AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 29, 1999.
FILE NO. 333-23271
FILE NO. 811-08091
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM N-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
PRE-EFFECTIVE AMENDMENT NO. [ ]
POST-EFFECTIVE AMENDMENT NO. 5 [X]
REGISTRATION STATEMENT UNDER
THE INVESTMENT COMPANY ACT OF 1940
POST-EFFECTIVE AMENDMENT NO. 5 [X]
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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 07102-4077
DEPOSITOR'S TELEPHONE NUMBER: (973) 802-6997
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C. CHRISTOPHER SPRAGUE, ESQ.
ASSISTANT GENERAL COUNSEL
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
3 GATEWAY CENTER, 12TH FLOOR
NEWARK, NJ 07102-4077
(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
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It is proposed that this filing will become effective (check appropriate space):
[ ] immediately upon filing pursuant to paragraph (b) of Rule 485
[X] on April 30, 1999 pursuant to paragraph (b) of Rule 485
[ ] 60 days after filing pursuant to paragraph (a) of Rule 485
[ ] on May 1, 1999 pursuant to paragraph (a) of Rule 485
Title of Securities Being Registered:
Interests in Group Variable Annuity Contracts.
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<PAGE>
PART A
<PAGE>
PROSPECTUS MAY 1, 1999
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"). The Contracts are group variable annuity contracts
sold by The Prudential Insurance Company of America ("Prudential") to retirement
plans qualifying for federal tax benefits under sections 401, 403(b), 408 or 457
of the Internal Revenue Code of 1986 as amended (the "Code") and to
non-qualified defined contribution annuity plans. In this Prospectus, Prudential
may be referred to as either "Prudential" or as "we" or "us". We may refer to a
participant under a retirement plan as "you."
We sell one of the Contracts (the "Small Plan Contract") exclusively to
retirement plans qualified under Sections 401(k) or 401(a) of the Code that
generally have 100 or fewer participants. We may delegate most of the
administrative services in connection with those Contracts to a third party
recordkeeper (the "Small Plan Contract Recordkeeper").
As a plan participant, you can allocate contributions made on your behalf in a
number of ways. You can allocate contributions to one or more of the twenty-two
Subaccounts. Each Subaccount 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 Flexible Managed Portfolio Equity Portfolio
Diversified Bond Portfolio High Yield Bond Portfolio Prudential Jennison
Government Income Portfolio Stock Index Portfolio Portfolio
Conservative Balanced Portfolio Equity Income Portfolio Global Portfolio
- --------------------------------------------------------------------------------
AIM VARIABLE INSURANCE FUNDS, INC.
AIM V.I. Growth and Income Fund AIM V.I. Value Fund
JANUS ASPEN SERIES MFS VARIABLE INSURANCE TRUST
Growth Portfolio Emerging Growth Series
International Growth Portfolio Research Series
OCC ACCUMULATION TRUST T. ROWE PRICE EQUITY SERIES, INC.
Managed Portfolio Equity Income Portfolio
Small Cap Portfolio
T. ROWE PRICE INTERNATIONAL SERIES, INC. WARBURG PINCUS TRUST
International Stock Portfolio Post-Venture Capital Portfolio
You also can allocate contributions to the Guaranteed Interest Account, which
guarantees a stipulated rate of interest if held for a specified period of time.
In this Prospectus, we do not describe that account in detail. Rather, we
mention the Guaranteed Interest Account only where necessary to explain how the
Prudential Discovery Select Group Variable Contract Account works.
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In this Prospectus, we provide information that you should know before you
invest. We have filed additional information about the Contracts with the
Securities and Exchange Commission ("SEC") in a Statement of Additional
Information ("SAI"), dated May 1, 1999. That SAI is legally a part of this
Prospectus. You can get a copy of the SAI free of charge by contacting us at the
address or telephone number shown on the cover page. The SEC maintains a Web
site (http://www.sec.gov) that contains the SAI, material incorporated by
reference, and other information regarding registrants that file electronically
with the SEC. The SEC's mailing address is 450 Fifth Street, N.W., Washington,
DC 20549, and its public reference number is (800) SEC-0330.
The accompanying prospectuses for the Funds and the related statements of
additional information describe the investment objectives and risks of investing
in the Funds. We may offer additional Funds and Subaccounts in the future.
The contents of the SAI with respect to the Contracts appears on page 44 of this
Prospectus.
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PLEASE READ THIS PROSPECTUS AND KEEP IT FOR FUTURE REFERENCE. IT IS ACCOMPANIED
BY A CURRENT PROSPECTUS FOR EACH OF THE FUNDS. YOU SHOULD READ THOSE
PROSPECTUSES CAREFULLY AND RETAIN THEM FOR FUTURE REFERENCE.
AS WITH ALL VARIABLE ANNUITY CONTRACTS, THE FACT THAT WE HAVE REGISTERED THE
CONTRACTS WITH THE SEC DOES NOT MEAN THAT THE SEC HAS DETERMINED THAT THE
CONTRACTS ARE A GOOD INVESTMENT. NOR HAS THE SEC DETERMINED THAT THIS PROSPECTUS
IS COMPLETE OR ACCURATE. IT IS A CRIMINAL OFFENSE TO STATE OTHERWISE.
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
30 Scranton Office Park
Scranton, PA 18507-1789
Telephone 1-800-458-6333
* DISCOVERY SELECT IS A SERVICE MARK OF PRUDENTIAL
<PAGE>
PROSPECTUS CONTENTS
PAGE
----
GLOSSARY................................................................... 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............ 13
THE FUNDS.............................................................. 13
GUARANTEED INTEREST ACCOUNT............................................ 17
THE CONTRACTS.............................................................. 17
THE ACCUMULATION PERIOD................................................ 18
ALLOCATION OF PURCHASE PAYMENTS ....................................... 19
ASSET ALLOCATION PROGRAM............................................... 19
TRANSFERS.............................................................. 19
DOLLAR COST AVERAGING ................................................. 22
AUTO-REBALANCING....................................................... 22
WITHDRAWALS............................................................ 22
SYSTEMATIC WITHDRAWAL PLAN............................................. 23
TEXAS OPTIONAL RETIREMENT PLAN......................................... 24
DEATH BENEFIT.......................................................... 25
DISCONTINUANCE OF CONTRIBUTIONS........................................ 26
LOAN PROVISION......................................................... 27
MODIFIED PROCEDURES.................................................... 28
CHARGES, FEES AND DEDUCTIONS............................................... 28
ADMINISTRATIVE FEE AND ANNUAL ACCOUNT CHARGE........................... 28
CHARGE FOR ASSUMING MORTALITY AND EXPENSE RISKS........................ 29
EXPENSES INCURRED BY THE FUNDS......................................... 29
WITHDRAWAL CHARGE...................................................... 29
LIMITATIONS ON WITHDRAWAL CHARGE....................................... 30
PREMIUM TAXES.......................................................... 31
FEDERAL TAX STATUS......................................................... 32
ANNUITY QUALIFICATION.................................................. 32
TAX-QUALIFIED RETIREMENT ARRANGEMENTS USING THE CONTRACTS.............. 32
NON-QUALIFIED ARRANGEMENTS USING THE CONTRACTS......................... 34
ENTITY OWNERS.......................................................... 36
WITHHOLDING............................................................ 36
TAXES ON PRUDENTIAL ................................................... 36
EFFECTING AN ANNUITY....................................................... 36
LIFE ANNUITY WITH PAYMENTS CERTAIN..................................... 37
ANNUITY CERTAIN........................................................ 37
JOINT AND SURVIVOR ANNUITY WITH PAYMENTS CERTAIN....................... 37
PURCHASING THE ANNUITY................................................. 38
OTHER INFORMATION.......................................................... 38
MISSTATEMENT OF AGE OR SEX............................................. 38
SALE OF THE CONTRACT AND SALES COMMISSIONS............................. 38
VOTING RIGHTS.......................................................... 38
SUBSTITUTION OF FUND SHARES............................................ 39
PERFORMANCE INFORMATION................................................ 39
REPORTS TO PARTICIPANTS................................................ 40
STATE REGULATION....................................................... 40
LEGAL PROCEEDINGS...................................................... 41
YEAR 2000 COMPLIANCE................................................... 42
SUBSEQUENT EVENTS...................................................... 43
STATEMENT OF ADDITIONAL INFORMATION.................................... 44
ADDITIONAL INFORMATION................................................. 44
i
<PAGE>
GLOSSARY
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.
CONTRACTS--The Group Variable Annuity Contracts that we describe in this
Prospectus and offer 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. The Small Plan Contract is one
of such Contracts.
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 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.
SMALL PLAN CONTRACT--A type of Contract used exclusively with retirement plans
qualified under Sections 401(k) or 401(a) of the Code that generally have 100 or
fewer Participants.
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--We credit a Participant with Units for 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. We will reduce the number of Units
credited to a Participant under any Subaccount 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 different
Unit Values 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. We make such determinations 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
Prudential offers the Contracts to retirement plans qualifying for federal tax
benefits under Sections 401, 403(b), 408 or 457 of the Internal Revenue Code of
1986, as amended (the "Code") and to nonqualified annuity arrangements. The
Contracts are group annuity contracts that we typically issue to employers.
These employers then make contributions under the Contract 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. We invest the assets
of each Subaccount in one of the Funds listed beginning on page 13. You may
direct contributions to one or a combination of variable investment options as
well as the Guaranteed Interest Account. We set up a separate Participant
Account to record your investment choices. You can withdraw amounts held under
your Participant Account, in whole or in part, prior to the annuity date. We
also provide for a death benefit under the Contract.
Through payroll deduction or similar agreements with the Contractholder, you may
make contributions under the Contract. In addition, you may make contributions
in ways other than payroll deduction under certain circumstances.
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. We deduct a mortality and
expense risk charge equal to an annual rate of 0.15% from the assets held in the
variable investment options with respect to all the Contracts. We deduct an
administrative charge 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, we deduct an administrative
charge equal to an annual rate of 1.05% from the assets held in the variable
investment options. You can find further details about the administrative charge
in the Fee Tables, pages 4 and 5, and under Administrative Fee and Annual
Account Charge, page 28.
With respect to Contracts other than the Small Plan Contract, we assess an
additional administrative charge of up to $32 per Participant (the annual
account charge) on the last Business Day of each calendar year and at the time
of a full withdrawal. We will prorate this annual account charge for new
Participants on a monthly basis for their first year of participation. With
respect to the Small Plan Contract, we assess an annual administrative charge of
up to $32 per Participant 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. We do not prorate this charge for new Participants under the Small Plan
Contract.
Under Contracts other than the Small Plan Contract, we may impose a withdrawal
charge 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.
2
<PAGE>
A charge against each of the Funds' assets is also made by the investment
adviser for providing investment advisory and management services. You can find
further details about charges under the section entitled Charges, Fees and
Deductions, page 28.
Unless restricted by the retirement arrangement under which you are covered, or
by a section of the Code, you may withdraw, at any time, all or part of your
Participant Account. See "Withdrawals," page 22. If you withdraw, you may be
taxed under the Code, including, under certain circumstances, a 10% penalty tax
on premature withdrawals. See "Federal Tax Status," page 32. In addition, you
may transfer all or a part of your Participant Account Value 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. You should send all written requests, notices, and transfer
requests required by the Contracts (other than withdrawal requests and death
benefit claims), to Prudential at the address shown on the cover of this
Prospectus. You may effect the telephone transactions that are permitted by your
retirement plan by calling Prudential at 1-800-458-6333. You must send all
written withdrawal requests or death benefit claims to Prudential by one of the
following three means: (1) By U.S. mail to: Prudential, 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,
30 Scranton Office Park, Scranton, Pennsylvania 18507-1789; or (3) Fax to
Prudential, Attention: Client Payments at: (570) 340-4328. 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 28.
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, we define "good order" 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.
We intend this brief description of the Contracts to provide a broad overview of
the more significant features of the Contracts. You can find more detailed
information about the Contracts in subsequent sections of this Prospectus and in
the Contracts themselves.
Transaction requests (including death benefit claims) received directly by
Prudential in good order on a given Business Day before the established
transaction cutoff time (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, we define "good order" 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):
-------------------------------------------------------------------------------
THE WITHDRAWAL CHARGE WILL BE EQUAL
TO THE FOLLOWING PERCENTAGE OF THE
YEARS OF CONTRACT PARTICIPATION CONTRIBUTIONS WITHDRAWN
-------------------------------------------------------------------------------
First Year 5%
Second Year 4%
Third Year 3%
Fourth Year 2%
Fifth Year 1%
Sixth and Subsequent Years No Charge
-------------------------------------------------------------------------------
Maximum Annual Account Charge.......................................... $32
DISCOVERY ACCOUNT ANNUAL EXPENSES
(AS A PERCENTAGE OF AVERAGE PARTICIPANT ACCOUNT VALUE)
ALL SUBACCOUNTS
------------------------
Mortality and Expense Risk Charge ......................... 0.15%
Administrative Fee ........................................ 0.85%
-----
Total Separate Account Annual Expenses .................... 1.00%
=====
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:
-------------------------------------------------------------------------------
THE WITHDRAWAL CHARGE WILL BE EQUAL
TO THE FOLLOWING PERCENTAGE OF THE
YEARS OF CONTRACT PARTICIPATION CONTRIBUTIONS WITHDRAWN
-------------------------------------------------------------------------------
First Year 5%
Second Year 4%
Third Year 3%
Fourth Year 2%
Fifth Year 1%
Sixth and Subsequent Years No Charge
-------------------------------------------------------------------------------
Maximum Annual Account Charge.......................................... $32
DISCOVERY ACCOUNT ANNUAL EXPENSES
(AS A PERCENTAGE OF AVERAGE PARTICIPANT ACCOUNT VALUE)
ALL SUBACCOUNTS
------------------------
Mortality and Expense Risk Charge ......................... 0.15%
Administrative Fee ........................................ 1.05%
-----
Total Separate Account Annual Expenses .................... 1.20%
=====
5
<PAGE>
ANNUAL EXPENSES OF THE FUNDS
(AS A PERCENTAGE OF PORTFOLIO AVERAGE NET ASSETS)
<TABLE>
<CAPTION>
INVESTMENT TOTAL TOTAL
MANAGEMENT OTHER CONTRACTUAL ACTUAL
FEE EXPENSES EXPENSES EXPENSES*
==============================================
THE PRUDENTIAL SERIES FUND, INC.
<S> <C> <C> <C> <C>
Conservative Balanced Portfolio.............................................. 0.55% 0.02% 0.57% 0.57%
Diversified Bond Portfolio................................................... 0.40% 0.02% 0.42% 0.42%
Equity Income Portfolio...................................................... 0.40% 0.02% 0.42% 0.42%
Equity Portfolio............................................................. 0.45% 0.02% 0.47% 0.47%
Flexible Managed Portfolio................................................... 0.60% 0.01% 0.61% 0.61%
Global Portfolio............................................................. 0.75% 0.11% 0.86% 0.86%
Government Income Portfolio.................................................. 0.40% 0.03% 0.43% 0.43%
High Yield Bond Portfolio.................................................... 0.55% 0.03% 0.58% 0.58%
Money Market Portfolio ...................................................... 0.40% 0.01% 0.41% 0.41%
Prudential Jennison Portfolio................................................ 0.60% 0.03% 0.63% 0.63%
Stock Index Portfolio........................................................ 0.35% 0.02% 0.37% 0.37%
AIM VARIABLE INSURANCE FUNDS, INC.
AIM V.I. Growth and Income Fund.............................................. 0.61% 0.04% 0.65% 0.65%
AIM V.I. Value Fund.......................................................... 0.61% 0.05% 0.66% 0.66%
JANUS ASPEN SERIES(1)
Growth Portfolio............................................................. 0.72% 0.03% 0.75% 0.68%
International Growth Portfolio............................................... 0.75% 0.20% 0.95% 0.86%
MFS VARIABLE INSURANCE TRUST
Emerging Growth Series....................................................... 0.75% 0.10% 0.85% 0.85%
Research Series.............................................................. 0.75% 0.11% 0.86% 0.86%
OCC ACCUMULATION TRUST
Managed Portfolio............................................................ 0.78% 0.04% 0.82% 0.82%
Small Cap Portfolio.......................................................... 0.80% 0.08% 0.88% 0.88%
T. ROWE PRICE(2)
T. Rowe Price Equity Series, Inc., Equity Income
Portfolio................................................................... 0.85% 0.00% 0.85% 0.85%
T. Rowe Price International Series, Inc., International
Stock Portfolio............................................................. 1.05% 0.00% 1.05% 1.05%
WARBURG PINCUS TRUST(3)
Post-Venture Capital Portfolio............................................... 1.25% 0.45% 1.70% 1.40%
</TABLE>
- ----------
* Reflects fee waivers and reimbursement of expenses, if any. The
following Expense Examples use "Total Actual Expenses."
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.
6
<PAGE>
(1) Janus Aspen Series. Fee reductions reduce Management Fees to the level of
the corresponding Janus retail fund. Janus has agreed to continue the applicable
waivers and fee reductions until at least the next annual renewal of the
advisory agreement.
(2) T. Rowe Price Funds: Management Fees include ordinary expenses of operating
the funds.
(3) Warburg Pincus Trust. Actual fees and expenses for the fiscal year ended
December 31, 1998 were 1.08% and 0.32% for Management Fees and Other Expenses,
respectively. Fee waivers and expense reimbursements or credits reduced fees and
expenses during 1998 but may be discontinued at any time.
EXAMPLES OF FEES AND EXPENSES
The following examples illustrate the cumulative dollar amount of all the above
expenses that you would incur on each $1,000 of investment.
o The examples assume a consistent 5% annual return on invested assets.
o The examples assume that the annual account charge is deducted from the
assets of each Subaccount based on a Participant Account Value of
$25,000.
THE 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
------ ------- ------- --------
THE PRUDENTIAL SERIES FUND, INC.
<S> <C> <C> <C> <C>
Money Market Subaccount .......................................... $ 66 $ 79 $ 94 $183
Diversified Bond Subaccount....................................... 66 79 94 184
Government Income Subaccount...................................... 66 79 95 185
Conservative Balanced Subaccount.................................. 67 84 102 201
Flexible Managed Subaccount....................................... 68 85 104 205
High Yield Bond Subaccount........................................ 67 84 103 202
Stock Index Subaccount............................................ 65 77 92 179
Equity Income Subaccount.......................................... 66 79 94 184
Equity Subaccount................................................. 66 80 97 190
Prudential Jennison Subaccount.................................... 68 85 105 207
Global Subaccount................................................. 70 92 117 231
AIM VARIABLE INSURANCE FUNDS, INC.
AIM V.I. Growth and Income Subaccount............................. 68 86 106 209
AIM V.I. Value Subaccount......................................... 68 86 107 210
JANUS ASPEN SERIES
Growth Subaccount................................................. 68 87 108 212
International Growth Subaccount................................... 70 92 117 231
MFS VARIABLE INSURANCE TRUST
Emerging Growth Subaccount........................................ 70 92 117 230
Research Subaccount............................................... 70 92 117 231
OCC ACCUMULATION TRUST
Managed Subaccount................................................ 70 91 115 227
Small Cap Subaccount.............................................. 70 93 118 234
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 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
------ ------- ------- --------
THE PRUDENTIAL SERIES FUND, INC.
<S> <C> <C> <C> <C>
Money Market Subaccount ............................................... $ 16 $ 49 $ 84 $183
Diversified Bond Subaccount............................................ 16 49 84 184
Government Income Subaccount........................................... 16 49 85 185
Conservative Balanced Subaccount....................................... 17 54 92 201
Flexible Managed Subaccount............................................ 18 55 94 205
High Yield Bond Subaccount............................................. 17 54 93 202
Stock Index Subaccount................................................. 15 47 82 179
Equity Income Subaccount............................................... 16 49 84 184
Equity Subaccount...................................................... 16 50 87 190
Prudential Jennison Subaccount......................................... 18 55 95 207
Global Subaccount...................................................... 20 62 107 231
AIM VARIABLE INSURANCE FUNDS, INC.
AIM V.I. Growth and Income Subaccount.................................. 18 56 96 209
AIM V.I. Value Subaccount.............................................. 18 56 97 210
JANUS ASPEN SERIES
Growth Subaccount...................................................... 18 57 98 212
International Growth Subaccount........................................ 20 62 107 231
MFS VARIABLE INSURANCE TRUST
Emerging Growth Subaccount............................................. 20 62 107 230
Research Subaccount.................................................... 20 62 107 231
OCC ACCUMULATION TRUST
Managed Subaccount..................................................... 20 61 105 227
Small Cap Subaccount................................................... 20 63 108 234
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 5 YEARS 10 YEARS
------ ------- ------- --------
THE PRUDENTIAL SERIES FUND, INC.
<S> <C> <C> <C> <C>
Money Market Subaccount ............................................... $ 68 $ 85 $ 104 $205
Diversified Bond Subaccount............................................ 68 85 105 206
Government Income Subaccount........................................... 68 85 105 207
Conservative Balanced Subaccount....................................... 69 90 113 222
Flexible Managed Subaccount............................................ 70 91 115 226
High Yield Bond Subaccount............................................. 69 90 113 223
Stock Index Subaccount................................................. 67 84 102 201
Equity Income Subaccount............................................... 68 85 105 206
Equity Subaccount...................................................... 68 87 107 211
Prudential Jennison Subaccount......................................... 70 91 116 228
Global Subaccount...................................................... 72 98 127 252
AIM VARIABLE INSURANCE FUNDS, INC.
AIM V.I. Growth and Income Subaccount.................................. 70 92 117 230
AIM V.I. Value Subaccount.............................................. 70 92 117 231
JANUS ASPEN SERIES
Growth Subaccount...................................................... 70 93 118 234
International Growth Subaccount........................................ 72 98 127 252
MFS VARIABLE INSURANCE TRUST
Emerging Growth Subaccount............................................. 72 98 127 251
Research Subaccount.................................................... 72 96 127 252
OCC ACCUMULATION TRUST
Managed Subaccount..................................................... 72 97 125 248
Small Cap Subaccount................................................... 72 99 128 254
T. ROWE PRICE
T. Rowe Price Equity Series, Inc., Equity Income Subaccount............ 72 98 127 251
T. Rowe Price International Series, Inc., International Stock
Subaccount............................................................ 74 104 137 271
WARBURG PINCUS TRUST
Post-Venture Capital Subaccount........................................ 78 115 154 306
</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 5 YEARS 10 YEARS
------ ------- ------- --------
THE PRUDENTIAL SERIES FUND, INC.
<S> <C> <C> <C> <C>
Money Market Subaccount ........................................... $ 18 $ 55 $ 94 $205
Diversified Bond Subaccount........................................ 18 55 95 206
Government Income Subaccount....................................... 18 55 95 207
Conservative Balanced Subaccount................................... 19 60 103 222
Flexible Managed Subaccount........................................ 20 61 105 226
High Yield Bond Subaccount......................................... 19 60 103 223
Stock Index Subaccount............................................. 17 54 92 201
Equity Income Subaccount........................................... 18 55 95 206
Equity Subaccount.................................................. 18 57 97 211
Prudential Jennison Subaccount..................................... 20 61 106 228
Global Subaccount.................................................. 22 68 117 252
AIM VARIABLE INSURANCE FUNDS, INC.
AIM V.I. Growth and Income Subaccount.............................. 20 62 107 230
AIM V.I. Value Subaccount.......................................... 20 62 107 231
JANUS ASPEN SERIES
Growth Subaccount.................................................. 20 63 108 234
International Growth Subaccount.................................... 22 68 117 252
MFS VARIABLE INSURANCE TRUST
Emerging Growth Subaccount......................................... 22 68 117 251
Research Subaccount................................................ 22 68 117 252
OCC ACCUMULATION TRUST
Managed Subaccount................................................. 22 67 115 248
Small Cap Subaccount............................................... 22 69 118 254
T. ROWE PRICE
T. Rowe Price Equity Series, Inc., Equity Income Subaccount........ 22 68 117 251
T. Rowe Price International Series, Inc., International Stock
Subaccount........................................................ 24 74 127 271
WARBURG PINCUS TRUST
Post-Venture Capital Subaccount.................................... 28 85 144 306
</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 45.
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. Our corporate office is located at 751 Broad
Street, Newark, New Jersey. We have been investing for pension funds since 1928.
Prudential is currently considering reorganizing itself into a publicly traded
stock company through a process known as "demutualization." On February 10,
1998, the Company's Board of Directors authorized management to take the
preliminary steps necessary to allow the Company to demutualize. On July 1,
1998, legislation was enacted in New Jersey that would permit this conversion to
occur and that specified the process for conversion. Demutualization is a
complex process involving development of a plan of reorganization, adoption of a
plan by the Company's Board of Directors, a public hearing, voting by qualified
policyholders and regulatory approval, all of which could take two or more years
to complete. Prudential's management and Board of Directors have not yet
determined to demutualize and it is possible that, after careful review,
Prudential could decide not to go public.
The plan of reorganization, which hasn't been developed and approved, would
provide the criteria for determining eligibility and the methodology for
allocating shares or other consideration to those who would be eligible.
Generally, the amount of shares or other consideration eligible customers would
receive would be based on a number of factors, including the types, amounts and
issue years of their policies. As a general rule, owners of Prudential-issued
insurance policies and annuity contracts would be eligible, while mutual fund
customers and customers of the Company's subsidiaries would not be. It has not
yet been determined whether any exceptions to that general rule will be made
with respect to policyholders and contractowners of Prudential's subsidiaries.
Eligible policyholders would generally include employers, associations, other
groups, and trusts established by or for such entities, that own group policies
issued by Prudential, and generally would include Contractholders. The
individuals covered under a group plan, such as the Participants under a
Contract, generally would not be eligible to receive stock or other
consideration from Prudential.
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 that we bear 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.
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<PAGE>
THE PRUDENTIAL DISCOVERY SELECT GROUP VARIABLE CONTRACT ACCOUNT
Prudential established the Prudential Discovery Select Group Variable Contract
Account (the "Discovery Account") 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 sufficient to support its
obligations under the Contracts. Prudential segregates the Discovery Account
assets from all of its other assets. Thus, those assets are not chargeable with
liabilities arising out of any other business Prudential conducts. 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, Prudential
will transfer these additional assets 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.
Prudential registered the Discovery Account 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
registration does not mean that the SEC supervises 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. These Subaccounts
invest in corresponding portfolios of the Funds available under the Contracts.
Prudential may establish additional Subaccounts in the future.
THE FUNDS
The following is a list of each Fund, its investment objective and its
investment adviser:
THE PRUDENTIAL SERIES FUND, INC.
MONEY MARKET PORTFOLIO. The investment objective is maximum current income
consistent with the stability of capital and the maintenance of liquidity. The
portfolio invests in short-term debt obligations that mature in 13 months or
less.
DIVERSIFIED BOND PORTFOLIO. The investment objective is a high level of income
over a longer term while providing reasonable safety of capital. The portfolio
invests primarily in higher grade debt obligations and high quality money market
instruments.
GOVERNMENT INCOME PORTFOLIO. The investment objective is a high level of income
over the longer term consistent with the preservation of capital. The portfolio
invests primarily in U.S. Government securities, including intermediate and
long-term U.S. Treasury securities and debt obligations issued by agencies or
instrumentalities established by the U.S. Government.
CONSERVATIVE BALANCED PORTFOLIO. The investment objective is a total investment
return consistent with a conservatively managed diversified portfolio. The
portfolio invests in a mix of equity securities, debt obligations and money
market instruments.
13
<PAGE>
FLEXIBLE MANAGED PORTFOLIO. The investment objective is a total investment
return consistent with an aggressively managed diversified portfolio. The
portfolio invests in a mix of equity securities, debt obligations and money
market instruments.
HIGH YIELD BOND PORTFOLIO. The investment objective is a high total return. The
portfolio invests primarily in high yield/high risk debt securities.
STOCK INDEX PORTFOLIO. The investment objective is investment results that
generally correspond to the performance of publicly-traded common stocks. The
portfolio attempts to duplicate the price and yield performance of the Standard
& Poor's 500 Composite Stock Price Index (the "S&P 500 Index").
EQUITY INCOME PORTFOLIO. The investment objective is both current income and
capital appreciation. The portfolio invests primarily in common stocks and
convertible securities that provide good prospects for returns above those of
the Standard & Poor's 500 Composite Stock Price Index or the NYSE Composite
Index.
EQUITY PORTFOLIO. The investment objective is capital appreciation. The
portfolio invests primarily in common stocks of major established corporations
as well as smaller companies that offer attractive prospects of appreciation.
PRUDENTIAL JENNISON PORTFOLIO. The investment objective is to achieve long-term
growth of capital. The portfolio invests primarily in equity securities of major
established corporations that offer above average growth prospects.
GLOBAL PORTFOLIO. The investment objective is long-term growth of capital. The
portfolio invests primarily in common stocks (and their equivalents) of foreign
and U.S. companies.
Prudential is the investment advisor for each of the portfolios of the
Prudential Series Fund. Prudential has a Service Agreement with its wholly-owned
subsidiary, The Prudential Investment Corporation ("PIC"), which provides that,
subject to Prudential's supervision, PIC will furnish investment advisory
services in connection with the management of the Prudential Series Fund. In
addition, Prudential has entered into a Subadvisory Agreement with its
wholly-owned subsidiary Jennison Associates Capital Corp. ("Jennison"), under
which Jennison furnishes investment advisory services in connection with the
management of the Prudential Jennison Portfolio.
AIM VARIABLE INSURANCE FUNDS, INC.
AIM V.I. GROWTH AND INCOME FUND. The Fund's investment objective is to seek
growth of capital, with current income as a secondary objective.
AIM V.I. VALUE FUND. The Fund's investment objective is to achieve long-term
growth of capital by investing primarily in equity securities judged by AIM
Advisors,Inc. to be undervalued relative to the current or projected earnings of
the companies issuing the securities, or relative market values of assets owned
by the companies issuing the securities or relative to the equity market
generally. Income is a secondary objective and would be satisfied principally
from the income (interest and dividends) generated by the common stocks,
convertible bonds and convertible preferred stocks that make up the Fund's
portfolio.
14
<PAGE>
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.
15
<PAGE>
T. ROWE PRICE
T. ROWE PRICE EQUITY SERIES, INC., EQUITY INCOME PORTFOLIO. The fund's objective
is to provide substantial dividend income as well as long-term capital
appreciation through investment in common stocks of established companies.
T. ROWE PRICE INTERNATIONAL SERIES, INC., INTERNATIONAL STOCK PORTFOLIO. The
fund's objective is long-term growth of capital through investment primarily in
common stocks of established, non-U.S. companies.
T. Rowe Price Associates, Inc. is the Investment Manager for the Equity Income
Portfolio and Rowe Price-Fleming International, Inc. is the Investment Manager
for the International Stock Portfolio.
WARBURG PINCUS TRUST
POST-VENTURE CAPITAL PORTFOLIO. Seeks long-term growth of capital by investing
primarily in equity securities of issuers in their post-venture capital stage of
development and pursues an aggressive investment strategy.
The Warburg Pincus Trust employs Warburg, Pincus Counselors, Inc. as investment
adviser and Abbott Capital Management, L.P. as its sub-investment adviser with
respect to a portion of the Post-Venture Capital Portfolio allocated to private
limited partnerships or other investment funds.
You can find further information about the Fund portfolios in the accompanying
prospectuses for each Fund.
-----------------------------------------
The investment advisors 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.
Prudential recognizes 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 to a conflict. 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.
An affiliate of each of the Funds (other than the portfolios in the Prudential
Series Fund) will compensate Prudential 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.
16
<PAGE>
You can review a full description of the Funds in the accompanying prospectuses
for each Fund and in the related statements of additional information. You
should read those documents in conjunction with this Prospectus. There is no
assurance that the investment objectives will be met.
A Fund may have an investment objective and investment policies closely
resembling those of a mutual fund within the same complex that is sold directly
to individual investors. Despite such similarities, there can be no assurance
that the investment performance of any such Fund will resemble that of its
retail fund counterpart.
GUARANTEED INTEREST ACCOUNT
The Guaranteed Interest Account is a credited interest option available to fund
certain group annuity contracts issued by Prudential. Amounts that you allocate
to the Guaranteed Interest Account become part of the General Account of
Prudential. Prudential's General Account consists of all assets owned by
Prudential other than those in the Discovery Account and other separate accounts
of Prudential. Subject to applicable law, Prudential has sole discretion over
the investment of the assets of the General Account.
Because of exemptive and exclusionary provisions, Prudential has not registered
interests in the General Account (which include interests in the Guaranteed
Interest Account) under the Securities Act of 1933. Nor has Prudential
registered the General Account as an investment company under the Investment
Company Act of 1940. Accordingly, those Acts do not apply to the General Account
or any interests therein, 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 that we make 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 that you allocate to the Guaranteed Interest
Account may be held within one or more guaranteed separate accounts. Prudential
has not registered interests in such separate account(s) under the Securities
Act of 1933 and has not registered the separate accounts as investment companies
under the Investment Company Act of 1940.
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. Prudential may issue a Contract 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 will have the rights and interests under
them that are described in this Prospectus. When a Contract is used to fund a
deferred compensation plan established by a tax-exempt entity under Section 457
of the Code, all rights under the Contract are owned by the Employer to whom, or
on whose behalf, the Contract is issued. All amounts that Prudential pays 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.
Notwithstanding the foregoing, the rules for Section 457 plans established by
state and local governments would be similar to those specified in this
paragraph.
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.
17
<PAGE>
THE ACCUMULATION PERIOD
Contributions; Crediting Units; Enrollment Forms; Deduction for Administrative
Expenses.
Ordinarily, an Employer will make contributions periodically to the Contract
pursuant to a payroll deduction or similar agreement between the Participant and
his Employer. In addition, you may make contributions in ways other than payroll
deduction under certain circumstances.
As a Participant, you designate what portion of the contributions made on your
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.
Participants under those Contracts must contact the record-keeper. See "Modified
Procedures," page 28.
Prudential credits the full amount (100%) of each contribution designated for
investment in any Subaccount to a Participant Account maintained for the
Participant. Except for the initial contribution, the number of Units that
Prudential credits 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.
Prudential will invest the initial contribution made for a Participant 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 Prudential does not receive the necessary enrollment
information 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) to the Contractholder. Any proceeds that Prudential pays to the
Contractholder under this procedure may be considered a prohibited and taxable
reversion to the Contractholder under current provisions of the Code. Similarly,
proceeds that Prudential returns 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. The Contractholder may avoid both
problems if it arranges to have the proceeds paid into a qualified trust or
annuity contract.
A change in the value of a Unit will not affect the number of Units of a
particular Subaccount credited to a Participant. However, the dollar value of a
Unit will vary from Business Day to Business Day depending upon the investment
experience of the Subaccount. Prudential will reduce the number of Units
credited to a Participant in a Subaccount to reflect any annual account charge.
Prudential determines the value of a Participant Account in a Subaccount on any
particular day by multiplying the total number of Units credited to the
Participant by the Subaccount's Unit Value on that day.
18
<PAGE>
Prudential set the Unit Value for each Subaccount at $10.00 on the date of
commencement of operations of that Subaccount. Prudential determines the Unit
Value for any subsequent Business Day 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.
Prudential determines the Unit Change Factor for any Business Day 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.
Prudential determines the value of the assets of a Subaccount 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, we will allocate subsequent
contributions 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, 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 transaction. 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
Prudential may make available an Asset Allocation Program 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, Prudential may make available a more comprehensive
model based on an internet web site for use by Participants. Prudential offers
the Asset Allocation Program 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.
Prudential regards the Asset Allocation Program as an aid in making purchase
payment allocations. You should not view the Program as any guarantee of
investment return. You also should realize that there can be no assurance that
any Fund portfolio will attain its investment objectives. As a Participant, you
should consider reviewing your investor profile questionnaire annually, and each
time your 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
19
<PAGE>
Subaccount or from the Guaranteed Interest Account, or, in the case of
Subaccounts, may be in terms of a percentage reallocation among Subaccounts.
Under certain Contracts, Prudential 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 (or to the Small Plan
Contract Recordkeeper, with respect to such Contracts), or by telephone,
internet or telecopy, depending on the terms of the arrangement applicable to
the Participant.
If a Contractholder chooses telephone privileges, each Participant will
automatically be enrolled to use the Telephone Transfer System. A Participant
may decline telephone 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, when Prudential receives a duly completed written transfer request form
or properly authorized telephone transfer request, Prudential will transfer all
or a portion of the Participant Account in any of the Subaccounts to another
Subaccount or from the Guaranteed Interest Account to the Subaccounts.
Prudential may restrict transfers from the Guaranteed Interest Account. There is
no minimum transfer amount. As of the Business Day you make the transfer
request, Prudential will reduce the Subaccount(s) from which the transfer is
made 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 Prudential credits 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.
Prudential did not design the Contracts 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
Prudential will discourage such a practice. 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.
Prudential may stipulate different procedures 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.
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 a Contract precludes such
transfers, 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
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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
Participant Account Value 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:
o continue to make transfers of all or part of his interest in his
Participant Account among the available investment options offered,
and
o 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 that you make among Subaccounts will take effect as of the end of the
Valuation Period in which a proper transfer request is received at Prudential
(or the Small Plan Contract Recordkeeper, in the case of the Small Plan
Contract).
From time to time, Prudential may make an offer to holders of other variable
annuities that Prudential or an affiliate issues to exchange their variable
annuity contracts for interests in a Contract issued by the Account. Prudential
will conduct any such exchange offer in accordance with SEC rules and other
applicable law. Current SEC rules pertaining to exchange offers among affiliated
variable annuity contracts generally require, with certain exceptions, that no
fee be imposed at the time of the exchange. Under this rule, Prudential could
charge an administrative fee at the time of the exchange, although we have no
present intention of doing so. SEC rules also require Prudential to give an
exchanging variable annuity contractholder "credit", for purposes of calculating
any withdrawal charge applicable under the Contract, for the time during which
the contractholder held the variable annuity that was exchanged.
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DOLLAR COST AVERAGING
Prudential may make available an administrative feature called Dollar Cost
Averaging ("DCA"). 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. Prudential currently imposes no
charge for this feature. Prudential would impose such a charge only pursuant to
an amendment to the administrative services agreement. Such an amendment would
have to be agreed to in writing by both Prudential and the Contractholder.
AUTO-REBALANCING
The Contracts may offer another investment technique. 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. It 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. Prudential currently imposes 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, a
Participant can make withdrawals 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.
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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, 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. You may specify the withdrawal amount 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 that you withdraw from contributions (including full withdrawals)
may be subject to a withdrawal charge. For purposes of determining withdrawal
charges, we consider withdrawals as having been made first from contributions.
See Withdrawal Charge, page 29. 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. We will effect the
withdrawal as of the end of the Valuation Period in which a proper withdrawal
request is received at Prudential (or the Small Plan Contract Recordkeeper, in
the case of the Small Plan Contract).
Prudential will generally pay the amount of any withdrawal within 7 days after
receipt of 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. 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 withdrawals by beneficiaries
must satisfy certain minimum distribution rules. See "Federal Tax Status," page
32.
You may arrange systematic withdrawals 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 will be made on a monthly, quarterly,
semi-annual, or annual basis.
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Prudential will effect all systematic withdrawals 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 will 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.
Prudential will take systematic withdrawals first out of the Participant's
investment, if any, in the Guaranteed Interest Account until that amount is
exhausted. Thereafter, Prudential will take systematic withdrawals 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 or Prudential's designee.
Prudential will provide such a form to a Participant 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. No systematic withdrawals will be made for a
Participant after Prudential has received this 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.
If a Participant arranges for systematic withdrawals, that 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 would
impose any such charge 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 Participant 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.
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A Participant has withdrawal benefits for Contracts issued under the Texas
Program only in the event of the 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. A Participant may, however, transfer the value of the
Participant's interest under the Contract 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
When Prudential receives due proof of a Participant's death and a claim and
payment election submitted on a form approved by us, we will pay to the
designated beneficiary a death benefit made up of the balance in the Participant
Account (after deduction of any annual account charges). 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, Prudential will
pay the death benefit, according to the Participant's instructions, in:
o one sum as if it were a single withdrawal,
o systematic withdrawals,
o an annuity, or
o a combination of the three.
Any such payment will be subject to the minimum distribution rules of Code
Section 401(a)(9) as described below under "Federal Tax Status." With respect to
the Small Plan Contract, the death benefit payment option listed in the fourth
bullet immediately above may not be available, although the other options are
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:
o to receive a one sum cash payment;
o 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;
o to receive regular payments in accordance with the systematic
withdrawal plan; or
o a combination of all or any two of (a), (b), and (c) above.
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, the total amount that Prudential will make available to the
beneficiary will be the greatest of:
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o the Participant's Account Value as of the date Prudential receives a
death benefit payment request in good order;
o the sum of all contributions made to the Participant Account less
withdrawals, transfers and charges; and
o 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, Prudential
will pay 50% of the balance in the Participant Account to such spouse even if
the designated beneficiary is someone other than the spouse. Under these
circumstances, Prudential would pay the remaining 50% 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 36. 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, Prudential will make
a one sum cash payment to the beneficiary, after deducting 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 Prudential pays a death benefit that results in reducing to zero the
balance in the Participant Account, Prudential will maintain the Participant
Account Value in the Subaccounts and the Guaranteed Interest Account that make
up the Participant Account for the beneficiary in the same manner as they had
been for the Participant, except:
o the beneficiary may make no contributions; and
o the beneficiary may not take a loan; and
o no withdrawal charge will be imposed upon withdrawals.
DISCONTINUANCE OF CONTRIBUTIONS
By notifying Prudential, the Contractholder may discontinue contributions on
behalf of all Participants under a Contract or for all Participants of an
Employer covered under a Contract. Contributions under the Contract will also be
discontinued for all Participants covered by a retirement arrangement that is
terminated.
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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 fact that contributions on a Participant's behalf are discontinued does not
otherwise affect the Participant's rights under the Contracts. 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 Account 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 that Participant Account unless prohibited by the retirement
arrangement, and pay the Participant the 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:
o $50,000, reduced by the highest outstanding balance of loans during
the one year period immediately preceding the date of the loan, or
o 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. Prudential invests those payments 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, we will deduct the loan
amount pro rata from the Participant Account Value in the Subaccounts. With
respect to the Small Plan Contract, we deduct amounts borrowed from a
Participant's Subaccounts on a pro rata basis. With respect to such Contracts,
amounts that a Participant repays 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. In that event,
Prudential will send the appropriate tax information to the Participant and the
Internal Revenue Service.
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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 we generally deduct it quarterly.
Under certain Contracts, we will deduct the loan maintenance fee annually. With
respect to Contracts other than the Small Plan Contract, Prudential will deduct
the loan maintenance charge first 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, Prudential will then deduct
the charge against any one or more of the Subaccounts in which the Participant
is invested. With respect to the Small Plan Contract, Prudential will deduct the
loan maintenance fee pro rata from each of the Participant's Subaccounts.
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. The Contract will set forth
any such different procedures.
CHARGES, FEES AND DEDUCTIONS
ADMINISTRATIVE FEE AND ANNUAL ACCOUNT CHARGE
Prudential imposes an administrative fee to compensate 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. Prudential deducts this fee 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.
Prudential deducts an annual account charge for recordkeeping and other
administrative services pro rata from each Participant Account or bills this
charge directly to the Employer. This annual account charge is payable to
Prudential. With respect to Contracts other than the Small Plan Contract,
Prudential imposes this charge 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, Prudential
assesses the annual account charge either:
o quarterly, on or about 14 days after the end of each quarter, or
o annually, on the last Business Day of the calendar year.
With respect to Contracts other than the Small Plan Contract, Prudential will
pro rate the annual account charge for new Participants for the first year of
their participation, based on the number of full months remaining in the
calendar
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year after the first contribution is received. With respect to the Small Plan
Contract, Prudential will not pro rate the annual account charge 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, Prudential will
impose the charge on the date that the 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). Prudential will not impose the
annual account charge, 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, Prudential will first assess the charge 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,
Prudential will then assess the charge 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.
Such lesser costs may be attributable to 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
Prudential makes a deduction daily from the assets of each of the Subaccounts as
compensation 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. Prudential assesses the charge daily at an
annual rate of 0.15% of the assets held in the Subaccounts for all of the
Contracts.
EXPENSES INCURRED BY THE FUNDS
Participants indirectly bear the charges and expenses of the Funds. You can
review details about investment management fees and other Fund expenses 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, Prudential may
assess a withdrawal charge 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. Prudential does not impose a withdrawal charge whenever
earnings are withdrawn.
With respect to Contracts other than the Small Plan Contract, the amount of the
withdrawal charge that Prudential imposes upon any withdrawal depends upon the
number of years of a Participant's participation in the Contract, the year in
which the withdrawal is made, and the kind of retirement arrangement that covers
the Participant. Participation in the Contract begins upon the date when the
first contribution on behalf of the Participant, along with enrollment
information in a form satisfactory to Prudential, is received by Prudential.
Such participation ends on the date when the Participant Account under the
Contract is canceled. In the event of such cancellation, Prudential reserves the
right to consider the Participant to be participating in the Contract for a
limited time (currently about one year) for the purposes of calculating any
withdrawal charge on the withdrawal of any future contributions.
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The table below describes the maximum amount of the withdrawal charge that
Prudential deducts with respect to Contracts other than the Small Plan Contract.
- -----------------------------------------------------------------------------
THE WITHDRAWAL CHARGE WILL BE EQUAL
TO THE FOLLOWING PERCENTAGE OF THE
YEARS OF CONTRACT PARTICIPATION CONTRIBUTIONS WITHDRAWN
- -----------------------------------------------------------------------------
First Year 5%
Second Year 4%
Third Year 3%
Fourth Year 2%
Fifth Year 1%
Sixth and Subsequent Years No Charge
- -----------------------------------------------------------------------------
We determine the withdrawal charge applicable to the Small Plan Contract 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, Prudential assesses the withdrawal charge against the Employer
based on the total value of contributions withdrawn under the terminated
Contract. Under a partial termination of the Contract, Prudential assesses the
withdrawal charge 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 a new employer, under
a new qualified retirement plan not covered under the Contract. Prudential would
assess the withdrawal charge 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, we no longer deduct a withdrawal charge. 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.
In general, Prudential will reduce the proceeds received by a Participant upon
any withdrawal 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 with respect to contributions withdrawn
for any of the following purposes:
o to purchase an annuity
o to provide a death benefit
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o pursuant to a systematic withdrawal plan generally
o to provide a minimum distribution payment
o in cases of financial hardship or disability retirement as determined
pursuant to provisions of the Employer's retirement arrangement
o roll-over contributions.
Further, for all plans other than IRAs, we will impose no withdrawal charge upon
contributions withdrawn due to resignation or retirement by the Participant or
termination of the Participant by the Contractholder.
Contributions that you transfer 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 we impose no
withdrawal charge upon them. Those contributions 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.
We consider loans to be withdrawals from the Subaccounts from which the loan
amount was deducted. However, we do not consider a loan to be a withdrawal from
the Contract. Therefore, we do not impose a withdrawal charge upon loans.
However, we will treat the principal portion of any loan repayment 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, we will treat the
outstanding balance of the loan as a withdrawal for purposes of the withdrawal
charge. We will deduct the withdrawal charge from the same Subaccounts, and in
the same proportions, as the loan amount was withdrawn. If sufficient funds do
not remain in those Subaccounts, we will deduct the withdrawal charge from the
Participant's other Subaccounts and the Guaranteed Interest Account.
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:
o the utilization of mass enrollment procedures; or
o 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
o an accumulated surplus of charges over expenses under a particular
Contract.
Generally, we lower or waive the withdrawal charge depending on the amount of
local service the Contractholder requires. In addition, we may lower the charge
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
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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 general in nature and describes only federal income
tax law (not state or other tax laws). It is based on current law and
interpretations, which may change. It is not intended as tax advice.
Participants and Contractholders should consult a qualified tax adviser for
complete information and advice.
ANNUITY QUALIFICATION
This discussion assumes the Contracts will be treated as annuity contracts for
federal income tax purposes. In order to qualify for the tax rules applicable to
annuity contracts, the assets underlying the Contracts must be diversified
according to certain rules. For further detail on diversification requirements,
see Dividends, Distributions and Taxes in the attached prospectus for the
Prudential Series Fund. Tax rules also require that Prudential must have
sufficient control over the underlying assets to be treated as the owner of the
underlying assets for tax purposes. Treasury Department regulations do not
provide guidance concerning the extent to which Participants may direct
investments in the particular investment options without causing Participants,
instead of Prudential, to be considered the owner of the underlying assets.
Prudential believes the Contracts are annuity contracts under the tax rules.
However, Prudential reserves the right to make any changes it deems necessary to
assure that the Contracts qualify as annuity contracts for tax purposes. Any
such changes will apply uniformly to affected Participants and will be made with
such notice to affected Participants as is feasible under the circumstances.
TAX-QUALIFIED RETIREMENT ARRANGEMENTS USING THE CONTRACTS
The Contracts may be used with qualified pension and profit sharing plans, plans
established by self-employed persons ("Keogh plans"), simplified employee
pension plans ("SEPs"), individual retirement plan accounts ("IRAs"), Roth IRAs,
and tax-deferred annuities ("TDAs"). The provisions of the tax law that apply to
these retirement arrangements that may be funded by the Contracts are complex,
and Participants are advised to consult a qualified tax adviser.
The Contracts may also be used with certain deferred compensation plans of a
state or local government or a tax-exempt organization (called "Section 457
Plans" after the Internal Revenue Code section that governs their structure).
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 these specific requirements. Please refer to the
discussion of Entity Owners on page 36, which may be applicable in certain
circumstances.
CONTRIBUTIONS
In general, assuming that the requirements and limitations of tax law 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.
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Contributions to a Roth IRA are subject to certain limits, and are not
deductible for federal income tax purposes.
EARNINGS
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 Subaccounts in which the contributions have been invested
until a distribution or withdrawal is received.
DISTRIBUTIONS OR WITHDRAWALS
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 tax law
applicable to the particular type of plan is necessary.
Furthermore, premature distributions or withdrawals may be restricted or subject
to a penalty tax. Participants contemplating a withdrawal should consult a
qualified tax adviser.
Under a Roth IRA, 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.
MINIMUM DISTRIBUTION RULES
In general, distributions from qualified retirement arrangements and Section 457
Plans must begin by the "Required Beginning Date" which is April 1 of the
calendar year following the later of (1) the year in which the Participant
attains age 70-1/2 or (2) the Participant retires. The following exceptions
apply:
o For a TDA, only benefits accruing after December 31, 1986 must begin
distribution by the Required Beginning Date.
o Roth IRAs are not subject to these pre-death minimum distribution
rules.
Distributions that are made after the Required Beginning Date must generally 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 Participant's date of
death. If the Participant dies before
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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 Section 457 Plan,
such period cannot exceed 15 years). Special rules apply where the deceased
Participant's spouse is his designated beneficiary.
In addition to the above rules, with respect to a Section 457 Plan, 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 take the
minimum distribution in any calendar year.
NON-QUALIFIED ARRANGEMENTS USING THE CONTRACTS
TAXES PAYABLE BY PARTICIPANT
Prudential believes the Contracts are annuity contracts for tax purposes.
Accordingly, as a general rule, Participants should not pay any tax until money
is received under the Contracts. Generally, annuity contracts issued by the same
company (and affiliates) to a Participant during the same calendar year must be
treated as one annuity contract for purposes of determining the amount subject
to tax under the rules described below.
TAXES ON WITHDRAWALS AND SURRENDER
If a Participant makes a withdrawal from the Contract or surrenders it before
annuity payments begin, the amount received will be taxed as ordinary income,
rather than as return of purchase payments, until all gain has been withdrawn.
If a Participant assigns all or part of the Contract as collateral for a loan,
the part assigned will be treated as a withdrawal. Also, if a Participant elects
the interest payment option, this will be treated, for tax purposes, as a
surrender of the Contract.
If a Participant transfers the Contract for less than full consideration, such
as by gift, tax will be triggered on the gain in the Contract. This rule does
not apply to transfers to a spouse or incident to divorce.
TAXES ON ANNUITY PAYMENTS
A portion of each annuity payment a Participant receives will be treated as a
partial return of purchase payments and will not be taxed. The remaining portion
will be taxed as ordinary income. Generally, the nontaxable portion is
determined by multiplying the annuity payment received by a fraction, the
numerator of which is the purchase payments (less any amounts previously
received tax-free) and the denominator of which is the total expected payments
under the Contract.
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After the full amount of the purchase payments have been recovered tax-free, the
full amount of the annuity payments will be taxable. If annuity payments stop
due to the death of the annuitant before the full amount of the purchase
payments have been recovered, a tax deduction is allowed for the unrecovered
amount.
PENALTY TAXES ON WITHDRAWALS AND ANNUITY PAYMENTS
Any taxable amount received under the Contract may be subject to a 10 percent
penalty tax. Amounts are not subject to this penalty tax if:
o the amount is paid on or after age 59-1/2 or the death of the
Participant;
o the amount received is attributable to the Participant becoming
disabled;
o the amount paid or received is in the form of level annuity payments
not less frequently than annually under a lifetime annuity; or
o the amount received is paid under an immediate annuity contract (in
which annuity payments begin within one year of purchase).
If the lifetime annuity payment stream is modified (other than as a result of
death or disability) before age 59-1/2 (or before the end of the five year
period beginning with the first payment and ending after age 59-1/2), the tax
for the year of modification will be increased by the penalty tax that would
have been imposed without the exception, plus interest for the deferral.
TAXES PAYABLE BY BENEFICIARIES
Generally, the same tax rules apply to amounts received by a beneficiary as
those set forth above with respect to a Participant. The election of an annuity
payment option instead of a lump sum death benefit may defer taxes. Certain
minimum distribution requirements apply upon the death of a Participant, as
discussed further below.
REQUIRED DISTRIBUTIONS UPON DEATH OF PARTICIPANT
Certain distributions must be made under the Contract upon the death of a
Participant. The required distributions depend on whether the Participant dies
on or before the start of annuity payments under the Contract or after annuity
payments are started under the Contract.
If the Participant dies on or after the annuity date, the remaining portion of
the interest in the Contract 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 the annuity date, the entire interest in the
Contract must be distributed within 5 years after the date of death. However, if
an annuity payment option is selected by the designated beneficiary and if
annuity payments begin within 1 year of the death of the Participant, the value
of the Contract may be distributed over the beneficiary's life or a period not
exceeding the beneficiary's life expectancy. The designated beneficiary is the
person to whom ownership of the Contract passes by reason of death, and must be
a natural person.
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If any portion of the Contract is payable to (or for the benefit of) a
Participant's surviving spouse, such portion of the Contract may be continued
with the spouse as the owner.
ENTITY OWNERS
When a Contract is held by a non-natural person (for example, a corporation),
the Contract generally will not be taxed as an annuity and increases in the
value of the Contract will be subject to tax. Exceptions include contracts held
by an entity as an agent for a natural person, contracts held under a qualified
pension or profit sharing plan, a TDA or individual retirement plan (see
discussion above) or contracts that provide for immediate annuities.
WITHHOLDING
Taxable amounts distributed from annuity contracts in nonqualified annuity
arrangements are subject to tax withholding. Participants may generally elect
not to have tax withheld from payments. The rate of withholding on annuity
payments will be determined on the basis of the withholding certificate filed
with Prudential. Absent these elections, Prudential will withhold the tax
amounts required by the applicable tax regulations. Participants may be subject
to penalties under the estimated tax payment rules if withholding and estimated
tax payments are not sufficient. Participants who fail to provide a social
security number or other taxpayer identification number will not be permitted to
elect out of withholding.
In addition, certain distributions from qualified plans, 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: (1) distributions for the life or life expectancy
of the Participant, or joint and last survivor expectancy of the Participant and
a designated beneficiary; or (2) distributions for a specified period of 10
years or more; or (3) distributions required as minimum distributions. Amounts
that are received under a Contract used in connection with a Section 457 Plan
are treated as wages for federal income tax purposes and are, thus, subject to
general withholding requirements.
Taxes on Prudential
Although the Account is registered as an investment company, it is not a
separate taxpayer for purposes of the Code. The earnings of the Subaccounts
invested in the Funds are taxed as part of the operations of Prudential. No
charge is being made currently against those Subaccounts for company federal
income taxes. Prudential will review the question of a charge to the Subaccounts
invested in the Funds for company federal income taxes periodically. Such a
charge may be made in future years for any federal income taxes that would be
attributable to the Contracts.
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.
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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. Prudential generally will make the first monthly annuity payment
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.
We make the following forms of annuity available to Participants.
LIFE ANNUITY WITH PAYMENTS CERTAIN
This is an immediate annuity payable monthly during the lifetime of the
annuitant. Prudential guarantees 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, we will continue payments in the same amount the
annuitant was receiving to his or her beneficiary. We make no further payments
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), we will continue payments during the
remainder of the period certain to the properly designated beneficiary.
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We may make other forms of annuity 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
Prudential does not deduct a withdrawal charge 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, Prudential deducts the full annual
account charge, unless the annuity becomes effective on January 1 of any year.
Prudential applies the resulting amount, less any applicable taxes, 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.
Prudential guarantees the schedule of annuity purchase rates in a Contract for
ten years from the date the Contract is issued. If at any time after a Contract
has been in effect for ten years, we modify the schedule of annuity purchase
rates, the modification is also guaranteed for ten years. A change in the
schedule of annuity purchase rates used for an 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, we will change each benefit and the amount of each annuity
payment to that which the total contributions would have bought for the correct
age and sex. Also, we will adjust for the amount of any overpayments we have
already made.
SALE OF THE CONTRACT AND SALES COMMISSIONS
Prudential Investment Management Services LLC ("PIMS"), a wholly-owned direct
subsidiary of Prudential, acts as the principal underwriter of the Contract.
PIMS was organized in 1996 under Delaware law, is registered as a broker and
dealer under the Securities Exchange Act of 1934, and is a member of the
National Association of Securities Dealers, Inc. PIMS' principal business
address is 751 Broad Street, Newark, NJ 07102. The Contract is sold by
registered representatives of PIMS who are also authorized by state insurance
departments to do so. The maximum commission that we will pay 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.
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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. As such, Prudential 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, as required by applicable securities laws.
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 to 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, we would have to obtain
the approval of the SEC, and possibly one or more state insurance departments.
We would notify Contractholders and Participants of any such substitution.
PERFORMANCE INFORMATION
We may depict performance information for the Subaccounts in advertising and
reports to current and prospective Contractholders and Participants. Performance
information is based on the historical investment experience of the Funds,
adjusted to take charges under the Contract into account, and does not indicate
or represent future performance.
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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:
o comparisons to market indices,
o comparisons to other investments,
o performance rankings,
o personalized illustrations of historical performance, and
o data presented by analysts or included in publications.
See Performance Information in the Statement of Additional Information for
recent performance information.
REPORTS TO PARTICIPANTS
Prudential will send Participants, at least annually, reports showing as of a
specified date the number of units credited to them in the Subaccounts of the
Discovery Account. We also will send each Participant 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.
40
<PAGE>
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.
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." New Jersey also can withhold or withdraw approval 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 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. The Supreme Court denied certiorari in January
1999, thereby making final the approval of the class action settlement.
Pursuant to the Settlement, Prudential agreed to provide and has been
implementing an Alternative Dispute Resolution ("ADR") process for class members
who believe they were misled concerning the sale or performance of their life
insurance Contracts. As of December 31, 1998, based on an analysis of claims
actually remedied, a sample of claims still to be remedied, and estimates of
additional liabilities associated with the ADR program, management estimated the
cost, before taxes, of remedying policyholder claims in the ADR process to be
approximately $2.56 billion. While management believes these to be reasonable
estimates based on available information, the ultimate amount of the total cost
of remedied policyholder claims and other related costs is dependent on complex
and varying factors, including the relief options still to be chosen by
claimants, the dollar value of those options, and the number and type of claims
that may successfully be appealed.
In addition, a number of actions have been filed against Prudential by
policyholders who have excluded themselves from the Settlement; Prudential
anticipates that additional suits may be filed by other policyholders.
Also, on July 9, 1996, a Multi-State Life Insurance Task Force comprised of
insurance regulators from 29 states and the District of Columbia, released a
report on Prudential's activities. As of February 24, 1997, Prudential had
entered into consent orders or agreements with all 50 states and the District of
Columbia to implement a remediation plan, whose terms closely parallel the
Settlement approved in the MDL proceeding, and agreed to a series of payments
allocated to all 50 states and the District of Columbia amounting to a total of
approximately $65 million. These agreements are now being implemented through
Prudential's implementation of the class Settlement.
Prudential's litigation is subject to many uncertainties, and given the
complexity and scope, the outcomes cannot be predicted with precision. It is
possible that the results of operations or the cash flow of the company, in
particular
41
<PAGE>
quarterly or annual periods, could be materially affected by an ultimate
unfavorable outcome of the matters specifically discussed above. Management
believes, however, that the ultimate resolution of all such matters, after
consideration of applicable reserves, should not have a material adverse effect
on Prudential's financial position.
YEAR 2000 COMPLIANCE
THE YEAR 2000 ISSUE
The services provided to a Contractholder or Participant in the Discovery Select
Group Retirement Annuity depend on the smooth functioning of numerous computer
systems. Many computer systems in use today are programmed to recognize only the
last two digits of a date as the year. As a result, any systems using this kind
of programming can not distinguish a date using "00" and may treat it as "1900"
instead of "2000." This problem may impact computer systems that store business
information, but it could also affect other equipment used in our business like
telephone, fax machines and elevators. If this problem is not corrected, the
"Year 2000" issue could affect the accuracy and integrity of business records.
Prudential's regular business operations could be interrupted as well as those
of other companies that deal with us.
In addition, the operations of the mutual funds associated with the Discovery
Select Group Retirement Annuity could experience problems resulting from the
Year 2000 issue. Please refer to the respective mutual fund's prospectus for
information regarding their approach to Year 2000 concerns. The following
describes Prudential's effort to address Year 2000 concerns.
To address this potential problem Prudential organized its Year 2000 efforts
around the following three areas:
o BUSINESS SYSTEMS - Computer programs directly used to support our
business;
o INFRASTRUCTURE - Computers and other business equipment like
telephones and fax machines; and
o BUSINESS PARTNERS - Year 2000 readiness of essential business
partners.
BUSINESS SYSTEMS. The business systems component includes a wide range of
computer programs that directly support Prudential's business operations
including systems for: insurance product processing, securities trading,
personnel record keeping and general accounting systems. All business systems
were analyzed to determine whether each computer program with a Year 2000
problem should be retired, replaced or renovated. The majority of this work has
been completed. A few remaining programs are currently being tested and
completion of this process is expected by June, 1999.
INFRASTRUCTURE. As with business applications, we established a specific
methodology and process for addressing infrastructure issues. The infrastructure
effort includes mainframe computer system hardware and operating system
software, mid-range systems and servers, telecommunications equipment and
systems, buildings and facilities systems, personal computers, and vendor
hardware and software. Other than desktop systems, substantially all other
infrastructure has been thoroughly tested. Presently, a small number of midrange
computers, and building and facilities systems are in the testing phase. We
expect to have the infrastructure implementation process completed by June,
1999.
BUSINESS PARTNERS. Prudential recognizes the importance of determining the Year
2000 readiness of external business relationships especially those that involve
electronic data transfer products and services, and products that impact our
essential business processes. Prudential first classified each business partner
as "highly critical" or "less critical" to our business and then began to
develop risk assessment and contingency plans to address the potential
42
<PAGE>
that a business partner could experience a Year 2000 failure. All highly
critical business partner relationships have been assessed and contingency
planning is completed. Risk assessment and contingency planning continues for
less critical business partners, and the target completion date for these
relationships is June 1999.
Prudential believes that the Business Application, Infrastructure and Business
Partners components of the Year 2000 project are substantially on schedule. A
small number of the projects may not meet their targeted completion date.
However, Prudential expects that these projects will be completed by September,
1999. If there are any delays, they should not have a significant impact on the
timing of the project as a whole.
THE COST OF YEAR 2000 READINESS
Prudential is funding the Year 2000 program from internal operating budgets, and
estimates that its total costs to address the Year 2000 issue would total
approximately $220 million. Because these expenses were part of the operating
budget, they did not impact the management of the Discovery Select Group
Retirement Annuity. During the course of the Year 2000 program, some optional
computer projects have been delayed, but these delays have not had any material
effect on the Discovery Select Group Retirement Annuity.
YEAR 2000 RISKS AND CONTINGENCY PLANNING
Prudential believes that it is well positioned to lessen the impact of the Year
2000 problem. However, given the nature of this issue, we cannot be 100% certain
that we are completely prepared, particularly because we cannot be certain of
Year 2000 readiness of third parties. As a result, we are unable to determine at
this time whether the consequences of Year 2000 failures may have a material
adverse effect on the results of Prudential's operations, liquidity or financial
condition. In the worst case, it is possible that a Year 2000 technology
failure, whether internal or external, could have a material impact on
Prudential's results of operations, liquidity, or financial position. If
Prudential is unable to address the Year 2000 problem, we may have difficulty in
responding to your incoming phone calls, calculating your unit values or
processing withdrawals and purchase payments. It is also possible that the
mutual funds associated with Discovery Select Group Retirement Annuity will be
unable to value their securities, in turn creating difficulties in purchasing or
selling shares of the respective mutual fund and calculating corresponding unit
asset values. The objective of Prudential's Year 2000 program has been to reduce
these risks as much as possible.
Most of the operations of the Discovery Select Group Retirement Annuity involve
such a large number of individual transactions that they can only be handled
with the help of computers. As a result, our current contingency plans include
responses to the failure of specific business programs or infrastructure
components. However, our contingency responses are now being reviewed and we
expect to finalize them by June, 1999 to ensure that they are workable under the
special conditions of a Year 2000 failure. Prudential believes that with the
completion of its Year 2000 program as scheduled, the possibility of significant
interruptions of normal operations will be reduced.
SUBSEQUENT EVENTS
On December 10, 1998, Prudential announced that it had entered into definitive
agreements for Aetna to acquire, subject to regulatory approval and certain
other conditions, Prudential's healthcare business for $1 billion. The
transaction is expected to be completed in the second quarter of 1999. Included
in this transaction are the Prudential
43
<PAGE>
HealthCare Health Maintenance Organization (HMO), Point of Service (POS),
Preferred Provider Organization (PPO), and indemnity health lines as well as its
dental business.
STATEMENT OF ADDITIONAL INFORMATION
<TABLE>
<CAPTION>
Page
----
The contents of the Statement of Additional Information include:
<S> <C>
Definitions..............................................................................................................2
Other Contract Provisions................................................................................................2
Administration...........................................................................................................2
Performance Information..................................................................................................3
Directors of Prudential..................................................................................................9
Officers of Prudential..................................................................................................11
Sale of Contracts.......................................................................................................14
Legal Matters...........................................................................................................14
Experts.................................................................................................................14
Financial Statements of the Discovery Account..........................................................................A-1
Consolidated financial statements of The Prudential Insurance Company of America and subsidiaries .....................B-1
</TABLE>
ADDITIONAL INFORMATION
Prudential has filed a registration statement 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. You may obtain the omitted information, however, from
the SEC's principal office in Washington, D.C., upon payment of a prescribed
fee.
You may obtain further information, including the Statement of Additional
Information, from Prudential without charge. The addresses and telephone numbers
are set forth on the cover page of this Prospectus.
44
<PAGE>
<TABLE>
APPENDIX
ACCUMULATION UNIT VALUES
CONTRACTS OTHER THAN SMALL PLAN CONTRACT
THE PRUDENTIAL DISCOVERY SELECT GROUP VARIABLE CONTRACT ACCOUNT
(CONDENSED FINANCIAL INFORMATION)
<CAPTION>
SUBACCOUNTS
-------------------------------------------------------------------------------------
PRUDENTIAL PRUDENTIAL PRUDENTIAL PRUDENTIAL
SERIES FUND SERIES FUND SERIES FUND SERIES FUND
MONEY MARKET DIVERSIFIED BOND GOVERNMENT INCOME CONSERVATIVE 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
12/31/98 12/31/97 12/31/98 12/31/97 12/31/98 12/31/97 12/31/98 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)............ $ 10.52 $ 10.08 $ 10.68 $ 10.07 $ 11.10 $ 10.27 $ 11.10 $ 10.03
3. Accumulation Units Outstanding
at end of period................ 42,992 815 63,041 542 33,914 60 146,440 563
--------- -------------------- --------- -------------------- --------- ---------
<CAPTION>
SUBACCOUNTS
----------------------------------------------------------------------------------
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
12/31/98 12/31/97 12/31/98 12/31/97 12/31/98 12/31/97 12/31/98 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)............ $ 10.90 $ 9.99 $ 10.02 $ 10.37 $ 13.09 $ 10.29 $ 10.13 $ 10.48
3. Accumulation Units Outstanding
at end of period................ 149,274 4,286 19,787 1,952 382,563 1,890 53,578 1,171
------------------- --------- -------------------- --------- --------- ----------
<CAPTION>
SUBACCOUNTS
------------------------------------------------------------------------------------
PRUDENTIAL PRUDENTIAL PRUDENTIAL
SERIES FUND SERIES FUND SERIES FUND AIM V.I.
EQUITY JENNISON GLOBAL GROWTH AND 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
12/31/98 12/31/97 12/31/98 12/31/97 12/31/98 12/31/97 12/31/98 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)............ $ 10.96 $ 10.12 $ 13.43 $ 9.87 $ 11.08 $ 8.95 $ 12.37 $ 9.79
3. Accumulation Units Outstanding
at end of period................ 769,653 2,907 77,040 3,111 124,465 1,576 16,899 1,122
--------- -------------------- --------- -------------------- --------- ---------
SUBACCOUNTS
-----------------------------------------------------------------------------------
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
12/31/98 12/31/97 12/31/98 12/31/97 12/31/98 12/31/97 12/31/98 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)............ $ 12.97 $ 9.89 $ 13.33 $ 9.92 $ 10.96 $ 9.44 $ 13.23 $ 9.95
3. Accumulation Units Outstanding
at end of period................ 37,442 1,738 43,275 462 34,735 942 61,164 470
-------------------- --------- -------------------- --------- --------- ----------
<CAPTION>
SUBACCOUNTS
----------------------------------------------------------------
OCC
OCC ACCUMULATION
MFS 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
12/31/98 12/31/97 12/31/98 12/31/97 12/31/98 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)............ $ 11.82 $ 9.67 $ 10.75 $ 10.13 $ 9.19 $ 10.20
3. Accumulation Units Outstanding
at end of period................ 14,548 779 23,869 2,135 12,742 2,781
--------- -------------------- --------- --------------------
<CAPTION>
SUBACCOUNTS
---------------------------------------------------------------
WARBURG PINCUS
T. ROWE PRICE T. ROWE PRICE POST-VENTURE
EQUITY INCOME INTERNATIONAL STOCK 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
12/31/98 12/31/97 12/31/98 12/31/97 12/31/98 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)............ $ 11.38 $ 10.54 $ 10.24 $ 8.92 $ 10.64 $ 10.08
3. Accumulation Units Outstanding
at end of period................ 26,852 1,704 6,523 216 6,039 5
--------- --------- -------------------- --------- ----------
</TABLE>
* Commencement of Operations
<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 07102-4077
PRUDENTIAL INVESTMENTS
3 Gateway Center, 12th Floor
Newark, NJ 07102-4077
[Prudential Logo]
DISCOVERY SELECT(SM) is a service mark of Prudential.
RS802B
CAT 62M093P B
DS.PR.001.0599
<PAGE>
PART B
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
MAY 1, 1999
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
SELECTSM 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 May 1, 1999. Certain portions of that
May 1, 1999 prospectus are incorporated by reference into this Statement of
Additional Information.
<PAGE>
TABLE OF CONTENTS
PAGE
----
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............................................ 3
PERFORMANCE INFORMATION.............................................. 4
DIRECTORS OF PRUDENTIAL............................................... 9
OFFICERS OF PRUDENTIAL................................................ 11
SALE OF CONTRACTS..................................................... 14
LEGAL MATTERS......................................................... 14
EXPERTS .............................................................. 14
FINANCIAL STATEMENTS OF THE DISCOVERY ACCOUNT......................... A-1
CONSOLIDATED FINANCIAL STATEMENTS OF THE PRUDENTIAL
INSURANCE COMPANY OF AMERICA AND SUBSIDIARIES........................ B-1
The Prudential Insurance Company of America
30 Scranton Office Park
Scranton, PA 18507-1789
Telephone 1-800-458-6333
<PAGE>
DEFINITIONS
CONTRACTS--The group variable annuity contracts described in the Prospectus and
offered for use in connection with retirement arrangements that qualify for
federal tax benefits under Sections 401, 403(b), 408 or 457 of the Internal
Revenue Code and with non-qualified annuity arrangements. 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.
SMALL PLAN CONTRACT--A type of Contract used exclusively with retirement plans
qualified under Sections 401(k) or 401(a) of the Code that generally have 100 or
fewer Participants.
SUBACCOUNT--A division of the Discovery Account, the assets of which are
invested in shares of the corresponding Funds.
We set out other defined terms in the Prospectus.
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. 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 another wholly-owned subsidiary,
Jennison Associates Capital Corp. ("Jennison"), with respect to the management
of the Prudential Jennison
2
<PAGE>
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 1998, 1997 and 1996, Prudential received $18,262,
$316 and $0 respectively 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
1998, 1997 and 1996, Prudential collected $6,379, $173 and $0 respectively in
annual account charges.
A withdrawal charge is also imposed on certain withdrawals from the Subaccounts
and the Guaranteed Interest Account. During 1998, Prudential collected $0 in
withdrawal charges.
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)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.
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
3
<PAGE>
presentation may assume that 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 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, 1998. This performance information is only
for Contracts other than the Small Plan Contract. Because its charges are
higher, the Small Plan Contract will have lower performance than the other
Contracts. 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.
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 12/31/98. 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>
ONE
YEAR
Fund Date ENDED 7/31/97-
Portfolio Established 12/31/98 12/31/98
--------- ----------- -------- --------
<S> <C> <C> <C>
The Prudential Series Fund, Inc.
Money Market Subaccount........................................ 6/24/97 4.35% 3.66%
Diversified Bond Subaccount.................................... 6/24/97 6.05% 4.77%
Government Income Subaccount................................... 6/24/97 8.04% 7.62%
Conservative Balanced Subaccount............................... 6/24/97 10.63% 7.63%
Flexible Managed Subaccount.................................... 6/24/97 9.13% 6.29%
High Yield Bond Subaccount..................................... 6/24/97 (3.34%) (0.17%)
Stock Index Subaccount......................................... 6/24/97 27.16% 20.88%
Equity Income Subaccount....................................... 6/24/97 (3.36%) (0.92%)
Equity Subaccount.............................................. 6/24/97 8.26% 6.68%
Prudential Jennison Subaccount................................. 6/24/97 36.01% 23.12%
Global Subaccount.............................................. 6/24/97 23.86% 7.51%
AIM Variable Insurance Funds, Inc.
AIM V.I. Growth and Income Subaccount.......................... 6/24/97 26.42% 16.19%
AIM V.I. Value Subaccount...................................... 6/24/97 31.10% 20.11%
Janus Aspen Series
Growth Subaccount.............................................. 6/24/97 34.32% 22.46%
International Growth Subaccount................................ 6/24/97 16.09% 6.70%
MFS Variable Insurance Trust
Emerging Growth Subaccount..................................... 6/24/97 32.85% 21.80%
Research Subaccount............................................ 6/24/97 22.22% 12.53%
OCC Accumulation Trust
Managed Subaccount............................................. 6/24/97 6.06% 5.22%
Small Cap Subaccount........................................... 6/24/97 (9.93%) (5.76%)
T. Rowe Price
T. Rowe Price Equity Series, Inc., Equity Income
Subaccount..................................................... 6/24/97 8.00% 9.52%
T. Rowe Price International Series, Inc., International
Stock Subaccount............................................... 6/24/97 14.71% 1.65%
Warburg Pincus Trust
Post-Venture Capital Subaccount................................ 6/24/97 5.58% 4.49%
</TABLE>
5
<PAGE>
Tables 2 and 3 below show average annual 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 12/31/98 12/31/98 12/31/98 12/31/98 12/31/98
--------- ----------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
The Prudential Series Fund, Inc.
Money Market Subaccount.............. 5/13/83 4.35% 3.96% 3.93% 4.45% 5.27%
Diversified Bond Subaccount.......... 5/13/83 6.05% 5.69% 6.22% 8.07% 8.17%
Government Income Subaccount......... 5/1/89 8.04% 5.65% 5.54% N/A 7.72%
Conservative Balanced
Subaccount......................... 5/13/83 10.63% 11.64% 9.64% 10.24% 9.81%
Flexible Managed Subaccount.......... 5/13/83 9.13% 12.60% 10.96% 11.97% 10.91%
High Yield Bond Subaccount........... 2/23/87 (3.34%) 6.28% 6.12% 7.99% 7.19%
Stock Index Subaccount............... 10/19/87 27.16% 27.01% 22.70% 17.66% 17.74%
Equity Income Subaccount............. 2/19/88 (3.36%) 15.54% 13.30% 13.67% 13.54%
Equity Subaccount.................... 5/13/83 8.26% 15.86% 15.52% 15.48% 13.94%
Prudential Jennison Subaccount....... 5/1/95 36.10% 25.67% N/A N/A 27.71%
Global Subaccount.................... 9/19/88 23.86% 15.20% 10.56% 9.61% 10.18%
AIM Variable Insurance Funds, Inc.
AIM V.I. Growth and Income
Subaccount......................... 5/2/94 26.42% 22.93% N/A N/A 21.14%
AIM V.I. Value Subaccount............ 5/5/93 31.10% 22.25% 20.48% N/A 20.68%
Janus Aspen Series
Growth Subaccount.................... 9/13/93 34.32% 23.76% 19.88% N/A 19.46%
International Growth Subaccount...... 5/2/94 16.09% 21.43% N/A N/A 17.34%
MFS Variable Insurance Trust
Emerging Growth Subaccount........... 7/24/95 32.85% 22.63% N/A N/A 25.06%
Research Subaccount.................. 7/24/95 22.22% 20.22% N/A N/A 20.80%
OCC Accumulation Trust
Managed Subaccount................... 8/1/88 6.06% 16.43% 18.26% 18.36% 18.00%
Small Cap Subaccount................. 8/1/88 (9.93%) 8.52% 7.32% 12.09% 11.74%
T. Rowe Price
T. Rowe Price Equity Series, Inc.,
Equity Income Subaccount............ 3/31/94 8.00% 17.54% N/A N/A 19.19%
T. Rowe Price International Series,
Inc., International Stock
Subaccount......................... 3/31/94 14.71% 9.77% N/A N/A 8.46%
Warburg Pincus Trust
Post--Venture Capital
Subaccount......................... 9/30/96 5.58% N/A N/A N/A 7.20%
</TABLE>
- -----------------------
Note 1: This table assumes no deferred sales charges.
6
<PAGE>
TABLE 3
SUBACCOUNT "HYPOTHETICAL"
CUMULATIVE 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 12/31/98 12/31/98 12/31/98 12/31/98 12/31/98
--------- ----------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
The Prudential Series Fund, Inc.
Money Market Subaccount.............. 5/13/83 4.35% 12.36% 21.25% 54.61% 123.26%
Diversified Bond Subaccount.......... 5/13/83 6.05% 18.08% 35.23% 117.42% 241.48%
Government Income Subaccount......... 5/1/89 8.04% 17.93% 30.99% N/A 105.26%
Conservative Balanced
Subaccount......................... 5/13/83 10.63% 39.19% 58.47% 165.11% 332.64%
Flexible Managed Subaccount.......... 5/13/83 9.13% 42.80% 68.28% 209.97% 405.51%
High Yield Bond Subaccount........... 2/23/87 (3.34%) 20.07% 34.62% 115.77% 127.93%
Stock Index Subaccount............... 10/19/87 27.16% 105.04% 178.29% 409.16% 523.46%
Equity Income Subaccount............. 2/19/88 (3.36%) 54.32% 86.78% 260.32% 297.59%
Equity Subaccount.................... 5/13/83 8.26% 55.57% 105.79% 322.15% 670.20%
Prudential Jennison Subaccount....... 5/1/95 36.10% 98.57% N/A N/A 145.42%
Global Subaccount.................... 9/19/88 23.86% 52.94% 65.25% 150.54% 171.23%
AIM Variable Insurance Funds, Inc.
AIM V.I. Growth and Income
Subaccount......................... 5/2/94 26.42% 85.86% N/A N/A 144.85%
AIM V.I. Value Subaccount............ 5/5/93 31.10% 82.81% 154.02% N/A 189.76%
Janus Aspen Series
Growth Subaccount.................... 9/13/93 34.32% 89.68% 148.74% N/A 156.68%
International Growth Subaccount...... 5/2/94 16.09% 79.16% N/A N/A 110.93%
MFS Variable Insurance Trust
Emerging Growth Subaccount........... 7/24/95 32.85% 84.51% N/A N/A 115.86%
Research Subaccount.................. 7/24/95 22.22% 73.84% N/A N/A 91.59%
OCC Accumulation Trust
Managed Subaccount................... 8/1/88 6.06% 57.88% 131.46% 440.01% 461.40%
Small Cap Subaccount................. 8/1/88 (9.93%) 27.83% 42.36% 213.28% 217.90%
T. Rowe Price
T. Rowe Price Equity Series, Inc.,
Equity Income Subaccount............ 3/31/94 8.00% 62.47% N/A N/A 130.47%
T. Rowe Price International Series,
Inc., International Stock
Subaccount......................... 3/31/94 14.71% 32.30% N/A N/A 47.41%
Warburg Pincus Trust
Post--Venture Capital
Subaccount......................... 9/30/96 5.58% N/A N/A N/A 16.95%
</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, 1998 were 3.81 % and 3.88%, 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) 365/7 -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 Finance & Dividends; Member, Corporate Governance
Committee. Business consultant since 1986. Senior Vice President, H.J. Heinz
from 1971 to 1986. Mr. Agnew is also a director of Bausch & Lomb, Inc. and Erie
Plastics Corporation. Age 64. Address: 600 Grant Street, Suite 660, Pittsburgh,
PA 15219.
FREDERICK K. BECKER--Director since 1994 (current term expires April, 2005).
Member, Auditing Committee; Member, Corporate Governance Committee. President,
Wilentz Goldman and Spitzer, P.A. (law firm) since 1989, with firm since 1960.
Age 63. Address: 90 Woodbridge Center Drive, Woodbridge, NJ 07095.
GILBERT F. CASELLAS--Director since 1998 (current term expires April, 2003).
Member, Compensation Committee. President, The Swarthmore Group, Inc. since
1999. Partner, McConnell Valdes, LLP in 1998. Chairman, U.S. Equal Employment
Opportunity Commission from 1994 to 1998. Age 46. Address: 1646 West Chester
Pike, Suite 3, West Chester, PA 19382.
JAMES G. CULLEN--Director since 1994 (current term expires April, 2001). Member,
Compensation Committee; Member, Committee on Business Ethics. President & Chief
Operating Officer, Bell Atlantic Corporation, since 1998. President & Chief
Executive Officer, Telecom Group, Bell Atlantic Corporation, from 1997 to 1998.
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 56. Address: 1310 North Court
House Road, 11th Floor, Alexandria, VA 22201.
CAROLYNE K. DAVIS--Director since 1989 (current term expires April, 2001).
Member, Committee on Business Ethics; Member, Compensation Committee.
Independent Health Care Advisor since 1997. National and International Health
Care Advisor, Ernst & Young, LLP from 1985 to 1997. Dr. Davis is also a director
of Beckman Coulter Instruments, Inc., Merck & Co., Inc., Minimed Incorporated,
and Beverley Enterprises. Age 67. 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. Mr.
Enrico originally joined PepsiCo, Inc. in 1971. Mr. Enrico is also a director of
A.H. Belo Corporation and Dayton Hudson Corporation. Age 54. Address: 700
Anderson Hill Road, Purchase, NY 10577.
ALLAN D. GILMOUR--Director since 1995 (current term expires April, 2003).
Member, Investment Committee; Member, Committee on Finance & 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, MeidiaOne Group, Inc., AP Automotive Systems, Inc., The Dow
Chemical Company and DTE Energy Company. Age 64. Address: 751 Broad Street, 23rd
Floor, Newark, NJ 07102.
WILLIAM H. GRAY, III--Director since 1991 (current term expires April, 2000).
Chairman, Committees on Nominations & Corporate Governance. Member, Executive
Committee; Member, Committee on Business Ethics. 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, Municipal
Bond Investors Assurance Corporation, Rockwell International Corporation,
Union-Pacific Corporation, Warner-Lambert Company, CBS Corporation, and
Electronic Data Systems. Age 57. Address: 8260 Willow Oaks Corp. Drive, Fairfax,
VA 22031-4511.
JON F. HANSON--Director since 1991 (current term expires April, 2003). Member,
Investment Committee; Member, Committee on Business Ethics. Chairman, Hampshire
Management Company since 1976. Mr. Hanson is also a director of James E. Hanson
Management Company, Neumann Distributors, Inc., Fleet Trust and Investment
Services Company, N.A., United Water Resources, Orange & Rockland
9
<PAGE>
Utilities, Inc., and Consolidated Delivery and Logistics. Age 62. 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 and Owens Corning. 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 Company, and
Pfizer, Inc. Age 56. 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. Chairman and Chief Executive
Officer, The Perkin Elmer Corporation from 1990 to 1996. Mr. Kelley is also a
director of Hercules Incorporated, and Alliant Techsystems. Age 67. Address: 751
Broad Street, 23rd Floor, Newark, NJ 07102-3777.
BURTON G. MALKIEL--Director since 1978 (current term expires April, 2002).
Chairman, Investment Committee; Member, Executive Committee; Member, Committee
on Finance & 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 66. 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
Bank from 1990 to 1994, with Chase since 1972. Age 56. Address: 751 Broad
Street, Newark, NJ 07102.
IDA F.S. SCHMERTZ--Director since 1997 (current term expires April, 2004).
Member, Audit Committee. Principal, Investment Strategies International since
1994. Age 64. Address: 751 Broad Street, 23rd Floor, Newark, NJ 07102.
CHARLES R. SITTER--Director since 1995 (current term expires April, 2003).
Member, Committee on Finance & Dividend; Member, Investment Committee. Retired
since 1996. President, Exxon Corporation from 1993 to 1996. Mr. Sitter began his
career with Exxon in 1957. Age 68. Address: 5959 Las Colinas Boulevard, Irving,
TX 75039-2298.
DONALD L. STAHELI--Director since 1995 (current term expires April, 2003).
Member, Compensation Committee; Member, Auditing Committee. Retired since 1996.
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, Conti-Financial
Corporation and Continental Grain Company. Age 67 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. Retired since
1998. Chairman of the Board, The Toronto-Dominion Bank from 1997 to 1998.
Chairman and Chief Executive Officer from 1978 to 1997. Mr. Thomson is also a
director of CGC, Inc., INCO, Limited, S.C. Johnson & Son, Inc., The Thomson
Corporation, Canadian Occidental Petroleum, Ltd., The Toronto-Dominion Bank and
Ontario Hydro. 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,
Committees on Nominations & Corporate Governance; Member, Investment Committee.
Retired since 1997. Chairman and Chief Executive Officer, Unisys Corporation,
from 1990 to 1997. Mr. Unruh is also a director of Ameritech Corporation and
Moss Micro. Age 57. Address: 751 Broad Street, Newark, NJ 07102-3777.
10
<PAGE>
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, Advanced Medicines, Inc. since 1997. Chairman, Chief Executive
Officer and President, Merck & Co., Inc. from 1986 to 1995, Dr. Vagelos
originally joined Merck in 1975 Dr. Vagelos is also a director of The Estee
Lauder Companies, Inc. and PepsiCo., Inc. Age 69. 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. Partner, Herbert, Van Ness, Cayci & Goodell (law firm) since
1998. Counselor at Law, Picco Herbert Kennedy (law firm) from 1990 to 1998. Mr.
Van Ness is also a director of Jersey Central Power & Light Company. Age 64.
Address: 22 Chambers Street, Princeton, NJ 08542.
PAUL A. VOLCKER--Director since 1988 (current term expires April, 2000).
Chairman, Committee on Finance & Dividends; Member, Executive Committee; Member,
Committee on Nominations & Corporate Governance. Consultant since 1997.
Chairman, Wolfensohn & Co., Inc. 1988 to 1996 Chairman, James D. Wolfensohn,
Inc. 1988 to 1996. Chief Executive Officer, James D. Wolfensohn, Inc. from 1995
to 1996. Mr. Volcker is also a director of Nestle, S.A., and Bankers Trust New
York Corporation as well as a Director of the Board of Overseers of TIAA-CREF.
Age 71, Address: 610 Fifth Avenue, Suite 420, New York, NY 10020.
JOSEPH H. WILLIAMS--Director since 1994 (current term expires April, 2002).
Member, Committee on Finance & Dividends; Member, Investment Committee.
Director, The Williams Companies since 1979. Chairman & Chief Executive Officer,
The Williams Companies from 1979 to 1993. Mr. Williams is also a director of The
Orvis Company, MTC Investors, LLC., and AEA Investors, Inc. Age 65. Address: One
Williams Center, Tulsa, OK 74102.
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
PRINCIPAL OFFICERS
ARTHUR F. RYAN--Chairman of the Board, President and Chief Executive Officer
since 1994; prior to 1994, President and Chief Operating Officer, Chase
Manhattan Corporation. Age 56.
E. MICHAEL CAULFIELD--Executive Vice President, Financial Management since 1998;
Chief Executive Officer, Prudential Investments from 1995 to 1998; Chief
Executive Officer, Money Management Group in 1995; prior to 1995, President,
Prudential Preferred Financial Services. Age 52.
MICHELE S. DARLING--Executive Vice President Human Resources since 1997; prior
to 1997, Executive Vice President, Canadian Imperial Bank of Commerce. Age 45.
ROBERT C. GOLDEN--Executive Vice President Operations and Systems since 1997;
prior to 1997, Executive Vice President, Prudential Securities. Age 53.
MARK B. GRIER--Executive Vice President, Corporate Governance since 1998;
Executive Vice President, Financial Management from 1997 to 1998; Chief
Financial Officer from 1995 to 1997; prior to 1995, Executive Vice President,
Chase Manhattan Corporation. Age 46.
JEAN D. HAMILTON--Executive Vice President, Prudential Institutional since 1998;
President, Diversified Group since 1995 to 1998; prior to 1995, President,
Prudential Capital Group. Age 52.
RODGER A. LAWSON--Executive Vice President, International Investments & Global
Marketing Communications since 1998; Executive Vice President, Marketing and
Planning from 1996 to 1998; President and CEO, Van Eck Global,from 1994 to 1996;
prior to 1994, President and CEO, Global Private Banking, Bankers Trust Company.
Age 52.
11
<PAGE>
KIYOFUMI SAKAGUCHI--Executive Vice President, International Insurance since
1998; President, International Insurance Group from 1995 to 1998; prior to 1995,
Chairman and CEO, The Prudential Life Insurance Co., Ltd., Japan. Age 56.
JOHN V. SCICUTELLA--Executive Vice President, Individual Financial Services
since 1998; Chief Executive Officer, Individual Insurance Group from 1997 to
1998; Executive Vice President Operations and Systems from 1995 to 1997; prior
to 1995, Executive Vice President, Chase Manhattan Corporation. Age 49.
JOHN R. STRANGFELD--Executive Vice President, Global Asset Management since
1998; Chief Executive Officer, Private Asset Management Group (PAMG) from 1996
to 1998; President, PAMG, from 1994 to 1996; prior to 1994, Senior Managing
Director. Age 45.
JAMES J. AVERY, JR.--Senior Vice President & Chief Actuary, Individual Insurance
Group since 1997; President Prudential Select from 1996 to 1997; prior to 1995,
Executive Vice President and Chief Operating Officer, Prudential Select. Age 47.
MARTIN A. BERKOWITZ--Senior Vice President, Financial Management since 1998;
Senior Vice President and Comptroller from 1995 to 1998; prior to 1995, Senior
Vice President and CFO, Prudential Investment Corporation. Age 50.
WILLIAM M. BETHKE--Senior Vice President and Chief Investment Officer since
1997; prior to 1997, President, Capital Management Group. Age 51.
ANNE E. BOSSI--Senior Vice President, Institutional since 1998; President, Group
Life & Disability 1997 to 1998; President, Group Life Insurance 1995 to 1997;
prior to 1995, President, Northeastern Group Operations. Age 47.
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. Age 51.
THOMAS J. CARROLL--Senior Vice President and Chief Auditor since 1999. Managing
Director, Bankers Trust Company from 1996 to 1998; prior to 1996, Global Chief
Auditor and Managing Director, Credit Suisse First Boston. Age 57.
THOMAS W. CRAWFORD--Senior Vice President, Individual Financial Services, since
1998; President and Chief Executive Officer, Prudential Property & Casualty
Company from 1996 to 1998; Vice President, Prudential Property & Casualty
Company in 1996; prior to 1996, President & CEO, Southern Heritage Insurance
Company. Age 55.
WILLIAM D. FRIEL--Senior Vice President and Chief Information Officer since
1996; prior to 1996, Chief Executive Officer, Prudential Service Company. Age
60.
MICHAEL J. HINES--Senior Vice President, Marketing and Communications since
1999; 1996 to 1998 Vice President, Marketing and Communications. Age 47.
RONALD P. JOELSON--Senior Vice President, Financial Management, since 1999.
Senior Vice President, Guaranteed Products, from 1996 to 1999. Vice President,
Guaranteed Investments, Guaranteed Products during 1996; prior to 1996, Managing
Director, Retirement Services. Age 40.
IRA J. KLEINMAN--Senior Vice President, International Insurance Group, since
1997; prior to 1997, Chief Marketing & Product Development Officer. Age 51.
KATHLEEN KRALL--Senior Vice President, Individual Financial Services since 1999;
Vice President, Individual Financial Services from 1996 to 1999; Vice President,
Operations and Systems from 1995 to 1996; prior to 1995 Vice President, Chase
Manhattan Bank. Age 41.
JOYCE R. LEIBOWITZ--Senior Vice President, Management Internal Controls since
1999; Vice President, Management Internal Controls from 1995 to 1999; prior to
1995 Integrated Control Officer. Age 51.
12
<PAGE>
JOHN M. LIFTIN--Senior Vice President and General Counsel since 1998;
Self-employed from 1997 to 1998; prior to 1997 Senior Vice President and General
Counsel, Kidder & Peabody Group, Inc. Age 55.
NEIL A. MCGUINNESS--Senior Vice President, Marketing, Prudential Investments,
since 1996; Director, Putnam Investments, in 1996; prior to 1996, President,
Fidelity Investment Employer Services Company. Age 52.
PRISCILLA A. MYERS--Senior Vice President, Demutualization since 1998; Senior
Vice President and Auditor from 1995 to 1998; prior to 1995, Vice President and
Auditor. Age 48.
I. EDWARD PRICE--Senior Vice President since 1996; Senior Vice President and
Actuary from 1995 to 1996; prior to 1995, Chief Executive Officer, Prudential
International Insurance. Age 56.
ROBERT J. SULLIVAN--Senior Vice President, Mutual Funds Sales, Individual
Financial Services since 1997; prior to 1997, Managing Director, Fidelity
Investments. Age 60.
SUSAN J. BLOUNT--Vice President and Secretary since 1995; prior to 1995,
Assistant General Counsel. Age 41.
C. EDWARD CHAPLIN--Vice President and Treasurer since 1995; prior to 1995,
Managing Director and Assistant Treasurer. Age 41.
ANTHONY S. PISZEL--Vice President and Controller since 1998; Vice President,
Enterprise Financial Management from 1997 to 1998; prior to 1997, Chief
Financial Officer, Individual Insurance Group. Age 44.
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
1998, 1997 and 1996, the aggregate dollar amount of underwriting commissions
paid to and the amounts retained by PIMS were $105,206, $4,896, and $0
respectively. During 1998, 1997 and 1996 PIMS paid $105,206, $4,896, and $0
respectively to cover individual representatives' commissions and other
distribution expenses.
Prudential may pay trail commissions to registered representatives who maintain
an ongoing relationship with a Contractholder. Typically, a trail commission is
compensation that is paid periodically to a representative, the amount of which
is linked to the value of the Contract and the amount of time that the Contract
has been in effect.
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 financial statements of Prudential as of December 31, 1998 and 1997 and for
each of the two years in the period ended December 31, 1998 and the financial
statements of the Account as of December 31, 1998 and for each of the two
periods in the period then ended included in this prospectus have been so
included in reliance on the reports of PricewaterhouseCoopers LLP, independent
accountants, given on the authority of said firm as experts in auditing and
accounting. PricewaterhouseCoopers LLP's principal business address is 1177
Avenue of the Americas, New York, New York 10036.
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
DECEMBER 31, 1998
<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] ........... $ 452,682 $ 658,819 $ 376,340 $ 1,627,341 $ 1,629,432 $ 198,171 $ 5,002,973
Net Receivable (Payable) from
the Prudential Insurance Co. ...
of America ..................... (180) (756) 101 (2,595) (2,534) (131) (2,360)
Net Receivable (Payable)
for Pending Capital
Transactions ................... (61) 15,444 (51) 692 807 310 6,372
--------- --------- --------- ----------- ----------- --------- ------------
NET ASSETS ........................ $ 452,441 $ 673,507 $ 376,390 $ 1,625,438 $ 1,627,705 $ 198,350 $ 5,006,985
--------- --------- --------- ----------- ----------- --------- ------------
NET ASSETS REPRESENTING:
Equity of Participant .......... $ 452,441 $ 673,507 $ 376,390 $ 1,625,438 $ 1,627,705 $ 198,350 $ 5,006,985
========= ========= ========= =========== =========== ========= ============
<CAPTION>
SUBACCOUNTS
------------------------------------------------------------------------------------
PRUDENTIAL
SERIES PRUDENTIAL PRUDENTIAL PRUDENTIAL
FUND SERIES SERIES SERIES AIM V.I. JANUS
EQUITY FUND FUND FUND GROWTH AND AIM V.I. 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] ....... $ 543,809 $ 8,444,684 $1,020,360 $ 1,381,071 $ 210,038 $ 485,731 $ 575,660
Net Receivable (Payable) from
the Prudential Insurance Co.
of America ................. (1,170) (22,851) 624 (1,978) (914) (724) (132)
Net Receivable (Payable)
for Pending Capital
Transactions ............... 164 14,138 13,900 287 (18) 606 1,415
--------- ----------- ---------- ----------- --------- --------- ---------
NET ASSETS .................... $ 542,803 $ 8,435,971 $1,034,884 $ 1,379,380 $ 209,106 $ 485,613 $ 576,943
--------- ----------- ---------- ----------- --------- --------- ---------
NET ASSETS REPRESENTING:
Equity of Participant ...... $ 542,803 $ 8,435,971 $1,034,884 $ 1,379,380 $ 209,106 $ 485,613 $ 576,943
========= =========== ========== =========== ========= ========= =========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
A-1
<PAGE>
FINANCIAL STATEMENTS OF THE DISCOVERY ACCOUNTS
STATEMENTS OF NET ASSETS
DECEMBER 31, 1998
<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] .............. 359,293 $ 800,871 $ 172,364 $ 257,240 $ 109,449 $ 306,105 $ 66,876 $ 64,860
Net Receivable (Payable) from
the Prudential Insurance Co
of America ........................ (2,768) (1,534) (409) (835) (396) (780) (1,215) (608)
Net Receivable (Payable)
for Pending Capital
Transactions ...................... 24,305 9,817 58 156 8,072 200 1,099 17
--------- --------- --------- --------- --------- --------- -------- --------
NET ASSETS ........................... $ 380,830 $ 809,154 $ 172,013 $ 256,561 $ 117,125 $ 305,525 $ 66,760 $ 64,269
--------- --------- --------- --------- --------- --------- -------- --------
NET ASSETS REPRESENTING:
Equity of Participants .......... $ 380,830 $ 809,154 $ 172,013 $ 256,561 $ 117,125 $ 305,525 $ 66,760 $ 64,269
========= ========= ========= ========= ========= ========= ======== ========
STATEMENTS OF OPERATIONS
YEAR ENDED
DECEMBER 31, 1998
<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 ....... $ 8,332 $ 26,057 $ 10,890 $ 40,577 $ 33,384 $ 12,803 $ 31,533
Expense [Note 3]
Fees Charged to Participants
for Administrative Purposes and
Mortality and Expense Risk ...... (1,387) (2,659) (1,149) (5,585) (5,969) (872) (15,150)
------- -------- -------- -------- --------- -------- ---------
NET INVESTMENT INCOME .................... 6,945 23,398 9,741 34,992 27,415 11,931 16,383
------- -------- -------- -------- --------- -------- ---------
NET REALIZED AND UNREALIZED
GAINS/(LOSSES) ON INVESTMENTS
Capital Gains Distributions Received ..... -- 363 -- 81,707 139,345 -- 65,441
Net Realized Gain/(Loss)
on Investments ........................ -- (3,470) (453) (5,911) (20,337) (4,798) (19,486)
Net Increase/(Decrease) in Unrealized
Appreciation on Investments ........... -- (4,505) 404 (57,421) (112,648) (13,191) 394,472
------- -------- -------- -------- --------- -------- ---------
NET GAIN/(LOSS) ON INVESTMENTS ........... -- (7,612) (49) 18,375 6,360 (17,989) 440,427
------- -------- -------- -------- --------- -------- ---------
NET INCREASE (DECREASE) IN
NET ASSETS RESULTING
FROM OPERATIONS .......................... $ 6,945 $ 15,786 $ 9,692 $ 53,367 $ 33,775 $ (6,058) $ 456,810
======= ======== ======== ======== ========= ======== =========
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
*Commencement of Operations
SEE NOTES TO FINANCIAL STATEMENTS
A-2
<PAGE>
FINANCIAL STATEMENTS OF THE DISCOVERY ACCOUNTS
STATEMENTS OF OPERATIONS
YEAR ENDED
DECEMBER 31, 1998
<TABLE>
<CAPTION>
SUBACCOUNTS
------------------------------------------------------------------------------------
PRUDENTIAL
SERIES PRUDENTIAL PRUDENTIAL PRUDENTIAL
FUND SERIES SERIES SERIES AIM V.I. JANUS
EQUITY FUND FUND FUND GROWTH AND AIM V.I. ASPEN
INCOME EQUITY JENNISON GLOBAL INCOME VALUE GROWTH
--------- ----------- ---------- ----------- --------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME
Ordinary Dividend Distributions ............. $ 7,932 $ 94,514 $ 827 $ 11,576 $ 788 $ 2,168 $ 4,311
Expense [Note 3]
Fees Charged to Participants
for Administrative Purposes and
Mortality and Expense Risk ................ (1,965) (29,746) (3,141) (4,802) (594) (1,370) (1,432)
-------- --------- --------- -------- -------- -------- --------
NET INVESTMENT INCOME (LOSS) ................. 5,967 64,768 (2,314) 6,774 194 798 2,879
-------- --------- --------- -------- -------- -------- --------
NET REALIZED AND UNREALIZED
GAINS/(LOSSES) ON INVESTMENTS
Capital Gains Distributions Received ......... 24,361 873,876 11,839 56,034 1,945 19,171 --
Net Realized Gain/(Loss)
on Investments .............................. (4,143) (45,717) (12,595) (14,573) (994) (3,766) (10,543)
Net Increase/(Decrease) in Unrealized
Appreciation on Investments ................. (39,789) (950,218) 144,102 18,863 27,977 52,143 97,391
-------- --------- --------- -------- -------- -------- --------
NET GAIN/(LOSS) ON INVESTMENTS ............... (19,571) (122,059) 143,406 60,324 28,928 67,548 86,848
-------- --------- --------- -------- -------- -------- --------
NET INCREASE (DECREASE)
IN NET ASSETS
RESULTING FROM OPERATIONS .................... $(13,604) $ (57,291) $ 141,092 $ 67,098 $ 29,122 $ 68,346 $ 89,727
======== ========= ========= ======== ======== ======== ========
<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 ..... $ 1,529 -- $ 39 $ 362 $ 197 $ 2,491 $ 704 --
Expense [Note 3]
Fees Charged to Participants
for Administrative Purposes and
Mortality Expense Risk ............ (1,060) (2,217) (515) (931) (538) (754) (249) (166)
-------- --------- -------- -------- ------- -------- ------- -------
NET INVESTMENT INCOME (LOSS) ......... 469 (2,217) (476) (569) (341) 1,737 455 (166)
-------- --------- -------- -------- ------- -------- ------- -------
NET REALIZED AND UNREALIZED
GAINS/(LOSSES) ON INVESTMENTS
Capital Gains Distributions Received . -- 789 515 1,500 2,261 7,891 248 --
Net Realized Gain/(Loss)
on Investments .................... (5,107) (9,432) (6,431) (3,657) (3,998) (2,583) (1,394) (2,035)
Net Increase/(Decrease) in Unrealized
Appreciation on Investments ....... 18,530 135,686 19,818 10,057 (1,454) 6,580 5,872 5,651
-------- --------- -------- -------- ------- -------- ------- -------
NET GAIN/(LOSS) ON INVESTMENTS ....... 13,423 127,043 13,902 7,900 (3,191) 11,888 4,726 3,616
-------- --------- -------- -------- ------- -------- ------- -------
NET INCREASE /(DECREASE) IN NET
ASSETS RESULTING FROM
OPERATIONS ........................... $ 13,892 $ 124,826 $ 13,426 $ 7,331 $(3,532) $ 13,625 $ 5,181 $ 3,450
======== ========= ======== ======== ======= ======== ======= =======
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
A-3
<PAGE>
FINANCIAL STATEMENTS OF THE DISCOVERY ACCOUNTS
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
SUBACCOUNTS
-------------------------------------------------------------------
PRUDENTIAL SERIES FUND PRUDENTIAL SERIES FUND
MONEY MARKET DIVERSIFIED BOND
------------------------------- ------------------------------
YEAR JULY 31, 1997* YEAR JULY 31, 1997*
ENDED TO ENDED TO
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998 1997 1998 1997
------------ -------------- ------------ --------------
<S> <C> <C> <C> <C>
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS ........................ $ 6,945 $ 51 $ 15,786 $ 11
--------- ------- --------- -------
ACCUMULATION UNIT TRANSACTIONS
Purchase Payments and
Transfers In [Note 7&8] ........................... 797,116 8,212 810,474 5,474
Withdrawals and
Transfers Out [Notes 7&8] ......................... (359,300) -- (157,252) --
Annual Account Charges Deducted
From Participants' Accumulation
Accounts [Note 4] ............................... (545) (38) (973) (13)
--------- ------- --------- -------
NET INCREASE IN NET ASSETS
RESULTING FROM ACCUMULATION
UNIT TRANSACTIONS ................................... 437,271 8,174 652,249 5,461
--------- ------- --------- -------
TOTAL INCREASE/(DECREASE) IN
NET ASSETS .......................................... 444,216 8,225 668,035 5,472
NET ASSETS
Beginning of Period ................................. 8,225 -- 5,472 --
--------- ------- --------- -------
End of Period ....................................... $ 452,441 $ 8,225 $ 673,507 $ 5,472
========= ======= ========= =======
<CAPTION>
SUBACCOUNTS
-------------------------------------------------------------------
PRUDENTIAL SERIES FUND PRUDENTIAL SERIES FUND
GOVERNMENT INCOME CONSERVATIVE BALANCE
------------------------------- ------------------------------
YEAR JULY 31, 1997* YEAR JULY 31, 1997*
ENDED TO ENDED TO
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998 1997 1998 1997
------------ -------------- ------------ --------------
<S> <C> <C> <C> <C>
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS ...................... $ 9,692 $ 7 $ 53,367 ($ 70)
--------- ---- ----------- -------
ACCUMULATION UNIT TRANSACTIONS
Purchase Payments and
Transfers In [Note 7&8] ......................... 505,132 613 1,678,603 5,755
Withdrawals and
Transfers Out [Notes 7&8] ....................... (138,978) -- (111,465) --
Annual Account Charges Deducted
From Participants' Accumulation
Accounts [Note 4] ............................. (76) -- (729) (23)
--------- ---- ----------- -------
NET INCREASE IN NET ASSETS
RESULTING FROM ACCUMULATION
UNIT TRANSACTIONS ................................. 366,078 613 1,566,409 5,732
--------- ---- ----------- -------
TOTAL INCREASE/(DECREASE) IN
NET ASSETS ........................................ 375,770 620 1,619,776 5,662
NET ASSETS
Beginning of Period ............................... 620 -- 5,662 --
--------- ---- ----------- -------
End of Period ..................................... $ 376,390 $620 $ 1,625,438 $ 5,662
========= ==== =========== =======
<CAPTION>
SUBACCOUNTS
------------------------------------------------------------------
PRUDENTIAL SERIES FUND PRUDENTIAL SERIES FUND
FLEXIBLE MANAGED HIGH YIELD BOND
------------------------------- ------------------------------
YEAR JULY 31, 1997* YEAR JULY 31, 1997*
ENDED TO ENDED TO
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998 1997 1998 1997
------------ -------------- ------------ --------------
<S> <C> <C> <C> <C>
NET INCREASE/(DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS ........................ $ 33,775 ($ 412) ($ 6,058) $ 40
ACCUMULATION UNIT TRANSACTIONS
Purchase Payments and
Transfers In [Notes 7&8] ......................... 1,770,868 43,587 198,666 20,242
Withdrawals and
Transfers Out [Notes 7&8] ........................ (219,644) -- (13,733) --
Annual Account Charges Deducted
From Participants' Accumulation
Accounts [Note 4] ................................... (351) (118) (789) (18)
----------- -------- --------- --------
NET INCREASE IN NET ASSETS
RESULTING FROM ACCUMULATION
UNIT TRANSACTIONS ................................. 1,550,873 43,469 184,144 20,224
----------- -------- --------- --------
TOTAL INCREASE/(DECREASE) IN
NET ASSETS .......................................... 1,584,648 43,057 178,086 20,264
NET ASSETS
Beginning of Period ................................. 43,057 -- 20,264 --
----------- -------- --------- --------
End of Period ....................................... $ 1,627,705 $ 43,057 $ 198,350 $ 20,264
=========== ======== ========= ========
<CAPTION>
SUBACCOUNTS
-------------------------------------------------------------------
PRUDENTIAL SERIES FUND PRUDENTIAL SERIES FUND
STOCK INDEX EQUITY INCOME
------------------------------- ------------------------------
YEAR JULY 31, 1997* YEAR JULY 31, 1997*
ENDED TO ENDED TO
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998 1997 1998 1997
------------ -------------- ------------ --------------
<S> <C> <C> <C> <C>
NET INCREASE/(DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS ........................ $ 456,810 $ 160 ($ 13,604) $ 107
----------- -------- --------- --------
ACCUMULATION UNIT TRANSACTIONS
Purchase Payments and
Transfers In [Notes 7&8] ......................... 4,860,238 19,364 555,878 12,239
Withdrawals and
Transfers Out [Notes 7&8] ........................ (329,120) -- (10,679) --
Annual Account Charges Deducted
From Participants' Accumulation
Accounts [Note 4] ................................... (457) (10) (1,092) (46)
----------- -------- --------- --------
NET INCREASE IN NET ASSETS
RESULTING FROM ACCUMULATION
UNIT TRANSACTIONS ................................. 4,530,661 19,354 544,107 12,193
----------- -------- --------- --------
TOTAL INCREASE/(DECREASE) IN
NET ASSETS .......................................... 4,987,471 19,514 530,503 12,300
NET ASSETS
Beginning of Period ................................. 19,514 -- 12,300 --
----------- -------- --------- --------
End of Period ....................................... $ 5,006,985 $ 19,514 $ 542,803 $ 12,300
=========== ======== ========= ========
*Commencement of Operations
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
A-4
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL STATEMENTS OF THE DISCOVERY ACCOUNTS
STATEMENTS OF CHANGES IN NET ASSETS
SUBACCOUNTS
----------------------------------------------------------------------------
PRUDENTIAL SERIES FUND PRUDENTIAL SERIES FUND
EQUITY JENNISON
----------------------------------------------------------------------------
YEAR JULY 31, 1997* YEAR JULY 31, 1997*
ENDED TO ENDED TO
DECEMBER 31, 1998 DECEMBER 31, 1997 DECEMBER 31, 1998 DECEMBER 31, 1997
----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS ... ($ 57,291) ($ 29) $ 141,092 ($ 435)
----------- -------- ----------- --------
ACCUMULATION UNIT TRANSACTIONS
Purchase Payments and
Transfers In [Notes 7&8] ..... 9,455,297 33,778 887,743 35,484
Withdrawals and
Transfers Out [Notes 7&8] .... (990,979) (4,287) (24,581) (4,225)
Annual Account Charges Deducted
From Participants' Accumulation
Accounts [Note 4] .............. (483) (35) (175) (19)
----------- -------- ----------- --------
NET INCREASE IN NET ASSETS
RESULTING FROM ACCUMULATION
UNIT TRANSACTIONS .............. 8,463,835 29,456 862,987 31,240
----------- -------- ----------- --------
TOTAL INCREASE/(DECREASE) IN
NET ASSETS ..................... 8,406,544 29,427 1,004,079 30,805
NET ASSETS
Beginning of Period ............ 29,427 -- 30,805 --
----------- -------- ----------- --------
End of Period .................. $ 8,435,971 $ 29,427 $ 1,034,884 $ 30,805
=========== ======== =========== ========
<CAPTION>
SUBACCOUNTS
------------------------------------------------------------------------------
PRUDENTIAL SERIES FUND AIM V.I.
GLOBAL GROWTH AND INCOME
------------------------------------------------------------------------------
YEAR JULY 31, 1997* YEAR JULY 31, 1997*
ENDED TO ENDED TO
DECEMBER 31, 1998 DECEMBER 31, 1997 DECEMBER 31, 1998 DECEMBER 31, 19
------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS ... $ 67,098 ($ 141) $ 29,122 ($ 57)
----------- ------- --------- --------
ACCUMULATION UNIT TRANSACTIONS
Purchase Payments and
Transfers In [Notes 7&8] ..... 1,462,943 17,037 172,567 11,089
Withdrawals and
Transfers Out [Notes 7&8] .... (164,746) (2,785) (3,487) --
Annual Account Charges Deducted
From Participants' Accumulation
Accounts [Note 4] .............. (26) -- (113) (5)
----------- ------- --------- --------
NET INCREASE IN NET ASSETS
RESULTING FROM ACCUMULATION
UNIT TRANSACTIONS .............. 1,298,171 14,252 168,957 11,084
----------- ------- --------- --------
TOTAL INCREASE/(DECREASE) IN
NET ASSETS ..................... 1,365,269 14,111 198,079 11,027
NET ASSETS
Beginning of Period ............ 14,111 -- 11,027 --
----------- ------- --------- --------
End of Period .................. $ 1,379,380 $14,111 $ 209,106 $ 11,027
=========== ======= ========= ========
<CAPTION>
SUBACCOUNTS
-------------------------------------------------------------------------------------
AIM V.I. JANUS ASPEN
VALUE GROWTH
-------------------------------------------------------------------------------------
YEAR JULY 31, 1997* YEAR JULY 31, 1997*
ENDED TO ENDED TO
DECEMBER 31, 1998 DECEMBER 31, 1997 DECEMBER 31, 1998 DECEMBER 31, 1997
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS .. $ 68,346 ($ 424) $ 89,727 ($ 26)
-------- --------- --------- ---------
ACCUMULATION UNIT TRANSACTIONS
Purchase Payments and
Transfers In [Notes 7&8] .... 410,625 17,701 519,122 4,652
Withdrawals and
Transfers Out [Notes 7&8] ... (10,598) -- (36,451) --
Annual Account Charges Deducted
From Participants' Accumulation
Accounts [Note 4] ........... (37) -- (73) (8)
-------- --------- --------- ---------
NET INCREASE IN NET ASSETS
RESULTING FROM ACCUMULATION
UNIT TRANSACTIONS ............. 399,990 17,701 482,598 4,644
TOTAL INCREASE/(DECREASE) IN -------- --------- --------- ---------
NET ASSETS .................... 468,336 17,277 572,325 4,618
NET ASSETS
Beginning of Period ........... 17,277 -- 4,618 --
-------- --------- --------- ---------
End of Period ................. $485,613 $ 17,277 $ 576,943 $ 4,618
======== ========= ========= =========
<CAPTION>
SUBACCOUNTS
-------------------------------------------------------------------------------------------
JANUS ASPEN MFS
INTERNATIONAL GROWTH EMERGING GROWTH
-------------------------------------------------------------------------------------------
YEAR JULY 31, 1997* YEAR JULY 31, 1997*
ENDED TO ENDED TO
DECEMBER 31, 1998 DECEMBER 31, 1997 DECEMBER 31, 1998 DECEMBER 31, 1997
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS .. $ 13,892 ($ 99) $ 124,826 ($ 21)
--------- --------- --------- ------
ACCUMULATION UNIT TRANSACTIONS
Purchase Payments and
Transfers In [Notes 7&8] .... 369,321 8,806 704,021 4,719
Withdrawals and
Transfers Out [Notes 7&8] ... (11,285) -- (24,367) --
Annual Account Charges Deducted
From Participants' Accumulation
Accounts [Note 4] ........... (3) -- (24) --
--------- --------- --------- ------
NET INCREASE IN NET ASSETS
RESULTING FROM ACCUMULATION
UNIT TRANSACTIONS ............. 358,033 8,806 679,630 4,719
TOTAL INCREASE/(DECREASE) IN --------- ---------
NET ASSETS .................... 371,925 8,905 804,456 4,698
NET ASSETS
Beginning of Period ........... 8,905 -- 4,698 --
--------- --------- --------- ------
End of Period ................. $ 380,830 $ 8,905 $ 809,154 $4,698
========= ========= ========= ======
*Commencement of Operations
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
A-5
<PAGE>
FINANCIAL STATEMENTS OF THE DISCOVERY ACCOUNTS
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
SUBACCOUNTS
-----------------------------------------------------------------------------------------------
MFS OCC ACCUMULATION
RESEARCH TRUST MANAGED
------------------------------------------------------------------------------------------------
YEAR JULY 31, 1997* YEAR JULY 31, 1997*
ENDED TO ENDED TO
DECEMBER 31, 1998 DECEMBER 31, 1997 DECEMBER 31, 1998 DECEMBER 31, 1997
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS ... $ 13,426 ($ 142) $ 7,331 ($ 57)
--------- ------- --------- --------
ACCUMULATION UNIT TRANSACTIONS
Purchase Payments and
Transfers In [Notes 7&8] ..... 169,889 7,711 242,811 21,752
Withdrawals and
Transfers Out [Note 7&8] ..... (18,797) -- (14,910) --
Annual Account Charges Deducted
From Participants' Accumulation
Accounts [Note 4] ............. (63) (11) (343) (23)
--------- ------- --------- --------
NET INCREASE IN NET ASSETS
RESULTING FROM ACCUMULATION
UNIT TRANSACTIONS .............. 151,029 7,700 227,558 21,729
--------- ------- --------- --------
TOTAL INCREASE/(DECREASE) IN
NET ASSETS ..................... 164,455 7,558 234,889 21,672
NET ASSETS
Beginning of Period ............ 7,558 -- 21,672 --
--------- ------- --------- --------
End of Period .................. $ 172,013 $ 7,558 $ 256,561 $ 21,672
========= ======= ========= ========
<CAPTION>
SUBACCOUNTS
----------------------------------------------------------------------------------------
OCC ACCUMULATION T. ROWE PRICE
TRUST SMALL CAP EQUITY INCOME
----------------------------------------------------------------------------------------
YEAR JULY 31, 1997* YEAR JULY 31, 1997*
ENDED TO ENDED TO
DECEMBER 31, 1998 DECEMBER 31, 1997 DECEMBER 31, 1998 DECEMBER 31, 1997
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS ... ($ 3,532) $ 368 $ 13,625 $ 572
--------- -------- --------- -------
ACCUMULATION UNIT TRANSACTIONS
Purchase Payments and
Transfers In [Notes 7&8] ..... 95,630 30,800 278,367 17,463
Withdrawals and
Transfers Out [Note 7&8] ..... (3,337) (2,796) (2,335) --
Annual Account Charges Deducted
From Participants' Accumulation
Accounts [Note 4] ............. (8) -- (167) --
--------- -------- --------- -------
NET INCREASE IN NET ASSETS
RESULTING FROM ACCUMULATION
UNIT TRANSACTIONS .............. 92,285 28,004 273,865 17,463
--------- -------- --------- -------
TOTAL INCREASE/(DECREASE) IN
NET ASSETS ..................... 88,753 28,372 287,490 18,035
NET ASSETS
Beginning of Period ............ 28,372 -- 18,035 --
--------- -------- --------- -------
End of Period .................. $ 117,125 $ 28,372 $ 305,525 $ 18,035
========= ======== ========= ========
<CAPTION>
SUBACCOUNTS
-------------------------------------------------------------------------------------
T. ROWE PRICE WARBURG PINCUS
INTERNATIONAL STOCK POST-VENTURE CAPITAL
-------------------------------------------------------------------------------------
YEAR JULY 31, 1997* YEAR JULY 31, 1997*
ENDED TO ENDED TO
DECEMBER 31, 1998 DECEMBER 31, 1997 DECEMBER 31, 1998 DECEMBER 31, 1997
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS ......... $ 5,181 $ 3 $ 3,450 $ 2
-------- ------ -------- ---
ACCUMULATION UNIT TRANSACTIONS
Purchase Payments and
Transfers In [Notes 7&8] ........... 60,070 1,928 62,801 47
Withdrawals and
Transfers Out [Notes 7&8] .......... (422) -- (2,031) --
Annual Account Charges Deducted
From Participants' Accumulation
Accounts [Note 4] ................... -- -- -- --
-------- ------ -------- ---
NET INCREASE IN NET ASSETS
RESULTING FROM ACCUMULATION
UNIT TRANSACTIONS .................... 59,648 1,928 60,770 47
-------- ------ -------- ---
TOTAL INCREASE/(DECREASE) IN
NET ASSETS ........................... 64,829 1,931 64,220 49
NET ASSETS
Beginning of Period .................. 1,931 -- 49 --
-------- ------ -------- ---
End of Period ........................ $ 66,760 $1,931 $ 64,269 $49
======== ====== ======== ===
</TABLE>
*Commencement of Operations
SEE NOTES TO FINANCIAL STATEMENTS
A-6
<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, 1997under 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 Small Plan Contract is used
exclusively with the retirement plans qualified under Sections 401(k) or
401(a) of the Code that generally have 100 or fewer Participants. 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
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
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
- --------------------------------------------------------------------------------
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, 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 45,268 59,568 31,703 107,913 98,395
NAV per Share $ 10.00 $ 11.06 $ 11.87 $ 15.08 $ 16.56
Cost at 12-31-98 $452,682 $663,335 $375,938 $1,685,482 $1,748,421
<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 27,493 132,564 27,146 284,908 42,675
NAV per Share $ 7.21 $ 37.74 $ 20.03 $ 29.64 $ 23.91
Cost at 12-31-98 $211,398 $4,608,580 $584,172 $9,395,574 $877,932
<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 65,268 8,843 18,504 24,454 16,892 37,301
NAV per Share $ 21.16 $ 23.75 $ 26.25 $ 23.54 $ 21.27 $ 21.47
Cost at 12-31-98 $1,362,905 $182,123 $434,605 $478,303 $340,664 $665,199
<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 9,048 5,881 4,738 15,902 4,606 5,487
NAV per Share $ 19.05 $ 43.74 $ 23.10 $ 19.25 $ 14.52 $ 11.82
Cost at 12-31-98 $152,675 $247,229 $110,412 $299,513 $61,038 $59,207
</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 with respect to Contracts other than the Small
Plan Contract. 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. For Small Plan Contracts, the
effective annual rate is 1.05% for the Administrative fee.
NOTE 4: ANNUAL ACCOUNT CHARGE
An additional administrative charge of up to $32, 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. Generally, 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. With respect to Contracts other than the Small Plan Contract,
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
- --------------------------------------------------------------------------------
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.
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.
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.
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, 1998 and the period July 31, 1997 through December 31, 1997 was as
follows:
1998
<TABLE>
<CAPTION>
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>
Units issued 77,066 77,584 46,903 157,519
Units redeemed 34,889 15,085 13,049 11,642
<CAPTION>
PRUDENTIAL SERIES PRUDENTIAL SERIES PRUDENTIAL SERIES
FUND FUND FUND
FLEXIBLE MANAGED HIGH YIELD BOND STOCK INDEX
----------------- ------------------ ----------------
<S> <C> <C> <C>
Units issued 167,022 19,350 412,078
Units redeemed 22,034 1,515 31,405
<CAPTION>
PRUDENTIAL SERIES PRUDENTIAL SERIES PRUDENTIAL SERIES PRUDENTIAL 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 53,716 862,500 76,594 140,744 16,129 36,711 46,330
Units redeemed 1,309 95,754 2,665 17,855 352 1,007 3,517
<CAPTION>
JANUS ASPEN MFS OCC ACCUMULATION OCC ACCUMULATION T. ROWE T. ROWE WARBURG PINCUS
INTERNATIONAL EMERGING MFS TRUST TRUST PRICE PRICE POST-VENTURE
GROWTH GROWTH RESEARCH MANAGED SMALL CAP EQUITY INCOME INTERNATIONAL STOCK CAPITAL
------------- -------- -------- ------- --------------- ------------- ------------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Units issued 35,096 63,305 15,701 23,307 10,378 25,387 6,346 6,273
Units redeemed 1,303 2,611 1,932 1,573 417 239 40 239
<CAPTION>
1997
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>
Units issued 819 543 60 565
Units redeemed 4 1 -- 2
<CAPTION>
PRUDENTIAL SERIES PRUDENTIAL SERIES PRUDENTIAL SERIES
FUND FUND FUND
FLEXIBLE MANAGED HIGH YIELD BOND STOCK INDEX
------------------ ------------------ -----------------
<S> <C> <C> <C>
Units issued 4,297 1,954 1,891
Units redeemed 11 2 1
<CAPTION>
PRUDENTIAL SERIES PRUDENTIAL SERIES PRUDENTIAL SERIES PRUDENTIAL 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>
T. ROWE
JANUS ASPEN MFS OCC ACCUMULATION OCC 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 3,058 1,704 216 5
Units redeemed -- -- 1 2 277 -- -- --
</TABLE>
A-9
<PAGE>
NOTES TO FINANCIAL STATEMENTS OF THE DISCOVERY ACCOUNT
- --------------------------------------------------------------------------------
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. 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. 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 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 also charges up to $60 per year as a loan maintenance fee for
record keepping 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. For the year ended
December 31, 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 SERIES PRUDENTIAL SERIES PRUDENTIAL SERIES PRUDENTIAL SERIES PRUDENTIAL SERIES PRUDENTIAL SERIES PRUDENTIAL SERIES
FUND FUND FUND FUND FUND FUND FUND
MONEY MARKET DIVERSIFIED BOND GOVERNMENT INCOME CONSERVATIVE BALANCED FLEXIBLE MANAGED HIGH YIELD BOND STOCK INDEX
---------------- ---------------- ----------------- --------------------- ---------------- ---------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Loans -- 635 -- 2,484 5,575 -- 5,309
Repayments -- -- -- -- 313 11 498
<CAPTION>
PRUDENTIAL SERIES PRUDENTIAL SERIES PRUDENTIAL SERIES PRUDENTIAL 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 4,247 10,176 5,250 298 -- -- 6,562
Repayments 289 2,279 2,279 1,334 -- -- --
<CAPTION>
T. ROWE
JANUS ASPEN MFS OCC ACCUMULATION OCC 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 -- 1,416 2,707 611 -- -- -- --
Repayments -- 1,026 175 -- 1,346 -- 11 --
</TABLE>
A-10
<PAGE>
NOTES TO FINANCIAL STATEMENTS OF THE DISCOVERY ACCOUNT
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997
PRUDENTIAL SERIES PRUDENTIAL SERIES PRUDENTIAL SERIES PRUDENTIAL SERIES PRUDENTIAL SERIES PRUDENTIAL SERIES PRUDENTIAL SERIES
FUND FUND FUND FUND FUND FUND FUND
MONEY MARKET DIVERSIFIED BOND GOVERNMENT INCOME CONSERVATIVE BALANCED FLEXIBLE MANAGED HIGH YIELD BOND STOCK INDEX
---------------- ---------------- ----------------- ------------ -------- ---------------- --------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Loans -- -- -- -- -- -- --
Repayments -- -- -- -- -- -- --
<CAPTION>
PRUDENTIAL SERIES PRUDENTIAL SERIES PRUDENTIAL SERIES PRUDENTIAL 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>
JANUS ASPEN MFS OCC ACCUMULATION OCC ACCUMULATION T. ROWE T. ROWE WARBURG PINCUS
INTERNATIONAL EMERGING MFS TRUST TRUST PRICE PRICE POST-VENTURE
GROWTH GROWTH RESEARCH MANAGED SMALL CAP EQUITY INCOME INTERNATIONAL STOCK CAPITAL
------------- -------- -------- ---------------- --------------- ------------- ------------------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Loans -- -- -- -- 2,796 -- -- --
Repayments -- -- -- -- -- -- -- --
</TABLE>
NOTE 10: CONDENSED FINANCIAL INFORMATION
ACCUMULATION UNIT VALUES FOR DISCOVERY ACCOUNT
PRUDENTIAL SERIES FUND
MONEY MARKET 01/01/98 07/31/97*
to to
12/31/98 12/31/97
-------- ---------
Beginning of period (rounded) $10.08 $10.00
End of period (rounded) $10.52 $10.08
Accumulation Units
Outstanding at end of period 42,992 815
PRUDENTIAL SERIES FUND
DIVERSIFIED BOND 01/01/98 07/31/97*
to to
12/31/98 12/31/97
-------- --------
Beginning of period (rounded) $10.07 $10.00
End of period (rounded) $10.68 $10.07
Accumulation Units
Outstanding at end of period 63,041 542
PRUDENTIAL SERIES FUND
GOVERNMENT INCOME 01/01/98 07/31/97*
to to
12/31/98 12/31/97
-------- --------
Beginning of period (rounded) $10.27 $10.00
End of period (rounded) $11.10 $10.27
Accumulation Units
Outstanding at end of period 33,914 60
PRUDENTIAL SERIES FUND
CONSERVATIVE BALANCED 01/01/98 07/31/97*
to to
12/31/98 12/31/97
-------- --------
Beginning of period (rounded) $10.03 $10.00
End of period (rounded) $11.10 $10.03
Accumulation Units
Outstanding at end of period 146,440 563
*Commencement of Operations
PRUDENTIAL SERIES FUND
FLEXIBLE MANAGED 01/01/98 07/31/97*
to to
12/31/98 12/31/97
-------- --------
Beginning of period (rounded) $09.99 $10.00
End of period (rounded) $10.90 $ 9.99
Accumulation Units
Outstanding at end of period 149,274 4,286
PRUDENTIAL SERIES FUND
HIGH YIELD BOND 01/01/98 07/31/97*
to to
12/31/98 12/31/97
--------- --------
Beginning of period (rounded) $10.37 $10.00
End of period (rounded) $10.02 $10.37
Accumulation Units
Outstanding at end of period 19,787 1,952
PRUDENTIAL SERIES FUND
STOCK INDEX 01/01/98 07/31/97*
to to
12/31/98 12/31/97
-------- --------
Beginning of period (rounded) $10.29 $10.00
End of period (rounded) $13.09 $10.29
Accumulation Units
Outstanding at end of period 382,563 1,890
PRUDENTIAL SERIES FUND
EQUITY INCOME 01/01/98 07/31/97*
to to
12/31/98 12/31/97
--------- ---------
Beginning of period (rounded) $10.48 $10.00
End of period (rounded) $10.13 $10.48
Accumulation Units
Outstanding at end of period 53,578 1,171
A-11
<PAGE>
NOTES TO FINANCIAL STATEMENTS OF DISCOVERY ACCOUNT
- --------------------------------------------------------------------------------
NOTE 10 (CONT'D): CONDENSED FINANCIAL INFORMATION
ACCUMULATION UNIT VALUES FOR THE DISCOVERY ACCOUNT
PRUDENTIAL SERIES FUND
EQUITY 01/01/98 07/31/97*
to to
12/31/98 12/31/97
-------- ---------
Beginning of period (rounded) $ 10.12 $10.00
End of period (rounded) $ 10.96 $10.12
Accumulation Units
Outstanding at end of period 769,653 2,907
PRUDENTIAL SERIES FUND
JENNISON 01/01/98 07/31/97*
to to
12/31/98 12/31/97
-------- --------
Beginning of period (rounded) $ 09.87 $10.00
End of period (rounded) $ 13.43 $09.87
Accumulation Units
Outstanding at end of period 77,040 3,111
PRUDENTIAL SERIES FUND
GLOBAL 01/01/98 07/31/97*
to to
12/31/98 12/31/97
--------- --------
Beginning of period (rounded) $08.95 $10.00
End of period (rounded) $11.08 $08.95
Accumulation Units
Outstanding at end of period 124,465 1,576
AIM V.I.
GROWTH AND INCOME 01/01/98 07/31/97*
to to
12/31/98 12/31/97
-------- ---------
Beginning of period (rounded) $09.79 $10.00
End of period (rounded) $12.37 $09.79
Accumulation Units
Outstanding at end of period 16,899 1,122
AIM V.I.
VALUE 01/01/98 07/31/97*
to to
12/31/98 12/31/97
-------- --------
Beginning of period (rounded) $09.89 $10.00
nd of period (rounded) $12.97 $09.89
Accumulation Units
Outstanding at end of period 37,442 1,738
JANUS ASPEN GROWTH 01/01/98 07/31/97*
to to
12/31/98 12/31/97
-------- ---------
Beginning of period (rounded) $09.92 $10.00
End of period (rounded) $13.33 $09.92
Accumulation Units
Outstanding at end of period 43,275 462
JANUS ASPEN
INTERNATIONAL GROWTH 01/01/98 07/31/97*
to to
12/31/98 12/31/97
-------- ---------
Beginning of period (rounded) $09.44 $10.00
End of period (rounded) $10.96 $09.44
Accumulation Units
Outstanding at end of period 34,735 942
MFS
EMERGING GROWTH 01/01/98 07/31/97*
to to
12/31/98 12/31/97
-------- ---------
Beginning of period (rounded) $09.95 $10.00
End of period (rounded) $13.23 $09.95
Accumulation Units
Outstanding at end of period 61,164 470
MFS
RESEARCH 01/01/98 07/31/97*
to to
12/31/98 12/31/97
-------- ---------
Beginning of period (rounded) $09.67 $10.00
End of period (rounded) $11.82 $09.67
Accumulation Units
Outstanding at end of period 14,548 779
OCC ACCUMULATION TRUST
MANAGED 01/01/98 07/31/97*
to to
12/31/98 12/31/97
-------- ---------
Beginning of period (rounded) $10.13 $10.00
End of period (rounded) $10.75 $10.13
Accumulation Units
Outstanding at end of period 23,869 2,135
OCC ACCUMULATION TRUST
SMALL CAP 01/01/98 07/31/97*
to to
12/31/98 12/31/97
-------- ---------
Beginning of period (rounded) $10.20 $10.00
End of period (rounded) $ 9.19 $10.20
Accumulation Units
Outstanding at end of period 12,742 2,781
T. ROWE PRICE
EQUITY INCOME 01/01/98 07/31/97*
to to
12/31/98 12/31/97
-------- ---------
Beginning of period (rounded) $10.54 $10.00
End of period (rounded) $11.38 $10.54
Accumulation Units
Outstanding at end of period 26,852 1,704
T. ROWE PRICE
INTERNATIONAL STOCK 01/01/98 07/31/97*
to to
12/31/98 12/31/97
-------- ----------
Beginning of period (rounded) $08.92 $10.00
End of period (rounded) $10.24 $08.92
Accumulation Units
Outstanding at end of period 6,523 216
WARBURG PINCUS
POST-VENTURE CAPITAL 01/01/98 07/31/97*
to to
12/31/98 12/31/97
-------- ---------
Beginning of period (rounded) $10.08 $10.00
End of period (rounded) $10.64 $10.08
Accumulation Units
Outstanding at end of period 6,039
A-12
<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 Series Equity Income Subaccount, T.
Rowe Price International Series 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, 1998, the results of each of their operations for the year then
ended and the changes in each of their net assets for the two periods in the
period then ended 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, 1998 with the underlying funds' transfer agents, provide a
reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
New York, New York
February 25, 1999
A-13
<PAGE>
THE PRUDENTIAL INSURANCE
COMPANY OF AMERICA
CONSOLIDATED FINANCIAL STATEMENTS AND
REPORT OF INDEPENDENT ACCOUNTANTS
DECEMBER 31, 1998 AND 1997
B-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
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, 1998 and 1997, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 1998 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 audits. 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.
/s/ PricewaterhouseCoopers LLP
New York, New York
February 26, 1999
B-2
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
DECEMBER 31, 1998 AND 1997 (IN MILLIONS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
ASSETS
Fixed maturities:
Available for sale, at fair value (amortized cost, 1998: $76,997; 1997: $71,496) $ 80,158 $ 75,270
Held to maturity, at amortized cost (fair value, 1998: $17,906; 1997: $19,894) 16,848 18,700
Trading account assets, at fair value 8,888 6,347
Equity securities, available for sale, at fair value (cost, 1998: $2,583; 1997: $2,376) 2,759 2,810
Mortgage loans on real estate 16,495 16,004
Investment real estate 801 1,519
Policy loans 7,476 7,034
Securities purchased under agreements to resell 10,252 8,661
Cash collateral for borrowed securities 5,622 5,047
Other long-term investments 2,658 2,489
Short-term investments 9,781 12,106
--------- ---------
Total investments 161,738 155,987
Cash 1,943 1,859
Accrued investment income 1,795 1,909
Broker-dealer related receivables 10,142 8,442
Deferred policy acquisition costs 6,462 6,083
Other assets 15,721 11,452
Separate Account assets 81,621 73,839
--------- ---------
TOTAL ASSETS $ 279,422 $ 259,571
========= =========
LIABILITIES AND EQUITY
LIABILITIES
Future policy benefits $ 69,129 $ 67,367
Policyholders' account balances 30,974 33,246
Unpaid claims and claim adjustment expenses 3,860 4,864
Policyholders' dividends 1,444 1,269
Securities sold under agreements to repurchase 21,486 12,347
Cash collateral for loaned securities 7,132 14,117
Income taxes payable 785 500
Broker-dealer related payables 6,530 3,338
Securities sold but not yet purchased 5,771 3,648
Other liabilities 16,169 14,659
Short-term debt 10,082 6,774
Long-term debt 4,734 4,273
Separate Account liabilities 80,931 73,451
--------- ---------
Total liabilities 259,027 239,853
--------- ---------
COMMITMENTS AND CONTINGENCIES (SEE NOTE 16)
EQUITY
Accumulated other comprehensive income 1,232 1,661
Retained earnings 19,163 18,057
--------- ---------
Total equity 20,395 19,718
--------- ---------
TOTAL LIABILITIES AND EQUITY $ 279,422 $ 259,571
========= =========
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
B-3
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (IN MILLIONS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
REVENUES
Premiums $ 9,024 $ 9,005 $ 9,999
Policy charges and fee income 1,462 1,434 1,490
Net investment income 9,520 9,456 9,461
Realized investment gains, net 2,630 2,168 1,128
Commissions and other income 4,451 4,481 4,512
-------- -------- --------
Total revenues 27,087 26,544 26,590
-------- -------- --------
BENEFITS AND EXPENSES
Policyholders' benefits 9,976 10,076 11,094
Interest credited to policyholders' account balances 1,806 2,044 2,251
Dividends to policyholders 2,478 2,422 2,339
General and administrative expenses 9,720 8,992 8,956
Sales practices remedies 510 1,640 410
-------- -------- --------
Total benefits and expenses 24,490 25,174 25,050
-------- -------- --------
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES 2,597 1,370 1,540
-------- -------- --------
Income taxes
Current 1,185 101 556
Deferred (215) 306 (376)
-------- -------- --------
970 407 180
-------- -------- --------
INCOME FROM CONTINUING OPERATIONS 1,627 963 1,360
-------- -------- --------
DISCONTINUED OPERATIONS
Loss from Healthcare operations, net of taxes (298) (353) (282)
Loss on disposal of Healthcare operations, net of taxes (223) -- --
-------- -------- --------
Net loss from discontinued operations (521) (353) (282)
-------- -------- --------
NET INCOME $ 1,106 $ 610 $ 1,078
======== ======== ========
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
B-4
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (IN MILLIONS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ACCUMULATED OTHER COMPREHENSIVE INCOME
------------------------------------------------------
FOREIGN NET TOTAL
CURRENCY UNREALIZED PENSION ACCUMULATED OTHER
TRANSLATION INVESTMENT LIABILITY COMPREHENSIVE RETAINED TOTAL
ADJUSTMENTS GAINS ADJUSTMENT INCOME EARNINGS EQUITY
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1996 $ (24) $ 2,397 $ -- $ 2,373 $ 16,369 $ 18,742
Comprehensive income (loss):
Net income 1,078 1,078
Other comprehensive income (loss), net of tax:
Change in foreign currency translation
adjustments (32) (32) (32)
Change in net unrealized investment gains (1,261) (1,261) (1,261)
Additional pension liability adjustment (4) (4) (4)
--------
Other comprehensive income (loss) (1,297)
--------
Total comprehensive income (loss) (219)
-----------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1996 (56) 1,136 (4) 1,076 17,447 18,523
Comprehensive income:
Net income 610 610
Other comprehensive income (loss), net of tax:
Change in foreign currency translation
adjustments (29) (29) (29)
Change in net unrealized investment gains 616 616 616
Additional pension liability adjustment (2) (2) (2)
--------
Other comprehensive income 585
--------
Total comprehensive income 1,195
-----------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1997 (85) 1,752 (6) 1,661 18,057 19,718
Comprehensive income:
Net income 1,106 1,106
Other comprehensive income, net of tax:
Change in foreign currency translation
adjustments 54 54 54
Change in net unrealized investment gains (480) (480) (480)
Additional pension liability adjustment (3) (3) (3)
--------
Other comprehensive income (429)
--------
Total comprehensive income 677
-----------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1998 $ (31) $ 1,272 $ (9) $ 1,232 $ 19,163 $ 20,395
=============================================================================
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
B-5
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (IN MILLIONS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,106 $ 610 $ 1,078
Adjustments to reconcile net income to
net cash provided by operating activities:
Realized investment gains, net (2,660) (2,209) (1,138)
Policy charges and fee income (135) (258) (208)
Interest credited to policyholders' account balances 1,806 2,044 2,251
Depreciation and amortization 305 258 266
Loss (gain) on disposal of businesses 223 -- (116)
Change in:
Deferred policy acquisition costs (165) (142) (122)
Future policy benefits and other insurance liabilities 584 2,762 2,471
Securities purchased under agreements to resell (1,591) (3,314) (217)
Trading account assets (2,540) (1,825) (433)
Income taxes receivable/payable 594 (1,391) (937)
Cash collateral for borrowed securities (575) (2,631) (332)
Cash collateral for securities loaned (net) (6,985) 5,668 2,891
Broker-dealer related receivables/payables 1,495 (672) (607)
Securities sold but not yet purchased 2,122 1,633 251
Securities sold under agreements to repurchase 9,139 4,844 (490)
Other, net (5,168) 4,142 (1,334)
--------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES (2,445) 9,519 3,274
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from the sale/maturity of:
Fixed maturities, available for sale 123,151 123,550 123,368
Fixed maturities, held to maturity 4,466 4,042 4,268
Equity securities, available for sale 2,792 2,572 2,162
Mortgage loans on real estate 4,839 4,299 5,731
Investment real estate 1,364 1,842 615
Other long-term investments 1,848 5,081 3,203
Disposal of businesses -- -- 52
Payments for the purchase of:
Fixed maturities, available for sale (126,742) (129,854) (125,093)
Fixed maturities, held to maturity (2,244) (2,317) (2,844)
Equity securities, available for sale (2,547) (2,461) (2,384)
Mortgage loans on real estate (4,885) (3,363) (1,906)
Investment real estate (31) (241) (142)
Other long-term investments (1,415) (4,148) (2,060)
Short-term investments (net) 2,145 (2,848) (1,915)
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES 2,741 (3,846) 3,055
--------- --------- ---------
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
B-6
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (IN MILLIONS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Policyholders' account deposits 6,955 5,020 2,676
Policyholders' account withdrawals (11,111) (9,873) (8,099)
Net increase in short-term debt 2,422 305 583
Proceeds from the issuance of long-term debt 1,940 324 93
Repayments of long-term debt (418) (464) (1,306)
-------- -------- --------
CASH FLOWS USED IN FINANCING ACTIVITIES (212) (4,688) (6,053)
-------- -------- --------
NET INCREASE IN CASH 84 985 276
CASH, BEGINNING OF YEAR 1,859 874 598
-------- -------- --------
CASH, END OF YEAR $ 1,943 $ 1,859 $ 874
======== ======== ========
SUPPLEMENTAL CASH FLOW INFORMATION:
Income taxes paid $ 163 $ 968 $ 793
-------- -------- --------
Interest paid $ 864 $ 708 $ 595
-------- -------- --------
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
B-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 financial services throughout the
United States and several locations worldwide. The Company's businesses
provide a full range of insurance, investment, securities brokerage and
other financial products and services to both retail consumers and
institutions. Principal products and services provided include life
insurance, property and casualty insurance, annuities, mutual funds,
pension and retirement related investments and administration, asset
management, and securities brokerage.
DEMUTUALIZATION
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 stock company. On July 1, 1998,
legislation was enacted in New Jersey that would permit this conversion to
occur and that specified the process for conversion. Demutualization is a
complex process involving development of a plan of reorganization, adoption
of a plan by the Company's Board of Directors, a public hearing, voting by
qualified voters and regulatory approval. There can be no assurance that
the Company will demutualize or, if it does so, when demutualization will
occur.
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 consolidated 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 a 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, "Accumulated other
comprehensive income."
TRADING ACCOUNT ASSETS AND SECURITIES SOLD BUT NOT YET PURCHASED are
carried at estimated fair value. Realized and unrealized gains and losses
on trading account assets and securities sold but not yet purchased are
included in "Commissions and other income."
EQUITY SECURITIES, available for sale, are comprised of common and
non-redeemable preferred stock and are carried at estimated fair value. The
associated unrealized gains and losses, net of income tax, and the effects
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, "Accumulated other
comprehensive income."
B-8
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
MORTGAGE LOANS ON REAL ESTATE are stated primarily at unpaid principal
balances, net of unamortized discounts and allowance for losses. The
allowance for losses is based upon a loan specific review and, for
performing loans collectively evaluated, a portfolio review. The loan
specific review includes consideration of expected future cash flows
relative to outstanding balances. The portfolio review includes
consideration of the composition of the loan portfolio, current economic
conditions, past results, current trends, the estimated aggregate value of
the underlying collateral, and other relevant environmental factors.
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, identified in management's
specific review of probable loan losses, 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.
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 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 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. 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 and is reviewed for
impairment whenever events or circumstances indicate the carrying value may
not be recoverable. In reviewing recoverability, an impairment loss is
recognized for an other than temporary decline in value to the extent the
reduction in carrying values of investment real estate exceeds estimated
undiscounted future cash flows. Charges relating to real estate to be
disposed of and impairments of real estate held for investment are included
in "Realized investment gains, net." Depreciation on real estate is
computed using the straight-line method over the estimated lives of the
properties.
POLICY LOANS are carried at unpaid principal balances.
SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL AND SECURITIES SOLD UNDER
AGREEMENTS TO REPURCHASE are treated as financing arrangements and 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 or resold is monitored, and additional collateral is requested,
where appropriate, to protect against credit exposure.
SECURITIES BORROWED AND SECURITIES LOANED are treated as financing
arrangements and 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 because the debtor typically
has the right to redeem the collateral on short notice. Substantially all
of 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.
B-9
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Securities repurchase and resale agreements and securities borrowed and
loaned 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.
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.
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.
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." Decreases in the lower of
depreciated cost or fair value less selling costs of investment real estate
held for sale are recorded in "Realized investment gains, net."
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, for certain products, 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 "Accumulated
other comprehensive income."
For participating 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. The average rate of assumed investment yield in
estimating expected gross margins was 9.97%, 9.39%, and 8.39% for 1998,
1997 and 1996, respectively. Deferred policy acquisition costs related to
non-participatory term insurance are amortized over the expected life of
the contracts in proportion to the premium income.
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.
B-10
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
For disability 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 Statements of Operations. Mortality, policy administration and
surrender charges on the accounts are included in "Policy charges and fee
income."
OTHER ASSETS AND OTHER LIABILITIES
Other assets consist primarily of prepaid benefit costs, reinsurance
recoverables, certain restricted assets, trade receivables and property and
equipment. Property and equipment are stated at cost less accumulated
depreciation. Depreciation is determined using the straight-line method
over the estimated useful lives of the related assets which generally range
from 3 to 40 years. Other liabilities consist primarily of trade payables
and reserves for sales practice remediation costs.
INSURANCE REVENUE AND EXPENSE RECOGNITION
Premiums from participating insurance policies are 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
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, 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.
B-11
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Premiums, benefits and expenses are stated net of reinsurance ceded to
other companies. Estimated reinsurance receivables and the cost of
reinsurance are recognized over the life of the reinsured policies using
assumptions consistent with those used to account for the underlying
policies.
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. The effects of
translating the Statements of Financial Position of non-U.S. entities with
functional currencies other than the U.S. dollar are recorded, net of
related hedge gains and losses and income taxes, as "Other comprehensive
income," a separate component of equity.
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 from trading activities of the
Company's broker-dealer subsidiary.
DERIVATIVE FINANCIAL INSTRUMENTS
Derivatives are financial instruments whose values are derived from
interest rates, foreign exchange rates, various financial indices, or the
value of securities or commodities. Derivative financial instruments can be
exchange-traded or contracted in the over-the-counter market and those used
by the Company include swaps, futures, forwards and options contracts. The
Company uses derivative financial instruments to hedge market risk from
changes in interest rates or foreign currency exchange rates, and to alter
interest rate or currency exposures arising from mismatches between assets
and liabilities. Additionally, derivatives are used in the broker-dealer
business and in a limited-purpose subsidiary for trading purposes.
To qualify as a hedge, derivatives must be designated as hedges for
existing assets, liabilities, firm commitments, or anticipated transactions
which are identified and probable to occur, and effective in reducing the
market risk to which the Company is exposed. The effectiveness of the
derivatives are evaluated at the inception of the hedge and throughout the
hedge period.
DERIVATIVES HELD FOR TRADING PURPOSES are used in the Company's securities
broker-dealer business and in a limited-purpose subsidiary to meet the
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. Trading derivative positions are
valued daily, generally by obtaining quoted market prices or through the
use of pricing models. Values are affected by changes in interest rates,
currency exchange rates, credit spreads, market volatility and liquidity.
The Company monitors these exposures through the use of various analytical
techniques.
Derivatives held for trading are recorded at fair value in "Trading account
assets," "Other liabilities" or "Receivables from/Payables to broker-dealer
clients" in the Consolidated Statements of Financial Position, and realized
and unrealized changes in fair value are included in "Commissions and other
income" of the Consolidated Statements of Operations in the periods in
which the changes occur. Cash flows from trading derivatives are reported
in the operating activities section of the Consolidated Statements of Cash
Flows.
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.
B-12
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
See Note 14 for a discussion of the accounting treatment of derivatives
that qualify as hedges. If the Company's use of other than trading
derivatives does not meet the criteria to apply hedge accounting, the
derivatives are recorded at fair value in "Other long-term investments" or
"Other liabilities" in the Consolidated Statements of Financial Position,
and changes in their fair value are recognized in earnings in "Realized
investment gains, net" without considering changes in the hedged assets or
liabilities. Cash flows from other than trading derivative assets and
liabilities are reported in the investing activities section in the
Consolidated Statements of Cash Flows.
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 life
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 that is expected 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 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
was 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 delayed the implementation of SFAS 125 for one year
for certain provisions, including repurchase agreements, dollar rolls,
securities lending and similar transactions. The Company adopted the
delayed provisions of SFAS 125 in 1998. The adoption of SFAS 125 did not
have a material impact on the Company's results of operations or financial
position.
During 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive
Income," which was issued by the FASB in June 1997. This statement defines
comprehensive income 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 Statements of Financial Position. Application of this
statement did not change recognition or measurement of net income and,
therefore, did not affect the Company's financial position or results of
operations.
During 1998, the Company adopted SFAS No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits," which was issued by the
FASB in February 1998. This statement standardizes the disclosure
requirements for pensions and other postretirement benefits, requires
additional information on changes in the benefit obligations and fair
values of plan assets and eliminates certain disclosures. This statement is
limited to changes in reporting and presentation and does not change
recognition or measurement of pension or other postretirement benefit
plans. Therefore, its adoption did not affect the Company's financial
position or results of operations.
B-13
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
On January 1, 1998, the Company adopted the American Institute of Certified
Public Accountants ("AICPA") Statement of Position 97-3, "Accounting by
Insurance and Other Enterprises for Insurance-Related Assessments" ("SOP
97-3"). This statement provides guidance for determining when an insurance
company or other enterprise should recognize a liability for guaranty-fund
assessments as well as guidance for measuring the liability. The adoption
of SOP 97-3 did not have a material effect on the Company's financial
condition or results of operations. In June 1998, the FASB issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities" which
requires that companies recognize all derivatives as either assets or
liabilities in the balance sheet and measure those instruments at fair
value. SFAS No. 133 provides, if certain conditions are met, that a
derivative may be specifically designated as (1) a hedge of the exposure to
changes in the fair value of a recognized asset or liability or an
unrecognized firm commitment (fair value hedge), (2) a hedge of the
exposure to variable cash flows of a forecasted transaction (cash flow
hedge), or (3) a hedge of the foreign currency exposure of a net investment
in a foreign operation, an unrecognized firm commitment, an
available-for-sale security or a foreign-currency-denominated forecasted
transaction (foreign currency hedge).
SFAS No. 133 does not apply to most traditional insurance contracts.
However, certain hybrid contracts that contain features which can affect
settlement amounts similarly to derivatives may require separate accounting
for the "host contract" and the underlying "embedded derivative"
provisions. The latter provisions would be accounted for as derivatives as
specified by the statement.
Under SFAS No. 133, the accounting for changes in fair value of a
derivative depends on its intended use and designation. For a fair value
hedge, the gain or loss is recognized in earnings in the period of change
together with the offsetting loss or gain on the hedged item. For a cash
flow hedge, the effective portion of the derivative's gain or loss is
initially reported as a component of other comprehensive income and
subsequently reclassified into earnings when the forecasted transaction
affects earnings. For a foreign currency hedge, the gain or loss is
reported in other comprehensive income as part of the foreign currency
translation adjustment. For all other derivatives not designated as hedging
instruments, the gain or loss is recognized in earnings in the period of
change. The Company is required to adopt this Statement no later than
January 1, 2000 and is currently assessing the effect of the new standard.
In October 1998, the AICPA issued Statement of Position 98-7, "Deposit
Accounting: Accounting for Insurance and Reinsurance Contracts That Do Not
Transfer Insurance Risk," ("SOP 98-7"). This statement provides guidance on
how to account for insurance and reinsurance contracts that do not transfer
insurance risk. SOP 98-7 is effective for fiscal years beginning after June
15, 1999. The adoption of this statement is not expected to have a material
effect on the Company's financial position or results of operations.
RECLASSIFICATIONS
Certain amounts in prior years have been reclassified to conform to current
year presentation.
B-14
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
3. DISCONTINUED OPERATIONS
In December 1998, the Company entered into a definitive agreement to sell
its HealthCare business to Aetna Inc. ("Aetna"). Included in this
transaction are the Company's managed medical care, point of service,
preferred provider organization and indemnity health lines, dental
business, as well as the Company's Administrative Services Only ("ASO")
businesses. The transaction was approved by the boards of directors of both
companies and is expected to be completed in the second quarter of 1999,
subject to review by federal antitrust authorities and approval by state
regulators, and other customary closing conditions. Proceeds from the sale
will consist of $500 million of cash and $500 million of Aetna three year
senior notes.
Loss from operations of discontinued businesses for 1998 includes results
through December 31, 1998 (the measurement date). The Statements of
Operations for 1997 and 1996 have been restated to conform with the 1998
presentation. Amounts within the footnotes have been adjusted, where noted,
to eliminate the impact of discontinued operations and to be consistent
with the presentation in the Consolidated Statements of Operations. The
following table presents the results of operations and the loss on the
disposal of the Company's HealthCare business, determined as of the
measurement date, which are included in "Discontinued Operations" in the
Consolidated Statements of Operations. Amounts for 1997 and 1996 include
revenues and expenses relating to a contract with the American Association
of Retired Persons for healthcare and similar coverages which was
terminated effective December 31, 1997.
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
(In Millions)
<S> <C> <C> <C>
Revenues $ 7,461 $ 10,305 $ 9,187
Policyholder benefits (6,064) (8,484) (7,711)
General and administrative expenses (1,822) (2,364) (1,921)
--------- --------- ---------
Loss before income taxes (425) (543) (445)
Income tax benefit 127 190 163
--------- --------- ---------
Loss from operations (298) (353) (282)
Loss on disposal, net of tax benefit of $131 (223) - -
--------- --------- ---------
Loss from discontinued operations, net of taxes $ (521) $ (353) $ (282)
========= ========= =========
</TABLE>
The loss on disposal includes anticipated operating losses to be incurred
by the HealthCare business subsequent to the measurement date through the
expected date of the sale, as well as estimates of other costs the Company
will incur in connection with the disposition of the HealthCare business.
Actual amounts may differ from these estimates. These include costs
attributable to facilities closure and systems terminations, severance,
payments to Aetna related to the ASO business, and estimated payments in
connection with an agreement covering the fully insured medical and dental
business. The latter agreement provides for payments either to or from
Aetna in the event that medical loss ratios (i.e., incurred medical expense
divided by earned premiums) for covered businesses are either less
favorable or more favorable than levels specified in the agreement for the
years 1999 and 2000. The loss on disposition was reduced by the estimated
impact of expected modifications of certain pension and other
postretirement benefit plans in which employees of the HealthCare business
participate. This amount includes curtailment gains and the cost of
termination benefits. (See Note 9.)
B-15
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
3. DISCONTINUED OPERATIONS (CONTINUED)
The following table presents the assets and liabilities pertaining to the
Company's HealthCare business at December 31, 1998 which are included in
the Company's Consolidated Statements of Financial Position.
(In Millions)
Cash and investments $ 1,652
Other assets 1,030
-------
Total assets 2,682
Future policy benefits 1,241
Other liabilities 1,105
-------
Total liabilities 2,346
-------
Net assets $ 336
=======
4. 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>
1998
-------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
---------- ---------- ---------- ----------
(In Millions)
<S> <C> <C> <C> <C>
FIXED MATURITIES AVAILABLE FOR SALE
U.S. Treasury securities and obligations of
U.S. government corporations and agencies $ 5,761 $ 580 $ 9 $ 6,332
Obligations of U.S. states and
their political subdivisions 2,672 204 1 2,875
Foreign government bonds 3,156 253 52 3,357
Corporate securities 57,373 2,545 553 59,365
Mortgage-backed securities 7,935 208 14 8,129
Other fixed maturities 100 - - 100
-----------------------------------------------------------
Total fixed maturities available for sale $ 76,997 $ 3,790 $ 629 $ 80,158
===========================================================
EQUITY SECURITIES AVAILABLE FOR SALE $ 2,583 $ 472 $ 296 $ 2,759
===========================================================
</TABLE>
B-16
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
4. INVESTMENTS (CONTINUED)
<TABLE>
<CAPTION>
1998
------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
FIXED MATURITIES HELD TO MATURITY (In Millions)
U.S. Treasury securities and obligations of
U.S. government corporations and agencies $ 5 $ - $ - $ 5
Obligations of U.S. states and
their political subdivisions 62 2 1 63
Foreign government bonds 31 4 - 35
Corporate securities 16,699 1,096 49 17,746
Mortgage-backed securities 1 - - 1
Other fixed maturities 50 6 - 56
------------------------------------------------------------
Total fixed maturities held to maturity $ 16,848 $ 1,108 $ 50 $ 17,906
============================================================
<CAPTION>
1997
-------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
--------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
FIXED MATURITIES AVAILABLE FOR SALE (In Millions)
U.S. Treasury securities and obligations of
U.S. government corporations and agencies $ 9,071 $ 671 $ - $ 9,742
Obligations of U.S. states and
their political subdivisions 1,529 152 - 1,681
Foreign government bonds 3,177 218 17 3,378
Corporate securities 50,043 2,611 144 52,510
Mortgage-backed securities 7,576 288 5 7,859
Other fixed maturities 100 - - 100
-----------------------------------------------------------
Total fixed maturities available for sale $ 71,496 $ 3,940 $ 166 $ 75,270
===========================================================
EQUITY SECURITIES AVAILABLE FOR SALE $ 2,376 $ 680 $ 246 $ 2,810
===========================================================
</TABLE>
B-17
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
4. INVESTMENTS (CONTINUED)
<TABLE>
<CAPTION>
1997
---------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
----------- ---------- ----------- ----------
(In Millions)
<S> <C> <C> <C> <C>
FIXED MATURITIES HELD TO MATURITY
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>
B-18
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
4. INVESTMENTS (CONTINUED)
The amortized cost and estimated fair value of fixed maturities by
contractual maturities at December 31, 1998, 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 $ 2,638 $ 2,644 $ 730 $ 736
Due after one year through five years 17,551 17,874 4,326 4,465
Due after five years through ten years 19,523 19,976 6,783 7,162
Due after ten years 29,350 31,535 5,008 5,542
Mortgage-backed securities 7,935 8,129 1 1
--------- ---------- -------- --------
Total $ 76,997 $ 80,158 $ 16,848 $ 17,906
========= ========== ======== ========
</TABLE>
Actual maturities may differ from contractual maturities because issuers
may have the right to call or prepay obligations.
Proceeds from the repayment of held to maturity fixed maturities during
1998, 1997 and 1996 were $4,466 million, $4,042 million and $4,268 million,
respectively. Gross gains of $135 million, $62 million and $78 million, and
gross losses of $2 million, $1 million and $7 million, were realized on
prepayment of held to maturity fixed maturities during 1998, 1997 and 1996,
respectively.
Proceeds from the sale of available for sale fixed maturities during 1998,
1997 and 1996 were $119,096 million, $120,604 million and $121,910 million,
respectively. Proceeds from the maturity of available for sale fixed
maturities during 1998, 1997 and 1996 were $ 4,055 million, $2,946 million
and $1,458 million, respectively. Gross gains of $1,765 million, $1,310
million and $1,562 million and gross losses of $443 million, $639 million
and $1,026 million were realized on sales and prepayments of available for
sale fixed maturities during 1998, 1997 and 1996, respectively.
Writedowns for impairments of fixed maturities which were deemed to be
other than temporary were $96 million, $13 million and $54 million for the
years 1998, 1997 and 1996, respectively.
During the years ended December 31, 1998 and December 31, 1997, certain
securities classified as held to maturity 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 $73 million and $27 million, respectively with
gross unrealized investment losses of $.4 million and gross unrealized
investment gains of $.6 million included during the years ended December
31, 1998 and 1997, respectively, in "Accumulated other comprehensive
income" at the time of the transfer.
B-19
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
4. INVESTMENTS (CONTINUED)
MORTGAGE LOANS ON REAL ESTATE
The Company's mortgage loans were collateralized by the following property
types at December 31:
AMOUNT PERCENTAGE AMOUNT PERCENTAGE
(IN MILLIONS) OF TOTAL (IN MILLIONS) OF TOTAL
------------- ---------- ------------- ----------
1998 1997
------------------------ -------------------------
Office buildings $ 4,267 25.2% $ 4,692 28.5%
Retail stores 3,021 17.9% 3,078 18.7%
Residential properties 716 4.2% 891 5.4%
Apartment complexes 4,362 25.8% 3,551 21.6%
Industrial buildings 1,989 11.8% 1,958 11.9%
Agricultural properties 1,936 11.4% 1,666 10.1%
Other 631 3.7% 618 3.8%
-------- ----- -------- -----
Subtotal 16,922 100.0% 16,454 100.0%
===== =====
Allowance for losses (427) (450)
-------- --------
Net carrying value $ 16,495 $ 16,004
======== ========
The mortgage loans are geographically dispersed throughout the United
States and Canada with the largest concentrations in California (23.8%)
and New York (9.5%) at December 31, 1998. Included in the above balances
are mortgage loans receivable from affiliated joint ventures of $87 million
and $225 million at December 31, 1998 and 1997, respectively.
Activity in the allowance for losses for all mortgage loans, for the years
ended December 31, is summarized as follows:
1998 1997 1996
----- ----- -----
(In Millions)
Allowance for losses, beginning of year $ 450 $ 515 $ 862
Additions charged to operations - - -
Release of allowance for losses - (41) (247)
Charge-offs, net of recoveries (23) (24) (100)
----- ----- -----
Allowance for losses, end of year $ 427 $ 450 $ 515
===== ===== =====
The $41 million and $247 million reductions of the mortgage loan allowance
for losses in 1997 and 1996, respectively, are 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.
B-20
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
4. INVESTMENTS (CONTINUED)
Impaired mortgage loans identified in management's specific review of
probable loan losses and related allowance for losses at December 31, are
as follows:
1998 1997
------- -------
(In Millions)
Impaired mortgage loans with allowance for losses $ 149 $ 330
Impaired mortgage loans with no allowance for losses 924 1,303
Allowance for losses (45) (97)
------- -------
Net carrying value of impaired mortgage loans $ 1,028 $ 1,536
======= =======
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 $1,329 million, $2,102 million and $2,842 million
during 1998, 1997 and 1996, respectively. Net investment income recognized
on these loans totaled $94 million, $140 million and $265 million for the
years ended December 31, 1998, 1997 and 1996, respectively.
INVESTMENT REAL ESTATE
The Company's "Investment real estate" of $801 million and $1,519 million
at December 31, 1998 and 1997, respectively, is held through direct
ownership. Of the Company's real estate, $675 million and $1,490 million
consists of commercial and agricultural assets held for disposal at
December 31, 1998 and 1997, respectively. Impairment losses aggregated $8
million, $40 million and $38 million for the years ended December 31, 1998,
1997 and 1996, respectively, and are included in "Realized investment
gains, net."
RESTRICTED ASSETS AND SPECIAL DEPOSITS
Assets of $3,135 million and $2,783 million at December 31, 1998 and 1997,
respectively, were on deposit with governmental authorities or trustees as
required by certain insurance laws. Additionally, assets valued at $3,727
million and $2,352 million at December 31, 1998 and 1997, respectively,
were held in voluntary trusts. Of this amount, $3,131 million and $1,801
million at December 31, 1998 and 1997, respectively, related to the
multi-state policyholder settlement as described in Note 16. 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 $403 million and $632 million at December 31,
1998 and 1997, respectively, were maintained as compensating balances,
which do not legally restrict the use of the funds, or pledged as
collateral for bank loans and other financing agreements. Restricted cash
and securities of $2,366 million and $1,835 million at December 31, 1998
and 1997, respectively, were included in the consolidated financial
statements in "Other assets." 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 $2,658 million and $2,489
million as of December 31, 1998 and 1997, respectively, are comprised of
$1,007 million and $1,498 million in real estate related interests and
$1,651 million and $991 million of non-real estate related interests. The
Company's share of net income from such entities was $285 million, $411
million and $245 million for 1998, 1997 and 1996, respectively, and is
reported in "Net investment income."
B-21
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
4. 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>
1998 1997 1996
-------- -------- --------
(In Millions)
<S> <C> <C> <C>
Fixed maturities - available for sale $ 5,366 $ 5,074 $ 4,871
Fixed maturities - held to maturity 1,406 1,622 1,793
Trading account assets 677 504 444
Equity securities - available for sale 54 52 81
Mortgage loans on real estate 1,525 1,555 1,690
Investment real estate 230 565 685
Policy loans 410 396 384
Securities purchased under agreements to resell 18 15 11
Receivables from broker-dealer clients 836 706 579
Short-term investments 725 697 702
Other investment income 415 520 559
-------- -------- --------
Gross investment income 11,662 11,706 11,799
Less investment expenses (2,035) (2,038) (2,130)
-------- -------- --------
Subtotal 9,627 9,668 9,669
Less amount relating to discontinued operations (107) (212) (208)
-------- -------- --------
Net investment income $ 9,520 $ 9,456 $ 9,461
======== ======== ========
</TABLE>
REALIZED INVESTMENT GAINS, NET, for the years ended December 31, were from
the following sources:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
(In Millions)
<S> <C> <C> <C>
Fixed maturities $ 1,381 $ 684 $ 513
Mortgage loans on real estate 22 68 248
Investment real estate 642 700 76
Equity securities - available for sale 427 363 267
Other 188 394 34
-------- -------- --------
Subtotal 2,660 2,209 1,138
Less amounts related to discontinued operations (30) (41) (10)
-------- -------- --------
Realized investment gains, net $ 2,630 $ 2,168 $ 1,128
======== ======== ========
</TABLE>
Based on the carrying value, assets categorized as "non-income producing"
for the year ended December 31, 1998 included in fixed maturities available
for sale, mortgage loans on real estate and other long term investments
totaled $1 million, $23 million and $13 million, respectively.
B-22
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
4. INVESTMENTS (CONTINUED)
NET UNREALIZED INVESTMENT GAINS
Net unrealized investment gains on securities available for sale are
included in the Consolidated Statements of Financial Position as a
component of "Accumulated other comprehensive income." Changes in these
amounts include reclassification adjustments to avoid double-counting in
"Comprehensive income," items that are included as part of "Net income" for
a period that also had been part of "Other comprehensive income" in earlier
periods. The amounts for the years ended December 31, are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
(In Millions)
<S> <C> <C> <C>
Net unrealized investment gains, beginning of year $ 1,752 $ 1,136 $ 2,397
Changes in net unrealized investment gains attributable to:
Investments:
Net unrealized investment gains (losses) on investments arising
during the period 522 1,706 (1,281)
Reclassification adjustment for gains included in net income (1,087) (631) (471)
------- ------- -------
Change in net unrealized investment gains, net of adjustments (565) 1,075 (1,752)
Impact of net unrealized investment gains on:
Future policy benefits 23 (360) 318
Deferred policy acquisition costs 62 (99) 173
------- ------- -------
Change in net unrealized investment gains (480) 616 (1,261)
------- ------- -------
Net unrealized investment gains, end of year $ 1,272 $ 1,752 $ 1,136
======= ======= =======
</TABLE>
Unrealized gains (losses) on investments arising during the periods
reported in the above table are net of income tax expense (benefit) of $282
million, $961 million and $(647) million for the years ended December 31,
1998, 1997 and 1996, respectively.
Reclassification adjustments reported in the above table for the years
ended December 31, 1998, 1997 and 1996 are net of income tax expense of
$588 million, $355 million and $238 million, respectively.
The future policy benefits reported in the above table are net of income
tax expense (benefit) of $15 million, $(203) million and $161 million for
the years ended December 31, 1998, 1997 and 1996, respectively.
Deferred policy acquisition costs in the above tables for the years ended
December 31, 1998, 1997 and 1996 are net of income tax expense (benefit) of
$36 million, $(55) million and $88 million, respectively.
B-23
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
5. 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>
1998 1997 1996
------- ------- -------
(In Millions)
<S> <C> <C> <C>
Balance, beginning of year $ 6,083 $ 6,095 $ 5,892
Capitalization of commissions, sales and issue expenses 1,313 1,409 1,260
Amortization (1,139) (1,176) (1,261)
Change in unrealized investment gains 77 (154) 261
Foreign currency translation 128 (91) (57)
------- ------- -------
Balance, end of year $ 6,462 $ 6,083 $ 6,095
======= ======= =======
</TABLE>
6. POLICYHOLDERS' LIABILITIES
FUTURE POLICY BENEFITS at December 31, are as follows:
1998 1997
------- -------
(In Millions)
Life insurance $48,927 $46,765
Annuities 15,360 15,469
Other contract liabilities 4,842 5,133
------- -------
Future policy benefits $69,129 $67,367
======= =======
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.
B-24
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
6. POLICYHOLDERS' LIABILITIES (CONTINUED)
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 3.5% 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
Table with certain payments
modifications based on historical
experience
Other contract liabilities - 5.3% to 7.0% Present value of
expected future
payments
based on historical
experience
</TABLE>
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 and to recover any unamortized
acquisition costs. A premium deficiency reserve has been recorded for the
group single premium annuity business, which consists of limited-payment,
long duration, traditional and non-participating annuities. A liability of
$1,780 million and $1,645 million is included in "Future policy benefits"
with respect to this deficiency for the years ended December 31, 1998 and
1997, respectively.
POLICYHOLDERS' ACCOUNT BALANCES at December 31, are as follows:
<TABLE>
<CAPTION>
1998 1997
-------- --------
(In Millions)
<S> <C> <C>
Individual annuities $ 4,997 $ 5,695
Group annuities and guaranteed investment contracts 16,770 19,053
Interest-sensitive life contracts 3,566 3,258
Dividend accumulations and other 5,641 5,240
------- --------
Policyholders' account balances $30,974 $ 33,246
======= ========
</TABLE>
Policyholders' account balances for interest-sensitive life and
investment-type contracts represent an accumulation of gross premium
payments plus credited interest less withdrawals, expenses and mortality
charges.
B-25
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
6. POLICYHOLDERS' LIABILITIES (Continued)
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 3.0% to 6.6% 0% to 8% for up to 8 years
Group annuities 5.0% to 13.4% Contractually limited or subject
to market value adjustment
Guaranteed investment contracts 3.9% to 15.4% Subject to market value withdrawal
payout status 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 and other 3.0% to 4.5% --
</TABLE>
B-26
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
6. POLICYHOLDERS' LIABILITIES (Continued)
Unpaid Claims and Claim Adjustment Expenses. The following table provides
a reconciliation of the activity in the liability for unpaid claims and
claim adjustment expenses for property and casualty and accident and
health insurance at December 31:
<TABLE>
<CAPTION>
1998 1997 1996
-------------------------- -------------------------- -----------------------
ACCIDENT PROPERTY ACCIDENT PROPERTY ACCIDENT PROPERTY
AND HEALTH AND CASUALTY AND HEALTH AND CASUALTY AND HEALTH AND CASUALTY
---------- ------------ ---------- ------------ ---------- -------------
(In Millions)
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1 $ 1,908 $ 2,956 $ 1,990 $ 3,076 $ 2,033 $ 3,053
Less reinsurance recoverables 810 535 10 553 15 557
------- ------- ------- ------- ------- -------
Net balance at January 1 1,098 2,421 1,980 2,523 2,018 2,496
------- ------- ------- ------- ------- -------
Incurred related to:
Current year 6,127 1,354 8,348 1,525 8,391 1,760
Prior years 7 (194) 102 (91) (66) (25)
------- ------- ------- ------- ------- -------
Total incurred 6,134 1,160 8,450 1,434 8,325 1,735
------- ------- ------- ------- ------- -------
Paid related to:
Current year 5,289 717 6,676 739 6,589 908
Prior years 851 681 1,854 797 1,774 800
------- ------- ------- ------- ------- -------
Total paid 6,140 1,398 8,530 1,536 8,363 1,708
------- ------- ------- ------- ------- -------
Net balance at December 31 1,092 2,183 1,900 2,421 1,980 2,523
Plus reinsurance recoverables 52 533 8 535 10 553
------- ------- ------- ------- ------- -------
Balance at December 31 $ 1,144 $ 2,716 $ 1,908 $ 2,956 $ 1,990 $ 3,076
======= ======= ======= ======= ======= =======
</TABLE>
The Accident and Health balance at December 31 includes amounts
attributable to the Company's discontinued HealthCare business: 1998 -
$1,082; 1997 - $1,757 and 1996 - $1,750.
In 1998 and 1997, the changes in provision for claims and claim adjustment
expenses for property and casualty related to prior years are primarily
driven by lower than anticipated losses for the Voluntary Auto line of
business.
The changes in provision for claims and claim adjustment expense for
accident and health related to prior years are primarily due to such
factors as changes in claim cost trends and an accelerated decline in the
indemnity health business.
The unpaid claims and claim adjustment expenses presented above consist 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 Consolidated
Statement of Operations periodically as the estimates are revised.
Accident and health unpaid claims liabilities for 1998, 1997 and 1996
included above are discounted using interest rates ranging from 3.0%
to 6.0%.
B-27
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
7. REINSURANCE
The Company participates in reinsurance in order to provide greater
diversification of business, provide additional capacity for future growth
and limit the maximum net loss potential arising from large risks. Life
reinsurance is accomplished through various plans of reinsurance,
primarily yearly renewable term and coinsurance. Property-casualty
reinsurance is placed on both a pro-rata and excess of loss basis.
Reinsurance ceded arrangements do not discharge the Company or the
insurance subsidiaries as the primary insurer. Ceded balances would
represent a liability to the Company in the event the reinsurers were
unable to meet their obligations to the Company under the terms of the
reinsurance agreements. The Company periodically reviews the financial
condition of its reinsurers and amounts recoverable therefrom, recording
an allowance when necessary for uncollectible reinsurance.
Reinsurance amounts included in the Consolidated Statements of Operations,
excluding HealthCare, for the years ended December 31, were as follows:
1998 1997 1996
------- ------ -------
(In Millions)
Direct Premiums $9,615 $9,679 $10,690
Reinsurance Assumed 65 42 13
Reinsurance Ceded (656) (716) (704)
------ ------ -------
Premiums $9,024 $9,005 $ 9,999
====== ====== =======
Policyholders' benefits ceded $ 519 $ 530 $ 571
====== ====== =======
Reinsurance recoverables, included in "Other assets" in the Company's
Consolidated Statements of Financial Position, at December 31, were as
follows:
1998 1997
------ ------
(In Millions)
Life insurance $ 620 $ 685
Property-casualty 564 554
Other reinsurance 92 65
------ ------
$1,276 $1,304
====== ======
B-28
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
8. SHORT-TERM AND LONG-TERM DEBT
Debt consists of the following at December 31:
SHORT-TERM DEBT
1998 1997
------- ------
(In Millions)
Commercial paper $ 7,057 $4,268
Notes payable 2,164 2,151
Current portion of long-term debt 861 355
------- ------
Total short-term debt $10,082 $6,774
======= ======
The weighted average interest rate on outstanding short-term debt was
approximately 5.4% and 6.0% at December 31, 1998 and 1997, 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 1998 1997
- ----------- -------------- ---- ----- ----
(In Millions)
<S> <C> <C> <C> <C>
Floating rate notes ("FRN") 1999 - 2005 4.04-14.00%(a) $ 729 $ 324
Long term notes 1999 - 2023 5.5% - 12% 1,318 910
Zero coupon notes 1999 8.6% (b) 364 334
Canadian dollar notes - 7.0% - 9.125% - 117
Japanese yen notes 1999 - 2000 0.5% - 4.6% 160 178
Swiss francs notes - 3.875% - 120
Canadian dollar FRN 2003 5.25%-5.89% 96 96
Surplus notes 2003 - 2025 6.875% - 8.3% 987 986
Senior notes 1999 - 2006 6.375% 393 -
Commercial paper backed by long-term
credit agreements 1,500 1,500
Other notes payable 1999 - 2017 4% - 7.5% 48 63
------- -------
Subtotal 5,595 4,628
Less: current portion of long-term debt (861) (355)
------- -------
Total long-term debt $ 4,734 $ 4,273
======= =======
</TABLE>
(a) The Company issued an S&P 500 index linked note of $29 million in September
of 1997. The interest rate on the note is based on the appreciation of the
S&P 500 index, with a contractual cap of 14%. At December 31, 1998, this
rate was 14%. Excluding this note, floating rate note interest rates were
between 4.04% - 5.50%.
(b) The rate shown for zero coupon notes represents a level yield to maturity.
B-29
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
8. SHORT-TERM AND LONG-TERM DEBT (CONTINUED)
Payment of interest and principal on the surplus notes issued after 1993,
of which $686 million were outstanding at December 31, 1998, 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, 1998,
are as follows: $862 million in 1999, $560 million in 2000, $327 million
in 2001, $1,816 million in 2002, $458 million in 2003 and $1,575 million
thereafter.
At December 31, 1998, the Company had $9,853 million in lines of credit
from numerous financial institutions of which $8,330 million were unused.
These lines of credit generally have terms ranging from one to five years.
Interest expense for short-term and long-term debt is $920 million,
$743 million and $618 million for the years ended December 31, 1998, 1997
and 1996, respectively.
9. EMPLOYEE BENEFIT PLANS
PENSION AND OTHER POSTRETIREMENT PLANS
The Company has funded non-contributory defined benefit pension plans
which cover substantially all of its employees. The Company also has
several non-funded non-contributory 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.
The Company provides certain life insurance and health care benefits
("Other postretirement benefits") for its retired employees, their
beneficiaries and covered dependents. The healthcare plan is
contributory; the life insurance plan is non-contributory. 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
certain circumstances after age 50 with at least 20 years of continuous
service. These benefits are funded as considered necessary by Company
management.
The Company has elected to amortize its transition obligation for other
postretirement benefits over 20 years.
B-30
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
9. EMPLOYEE BENEFIT PLANS (CONTINUED)
Prepaid and accrued benefit 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, is summarized below:
<TABLE>
<CAPTION>
OTHER
PENSION BENEFITS POSTRETIREMENT BENEFITS
---------------------- ------------------------
1998 1997 1998 1997
-------- ------- ------- -------
(In Millions) (In Millions)
<S> <C> <C> <C> <C>
CHANGE IN BENEFIT OBLIGATION:
Benefit obligation at the beginning of period $(5,557) $(5,148) $(2,128) $(2,002)
Service cost (159) (127) (35) (38)
Interest cost (397) (376) (142) (149)
Plan participants' contributions - - ( 6) (4)
Amendments (58) - - 31
Actuarial losses (600) (334) (31) (84)
Transfer to third party - 32 - -
Contractual termination benefits (30) (63) - -
Benefits paid 485 460 128 117
Foreign currency changes 7 (1) 1 1
------- ------- ------- -------
Benefit obligation at end of period $(6,309) $(5,557) $(2,213) $(2,128)
======= ======= ======= =======
CHANGE IN PLAN ASSETS:
Fair value of plan assets at beginning of period $ 8,489 $ 7,306 $ 1,354 $ 1,313
Actual return on plan assets 445 1,693 146 120
Transfer to third party (4) (32) - -
Contribution from pension plan - - 31 25
Employer contributions 25 16 13 9
Plan participants' contributions - - 6 4
Withdrawal under IRS Section 420 (36) (35) - -
Benefits paid (485) (460) (128) (117)
Foreign currency changes (7) 1 - -
------- ------- ------- -------
Fair value of plan assets at end of period $ 8,427 $ 8,489 $ 1,422 $ 1,354
======= ======= ======= =======
FUNDED STATUS:
Funded status at end of period $ 2,118 $ 2,932 $ (791) $ (774)
Unrecognized transition (asset) liability (554) (661) 660 707
Unrecognized prior service cost 335 327 - -
Unrecognized actuarial net gain (813) (1,644) (353) (364)
Effects of 4th quarter activity (9) (63) 2 33
------- ------- ------- -------
Net amount recognized $ 1,077 $ 891 $ (482) $ (398)
======= ======= ======= =======
AMOUNTS RECOGNIZED IN THE STATEMENTS OF FINANCIAL
POSITION CONSIST OF:
Prepaid benefit cost $ 1,348 $ 1,150 $ - $ -
Accrued benefit liability (287) (270) (482) (398)
Intangible asset 7 5 - -
Accumulated other comprehensive income 9 6 - -
-------- -------- -------- ---------
Net amount recognized $ 1,077 $ 891 $ (482) $ (398)
======== ======== ======== =========
</TABLE>
B-31
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
9. EMPLOYEE BENEFIT PLANS (CONTINUED)
The projected benefit obligation, accumulated benefit obligation and fair
value of plan assets for the pension plan with accumulated benefit
obligations in excess of plan assets were $384 million, $284 million and
$0, respectively, as of September 30, 1998 and $319 million, $226 million
and $ 0, respectively, as of September 30, 1997.
The effects of fourth quarter activity are summarized as follows:
<TABLE>
<CAPTION>
OTHER
PENSION BENEFITS POSTRETIREMENT BENEFITS
---------------------- -----------------------
1998 1997 1998 1997
------ ------- ------ ------
(In Millions)
<S> <C> <C> <C> <C>
Effect of IRS Section 420 transfer $ - $ (36) $ - $ -
Contractual termination benefits (14) (30) - -
Contribution from pension plan - - - 31
Employer contributions 5 3 2 2
----- ------- ------ ------
Effects of 4th quarter activity $ (9) $ (63) $ 2 $ 33
====== ======= ====== ======
</TABLE>
Pension plan assets consist primarily of equity securities, bonds, real estate
and short-term investments, of which $5,926 million and $6,022 million are
included in Separate Account assets and liabilities at September 30, 1998 and
1997, respectively.
Other postretirement plan assets 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 $1,018
million and $1,044 million of Company insurance policies and contracts at
September 30, 1998 and 1997, 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 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, 1998 that their employment had been
terminated. Costs related to these amendments are reflected below in contractual
termination benefits.
B-32
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
9. EMPLOYEE BENEFIT PLANS (CONTINUED)
Net periodic benefit cost included in "General and administrative expenses"
in the Company's Consolidated Statements of Operations for the years ended
December 31, includes the following components:
<TABLE>
<CAPTION>
OTHER
PENSION BENEFITS POSTRETIREMENT BENEFITS
----------------------------------- ------------------------------------
1998 1997 1996 1998 1997 1996
----------------------------------- ------------------------------------
(In Millions)
<S> <C> <C> <C> <C> <C> <C>
COMPONENTS OF NET PERIODIC BENEFITS COSTS:
Service cost $ 159 $ 127 $ 140 $ 35 $ 38 $ 45
Interest cost 397 376 354 142 149 157
Expected return on plan assets (674) (617) (594) (119) (87) (93)
Amortization of transition amount (106) (106) (107) 47 50 53
Amortization of prior service cost 45 42 26 - - -
Amortization of actuarial net (gain) loss 1 - - (13) (13) (3)
Curtailment gain (loss) 5 - - - - (9)
Contractual termination benefits 14 30 63 - - -
------- ------- ------- ------- ------- ------
Net periodic (benefit) cost $ (159) $ (148) $ (118) $ 92 $ 137 $ 150
======= ======= ======= ======= ======= ======
</TABLE>
The assumptions at September 30, used by the Company to calculate the benefit
obligations as of that date and to determine the benefit cost in the subsequent
year are as follows:
<TABLE>
<CAPTION>
OTHER
PENSION BENEFITS POSTRETIREMENT BENEFITS
------------------------------ ----------------------------------------
1998 1997 1996 1998 1997 1996
------------------------------ ----------------------------------------
<S> <C> <C> <C> <C> <C> <C>
WEIGHTED-AVERAGE ASSUMPTIONS:
Discount rate 6.50% 7.25% 7.75% 6.50% 7.25% 7.75%
Rate of increase in compensation levels 4.50% 4.50% 4.50% 4.50% 4.50% 4.50%
Expected return on plan assets 9.50% 9.50% 9.50% 9.00% 9.00% 9.00%
Health care cost trend rates - - - 7.80-11.00% 8.20-11.80% 8.50-12.50%
Ultimate health care cost trend rate
after gradual decrease until 2006 - - - 5.00% 5.00% 5.00%
</TABLE>
B-33
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
9. EMPLOYEE BENEFIT PLANS (CONTINUED)
Assumed health care cost trend rates have a significant effect on the
amounts reported for the health care plan. A one-percentage point
increase and decrease in assumed health care cost trend rates would have
the following effects:
OTHER
POSTRETIREMENT BENEFITS
-----------------------
1998
------
(In Millions)
ONE PERCENTAGE POINT INCREASE
Effect on total service and interest costs $ 24
Effect on postretirement benefit obligation (226)
ONE PERCENTAGE POINT DECREASE
Effect on total service and interest costs $ (19)
Effect on postretirement benefit obligation 187
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, 1998 and 1997
was $135 million and $144 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 3% of annual salary,
resulting in $54 million, $63 million and $57 million of expenses included in
"General and administrative expenses" for 1998, 1997 and 1996, respectively.
DISCONTINUED OPERATIONS
In connection with the disposal of the Company's HealthCare business, as more
fully discussed in Note 3, the loss on disposal was reduced by an estimated
curtailment gain of $30 million.
B-34
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
10. INCOME TAXES
The components of income tax expense for the years ended December 31, were
as follows:
1998 1997 1996
------ ------ ------
(In Millions)
Current tax expense (benefit):
U.S. $ 983 $ (14) $ 400
State and local 54 51 108
Foreign 148 64 48
------ ------ ------
Total $1,185 $ 101 $ 556
====== ====== ======
Deferred tax expense (benefit):
U.S. $ (193) $ 269 $ (428)
State and local (6) 4 (2)
Foreign (16) 33 54
------ ------ ------
Total $ (215) $ 306 $ (376)
====== ====== ======
Total income tax expense $ 970 $ 407 $ 180
====== ====== ======
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 continuing operations before income taxes for the following reasons:
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ ------
(In Millions)
<S> <C> <C> <C>
Expected federal income tax expense $ 908 $ 480 $ 539
Equity tax (benefit) 75 (65) (365)
State and local income taxes 31 37 69
Tax-exempt interest and dividend received deduction (46) (67) (67)
Other
2 22 4
------ ------ ------
Total income tax expense $ 970 $ 407 $ 180
====== ====== ======
</TABLE>
B-35
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
10. INCOME TAXES (CONTINUED)
Deferred tax assets and liabilities at December 31, resulted from the items
listed in the following table:
1998 1997
------- -------
(In Millions)
Deferred tax assets
Insurance reserves $ 1,584 $ 1,482
Policyholder dividends 265 250
Net operating loss carryforwards 260 80
Litigation related reserves 104 178
Employee benefits 63 42
Other 134 287
------- -------
Deferred tax assets before valuation allowance 2,410 2,319
Valuation allowance (13) (18)
------- -------
Deferred tax assets after valuation allowance 2,397 2,301
------- -------
Deferred tax liabilities
Investments 1,414 1,867
Deferred policy acquisition costs 1,436 1,525
Depreciation 64 36
------- -------
Deferred tax liabilities 2,914 3,428
------- -------
Net deferred tax liability $ 517 $ 1,127
======= =======
Management believes that based on its historical pattern of taxable income, the
Company will produce sufficient income in the future to realize its 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, 1998 and 1997,
respectively, the Company had federal life net operating loss carryforwards of
$540 million and $1,200 million, which expire by 2012. At December 31, 1998 and
1997, respectively, the Company had state non-life operating loss carryforwards
for tax purposes approximating $1,059 million and $800 million, which expire by
2018.
The Internal Revenue Service (the "Service") has completed all examinations of
the consolidated federal income tax returns through 1989. The Service has
examined the years 1990 through 1992. Discussions are being held with the
Service with respect to proposed adjustments. Management, however, 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.
B-36
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
11. STATUTORY EQUITY AND INCOME
Applicable insurance department regulations require that the Company
prepare statutory financial statements in accordance with statutory
accounting practices prescribed or permitted by the New Jersey Department
of Banking and Insurance. Statutory accounting practices primarily differ
from GAAP by charging policy acquisition costs to expense as incurred,
establishing future policy benefits reserves using different actuarial
assumptions, not providing for deferred taxes, and valuing securities on a
different basis. The Company's statutory net income, as filed with the New
Jersey Department of Banking and Insurance was $1,247 million, $1,471
million and $1,402 million for the years 1998, 1997 and 1996,
respectively. Statutory capital and surplus, as filed, at December 31,
1998 and 1997 was $8,536 million and $9,242 million, respectively.
12. 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, 1998, future minimum lease payments under non-cancelable
operating leases are estimated as follows:
(In Millions)
1999 $ 295
2000 263
2001 231
2002 198
2003 157
Remaining years after 2003 753
-------
Total $ 1,897
=======
Amounts presented in the table above include operating leases relating to
the Company's HealthCare business. See Note 3 for a discussion of the
pending sale of this business. Amounts applicable to the HealthCare
business are $65 million in 1999, $58 million in 2000, $52 million in
2001, $45 million in 2002, $34 million in 2003 and $89 million thereafter.
Rental expense incurred for the years ended December 31, 1998, 1997 and
1996 was approximately $320 million, $352 million and $343 million,
respectively.
13. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated 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
estimated fair values (for all other financial instruments presented in
the table, the carrying value approximates estimated fair value).
B-37
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
13. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
FIXED MATURITIES AND EQUITY SECURITIES
Estimated 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 fair value of
certain non-performing private placement securities is based on amounts
estimated by management.
MORTGAGE LOANS ON REAL ESTATE
The estimated 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 loans, the
estimated 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 estimated 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
Estimated fair values of policyholders' account balances are derived by
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. For interest sensitive life
contracts, fair value approximates carrying value.
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.
B-38
<PAGE>
- -------------------------------------------------------------------------------
13. 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>
1998 1997
----------------------- ------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
-------- ---------- -------- ----------
(In Millions)
<S> <C> <C> <C> <C>
FINANCIAL ASSETS:
Other than trading:
Fixed maturities:
Available for sale $ 80,158 $ 80,158 $ 75,270 $ 75,270
Held to maturity 16,848 17,906 18,700 19,894
Equity securities 2,759 2,759 2,810 2,810
Mortgage loans on real estate 16,495 17,265 16,004 16,703
Policy loans 7,476 8,037 7,034 7,201
Securities purchased under agreements to resell 1,737 1,737 - -
Short-term investments 9,781 9,781 12,106 12,106
Cash 1,943 1,943 1,859 1,859
Restricted Assets 2,366 2,366 1,835 1,835
Separate Account assets 81,621 81,621 73,839 73,839
Derivative financial instruments 132 135 93 92
Trading:
Trading account assets $ 8,888 $ 8,888 $ 6,347 $ 6,347
Broker-dealer related receivables 10,142 10,142 8,442 8,442
Derivative financial instruments 765 765 910 910
Securities purchased under agreements to resell 8,515 8,515 8,661 8,661
Cash collateral for borrowed securities 5,622 5,622 5,047 5,047
FINANCIAL LIABILITIES:
Other than trading:
Policyholders' account balances $ 30,974 $ 31,940 $ 33,246 $ 34,201
Securities sold under agreements to repurchase 7,085 7,085 85 85
Cash collateral for loaned securities 2,450 2,450 9,647 9,647
Short-term and long-term debt 14,816 15,084 11,047 11,131
Securities sold but not yet purchased 2,215 2,215 - -
Separate Account liabilities 80,931 80,931 73,451 73,451
Derivative financial instruments 390 391 100 99
Trading:
Broker-dealer related payables $ 6,530 $ 6,530 $ 3,338 $ 3,338
Derivative financial instruments 725 725 1,019 1,019
Securities sold under agreements to repurchase 14,401 14,401 12,262 12,262
Cash collateral for loaned securities 4,682 4,682 4,470 4,470
Securities sold but not yet purchased 3,556 3,556 3,648 3,648
</TABLE>
B-39
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
14. DERIVATIVE AND OFF-BALANCE SHEET CREDIT-RELATED INSTRUMENTS
INTEREST RATE SWAPS
The Company uses interest rate swaps to reduce market risks from changes in
interest rates and to alter interest rate exposures arising from mismatches
between assets and liabilities. Under interest rates swaps, the Company
agrees with other parties to exchange, at specified intervals the difference
between fixed-rate and floating-rate interest amounts calculated by
reference to an agreed notional principal amount. Generally, no cash is
exchanged at the outset of the contract and no principal payments are made
by either party. Cash is paid or received based on the terms of the swap.
These transactions are entered into pursuant to master agreements that
provide for a single net payment to be made by one counterparty at each due
date. 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.
If swap agreements meet the criteria for hedge accounting, net interest
receipts or payments are accrued and recognized over the life of the swap
agreements as an adjustment to interest income or expense of the hedged
item. Any unrealized gains or losses are not recognized until the hedged
item is sold or matures. Gains or losses on early termination of interest
rate swaps are deferred and amortized over the remaining period originally
covered by the swaps. If the criteria for hedge accounting are not met, the
swap agreements are accounted for at market value with changes in fair value
reported in current period earnings.
FUTURES AND OPTIONS
The Company uses exchange-traded Treasury futures and options to reduce
market risks from changes in interest rates, to alter mismatches between the
duration of assets in a portfolio and the duration of liabilities supported
by those assets, and to hedge against changes in the value of securities it
owns or anticipates acquiring. The Company enters into exchange-traded
futures and options with regulated futures commissions merchants who are
members of a trading exchange. The fair value of futures and options is
based on market quotes for transactions with similar terms.
Under exchange-traded futures, the Company agrees to purchase a specified
number of contracts with other parties and to post variation margin on a
daily basis in an amount equal to the difference in the daily market values
of those contracts. Futures are typically used to hedge duration mismatches
between assets and liabilities by replicating Treasury performance. Treasury
futures move substantially in value as interest rates change and can be used
to either modify or hedge existing interest rate risk. This strategy
protects against the risk that cash flow requirements may necessitate
liquidation of investments at unfavorable prices resulting from increases in
interest rates. This strategy can be a more cost effective way of
temporarily reducing the Company's exposure to a market decline than selling
fixed income securities and purchasing a similar portfolio when such a
decline is believed to be over.
If futures meet hedge accounting criteria, changes in their fair value are
deferred and recognized as an adjustment to the carrying value of the hedged
item. Deferred gains or losses from the hedges for interest-bearing
financial instruments are amortized as a yield adjustment over the remaining
lives of the hedged item. Futures that do not qualify as hedges are carried
at fair value with changes in value reported in current period earnings. The
gains and losses associated with anticipatory transactions are not material.
B-40
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
14. DERIVATIVE AND OFF-BALANCE SHEET CREDIT-RELATED INSTRUMENTS (CONTINUED)
When the Company anticipates a significant decline in the stock market
which will correspondingly affect its diversified portfolio, it may
purchase put index options where the basket of securities in the index is
appropriate to provide a hedge against a decrease in the value of the
equity portfolio or a portion thereof. This strategy effects an orderly
sale of hedged securities. When the Company has large cash flows which it
has allocated for investment in equity securities, it may purchase call
index options as a temporary hedge against an increase in the price of the
securities it intends to purchase. This hedge permits such investment
transactions to be executed with the least possible adverse market impact.
Option premium paid or received is reported as an asset or liability and
amortized into income over the life of the option. If options meet the
criteria for hedge accounting, changes in their fair value are deferred
and recognized as an adjustment to the hedged item. Deferred gains or
losses from the hedges for interest-bearing financial instruments are
recognized as an adjustment to interest income or expense of the hedged
item. If the options do not meet the criteria for hedge accounting, they
are fair valued, with changes in fair value reported in current period
earnings.
CURRENCY DERIVATIVES
The Company uses currency derivatives, including exchange-traded currency
futures and options, currency forwards and currency swaps to reduce market
risks from changes in currency values of investments denominated in
foreign currencies that the Company either holds or intends to acquire and
to alter the currency exposures arising from mismatches between such
foreign currencies and the U.S. Dollar.
Under currency forwards, the Company agrees with other parties upon
delivery of a specified amount of specified currency at a specified future
date. Typically, the price is agreed upon at the time of the contract and
payment for such a contract is made at the specified future date. Under
currency swaps, the Company agrees with other parties to exchange, at
specified intervals, the difference between one currency and another at a
forward exchange rate and calculated by reference to an agreed principal
amount. Generally, the principal amount of each currency is exchanged at
the beginning and termination of the currency swap by each party. These
transactions are entered into pursuant to master agreements that provide
for a single net payment to be made by one counterparty for payments made
in the same currency at each due date.
If currency derivatives are effective as hedges of foreign currency
translation and transaction exposures, gains or losses are recorded in
"Accumulated other comprehensive income." If currency derivatives do not
meet hedge accounting criteria, gains or losses from those derivatives are
recognized in current period earnings.
The tables below summarize the Company's outstanding positions by
derivative instrument types as of December 31, 1998 and 1997. 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.
B-41
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
14. DERIVATIVE AND OFF-BALANCE SHEET CREDIT-RELATED INSTRUMENTS (CONTINUED)
DERIVATIVE FINANCIAL INSTRUMENTS
DECEMBER 31, 1998
(In Millions)
<TABLE>
<CAPTION>
TRADING OTHER THAN TRADING TOTAL
------------------------- ------------------------- -------------------------
ESTIMATED ESTIMATED ESTIMATED
NOTIONAL FAIR VALUE NOTIONAL FAIR VALUE NOTIONAL FAIR VALUE
-------- ---------- -------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Swaps:
Assets $ 4,564 $ 309 $ 2,200 $ 96 $ 6,764 $ 405
Liabilities 4,734 274 3,065 349 7,799 623
Forwards:
Assets 45,651 282 1,004 14 46,655 296
Liabilities 39,153 280 2,039 37 41,192 317
Futures:
Assets 3,272 61 1,786 23 5,058 84
Liabilities 4,371 47 531 5 4,902 52
Options:
Assets 8,310 113 130 2 8,440 115
Liabilities 6,388 124 213 - 6,601 124
-------- -------- -------- ------- -------- --------
Total:
Assets $ 61,797 $ 765 $ 5,120 $ 135 $ 66,917 $ 900
======== ======== ======== ======= ======== ========
Liabilities $ 54,646 $ 725 $ 5,848 $ 391 $ 60,494 $ 1,116
======== ======== ======== ======= ======== ========
</TABLE>
B-42
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
14. 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 ESTIMATED
NOTIONAL FAIR VALUE NOTIONAL FAIR VALUE NOTIONAL FAIR VALUE
-------- ----------- -------- ----------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Swaps:
Assets $ 5,798 $ 316 $ 1,446 $ 67 $ 7,244 $ 383
Liabilities 5,439 418 1,197 70 6,636 488
Forwards:
Assets 29,947 438 1,171 25 31,118 463
Liabilities 29,985 461 687 8 30,672 469
Futures:
Assets 4,103 51 46 - 4,149 51
Liabilities 3,064 50 3,320 21 6,384 71
Options:
Assets 6,893 105 239 - 7,132 105
Liabilities 3,946 90 224 - 4,170 90
------- ------- ------- ------ ------- -------
Total:
Assets $46,741 $ 910 $ 2,902 $ 92 $49,643 $ 1,002
======= ======= ======= ====== ======= =======
Liabilities $42,434 $ 1,019 $ 5,428 $ 99 $47,862 $ 1,118
======= ======= ======= ====== ======= =======
</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. At December
31, 1998 and 1997 approximately 97% and 95%, respectively, 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, 1998, 1997 and 1996
relating to forwards, futures and swaps were $67 million, $(5) million and $(13)
million; $59 million, $37 million and $(13) million; and $42 million, $32
million and $(11) 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, 1998 and 1997 were $1,165 million and $1,015
million, respectively, and for derivatives in a liability position were $1,140
million and $1,166 million, respectively. Of those derivatives held for trading
purposes at December 31, 1998, 63% of the notional amount consisted of interest
rate derivatives, 32% consisted of foreign currency derivatives, and 5%
consisted of equity and commodity derivatives. Of those derivatives held for
purposes other than trading at December 31, 1998, 60% of notional consisted of
interest rate derivatives, 31% consisted of foreign currency derivatives, and 9%
consisted of equity and commodity derivatives.
B-43
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
14. 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
underfunded portion of commitments to fund investments in private placement
securities, and unused credit card and home equity lines. In connection
with the Company's commercial banking business, loan commitments for credit
cards and home equity lines of credit include agreements to lend up to
specified limits to customers. It is anticipated that commitment amounts
will only be partially drawn down based on overall customer usage patterns,
and, therefore, do not necessarily represent future cash requirements. The
Company evaluates each credit decision on such commitments at least
annually and has the ability to cancel or suspend such lines at its option.
The total available lines of credit card and home equity commitments were
$3.0 billion of which $2.2 billion remains available at December 31, 1998.
Also in connection with the Company's investment banking activities, the
Company enters into agreements with mortgage originators and others to
provide financing on both a secured and unsecured basis. Aggregate
financing commitments on a secured basis approximate $6.1 billion of which
$3.3 billion remains available at December 31, 1998. Unsecured commitments
approximate $65.0 million, the majority of which is outstanding at December
31, 1998.
Other commitments substantially include commitments to purchase and sell
mortgage loans and the underfunded portion of commitments to fund
investments in private placement securities. These mortgage loans and
private commitments were $2.5 billion of which $1.8 billion remain
available at December 31, 1998. Additionally, mortgage loans sold with
recourse were $0.5 billion at December 31, 1998.
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. At December 31,
1998 these were immaterial.
15. DIVESTITURE
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."
16. CONTINGENCIES AND LITIGATION
STOP-LOSS REINSURANCE 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. The Company
has guaranteed
B-44
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
16. CONTINGENCIES AND LITIGATION (CONTINUED)
Gibraltar's obligations arising under the stop-loss agreement subject to a
limit of $375 million. Through December 31, 1998, Gibraltar has incurred
$375 million in losses under the stop-loss agreement, including $90 million
in 1998. Gibraltar has paid $197 million to Pru Re under the stop-loss
agreement.
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
The Company has reviewed its obligations under certain managed care
arrangements for possible failure to comply with contractual and regulatory
requirements. It is the opinion of management that adequate reserves have
been established to provide for appropriate reimbursements to customers.
REINSURANCE AND PARTICIPATION AGREEMENT
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. In November 1998,
the Rehabilitation Court approved the sale of MBLLAC's individual life
insurance and individual group annuity business to affiliates of SunAmerica
Inc. Upon the end of the rehabilitation period, expected during 1999, the
agreement will terminate.
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.
Two putative class actions and approximately 320 individual actions were
pending against the Company in the United States as of January 31, 1999
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. Additional
suits may be filed by individuals who opted out of the class action
settlement described below. The sales practices alleged to have occurred
are contrary to Company policy. Some of these cases seek substantial
damages while others seek unspecified compensatory, punitive and treble
damages. The Company intends to defend these cases vigorously.
B-45
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
16. CONTINGENCIES AND LITIGATION (CONTINUED)
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. 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 and that the
Company's efforts to prevent such practices were not sufficiently
effective. Based on the findings, the Task Force recommended, and the
Company agreed to, various changes to its sales and business practices
controls, and 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 U.S. District
Court for the District of 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 U.S. District Court 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 was affirmed by the U.S. Court of Appeals for the Third Circuit
in July 1998 although the issue of class counsel's fees was sent back to
the U.S. District Court for review. The Supreme Court denied certiorari in
January 1999, thereby making final the approval of the class action
settlement.
While the approval of the class action settlement is now final, the Company
remains subject to oversight and review by insurance regulators and other
regulatory authorities with respect to its sales practices and the conduct
of the remediation program. The releases granted by the state insurance
regulators pursuant to the individual state settlement agreements do not
become final until the remediation program has been completed without any
material changes to which those regulators have not agreed. The U.S.
District Court has also retained jurisdiction as to all matters relating to
the administration, consummation, enforcement and interpretation of the
class action settlement.
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 in
B-46
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
16. CONTINGENCIES AND LITIGATION (CONTINUED)
October 1996, 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.
In January 1997 the U.S. District Court sanctioned and fined the Company
$1 million for failure to properly implement procedures for its employees
to retain documents in violation of the Courts' order that required the
parties to preserve all documents relevant to the class action and
remediation program. The Court ordered the Company to implement a document
retention policy and directed that an independent expert be engaged to
investigate the extent of document destruction and its impact on the
remediation program.
In response to the class notices, the owners of approximately 503,000
policies indicated an interest in a Basic Claim Relief remedy. Management
believes that costs associated with providing Basic Claim Relief will not
be material to the Company's financial position or results of operations.
The owners of approximately 1.16 million policies responded to the class
notices by indicating an intent to file an ADR claim. All policyholders
who responded were provided an ADR claim form for completion and
submission. The ADR process generally requires that individual claim forms
and files be reviewed by the Company and by one or more independent claim
evaluators. Approximately 649,000 claim forms were completed and returned
and approximately 591,000 decision letters had been mailed to claimants as
of January 31, 1999. In many instances, claimants have the right to
"appeal" the Company's decision to an independent reviewer. Management
believes that the bulk of such appeals will be resolved in 1999.
In 1996, the Company recorded in its Consolidated Statement of Operations
the cost of $410 million as a guaranteed minimum remediation expense
pursuant to the settlement agreement. Management had no better information
available at that time upon which to make a reasonable estimate of losses
associated with the settlement. In 1997, based on additional information
derived from claim sampling techniques, the terms of the settlement and
the number of claim forms received, management 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 was funded in a settlement trust. Management
expressly noted that additional cost items were anticipated that could not
be fully evaluated at that time.
In 1998, based on estimates derived from an analysis of claims actually
remedied (including interest), a sample of claims still to be remedied, an
estimate of additional liability associated with the results of the
investigation by the independent expert regarding the impact of document
destruction on the ADR program, and an estimate of additional liabilities
associated with a claimant's right to "appeal" the Company's decision,
management increased the estimated liability for the cost of ADR remedies
by $.51 billion before taxes to a total of $2.56 billion before taxes, all
of which has been funded in a settlement trust as discussed in Note 4. The
Company has also recorded from 1996 through 1998 additional charges to
reflect ongoing administrative costs related to the ADR program,
regulatory fines, penalties and related payments, litigation costs and
settlements, and other fees and expenses associated with the resolution of
sales practices issues. While management believes the foregoing provisions
are reasonable estimates based on information currently available, the
ultimate amount of the total cost of remedied policyholder claims and
other related costs is dependent on complex and varying factors, including
the relief options still to be chosen by claimants, the dollar value of
those options, and the number and type of claims that may successfully be
appealed.
B-47
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
16. CONTINGENCIES AND LITIGATION (CONTINUED)
The Company's litigation is subject to many uncertainties, and given the
complexity and scope, the outcomes cannot be predicted with precision. 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 the matters specifically discussed
above. Management believes, however, that the ultimate resolution of all
such matters, after consideration of applicable reserves, should not have a
material adverse effect on the Company's financial position.
******
B-48
<PAGE>
PART C
OTHER INFORMATION
Item 24. Financial statements and Exhibits
(a) The following financial statements are included in Part B:
Financial Statements of Registrant for the fiscal year ended
December 31, 1998
Financial Statement 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 4)
3(b). Broker-dealer sales agreement. (Note 2)
4(a). Form of Group Annuity Contract offered by The
Prudential Insurance Company of America (FL). (Note
2)
4(b). Form of Group Annuity Contract offered to small 401
plans by The Prudential Insurance Company of
America. (PA) (Note 4)
4(c) Form of Group Annuity Contract offered by the
Prudential Insurance Company of America (NJ). (Note
8)
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 May 12, 1998. (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)
8(c)(i). Form of Amendment to Participation Agreement between
The Prudential Insurance Company of America and
Janus Aspen Series. (Note 8)
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)
C-1
<PAGE>
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). 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 3)
Gilbert F. Casellas, (Note 7)
Anthony S. Piszel (Note 8)
11. Not applicable.
12. Not applicable.
13. Schedule for Computation of Performance
Calculations.
- ----------
(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.
(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 Form S-6, Registration No. 333-64957,
filed September 30, 1998 on behalf of The Prudential Variable
Appreciable Account.
(Note 8) Incorporated by reference to Post-Effective Amendment No. 4 to this
Registration Statement, filed February 23, 1999.
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
C-2
<PAGE>
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 February 28, 1999 there were7,356 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 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
(a) Prudential Investment Management Services LLC ("PIMS"), a
direct wholly owned subsidiary of Prudential, acts as the
principal underwriter for the registrant and also for The
Prudential Variable Contract Account-2, The Prudential
Variable Contract Account-10, and The Prudential Variable
Contract Account-11, which are registered as open-end
management investment companies under the Investment Company
Act of 1940. It also acts as principal underwriter for The
Prudential Variable Contract Account-24 and The Prudential
Variable Contract GI-2, which are registered as unit
investment trusts under the Investment Company Act of 1940.
(b)(1) The following table sets forth certain information regarding
the officers and directors of PIMS:
NAME AND PRINCIPAL POSITIONS AND OFFICES
BUSINESS ADDRESS WITH UNDERWRITER
------------------------ ---------------------------------
Robert F. Gunia President
C. Edward Chaplin Treasurer
Kevin B. Frawley Senior Vice President and Chief
Compliance Officer
Jean D. Hamilton Executive Vice President
C-3
<PAGE>
Carl L. McGuire Vice President
Brian Henderson Senior Vice President and Chief
Operating Officer
John R. Strangfeld Executive Vice President
William V. Healey Senior Vice President, Secretary
and Chief Legal Officer
Margaret M. Deverell Vice President, Comptroller and
Chief Financial Officer
------------------
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>
<CAPTION>
(c)
NAME OF NET UNDERWRITING
PRINCIPAL DISCOUNTS AND COMPENSATION BROKERAGE
UNDERWRITER COMMISSIONS ON REDEMPTION COMMISSIONS
------------------------- ---------------- ------------- -----------
<S> <C> <C> <C>
Prudential Investment $ $ $
Management Services, LLC -0- -0- 105,206
</TABLE>
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
C-4
<PAGE>
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
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.
C-5
<PAGE>
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.
C-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant,
The Prudential Discovery Select Group Variable Contract Account, certifies that
this Amendment is filed solely for one or more of the purposes specified in Rule
485(b)(1), and that no material event requiring disclosure in the prospectus,
other than one listed in Rule 485(b)(1), has occurred since the effective date
of the Registrant's most recent post-effective amendment, and 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 29 day of
April, 1999.
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-7
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant,
The Prudential Discovery Select Group Variable Contract Account, certifies that
this Amendment is filed solely for one or more of the purposes specified in Rule
485(b)(1), and that no material event requiring disclosure in the prospectus,
other than one listed in Rule 485(b)(1), has occurred since the effective date
of the Registrant's most recent post-effective amendment, and 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 29 day of
April, 1999.
SIGNATURE AND TITLE
--------------------
/s/ * /s/ *
- --------------------------------------- ----------------------------------
ARTHUR F. RYAN CAROLYNE K. DAVIS
CHAIRMAN OF THE BOARD, PRESIDENT DIRECTOR
AND CHIEF EXECUTIVE OFFICER
/s/ * /s/ *
- --------------------------------------- ----------------------------------
ANTHONY S. PISZEL ROGER A. ENRICO
VICE PRESIDENT AND CONTROLLER DIRECTOR
(CHIEF ACCOUNTING OFFICER)
/s/ * /s/ *
- --------------------------------------- ----------------------------------
RICHARD J. CARBONE ALLAN D. GILMOUR
SENIOR VICE PRESIDENT AND DIRECTOR
PRINCIPAL FINANCIAL OFFICER
/s/ * /s/ *
- --------------------------------------- ----------------------------------
FRANKLIN E. AGNEW WILLIAM H. GRAY, III
DIRECTOR DIRECTOR
/s/ * /s/ *
- --------------------------------------- ----------------------------------
FREDERIC K. BECKER JON F. HANSON
DIRECTOR DIRECTOR
/s/ * /s/ *
- --------------------------------------- ----------------------------------
GILBERT F. CASELLAS GLEN H. HINER
DIRECTOR DIRECTOR
/s/ * *By: C. CHRISTOPHER SPRAGUE
- --------------------------------------- ----------------------------
JAMES G. CULLEN C. CHRISTOPHER SPRAGUE
DIRECTOR (ATTORNEY-IN-FACT)
April 29, 1999
C-8
<PAGE>
SIGNATURE AND TITLE
--------------------
/s/ * /s/ *
- ---------------------------- -------------------------------------
CONSTANCE J. HORNER RICHARD M. THOMSON
DIRECTOR DIRECTOR
/s/ * /s/ *
- ---------------------------- -------------------------------------
GAYNOR N. KELLEY JAMES A. UNRUH
DIRECTOR DIRECTOR
/s/ * /s/ *
- ---------------------------- -------------------------------------
BURTON G. MALKIEL P. ROY VAGELOS, M.D.
DIRECTOR DIRECTOR
/s/ * /s/ *
- ---------------------------- -------------------------------------
IDA F.S. SCHMERTZ STANLEY C. VAN NESS
DIRECTOR DIRECTOR
/s/ * /s/ *
- ---------------------------- -------------------------------------
CHARLES R. SITTER PAUL A. VOLCKER
DIRECTOR DIRECTOR
/s/ * /s/ *
- ---------------------------- -------------------------------------
DONALD L. STAHELI JOSEPH H. WILLIAMS
DIRECTOR DIRECTOR
*By: C. CHRISTOPHER SPRAGUE
-------------------------------
C. CHRISTOPHER SPRAGUE
(ATTORNEY-IN-FACT)
April 29, 1999.
C-9
<PAGE>
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
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.
13 Schedule of Computation of Performance Calculations.
C-10
Exhibit 9
April 23, 1999
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 178: 28-7 of the Revised Statutes 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. 5 to the Registration Statement (Registration Number 333-23271)
under the Securities Act of 1933 for the registration of certain variable
annuity contracts issued with respect to the Account.
I am of the following opinion:
(1) Prudential was duly organized under the laws of New Jersey and is a
validly existing insurance company.
(2) The Account has been duly created and is validly existing as a
separate account pursuant to the aforementioned 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
EXHIBIT 10
CONSENT OF INDEPENDENT ACCOUNTANTS
----------------------------------
We hereby consent to the use in the Statement of Additional Information
constituting part of this Post-Effective Amendment No. 5 to the registration
statement on Form N-4 (the "Registration Statement") of our report dated
February 25, 1999, 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 the Registration Statement of our report dated February 26,
1999, relating to the consolidated financial statements of The Prudential
Insurance Company of America and its subsidiaries, which appears in such
Statement of Additional Information.
We also consent to the reference to us under the heading "Experts" in the
Statement of Additional Information.
/s/PricewaterhouseCoopers LLP
- -----------------------------
New York, New York
April 23, 1999
1
April 23, 1999
Board of Directors
The Prudential Insurance Company of America
751 Broad Street
Newark, NJ 07102
Ladies and Gentlemen:
We hereby consent to the reference to our name the caption "Legal
Matters" in the Statement of Additional Information filed as part of
Post-Effective Amendment No. 5 to the registration statement on Form N-4 for The
Prudential Discovery Select Group Variable Contract Account (File No.
333-23271). In giving this consent, we do not admit that we are in the category
of persons whose consent is required under Section 7 of the Securities Act of
1933.
Very truly yours,
SHEA & GARDNER
By: /s/ CHRISTOPHER E. PALMER
---------------------------
Christopher E. Palmer
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
DS HYP DS MONEY MARKET
F43 1.0000
REPORT AS OF 12/31/1998
ONE THREE ONE THREE FIVE TEN INCEPTION
MONTH MONTH YTD YEAR YEAR YEAR YEAR 5/13/83
--------------------------------------------------------------------------------------------------------
UNIT VALUES 10.52377654 10.48543754 10.41388269 10.08530459 10.08530459 9.36626428 8.6791729 6.80671164 4.71371961
ANNUALIZE RETURNS 0.37% 1.06% 4.35% 4.35% 3.96% 3.93% 4.45% 5.27%
CUMULATIVE RETURNS 0.37% 1.06% 4.35% 4.35% 12.36% 21.25% 54.61% 123.26%
SURRENDER CHARGES 5.00% 5.00% 5.00% 5.00% 3.00% 1.00% 0.00% 0.00%
ACCOUNT CHARGES (DOLLARS) 0.6 0.6 0.6 0.6 1.8 3 6 9.6
ANNUALIZE RETURNS W/CHARGES -4.69% -4.00% -0.71% -0.71% 2.97% 3.70% 4.41% 5.24%
CUMULATIVE RETURNS W/CHARGES -4.69% -4.00% -0.71% -0.71% 9.18% 19.95% 54.01% 122.30%
TOTAL NUMBER OF YEARS 15.64
DS HYP DS DIVERSIFIED BOND
F44 1.0000
REPORT AS OF 12/31/1998
ONE THREE ONE THREE FIVE TEN INCEPTION
MONTH MONTH YTD YEAR YEAR YEAR YEAR 5/13/83
--------------------------------------------------------------------------------------------------------
UNIT VALUES 10.68358450 10.64444177 10.69622709 10.07371777 10.07371777 9.0477338 7.90027187 4.91379342 3.12857503
ANNUALIZE RETURNS 0.37% -0.12% 6.05% 6.05% 5.69% 6.22% 8.07% 8.17%
CUMULATIVE RETURNS 0.37% -0.12% 6.05% 6.05% 18.08% 35.23% 117.42% 241.48%
SURRENDER CHARGES 5.00% 5.00% 5.00% 5.00% 3.00% 1.00% 0.00% 0.00%
ACCOUNT CHARGES (DOLLARS) 0.6 0.6 0.6 0.6 1.8 3 6 9.6
ANNUALIZE RETURNS W/CHARGES -4.69% -5.18% 0.99% 0.99% 4.73% 6.01% 8.04% 8.15%
CUMULATIVE RETURNS W/CHARGES -4.69% -5.18% 0.99% 0.99% 14.90% 33.93% 116.82% 240.52%
TOTAL NUMBER OF YEARS 15.64
DS HYP DS EQUITY
F45 1.0000
REPORT AS OF 12/31/1998
ONE THREE ONE THREE FIVE TEN INCEPTION
MONTH MONTH YTD YEAR YEAR YEAR YEAR 5/13/83
-----------------------------------------------------------------------------------------------------
UNIT VALUES 10.96074761 10.93366872 9.62877826 10.12422612 10.12422612 7.04550309 5.32609153 2.59642342 1.42311131
ANNUALIZE RETURNS 0.25% 13.83% 8.26% 8.26% 15.86% 15.52% 15.48% 13.94%
CUMULATIVE RETURNS 0.25% 13.83% 8.26% 8.26% 55.57% 105.79% 322.15% 670.20%
SURRENDER CHARGES 5.00% 5.00% 5.00% 5.00% 3.00% 1.00% 0.00% 0.00%
ACCOUNT CHARGES (DOLLARS) 0.6 0.6 0.6 0.6 1.8 3 6 9.6
ANNUALIZE RETURNS W/CHARGES -4.81% 8.77% 3.20% 3.20% 15.06% 15.37% 15.47% 13.93%
CUMULATIVE RETURNS W/CHARGES -4.81% 8.77% 3.20% 3.20% 52.39% 104.49% 321.55% 669.24%
TOTAL NUMBER OF YEARS 15.64
DS HYP DS PRU JENNISON
F46 1.0000
REPORT AS OF 12/31/1998
ONE THREE ONE THREE FIVE TEN INCEPTION
MONTH MONTH YTD YEAR YEAR YEAR YEAR 5/1/95
-----------------------------------------------------------------------------------------------------
UNIT VALUES 13.43304181 11.98424596 10.40298049 9.86997541 9.86997541 6.76472415 N/A N/A 5.47343724
ANNUALIZE RETURNS 12.09% 29.13% 36.10% 36.10% 25.67% N/A N/A 27.71%
CUMULATIVE RETURNS 12.09% 29.13% 36.10% 36.10% 98.57% N/A N/A 145.42%
SURRENDER CHARGES 5.00% 5.00% 5.00% 5.00% 3.00% 1.00% 0.00% 2.00%
ACCOUNT CHARGES (DOLLARS) 0.6 0.6 0.6 0.6 1.8 3 6 2.4
ANNUALIZE RETURNS W/CHARGES 7.03% 24.07% 31.04% 31.04% 24.99% N/A N/A 27.39%
CUMULATIVE RETURNS W/CHARGES 7.03% 24.07% 31.04% 31.04% 95.39% N/A N/A 143.18%
TOTAL NUMBER OF YEARS 3.67
DS HYP DS GLOBAL
F47 1.0000
REPORT AS OF 12/31/1998
ONE THREE ONE THREE FIVE TEN INCEPTION
MONTH MONTH YTD YEAR YEAR YEAR YEAR 9/19/88
--------------------------------------------------------------------------------------------------------
UNIT VALUES 11.08243441 10.32827954 9.0946811 8.94783879 8.94783879 7.24641743 6.70660561 4.42349468 4.08606601
ANNUALIZE RETURNS 7.30% 21.86% 23.86% 23.86% 15.20% 10.56% 9.61% 10.18%
CUMULATIVE RETURNS 7.30% 21.86% 23.86% 23.86% 52.94% 65.25% 150.54% 171.23%
SURRENDER CHARGES 5.00% 5.00% 5.00% 5.00% 3.00% 1.00% 0.00% 0.00%
ACCOUNT CHARGES (DOLLARS) 0.6 0.6 0.6 0.6 1.8 3 6 6.6
ANNUALIZE RETURNS W/CHARGES 2.24% 16.80% 18.80% 18.80% 14.40% 10.39% 9.59% 10.16%
CUMULATIVE RETURNS W/CHARGES 2.24% 16.80% 18.80% 18.80% 49.76% 63.95% 149.94% 170.57%
TOTAL NUMBER OF YEARS 10.28
DS HYP DS STOCK INDEX
F48 1.0000
REPORT AS OF 12/31/1998
ONE THREE ONE THREE FIVE TEN INCEPTION
MONTH MONTH YTD YEAR YEAR YEAR YEAR 10/19/87
--------------------------------------------------------------------------------------------------------
UNIT VALUES 13.08801713 12.37482082 10.80551184 10.29252496 10.29252496 6.38301499 4.70303298 2.57053257 2.09927076
ANNUALIZE RETURNS 5.76% 21.12% 27.16% 27.16% 27.01% 22.70% 17.66% 17.74%
CUMULATIVE RETURNS 5.76% 21.12% 27.16% 27.16% 105.04% 178.29% 409.16% 523.46%
SURRENDER CHARGES 5.00% 5.00% 5.00% 5.00% 3.00% 1.00% 0.00% 0.00%
ACCOUNT CHARGES (DOLLARS) 0.6 0.6 0.6 0.6 1.8 3 6 7.2
ANNUALIZE RETURNS W/CHARGES 0.70% 16.06% 22.10% 22.10% 26.35% 22.59% 17.65% 17.72%
CUMULATIVE RETURNS W/CHARGES 0.70% 16.06% 22.10% 22.10% 101.86% 176.99% 408.56% 522.74%
TOTAL NUMBER OF YEARS 11.2
DS HYP DS HIGH YIELD BOND
F49 1.0000
REPORT AS OF 12/31/1998
ONE THREE ONE THREE FIVE TEN INCEPTION
MONTH MONTH YTD YEAR YEAR YEAR YEAR 2/23/87
--------------------------------------------------------------------------------------------------------
UNIT VALUES 10.02417348 10.06522977 9.7993395 10.37021816 10.37021816 8.348381 7.44630871 4.64587472 4.39795641
ANNUALIZE RETURNS -0.41% 2.29% -3.34% -3.34% 6.28% 6.12% 7.99% 7.19%
CUMULATIVE RETURNS -0.41% 2.29% -3.34% -3.34% 20.07% 34.62% 115.77% 127.93%
SURRENDER CHARGES 5.00% 5.00% 5.00% 5.00% 3.00% 1.00% 0.00% 0.00%
ACCOUNT CHARGES (DOLLARS) 0.6 0.6 0.6 0.6 1.8 3 6 7.2
ANNUALIZE RETURNS W/CHARGES -5.47% -2.77% -8.40% -8.40% 5.33% 5.92% 7.96% 7.16%
CUMULATIVE RETURNS W/CHARGES -5.47% -2.77% -8.40% -8.40% 16.89% 33.32% 115.17% 127.21%
TOTAL NUMBER OF YEARS 11.86
DS HYP DS EQUITY INCOME
F50 1.0000
REPORT AS OF 12/31/1998
ONE THREE ONE THREE FIVE TEN INCEPTION
MONTH MONTH YTD YEAR YEAR YEAR YEAR 2/19/88
--------------------------------------------------------------------------------------------------------
UNIT VALUES 10.13115704 10.37332714 9.36050959 10.48377205 10.48377205 6.56503664 5.42461677 2.81170755 2.54813628
ANNUALIZE RETURNS -2.33% 8.23% -3.36% -3.36% 15.54% 13.30% 13.67% 13.54%
CUMULATIVE RETURNS -2.33% 8.23% -3.36% -3.36% 54.32% 86.76% 260.32% 297.59%
SURRENDER CHARGES 5.00% 5.00% 5.00% 5.00% 3.00% 1.00% 0.00% 0.00%
ACCOUNT CHARGES (DOLLARS) 0.6 0.6 0.6 0.6 1.8 3 6 6.6
ANNUALIZE RETURNS W/CHARGES -7.39% 3.17% -8.42% -8.42% 14.75% 13.14% 13.65% 13.52%
CUMULATIVE RETURNS W/CHARGES -7.39% 3.17% -8.42% -8.42% 51.14% 85.46% 259.72% 296.93%
TOTAL NUMBER OF YEARS 10.87
DS HYP DS GOVERNMENT INCOME
F51 1.0000
REPORT AS OF 12/31/1998
ONE THREE ONE THREE FIVE TEN INCEPTION
MONTH MONTH YTD YEAR YEAR YEAR YEAR 5/1/89
--------------------------------------------------------------------------------------------------------
UNIT VALUES 11.09824064 11.06923014 11.16126544 10.27198283 10.27198283 9.41096484 8.47259126 N/A 5.40699008
ANNUALIZE RETURNS 0.26% -0.56% 8.04% 8.04% 5.65% 5.54% N/A 7.72%
CUMULATIVE RETURNS 0.26% -0.56% 8.04% 8.04% 17.93% 30.99% N/A 105.26%
SURRENDER CHARGES 5.00% 5.00% 5.00% 5.00% 3.00% 1.00% 0.00% 0.00%
ACCOUNT CHARGES (DOLLARS) 0.6 0.6 0.6 0.6 1.8 3 6 6
ANNUALIZE RETURNS W/CHARGES -4.80% -5.62% 2.98% 2.98% 4.69% 5.33% N/A 7.68%
CUMULATIVE RETURNS W/CHARGES -4.80% -5.62% 2.98% 2.98% 14.75% 29.69% N/A 104.66%
TOTAL NUMBER OF YEARS 9.67
DS HYP CONSERVATIVE BALANCED
F52 1.0000
REPORT AS OF 12/31/1998
ONE THREE ONE THREE FIVE TEN INCEPTION
MONTH MONTH YTD YEAR YEAR YEAR YEAR 5/13/83
--------------------------------------------------------------------------------------------------------
UNIT VALUES 11.09970239 10.88690854 10.41711011 10.03328859 10.03328859 7.97467498 7.00439913 4.18368554 2.56559147
ANNUALIZE RETURNS 1.95% 6.55% 10.63% 10.63% 11.64% 9.64% 10.24% 9.81%
CUMULATIVE RETURNS 1.95% 6.55% 10.63% 10.63% 39.19% 58.47% 165.31% 332.64%
SURRENDER CHARGES 5.00% 5.00% 5.00% 5.00% 3.00% 1.00% 0.00% 0.00%
ACCOUNT CHARGES (DOLLARS) 0.6 0.6 0.6 0.6 1.8 3 6 9.6
ANNUALIZE RETURNS W/CHARGES -3.11% 1.49% 5.57% 5.57% 10.79% 9.46% 10.22% 9.80%
CUMULATIVE RETURNS W/CHARGES -3.11% 1.49% 5.57% 5.57% 36.01% 57.17% 164.71% 331.68%
TOTAL NUMBER OF YEARS 15.64
DS HYP DS FLEXIBLE MANAGED
F53 1.0000
REPORT AS OF 12/31/1998
ONE THREE ONE THREE FIVE TEN INCEPTION
MONTH MONTH YTD YEAR YEAR YEAR YEAR 5/13/83
--------------------------------------------------------------------------------------------------------
UNIT VALUES 10.90413396 10.71824889 9.94455834 9.99183978 9.99183978 7.6356925 6.47964831 3.51784661 2.15705884
ANNUALIZE RETURNS 1.73% 9.65% 9.13% 9.13% 12.60% 10.96% 11.97% 10.91%
CUMULATIVE RETURNS 1.73% 9.65% 9.13% 9.13% 42.80% 68.28% 209.97% 405.51%
SURRENDER CHARGES 5.00% 5.00% 5.00% 5.00% 3.00% 1.00% 0.00% 0.00%
ACCOUNT CHARGES (DOLLARS) 0.6 0.6 0.6 0.6 1.8 3 6 9.6
ANNUALIZE RETURNS W/CHARGES -3.33% 4.59% 4.07% 4.07% 11.76% 10.79% 11.95% 10.90%
CUMULATIVE RETURNS W/CHARGES -3.33% 4.59% 4.07% 4.07% 39.62% 66.98% 209.37% 404.55%
TOTAL NUMBER OF YEARS 15.64
DS HYP DS INT'L STOCK-T.ROWE
F54 1.0000
REPORT AS OF 12/31/1998
ONE THREE ONE THREE FIVE TEN INCEPTION
MONTH MONTH YTD YEAR YEAR YEAR YEAR 3/31/94
--------------------------------------------------------------------------------------------------------
UNIT VALUES 10.23527303 9.91846193 8.68360556 8.92259786 8.92259786 7.73667997 N/A N/A 6.95591551
ANNUALIZE RETURNS 3.19% 17.87% 14.71% 14.71% 9.77% N/A N/A 8.46%
CUMULATIVE RETURNS 3.19% 17.87% 14.71% 14.71% 32.30% N/A N/A 47.14%
SURRENDER CHARGES 5.00% 5.00% 5.00% 5.00% 3.00% 1.00% 0.00% 1.00%
ACCOUNT CHARGES (DOLLARS) 0.6 0.6 0.6 0.6 1.8 3 6 3
ANNUALIZE RETURNS W/CHARGES -1.87% 12.81% 9.65% 9.65% 8.88% N/A N/A 8.26%
CUMULATIVE RETURNS W/CHARGES -1.87% 12.81% 9.65% 9.65% 29.12% N/A N/A 45.84%
TOTAL NUMBER OF YEARS 4.75
DS HYP EQUITY INCOME-T.ROWE
F55 1.0000
REPORT AS OF 12/31/1998
ONE THREE ONE THREE FIVE TEN INCEPTION
MONTH MONTH YTD YEAR YEAR YEAR YEAR 3/31/94
--------------------------------------------------------------------------------------------------------
UNIT VALUES 11.37789512 11.31177508 10.2829904 10.53517182 10.53517182 7.00304533 N/A N/A 4.93689902
ANNUALIZE RETURNS 0.58% 10.65% 8.00% 8.00% 17.54% N/A N/A 19.19%
CUMULATIVE RETURNS 0.58% 10.65% 8.00% 8.00% 62.47% N/A N/A 130.47%
SURRENDER CHARGES 5.00% 5.00% 5.00% 5.00% 3.00% 1.00% 0.00% 1.00%
ACCOUNT CHARGES (DOLLARS) 0.6 0.6 0.6 0.6 1.8 3 6 3
ANNUALIZE RETURNS W/CHARGES -4.48% 5.59% 2.94% 2.94% 16.77% N/A N/A 19.05%
CUMULATIVE RETURNS W/CHARGES -4.48% 5.59% 2.94% 2.94% 59.29% N/A N/A 129.17%
TOTAL NUMBER OF YEARS 4.75
DS HYP OCC ACCUM TRUST MANAGE
F56 1.0000
REPORT AS OF 12/31/1998
ONE THREE ONE THREE FIVE TEN INCEPTION
MONTH MONTH YTD YEAR YEAR YEAR YEAR 8/1/88
--------------------------------------------------------------------------------------------------------
UNIT VALUES 10.74884693 10.78097462 9.67799646 10.13452015 10.13452015 6.80818214 4.64394719 1.99050508 1.91463535
ANNUALIZE RETURNS -0.30% 11.06% 6.06% 6.06% 16.43% 18.26% 18.36% 18.00%
CUMULATIVE RETURNS -0.30% 11.06% 6.06% 6.06% 57.88% 131.46% 440.01% 461.40%
SURRENDER CHARGES 5.00% 5.00% 5.00% 5.00% 3.00% 1.00% 0.00% 0.00%
ACCOUNT CHARGES (DOLLARS) 0.6 0.6 0.6 0.6 1.8 3 6 6.6
ANNUALIZE RETURNS W/CHARGES -5.36% 6.00% 1.00% 1.00% 15.64% 18.13% 18.35% 17.99%
CUMULATIVE RETURNS W/CHARGES -5.36% 6.00% 1.00% 1.00% 54.70% 130.16% 439.41% 460.74%
TOTAL NUMBER OF YEARS 10.42
DS HYP OCC ACCUM TRUST SM CAP
F57 1.0000
REPORT AS OF 12/31/1998
ONE THREE ONE THREE FIVE TEN INCEPTION
MONTH MONTH YTD YEAR YEAR YEAR YEAR 8/1/88
--------------------------------------------------------------------------------------------------------
UNIT VALUES 9.19229670 9.13708657 8.29847045 10.20529645 10.20529645 7.19089092 6.45700556 2.93420702 2.89161086
ANNUALIZE RETURNS 0.60% 10.77% -9.93% -9.93% 8.52% 7.32% 12.09% 11.74%
CUMULATIVE RETURNS 0.60% 10.77% -9.93% -9.93% 27.83% 42.36% 213.28% 217.90%
SURRENDER CHARGES 5.00% 5.00% 5.00% 5.00% 3.00% 1.00% 0.00% 0.00%
ACCOUNT CHARGES (DOLLARS) 0.6 0.6 0.6 0.6 1.8 3 6 6.6
ANNUALIZE RETURNS W/CHARGES -4.46% 5.71% -14.99% -14.99% 7.61% 7.12% 12.07% 11.71%
CUMULATIVE RETURNS W/CHARGES -4.46% 5.71% -14.99% -14.99% 24.65% 41.06% 212.68% 217.24%
TOTAL NUMBER OF YEARS 10.42
DS HYP DS VI GROWTH & INCOME
F58 1.0000
REPORT AS OF 12/31/1998
ONE THREE ONE THREE FIVE TEN INCEPTION
MONTH MONTH YTD YEAR YEAR YEAR YEAR 5/2/94
--------------------------------------------------------------------------------------------------------
UNIT VALUES 12.37363102 11.34457667 9.80861812 9.78776022 9.78776022 6.65759708 N/A N/A 5.05356612
ANNUALIZE RETURNS 9.07% 26.15% 26.42% 26.42% 22.93% N/A N/A 21.14%
CUMULATIVE RETURNS 9.07% 26.15% 26.42% 26.42% 85.86% N/A N/A 144.85%
SURRENDER CHARGES 5.00% 5.00% 5.00% 5.00% 3.00% 1.00% 0.00% 1.00%
ACCOUNT CHARGES (DOLLARS) 0.6 0.6 0.6 0.6 1.8 3 6 3
ANNUALIZE RETURNS W/CHARGES 4.01% 21.09% 21.36% 21.36% 22.22% N/A N/A 21.01%
CUMULATIVE RETURNS W/CHARGES 4.01% 21.09% 21.36% 21.36% 82.68% N/A N/A 143.55%
TOTAL NUMBER OF YEARS 4.66
DS HYP DS VI VALUE - AIM
F59 1.0000
REPORT AS OF 12/31/1998
ONE THREE ONE THREE FIVE TEN INCEPTION
MONTH MONTH YTD YEAR YEAR YEAR YEAR 5/5/93
--------------------------------------------------------------------------------------------------------
UNIT VALUES 12.96976464 11.69209116 10.23591687 9.89265716 9.89265716 7.09460554 5.10575988 N/A 4.47602576
ANNUALIZE RETURNS 10.93% 26.71% 31.10% 31.10% 22.25% 20.48% N/A 20.68%
CUMULATIVE RETURNS 10.93% 26.71% 31.10% 31.10% 82.81% 154.02% N/A 189.76%
SURRENDER CHARGES 5.00% 5.00% 5.00% 5.00% 3.00% 1.00% 0.00% 0.00%
ACCOUNT CHARGES (DOLLARS) 0.6 0.6 0.6 0.6 1.8 3 6 3.6
ANNUALIZE RETURNS W/CHARGES 5.87% 21.65% 26.04% 26.04% 21.54% 20.36% N/A 20.65%
CUMULATIVE RETURNS W/CHARGES 5.87% 21.65% 26.04% 26.04% 79.63% 152.72% N/A 189.40%
TOTAL NUMBER OF YEARS 5.66
DS HYP DS ASPEN GROWTH-JANUS
F60 1.0000
REPORT AS OF 12/31/1998
ONE THREE ONE THREE FIVE TEN INCEPTION
MONTH MONTH YTD YEAR YEAR YEAR YEAR 9/13/93
--------------------------------------------------------------------------------------------------------
UNIT VALUES 13.33213058 11.61050992 10.46630048 9.92566549 9.92566549 7.02880458 5.35978953 N/A 5.19413063
ANNUALIZE RETURNS 14.83% 27.38% 34.32% 34.32% 23.76% 19.98% N/A 19.46%
CUMULATIVE RETURNS 14.83% 27.38% 34.32% 34.32% 89.68% 148.74% N/A 156.68%
SURRENDER CHARGES 5.00% 5.00% 5.00% 5.00% 3.00% 1.00% 0.00% 0.00%
ACCOUNT CHARGES (DOLLARS) 0.6 0.6 0.6 0.6 1.8 3 6 3.6
ANNUALIZE RETURNS W/CHARGES 9.77% 22.32% 29.26% 29.26% 23.07% 19.85% N/A 19.43%
CUMULATIVE RETURNS W/CHARGES 9.77% 22.32% 29.26% 29.26% 86.50% 147.44% N/A 156.32%
TOTAL NUMBER OF YEARS 5.3
DS HYP DS ASPEN INT'L GROWTH
F61 1.0000
REPORT AS OF 12/31/1998
ONE THREE ONE THREE FIVE TEN INCEPTION
MONTH MONTH YTD YEAR YEAR YEAR YEAR 5/2/94
--------------------------------------------------------------------------------------------------------
UNIT VALUES 10.96373018 10.44028288 9.42489045 9.44399694 9.44399694 6.11955541 N/A N/A 5.19792559
ANNUALIZE RETURNS 5.01% 16.33% 16.09% 16.09% 21.43% N/A N/A 17.34%
CUMULATIVE RETURNS 5.01% 16.33% 16.09% 16.09% 79.16% N/A N/A 110.93%
SURRENDER CHARGES 5.00% 5.00% 5.00% 5.00% 3.00% 1.00% 0.00% 1.00%
ACCOUNT CHARGES (DOLLARS) 0.6 0.6 0.6 0.6 1.8 3 6 3
ANNUALIZE RETURNS W/CHARGES -0.05% 11.27% 11.03% 11.03% 20.71% N/A N/A 17.18%
CUMULATIVE RETURNS W/CHARGES -0.05% 11.27% 11.03% 11.03% 75.98% N/A N/A 109.63%
TOTAL NUMBER OF YEARS 4.66
DS HYP DS RESEARCH SERIES-MFS
F62 1.0000
REPORT AS OF 12/31/1998
ONE THREE ONE THREE FIVE TEN INCEPTION
MONTH MONTH YTD YEAR YEAR YEAR YEAR 7/24/95
--------------------------------------------------------------------------------------------------------
UNIT VALUES 11.82382701 11.04583039 9.74122669 9.67444144 9.67444144 6.80174638 N/A N/A 6.17129589
ANNUALIZE RETURNS 7.04% 21.38% 22.22% 22.22% 20.22% N/A N/A 20.80%
CUMULATIVE RETURNS 7.04% 21.38% 22.22% 22.22% 73.84% N/A N/A 91.59%
SURRENDER CHARGES 5.00% 5.00% 5.00% 5.00% 3.00% 1.00% 0.00% 2.00%
ACCOUNT CHARGES (DOLLARS) 0.6 0.6 0.6 0.6 1.8 3 6 2.4
ANNUALIZE RETURNS W/CHARGES 1.98% 16.32% 17.16% 17.16% 19.48% N/A N/A 20.39%
CUMULATIVE RETURNS W/CHARGES 1.98% 16.32% 17.16% 17.16% 70.66% N/A N/A 89.35%
TOTAL NUMBER OF YEARS 3.44
DS HYP EMERGING GROWTH SERIES
F63 1.0000
REPORT AS OF 12/31/1998
ONE THREE ONE THREE FIVE TEN INCEPTION
MONTH MONTH YTD YEAR YEAR YEAR YEAR 7/24/95
--------------------------------------------------------------------------------------------------------
UNIT VALUES 13.22915705 11.70574052 10.44029958 9.95784439 9.95784439 7.16980664 N/A N/A 6.12857403
ANNUALIZE RETURNS 13.01% 26.71% 32.85% 32.85% 22.63% N/A N/A 25.06%
CUMULATIVE RETURNS 13.01% 26.71% 32.85% 32.85% 84.51% N/A N/A 115.86%
SURRENDER CHARGES 5.00% 5.00% 5.00% 5.00% 3.00% 1.00% 0.00% 2.00%
ACCOUNT CHARGES (DOLLARS) 0.6 0.6 0.6 0.6 1.8 3 6 2.4
ANNUALIZE RETURNS W/CHARGES 7.95% 21.65% 27.79% 27.79% 21.92% N/A N/A 24.68%
CUMULATIVE RETURNS W/CHARGES 7.95% 21.65% 27.79% 27.79% 81.33% N/A N/A 113.62%
TOTAL NUMBER OF YEARS 3.44
DS HYP POST-VENTURE CAPITAL
F64 1.0000
REPORT AS OF 12/31/1998
ONE THREE ONE THREE FIVE TEN INCEPTION
MONTH MONTH YTD YEAR YEAR YEAR YEAR 9/30/96
--------------------------------------------------------------------------------------------------------
UNIT VALUES 10.64291786 9.73043531 8.6869582 10.08039626 10.08039626 N/A N/A N/A 9.10026992
ANNUALIZE RETURNS 9.38% 22.52% 5.58% 5.58% N/A N/A N/A 7.20%
CUMULATIVE RETURNS 9.38% 22.52% 5.58% 5.58% N/A N/A N/A 16.95%
SURRENDER CHARGES 5.00% 5.00% 5.00% 5.00% 3.00% 1.00% 0.00% 3.00%
ACCOUNT CHARGES (DOLLARS) 0.6 0.6 0.6 0.6 1.8 3 6 1.8
ANNUALIZE RETURNS W/CHARGES 4.32% 17.46% 0.52% 0.52% N/A N/A N/A 5.90%
CUMULATIVE RETURNS W/CHARGES 4.32% 17.46% 0.52% 0.52% N/A N/A N/A 13.77%
TOTAL NUMBER OF YEARS 2.25
</TABLE>
