of New Jersey law
permitting indemnification can be found in Section 14A:3-5 of the New
Jersey Statutes Annotated. The text of Prudential's By-law 27, which
relates to indemnification of officers and directors, is incorporated
by reference to Exhibit (8)(ii) of Post-Effective Amendment No. 12 to
Form N-4, Registration No. 33-25434, filed April 30, 1997, on behalf
of the Prudential Variable Contract Account.
Insofar as indemnification for liability arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or
otherwise, the registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against
public policy as expressed in the Securities Act of 1933 and is,
therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by
the registrant of expenses incurred or paid by a director, officer, or
controlling person of the registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered,
the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Securities Act of 1933
and will be governed by the final adjudication of such issue.
Item 29. PRINCIPAL UNDERWRITER
</TABLE>
<TABLE>
<S> <C> <C> <C>
(a)
Prudential Investment Management Services LLC ("PIMS"),
an indirect wholly owned subsidiary of Prudential, acts
as the principal underwriter for the registrant and
also for The Prudential Variable Contract Account-2,
The Prudential Variable Contract Account-10, and The
Prudential Variable Contract Account-11, which are
registered as open-end management investment companies
under the Investment Company Act of 1940. It also acts
as principal underwriter for The Prudential Variable
Contract Account-24 and The Prudential Variable
Contract GI-2, which are registered as unit Investment
trusts under the Investment Company Act of 1940:
(b)(1)
The following table sets forth certain information
regarding the officers and directors of PIMS:
</TABLE>
<TABLE>
<CAPTION>
Name and Principal Positions and Offices
Business Address with Underwriter
---------------------------- ----------------------------
<S> <C> <C>
Caulfield, Edward M. President
Chaplin, C. Edward Treasurer
Fetting, Mark R. Executive Vice President
Greene, Jonathan M. Executive Vice President
Hamilton, Jean D. Executive Vice President
Joelson, Ronald P. Executive Vice President
McGuire, Carl L. Vice President
Mosse, Mario A. Chief Operating Officer
Storms, Brian M. Executive Vice President
Strangfeld, John R. Executive Vice President
Wallner, Scott S. Chief Legal Officer/
Vice President/Secretary
Margaret M. Deverell Chief Financial Officer/
Comptroller/VP
--------------
The principal business address for the directors and
officers, with the exception of Carl L. McGuire, is 751
Broad Street, Newark, NJ 07102. The principal business
address for Carl L. McGuire is: c/o Prudential
Investments, 30 Scranton Office Park, Scranton, PA 18307
</TABLE>
C - 4
<PAGE>
<TABLE>
<CAPTION>
(c)
Name of Net Underwriting
Principal Discounts and Compensation Brokerage
Underwriter Commissions on Redemption Commissions
------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
Prudential
Investment
Management
Services, LLC $-0- $-0- $4,710
</TABLE>
<TABLE>
<S> <C> <C> <C>
Item 30. LOCATION OF ACCOUNTS AND RECORDS
The names and addresses of the persons who maintain physical
possession of the accounts, books and documents required to be
maintained by Section 31(a) of the Investment Company Act of 1940 and
the rules thereunder are:
The Prudential Insurance Company of America
and The Prudential Investment Corporation
751 Broad Street
Newark, New Jersey 07102-3777
The Prudential Insurance Company of America
and The Prudential Investment Corporation
Gateway Buildings Two, Three and Four
100 Mulberry Street
Newark, New Jersey 07102
The Prudential Insurance Company of America and
The Prudential Investment Corporation
56 North Livingston Avenue
Roseland, New Jersey 07088
The Prudential Insurance Company of America
c/o Prudential Investments
30 Scranton Office Park
Scranton, Pennsylvania 18507-1789
The Prudential Insurance Company of America
c/o The Prudential Asset Management Company, Inc.
71 Hanover Road
Florham Park, New Jersey 07932
Investors Fiduciary Trust Company
127 West 10th Street
Kansas City, Missouri 64105
BISYS Plan Services, L. P.
323 Norristown Road
Ambler, PA 19002
Item 31. MANAGEMENT SERVICES
SUMMARY OF RETIREMENT PLAN SERVICES OUTSOURCING AGREEMENT
</TABLE>
C - 5
<PAGE>
<TABLE>
<S> <C> <C> <C>
Included as an exhibit to this registration statement is an
agreement (the "Agreement") dated August 6, 1998 between The
Prudential Insurance Company of America ("Prudential") and
BISYS Plan Services, L. P. ("BISYS"). Pursuant to the
Agreement, Prudential has delegated to BISYS certain
recordkeeping and administrative services to be performed on
behalf of certain defined contribution pension plans (the
"Plans") that qualify or intend to qualify under Section
401(k) and/or Section 401(a) of the Internal Revenue Code of
1986, as amended. In addition to the recordkeeping and
administrative services, BISYS is obligated under the
Agreement to arrange for the provision to the Plans of
certain trust and accounting services and certain order
placement, processing and related services. Schedule F of
the Agreement describes the specific services that BISYS
will provide with respect to the Discovery Select Group
Retirement Annuity. These services include, among others:
(a) providing participant-level recordkeeping, (b)
administering certain features of the annuity, and (c)
transmitting participant purchase orders.
The Plans to which BISYS will provide these services are
small defined contribution plans with which Prudential has
entered into an administrative services agreement.
Typically, these Plans will share the following
characteristics, among others: (a) less than $1 million in
anticipated Plan assets, (b) fewer than 100 eligible
employees, and (c) $3,000 minimum average annual cash flow
per participant (for a start-up Plan).
Under the Agreement, BISYS collects from the Plans a variety
of fees and charges (the "Fees") on Prudential's behalf, and
is entitled to keep such Fees as payment in full for BISYS's
satisfactory performance of its services and obligations
under the Agreement. These Fees include, among others: (a)
an annual fee of $2,000 per Plan, (b) an annual fee per Plan
participant of either $14 or $28, and (c) an installation
charge for each startup Plan of $1,500.
The initial term of the Agreement is two years from the
Agreement's "effective date." The Agreement is automatically
extended for successive two year terms unless, at least 180
days prior to the end of such initial or subsequent term,
BISYS gives Prudential notice that such term will not be
extended.
Item 32. UNDERTAKINGS
The Registrant hereby undertakes:
(a)
to file a post-effective amendment to this registration
statement as frequently as is necessary to ensure that
the audited financial statements in this registration
statement are never more than 16 months old for so long
as payments under the variable annuity contracts may be
accepted, unless otherwise permitted.
(b)
to include either (1) as part of any enrollment form to
purchase a contract offered by the prospectus, a space
that an applicant can check to request a Statement of
Additional Information, or (2) a post card or similar
written communication affixed to or included in the
prospectus that the applicant can remove to send for a
Statement of Additional Information.
(c) To deliver any Statement of Additional Information and
any financial statements required to be made available
under this Form promptly upon written or oral request.
(d)
Prudential Insurance Company of America hereby
represents that the fees and charges deducted under the
Contract, in the aggregate, are reasonable in relation
to the services rendered, the expenses expected to be
incurred, and the risks assumed by Prudential Insurance
Company of America.
</TABLE>
C - 6
<PAGE>
<TABLE>
<S> <C> <C> <C>
403(b) ANNUITIES
The Registrant intends to rely on the no-action response dated
November 28, 1988, from Ms. Angela C. Goelzer of the Commission staff
to the American Council of Life Insurance concerning the redeemability
of Section 403(b) annuity contracts and the Registrant has complied
with the provisions of paragraphs (1)-(4) thereof.
TEXAS ORP
The Registrant intends to offer Contracts to Participants in the Texas
Optional Retirement Program. In connection with that offering, Rule
6c-7 of the Investment Company Act of 1940 is being relied upon and
paragraphs (a)-(d) of that Rule will be complied with.
</TABLE>
C - 7
<PAGE>
SIGNATURES
As required by the Securities Act of 1933 and the Investment Company Act
of 1940, the Registrant and the Depositor have duly caused this Registration
Statement to be signed on their behalf, in the City of Newark, and the State of
New Jersey on this 16th day of October, 1998.
THE PRUDENTIAL DISCOVERY SELECT GROUP VARIABLE
CONTRACT ACCOUNT
----------------------------------------------
(REGISTRANT)
BY: THE PRUDENTIAL INSURANCE COMPANY OF
AMERICA
-------------------------------------------
(DEPOSITOR)
By: /s/ C. CHRISTOPHER SPRAGUE
-----------------------------------------
C. Christopher Sprague
Assistant General Counsel
-----------------------------------------
(Signature and Title)
C - 8
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant certifies that this Amendment is filed solely for one or more of the
purposes specified in Rule 485(b)(1) under the Securities Act of 1933 and that
no material event requiring disclosure in the prospectus, other than one listed
in Rule 485(b)(1), has occurred since the filing date of the most recent
Amendment to the Registration Statement which included a prospectus and has
caused this Registration Statement to be signed on its behalf by the undersigned
thereunto duly authorized, and its seal hereunto affixed and attested, all in
the city of Newark and the State of New Jersey, on this 16th day of October,
1998.
<TABLE>
<CAPTION>
Signature Title Date
- ------------------------- ------------------------- -------------------------
<S> <C> <C>
*/s/ ARTHUR F. RYAN Chairman of the Board,
- ------------------------- President and Chief
Arthur F. Ryan Executive Officer
*/s/ MARTIN A. BERKOWITZ Senior Vice President and
- ------------------------- Comptroller
Martin A. Berkowitz
*/s/ RICHARD J. CARBONE Senior Vice President and
- ------------------------- Principal Financial
Richard J. Carbone Officer
*/s/ FRANKLIN E. AGNEW
- ------------------------- Director
Franklin E. Agnew
*/s/ FREDERIC K. BECKER
- ------------------------- Director
Frederic K. Becker
*/s/ GILBERT F. CASELLAS
- ------------------------- Director
Gilbert F. Casellas
*/s/ JAMES G. CULLEN
- ------------------------- Director
James G. Cullen
*/s/ CAROLYNE K. DAVIS
- ------------------------- Director October 16, 1998
Carolyne K. Davis
*/s/ ROGER A. ENRICO
- ------------------------- Director
Roger A. Enrico
*/s/ ALLAN D. GILMOUR
- ------------------------- Director
Allan D. Gilmour
*/s/ WILLIAM H. GRAY, III
- ------------------------- Director
William H. Gray, III
</TABLE>
*By: __/s/ C. CHRISTOPHER SPRAGUE________________
C. CHRISTOPHER SPRAGUE
(Attorney-in-Fact)
C - 9
<PAGE>
<TABLE>
<CAPTION>
Signature Title Date
- ------------------------- ------------------------- -------------------------
<S> <C> <C>
*/s/ JON F. HANSON
- ------------------------- Director
Jon F. Hanson
*/s/ GLEN H. HINER
- ------------------------- Director
Glen H. Hiner
*/s/ CONSTANCE J. HORNER
- ------------------------- Director
Constance J. Horner
*/s/ ALLEN F. JACOBSON
- ------------------------- Director
Allen F. Jacobson
*/s/ GAYNOR N. KELLEY
- ------------------------- Director
Gaynor N. Kelley
*/s/ BURTON G. MALKIEL
- ------------------------- Director
Burton G. Malkiel
*/s/ IDA F. S. SCHMERTZ
- ------------------------- Director
Ida F. S. Schmertz
*/s/ CHARLES R. SITTER
- ------------------------- Director
Charles R. Sitter
*/s/ DONALD L. STAHELI
- ------------------------- Director October 16, 1998
Donald L. Staheli
*/s/ RICHARD M. THOMSON
- ------------------------- Director
Richard M. Thomson
*/s/ JAMES A. UNRUH
- ------------------------- Director
James A. Unruh
*/s/ P. ROY VAGELOS, M.D.
- ------------------------- Director
P. Roy Vagelos, M.D.
*/s/ STANLEY C. VAN NESS
- ------------------------- Director
Stanley C. Van Ness
*/s/ PAUL A. VOLCKER
- ------------------------- Director
Paul A. Volcker
*/s/ JOSEPH H. WILLIAMS
- ------------------------- Director
Joseph H. Williams
</TABLE>
*By: __/s/ C. CHRISTOPHER SPRAGUE________________
C. CHRISTOPHER SPRAGUE
(Attorney-in-Fact)
C - 10
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- ------------------------------------------------------------
<S> <C>
3(a). Distribution Agreement between The Prudential Insurance
Company of America and Prudential Investment Management
Services LLC
8(c). Amendment to Participation Agreement between The Prudential
Insurance Company of America and Janus Aspen Series.
9. Consent and opinion of C. Christopher Sprague, Assistant
General Counsel, The Prudential Insurance Company of
America, as to the legality of the securities being
registered.
10(a). Consent of PricewaterhouseCoopers, LLP Independent
Accountants.
10(b). Consent of Shea & Gardner.
10(c). Power of Attorney for Richard J. Carbone.
10(d). Consent of Deloitte & Touche LLP, Independent Auditors.
13. Schedule for Computation of Performance Calculations.
</TABLE>
<PAGE>
DISTRIBUTION AGREEMENT
AGREEMENT made this 23rd day of June, 1997, by and between The Prudential
Insurance Company of America (the "Company"), a New Jersey corporation on its
own behalf and on behalf of Prudential Discovery Select Group Variable Contract
Account (the "Account") and Prudential Investment Management Services LLC (the
"Distributor"), a Delaware limited liability company.
WITNESSETH:
WHEREAS, the Company has established and maintains the Account, a separate
investment accounts, pursuant to the laws of New Jersey for the purpose of
providing a choice of variable investment options under group annuity contracts
(the "Contracts"), to commence after the effectiveness of Registration
Statements filed with the Securities and Exchange Commission on Form N-4
pursuant to the Securities Act of 1933, as amended (the "Securities Act");
WHEREAS, the Account is registered as a unit investment trust under the
Investment Company Act of 1940 (the "Investment Company Act");
WHEREAS, The Distributor is a broker-dealer registered with the
Securities and Exchange Commission (the "Commission") under Section 15(b) of
the Securities Exchange Act of 1934 (the "Exchange Act") and is a member of
the National Association of Securities Dealers, Inc. (the "NASD"); and
WHEREAS, the Company and the Distributor wish to enter into an agreement
to have the Distributor act as the Company's principal underwriter for the
sale of Contracts and the distribution of certificates of participation (the
"Certificates") in the Contracts:
NOW THEREFORE, the parties agree as follows:
1. APPOINTMENT OF THE DISTRIBUTOR
The Company agrees that during the term of this Agreement it will take all
action required to cause the Contracts to comply with all applicable federal and
state laws and regulations. During the term of this Agreement, the Company
appoints the Distributor and the Distributor agrees to act as the principal
underwriter for the sale of Contracts, as well as the Certificates issued
thereunder, in each state and other jurisdictions in which such Contracts may
lawfully be sold. Distributor shall offer the Contracts for sale and distribute
Certificates at premium rates set by the Company. Applications for the
Contracts and the underlying Certificates shall be solicited only by
representatives of Distributor duly qualified and appropriately licensed in each
state or other jurisdiction where they solicit such applications. Company shall
appoint Distributor's qualified representatives as life insurance agents of
Company. Completed applications for Contracts and the underlying Certificates
shall be transmitted directly to the Company for acceptance or rejection in
accordance with underwriting rules established by the Company. Initial premium
payments for the Certificates under the Contracts shall be made by check payable
to the Company and shall be held at all times by Distributor or its
representatives in a fiduciary capacity and remitted promptly to the Company.
Anything in this Agreement to the contrary notwithstanding, the Company retains
the ultimate
-1-
<PAGE>
right to control the sale of the Contracts, as well as the Certificates issued
thereunder, and to appoint and discharge life insurance agents of the Company.
The Distributor shall be held to the exercise of reasonable care in carrying out
the provisions of this Agreement.
2. SALES AGREEMENTS
Distributor is hereby authorized to enter into separate written agreements,
on such terms and conditions as Distributor may determine not inconsistent with
this Agreement, with one or more organizations which agree to participate in the
distribution of the Contracts and Certificates under the Contracts. Such
organization (hereafter "Broker") shall be registered with the Commission under
Section 15(b) of the Exchange Act and with the NASD as a member firm. Broker
and its representatives soliciting applications for Contracts and Certificates
shall be duly and appropriately licensed, registered, or otherwise qualified
for the sale of such Contracts and Certificates (and the riders and other
policies offered in connection therewith) under the insurance laws and any
applicable blue-sky laws of each state or other jurisdiction in which the Broker
or its representatives solicit such sales.
Broker shall assume any legal responsibilities of Company for the acts,
commissions or defalcations of such representatives insofar as they relate to
the sale of the Contracts and Certificates. Applications for Contracts and
Certificates solicited by such Broker through its representatives shall be
transmitted directly to the Company, and if received by Distributor, shall be
forwarded to Company. All premium payments under the Contracts shall be made by
check to Company and, if received by Broker, shall be held at all times in a
fiduciary capacity and remitted promptly to Company.
3. LIFE INSURANCE LICENSING
Company shall be responsible for insuring that Brokers are duly qualified,
under the insurance laws of the applicable jurisdictions, to sell the Contracts
and Certificates.
4. SUITABILITY
Parties to this Agreement are prohibited from recommending the purchase of
investment options or interests in the Account to prospective Contract holders
and Certificates purchasers. Such prohibition also shall extend to
contributions, transfers, exchanges, and redemptions by Certificate purchasers
of investment options or interests in the Account. Parties shall take
reasonable steps to ensure that their representatives and associates refrain
from making the aforementioned recommendations.
Parties to this Agreement shall take reasonable steps to ensure that they
will offer Certificates that are appropriate to the needs of the prospective
Certificate purchasers. While not limited to the following, a determination of
appropriateness shall be based on information furnished to the parties after
reasonable inquiry of such applicants concerning the applicants' insurance and
investment objectives, financial situations and needs, and the likelihood that
the applicants will continue to make the premium payments contemplated by the
Certificates under the Contracts.
-2-
<PAGE>
5. PROMOTIONAL MATERIALS
Company shall have the responsibility for furnishing to Distributor and its
representatives sales promotion materials and individual sales proposals
relating to the sale of the Contracts and Certificates. Distributor shall not
use any such materials that have not been approved by Company. Distributor
shall be responsible for obtaining NASD review of all promotional materials.
6. COMPENSATION
Company shall arrange for the payment of commissions directly to those
representatives of Distributor who are entitled thereto in connection with the
sale of the Contracts on behalf of Distributor, in the amounts and on such terms
and conditions as Company and Distributor shall determine; provided that such
terms, conditions and commissions shall be as are set forth in or as are not
inconsistent with the Prospectus included as part of the Registration Statement
for the Contracts and effective under the Securities Act.
Company shall arrange for the payment of commissions directly to those
Brokers who sell Contracts and Certificates under agreements entered into
pursuant to paragraph 2 hereof, in amounts as may be agreed to by the Company
and specified in such written agreements between Distributor and Brokers.
Company shall reimburse Distributor for the costs and expenses incurred by
Distributor in furnishing or obtaining the services, materials, and supplies
required by the terms of this Agreement in the initial sales efforts and the
continuing obligations hereunder. Reimbursement shall be a portion of
Distributor's yearly expenses based on Company's share of relevant activity. In
addition, Company shall pay Distributor a surcharge of one (1) to three (3)
percent of the commissions Company pays to Brokers and to representatives of
Distributor.
7. RECORDS
Distributor shall have the responsibility for maintaining the records of
its representatives that are licensed, registered and otherwise qualified to
sell the Contracts and the underlying Certificates. Distributor shall
maintain such other records as are required of it by applicable laws and
regulations. The books, accounts, and records of the Company, the Account
and Distributor shall be maintained so as to disclose clearly and accurately
the nature and details of the transactions. Copies of all records maintained
by the Distributor in connection with this Agreement shall be made available
to and become the property of the Company upon its request. The Distributor
shall keep confidential any information obtained pursuant to this Agreement
and shall disclose such information only if the Company has authorized such
disclosure, or if such disclosure is expressly required by applicable federal
or state regulatory authorities.
8. INVESTIGATION AND PROCEEDING
Distributor and Company agree to cooperate fully in any insurance
regulatory investigation or proceeding or judicial proceeding arising in
connection with the Contracts and Certificates distributed under this
Agreement. Distributor and Company further agree to
-3-
<PAGE>
cooperate fully in any securities regulatory investigation or proceeding with
respect to Company, Distributor, their affiliates and their representatives
to the extent that such investigation or proceeding is in connection with the
Contracts and Certificates distributed under this Agreement. The Distributor
shall furnish applicable federal and state regulatory authorities with any
information or reports in connection with its services under this Agreement
which such authorities may request to ascertain whether the Company's
operations are being conducted in a manner consistent with any applicable law
or regulation.
In the case of a substantive customer complaint, Distributor and Company
will cooperate in investigating such complaint and any response to such
complaint will be sent to the other party to this Agreement for approval not
less than five business days before being sent to the customer or regulatory
authority, except that if a more prompt response is required, the proposed
response shall be communicated by telephone or telegraph.
9. TERMINATION
This Agreement shall terminate automatically upon its assignment within
the meaning of such term in the Investment Company Act. This Agreement,
however, may be transferred by the Distributor without the prior written
consent of the Company in the circumstances set forth in Rule 2a-6 under the
Investment Company Act. The Agreement may be terminated at any time by
either party on 60 days written notice to the other party, without the
payment of any penalty. Upon termination of this Agreement all
authorizations, rights and obligations shall cease except the obligation to
settle accounts hereunder, including commissions on premiums subsequently
received for Contracts in effect at a time of termination, and the agreements
contained in paragraph 8 hereof.
10. REGULATION
This Agreement shall be subject to the provisions of the Investment Company
Act and the Exchange Act and of the rules, regulations, and rulings thereunder
and the applicable rules and regulations of the NASD, from time to time in
effect, and the terms hereof shall be interpreted and construed in accordance
therewith.
11. SEVERABILITY
If any provision of this Agreement shall be held or made invalid by a
court decision, statute, rule or otherwise, the remainder of this Agreement
shall not be affected thereby.
12. WARRANTIES
Each party to this Agreement warrants to the other party as follows:
(a) it has full power and authority to execute and deliver this
Agreement and to perform and observe the provisions herein;
(b) the execution, delivery, and performance of this Agreement have
been duly authorized by all necessary corporate actions and do not and will
not contravene any requirement of law or any contractual restrictions or
-4-
<PAGE>
agreement binding on or affecting such party or its assets; and
(c) this Agreement has been duly and properly executed and delivered
by such party and constitutes a legal, valid, and binding obligation of
such party enforceable in accordance with its terms.
13. APPLICABLE LAW
This Agreement shall be construed and enforced in accordance with and
governed by the laws of the State of New Jersey.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the day and year first above written.
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
By:
---------------------------------------
Name: Mark R. Fetting
Title: President, Retirement Services
PRUDENTIAL INVESTMENT MANAGEMENT SERVICES LLC
By:
---------------------------------------
Name: E. Michael Caulfield
Title: President
-5-
<PAGE>
JANUS ASPEN SERIES
AMENDMENT TO FUND PARTICIPATION AGREEMENT
The undersigned hereby amend their Fund Participation Agreement dated July 2,
1997 ("Agreement") by:
Replacing Schedule A of the original Agreement with the attached Schedule
A, which adds a new Contract Funded by the Separate Account.
This amendment shall not affect any other provision of the Agreement or any
other agreement or understanding among the parties.
IN WITNESS WHEREOF, the parties have caused their duly authorized officers to
execute this Participation Agreement Amendment as of __________________________,
1998.
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
By:
------------------------------------------------
Name:
Title:
JANUS ASPEN SERIES
By:
------------------------------------------------
Name:
Title:
JANUS CAPITAL CORPORATION
By:
------------------------------------------------
Name:
Title:
<PAGE>
SCHEDULE A
SEPARATE ACCOUNTS AND ASSOCIATED CONTRACTS.
Name of Separate Account and Contracts/Policies Funded
Date Established by Board of Directors By Separate Account
- ------------------------------------------- ------------------------------
Prudential Discovery Select Group Variable Discovery Select Group Annuity
Account established February 11, 1997 Contract
DC-403-97
Discovery Select Group Annuity
Contract
DC-401-98
<PAGE>
October 16, 1998
The Prudential Insurance Company
of America
751 Broad Street
Newark, New Jersey 07102-3777
Gentlemen:
In my capacity as Assistant General Counsel of The Prudential Insurance Company
of America, I have reviewed the establishment of the Prudential Discovery Select
Group Variable Contract Account ("the Account") on February 11, 1997 by the
Finance Committee of the Board of Directors of Prudential as a separate account
for assets applicable to certain variable annuity contracts, pursuant to the
provisions of Section 17B: 28-7 of the Revised Statues of New Jersey and
relevant documents contained in the registration statement.
I was responsible for oversight of the preparation and review of Post-Effective
Amendment No. 3 to the Registration Statement (Registration Number 333-23271)
under the Securities Act of 1933 for the registration of certain variable
annuity contracts issues with respect to the Account.
I am of the following opinion:
(1) Prudential was duly organized under the laws of New Jersey and is a
validly existing insurance company.
(2) The Account has been duly created and is validly existing as a
separate account pursuant to the aforesaid provisions of New Jersey
Law.
(3) The portion of the assets held in the Account equal to the reserve and
other liabilities for variable benefits under the variable annuity
contracts is not chargeable with liabilities arising out of any other
business Prudential may conduct.
(4) Assuming that the variable annuity contracts are issued in accordance
with their terms, and that any necessary payment for the contracts
is received by Prudential, the variable annuity contracts are legally
issued and are valid and binding obligations of Prudential.
In arriving at the foregoing opinion, I have made such examination of law and
examined such records and other documents as I judged to be necessary or
appropriate.
I hereby consent to the filing of this opinion as an exhibit to the Registration
Statement.
Sincerely,
C. Christopher Sprague
Assistant General Counsel
<PAGE>
Exhibit 10(a)
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Statement of Additional Information
constituting part of this Post-Effective Amendment No. 3 to the registration
statement on Form N-4 (the "Registration Statement") of our report dated
February 26, 1998, relating to the financial statements of The Prudential
Discovery Select Group Variable Contract Account, which appears in such
Statement of Additional Information.
We also consent to the use in the Statement of Additional Information
constituting part of this Registration Statement of our report dated March 5,
1998, relating to the consolidated financial statements of The Prudential
Insurance Company of America, which appears in such Statement of Additional
Information.
We also consent to the references to us under the headings "Experts" in the
Statement of Additional Information.
/s/ PricewaterhouseCoopers LLP
PRICEWATERHOUSECOOPERS LLP
New York, New York
October 6, 1998
<PAGE>
Shea & Gardner
1800 Massachusetts Avenue NW
Washington, D.C. 20036
(202) 828-2000
Fax: (202) 828-2195
CONSENT OF SHEA & GARDNER
We consent to the reference to Shea & Gardner under the heading "Legal Matters"
in this Post-Effective Amendment No. 3 to Registration Statement No. 333-23271
on Form N-4 of The Prudential Discovery Select Group Variable Contract Account
of The Prudential Insurance Company of America.
Shea & Gardner
by: /s/ Christopher E. Palmer
October 6, 1998
<PAGE>
POWER OF ATTORNEY
Know all men by these presents:
That I, Richard J. Carbone, of Staten Island, New York, Senior Vice
President and Chief Financial Officer of The Prudential Insurance Company
of America, do hereby make, constitute and appoint as my true and lawful
attorneys in fact LEE D. AUGSBUGER, SUSAN L. BLOUNT, THOMAS C. CASTANO,
CAREN A. CUNNINGHAM, TIMOTHY P. HARRIS, DODIE KENT, CLIFFORD E. KIRSCH,
THOMAS J. LOFTUS, KIRK A. MONTGOMERY, BERNARD V. PETERSON, PETER T. SCOTT,
C. CHRISTOPHER SPRAGUE and ARTHUR D. WOODS III or any of them severally for
me and in my name, place and stead to sign, where applicable: Annual
Reports of Form 10-K, registration statements on the appropriate forms
prescribed by the Securities and Exchange Commission, and any other
periodic documents and reports required under the Investment Company Act of
1940, the Securities Act of 1933 and all amendments thereto executed on
behalf of The Prudential Insurance Company of America and filed with the
Securities and Exchange Commission for the following:
The Prudential Variable Contract Account-2 and group variable annuity
contracts, to the extent they represent participating interests in said
Account;
The Prudential Variable Contract Account-10 and group annuity contracts, to
the extent they represent participating interests in said Account;
The Prudential Variable Contract Account-11 and group annuity contracts, to
the extent they represent participating interests in said Account;
The Prudential Variable Contract Account-24 and group annuity contracts, to
the extent they represent participating interests in said Account;
The Prudential Variable Contract Real Property Account and individual
variable life insurance and annuity contracts, to the extent they represent
participating interests in said Account;
Prudential's Investment Plan Account and Systematic Investment Plan
Contracts, to the extent they represent participating interests in said
Account, and shares of the Common Stock of Prudential's Gibraltar Fund;
Prudential's Annuity Plan Account and Variable Annuity Contracts, to the
extent they represent participating interests in said Account, and shares
of the Common Stock of Prudential's Gibraltar Fund;
Prudential's Annuity Plan Account-2 and Variable Annuity Contracts, to the
extent they represent participating interests in said Account, and shares
of the Common Stock of Prudential's Gibraltar Fund;
The Prudential Individual Variable Contract Account and Individual Variable
Annuity Contracts, to the extent they represent participating interests in
said Account;
<PAGE>
The Prudential Qualified Individual Variable Contract Account and
Individual Variable Annuity Contracts, to the extent they represent
participating interests in said Account;
The Prudential Variable Appreciable Account and Variable Life Insurance
Contracts, to the extent they represent participating interests in said
Account;
The Prudential Variable Life Insurance Account and Variable Life Insurance
Contracts, to the extent they represent participating interests in said
Account;
The Prudential Variable Contract Account GI-2 and Group Variable Life
Insurance Contracts, to the extent they represent participating interests
in said Account; and
The Prudential Discovery Select Group Variable Contract Account and group
annuity contracts, to the extent they represent participating interests in
said Account.
IN WITNESS WHEREOF, I have hereunto set my hand this 9th day of September, 1998.
/s/ Richard J. Carbone
--------------------------------
Signature
State of NEW JERSEY )
------------------
) SS
County of ESSEX )
----------------
On this 9th day of September, 1998, before me personally appeared Richard
J. Carbone, to me known to me to be the person mentioned and described in and
who executed the foregoing instrument and duly acknowledged to me that (s)he
executed the same.
My commission expires:
ANN L. WELLBROCK /s/ Ann L. Wellbrock
NOTARY PUBLIC OF NEW JERSEY ---------------------------------
My Commission Expires July 26, 1999 Notary Public
<PAGE>
Exhibit 10(d)
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Post-Effective Amendment No. 3 to Registration
Statement No. 333-23271 on Form N-4 of The Prudential Discovery Select Group
Variable Contract Account of The Prudential Insurance Company of America of
our report dated June 4, 1997, relating to the consolidated financial
statements of The Prudential Insurance Company of America and subsidiaries in
the Statement of Additional Information, which is a part of such Registration
Statement, and to the reference to us under the heading "Experts", also
appearing in the Statement of Additional Information.
/s/ Deloitte & Touche LLP
Parsippany, New Jersey
October 6, 1998
<PAGE>
<TABLE>
<CAPTION>
DS HYP DS MONEY MARKET
F43 1.0000
REPORT AS OF 12/31/1997
ONE THREE ONE THREE FIVE TEN INCEPTION
MONTH MONTH YTD YEAR YEAR YEAR YEAR 6/24/97
<S> <C> <C> <C> <C> <C> <C> <C> <C>
UNIT VALUES 10.08530459 10.04420086 9.99336739 N/A N/A N/A N/A N/A 9.95597791
ANNUALIZE RETURNS 0.41% 0.92% N/A N/A N/A N/A N/A N/A
CUMULATIVE RETURNS 0.41% 0.92% N/A N/A N/A N/A N/A 1.30%
SURRENDER CHARGES 5.00% 5.00% 5.00% 5.00% 3.00% 1.00% 0.00% 5.00%
ACCOUNT CHARGES (DOLLARS) 0.6 0.6 0.6 0.6 1.8 3 6 0.6
ANNUALIZE RETURNS W/CHARGES -4.65% -4.14% N/A N/A N/A N/A N/A N/A
CUMULATIVE RETURNS W/CHARGES -4.65% -4.14% N/A N/A N/A N/A N/A -3.76%
TOTAL NUMBER OF YEARS 0
<CAPTION>
DS HYP DS DIVERSIFIED BOND
F44 1.0000
REPORT AS OF 12/31/1997
ONE THREE ONE THREE FIVE TEN INCEPTION
MONTH MONTH YTD YEAR YEAR YEAR YEAR 6/24/97
<S> <C> <C> <C> <C> <C> <C> <C> <C>
UNIT VALUES 10.07371777 10.0146944 10.0266231 N/A N/A N/A N/A N/A 9.72642525
ANNUALIZE RETURNS 0.59% 0.47% N/A N/A N/A N/A N/A N/A
CUMULATIVE RETURNS 0.59% 0.47% N/A N/A N/A N/A N/A 3.57%
SURRENDER CHARGES 5.00% 5.00% 5.00% 5.00% 3.00% 1.00% 0.00% 5.00%
ACCOUNT CHARGES (DOLLARS) 0.6 0.6 0.6 0.6 1.8 3 6 0.6
ANNUALIZE RETURNS W/CHARGES -4.47% -4.59% N/A N/A N/A N/A N/A N/A
CUMULATIVE RETURNS W/CHARGES -4.47% -4.59% N/A N/A N/A N/A N/A -1.49%
TOTAL NUMBER OF YEARS 0
</TABLE>
Page 1
<PAGE>
<TABLE>
<CAPTION>
DS HYP DS EQUITY
F45 1.0000
REPORT AS OF 12/31/1997
ONE THREE ONE THREE FIVE TEN INCEPTION
MONTH MONTH YTD YEAR YEAR YEAR YEAR 6/24/97
<S> <C> <C> <C> <C> <C> <C> <C> <C>
UNIT VALUES 10.12422612 10.13050419 10.25564093 N/A N/A N/A N/A N/A 9.46292765
ANNUALIZE RETURNS -0.06% -1.28% N/A N/A N/A N/A N/A N/A
CUMULATIVE RETURNS -0.06% -1.28% N/A N/A N/A N/A N/A 6.99%
SURRENDER CHARGES 5.00% 5.00% 5.00% 5.00% 3.00% 1.00% 0.00% 5.00%
ACCOUNT CHARGES (DOLLARS) 0.6 0.6 0.6 0.6 1.8 3 6 0.6
ANNUALIZE RETURNS W/CHARGES -5.12% -6.34% N/A N/A N/A N/A N/A N/A
CUMULATIVE RETURNS W/CHARGES -5.12% -6.34% N/A N/A N/A N/A N/A 1.93%
TOTAL NUMBER OF YEARS 0
<CAPTION>
DS HYP DS PRU JENNISON
F46 1.0000
REPORT AS OF 12/31/1997
ONE THREE ONE THREE FIVE TEN INCEPTION
MONTH MONTH YTD YEAR YEAR YEAR YEAR 6/24/97
<S> <C> <C> <C> <C> <C> <C> <C> <C>
UNIT VALUES 9.86997541 9.76122502 10.14367321 N/A N/A N/A N/A N/A 9.07538376
ANNUALIZE RETURNS 1.11% -2.70% N/A N/A N/A N/A N/A N/A
CUMULATIVE RETURNS 1.11% -2.70% N/A N/A N/A N/A N/A 8.76%
SURRENDER CHARGES 5.00% 5.00% 5.00% 5.00% 3.00% 1.00% 0.00% 5.00%
ACCOUNT CHARGES (DOLLARS) 0.6 0.6 0.6 0.6 1.8 3 6 0.6
ANNUALIZE RETURNS W/CHARGES -3.95% -7.76% N/A N/A N/A N/A N/A N/A
CUMULATIVE RETURNS W/CHARGES -3.95% -7.76% N/A N/A N/A N/A N/A 3.70%
TOTAL NUMBER OF YEARS 0
</TABLE>
Page 2
<PAGE>
<TABLE>
<CAPTION>
DS HYP DS GLOBAL
F47 1.0000
REPORT AS OF 12/31/1997
ONE THREE ONE THREE FIVE TEN INCEPTION
MONTH MONTH YTD YEAR YEAR YEAR YEAR 6/24/97
<S> <C> <C> <C> <C> <C> <C> <C> <C>
UNIT VALUES 8.94783879 8.94466092 9.79749608 N/A N/A N/A N/A N/A 9.65293935
ANNUALIZE RETURNS 0.04% -8.67% N/A N/A N/A N/A N/A N/A
CUMULATIVE RETURNS 0.04% -8.67% N/A N/A N/A N/A N/A -7.30%
SURRENDER CHARGES 5.00% 5.00% 5.00% 5.00% 3.00% 1.00% 0.00% 5.00%
ACCOUNT CHARGES (DOLLARS) 0.6 0.6 0.6 0.6 1.8 3 6 0.6
ANNUALIZE RETURNS W/CHARGES -5.02% -13.73% N/A N/A N/A N/A N/A N/A
CUMULATIVE RETURNS W/CHARGES -5.02% -13.73% N/A N/A N/A N/A N/A -12.36%
TOTAL NUMBER OF YEARS 0
<CAPTION>
DS HYP DS STOCK INDEX
F48 1.0000
REPORT AS OF 12/31/1997
ONE THREE ONE THREE FIVE TEN INCEPTION
MONTH MONTH YTD YEAR YEAR YEAR YEAR 6/24/97
<S> <C> <C> <C> <C> <C> <C> <C> <C>
UNIT VALUES 10.29252496 10.12695257 10.03362196 N/A N/A N/A N/A N/A 9.39202991
ANNUALIZE RETURNS 1.63% 2.58% N/A N/A N/A N/A N/A N/A
CUMULATIVE RETURNS 1.63% 2.58% N/A N/A N/A N/A N/A 9.59%
SURRENDER CHARGES 5.00% 5.00% 5.00% 5.00% 3.00% 1.00% 0.00% 5.00%
ACCOUNT CHARGES (DOLLARS) 0.6 0.6 0.6 0.6 1.8 3 6 0.6
ANNUALIZE RETURNS W/CHARGES -3.43% -2.48% N/A N/A N/A N/A N/A N/A
CUMULATIVE RETURNS W/CHARGES -3.43% -2.48% N/A N/A N/A N/A N/A 4.53%
TOTAL NUMBER OF YEARS 0
</TABLE>
Page 3
<PAGE>
<TABLE>
<CAPTION>
DS HYP DS HIGH YIELD BOND
F49 1.0000
REPORT AS OF 12/31/1997
ONE THREE ONE THREE FIVE TEN INCEPTION
MONTH MONTH YTD YEAR YEAR YEAR YEAR 6/24/97
<S> <C> <C> <C> <C> <C> <C> <C> <C>
UNIT VALUES 10.37021816 10.2833589 10.26291872 N/A N/A N/A N/A N/A 9.7171669
ANNUALIZE RETURNS 0.84% 1.05% N/A N/A N/A N/A N/A N/A
CUMULATIVE RETURNS 0.84% 1.05% N/A N/A N/A N/A N/A 6.72%
SURRENDER CHARGES 5.00% 5.00% 5.00% 5.00% 3.00% 1.00% 0.00% 5.00%
ACCOUNT CHARGES (DOLLARS) 0.6 0.6 0.6 0.6 1.8 3 6 0.6
ANNUALIZE RETURNS W/CHARGES -4.22% -4.01% N/A N/A N/A N/A N/A N/A
CUMULATIVE RETURNS W/CHARGES -4.22% -4.01% N/A N/A N/A N/A N/A 1.66%
TOTAL NUMBER OF YEARS 0
<CAPTION>
DS HYP DS EQUITY INCOME
F50 1.0000
REPORT AS OF 12/31/1997
ONE THREE ONE THREE FIVE TEN INCEPTION
MONTH MONTH YTD YEAR YEAR YEAR YEAR 6/24/97
<S> <C> <C> <C> <C> <C> <C> <C> <C>
UNIT VALUES 10.48377205 10.28062528 10.51054583 N/A N/A N/A N/A N/A 9.21250358
ANNUALIZE RETURNS 1.98% -0.25% N/A N/A N/A N/A N/A N/A
CUMULATIVE RETURNS 1.98% -0.25% N/A N/A N/A N/A N/A 13.80%
SURRENDER CHARGES 5.00% 5.00% 5.00% 5.00% 3.00% 1.00% 0.00% 5.00%
ACCOUNT CHARGES (DOLLARS) 0.6 0.6 0.6 0.6 1.8 3 6 0.6
ANNUALIZE RETURNS W/CHARGES -3.08% -5.31% N/A N/A N/A N/A N/A N/A
CUMULATIVE RETURNS W/CHARGES -3.08% -5.31% N/A N/A N/A N/A N/A 8.74%
TOTAL NUMBER OF YEARS 0
</TABLE>
Page 4
<PAGE>
<TABLE>
<CAPTION>
DS HYP DS GOVERNMENT INCOME
F51 1.0000
REPORT AS OF 12/31/1997
ONE THREE ONE THREE FIVE TEN INCEPTION
MONTH MONTH YTD YEAR YEAR YEAR YEAR 6/24/97
<S> <C> <C> <C> <C> <C> <C> <C> <C>
UNIT VALUES 10.27198283 10.16295305 10.0033507 N/A N/A N/A N/A N/A 9.76098336
ANNUALIZE RETURNS 1.07% 2.69% N/A N/A N/A N/A N/A N/A
CUMULATIVE RETURNS 1.07% 2.69% N/A N/A N/A N/A N/A 5.24%
SURRENDER CHARGES 5.00% 5.00% 5.00% 5.00% 3.00% 1.00% 0.00% 5.00%
ACCOUNT CHARGES (DOLLARS) 0.6 0.6 0.6 0.6 1.8 3 6 0.6
ANNUALIZE RETURNS W/CHARGES -3.99% -2.37% N/A N/A N/A N/A N/A N/A
CUMULATIVE RETURNS W/CHARGES -3.99% -2.37% N/A N/A N/A N/A N/A 0.18%
TOTAL NUMBER OF YEARS 0
<CAPTION>
DS HYP CONSERVATIVE BALANCED
F52 1.0000
REPORT AS OF 12/31/1997
ONE THREE ONE THREE FIVE TEN INCEPTION
MONTH MONTH YTD YEAR YEAR YEAR YEAR 6/24/97
<S> <C> <C> <C> <C> <C> <C> <C> <C>
UNIT VALUES 10.03328859 9.99064704 10.09572088 N/A N/A N/A N/A N/A 9.58279742
ANNUALIZE RETURNS 0.43% -0.62% N/A N/A N/A N/A N/A N/A
CUMULATIVE RETURNS 0.43% -0.62% N/A N/A N/A N/A N/A 4.70%
SURRENDER CHARGES 5.00% 5.00% 5.00% 5.00% 3.00% 1.00% 0.00% 5.00%
ACCOUNT CHARGES (DOLLARS) 0.6 0.6 0.6 0.6 1.8 3 6 0.6
ANNUALIZE RETURNS W/CHARGES -4.63% -5.68% N/A N/A N/A N/A N/A N/A
CUMULATIVE RETURNS W/CHARGES -4.63% -5.68% N/A N/A N/A N/A N/A -0.36%
TOTAL NUMBER OF YEARS 0
</TABLE>
Page 5
<PAGE>
<TABLE>
<CAPTION>
DS HYP DS FLEXIBLE MANAGED
F53 1.0000
REPORT AS OF 12/31/1997
ONE THREE ONE THREE FIVE TEN INCEPTION
MONTH MONTH YTD YEAR YEAR YEAR YEAR 6/24/97
<S> <C> <C> <C> <C> <C> <C> <C> <C>
UNIT VALUES 9.99183978 9.92256142 10.15217989 N/A N/A N/A N/A N/A 9.43577638
ANNUALIZE RETURNS 0.70% -1.58% N/A N/A N/A N/A N/A N/A
CUMULATIVE RETURNS 0.70% -1.58% N/A N/A N/A N/A N/A 5.89%
SURRENDER CHARGES 5.00% 5.00% 5.00% 5.00% 3.00% 1.00% 0.00% 5.00%
ACCOUNT CHARGES (DOLLARS) 0.6 0.6 0.6 0.6 1.8 3 6 0.6
ANNUALIZE RETURNS W/CHARGES -4.36% -6.64% N/A N/A N/A N/A N/A N/A
CUMULATIVE RETURNS W/CHARGES -4.36% -6.64% N/A N/A N/A N/A N/A 0.83%
TOTAL NUMBER OF YEARS 0
<CAPTION>
DS HYP DS INT'L STOCK-T.ROWE
F54 1.0000
REPORT AS OF 12/31/1997
ONE THREE ONE THREE FIVE TEN INCEPTION
MONTH MONTH YTD YEAR YEAR YEAR YEAR 6/24/97
<S> <C> <C> <C> <C> <C> <C> <C> <C>
UNIT VALUES 8.92259786 8.88239201 9.66391563 N/A N/A N/A N/A N/A 9.74029668
ANNUALIZE RETURNS 0.45% -7.67% N/A N/A N/A N/A N/A N/A
CUMULATIVE RETURNS 0.45% -7.67% N/A N/A N/A N/A N/A -8.40%
SURRENDER CHARGES 5.00% 5.00% 5.00% 5.00% 3.00% 1.00% 0.00% 5.00%
ACCOUNT CHARGES (DOLLARS) 0.6 0.6 0.6 0.6 1.8 3 6 0.6
ANNUALIZE RETURNS W/CHARGES -4.61% -12.73% N/A N/A N/A N/A N/A N/A
CUMULATIVE RETURNS W/CHARGES -4.61% -12.73% N/A N/A N/A N/A N/A -13.46%
TOTAL NUMBER OF YEARS 0
</TABLE>
Page 6
<PAGE>
<TABLE>
<CAPTION>
DS HYP EQUITY INCOME-T.ROWE
F55 1.0000
REPORT AS OF 12/31/1997
ONE THREE ONE THREE FIVE TEN INCEPTION
MONTH MONTH YTD YEAR YEAR YEAR YEAR 6/24/97
<S> <C> <C> <C> <C> <C> <C> <C> <C>
UNIT VALUES 10.53517182 10.23880254 10.14311816 N/A N/A N/A N/A N/A 9.53659995
ANNUALIZE RETURNS 2.89% 3.87% N/A N/A N/A N/A N/A N/A
CUMULATIVE RETURNS 2.89% 3.87% N/A N/A N/A N/A N/A 10.47%
SURRENDER CHARGES 5.00% 5.00% 5.00% 5.00% 3.00% 1.00% 0.00% 5.00%
ACCOUNT CHARGES (DOLLARS) 0.6 0.6 0.6 0.6 1.8 3 6 0.6
ANNUALIZE RETURNS W/CHARGES -2.17% -1.19% N/A N/A N/A N/A N/A N/A
CUMULATIVE RETURNS W/CHARGES -2.17% -1.19% N/A N/A N/A N/A N/A 5.41%
TOTAL NUMBER OF YEARS 0
<CAPTION>
DS HYP OCC ACCUM TRUST MANAGE
F56 1.0000
REPORT AS OF 12/31/1997
ONE THREE ONE THREE FIVE TEN INCEPTION
MONTH MONTH YTD YEAR YEAR YEAR YEAR 6/24/97
<S> <C> <C> <C> <C> <C> <C> <C> <C>
UNIT VALUES 10.13452015 10.13280541 10.11316797 N/A N/A N/A N/A N/A 9.53455304
ANNUALIZE RETURNS 0.02% 0.21% N/A N/A N/A N/A N/A N/A
CUMULATIVE RETURNS 0.02% 0.21% N/A N/A N/A N/A N/A 6.29%
SURRENDER CHARGES 5.00% 5.00% 5.00% 5.00% 3.00% 1.00% 0.00% 5.00%
ACCOUNT CHARGES (DOLLARS) 0.6 0.6 0.6 0.6 1.8 3 6 0.6
ANNUALIZE RETURNS W/CHARGES -5.04% -4.85% N/A N/A N/A N/A N/A N/A
CUMULATIVE RETURNS W/CHARGES -5.04% -4.85% N/A N/A N/A N/A N/A 1.23%
TOTAL NUMBER OF YEARS 0
</TABLE>
Page 7
<PAGE>
<TABLE>
<CAPTION>
DS HYP OCC ACCUM TRUST SM CAP
F57 1.0000
REPORT AS OF 12/31/1997
ONE THREE ONE THREE FIVE TEN INCEPTION
MONTH MONTH YTD YEAR YEAR YEAR YEAR 6/24/97
<S> <C> <C> <C> <C> <C> <C> <C> <C>
UNIT VALUES 10.20529645 10.4733829 10.51420111 N/A N/A N/A N/A N/A 9.51446545
ANNUALIZE RETURNS 1.57% -2.94% N/A N/A N/A N/A N/A N/A
CUMULATIVE RETURNS 1.57% -2.94% N/A N/A N/A N/A N/A 7.26%
SURRENDER CHARGES 5.00% 5.00% 5.00% 5.00% 3.00% 1.00% 0.00% 5.00%
ACCOUNT CHARGES (DOLLARS) 0.6 0.6 0.6 0.6 1.8 3 6 0.6
ANNUALIZE RETURNS W/CHARGES -3.49% -8.00% N/A N/A N/A N/A N/A N/A
CUMULATIVE RETURNS W/CHARGES -3.49% -8.00% N/A N/A N/A N/A N/A 2.20%
TOTAL NUMBER OF YEARS 0
<CAPTION>
DS HYP DS VI GROWTH & INCOME
F58 1.0000
REPORT AS OF 12/31/1997
ONE THREE ONE THREE FIVE TEN INCEPTION
MONTH MONTH YTD YEAR YEAR YEAR YEAR 6/24/97
<S> <C> <C> <C> <C> <C> <C> <C> <C>
UNIT VALUES 9.78776022 9.75154056 10.03330085 N/A N/A N/A N/A N/A 9.25095824
ANNUALIZE RETURNS 0.37% -2.45% N/A N/A N/A N/A N/A N/A
CUMULATIVE RETURNS 0.37% -2.45% N/A N/A N/A N/A N/A 5.80%
SURRENDER CHARGES 5.00% 5.00% 5.00% 5.00% 3.00% 1.00% 0.00% 5.00%
ACCOUNT CHARGES (DOLLARS) 0.6 0.6 0.6 0.6 1.8 3 6 0.6
ANNUALIZE RETURNS W/CHARGES -4.69% -7.51% N/A N/A N/A N/A N/A N/A
CUMULATIVE RETURNS W/CHARGES -4.69% -7.51% N/A N/A N/A N/A N/A 0.74%
TOTAL NUMBER OF YEARS 0
</TABLE>
Page 8
<PAGE>
<TABLE>
<CAPTION>
DS HYP DS VI VALUE - AIM
F59 1.0000
REPORT AS OF 12/31/1997
ONE THREE ONE THREE FIVE TEN INCEPTION
MONTH MONTH YTD YEAR YEAR YEAR YEAR 6/24/97
<S> <C> <C> <C> <C> <C> <C> <C> <C>
UNIT VALUES 9.89265716 9.83656722 10.08321771 N/A N/A N/A N/A N/A 9.42586312
ANNUALIZE RETURNS 0.57% -1.89% N/A N/A N/A N/A N/A N/A
CUMULATIVE RETURNS 0.57% -1.89% N/A N/A N/A N/A N/A 4.95%
SURRENDER CHARGES 5.00% 5.00% 5.00% 5.00% 3.00% 1.00% 0.00% 5.00%
ACCOUNT CHARGES (DOLLARS) 0.6 0.6 0.6 0.6 1.8 3 6 0.6
ANNUALIZE RETURNS W/CHARGES -4.49% -6.95% N/A N/A N/A N/A N/A N/A
CUMULATIVE RETURNS W/CHARGES -4.49% -6.95% N/A N/A N/A N/A N/A -0.11%
TOTAL NUMBER OF YEARS 0
<CAPTION>
DS HYP DS ASPEN GROWTH-JANUS
F60 1.0000
REPORT AS OF 12/31/1997
ONE THREE ONE THREE FIVE TEN INCEPTION
MONTH MONTH YTD YEAR YEAR YEAR YEAR 6/24/97
<S> <C> <C> <C> <C> <C> <C> <C> <C>
UNIT VALUES 9.92566549 9.84204278 10.0584036 N/A N/A N/A N/A N/A 9.33594138
ANNUALIZE RETURNS 0.85% -1.32% N/A N/A N/A N/A N/A N/A
CUMULATIVE RETURNS 0.85% -1.32% N/A N/A N/A N/A N/A 6.32%
SURRENDER CHARGES 5.00% 5.00% 5.00% 5.00% 3.00% 1.00% 0.00% 5.00%
ACCOUNT CHARGES (DOLLARS) 0.6 0.6 0.6 0.6 1.8 3 6 0.6
ANNUALIZE RETURNS W/CHARGES -4.21% -6.38% N/A N/A N/A N/A N/A N/A
CUMULATIVE RETURNS W/CHARGES -4.21% -6.38% N/A N/A N/A N/A N/A 1.26%
TOTAL NUMBER OF YEARS 0
</TABLE>
Page 9
<PAGE>
<TABLE>
<CAPTION>
DS HYP DS ASPEN INT'L GROWTH
F61 1.0000
REPORT AS OF 12/31/1997
ONE THREE ONE THREE FIVE TEN INCEPTION
MONTH MONTH YTD YEAR YEAR YEAR YEAR 6/24/97
<S> <C> <C> <C> <C> <C> <C> <C> <C>
UNIT VALUES 9.44399694 9.30892171 9.93673085 N/A N/A N/A N/A N/A 9.51702091
ANNUALIZE RETURNS 1.45% -4.96% N/A N/A N/A N/A N/A N/A
CUMULATIVE RETURNS 1.45% -4.96% N/A N/A N/A N/A N/A -0.77%
SURRENDER CHARGES 5.00% 5.00% 5.00% 5.00% 3.00% 1.00% 0.00% 5.00%
ACCOUNT CHARGES (DOLLARS) 0.6 0.6 0.6 0.6 1.8 3 6 0.6
ANNUALIZE RETURNS W/CHARGES -3.61% -10.02% N/A N/A N/A N/A N/A N/A
CUMULATIVE RETURNS W/CHARGES -3.61% -10.02% N/A N/A N/A N/A N/A -5.83%
TOTAL NUMBER OF YEARS 0
<CAPTION>
DS HYP DS RESEARCH SERIES-MFS
F62 1.0000
REPORT AS OF 12/31/1997
ONE THREE ONE THREE FIVE TEN INCEPTION
MONTH MONTH YTD YEAR YEAR YEAR YEAR 6/24/97
<S> <C> <C> <C> <C> <C> <C> <C> <C>
UNIT VALUES 9.67444144 9.67625812 9.89971269 N/A N/A N/A N/A N/A 9.37314278
ANNUALIZE RETURNS -0.02% -2.28% N/A N/A N/A N/A N/A N/A
CUMULATIVE RETURNS -0.02% -2.28% N/A N/A N/A N/A N/A 3.21%
SURRENDER CHARGES 5.00% 5.00% 5.00% 5.00% 3.00% 1.00% 0.00% 5.00%
ACCOUNT CHARGES (DOLLARS) 0.6 0.6 0.6 0.6 1.8 3 6 0.6
ANNUALIZE RETURNS W/CHARGES -5.08% -7.34% N/A N/A N/A N/A N/A N/A
CUMULATIVE RETURNS W/CHARGES -5.08% -7.34% N/A N/A N/A N/A N/A -1.85%
TOTAL NUMBER OF YEARS 0
</TABLE>
Page 10
<PAGE>
<TABLE>
<CAPTION>
DS HYP EMERGING GROWTH SERIES
F63 1.0000
REPORT AS OF 12/31/1997
ONE THREE ONE THREE FIVE TEN INCEPTION
MONTH MONTH YTD YEAR YEAR YEAR YEAR 6/24/97
<S> <C> <C> <C> <C> <C> <C> <C> <C>
UNIT VALUES 9.95784439 10.6543299 10.32281904 N/A N/A N/A N/A N/A 9.19829397
ANNUALIZE RETURNS -1.07% -3.54% N/A N/A N/A N/A N/A N/A
CUMULATIVE RETURNS -1.07% -3.54% N/A N/A N/A N/A N/A 8.26%
SURRENDER CHARGES 5.00% 5.00% 5.00% 5.00% 3.00% 1.00% 0.00% 5.00%
ACCOUNT CHARGES (DOLLARS) 0.6 0.6 0.6 0.6 1.8 3 6 0.6
ANNUALIZE RETURNS W/CHARGES -6.13% -8.60% N/A N/A N/A N/A N/A N/A
CUMULATIVE RETURNS W/CHARGES -6.13% -8.60% N/A N/A N/A N/A N/A 3.20%
TOTAL NUMBER OF YEARS 0
<CAPTION>
DS HYP POST-VENTURE CAPITAL
F64 1.0000
REPORT AS OF 12/31/1997
ONE THREE ONE THREE FIVE TEN INCEPTION
MONTH MONTH YTD YEAR YEAR YEAR YEAR 6/24/97
<S> <C> <C> <C> <C> <C> <C> <C> <C>
UNIT VALUES 10.08039626 9.8783527 10.51250332 N/A N/A N/A N/A N/A 9.22391109
ANNUALIZE RETURNS 2.05% -4.11% N/A N/A N/A N/A N/A N/A
CUMULATIVE RETURNS 2.05% -4.11% N/A N/A N/A N/A N/A 9.29%
SURRENDER CHARGES 5.00% 5.00% 5.00% 5.00% 3.00% 1.00% 0.00% 5.00%
ACCOUNT CHARGES (DOLLARS) 0.6 0.6 0.6 0.6 1.8 3 6 0.6
ANNUALIZE RETURNS W/CHARGES -3.01% -9.17% N/A N/A N/A N/A N/A N/A
CUMULATIVE RETURNS W/CHARGES -3.01% -9.17% N/A N/A N/A N/A N/A 4.23%
TOTAL NUMBER OF YEARS 0
PAGE
</TABLE>
Page 11
