AS FILED WITH THE SEC ON APRIL 24, 1998.
REGISTRATION NO. 33-25434
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------
FORM N-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [_]
PRE-EFFECTIVE AMENDMENT NO. [_]
POST-EFFECTIVE AMENDMENT NO. 13 [X]
AND
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [_]
AMENDMENT NO. 29 [X]
(Check appropriate box or boxes)
----------
THE PRUDENTIAL INDIVIDUAL VARIABLE
CONTRACT ACCOUNT
(Exact Name of Registrant)
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
(Name of Depositor)
751 BROAD STREET
NEWARK, NEW JERSEY 07102-3777
(888) PRU-2888
(Address and telephone number of principal executive offices)
----------
THOMAS C. CASTANO
ASSISTANT SECRETARY
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
751 BROAD STREET
NEWARK, NEW JERSEY 07102-3777
(Name and address of agent for service)
Copies to:
CHRISTOPHER E. PALMER LEE D. AUGSBURGER
SHEA & GARDNER ASSISTANT GENERAL COUNSEL
1800 MASSACHUSETTS AVENUE, N.W. THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
WASHINGTON, D.C. 20036 751 BROAD STREET
NEWARK, NEW JERSEY 07102-3777
----------
It is proposed that this filing will become effective (check appropriate space)
[_] immediately upon filing pursuant to paragraph (b) of Rule 485
[X] on May 1, 1998 pursuant to paragraph (b) of Rule 485
-----------
(date)
[_] 60 days after filing pursuant to paragraph (a)(1) of Rule 485
[_] on pursuant to paragraph (a)(1) of Rule 485
------
(date)
If appropriate, check the following box:
[_] this post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
Title of Securities Being Registered: Interests in Individual Variable Annuity
Contracts
================================================================================
<PAGE>
CROSS REFERENCE SHEET
(AS REQUIRED BY RULE 495(a) UNDER THE 1933 ACT)
<TABLE>
<CAPTION>
N-4 ITEM NUMBER AND CAPTION LOCATION
- --------------------------- --------
PART A
<S> <C>
1. Cover Page....................................... Cover Page
2. Definitions...................................... Definitions of Special Terms Used in This Prospectus
3. Synopsis or Highlights........................... Brief Description of the Contract
4. Condensed Financial Information.................. Accumulation Unit Values
5. General Description of Registrant,
Depositor, and Portfolio Companies............... General Information About The Prudential, The
Prudential Individual Variable Contract Account, and
The Variable Investment Options Available Under the
Contract; The Fixed-Rate Option
6. Deductions and Expenses.......................... Brief Description of the Contract; Charges, Fees, and
Deductions
7. General Description of Variable Annuity
Contracts........................................ Part A: Brief Description of the Contract; Allocation
of Purchase Payments; Transfers; Death Benefit; The
Fixed-Rate Option; Voting Rights; Ownership of the
Contract; State Regulation
Part B: Participation in Divisible Surplus
8. Annuity Period................................... Brief Description of the Contract; Sales Charges on
Withdrawals; Effecting an Annuity
9. Death Benefit.................................... Death Benefit; Effecting an Annuity
10. Purchases and Contract Value..................... Brief Description of the Contract; The Prudential
Insurance Company of America; Requirements for
Issuance of a Contract; Valuation of a Contract
Owner's Contract Fund
11. Redemptions...................................... Brief Description of the Contract; Short-Term
Cancellation Right or "Free Look"; Withdrawals;
Charges, Fees, and Deductions; Effecting an Annuity
12. Taxes............................................ Premium Taxes; Federal Tax Status
13. Legal Proceedings................................ Litigation
14. Table of Contents of the Statement of
Additional Information........................... Additional Information
PART B
15. Cover Page....................................... Cover Page
16. Table of Contents................................ Contents
17. General Information and History.................. Not Applicable
18. Services......................................... Experts
19. Purchase of Securities Being Offered ............ Part A: Brief Description of the Contract; Charges,
Fees, and Deductions; Sale of the Contract and Sales
Commissions
20. Underwriters..................................... Part A: Sale of the Contract and Sales Commissions
Part B: Principal Underwriters
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
N-4 ITEM NUMBER AND CAPTION LOCATION
- --------------------------- --------
<S> <C>
21. Calculation of Performance Data Financial Statements of The Prudential Individual
Variable Contract Account
22. Annuity Payments................................. Part A: Valuation of a Contract Owner's Contract
Fund; Effecting an Annuity
23. Financial Statements............................. Financial Statements of The Prudential Individual
Variable Contract Account; Consolidated Financial
Statements of The Prudential Insurance Company of
America
</TABLE>
PART C
Information required to be included in Part C is set forth under the appropriate
Item, so numbered in Part C to this Registration Statement.
ii
<PAGE>
[LOGO] DISCOVERY(R)
PLUS
PROSPECTUS
MAY 1, 1998
THE PRUDENTIAL
INDIVIDUAL VARIABLE CONTRACT ACCOUNT
VARIABLE ANNUITY CONTRACTS
DISCOVERY(R) PLUS
This prospectus describes the DISCOVERY(R) Plus Contract* (the "Contract"), an
individual variable annuity contract issued by The Prudential Insurance Company
of America ("Prudential").
The Contract is purchased by making a single payment of $10,000 or more. This
contract is no longer offered for sale in New York. Effective March 6, 1998,
this contract is no longer offered for sale in Oregon to retirement arrangements
entitled to favorable federal income tax treatment. Subsequent payments of
$1,000 or more ($10,000 or more when issued in New York) are also accepted.
Subsequent payments are not allowed in Oregon. The purchase payments will be
allocated as the Contract owner directs in one or more of the following ways.
They may be allocated to one or more of the subaccounts of The Prudential
Individual Variable Contract Account (the "Account"), to a fixed-rate option or
to a real estate option funded by another separate account of Prudential.
The assets of each subaccount of the Account will be invested in a corresponding
portfolio of The Prudential Series Fund, Inc. (the "Series Fund"). The attached
prospectus for the Series Fund and its statement of additional information
describe the investment objectives of and risks of investing in the thirteen
currently available portfolios of the Series Fund: the MONEY MARKET PORTFOLIO,
the DIVERSIFIED BOND PORTFOLIO, the GOVERNMENT INCOME PORTFOLIO, the
CONSERVATIVE BALANCED PORTFOLIO, the FLEXIBLE MANAGED PORTFOLIO, the HIGH YIELD
BOND PORTFOLIO, the STOCK INDEX PORTFOLIO, the EQUITY INCOME PORTFOLIO, the
EQUITY PORTFOLIO, the PRUDENTIAL JENNISON PORTFOLIO, the SMALL CAPITALIZATION
STOCK PORTFOLIO, the GLOBAL PORTFOLIO, and the NATURAL RESOURCES PORTFOLIO.
Other subaccounts and portfolios may be added in the future. Any portion of a
purchase payment allocated to the FIXED-RATE OPTION is credited with interest
daily at a rate periodically declared by Prudential in its sole discretion, but
not less than 3.1%. If the real estate investment option is selected, the
requested portion of a purchase payment will be allocated to PRUDENTIAL VARIABLE
CONTRACT REAL PROPERTY ACCOUNT (the "Real Property Account"), a separate account
of Prudential which, through a partnership, invests primarily in
income-producing real property. The Real Property Account is described in a
prospectus that is attached to this one. This prospectus describes the Contract
generally and The Prudential Individual Variable Contract Account.
On the annuity date, the amount credited under the Contract will be applied to
effect a fixed-dollar annuity at rates no less favorable than those set forth in
the Contract and guaranteed by Prudential. With the consent of Prudential, the
annuity date can be changed. Upon annuitization, the Contract owner's
participation in the investment options ceases. Prior to that annuity date, the
Contract owner may withdraw in whole or in part the cash surrender value of the
Contract. Federal tax law, however, imposes restrictions on withdrawals from
Section 403(b) annuities. The value allocated to the subaccounts and the Real
Property Account will vary with the investment performance of those accounts,
and the value allocated to the fixed-rate option will increase as interest is
credited. Withdrawals may be subject to tax and to a contingent deferred sales
charge and, in certain circumstances, a tax penalty equal to 10% of that portion
of the amount withdrawn which is includible in income.
----------
This prospectus provides information a prospective investor should know before
investing. Additional information about the Contract has been filed with the
Securities and Exchange Commission in a statement of additional information,
dated May 1, 1998, which information is incorporated herein by reference, and is
available without charge upon written request to The Prudential Insurance
Company of America, 751 Broad Street, Newark, New Jersey 07102-3777, or by
telephoning (888) PRU-2888.
The Contents of the statement of additional information appear on page 29 of
this prospectus.
----------
PLEASE READ THIS PROSPECTUS AND KEEP IT FOR FUTURE REFERENCE. IT IS ATTACHED TO
A CURRENT PROSPECTUS FOR THE PRUDENTIAL SERIES FUND, INC. AND A CURRENT
PROSPECTUS FOR THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY ACCOUNT.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA PRUDENTIAL ANNUITY SERVICE CENTER
751 Broad Street P.O. Box 14205
Newark, New Jersey 07102-3777 New Brunswick, NJ 08906-4205
Telephone: (888) PRU-2888 Telephone: (888) PRU-2888
*DISCOVERY is a registered mark of Prudential.
PIVC-1 Ed 5-98, Catalog #646956H
<PAGE>
PROSPECTUS CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
DEFINITIONS OF SPECIAL TERMS USED IN THIS PROSPECTUS...................... 1
BRIEF DESCRIPTION OF THE CONTRACT......................................... 2
GENERAL INFORMATION ABOUT THE PRUDENTIAL, THE PRUDENTIAL INDIVIDUAL
VARIABLE CONTRACT ACCOUNT, AND THE VARIABLE INVESTMENT
OPTIONS AVAILABLE UNDER THE CONTRACT.................................. 11
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA....................... 11
THE PRUDENTIAL INDIVIDUAL VARIABLE CONTRACT ACCOUNT............... 11
THE PRUDENTIAL SERIES FUND, INC................................... 11
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY ACCOUNT............ 12
DETAILED INFORMATION ABOUT THE CONTRACT................................... 13
REQUIREMENTS FOR ISSUANCE OF A CONTRACT........................... 13
SHORT-TERM CANCELLATION RIGHT OR "FREE LOOK" ..................... 13
ALLOCATION OF PURCHASE PAYMENTS................................... 13
ADDITIONAL AMOUNTS................................................ 14
TRANSFERS......................................................... 14
WITHDRAWALS....................................................... 15
DEATH BENEFIT..................................................... 15
VALUATION OF A CONTRACT OWNER'S CONTRACT FUND..................... 16
CHARGES, FEES, AND DEDUCTIONS............................................. 16
1. PREMIUM TAXES.................................................. 16
2. SALES CHARGES ON WITHDRAWALS................................... 17
3. RECAPTURE OF ADDITIONAL AMOUNTS................................ 18
4. ADMINISTRATIVE CHARGE.......................................... 18
5. CHARGE FOR ASSUMING MORTALITY AND EXPENSE RISKS................ 18
6. EXPENSES INCURRED BY THE SERIES FUND........................... 18
THE FIXED-RATE OPTION..................................................... 19
FEDERAL TAX STATUS........................................................ 19
TAXES PAYABLE BY CONTRACT OWNERS.................................. 20
CONTRACTS USED IN CONNECTION WITH TAX FAVORED PLANS............... 21
PLANS FOR SELF-EMPLOYED INDIVIDUALS............................... 21
IRAS.............................................................. 21
SEPS.............................................................. 21
TDA'S............................................................. 22
ELIGIBLE DEFERRED COMPENSATION PLANS OF STATE OR LOCAL
GOVERNMENTS AND TAX EXEMPT ORGANIZATIONS........................ 22
QUALIFIED PENSION AND PROFIT SHARING PLANS........................ 22
MINIMUM DISTRIBUTION OPTION....................................... 23
WITHHOLDING....................................................... 23
TAXES ON PRUDENTIAL............................................... 23
ERISA DISCLOSURE.................................................. 23
ADDITIONAL ERISA REQUIREMENTS..................................... 24
EFFECTING AN ANNUITY...................................................... 24
1. LIFE ANNUITY WITH 120 PAYMENTS CERTAIN......................... 25
2. INTEREST PAYMENT OPTION........................................ 25
3. OTHER ANNUITY OPTIONS.......................................... 25
4. OTHER OPTIONS.................................................. 25
LEGAL CONSIDERATIONS RELATING TO SEX-DISTINCT ANNUITY PURCHASE
RATES.......................................................... 25
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PAGE
<S> <C>
OTHER INFORMATION......................................................... 25
VOTING RIGHTS..................................................... 25
SALE OF THE CONTRACT AND SALES COMMISSIONS........................ 26
SUBSTITUTION OF SERIES FUND SHARES................................ 26
OWNERSHIP OF THE CONTRACT......................................... 26
PERFORMANCE INFORMATION........................................... 27
REPORTS TO CONTRACT OWNERS........................................ 27
STATE REGULATION.................................................. 27
LITIGATION........................................................ 27
YEAR 2000 COMPLIANCE.............................................. 28
ADDITIONAL INFORMATION............................................ 28
DIRECTORS AND OFFICERS.................................................... 30
</TABLE>
<PAGE>
DEFINITIONS OF SPECIAL TERMS USED IN THIS PROSPECTUS
ACCOUNT--See The Prudential Individual Variable Contract Account (the "Account")
below.
ADDITIONAL AMOUNT--On payments made during the first 3 Contract years, and
thereafter at Prudential's discretion, an additional 1% added to and invested
with the purchase payment. This Additional Amount or "bonus" will be recaptured
by Prudential if the payment is withdrawn within 6 Contract years after it is
made.
AMOUNT CREDITED UNDER THE CONTRACT--See Contract fund below.
ANNUITANT--The person or persons, designated by the Contract owner, upon whose
life or lives monthly annuity payments are based after an annuity is effected.
ANNUITY CONTRACT--A contract designed to provide an annuitant with an income,
which may be a lifetime income, beginning on the annuity date.
ANNUITY DATE--The date, specified in the Contract, when annuity payments are to
begin.
BONUS--See Additional Amount above.
CASH SURRENDER VALUE--The surrender value of the Contract, which equals the
Contract fund less any contingent deferred sales charge, any bonus subject to
recapture, and any administrative charge due upon surrender.
CONTRACT ANNIVERSARY--The same day and month as the Contract date in each later
year.
CONTRACT DATE--The date Prudential received the initial purchase payment and
certain required documentation
CONTRACT FUND--The total value attributable to a specific Contract representing
amounts in all the subaccounts, under the fixed-rate option, and in the Real
Property Account. At times throughout this prospectus, when an alternative
identification may be desirable for complete clarity, or to further describe the
role of the Contract fund, we refer to the Contract fund as "the amount credited
under the Contract." The term should not be confused with The Prudential Series
Fund, Inc. (the "Series Fund") defined below.
CONTRACT OWNER--The person who purchases a DISCOVERY Plus Contract and makes the
purchase payments. The Contract may be owned by joint owners. An owner will
usually also be an annuitant, but need not be. An owner has all rights in the
Contract before the annuity date. Subject to certain limitations and
requirements described in this prospectus, these rights include the right to
make withdrawals or surrender the Contract, to designate and change the
beneficiaries who will receive the proceeds at the death of the annuitant before
the annuity date, to transfer funds among the subaccounts, the fixed-rate
option, and the Real Property Account, and to designate a mode of settlement for
the annuitant on the annuity date
CONTRACT YEAR--A year that starts on the Contract date or on a Contract
anniversary.
FIXED-RATE OPTION--An investment option under which Prudential credits interest
to the amount allocated at a rate periodically declared in advance by Prudential
but not less than 3.1%.
SUBACCOUNT--A division of the Account, the assets of which are invested in
shares of the corresponding portfolio of the Series Fund.
THE PRUDENTIAL INDIVIDUAL VARIABLE CONTRACT ACCOUNT (THE "ACCOUNT")--A separate
account of Prudential registered as a unit investment trust under the Investment
Company Act of 1940.
THE PRUDENTIAL SERIES FUND, INC. (THE "SERIES FUND")--A mutual fund with
separate portfolios, one or more of which may be chosen as an underlying
investment for the Contract.
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY ACCOUNT (THE "REAL PROPERTY
ACCOUNT")--A separate account of Prudential which, through a partnership,
invests primarily in income-producing real property.
VALUATION PERIOD--The period of time from one determination of the value of the
amount invested in a subaccount to the next. Such determinations are made when
the net asset values of the portfolios of the Series Fund are calculated, which
is generally at 4:15 p.m. New York City time on each day during which the New
York Stock Exchange is open.
VARIABLE INVESTMENT OPTIONS--The subaccounts and the Real Property Account.
1
<PAGE>
BRIEF DESCRIPTION OF THE CONTRACT
The Prudential DISCOVERY Plus Contract (the "Contract") provides a way to invest
on a tax-deferred basis in one or more investment options with different
investment objectives and to obtain income protection for later life by
receiving annuity payments commencing on the annuity date. DISCOVERY Plus is a
variable annuity contract. It is called a "variable" contract because the value
of the Contract depends upon the investment results of the investment option[s]
selected. Amounts held under the Contract may be withdrawn, in whole or in part,
prior to the annuity date.
The Contract is purchased by making an initial purchase payment of at least
$10,000. Subsequent payments of at least $1,000 ($10,000 or more when issued in
New York) may also be made. (Effective March 15, 1997, this contract no longer
offered for sale in New York, and effective January 1, 1998, this contract is no
longer offered for sale in Oregon to retirement arrangements entitled to federal
income tax treatment.) Subsequent payments are not allowed in Oregon. The
Prudential Insurance Company of America ("Prudential") allocates the purchase
payment (after deduction of any applicable amount needed to pay taxes
attributable to premiums) in the subaccount[s], The Prudential Variable Contract
Real Property Account (the "Real Property Account") or the fixed-rate option in
accordance with the owner's instructions.
The assets of each subaccount are invested in a corresponding portfolio of The
Prudential Series Fund, Inc. (the "Series Fund"), a series mutual fund to which
Prudential acts as investment advisor. The Series Fund currently has thirteen
portfolios available for investment by Contract owners. The MONEY MARKET
PORTFOLIO is invested in short-term debt obligations similar to those purchased
by money market funds; the DIVERSIFIED BOND PORTFOLIO is invested primarily in
high quality medium-term corporate and government debt securities; the
GOVERNMENT INCOME PORTFOLIO is invested primarily in U.S. Government securities
including intermediate and long-term U.S. Treasury securities and debt
obligations issued by agencies of or instrumentalities established, sponsored or
guaranteed by the U.S. Government; the CONSERVATIVE BALANCED PORTFOLIO is
invested in a mix of money market instruments, fixed income securities, and
common stocks, in proportions believed by the investment manager to be
appropriate for an investor who desires diversification of investment who
prefers a relatively lower risk of loss and a correspondingly reduced chance of
high appreciation; the FLEXIBLE MANAGED PORTFOLIO is invested in a mix of money
market instruments, fixed income securities, and common stocks, in proportions
believed by the investment manager to be appropriate for an investor desiring
diversification of investment who is willing to accept a relatively high level
of loss in an effort to achieve greater appreciation; the HIGH YIELD BOND
PORTFOLIO is invested primarily in high yield fixed income securities of medium
to lower quality, also known as high risk bonds; the STOCK INDEX PORTFOLIO is
invested in common stocks selected to duplicate the price and yield performance
of the Standard & Poor's 500 Composite Stock Price Index; the EQUITY INCOME
PORTFOLIO is invested primarily in common stocks and convertible securities that
provide favorable prospects for investment income returns above those of the
Standard & Poor's 500 Stock Index or the NYSE Composite Index; the EQUITY
PORTFOLIO is invested primarily in common stocks; the PRUDENTIAL JENNISON
PORTFOLIO is invested primarily in equity securities of established companies
with above-average growth prospects; the SMALL CAPITALIZATION STOCK PORTFOLIO is
invested primarily in equity securities of publicly-traded companies with small
market capitalization; the GLOBAL PORTFOLIO is invested primarily in common
stocks and common stock equivalents (such as convertible debt securities) of
foreign and domestic issuers; and the NATURAL RESOURCES PORTFOLIO is invested
primarily in common stocks and convertible securities of natural resource
companies, and in securities (typically debt securities or preferred stock) the
terms of which are related to the market value of a natural resource. Further
information about the Series Fund portfolios can be found under THE PRUDENTIAL
SERIES FUND, INC. on page 11.
The Contract owner also may invest a portion of his or her purchase payments in
the Real Property Account, which, through a partnership, invests primarily in
income-producing real property. If a Contract owner elects to invest in this
real estate investment option, the assets will be maintained in a subaccount of
the Real Property Account related to the Contract that provides the mechanism
and maintains the records whereby various Contract charges are made. The
investment objectives of the Real Property Account and the partnership are
described briefly under THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY ACCOUNT
on page 12.
The value of the Contract will vary to reflect the investment results of the
variable investment options (the subaccounts and the Real Property Account) in
which money is invested and the amount of interest credited on amounts allocated
to the fixed-rate option. The total amount attributable to a Contract allocated
to all the variable investment options and to the fixed-rate option is known as
the "Contract fund". For a discussion of the fixed-rate option, see THE
FIXED-RATE OPTION, page 19.
The Contracts described in this prospectus have a further attractive feature.
During the first 3 Contract years, and in Contract years thereafter at
Prudential's discretion, Prudential will add an Additional Amount, as a bonus,
of 1% to
2
<PAGE>
every purchase payment. Prudential reserves the right to limit its payment of
such Additional Amounts under a particular Contract to $1,000 in each Contract
year. This Additional Amount will be allocated among the subaccounts, the Real
Property Account, and the fixed-rate option in the same proportions as the
purchase payment to which it is added. See ADDITIONAL AMOUNTS, page 14. During
the first 6 Contract years following a purchase payment, the bonus attributable
to any portion of that purchase payment that is withdrawn will be recaptured by
Prudential, unless such withdrawn purchase payment is used to effect an annuity
that is not subject to a sales charge. See SALES CHARGES ON WITHDRAWALS, page 17
and RECAPTURE OF ADDITIONAL AMOUNTS, page 18.
Prudential makes charges under the Contract for the costs of selling and
distributing the Contract, for administering the Contract, and for assuming
mortality and expense risks under the Contract. Moreover, on any Contract
subject to a tax attributable to premiums, Prudential will deduct the tax, as
provided under applicable law, from the purchase payment when received, or from
the Contract fund at the time the annuity is effected. The deduction for taxes
imposed on purchase payments will be lower, or not made at all, if total
purchase payments meet certain minimum amounts. See PREMIUM TAXES, page 16.
Prudential makes a charge against the Series Fund's assets and against the Real
Property Account's assets for providing investment advisory and management
services.
The administrative charge is a daily charge equal to an annual rate of 0.2% of
the assets held in the variable investment options. A maintenance charge of $30
will be deducted on a Contract anniversary or at the time of a full withdrawal
if and only if the amount then credited under the Contract is less than $10,000.
This $30 fee will not be charged if the Contract fund is less than $10,000 as a
result of a withdrawal due to confinement in a nursing home or hospital, or due
to a terminal illness. The mortality and expense risk charge is a daily charge
equal to an annual rate of 1% of the assets held in the variable investment
options. A contingent deferred sales charge may be imposed upon the withdrawal
of purchase payments. The maximum contingent deferred sales charge is 7% of the
purchase payment withdrawn. Further detail about charges may be found under
CHARGES, FEES, AND DEDUCTIONS, page 16.
Subject to restrictions on withdrawals from Section 403(b) annuities ("TDA's")
imposed by federal tax law, the Contract owner may withdraw all or part of the
amount credited under the Contract prior to the annuity date, subject to the
possible sales charge mentioned above and the possible recapture of the 1%
bonus. See WITHDRAWALS, page 15 and TDA'S, page 22. If a full or partial
withdrawal is requested, it may be wholly or partially taxable. Certain
withdrawals may be subject to a federal penalty tax as well as to federal income
tax. See TAXES PAYABLE BY CONTRACT OWNERS, page 20. If a lump sum is requested,
it will be paid within 7 days and deducted from the amount credited under the
Contract. See WITHDRAWALS, page 15. If an annuity option is selected, annuity
payments will be in monthly installments of guaranteed amounts. See EFFECTING AN
ANNUITY, page 24.
In the event that the annuitant dies prior to the annuity date or the surrender
of the Contract for its cash surrender value, Prudential will pay a death
benefit to the stated beneficiary. See DEATH BENEFIT, page 15. In the event that
the owner dies before the entire value of the Contract is distributed, the
remaining value must be distributed according to certain specified rules in
order for the Contract to qualify as an annuity for tax purposes.
Amounts may be transferred among the subaccounts, to the Real Property Account,
and to the fixed-rate option up to four times each year. Currently, you may make
additional transfers without Prudential's consent. There are limitations upon
transfers into and out of the Real Property Account and out of the fixed-rate
option. See TRANSFERS, page 14.
As long as the minimum purchase payment requirements are satisfied, this
Contract may be purchased in connection with, or used for rollovers from,
retirement arrangements that qualify for federal tax benefits under Sections
401, 403(a), 403(b), 408(a), 408(b), 408(k), 408(p) or 457 of the Internal
Revenue Code ("tax favored plans"). There are certain special provisions and/or
restrictions applicable to Contracts issued to tax favored plans. Such Contracts
may not invest in The Real Property Account.
For a limited time, a Contract may be returned for a refund in accordance with
the terms of its "free look" provision. See SHORT-TERM CANCELLATION RIGHT or
"FREE LOOK", page 13.
This Brief Description of the Contract is intended to provide a broad overview
of the more significant features of the Contract. More detailed information will
be found in subsequent sections of this prospectus and in the Contract document.
3
<PAGE>
FEE TABLE
CONTRACT OWNER TRANSACTION EXPENSES
Sales Load Imposed on Purchase Payments.........None (1% bonus added to
payment up to a maximum bonus
of $1,000 per Contract year)
Maximum Deferred Sales Load:
MAXIMUM DEFERRED SALES
CHARGE AS A PERCENTAGE OF
CONTRACT YEARS AFTER PAYMENT PURCHASE PAYMENT WITHDRAWN*
- ---------------------------- ------------------------------------
0............................... 7% plus return of 1% bonus
1 year.......................... 7% plus return of 1% bonus
2 years......................... 7% plus return of 1% bonus
3 years......................... 6% plus return of 1% bonus
4 years......................... 5% plus return of 1% bonus
5 years......................... 4% plus return of 1% bonus
6 or more years................. 0%
*The deferred sales load is not imposed on that portion of the withdrawals
made in any Contract year equal to the first 10% of the Contract fund. The
deferred sales load is not imposed in connection with the Critical Care
Access feature and may be reduced on the withdrawal of purchase payments
made on or after the annuitant's 81st birthday.
Annual Contract Fee........................................................None*
*If the Contract fund is less than $10,000, a $30 annual charge is assessed.
This $30 fee will not be charged if the Contract fund is less than $10,000 as
a result of a withdrawal due to confinement in a nursing home or hospital, or
due to a terminal illness. The minimum initial purchase payment is $10,000.
SEPARATE ACCOUNT ANNUAL EXPENSES (AS A PERCENTAGE OF AVERAGE CONTRACT FUND)
ALL SUBACCOUNTS
---------------
Mortality and Expense Risk Fee.................. 1.00%
Administrative Charge........................... .20%
Total Separate Account Annual Expenses.......... 1.20%
THE PRUDENTIAL SERIES FUND, INC. ANNUAL EXPENSES (AS A PERCENTAGE OF PORTFOLIO
AVERAGE NET ASSETS)
<TABLE>
<CAPTION>
MONEY DIVERSIFIED GOVERNMENT CONSERVATIVE FLEXIBLE HIGH
MARKET BOND INCOME BALANCED MANAGED YIELD BOND
------- ------------ ---------- ------------ -------- ------------
<S> <C> <C> <C> <C> <C> <C>
Investment Management
Fee..................................... .40% .40% .40% .55% .60% .55%
Other Expenses............................. .03% .03% .04% .01% .02% .02%
------- ------------ ---------- ------------ -------- ------------
Total Series Fund
Annual Expenses......................... .43% .43% .44% .56% .62% .57%
======= ============ ========== ============ ======== ===========
</TABLE>
<TABLE>
<CAPTION>
SMALL
STOCK EQUITY PRUDENTIAL CAPITALIZATION NATURAL
INDEX INCOME EQUITY JENNISON STOCK GLOBAL RESOURCE
------- ------------ ---------- ------------ -------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Investment Management .35% .40% .45% .60% .40% .75% .45%
Fee.....................................
Other Expenses............................. .02% .01% .01% .04% .10% .10% .09%
------- ------------ ---------- ------------ -------- ----------- ----------
Total Series Fund Annual Expenses.......... .37% .41% .46% .64% .50% .85 % .54%
======= ============ ========== ============ ======== =========== ==========
</TABLE>
4
<PAGE>
The purpose of the foregoing tables is to assist the Contract owners in
understanding the expenses of Prudential Individual Variable Contract Account
and The Prudential Series Fund, Inc. (the "Series Fund") that they bear,
directly or indirectly. See the sections on charges in this prospectus and the
attached prospectus for the Series Fund. The above tables do not include any
taxes attributable to premiums. Currently, there is no deduction for such taxes
at the time purchase payments are made, but in some states a deduction is made
when an annuity is effected.
Except for the Global Portfolio, Prudential reimburses a portfolio when its
ordinary operating expenses, excluding taxes, interest, and brokerage
commissions exceed 0.75% of the portfolio's average daily net assets. The
amounts listed for the portfolios under "Other Expenses" are based on amounts
incurred in the last fiscal year.
EXAMPLES OF FEES AND EXPENSES.
The following examples, and those on page 6, illustrate the cumulative dollar
amount of all the above expenses that would be incurred on each $1,000
investment,
o The examples assume a consistent 5% annual return on invested assets;
o The examples do not take into consideration any taxes attributable to
premiums which may be payable at the time of annuitization or at the
time of purchase payments;
o The amounts shown are overstated for Contract funds over $10,000 and
understated for Contract funds less than $10,000;
For a term less than 10 years, the expenses shown in Table I, describe
applicable charges for the withdrawal of your entire Contract fund. 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.
The following example shows how the Year 1 expenses shown in Table I were
calculated for the Money Market Portfolio, for each $1,000 invested. This
assumes a withdrawal is made just prior to the end of the first year after
payment. The amount of the Annual Administrative Charge in this example is
calculated in a manner prescribed by the Securities and Exchange Commission.
<TABLE>
<CAPTION>
<S> <C> <C>
Initial Investment $1,000.00
Plus 1% bonus ($1,000 + $10) 1,010.00
Total Contract Expenses (1.2 risk fees + .43 management fee
+ 0.75 annual maintenance charge) 1.705%
Assumed 5% Rate of Return Minus
Total Contract Expenses 3.295%
Value of Funds ($1,010 x 3.295%) 33.28
Total Value of Funds ($1,010 + 33.28) 1,043.28
Average Value of Funds {($1,043 + 1,010)*12} 1,026.64
Total Contract Expenses ($1,026.64 x 1.705% (rounded)) 18.00
Contingent Deferred Sales Charges
Initial Investment 1,000.00
10% Charge Fee Withdrawal 100.00
Amount Subject to Withdrawal Charge 900.00
Surrender Charge (900* 7.00%) 63.00
Plus Total Contract Expenses 18.00
-----------
Total Charges $ 81.00
*Note that in this example, Prudential would recapture the 1% bonus that had
been credited to the initial investment.
</TABLE>
5
<PAGE>
TABLE I
- -------
If you withdraw your entire Contract fund thereby surrendering your Contract
just prior to the end of the applicable time period, you would pay the following
cumulative expenses on each $1,000 invested, assuming 5% annual return on
assets:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
----------- ------------ ------------- -------------
<S> <C> <C> <C> <C>
MONEY MARKET PORTFOLIO................................. $ 81 $103 $118 $203
DIVERSIFIED BOND PORTFOLIO............................. $ 81 $103 $118 $203
GOVERNMENT INCOME PORTFOLIO............................ $ 81 $104 $119 $205
CONSERVATIVE BALANCED PORTFOLIO........................ $ 82 $107 $125 $217
FLEXIBLE MANAGED PORTFOLIO............................. $ 82 $109 $128 $224
HIGH YIELD BOND PORTFOLIO.............................. $ 82 $108 $126 $219
STOCK INDEX PORTFOLIO.................................. $ 80 $101 $115 $197
EQUITY INCOME PORTFOLIO................................ $ 80 $103 $117 $201
EQUITY PORTFOLIO....................................... $ 81 $104 $120 $207
PRUDENTIAL JENNISON PORTFOLIO.......................... $ 83 $110 $129 $226
SMALL CAPITALIZATION STOCK PORTFOLIO................... $ 81 $105 $122 $211
GLOBAL PORTFOLIO....................................... $ 85 $116 $140 $248
NATURAL RESOURCES PORTFOLIO............................ $ 82 $107 $124 $215
</TABLE>
As an example, if the entire Contract fund is invested in the Flexible Managed
Portfolio, and you surrendered your entire Contract just prior to the end of 1
year, you would pay $82 per $1,000 invested, reflecting all charges including
the 7% contingent deferred sales charge.
TABLE II
- --------
If you annuitize just before the end of the applicable time period, you would
pay the following cumulative expenses on each $1,000 invested, assuming 5%
annual return on assets:
(Note: The 1, 3, and 5 Year columns reflect the imposition of the contingent
deferred sales charge; however, some of the annuity options may not be
subject to this charge after year 1. Where this is the case, the expenses
shown in Table III below would be applicable. See page 17 under the SALES
CHARGES ON WITHDRAWALS section.)
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
----------- ------------ ------------- -------------
<S> <C> <C> <C> <C>
MONEY MARKET PORTFOLIO................................. $ 81 $103 $118 $203
DIVERSIFIED BOND PORTFOLIO............................. $ 81 $103 $118 $203
GOVERNMENT INCOME PORTFOLIO............................ $ 81 $104 $119 $205
CONSERVATIVE BALANCED PORTFOLIO........................ $ 82 $107 $125 $217
FLEXIBLE MANAGED PORTFOLIO............................. $ 82 $109 $128 $224
HIGH YIELD BOND PORTFOLIO.............................. $ 82 $108 $126 $219
STOCK INDEX PORTFOLIO.................................. $ 80 $101 $115 $197
EQUITY INCOME PORTFOLIO................................ $ 80 $103 $117 $201
EQUITY PORTFOLIO....................................... $ 81 $104 $120 $207
PRUDENTIAL JENNISON PORTFOLIO.......................... $ 83 $110 $129 $226
SMALL CAPITALIZATION STOCK PORTFOLIO................... $ 81 $105 $122 $211
GLOBAL PORTFOLIO....................................... $ 85 $116 $140 $248
NATURAL RESOURCES PORTFOLIO............................ $ 82 $107 $124 $215
</TABLE>
TABLE III
- ---------
If you do not withdraw any portion of your Contract fund as of the end of the
applicable time period, you would pay the following cumulative expenses on each
$1,000 invested, assuming 5% annual return on assets:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
----------- ------------ ------------- -------------
<S> <C> <C> <C> <C>
MONEY MARKET PORTFOLIO................................. $ 18 $54 $ 93 $203
DIVERSIFIED BOND PORTFOLIO............................. $ 18 $54 $ 93 $203
GOVERNMENT INCOME PORTFOLIO............................ $ 18 $55 $ 94 $205
CONSERVATIVE BALANCED PORTFOLIO........................ $ 19 $58 $100 $217
FLEXIBLE MANAGED PORTFOLIO............................. $ 19 $60 $103 $224
HIGH YIELD BOND PORTFOLIO.............................. $ 19 $59 $101 $219
STOCK INDEX PORTFOLIO.................................. $ 17 $52 $ 90 $197
EQUITY INCOME PORTFOLIO................................ $ 17 $54 $ 92 $201
EQUITY PORTFOLIO....................................... $ 18 $55 $ 95 $207
PRUDENTIAL JENNISON PORTFOLIO.......................... $ 20 $61 $104 $226
SMALL CAPITALIZATION STOCK PORTFOLIO................... $ 18 $56 $ 97 $211
GLOBAL PORTFOLIO....................................... $ 22 $67 $115 $248
NATURAL RESOURCES PORTFOLIO............................ $ 19 $58 $ 99 $215
</TABLE>
Notice that in all 3 of the above tables, the level of cumulative charges is
identical for the 10 year column. This is because at that point there are no
contingent deferred sale charges taken by Prudential upon surrender or
annuitization. It may be helpful to consider the dollar amounts shown as
percentages of the amount invested ($1,000) over the period specified. In the
case of the Money Market Portfolio, $203 at the end of 10 years equals $20.30
per year,
6
<PAGE>
or approximately 2.03% of $1,000. The above examples use as the
annual Contract fee the average fee assessed based on the aggregate annual
Contract fees collected during the 12 month period ended December 31, 1997
divided by total assets allocated to the subaccounts. Your actual fees will vary
based on the amount of your Contract Fund and your specific allocation.
7
<PAGE>
<TABLE>
ACCUMULATION UNIT VALUES
THE PRUDENTIAL INDIVIDUAL VARIABLE CONTRACT ACCOUNT
DISCOVERY PLUS CONTRACT
(CONDENSED FINANCIAL INFORMATION)
<CAPTION>
SUBACCOUNTS
--------------------------------------------------------------------------------------------------------
MONEY MARKET
--------------------------------------------------------------------------------------------------------
01/01/97 01/01/96 01/01/95 01/01/94 01/01/93 01/01/92 01/01/91 01/01/90 02/27/89*
TO TO TO TO TO TO TO TO TO
12/31/97 12/31/96 12/31/95 12/31/94 12/31/93 12/31/92 12/31/91 12/31/90 12/31/89
----------- ----------- ----------- ----------- ---------- ----------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1. Accumulation unit
value at beginning
of period............... $ 2.008 $ 1.931 $ 1.847 $ 1.796 $ 1.766 $ 1.722 $ 1.641 $ 1.536 $ 1.440
2. Accumulation unit
value at end of
period.................. 2.092 2.008 1.931 1.847 1.796 1.766 1.722 1.641 1.536
3. Number of accumulation
units outstanding at
end of period........... 100,713,122 133,461,350 132,240,079 137,690,220 98,824,301 110,136,278 108,951,868 78,507,679 20,144,839
--------------------------------------------------------------------------------------------------------
<CAPTION>
DIVERSIFIED BOND
--------------------------------------------------------------------------------------------------------
01/01/97 01/01/96 01/01/95 01/01/94 01/01/93 01/01/92 01/01/91 01/01/90 02/27/89*
TO TO TO TO TO TO TO TO TO
12/31/97 12/31/96 12/31/95 12/31/94 12/31/93 12/31/92 12/31/91 12/31/90 12/31/89
----------- ----------- ----------- ----------- ---------- ----------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1. Accumulation unit
value at beginning of
period.................. $ 2.990 $ 2.899 $ 2.430 $ 2.541 $ 2.335 $ 2.204 $ 1.916 $ 1.790 $ 1.596
2. Accumulation unit
value at end of
period.................. 3.208 2.990 2.899 2.430 2.541 2.335 2.204 1.916 1.790
3. Number of accumulation
units outstanding at
end of period........... 54,997,472 63,529,814 62,158,709 62,532,884 65,012,139 43,861,931 26,025,946 14,221,106 6,775,075
--------------------------------------------------------------------------------------------------------
<CAPTION>
EQUITY
--------------------------------------------------------------------------------------------------------
01/01/97 01/01/96 01/01/95 01/01/94 01/01/93 01/01/92 01/01/91 01/01/90 02/27/89*
TO TO TO TO TO TO TO TO TO
12/31/97 12/31/96 12/31/95 12/31/94 12/31/93 12/31/92 12/31/91 12/31/90 12/31/89
----------- ----------- ----------- ----------- ---------- ----------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1. Accumulation unit
value at beginning of
period.................. $ 5.680 $ 4.850 $ 3.738 $ 3.681 $ 3.056 $ 2.709 $ 2.176 $ 2.323 $ 1.884
2. Accumulation unit
value at end of
period.................. 6.996 5.680 4.850 3.738 3.681 3.056 2.709 2.176 2.323
3. Number of accumulation
units outstanding at
end of period........... 159,618,134 176,617,231 187,580,951 144,081,975 109,315,212 64,109,169 35,797,392 13,870,625 5,468,614
--------------------------------------------------------------------------------------------------------
<CAPTION>
PRUDENTIAL JENNISON
---------------------------------
01/01/97 01/01/96 05/01/95*
TO TO TO
12/31/97 12/31/96 12/31/95
---------- ---------- ----------
<S> <C> <C> <C>
1. Accumulation unit
value at beginning of
period.................. $ 1.408 $ 1.245 $ 1.009
2. Accumulation unit
value at end of
period.................. 1.832 1.408 1.245
3. Number of accumulation
units outstanding at
end of period.......... 65,230,050 54,259,732 19,918,994
-----------------------------------
<CAPTION>
SMALL CAPITALIZATION STOCK
---------------------------------
01/01/97 01/01/96 05/01/95*
TO TO TO
12/31/97 12/31/96 12/31/95
---------- ---------- ----------
<S> <C> <C> <C>
1. Accumulation unit
value at beginning of
period.................. $ 1.408 $ 1.190 $ 1.002
2. Accumulation unit
value at end of
period.................. 1.742 1.408 1.190
3. Number of accumulation
units outstanding at
end of period........... 51,033,360 34,325,331 15,303,395
* Commencement of Business
The financial statements of the Account are in the statement of additional information.
</TABLE>
8
<PAGE>
<TABLE>
ACCUMULATION UNIT VALUES
THE PRUDENTIAL INDIVIDUAL VARIABLE CONTRACT ACCOUNT
DISCOVERY PLUS CONTRACT
(CONDENSED FINANCIAL INFORMATION) (CONTINUED)
<CAPTION>
SUBACCOUNTS
--------------------------------------------------------------------------------------------------------
FLEXIBLE MANAGED
--------------------------------------------------------------------------------------------------------
01/01/97 01/01/96 01/01/95 01/01/94 01/01/93 01/01/92 01/01/91 01/01/90 02/27/89*
TO TO TO TO TO TO TO TO TO
12/31/97 12/31/96 12/31/95 12/31/94 12/31/93 12/31/92 12/31/91 12/31/90 12/31/89
----------- ----------- ----------- ----------- ---------- ----------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1. Accumulation unit
value at beginning
of period............... $ 3.895 $ 3.469 $ 2.828 $ 2.955 $ 2.587 $ 2.434 $ 1.963 $ 1.950 $ 1.656
2. Accumulation unit
value at end of
period.................. 4.540 3.895 3.469 2.828 2.955 2.587 2.434 1.963 1.950
3. Number of accumulation
units outstanding at
end of period........... 128,050,185 140,908,132 135,760,708 140,860,169 111,136,044 62,046,878 33,449,040 20,844,438 7,863,675
--------------------------------------------------------------------------------------------------------
<CAPTION>
CONSERVATIVE BALANCED
--------------------------------------------------------------------------------------------------------
01/01/97 01/01/96 01/01/95 01/01/94 01/01/93 01/01/92 01/01/91 01/01/90 02/27/89*
TO TO TO TO TO TO TO TO TO
12/31/97 12/31/96 12/31/95 12/31/94 12/31/93 12/31/92 12/31/91 12/31/90 12/31/89
----------- ----------- ----------- ----------- ---------- ----------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1. Accumulation unit
value at beginning
of period............... $ 3.424 $ 3.077 $ 2.655 $ 2.713 $ 2.447 $ 2.316 $ 1.968 $ 1.892 $ 1.666
2. Accumulation unit
value at end of
period.................. 3.839 3.424 3.077 2.655 2.713 2.447 2.316 1.968 1.892
3. Number of accumulation
units outstanding at
end of period........... 271,684,907 300,853,936 296,641,925 313,266,018 242,321,897 133,530,065 59,165,985 29,438,662 10,559,021
--------------------------------------------------------------------------------------------------------
<CAPTION>
HIGH YIELD BOND
--------------------------------------------------------------------------------------------------------
01/01/97 01/01/96 01/01/95 01/01/94 01/01/93 01/01/92 01/01/91 01/01/90 02/27/89*
TO TO TO TO TO TO TO TO TO
12/31/97 12/31/96 12/31/95 12/31/94 12/31/93 12/31/92 12/31/91 12/31/90 12/31/89
----------- ----------- ----------- ----------- ---------- ----------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1. Accumulation unit
value at beginning
of period............... $ 2.053 $ 1.865 $ 1.605 $ 1.670 $ 1.417 $ 1.220 $ 0.887 $ 1.019 $ 1.078
2. Accumulation unit
value at end of
period.................. 2.308 2.053 1.865 1.605 1.670 1.417 1.220 0.887 1.019
3. Number of accumulation
units outstanding at
end of period........... 74,090,922 84,625,385 86,497,155 82,161,785 68,503,233 31,814,404 9,103,642 3,962,676 2,636,013
--------------------------------------------------------------------------------------------------------
<CAPTION>
STOCK INDEX
--------------------------------------------------------------------------------------------------------
01/01/97 01/01/96 01/01/95 01/01/94 01/01/93 01/01/92 01/01/91 01/01/90 02/27/89*
TO TO TO TO TO TO TO TO TO
12/31/97 12/31/96 12/31/95 12/31/94 12/31/93 12/31/92 12/31/91 12/31/90 12/31/89
----------- ----------- ----------- ----------- ---------- ----------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1. Accumulation unit
value at beginning
of period............... $ 2.907 $ 2.401 $ 1.772 $ 1.776 $ 1.639 $ 1.548 $ 1.208 $ 1.268 $ 1.018
2. Accumulation unit
value at end of
period.................. 3.816 2.907 2.401 1.772 1.776 1.639 1.548 1.208 1.268
3. Number of accumulation
units outstanding at
end of period........... 118,969,379 118,928,560 99,553,628 89,080,644 91,215,676 71,404,267 38,553,592 17,965,337 5,881,105
--------------------------------------------------------------------------------------------------------
<CAPTION>
EQUITY INCOME
--------------------------------------------------------------------------------------------------------
01/01/97 01/01/96 01/01/95 01/01/94 01/01/93 01/01/92 01/01/91 01/01/90 02/27/89*
TO TO TO TO TO TO TO TO TO
12/31/97 12/31/96 12/31/95 12/31/94 12/31/93 12/31/92 12/31/91 12/31/90 12/31/89
----------- ----------- ----------- ----------- ---------- ----------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1. Accumulation unit
value at beginning
of period............... $ 3.044 $ 2.530 $ 2.104 $ 2.099 $ 1.737 $ 1.596 $ 1.267 $ 1.332 $ 1.139
2. Accumulation unit
value at end of
period.................. 4.108 3.044 2.530 2.104 2.099 1.737 1.596 1.267 1.332
3. Number of accumulation
units outstanding at
end of period........... 195,232,259 212,322,247 220,184,990 218,661,165 155,205,890 68,252,437 28,475,526 16,439,709 9,230,667
--------------------------------------------------------------------------------------------------------
* Commencement of Business
The financial statements of the Account are in the statement of additional information.
</TABLE>
9
<PAGE>
<TABLE>
ACCUMULATION UNIT VALUES
THE PRUDENTIAL INDIVIDUAL VARIABLE CONTRACT ACCOUNT
DISCOVERY PLUS CONTRACT
(CONDENSED FINANCIAL INFORMATION) (CONTINUED)
<CAPTION>
SUBACCOUNTS
--------------------------------------------------------------------------------------------------------
NATURAL RESOURCES
--------------------------------------------------------------------------------------------------------
01/01/97 01/01/96 01/01/95 01/01/94 01/01/93 01/01/92 01/01/91 01/01/90 02/27/89*
TO TO TO TO TO TO TO TO TO
12/31/97 12/31/96 12/31/95 12/31/94 12/31/93 12/31/92 12/31/91 12/31/90 12/31/89
----------- ----------- ----------- ----------- ---------- ----------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1. Accumulation unit
value at beginning
of period............... $ 2.840 $ 2.196 $ 1.751 $ 1.851 $ 1.497 $ 1.412 $ 1.295 $ 1.391 $ 1.137
2. Accumulation unit
value at end of
period.................. 2.481 2.840 2.196 1.751 1.851 1.497 1.412 1.295 1.391
3. Number of accumulation
units outstanding at
end of period........... 35,935,730 43,858,984 37,663,872 38,719,527 21,404,880 9,178,489 7,245,895 7,525,168 2,095,818
--------------------------------------------------------------------------------------------------------
<CAPTION>
GLOBAL
--------------------------------------------------------------------------------------------------------
01/01/97 01/01/96 01/01/95 01/01/94 01/01/93 01/01/92 01/01/91 01/01/90 02/27/89*
TO TO TO TO TO TO TO TO TO
12/31/97 12/31/96 12/31/95 12/31/94 12/31/93 12/31/92 12/31/91 12/31/90 12/31/89
----------- ----------- ----------- ----------- ---------- ----------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1. Accumulation unit
value at beginning
of period............... $ 1.814 $ 1.533 $ 1.339 $ 1.425 $ 1.007 $ 1.056 $ 0.959 $ 1.115 $ 1.015
2. Accumulation unit
value at end of
period.................. 1.917 1.814 1.533 1.339 1.425 1.007 1.056 0.959 1.115
3. Number of accumulation
units outstanding at
end of period........... 115,977,749 131,910,848 212,272,476 127,945,906 51,691,984 12,211,247 6,345,863 5,058,856 1,221,795
--------------------------------------------------------------------------------------------------------
<CAPTION>
GOVERNMENT INCOME
--------------------------------------------------------------------------------------------------------
01/01/97 01/01/96 01/01/95 01/01/94 01/01/93 01/01/92 01/01/91 01/01/90 02/27/89*
TO TO TO TO TO TO TO TO TO
12/31/97 12/31/96 12/31/95 12/31/94 12/31/93 12/31/92 12/31/91 12/31/90 12/31/89
----------- ----------- ----------- ----------- ---------- ----------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1. Accumulation unit
value at beginning
of period............... $ 1.736 $ 1.719 $ 1.456 $ 1.553 $ 1.397 $ 1.335 $ 1.164 $ 1.108 $ 1.000
2. Accumulation unit
value at end of
period.................. 1.881 1.736 1.719 1.456 1.553 1.397 1.335 1.164 1.108
3. Number of accumulation
units outstanding at
end of period........... 97,819,209 122,312.126 131,063,592 148,872,947 161,058,905 103,111,144 35,607,897 8,957,406 3,570,059
--------------------------------------------------------------------------------------------------------
* Commencement of Business
The financial statements of the Account are in the statement of additional information.
</TABLE>
10
<PAGE>
GENERAL INFORMATION ABOUT PRUDENTIAL,
THE PRUDENTIAL INDIVIDUAL VARIABLE CONTRACT ACCOUNT,
AND THE VARIABLE INVESTMENT OPTIONS AVAILABLE
UNDER THE CONTRACT
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
The Prudential Insurance Company of America ("Prudential") is a mutual insurance
company, founded in 1875 under the laws of the State of New Jersey. Prudential
is currently considering reorganizing itself into a stock company. This form of
reorganization, known as demutualization, is a complex process that may take two
or more years to complete. No plan of demutualization has been adopted yet by
Prudential's Board of Directors. Adoption of a plan of demutualization would
occur only after enactment of appropriate legislation in New Jersey and would
have to be approved by Prudential's policyholders and appropriate state
insurance regulators. Throughout the process, there will be a continuing
evaluation by the Board of Directors and management of Prudential as to the
desirability of demutualization. The Board of Directors, in its discretion, may
choose not to demutualize or to delay demutualization for a time.
Prudential is licensed to sell life insurance and annuities in the District of
Columbia, Guam, the U.S. Virgin Islands and in all states. These Contracts are
not offered in any state in which the necessary approvals have not yet been
obtained.
Prudential's financial statements appear in the statement of additional
information and should be considered only as bearing upon Prudential's ability
to meet its obligations under the Contracts.
THE PRUDENTIAL INDIVIDUAL VARIABLE CONTRACT ACCOUNT
The Prudential Individual Variable Contract Account (the "Account") was
established on October 12, 1982 under New Jersey law as a separate investment
account. The Account meets the definition of a "separate account" under the
federal securities laws. The Account holds assets that are segregated from all
of Prudential's other assets.
The obligations to Contract owners and beneficiaries arising under the Contract
are general corporate obligations of Prudential. Prudential is also the legal
owner of the assets in the Account. Prudential will at all times maintain assets
in the Account with a total market value at least equal to the reserve and other
liabilities relating to the variable benefits attributable to the Account. These
assets may not be charged with liabilities which arise from any other business
Prudential conducts. In addition to these assets, the Account's assets may
include funds contributed by Prudential to commence operation of the Account and
may include accumulations of the charges Prudential makes against the Account.
From time to time these additional assets will be transferred to Prudential's
general account. Before making any such transfer, Prudential will consider any
possible adverse impact the transfer might have on the Account.
The Account is registered with the Securities and Exchange Commission ("SEC")
under the Investment Company Act of 1940 ("1940 Act") as a unit investment
trust, which is a type of investment company. This does not involve any
supervision by the SEC of the management or investment policies or practices of
the Account. For state law purposes, the Account is treated as a part or
division of Prudential. There are currently thirteen subaccounts within the
Account, each of which invests in a single corresponding portfolio of the Series
Fund. Additional subaccounts may be added in the future. The Account's financial
statements appear in the statement of additional information.
THE PRUDENTIAL SERIES FUND, INC.
The Prudential Series Fund, Inc. (the "Series Fund") is registered under the
1940 Act as an open-end diversified management investment company. Its shares
are currently sold only to separate accounts of Prudential and certain other
insurers that offer variable life insurance and variable annuity contracts. The
Account will purchase and redeem shares from the Series Fund at net asset value.
Shares will be redeemed to the extent necessary for Prudential to provide
benefits under the Contract and to transfer assets from one subaccount to
another, as requested by Contract owners. Any dividend or capital gain
distribution received from a portfolio of the Series Fund will be reinvested
immediately at net asset value in shares of that portfolio and retained as
assets of the corresponding subaccount.
Prudential is the investment advisor for the assets of each of the portfolios of
the Series Fund. Prudential's principal business address is 751 Broad Street,
Newark, New Jersey 07102-3777. Prudential has a Service Agreement with its
wholly-owned subsidiary The Prudential Investment Corporation ("PIC"), which
provides that, subject to Prudential's supervision, PIC will furnish investment
advisory services in connection with the management of the Series Fund. In
addition, Prudential has entered into a Subadvisory Agreement with its
wholly-owned subsidiary Jennison Associates Capital Corp. ("Jennison"), under
which Jennison furnishes investment advisory services in connection with the
management of the Prudential Jennison Portfolio. Further detail is provided in
the prospectus
11
<PAGE>
and statement of additional information for the Series Fund. Prudential, PIC and
Jennison are registered as investment advisors under the Investment Advisers Act
of 1940.
As an investment advisor, Prudential charges the Series Fund a daily investment
management fee as compensation for its services. The following table shows the
investment management fee charged for each portfolio of the Series Fund
available for investment by Contract owners.
---------------------------------------------------------------------------
ANNUAL INVESTMENT
MANAGEMENT FEE AS
A PERCENTAGE OF AVERAGE
PORTFOLIO DAILY NET ASSETS
---------------------------------------------------------------------------
MONEY MARKET PORTFOLIO 0.40%
DIVERSIFIED BOND PORTFOLIO 0.40%
GOVERNMENT INCOME PORTFOLIO 0.40%
CONSERVATIVE BALANCED PORTFOLIO 0.55%
FLEXIBLE MANAGED PORTFOLIO 0.60%
HIGH YIELD BOND PORTFOLIO 0.55%
STOCK INDEX PORTFOLIO 0.35%
EQUITY INCOME PORTFOLIO 0.40%
EQUITY PORTFOLIO 0.45%
PRUDENTIAL JENNISON PORTFOLIO 0.60%
SMALL CAPITALIZATION STOCK PORTFOLIO 0.40%
GLOBAL PORTFOLIO 0.75%
NATURAL RESOURCES PORTFOLIO 0.45%
---------------------------------------------------------------------------
It is conceivable that in the future it may become disadvantageous for both
variable life insurance and variable annuity contract separate accounts to
invest in the same underlying mutual fund. Although neither the companies which
invest in the Series Fund, nor the Series Fund currently foresees any such
disadvantage, the Series Fund's Board of Directors intends to monitor events in
order to identify any material conflict between variable life insurance and
variable annuity contract owners and to determine what action, if any, should be
taken in response thereto. 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 Series Fund; or (4)
differences between voting instructions given by variable life insurance and
variable annuity contract owners.
A FULL DESCRIPTION OF THE SERIES FUND, ITS INVESTMENT OBJECTIVES, MANAGEMENT,
POLICIES, AND RESTRICTIONS, ITS EXPENSES, THE RISKS ATTENDANT TO INVESTMENT
THEREIN INCLUDING ANY RISKS ASSOCIATED WITH INVESTMENT IN THE HIGH YIELD BOND
PORTFOLIO AND ALL OTHER ASPECTS OF ITS OPERATION IS CONTAINED IN THE ATTACHED
PROSPECTUS FOR THE SERIES FUND AND IN ITS STATEMENT OF ADDITIONAL INFORMATION,
WHICH SHOULD BE READ IN CONJUNCTION WITH THIS PROSPECTUS. THERE IS NO ASSURANCE
THAT THE INVESTMENT OBJECTIVES WILL BE MET.
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY ACCOUNT
The Prudential Variable Contract Real Property Account (the "Real Property
Account") is a separate account of Prudential that, through a general
partnership formed by Prudential and two of its subsidiaries, invests primarily
in income-producing real property such as office buildings, shopping centers,
agricultural land, hotels, apartments or industrial properties. It also invests
in mortgage loans and other real estate-related investments, including
sale-leaseback transactions. The objectives of the Real Property Account and the
partnership are to preserve and protect capital, provide for compounding of
income as a result of reinvestment of cash flow from investments, and provide
for increases over time in the amount of such income through appreciation in the
value of assets.
The partnership has entered into an investment management agreement with
Prudential, under which Prudential selects the properties and other investments
held by the partnership. Prudential charges the partnership a daily fee for
investment management which amounts to 1.25% per year of the average daily gross
assets of the partnership.
A FULL DESCRIPTION OF THE REAL PROPERTY ACCOUNT, ITS MANAGEMENT, POLICIES, AND
RESTRICTIONS, ITS CHARGES AND EXPENSES, THE RISKS ATTENDANT TO INVESTMENT
THEREIN, THE PARTNERSHIP'S INVESTMENT OBJECTIVES, AND ALL OTHER ASPECTS OF THE
REAL PROPERTY ACCOUNT'S AND THE PARTNERSHIP'S OPERATIONS IS CONTAINED IN THE
ATTACHED PROSPECTUS FOR THE REAL PROPERTY ACCOUNT, WHICH SHOULD BE READ TOGETHER
WITH THIS PROSPECTUS BY ANY CONTRACT OWNER CONSIDERING THE REAL ESTATE
INVESTMENT OPTION. THERE IS NO ASSURANCE THAT THE INVESTMENT OBJECTIVES WILL BE
MET.
12
<PAGE>
DETAILED INFORMATION ABOUT THE CONTRACT
REQUIREMENTS FOR ISSUANCE OF A CONTRACT
The minimum initial purchase payment is $10,000. Effective March 15, 1997, this
contract is no longer offered for sale in New York, and effective March 6, 1998,
this contract is no longer offered for sale in Oregon to retirement arrangements
entitled to federal income tax treatment. The Contract may generally be issued
on proposed annuitants below the age of 86. Before issuing any Contract,
Prudential requires submission of certain information. Following Prudential's
review of the information and approval of issuance of the Contract, a Contract
will be issued that sets forth precisely the owner's rights and the Company's
obligations. The Contract owner may thereafter make additional purchase payments
of $1,000 or more ($10,000 or more when issued in New York), but there is no
obligation to do so. These additional purchase payments may be made by check
payable to the order of Prudential and mailed to the PrudentialAnnuity Service
Center, accompanied by forms that will be provided for this purpose. Subsequent
payments are not allowed in Oregon.
The Contract date will be the date the initial purchase payment and certain
required information are received in the Prudential Annuity Service Center. The
amount credited under the Contract begins to vary as of the end of the first
valuation period to reflect the investment results of the variable investment
option[s] and/or the interest rate declared for the fixed-rate option as chosen
by the applicant. If the issuance of the Contract is not approved, because the
current underwriting requirements are not met, the purchase payment will
promptly be returned. The Company reserves the right to change these
requirements on a non-discriminatory basis.
SHORT-TERM CANCELLATION RIGHT OR "FREE LOOK"
Generally, a Contract may be returned for a refund within 10 days after it is
received by the Contract owner. Some states allow a longer period of time during
which a Contract may be returned for a refund. A refund can be requested by
mailing or delivering the Contract to the representative who sold it or to the
Prudential Annuity Service Center, previously known as the Prudential Home
Office, specified in the Contract. The Contract owner will then receive a refund
of all purchase payments made, plus or minus any change due to investment
experience in the value of the invested portion of the payments, excluding any
bonus paid on the purchase payments, calculated as if no charges had been made
against the Account or the Series Fund. However, if applicable law so requires,
the Contract owner who exercises his or her short-term cancellation right will
receive a refund of all purchase payments made, excluding any bonus paid on the
purchase payments, with no adjustment for investment experience.
ALLOCATION OF PURCHASE PAYMENTS
The Contract owner determines how the initial purchase payment will be allocated
among the subaccounts, the Real Property Account, and the fixed-rate option, by
specifying the desired allocation on the application form for a Contract. The
owner may choose to allocate nothing to a particular subaccount, to the Real
Property Account or to the fixed-rate option, but any allocation made must be at
least 10% and may not be a fractional percent. Subsequent purchase payments will
be allocated in the same proportions as the most recent purchase payment made by
the owner. The subsequent purchase payments which are allocated to the variable
investment option[s] will be credited under the Contract based on the next
computed value of an accumulation unit following receipt of payment by
Prudential at the Annuity Service Center. The value of an accumulation unit is
determined when the net asset values of the portfolios of the Series Fund are
calculated, which is generally at 4:15 p.m. New York City time on each day
during which the New York Stock Exchange is open. Subsequent purchase payments
allocated to the fixed-rate option will begin earning interest on the date
received. The Contract owner may change the way in which subsequent purchase
payments are allocated by providing Prudential with written instructions or by
telephoning the Annuity Service Center, provided the Contract owner is enrolled
to use the Telephone Transfer System.
Additionally, a feature called Dollar Cost Averaging ("DCA") is available to
Contract owners. Under this feature, purchase payments may be allocated to the
portion of the Money Market subaccount used for this feature (the "DCA
account"), and designated amounts will be transferred monthly from the DCA
account to other investment options available under the Contract, excluding the
Money Market subaccount and the fixed-rate option, but including the Real
Property Account. Automatic monthly transfers must be at least 3% of the amount
initially allocated to the DCA account (that is, if $10,000 is initially
allocated, the minimum monthly transfer is $300), with a minimum of $20
transferred into any one investment option. These amounts are subject to change
at Prudential's discretion. The minimum transfer amount will only be
recalculated if the amount designated for transfer is increased.
When DCA is established at issue, the greater of $10,000 or 10% of the initial
purchase payment must be allocated to the DCA account. When DCA is established
after issue, the Contract owner must allocate to the DCA account at least
$10,000. These minimums are subject to change at Prudential's discretion. After
DCA has been established and as long as the DCA account has a positive balance,
Contract owners may allocate or transfer amounts to the DCA account, subject to
the limitations on purchase payments and transfers generally. In addition, if
the Contract
13
<PAGE>
owner has already established DCA, the purchase payment allocation instructions
may include an allocation of all or a portion of all your purchase payment to
the DCA account.
Each automatic monthly transfer will take effect as of the end of the valuation
period on the Monthly date (i.e. the Contract date and the same date in each
subsequent month), provided the New York Stock Exchange ("NYSE") is open on that
date. If the NYSE is not open on the Monthly date, the transfer will take effect
as of the end of the valuation period on the next day that the NYSE is open. If
the Monthly date does not occur in a particular month (e.g., February 30), the
transfer will take effect as of the end of the valuation period on the last day
of the month that the NYSE is open. Automatic monthly transfers will continue
until the balance in the DCA account reaches zero, or until the Contract owner
gives notification of a change in allocation or cancellation of the feature. If
the Contract has an outstanding payment allocation to the DCA account, but the
DCA option has previously been canceled, purchase payments allocated to the DCA
account will be allocated to the Money Market subaccount. Currently, there is no
charge for using the DCA feature.
ADDITIONAL AMOUNTS
For purchase payments made, during the first 3 Contract years, and in Contract
years thereafter at Prudential's discretion, Prudential will add an Additional
Amount, as a bonus, of 1% to the purchase payment and allocate that Additional
Amount to the subaccounts, the Real Property Account, and the fixed-rate option
in the same manner as that purchase payment. Prudential reserves the right,
however, to limit its payment of such Additional Amounts to $1,000 in each
Contract year. This Additional Amount or bonus will work as follows. Suppose the
owner makes an initial purchase payment of $10,000 to be allocated equally to
the Equity Subaccount and the fixed-rate option. Prudential would increase the
payment by 1%, or $100, and allocate $5,050 to both the Equity Subaccount and to
the fixed-rate option. Later in the year the owner sends Prudential an
additional purchase payment of $6,000, but fails to indicate how it should be
applied. Prudential would increase that amount by 1% or $60, and based on the
owner's most recent instruction, would allocate $3,030 to both the Equity
Subaccount and to the fixed-rate option.
The Additional Amount will not be subject to taxes attributable to premiums. It
will, however, be recaptured by Prudential in the event the owner makes a
withdrawal of a purchase payment on which an Additional Amount was paid within 6
Contract years after the payment, unless such withdrawn purchase payment is used
to effect an annuity that is not subject to a sales charge. See SALES CHARGES ON
WITHDRAWALS, page 17, and RECAPTURE OF ADDITIONAL AMOUNTS, page 18.
TRANSFERS
The Contract owner may make up to four transfers per Contract year. Currently,
the Contract owner may make additional transfers without Prudential's consent.
The Contract owner may transfer all or part of the amount credited to any
subaccount to any of the other subaccounts, to the Real Property Account or to
the fixed-rate option without charge. The Contract owner may transfer amounts by
proper written notice to the Prudential Annuity Service Center, or by telephone
unless the Contract owner asks that transfers by telephone not be made.
Prudential has adopted procedures designed to ensure that requests by telephone
are genuine and will require appropriate identification for that purpose.
Prudential will not be liable for following telephone instructions that it
reasonably believes to be genuine. Prudential cannot guarantee that owners will
be able to get through to complete a telephone transfer during peak periods such
as periods of drastic economic or market change. Transfers among subaccounts
will take effect as of the end of the valuation period in which a proper
transfer request is received at the Prudential Annuity Service Center. The
request may be in dollars, such as a request to transfer $5,000 from one
subaccount to another, or may be in terms of a percentage reallocation among
subaccounts. In the latter case, the percentage must be whole numbers.
Transfers from the fixed-rate option to the variable investment options are
permitted once each Contract year during a 30-day period. Currently that period
begins on the Contract anniversary. Prudential reserves the right to change the
beginning date of the transfer period. The maximum amount which currently may be
transferred out of the fixed-rate option each year is the greater of: (a) 25% of
the amount in the fixed-rate option, and (b) $5,000. These limits are subject to
change in the future. Although it is not Prudential's present practice to do so,
it may in the future permit transfers outside of the 30-day period referred to
above and change the maximum amount that may be transferred out of the
fixed-rate option.
Transfers from the Real Property Account to the subaccounts or to the fixed-rate
option are currently permitted once each Contract year and only during the
30-day period beginning on the Contract anniversary. The maximum amount which
currently may be transferred out of the Real Property Account is the greater of:
(a) 50% OF THE AMOUNT IN THE REAL PROPERTY ACCOUNT, AND (b) $10,000. Transfer
requests received prior to the Contract anniversary will be effected on the
Contract anniversary. TRANSFER REQUESTS RECEIVED WITHIN THE 30-DAY PERIOD
BEGINNING ON THE CONTRACT ANNIVERSARY WILL BE EFFECTED AS OF THE END OF THE
VALUATION PERIOD IN WHICH A PROPER TRANSFER REQUEST IS RECEIVED AT THE
PRUDENTIAL ANNUITY SERVICE CENTER. Restrictions on transfers to and from
the Real
14
<PAGE>
Property Account, which are subject to change, are fully described in the
attached prospectus for the Real Property Account.
The Contract was not designed for professional market timing organizations or
other organizations or individuals using programed, large or frequent transfers.
A pattern of exchanges that coincides with a "market timing" strategy may be
disruptive to the Series Fund and will be discouraged. If such a pattern were to
be found, we may be required to modify the transfer procedures, including, but
not limited to, not accepting transfer requests of an agent acting under a power
of attorney on behalf of more than one owner.
WITHDRAWALS
Subject to any restrictions on withdrawals contained in the tax favored plan
under which a participant is covered, the Contract owner may at any time make a
withdrawal from the Contract fund of all or part of the cash surrender value of
the Contract. However, Prudential's consent will be required for a partial
withdrawal if the amount requested is less than $500 or if it would reduce the
amount credited under the Contract to less than $500. In addition, there are
certain restrictions on the withdrawal of salary reduction contributions and
earnings invested in annuity contracts subject to Section 403(b) of the Internal
Revenue Code. Under such contracts, withdrawals may be made prior to attaining
age 59 1/2 in the event of severance of employment, death, total and permanent
disability and, in limited circumstances, hardship. See TDA'S, page 22. Amounts
held under TDA contracts as of December 31, 1988 are exempt from these
restrictions. The withdrawal restrictions do not apply to transfers among the
available investment options offered by Prudential or to the direct transfer of
all or part of the Contract owner's interest in the Contract 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).
Unless otherwise specified, a partial withdrawal will be allocated among all
subaccounts, the Real Property Account, and the fixed-rate option in the same
proportions as the value of the amount in each subaccount, the Real Property
Account, and the fixed-rate option bears to the total amount then credited to
the Contract. If a total or partial withdrawal is made in the first 6 Contract
years following a purchase payment, there may be a contingent deferred sales
charge. See SALES CHARGES ON WITHDRAWALS, page 17. The withdrawal will be
effected as of the end of the valuation period in which a proper withdrawal
request is received at the Annuity Service Center.
Prudential will generally pay the amount of any withdrawal, less any applicable
sales charges and any required tax withholding, within 7 days after it receives
a properly completed withdrawal request. Prudential may delay payment of any
withdrawal allocable to the subaccount[s] for a longer period if the disposal or
valuation of the Account's assets is not reasonably practicable because the New
York Stock Exchange is closed for other than a regular holiday or weekend,
trading is restricted by the SEC or the SEC declares that an emergency exists.
With respect to the amount of any withdrawal allocable to the fixed-rate option,
Prudential expects to pay the withdrawal promptly upon request. However,
Prudential has the right to delay payment of such withdrawal for up to 6 months
(or a shorter period if required by applicable law). Prudential will pay
interest of at least 3% a year if it delays such a payment for 30 days or more
(or a shorter period if required by applicable law).
Prudential also offers an Automated Withdrawal feature which enables Contract
owners to receive periodic withdrawals either monthly, quarterly, semi-annually
or annually. Withdrawals may be made from a designated investment option or
proportionally from all investment options. Withdrawals must be in a specified
amount rather than a percentage of the amount in the portfolio. Withdrawal
charges may apply if the withdrawals in any Contract year exceed the
withdrawal-free amount.
A withdrawal will generally have federal income tax consequences, which could
include tax penalties. The Contract owner should consult with a tax advisor
before making a withdrawal.
DEATH BENEFIT
If the annuitant should die before he or she has begun to receive annuity
payments, a death benefit, calculated as of the date due proof of death is
received by Prudential, will be payable to the beneficiary you designate. Unless
the retirement arrangement that covered you provides otherwise, the beneficiary
will have the right to elect to receive this amount without the imposition of
any sales charge or any further annual maintenance charge, in one sum, in
periodic payments, in the form of a lifetime annuity or in a combination of
these ways. Payments will begin once Prudential receives all information
necessary to process the claim. If the death benefit is payable as a result of
your coverage under a qualified pension plan, IRA, SEP savings incentive match
plan for employees under section 408(p) of the Code ("SIMPLE"), or tax-deferred
annuity under section 403(b) of the Code, your entire death benefit generally
must be distributed within 5 years after your date of death. However, if an
annuity payment option is elected, and if annuity payments begin within one year
of your death, the death benefits may be distributed over the beneficiary's life
expectancy. If your spouse is your beneficiary, annuity payments need only begin
on or before April 1 of the calendar year following the calendar year in which
you would have attained age 70 1/2 or in some instances, the remaining interest
in the Contract may be rolled over to an IRA owned by your spouse. With respect
to Contracts issued in connection with IRAs, if your spouse is the designated
beneficiary, the Contract may continue
15
<PAGE>
with your spouse treated as the employee. If you die after you have begun to
receive annuity payments as a result of your coverage under a qualified
retirement plan, traditional IRA, SEP, SIMPLE or tax-deferred annuity, but
before your entire interest in the Contract is distributed, the remaining
portion of your interest in the Contract must be distributed at least as rapidly
under the method of distribution being used as of your date of death. Special
additional rules apply to Contracts used in conjunction with plans subject to
Section 457 of the Code. Subject to the terms of the retirement arrangement, if
the beneficiary fails to make any election within any time limit prescribed by
or for the retirement arrangements that covered the Contract owner, Prudential
will make a one-sum cash payment to the beneficiary, after deduction of the
annual account charge then due.
The death benefit will equal the greater of (a) the contract fund or (b) the
"minimum proceeds," both determined as of the date Prudential receives due proof
of death. The minimum proceeds is the sum of the purchase payments you made,
plus the Additional Amounts credited by Prudential, reduced by any withdrawal(s)
you made. Each withdrawal reduces the minimum proceeds in the same proportion as
it reduces the Contract fund on the withdrawal date. Minimum proceeds does not
include investment results. The minimum proceeds may be enhanced on the sixth
Contract anniversary. If, on that date, the Contract fund is greater than the
minimum proceeds, the minimum proceeds will be increased to equal the Contract
fund on that date. Going forward, minimum proceeds will continue to be adjusted
to reflect any future purchase payments or withdrawals as described above. The
increase to minimum proceeds on the sixth Contract anniversary is not currently
applicable to contracts issued in Texas.
Under certain types of retirement arrangements, in the case of a married
Participant, a pre-retirement survivor annuity is paid to the Participant's
spouse if the Participant dies prior to his or her retirement under the plan. A
Participant may waive this coverage with his or her spouse's consent on or after
attaining age 35 or upon termination of employment, if earlier. This consent
must contain the signatures of the Participant and spouse and must be notarized
or witnessed by an authorized plan representative. Unless such consent is
obtained, the law requires that at least 50% of the Participant's account
balance as of his or her date of death be used to purchase a life annuity form
of payment for the Participant's spouse even if the designated beneficiary is
someone other than the spouse. These spousal consent requirements were generally
effective beginning January 1, 1985 and apply to married vested Participants in
most qualified pension plans, including plans for self-employed individuals, and
those Section 403(b) annuities which are considered employee pension benefit
plans under ERISA. Subject to these spousal consent rules, unless the
beneficiary has been irrevocably designated, the owner may change the
beneficiary at any time.
VALUATION OF A CONTRACT OWNER'S CONTRACT FUND
The value of a Contract owner's Contract fund is the sum of his or her interests
in the variable investment options and in the fixed-rate option. The portion of
the Contract fund allocated to the Account is the sum of the interests in each
subaccount. The values are measured in Units, for example, Money Market Units,
Diversified Bond Units or Flexible Managed Units. Every purchase payment made by
an owner is converted into Units of the subaccount or subaccounts selected by
dividing the amount of the purchase payment by the Unit Value for the subaccount
to which that amount has been allocated. The value of these Units changes each
valuation period to reflect the investment results, expenses, and charges of the
subaccount and the corresponding Series Fund portfolio. Further detail about
Units is contained in the statement of additional information.
There is, of course, no guarantee that an owner's Contract fund will increase or
that it will not fall below the amount of the owner's total purchase payments.
However, Prudential guarantees a minimum interest rate of 3.1% a year on that
portion of the Contract fund allocated to the fixed-rate option. Excess interest
on payments allocated to the fixed-rate option may be credited in addition to
the guaranteed interest rate. See THE FIXED-RATE OPTION, page 19. The valuation
of the portion of the Contract fund held in the Real Property Account is
described in the attached prospectus for the Real Property Account.
CHARGES, FEES, AND DEDUCTIONS
1. PREMIUM TAXES
A charge may be deducted for taxes attributable to premiums. For these purposes,
"taxes attributable to premiums" shall include any state or local premium taxes
and, where approval has been obtained, any federal premium taxes and any
federal, state or local income, excise, business or any other type of tax (or
component thereof) measured by or based upon the amount of premium received by
Prudential. If Prudential pays a state or local tax at the time purchase
payments are made, the deduction will be made at that time based on the
applicable rate. Currently, no such deduction is made from purchase payments in
any state. In some states, however, Prudential pays a premium tax when an
annuity is effected. In those states, the tax will be deducted at that time. The
tax rates currently in effect in those states that impose a tax range from 0.5%
to 5%. Prudential also reserves the right to deduct from each
16
<PAGE>
purchase payment a charge up to a maximum of 0.3% for federal income taxes
measured by premiums in those states where approval has been obtained.
Currently, no such charge is being made in any state.
A deduction for any such taxes imposed on purchase payments will not be made,
however, except to the extent that the total tax attributable to premiums is in
excess of 4% when: (1) a Contract owner's total purchase payments, less any
purchase payments withdrawn, equal or exceed $50,000; or (2) a Contract owner
purchases separate Contracts for each of his or her children or grandchildren as
annuitants, each Contract has purchase payments totalling at least $25,000, and
total purchase payments, less any purchase payments withdrawn, equal or exceed
$50,000.
2. SALES CHARGES ON WITHDRAWALS
A contingent deferred sales charge may be imposed on the withdrawal of purchase
payments. 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. There is no sales charge on the withdrawal of investment
income. No sales charge will be imposed if the Contract is surrendered due to
the death of the annuitant.
The sales charge will be applied as a percentage of the amount of a purchase
payment withdrawn within 6 Contract years following the payment, allowing for a
10% yearly free withdrawal privilege. The percentage charged will vary from 4%
to 7% depending on how soon the withdrawal occurs from the date the purchase
payment was made. Any amount that the owner withdraws will first be treated for
the purpose of calculating this sales charge as a withdrawal of investment
income until an amount equal to the Contract's total investment income has been
withdrawn. For the purpose of determining sales charges, further withdrawals
will be considered withdrawals of purchase payments. Purchase payments are
deemed to be withdrawn on a first-in, first-out basis. The amount of any sales
charge will depend on the amount of purchase payments withdrawn and the number
of Contract years that has elapsed since the owner made the particular purchase
payment. The sales charge will be determined without reference to the source of
the withdrawal.
In a Contract year when sales charges apply (the first 6 Contract years
following a purchase payment), the withdrawal of purchase payment amounts up to
10% of the Contract fund may be made without incurring a sales charge. This is
so even if partial withdrawals have been made in previous years. This
charge-free withdrawal amount does not accumulate from Contract year to Contract
year. In the first 6 years following a purchase payment, a sales charge will
apply to any part of a withdrawal of a purchase payment in each year which is in
excess of 10% of the Contract fund as of the date of the first withdrawal in
that Contract year.
In addition, for non-qualified contracts and qualified contracts issued on or
after May 1, 1993, the following will apply: based on regulatory approval of the
Waiver of Withdrawal Charges endorsement ("Critical Care Access"), all or part
of any withdrawal and maintenance charges associated with a full or partial
withdrawal, or any annuitization or withdrawal charge due on the annuity date,
will be waived following the receipt of due proof that the annuitant or
co-annuitant (if applicable) has been confined to an eligible nursing home or
hospital for a period of at least 3 months or a physician has certified that the
annuitant or co-annuitant (if applicable) has 6 months or less to live.
If an owner withdraws all or part of a purchase payment before the end of the
Contract year during which it was made, the sales charge will be 7% of the
purchase payment withdrawn, after deducting the 10% free withdrawal amount. The
sales charge imposed on the withdrawal of a purchase payment during the 2
Contract years following the Contract year in which the purchase payment was
made is 7% and then decreases in the 3rd, 4th, and 5th years following the year
in which the payment was made, in accordance with the following table:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
FOR WITHDRAWALS OF PURCHASE PAYMENTS THE SALES CHARGE WILL BE EQUAL TO
DURING THE CONTRACT YEAR INDICATED THE FOLLOWING PERCENTAGE OF THE
PURCHASE PAYMENT WITHDRAWN(a)
- --------------------------------------------------------------------------------------------------------
<S> <C>
Contract Year In Which Payment Made 7%
First Contract Year Following Year in Which Payment Made 7%
Second Contract Year Following Year in Which Payment Made 7%
Third Contact Year Following Year in Which Payment Made 6%
Fourth Contract Year Following Year in Which Payment Made 5%
Fifth Contract Year Following Year in Which Payment Made 4%
Subsequent Contract Years No Charge
- --------------------------------------------------------------------------------------------------------
(a) Subject to 10% free withdrawal described above.
- --------------------------------------------------------------------------------------------------------
</TABLE>
For purchase payments made on and after the annuitant's 81st birthday, the sales
charge percentages described in the above table for withdrawals of such purchase
payments will be subject to reduction based on reductions in costs for purposes
of complying with state non-forfeiture laws.
17
<PAGE>
The owner's withdrawal request should specify the source from which the
withdrawal is to be made. Otherwise, the withdrawal, subject to minimum amount
requirements, will be allocated to the investment option[s] in which the
Contract fund is invested in the same proportions as the value of the interests
in these options bears to the total value of the owner's Contract fund.
Amounts used for the purpose of effecting an annuity or the interest payment
option are subject to the withdrawal charges described above. See EFFECTING AN
ANNUITY, page 24. However, this charge will not be deducted if a life annuity or
fixed period annuity of 10 years or greater is effected after the first Contract
year.
3. RECAPTURE OF ADDITIONAL AMOUNTS
If an owner makes a withdrawal which consists partially or wholly of purchase
payments, Prudential may recapture the Additional Amounts that were credited to
the Contract fund based on those payments. If the duration from the start of the
Contract year in which a purchase payment was made to the start of the Contract
year of withdrawal is 6 years or more, the Additional Amounts credited will not
be recaptured. For example, suppose you make an initial purchase payment of
$10,000 for which you are credited with a bonus of 1% or $100. In the second
year, you make an additional payment of $2,400 and are credited with an
additional bonus of $24. In the fifth Contract year you request a partial
Contract withdrawal of $1,600. On the date of the withdrawal, the value of your
Contract fund is $13,900, which includes $1,376 of earnings. Thus, the requested
withdrawal represents a withdrawal of $224 of purchase payments. Because $224 of
purchase payments is being withdrawn and the duration from the start of the
Contract years of these purchase payment to the Contract year of withdrawal is
less than 6 years, the portion of the Additional Amounts recaptured will be
$2.24 (1% of $224).
Prudential will not recapture Additional Amounts credited upon the portion of
the purchase payment withdrawn if such withdrawal is used to effect an annuity
that is not subject to a sales charge or is the result of a withdrawal where
surrender charges have been waived due to confinement in a nursing home or
hospital, or due to a terminal illness. See SALES CHARGES ON WITHDRAWALS, page
17.
4. ADMINISTRATIVE CHARGE
There are two possible charges imposed under the Contracts to reimburse
Prudential for the expenses it incurs in administering the Contracts, which
include such things as issuing the Contract, establishing and maintaining
records, and providing reports to Contract owners. These are an annual
maintenance charge and a daily administrative charge. An annual maintenance
charge of $30 will be deducted if and only if the Contract fund is less than
$10,000 on a Contract anniversary or at the time a full withdrawal is effected.
This $30 fee will not be charged if the Contract fund is less than $10,000 as a
result of a withdrawal due to confinement in a nursing home or hospital, or due
to a terminal illness, as applied under the Waiver of Withdrawal Charges
endorsement. See SALES CHARGES ON WITHDRAWALS, page 17. Otherwise, no annual
maintenance charge will be made. This charge is not made after annuitization and
may not be increased by Prudential.
The daily administrative charge will be assessed by deducting, from the assets
of each of the variable investment options, a percentage of those assets
equivalent to an effective annual rate of up to 0.2% (.00054740%, daily). This
administrative charge is guaranteed never to be increased above an effective
annual rate of 0.2% over the life of the Contracts.
5. CHARGE FOR ASSUMING MORTALITY AND EXPENSE RISKS
In addition to the sales and administrative charges described above, a deduction
is made daily from each of the variable investment options to reimburse
Prudential for assuming the risk that its estimates of longevity and of the
expenses it expects to incur, over the lengthy periods that the Contract may be
in effect--estimates that are the basis for the level of the other charges it
makes and the annuity purchase rates it guarantees under the Contract--will turn
out to be incorrect. The charge will be made daily at an annual rate of up to 1%
(.00272616%, daily) of the assets held in the variable investment options. Of
this amount, 0.3% is for assuming the risk that the charges made under the
Contracts may not cover administrative expenses, and 0.7% is for assuming
mortality risks. This charge is not assessed against amounts allocated to the
fixed-rate option or after a fixed-dollar annuity is effected.
6. EXPENSES INCURRED BY THE SERIES FUND
The charges and expenses of the Series Fund, net of reimbursements, are
indirectly borne by the Contract owners. Investment management fees for the
available Series Fund portfolios are briefly described under THE PRUDENTIAL
SERIES FUND, INC. on page 11. Further detail about management fees and other
Series Fund expenses is provided in the attached prospectus for the Series Fund
and its statement of additional information. Higher charges and expenses are
incurred if the Real Property Account is selected, as described in the
prospectus for the Real Property Account that is attached to this one.
18
<PAGE>
THE FIXED-RATE OPTION
BECAUSE OF EXEMPTIVE AND EXCLUSIONARY PROVISIONS, INTERESTS IN THE FIXED-RATE
OPTION UNDER THE CONTRACT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933 AND THE GENERAL ACCOUNT HAS NOT BEEN REGISTERED AS AN INVESTMENT COMPANY
UNDER THE INVESTMENT COMPANY ACT OF 1940. ACCORDINGLY, INTERESTS IN THE
FIXED-RATE OPTION ARE NOT SUBJECT TO THE PROVISIONS OF THESE ACTS, AND
PRUDENTIAL HAS BEEN ADVISED THAT THE STAFF OF THE SECURITIES AND EXCHANGE
COMMISSION HAS NOT REVIEWED THE DISCLOSURE IN THIS PROSPECTUS RELATING TO THE
FIXED-RATE OPTION. DISCLOSURE REGARDING THE FIXED-RATE OPTION MAY, HOWEVER, BE
SUBJECT TO CERTAIN GENERALLY APPLICABLE PROVISIONS OF FEDERAL SECURITIES LAWS
RELATING TO THE ACCURACY AND COMPLETENESS OF STATEMENTS MADE IN PROSPECTUSES.
As explained earlier, a Contract owner may elect to allocate, either initially
or by transfer, all or part of the amount credited under the Contract to a
fixed-rate option, and the amount so allocated or transferred becomes part of
Prudential's general assets. Sometimes this is referred to as Prudential's
general account, which consists of all assets owned by Prudential other than
those in the Account and in other separate accounts that have been or may be
established by Prudential. Subject to applicable law, Prudential has sole
discretion over the investment of the assets of the general account, and
Contract owners do not share in the investment experience of those assets.
Instead, Prudential guarantees that the part of the Contract fund allocated to
the fixed-rate option will accrue interest daily at an effective annual rate
that Prudential declares periodically, but not less than an effective annual
rate of 3.1%. Currently, for Contracts issued on or after November 6, 1995, the
declared interest rates will remain in effect from the date money is allocated
to the fixed-rate option until that same date one year later. For Contracts
issued prior to November 6, 1995, the declared interest rates will remain in
effect from the date money is allocated to the fixed rate option until that same
date three years following the date of the allocation. After the initial
guarantee period, a new crediting rate will be declared each year, and will
remain in effect for at least the calendar year, so long as required by
applicable law. Prudential reserves the right to change this practice.
Prudential is not obligated to credit interest at a higher rate than 3.1% where
state approved (otherwise 4%), although in its sole discretion it may do so.
Different crediting rates may be declared for different portions of the Contract
fund allocated to the fixed-rate option. On request, a Contract owner will be
advised of the interest rates that currently apply to his or her Contract.
Transfers from the fixed-rate option are subject to strict limits. See
TRANSFERS, page 14.
FEDERAL TAX STATUS
The following discussion is general in nature. It is not intended as tax advice.
Nor does it consider any applicable state or other tax laws. A qualified tax
advisor should be consulted for complete information and advice. The discussion
is based on current laws and interpretations, which may change.
The following rules do not generally apply to annuity Contracts held by or for
non-natural persons (e.g., corporations). For special rules relating to
contracts issued in connection with tax qualified plans, IRAs, TDA's and Section
457 plans, see CONTRACTS USED IN CONNECTION WITH TAX FAVORED PLANS, page 21.
Where a contract is held by a non-natural person, unless the Contract owner is a
nominee or agent for a natural person (or in other limited circumstances), the
Contract will generally not be treated as an annuity for tax purposes, and
increases in the value of the Contract will be subject to current tax.
The following discussion assumes that the Contract will be treated as an annuity
for federal income tax purposes. Section 817(h) of the Internal Revenue Code
(the "Code") provides that the underlying investments for a variable annuity
must satisfy certain diversification requirements. For further details on
diversification requirements, see DIVIDENDS, DISTRIBUTIONS, AND TAXES in the
attached prospectus for the Series Fund. Prudential believes the underlying
variable investment options for the Contract meet these diversification
requirements. In connection with the issuance of temporary regulations relating
to diversification requirements under Section 817(h), the Treasury Department
announced that such regulations do not provide guidance concerning the extent to
which Contract owners may direct their investments to particular divisions of a
separate account. Such guidance will be included in regulations or revenue
rulings under Section 817(d) relating to the definition of a variable contract.
Because of this uncertainty, Prudential reserves the right to make such changes
as it deems necessary to assure that the Contract continues to qualify as an
annuity for tax purposes. Any such changes will apply uniformly to affected
Contract owners and will be made with such notice to affected Contract owners as
is feasible under the circumstances.
Under current law Prudential believes that the Contract will be treated as an
annuity for federal income tax purposes and that the issuing insurance company,
Prudential, and not the Contract owner, will be treated as the owner of the
underlying investments for the Contract. Accordingly, generally no tax should be
payable by any Contract owner as a result of any increase in the value of the
Contract until money is received by him or her, either in the form of a
19
<PAGE>
cash withdrawal or as an annuity. It is important, however, to consider how
amounts that are withdrawn will be taxed.
TAXES PAYABLE BY CONTRACT OWNERS
The Code generally provides that amounts withdrawn by a Contract owner from his
or her Contract, before annuity payments begin, will be treated for tax purposes
as being first withdrawals of investment income, rather than as withdrawals of
purchase payments, until all investment income has been withdrawn. To the extent
the assignment is authorized by the Contract, the assignment or pledge (or
agreement to assign or pledge) any portion of the value of the Contract for a
loan shall be treated as a withdrawal subject to this rule. Amounts withdrawn
before annuity payments begin which represent a distribution of investment
income will be taxable as ordinary income and may be subject to a penalty tax.
Amounts which represent a withdrawal of purchase payments will ordinarily not be
taxable as ordinary income or be subject to a penalty tax.
All contracts issued after October 21, 1988 by the same company (and affiliates)
to the same contract owner during any calendar year are treated as one annuity
contract for purposes of determining the amount includible in income of any
distribution that is not received as an annuity payment.
Where a contract is issued in exchange for a contract containing purchase
payments made before August 14, 1982, favorable tax rules may apply to certain
withdrawals from the contract. Consult a tax advisor for information regarding
these rules.
Different tax rules apply to receipt of annuity payments. A portion of each
annuity payment received under a Contract will be treated as a partial return of
the purchase payments and will not be taxable. The remaining portion of the
annuity payment will be taxed as ordinary income. Exactly how an annuity payment
is divided into taxable and non-taxable portions depends upon the period over
which annuity payments are expected to be received, which in turn is governed by
the form of annuity selected and, where a lifetime annuity is chosen, by the
life expectancy of the annuitant. In the case of Contracts under which annuity
payments commence after 1986, annuity payments which are received after the
annuitant recovers the full amount of the purchase payments will be fully
includible in income. Should annuity payments cease on account of the death of
the annuitant before the purchase payment has been fully recovered, the
annuitant, on his or her last tax return, (or in certain cases the beneficiary),
is allowed a deduction for the unrecovered amount.
The Code further provides that any amount received under an annuity contract may
be subject to a penalty tax. The amount of the penalty is equal to 10% of that
portion of the amount that is includible in income. Some withdrawals will be
exempt from the penalty. Some examples are withdrawals: (1) made on or after the
Contract owner reaches age 59 1/2, (2) made on or after the death of the
Contract owner, (3) attributable to the Contract owner becoming disabled within
the meaning of Code section 72(m)(7), (4) in the form of level annuity payments,
made not less frequently than annually under a lifetime annuity, (5) allocable
to investment in the contract before August 14, 1982, (6) under a qualified
funding asset (defined by Code section 130(d)), or (7) under an immediate
annuity contract (within the meaning of section 72(u)(4)).
If the 10% penalty tax does not apply to a withdrawal by reason of the exception
for withdrawals in the form of a level annuity (clause (4) above), but the
series of payments is modified (other than by reason of death or disability),
either (a) before the end of the 5-year period beginning with the first payment
and after the Contract owner reaches age 59 1/2, or (b) before the Contract
owner attains age 59 1/2, the Contract owner's tax for the year of the
modification will be increased by the penalty tax that would have been imposed
without the exception, plus interest for the deferral period.
Election of the interest payment option is not considered an annuity payment for
tax purposes. Accordingly, unless the Contract is held by an individual
retirement annuity, such election will cause investment income under the
Contract to be taxable.
Generally, the same tax rules apply to amounts received as a death benefit by
the beneficiary as those set forth above with respect to the Contract owner. The
election of an annuity payment option by the beneficiary may defer taxes
otherwise payable upon the receipt of a lump sum death benefit. Certain minimum
distribution requirements apply in the case where the owner dies. See IRS
Required Distributions on Death of Owner in the Statement of Additional
Information.
Transfer of the Contract to a new owner or assignment of the Contract may have
gift, estate and/or income tax consequences depending on the circumstances. In
addition, a transfer of the Contract to or the designation of a beneficiary who
is either 37 1/2 years younger than the Contract owner or a grandchild of the
Contract owner may have Generation Skipping Transfer tax consequences under
section 2601 of the Code.
Certain transfers of a Contract for less than full consideration, such as a
gift, will trigger tax on the investment income in the Contract. This rule does
not apply to certain transfers between spouses or incident to divorce. See
OWNERSHIP OF THE CONTRACT, page 26.
20
<PAGE>
CONTRACTS USED IN CONNECTION WITH TAX FAVORED PLANS
The Contract may be purchased for use in connection with various retirement
arrangements entitled to favorable federal income tax treatment ("tax favored
plans"). These are individual retirement accounts and annuities ("IRAs") subject
to Sections 408(a) and 408(b) of the Code, simplified employee pension plans
("SEPs") under Section 408(k) of the Code, saving incentive match plans for
employees ("SIMPLEs") under Section 408(p) of the Code, tax deferred annuities
("TDAs") under Section 403(b) of the Code, deferred compensation plans of state
and local governments and tax exempt organizations under Section 457 of the
Code, and pension, profit sharing and annuity plans qualified under Sections
401(a) and 403(a) of the Code. Such plans, accounts, and annuities must satisfy
certain requirements of the Code in order to be entitled to the federal income
tax benefits accorded to these plans. A discussion of these requirements is
beyond the scope of this prospectus, and it is assumed that such requirements
are met with respect to a Contract purchased for use in connection with a tax
favored plan. This Contract is not available in the TDA and pension markets in
Oregon.
In general, assuming the requirements and limitations of the Code provisions
applicable to the particular type of tax favored plan involved are satisfied,
purchase payments (other than after-tax employee payments) under the Contract
will be deductible (or not includible in income) up to certain amounts each year
and tax will not be imposed on the investment income and realized gains of the
subaccounts in which the purchase payments have been invested until a
distribution is received. Persons contemplating the purchase of a Contract in
connection with a tax favored plan should consult their tax advisor before
purchasing a Contract for such purposes.
The comments which follow concerning specific tax favored plans are intended
merely to call attention to certain of their features. No attempt has been made
to discuss in full the tax ramifications involved or to offer tax advice. As
suggested above, a qualified tax advisor should be consulted for advice and
answers to any questions.
PLANS FOR SELF-EMPLOYED INDIVIDUALS
For self-employed individuals who establish qualified plans, contributions are
deductible within the limits prescribed by the Code. Annual deductible
contributions cannot exceed the lesser of $30,000 or 25% of "earned income". For
this purpose "earned income" is computed after the deduction for contributions
to the plan is considered.
Under these plans, payments are subject to certain minimum distribution
requirements, and generally must begin by April 1 of the calendar year following
the later of the calendar year in which the employee: (1) attains age 70 1/2; or
(2) retires.
IRAs
The Code permits persons who receive certain qualifying distributions from a
qualified pension or profit-sharing plan, TDA or IRA to make, within 60 days, a
tax-free "rollover" transfer of all or any part of the amount of such
distribution to an IRA which they establish. Additionally, the spouse of a
deceased employee may roll over to an IRA certain distributions received by the
spouse from a qualified pension or profit-sharing plan, TDA or IRA on account of
the employee's death.
Because the Contract's minimum initial payment of $10,000 is greater than the
maximum annual contribution permitted to be made to an IRA (generally, $2,000),
a Contract may be purchased as a Section 408(b) IRA only in connection with a
"rollover" of the proceeds of a qualified plan, TDA or IRA. In order to qualify
as an IRA under Section 408(b) of the Code, a Contract (or a rider made a part
of the Contract) must contain certain additional provisions: (1) the owner of
the Contract must be the annuitant, except when a transfer is made to a former
spouse in accordance with a divorce decree as provided in Section 408(d)(6) of
the Code; (2) the rights of the owner cannot be forfeitable; (3) the Contract
may not be sold, assigned, discounted or pledged for any purpose to any person
except Prudential; (4) except in the case of a "rollover" contribution, the
annual premium may not exceed $2,000; (5) generally, for traditional IRAs, the
annuity date may be no later than April 1st of the calendar year following the
calendar year in which the annuitant attains age 70 1/2; and (6) annuity and
death benefit payments must satisfy certain minimum distribution requirements.
Contracts issued as Section 408(b) IRAs will conform to such requirements.
SEPs
Under a SEP, annual employer contributions to an IRA established by an employee
are not includible in income up to the lesser of $30,000 or 15% of the
employee's earned income (excluding the employer's contribution to the SEP). In
addition, a SEP must satisfy certain minimum participation requirements and
contributions may not discriminate in favor of highly compensated employees.
Contracts issued as Section 408(b) IRAs established under a SEP must satisfy the
requirements described above for a Section 408(b) IRA.
Certain SEP arrangements are permitted to allow employees to elect to reduce
their salaries by as much as $10,000 (in 1998, as indexed) and have their
employer make contributions on their behalf to the SEP. These arrangements,
called salary reduction SEPs, are available only if the employer maintaining the
SEP has 25 or fewer
21
<PAGE>
employees and at least 50% of the eligible employees elect to make salary
reduction contributions. Other limitations may reduce the permissible
contribution level for highly compensated employees. New Salary Reduction SEPs
may not be established after 1996.
In accordance with IRS regulations, persons who purchase a Contract used as an
IRA, including one established under a SEP arrangement, are given disclosure
material prepared by Prudential. The material includes this prospectus, a copy
of the Contract, and a brochure containing information about eligibility,
contribution limits, tax consequences, and other particulars concerning IRAs.
The regulations require that such persons be given a free look after making an
initial contribution in which to affirm or reverse their decision to
participate. Therefore, within the free look period, a person may cancel his or
her Contract by notifying Prudential in writing, and Prudential will refund all
of the purchase payments under the Contract or, if greater, the amount credited
under the Contract (less any bonus) computed as of the valuation period that
Prudential receives the notice for cancellation. See SHORT-TERM CANCELLATION
RIGHT OR "FREE LOOK", page 13.
TDA's
Section 403(b) of the Code permits employers and employees of Section 501(c)(3)
tax-exempt organizations and public educational organizations to make, subject
to certain limitations, contributions to an annuity in which the employee's
rights are nonforfeitable (commonly referred to as a "tax deferred annuity" or
"TDA"). The amounts contributed under a TDA and increments thereon are not
taxable as income until distributed as annuity income or otherwise. Generally,
contributions to a TDA may be made through a salary reduction arrangement up to
a maximum of $10,000 (in 1998, as indexed). However, under certain special
rules, the limit could be increased as much as $3,000. In addition, the Code
permits certain total distributions from a TDA to be "rolled over" to another
TDA or IRA. Certain partial distributions from a TDA may be "rolled over" to an
IRA.
An annuity contract will not qualify as a TDA, unless under such contract
distributions from salary reduction contributions and earnings thereon (other
than distributions attributable to assets held as of December 31, 1988) may be
paid only on account of attainment of age 59 1/2, severance of employment,
death, total and permanent disability and, in limited circumstances, hardship.
(Such hardship withdrawals are permitted, however, only to the extent of salary
reduction contributions and not earnings thereon.)
The Section 403(b)(11) withdrawal restrictions referred to above do not apply to
the transfer of all or part of a Contract owner's interest in his or her
Contract among the available investment options offered by Prudential or to the
direct transfer of all or part of the Contract owner's interest in the Contract
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) of the Code.
In imposing the restrictions on withdrawals as described above, Prudential is
relying upon a no-action letter dated November 28, 1988 from the Chief of the
Office of Insurance Products and Legal Compliance of the Securities and Exchange
Commission to the American Council of Life Insurance.
Employer contributions are subject generally to the same coverage, minimum
participation and nondiscrimination rules applicable to qualified pension and
profit-sharing plans. Distributions from a TDA generally must commence by April
1 of the calendar year following the later of: (1) the calendar year in which
the employee attains age 70 1/2; or (2) the calendar year in which the employee
retires. Distributions must satisfy minimum distribution requirements similar to
those that apply to qualified plans generally.
ELIGIBLE DEFERRED COMPENSATION PLANS OF STATE OR
LOCAL GOVERNMENTS AND TAX EXEMPT ORGANIZATIONS
A Contract may be used to fund an eligible deferred compensation plan of a state
or local government or a tax-exempt organization. The amounts contributed under
such plans and increments thereon are not taxable as income until distributed or
otherwise made available to the employee or other beneficiary. If the
requirements of Section 457 of the Code are not met, however, employees may be
required to include in gross income all or part of the contributions and
earnings thereon. Although assets of deferred compensation plans are generally
part of the employer's general assets, subject to certain transition rules,
governmental plans must hold assets in a trust, annuity contract or custodial
account. Contributions generally may not exceed the lesser of $8,000 (in 1998,
as indexed) or 331/3% of the employee's compensation. Distributions must begin
by April 1 of the year following attainment of age 70 1/2 or April 1 of the
calendar year following the calendar year the participant retires, if that is
later. Distributions are subject to special minimum distribution rules in
addition to the minimum distribution requirements for qualified plans. Rollovers
are not permitted (other than between Section 457 plans).
QUALIFIED PENSION AND PROFIT SHARING PLANS
A Contract may be used to fund a qualified pension or profit-sharing plan. The
plan itself must satisfy the coverage, minimum participation nondiscrimination
and minimum distribution and all other requirements applicable generally to
22
<PAGE>
qualified pension and profit-sharing plans. The Code also imposes dollar
limitations on contributions that may be made to or benefits that may be
received from a qualified pension or profit-sharing plan (including a limitation
of $10,000 (in 1998, as indexed) on the amount that an employee may contribute
through a salary reduction arrangement in the case of a plan with a qualified
"cash or deferred" arrangement). Generally, distributions from a qualified plan
must begin by April 1 of the year following attainment of age 70 1/2 or April 1
of the calendar year the participant retires, if that is later. Distributions
are subject to certain minimum distribution requirements.
MINIMUM DISTRIBUTION OPTION
The Minimum Distribution Option is a program available with IRA and SEP
programs. It enables the client to satisfy IRS minimum distribution
requirements, without having to annuitize or cash surrender their Contracts.
Distributions from traditional IRAs and SEPs must begin by April 1 of the year
following attainment of age 70 1/2. Each year until the maturity date,
Prudential will recalculate the minimum amount the Contract owner is required to
withdraw from his or her IRA or SEP. Prudential will send the Contract owner a
check for the minimum distribution amount less any partial withdrawals made
during the year. Prudential's calculations are based solely on the cash value of
the Contract. If the Contract owner has other IRA accounts, he or she will be
responsible for taking the minimum distribution from each.
WITHHOLDING
Certain distributions from qualified retirement plans and 403(b) annuities will
be subject to mandatory 20% withholding unless the distribution is an eligible
rollover distribution that is "directly" rolled over into another qualified
plan, 403(b) annuity or IRA. Unless the Contract owner elects to the contrary,
the portion of any taxable amounts received under the Contract will be subject
to withholding to meet federal income tax obligations. The rate of withholding
on annuity payments where mandatory withholding is not required will be
determined on the basis of the withholding certificate filed by the Contract
owner with Prudential. For payments not subject to mandatory withholding, if no
such certificate is filed, the Contract owner will be treated, for purposes of
determining the withholding rate on annuity payments, as a married person with
three exemptions; the rate of withholding on all other payments made under the
Contract, such as amounts received upon withdrawals, will be 10%. Thus, if the
Contract owner fails to elect that there be no withholding, Prudential will
withhold from every withdrawal or annuity payment the appropriate percentage of
the amount of the payment that is taxable. Prudential will provide the Contract
owner with forms and instructions concerning the right to elect that no amount
be withheld from payments. Recipients who elect not to have withholding made are
liable for payment of federal income taxes on the taxable portion of the
distribution. All recipients may be subject to penalties under the estimated tax
payment rules if withholding and estimated tax payments are not sufficient.
Contract owners who do not provide a social security number or other taxpayer
identification number will not be permitted to elect out of withholding. Special
withholding rules apply to nonresident aliens. Generally, there will be no
withholding for taxes until payments are actually received under the Contract.
Distributions to Contract owners under an eligible deferred compensation plan
subject to Section 457 of the Code are treated as the payment of wages for
federal income tax purposes and thus are subject to the 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 Account are
taxed as part of the operations of Prudential. No charge is being made currently
against the Account for Company federal income taxes (excluding any charge for
taxes attributable to premiums.) Prudential will review the question of a charge
to the Account 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 Contract.
Under current law, Prudential may incur state and local taxes (in addition to
premium taxes) in several states. At present, these taxes are not significant
and they are not charged against the Contract or the Account. If there is a
material change in applicable state or local tax laws, the imposition of any
such taxes upon Prudential that are attributable to the Account may result in a
corresponding charge against the Account.
ERISA DISCLOSURE
The Employee Retirement Income Security Act of 1974 ("ERISA") prevents a
fiduciary with respect to a pension or profit-sharing plan from receiving any
benefit from any party dealing with the plan as a result of the sale of the
Contract (other than benefits that would otherwise be provided in the plan).
Administrative exemptions issued by the IRS and the Department of Labor under
ERISA permit transactions between insurance agents and qualified pension and
profit sharing plans under Sections 401(a) and 403(a) of the Code and with SEP
IRAs. To be able to rely on the exemption certain information must be disclosed
to the plan fiduciary. The information that must be disclosed includes the
relationship between the agent and the insurer, a description of any charges,
fees, discounts, penalties or adjustments that may be imposed in connection with
the
23
<PAGE>
purchase, holding, exchange or termination of the Contract, as well as the
commissions received by the agent. Information about any applicable charges,
fees, discounts, penalties or adjustments may be found under CHARGES, FEES AND
DEDUCTIONS, page 16. Information about sales representatives and commissions may
be found under SALE OF THE CONTRACT AND SALES COMMISSIONS, page 26. In addition
to disclosure, other conditions apply to the use of the exemption. For example,
a plan fiduciary may not be a partner or employee of the Prudential
representative making the sale. The fiduciary must not be a relative of the
representative (including spouse, direct descendant, spouse of a direct
descendant, ancestor, brother, sister, spouse of a brother or sister). The
representative may not be an employee, officer, director or partner of either
the independent fiduciary or the employer establishing the plan. No relative of
the representative may: (1) control, directly or indirectly, the corporation
establishing or maintaining the plan; (2) be either a partner with a 10% or more
interest in the partnership or the sole proprietor establishing or maintaining
the plan; or (3) be an owner of a 5% or more interest in a Subchapter S
Corporation establishing or maintaining the plan. In addition, no affiliate
(including relatives) of the representative may be a trustee, administrator or a
fiduciary with written authority to acquire, manage or dispose of the assets of
the plan.
ADDITIONAL ERISA REQUIREMENTS
If your retirement arrangement is part of a plan governed by ERISA, additional
requirements such as spousal consent to distributions may be necessary. Consult
the terms of your retirement arrangement.
EFFECTING AN ANNUITY
Upon the annuity date, the amount credited under a Contract (which includes any
amount allocated to the fixed-rate option as well as to the variable investment
options) is converted into a fixed-dollar annuity payable to the annuitant[s]
named in the Contract. If two annuitants are named in the Contract, the Contract
owner may decide how much of the amount is to be applied for each annuitant and
under which form[s] of annuity. If the Contract is not large enough to produce a
monthly payment of $50, the Contract owner will be paid the cash surrender value
in a single sum.
When a Contract owner requests a withdrawal in the form of an annuity, all
amounts held in the investment options will be withdrawn 7 days prior to the end
of the month in which the request is made or the end of a subsequent month
designated by the owner. An amount equal to the withdrawal charge, if any, and
any additional amount subject to recapture, will be deducted. An amount equal to
the premium tax, if any, imposed by the state in which the annuitant resides is
then deducted (unless deducted earlier). Many states do not impose a premium
tax. In other states the tax ranges from 0.5% to 5% of the amount applied to
effect an annuity. See PREMIUM TAXES, page 16. Some local jurisdictions also
impose a tax. The amount remaining is applied to effect an annuity. This amount
becomes part of Prudential's general account.
The amount of the monthly payments will depend upon the amount applied and
tables of rates set forth in the Contract which Prudential guarantees will be
used even if longevity has significantly improved since the Contract date. If,
however, Prudential at the time is offering more favorable rates, then those
will be used.
The annuity will be in one of the forms listed below. All the annuity options
under this Contract are fixed annuity options under which the Contract owner's
participation in the variable investment options ceases when the annuity is
effected and the amount of each monthly payment does not change. Unless
Prudential consents to a later date, an annuity must begin no later than the
first Contract anniversary after the annuitant's 90th birthday, or if there are
two annuitants named in the Contract, the 90th birthday of the primary
annuitant. Special rules apply in the case of a Contract issued in connection
with a tax favored retirement plan. Prudential will then make monthly payments
to the annuitant on the first day of each month for a period determined by the
form of annuity selected. Unless applicable law states otherwise and subject to
the terms of the retirement arrangement, if the owner has not selected an
annuity option to take effect by the annuity date, the interest payment option
(see below) will become effective then.
Where the owner dies before the annuity starting date, the entire interest must
be distributed within 5 years of death. The requirement will be satisfied,
however, if the distribution to a designated beneficiary begins no later than
one year after the owner's death and is to continue over the beneficiary's life
or a period not exceeding the beneficiary's life expectancy. If the owner's
spouse is the designated beneficiary, the Contract may continue with the spouse
treated as the owner. If the owner dies on or after the annuity starting date
and before the entire interest in the annuity has been distributed, the
remaining interest will be distributed at least as rapidly as under the method
being used as of the date of death.
24
<PAGE>
1. LIFE ANNUITY WITH 120 PAYMENTS CERTAIN
Payments will be made to the annuitant monthly during his or her lifetime. If
the annuitant dies before the 120th monthly payment is due, monthly annuity
payments do not continue to the beneficiary designated by the annuitant unless
he or she so selects. Instead, the discounted value of the remaining unpaid
installments, to and including the 120th monthly payment, is payable to the
beneficiary in one sum. In calculating the discounted value of the unpaid future
payments, Prudential will discount each such payment at the interest rate used
to compute the amount of the actual 120 payments. If the payments were based on
the tables of rates set forth in the Contract, the interest rate used is 3.5% a
year. Once annuity payments have begun, an annuitant may withdraw the present
value of any of the 120 payments certain that have not been paid.
2. INTEREST PAYMENT OPTION
The annuitant may choose to have Prudential hold a designated amount to
accumulate at interest. If no option has been selected by the annuity date, this
option will automatically become effective unless applicable law states
otherwise. Prudential will pay interest at an effective rate of at least 3% a
year, and it may pay a higher rate of interest. Once this option is effected, an
annuitant may withdraw the unpaid balance, or any part not less than $100.
Generally, this option will not satisfy IRS minimum distribution requirements.
3. OTHER ANNUITY OPTIONS
Currently, you may choose to receive the proceeds of your Contract fund in the
form of payments like those of any annuity or life annuity then regularly
offered by Prudential or by Pruco Life Insurance Company that (1) is based on
United States Currency; (2) is bought by a single sum; (3) does not provide for
dividends; and (4) does not normally provide for deferral of the first payment.
Under Option 3, unless a fixed period annuity of less than 10 years is selected,
Prudential will waive withdrawal charges that might be applicable under other
annuity options. Further, if you select Option 1 without a right of withdrawal,
Prudential will effect that option under Option 3 if doing so provides greater
monthly payments.
LEGAL CONSIDERATIONS RELATING TO SEX-DISTINCT ANNUITY PURCHASE RATES
It should be noted that while in general the Contract provides for sex-distinct
annuity purchase rates for life annuities, those rates are not applicable to
Contracts offered in states that have adopted regulations prohibiting
sex-distinct annuity purchase rates. Rather, blended unisex annuity purchase
rates for life annuities will be provided under all Contracts issued in those
states, whether the annuitant is male or female. Other things being equal, such
unisex annuity purchase rates will result in the same monthly annuity payments
for male and female annuitants.
In addition, employers and employee organizations considering purchase of a
Contract should consult their legal advisors to determine whether purchase of a
Contract based on sex-distinct annuity purchase rates is consistent with Title
VII of the Civil Rights Act of 1964 or other applicable law. Prudential may
offer the Contracts with unisex annuity purchase rates to such prospective
purchasers.
Special provisions may apply if the Contract is issued in connection with a tax
favored retirement plan. The necessary information will be provided by the plan
sponsor or administrator.
OTHER INFORMATION
VOTING RIGHTS
As stated above, all of the assets held in the subaccounts of the Account will
be invested in shares of the corresponding portfolios of the Series Fund.
Prudential is the legal owner of those shares and as such has the right to vote
on any matter voted on at Series Fund shareholders meetings. However, Prudential
will, as required by law, vote the shares of the Series Fund at any regular and
special shareholders meetings in accordance with voting instructions received
from Contract owners. The Series Fund will not hold annual shareholders meetings
when not required to do so under Maryland law or the Investment Company Act of
1940. Series Fund shares for which no timely instructions from Contract owners
are received, and any shares attributable to general account investments of
Prudential, will be voted in the same proportion as shares in the respective
portfolios for which instructions are received. Should the applicable federal
securities laws or regulations, or their current interpretation, change so as to
permit Prudential to vote shares of the Series Fund in its own right, it may
elect to do so.
Matters on which Contract owners may give voting instructions include the
following: (1) election of the Board of Directors of the Series Fund; (2)
ratification of the independent accountant of the Series Fund; (3) approval of
the investment advisory agreement for a portfolio of the Series Fund
corresponding to the Contract
25
<PAGE>
owner's selected subaccount[s]; (4) any change in the fundamental investment
policy of a portfolio corresponding to the Contract owner's selected
subaccount[s]; and (5) any other matter requiring a vote of the shareholders of
the Series Fund. With respect to approval of the investment advisory agreement
or any change in a portfolio's fundamental investment policy, Contract owners
participating in such portfolios will vote separately on the matter.
The number of Series Fund shares for which instructions may be given by a
Contract owner is determined by dividing the portion of the value of the
Contract derived from participation in a subaccount, by the value of one share
in the corresponding portfolio of the Series Fund. The number of votes for which
each Contract owner may give Prudential instructions will be determined as of
the record date chosen by the Board of Directors of the Series Fund. Prudential
will furnish Contract owners with proper forms and proxies to enable them to
give these instructions. Prudential reserves the right to modify the manner in
which the weight to be given voting instructions is calculated where such a
change is necessary to comply with current federal regulations or
interpretations of those regulations.
Contract owners also share with the owners of all Prudential Contracts and
policies the right to vote in elections for members of the Board of Directors of
Prudential.
SALE OF THE CONTRACT AND SALES COMMISSIONS
Currently, Pruco Securities Corporation ("Prusec"), an indirect wholly-owned
subsidiary of Prudential, which was organized in 1971 under New Jersey law, acts
as the principal underwriter of the Contract. Prudential expects that during the
second quarter of 1998 Prusec's responsibilities as principal underwriter will
be assigned to Prudential Investment Management Services LLC ("PIMS"). PIMS,
also an indirect wholly-owned subsidiary of Prudential, is a limited liability
corporation organized under Delaware law in 1996. PIMS will act as principal
underwriter under substantially the same terms as Prusec does currently. Both
Prusec and PIMS are registered as broker-dealers under the Securities Exchange
Act of 1934 and are members of the National Association of Securities Dealers,
Inc. The principal business address of both Prusec and PIMS is 751 Broad Street,
Newark, New Jersey 07102-3777.
The Contract is currently sold by registered representatives of the principal
underwriter and may also be sold through other broker-dealers authorized by the
principal underwriter, including broker-dealers otherwise unaffiliated with
Prudential. Registered representatives of such other unaffiliated broker-dealers
may be paid on a different basis than registered representatives of the
principal underwriter or broker-dealers affiliated with Prudential. The maximum
commission that will be paid to the broker-dealer to cover both the individual
representative's commission and other distribution expenses will not exceed 6%
of the purchase payment. In addition, trail commissions based on the size of the
contract Fund may be paid.
Such commissions will be subject to reduction if Prudential accepts purchase
payments on and after the annuitant's 81st birthday. See REQUIREMENTS FOR
ISSUANCE OF A CONTRACT, page 13. The representative may be required to return
all of the first year commission if the Contract is not continued through the
first year. Representatives who meet certain productivity, profitability, and
persistency standards with regard to the sale of the Contract will be eligible
for additional compensation.
Sales expenses in any year are not equal to the deduction for sales load in that
year. Prudential expects to recover its total sales expenses over the periods
the Contracts are in effect. To the extent that the sales charges are
insufficient to cover total sales expenses, the sales expenses will be recovered
from Prudential's surplus.
SUBSTITUTION OF SERIES 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 Series Fund may
become unsuitable for investment by Contract owners because of investment policy
changes, tax law changes or the unavailability of shares for investment. In that
event, Prudential may seek to substitute the shares of another portfolio or of
an entirely different mutual fund. Before this can be done, the approval of the
SEC, and possibly one or more state insurance departments, will be required.
Contract owners will be notified of such substitution.
OWNERSHIP OF THE CONTRACT
Generally, the Contract owner is entitled to exercise all the rights under the
Contract. The Contract owner is usually, but not always, an annuitant. Ownership
of the Contract may, however, be transferred to another person who need not be
the person who is to receive annuity payments. Transfer of the ownership of a
Contract may involve federal income tax consequences, or may be prohibited under
certain Contracts, and the owner should consult with a qualified tax advisor
before attempting any such transfer. Generally, ownership of the Contract is not
assignable to another insurance company or employee benefit plan or program
without Prudential's consent.
26
<PAGE>
PERFORMANCE INFORMATION
Performance information for the subaccounts may appear in advertising and
reports to current and prospective Contract owners. Performance information is
based on historical investment experience of those investment options and does
not indicate or represent future performance.
Total returns are based on the overall dollar or percentage change in value of a
hypothetical investment. Total return quotations reflect changes in unit values
and the deduction of applicable charges.
A cumulative total return reflects performance over a stated period of time. An
average annual total return reflects the hypothetical annually compounded return
that would have produced the same cumulative total return if the performance had
been constant over the entire period.
The Money Market Subaccount may advertise its current and effective yield.
Current yield reflects the income generated by an investment in the subaccount
over a specified seven-day period. Effective yield is calculated in a similar
manner except that income earned is assumed to be reinvested.
Reports or advertising may include comparative performance information,
including, but not limited to: comparisons to market indices; comparisons to
other investments; performance rankings; and data presented by analysts or
included in publications.
See "Performance Information" in the Statement of Additional Information for
recent performance information.
REPORTS TO CONTRACT OWNERS
Once each Contract year, Contract owners will be sent statements that provide
certain information pertinent to their own Contract. These statements detail
values and transactions made and specific Contract data that apply only to each
particular Contract. On request, a Contract owner will be sent a current
statement in a form similar to that of the annual statement described above, but
Prudential may limit the number of such requests or impose a reasonable charge
if such requests are made too frequently.
Contract owners will be sent annual and semi-annual reports of the Series Fund
showing the financial condition of the portfolios and the investments held in
each.
If a single individual or company invests in the Series Fund through more than
one variable insurance contract, then the individual or company will receive
only one copy of each annual and semi-annual report issued by the Series Fund.
However, if such individual or company wishes to receive multiple copies of any
such report, a request may be made by calling the toll-free telephone number
listed on the cover page of this prospectus.
STATE REGULATION
Prudential is subject to regulation and supervision by the Department of
Insurance of the State of New Jersey, which periodically examines its operations
and financial condition. It is also subject to the insurance laws and
regulations of all jurisdictions in which it is authorized to do business.
Prudential is required to submit annual statements of its operations, including
financial statements, to the insurance departments of the various jurisdictions
in which it does business to determine solvency and compliance with local
insurance laws and regulations.
In addition to the annual statements referred to above, Prudential is required
to file with New Jersey and other jurisdictions a separate statement with
respect to the operations of all its variable contract accounts, in a form
promulgated by the National Association of Insurance Commissioners.
LITIGATION
On October 28, 1996, Prudential entered into a Stipulation of Settlement in a
multidistrict proceeding involving allegations of various claims relating to
Prudential's life insurance sales practices. (In re Prudential Insurance Company
of America Sales Practices Litigation, D.N.J., MDL No. 1061, Master Docket No.
95-4704 (AMW)). On March 7, 1997, the United States District Court for the
District of New Jersey approved the Stipulation of Settlement as fair,
reasonable and adequate, and later issued a Final Order and Judgment in the
consolidated class actions before the court, 962 F.Supp. 450 (March 17, 1997, as
amended April 14, 1997). The Court's Final Order and Judgment approving the
class Settlement has been appealed to the United States Court of Appeals for the
Third Circuit, which held a hearing on January 26, 1998. The Court has not yet
issued a ruling on the appeal.
Pursuant to the Settlement, Prudential agreed to provide and has begun to
implement an Alternative Dispute Resolution ("ADR") process for class members
who believe they were misled concerning the sale or performance of their life
insurance policies. Management now has information which allows for computation
of a reasonable estimate of losses associated with ADR claims. Based on this
information, management estimated the cost of remedying policyholder claims in
the ADR process before taxes to be approximately $2.05 billion. While
27
<PAGE>
management believes these to be reasonable estimates based on information
currently available, the ultimate amount of the total cost of remedied
policyholder claims is dependent on complex and varying factors, including
actual claims by eligible policyholders, the relief options chosen and the
dollar value of those options. There are also additional elements of the ADR
process which cannot be fully evaluated at this time (e.g., claims which may be
successfully appealed) which could increase this estimate.
In addition, a number of actions have been filed against Prudential by
policyowners who have excluded themselves from the settlement; Prudential
anticipates that additional suits may be filed by other policyowners.
Also, on July 9, 1996, a Multi-State Life Insurance Task Force comprised of
insurance regulators from 29 states and the District of Columbia, released a
report on Prudential's activities. As of February 24, 1997, Prudential had
entered into consent orders or agreements with all 50 states and the District of
Columbia to implement a remediation plan, which terms closely parallel the
Settlement approved in the MDL proceeding, and agreed to a series of payments
allocated to all 50 states and the District of Columbia amounting to a total of
approximately $65 million. These agreements are now being implemented through
Prudential's implementation of the class Settlement.
Litigation is subject to many uncertainties, and given the complexity and scope
of these suits, their outcome cannot be predicted. It is also not possible to
predict the likely results of any regulatory inquiries or their effect on
litigation which might be initiated in response to widespread media coverage of
these matters.
Accordingly, management is unable to make a meaningful estimate of the amount or
range of loss that could result from an unfavorable outcome of all pending
litigation and regulatory inquiries. It is possible that the results of
operations or the cash flow of Prudential, in particular quarterly or annual
periods could be materially affected by an ultimate unfavorable outcome of
certain pending litigation and regulatory matters. Management believes, however,
that the ultimate outcome of all pending litigation and regulatory matters
referred to above should not have a material adverse effect on Prudential's
financial position after consideration of applicable reserves.
YEAR 2000 COMPLIANCE
The services provided to the Contract owners by Prudential, Prusec and PIMS
depend on the smooth functioning of their respective computer systems. The year
2000, however, holds the potential for a significant disruption in the operation
of these systems. Many computer programs cannot distinguish the year 2000 from
the year 1900 because of the way in which dates are encoded. Left uncorrected,
the year "00" could cause systems to perform date comparisons and calculations
incorrectly that in turn could compromise the integrity of business records and
lead to serious interruption of business processes.
Prudential, as Prusec's and PIMS's ultimate corporate parent, identified this
issue as a critical priority in 1995 and has established quality assurance
procedures including a certification process to monitor and evaluate
enterprise-wide conversion and upgrading of systems for "Year 2000" compliance.
Prudential has also initiated an analysis of potential expose that could result
from the failure of major service providers such as suppliers, custodians and
brokers, to achieve Year 2000 compliance. Prudential expects to complete its
adaptation, testing and certification of software for Year 2000 compliance by
December 31, 1998. During 1999, Prudential plans to conduct additional internal
testing, to participate in securities industry-wide test efforts and to complete
major service provider analysis and contingency planning.
The expenses of Prudential's Year 2000 compliance are allocated across its
various businesses, including those businesses not engaged in providing services
to Contract owners. Accordingly, while the expense is substantial in the
aggregate, it is not expected to have a material impact on Prudential's,
Prusec's and PIMS's abilities to meet their contractual commitments to Contract
owners.
Prudential believes that it is well positioned to achieve the necessary
modifications and mitigate Year 2000 risks. However, if such efforts are not
completed on a timely basis, the Year 2000 issue could have a material adverse
impact on Prudential's operations, those of its subsidiary and affiliate
companies and/or the Account. Moreover, there can be no assurance that the
measurers taken by Prudential's external service providers will be sufficient to
avoid any material adverse impact on Prudential's operations or those of its
subsidiary and affiliate companies.
ADDITIONAL INFORMATION
A registration statement has been filed with the SEC under the Securities Act of
1933 and the Investment Company Act of 1940, relating to the offering described
in this prospectus. This prospectus does not include all of the information set
forth in the registration statement. Certain portions have been omitted pursuant
to the rules and regulations of the SEC. The omitted information may, however,
be obtained from the SEC's principal office in Washington, D.C., upon payment of
a prescribed fee.
Further information, including the statement of additional information prepared
by Prudential, may also be obtained from Prudential's office. The address and
telephone number are set forth on the cover of this prospectus.
28
<PAGE>
The Contents of the statement of additional information include:
OTHER INFORMATION CONCERNING THE ACCOUNT
A. EXPERTS
B. PRINCIPAL UNDERWRITER
C. DETERMINATION OF SUBACCOUNT UNIT VALUES
D. IRS REQUIRED DISTRIBUTIONS ON DEATH OF OWNER
E. PARTICIPATION IN DIVISIBLE SURPLUS
F. PERFORMANCE INFORMATION
G. FINANCIAL STATEMENTS
FINANCIAL STATEMENTS OF THE PRUDENTIAL INDIVIDUAL VARIABLE CONTRACT ACCOUNT
CONSOLIDATED FINANCIAL STATEMENTS OF THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
DETERMINATION OF SUBACCOUNT UNIT VALUES
A. SUBACCOUNT UNIT VALUES
B. DETERMINATION OF THE AMOUNT OF MONTHLY VARIABLE ANNUITY PAYMENT
29
<PAGE>
DIRECTORS AND OFFICERS OF PRUDENTIAL
The directors and certain officers of Prudential, listed with their principal
occupations during the past 5 years, are shown below.
DIRECTORS
FRANKLIN E. AGNEW -- Director since 1994 (current term expires April, 2000).
Member, Committee on Dividends; Member, Finance Committee; Member Corporate
Governance Committee. Business consultant since 1987. Senior Vice President,
H.J. Heinz from 1971 to 1986. Mr. Agnew is also a director of Bausch & Lomb,
Inc. John Wiley & Sons, Inc. and Erie Plastics Corporation. Age 63. Address: 600
Grant Street, Suite 660, Pittsburgh, PA 15219.
FREDERICK K. BECKER -- Director since 1994 (current term expires April, 1999).
Member, Auditing Committee, Member, Committee on Business Ethics; Member,
Corporate Governance Committee. President, Wilentz Goldman and Spitzer, P.A.
(law firm) since 1989, with firm since 1960. Age 62. Address: 90 Woodbridge
Center Drive, Woodbridge, NJ 07095.
JAMES G. CULLEN -- Director since 1994 (current term expires April, 2001).
Member, Compensation Committee; Member, Committee on Business Ethics. President
& Chief Executive Officer, Telecom Group, Bell Atlantic Corporation, since 1997.
Vice Chairman, Bell Atlantic Corporation from 1995 to 1997. President, Bell
Atlantic Corporation from 1993 to 1995. Mr. Cullen is also a director of Bell
Atlantic Corporation and Johnson & Johnson. Age 55. Address: 1310 North Court
House Road, 11th Floor, Alexandria, VA 22201.
CAROLYNE K. DAVIS -- Director since 1989 (current term expires April, 2001).
Member, Finance Committee; Member Committee on Business Ethics; Member,
Compensation Committee. Independent Health Care Advisor. National and
International Health Care Advisor, Ernst & Young, LLP from 1985 to 1997. Dr.
Davis is also a director of Beckman Instruments, Inc., Merck & Co., Inc.,
Science Applications International Corporation, Minimed Incorporated, and
Beverley Enterprises. Age 65. Address: 751 Broad Street, 23rd Floor, Newark, NJ
07102.
ROGER A. ENRICO -- Director since 1994 (current term expires April, 2002).
Member, Committees on Nominations & Corporate Governance; Member, Compensation
Committee. Chairman and Chief Executive Officer, PepsiCo, Inc. since 1996.
Originally with PepsiCo, Inc. since 1971. Mr. Enrico is also a director of A.M.
Belo Corporation and Dayton Hudson Corporation. Age 53. Address: 700 Anderson
Hill Road, Purchase, NY 10577.
ALLAN D. GILMOUR -- Director since 1995 (current term expires April, 1999).
Member, Finance Committee; Member, Committee on Dividends. Retired since 1995.
Vice Chairman, Ford Motor Company, from 1993 to 1995. Mr. Gilmour originally
joined Ford in 1960. Mr. Gilmour is also a director of Whirlpool Corporation,
USWest, Inc., The Dow Chemical Company and DTE Energy Company. Age 63 . Address:
751 Broad Street, 23rd Floor, Newark, NJ 07102.
WILLIAM H. GRAY, III -- Director since 1991 (current term expires April, 2000).
Member, Executive Committee; Member, Finance Committee; Chairman, Committees on
Nominations & Corporate Governance. President and Chief Executive Officer, The
College Fund/UNCF since 1991. Mr. Gray served in Congress from 1979 to 1991. Mr.
Gray is also a director of Chase Manhattan Corporation, The Chase Manhattan
Bank, Lotus Development Corporation, Municipal Bond Investors Assurance
Corporation, Rockwell International Corporation, Union-Pacific Corporation,
Warner-Lambert Company, Westinghouse Electric Corporation, and Electronic Data
Systems. Age 56. Address: 8260 Willow Oaks Corp. Drive, Fairfax, VA 22031-4511.
JON F. HANSON -- Director since 1991 (current term expires April, 2003). Member,
Finance Committee; Member, Committee on Dividends. Chairman, Hampshire
Management Company since 1976. Mr. Hanson is also a director of United Water
Resources, Orange & Rockland Utilities, Inc., and Consolidated Delivery and
Logistics. Age 61. Address: 235 Moore Street, Suite 200, Hackensack, NJ 07601.
GLEN H. HINER, JR. -- Director since 1997. (current term expires April, 2001).
Member, Compensation Committee. Chairman and Chief Executive Officer, Owens
Corning since 1991. Senior Vice President and Group Executive, Plastics Group,
General Electric Company from 1983 to 1991. Mr Hiner is also a director of Dana
Corporation. Age 64. Address: One Owens Corning Parkway, Toledo, OH 43659.
30
<PAGE>
CONSTANCE J. HORNER -- Director since 1994 (current term expires April, 2002).
Member, Auditing Committee; Member, Committees on Nominations & Corporate
Governance. Guest Scholar, The Brookings Institution since 1993. Ms. Horner is
also a director of Foster Wheeler Corporation, Ingersoll-Rand Corporation, and
Pfizer, Inc. Age 55. Address: 1775 Massachusetts Ave., N.W. Washington, D.C.
20036-2188.
GAYNOR N. KELLEY -- Director since 1997 (current term expires April, 2001).
Member, Auditing Committee. Retired since 1996. Former Chairman and Chief
Executive Officer, The Perkins Elmer Corporation from 1990 to 1996. Mr. Kelley
is also a director of Hercules Incorporated, Arrow Electronics, Inc., and
Alliant Techsystems. Age 66. Address: 751 Broad Street, 23rd Floor, Newark, NJ
07102-3777.
BURTON G. MALKIEL -- Director since 1978 (current term expires April, 2002).
Chairman, Finance Committee; Member, Executive Committee; Member, Committee on
Dividends. Professor of Economics, Princeton University, since 1988. Dr. Malkiel
is also a director of Banco Bilbao Vizcaya, Baker Fentress & Company, The
Jeffrey Company. The Southern New England Telecommunications Company, and
Vanguard Group, Inc. Age 65. Address: Princeton University, 110 Fisher Hall,
Prospect Avenue, Princeton, NJ 08544-1021.
ARTHUR F. RYAN -- Chairman of the Board, President and Chief Executive Officer
of Prudential since 1994. President and Chief Operating Officer, Chase Manhattan
Corp. from 1990 to 1994, with Chase since 1972. Age 55. Address: 751 Broad
Street, Newark, NJ 07102.
IDA F.S. SCHMERTZ -- Director since 1997 (current term expires April, 2004).
Member, Finance Committee. Principal, Investment Strategies International since
1994. Age 63. Address: 751 Broad Street, 23rd Floor, Newark, NJ 07102.
CHARLES R. SITTER -- Director since 1995 (current term expires April, 1999).
Member, Finance Committee; Member, Committee on Dividends. Retired since 1996.
President, Exxon Corporation from 1993 to 1996. Mr. Sitter began his career with
Exxon in 1957. Age 67. Address: 5959 Las Colinas Boulevard, Irving, TX
75039-2298.
DONALD L. STAHELI -- Director since 1995 (current term expires April, 1999).
Member, Compensation Committee; Member, Auditing Committee. Retired since 1997.
Chairman and Chief Executive Officer, Continental Grain Company from 1994 to
1997. President and Chief Executive Officer, Continental Grain Company from 1988
to 1994. Mr. Staheli is also director of Bankers Trust Company and Bankers Trust
New York Corporation. Age 66. Address: 39 Locust Street, Suite 204, New Canaan,
CT 06840.
RICHARD M. THOMSON -- Director since 1976 (current term expires April, 2000).
Chairman, Executive Committee; Chairman, Compensation Committee; Member,
Committee on Nominations & Corporate Governance. Chairman of the Board, The
Toronto-Dominion Bank since 1997. Chairman and Chief Executive Officer from 1978
to 1997. Mr. Thomson is also a director of CGC, Inc., INCO, Limited, S.C.
Johnson & Son, Inc., The Thomson Corporation, and Canadian Occidental Petroleum,
Ltd. Age 64. Address: P.O. Box 1, Toronto-Dominion Centre, Toronto, Ontario,
M5K 1A2, Canada.
JAMES A. UNRUH -- Director since 1996 (current term expires April, 2000).
Member, Compensation Committee. Retired since 1997. Chairman and Chief Executive
Officer, Unisys Corporation, from 1990 to 1997. Mr. Unruh is also a director of
Ameritech Corporation. Age 55. Address: Two Bala Plaza, Suite 300, Bala Cynwyd,
PA 19004.
P. ROY VAGELOS, M.D. -- Director since 1989 (current term expires April, 2001).
Chairman, Auditing Committee; Member, Executive Committee; Member, Committees on
Nominations & Corporate Governance. Chairman, Regeneron Pharmaceuticals since
1995. Chairman and Chief Executive Officer, Merck & Co., Inc. from 1986 to 1994.
Dr. Vagelos is also a director of The Estee Lauder Companies, Inc. and PepsiCo.,
Inc. Age 68. Address: One Crossroads Drive, Building A, 3rd Floor, Bedminster,
NJ 07921.
STANLEY C. VAN NESS -- Director since 1990 (current term expires April, 2002).
Chairman, Committee on Business Ethics; Member, Executive Committee; Member,
Auditing Committee. Counselor at Law, Picco Herbert Kennedy (law firm) from
1990. Mr. Van Ness is also a director of Jersey Central Power & Light Company.
Age 63. Address: 22 Chambers Street, Princeton, NJ 08542.
PAUL A. VOLCKER -- Director since 1988 (current term expires April, 2000).
Chairman, Committee on Dividends; Member, Executive Committee; Member, Committee
on Nominations & Corporate Governance. Consultant since 1996. Chairman, James D.
Wolfensohn, Inc. from 1988 to 1996. Chief Executive Officer, James D.
Wolfensohn, Inc. from 1995 to 1996. Mr. Volcker is also a public member of the
Board of Governors of the American Stock Exchange, a member of the Board of
Overseers of TIAA-CREF, and a director of Nestle, S.A., UAL Corporation, and
Bankers Trust New York Corporation. Age 70. Address: 610 Fifth Avenue, Suite
420, New York, NY 10020.
31
<PAGE>
JOSEPH H. WILLIAMS -- Director since 1994 (current term expires April, 2002).
Member, Committee on Dividends; Member, Auditing Committee. Director, The
Williams Companies since 1971. Chairman & Chief Executive Officer, The Williams
Companies from 1979 to 1993. Mr. Williams is also a director of Flint
Industries, The Orvis Company, and MTC Investors, LLC. Age 64. Address: One
Williams Center, Tulsa, OK 74172.
PRINCIPAL OFFICERS
ARTHUR F. RYAN -- Chairman, President and Chief Executive Officer since 1994;
prior to 1994, President and Chief Operating Officer, Chase Manhattan
Corporation, New York, NY. Age 55.
E. MICHAEL CAULFIELD -- Chief Executive Officer, Prudential Investments since
1996; Chief Executive Officer, Money Management Group from 1995 to 1996; prior
to 1995, President, Prudential Preferred Financial Services. Age 51.
MICHELE S. DARLING -- Executive Vice President Human Resources since 1997; prior
to 1997, Executive Vice President, Canadian Imperial Bank of Commerce, Toronto,
Canada. Age 44.
ROBERT C. GOLDEN -- Executive Vice President Corporate Operations and Systems
since 1997; prior to 1997, Executive Vice President, Prudential Securities, New
York, NY. Age 51.
MARK B. GRIER -- Executive Vice President, Financial Management since 1997;
Chief Financial Officer from 1995 to 1997; prior to 1995, Executive Vice
President, Chase Manhattan Corporation, New York, NY. Age 44.
RODGER A. LAWSON -- Executive Vice President, Marketing and Planning since 1996;
President and CEO, Van Eck Global, New York, NY, from 1994 to 1996; prior to
1994, President and CEO, Global Private Banking, Bankers Trust Company, New
York, NY. Age 50.
JOHN V. SCICUTELLA -- Chief Executive Officer, Individual Insurance Group since
1997; Executive Vice President Operations and Systems from 1995 to 1997; prior
to 1995, Executive Vice President, Chase Manhattan Corporation. Age 48.
JOHN R. STRANGFELD -- Executive Vice President, Private Asset Management Group
(PAMG) since 1998; President, PAMG, from 1996 to 1998; prior to 1996, Senior
Managing Director. Age 44.
R. BROCK ARMSTRONG -- Senior Vice President, Individual Insurance Development
since 1997; prior to 1997, Executive Vice President, London Life Insurance
Company, London, Canada. Age 50.
JAMES J. AVERY, JR. -- Senior Vice President & Chief Actuary since 1997;
President Prudential Select from 1995 to 1997; prior to 1995, Chief Financial
Officer, Prudential Select. Age 46.
MARTIN A. BERKOWITZ -- Senior Vice President and Comptroller since 1995; prior
to 1995, Senior Vice President and CFO, Prudential Investment Corporation. Age
48.
WILLIAM M. BETHKE -- Chief Investment Officer since 1997; prior to 1997, Senior
Vice President. Age 50.
RICHARD J. CARBONE -- Senior Vice President and Chief Financial Officer since
1997. Controller, Salomon Brothers, New York, NY, from 1995 to 1997; prior to
1995, Controller, Bankers Trust, New York, NY. Age 50.
LEO J. CORBETT -- Senior Vice President, Individual Insurance Marketing since
1997; prior to 1997, Managing Director, Lehman Brothers, New York, NY. Age 49.
MARK R. FETTING -- President, Prudential Retirement Services since 1996; prior
to 1996, President, Prudential Defined Contribution Services. Age 43.
WILLIAM D. FRIEL -- Senior Vice President and Chief Information Officer since
1993. Age 59.
JONATHAN M. GREENE -- President, Investment Management since 1996; prior to
1996, Vice President, T. Rowe Price, Baltimore, MD. Age 54.
JEAN D. HAMILTON -- President, Diversified Group since 1995; prior to 1995,
President, Prudential Capital Group. Age 51.
32
<PAGE>
RONALD P. JOELSON -- Senior Vice President, Guaranteed Products since 1997;
President, Prudential Investments Guaranteed Products from 1996 to 1998; prior
to 1996, Managing Director, Enterprise Planning Unit. Age 40.
IRA J. KLEINMAN -- Executive Vice President, International Insurance Group,
since 1997; prior to 1997, Senior Vice President. Age 51.
NEIL A. MCGUINNESS -- Senior Vice President, Marketing, Prudential Investments,
since 1996; prior to 1996, Managing Director, Putnam Investments, Boston, MA.
Age 51.
PRISCILLA A. MYERS -- Senior Vice President, Audit, Compliance and Investigation
since 1995. Vice President and Auditor from 1989 to 1995. Age 48.
RICHARD O. PAINTER -- President, Prudential Insurance & Financial Services since
1995; prior to 1995, Senior Vice President, New York Life, New York, NY. Age 50.
I. EDWARD PRICE -- Senior Vice President and Actuary since 1995; prior to 1995,
Chief Executive Officer, Prudential International Insurance. Age 55.
KIYOFUMI SAKAGUCHI -- President, International Insurance Group since 1995; prior
to 1995, Chairman and CEO, The Prudential Life Insurance Co., Ltd., Japan. Age
55.
BRIAN M. STORMS -- President, Mutual Funds and Annuities, Prudential Investments
since 1996; prior to 1996, Managing Director, Fidelity Investments, Boston. Age
43.
ROBERT J. SULLIVAN -- Senior Vice President, Sales, Prudential Investments since
1997; prior to 1997, Managing Director, Fidelity Investments, Boston. Age 59.
SUSAN J. BLOUNT -- Vice President and Secretary since 1995; prior to 1995,
Assistant General Counsel. Age 40.
C. EDWARD CHAPLIN -- Vice President and Treasurer since 1995; prior to 1995,
Managing Director and Assistant Treasurer. Age 41.
Prudential officers are elected annually.
33
<PAGE>
Discovery(R) Plus is by The Prudential Insurance
Company of America and offered through Pruco
Securities Corporation, a subsidiary of The
Prudential Insurance Company of America. DISCOVERY is
a registered mark of Prudential.
The Prudential Insurance Company of America
751 Broad Street
Newark, New Jersey 07102-3777
Pruco Securities Corporation
751 Broad Street
Newark, New Jersey 07102-3777
---------------
BULK RATE
U.S. Postage
PAID
Jersey City, NJ
Permit No. 60
---------------
[LOGO] PRUDENTIAL
The Prudential Insurance Company of America
751 Broad Street
Newark, New Jersey 07102-3777
PIVC-1
Cat.646956H ED. 5/98
<PAGE>
PART B
INFORMATION IN A STATEMENT
OF ADDITIONAL INFORMATION
<PAGE>
STATEMENT OF ADDITIONAL
May 1, 1998
THE PRUDENTIAL
INDIVIDUAL VARIABLE CONTRACT ACCOUNT
VARIABLE ANNUITY CONTRACTS
The DISCOVERY(R) Plus Contract* (the "Contract") is a variable
annuity contract issued by The Prudential Insurance Company of America
("Prudential") and funded through The Prudential Individual Variable Contract
Account (the "Account"). The Contract is purchased by making an initial purchase
payment of $10,000 or more; subsequent payments must be $1,000 or more ($10,000
or more when issued in New York). (Effective March 15, 1997, this contract is no
longer offered for sale in New York. Effective January 1, 1998, this contract is
no longer offered for sale in Oregon to retirement arrangements entitled to
favorable federal income tax treatment.) Subsequent payments are not allowed in
Oregon.
This statement of additional information is not a prospectus and should be read
in conjunction with the Contract's prospectus, dated May 1, 1998, which is
available without charge upon written request to The Prudential Insurance
Company of America, 751 Broad Street, Newark, New Jersey 07102-3777, or by
telephoning(888) PRU-2888.
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
751 Broad Street
Newark, New Jersey 07102-3777
Telephone: (888) PRU-2888
*DISCOVERY is a registered mark of Prudential.
PIVC-1B Ed 5-98
Catalog #64M101W
<PAGE>
CONTENTS
PAGE
----
OTHER INFORMATION CONCERNING THE ACCOUNT................................... 1
A. EXPERTS........................................................ 1
B. PRINCIPAL UNDERWRITER.......................................... 1
C. DETERMINATION OF SUBACCOUNT UNIT VALUES........................ 1
D. IRS REQUIRED DISTRIBUTIONS ON DEATH OF OWNER................... 2
E. PARTICIPATION IN DIVISIBLE SURPLUS............................. 2
F. PERFORMANCE INFORMATION........................................ 2
G. FINANCIAL STATEMENTS........................................... 5
FINANCIAL STATEMENTS OF THE PRUDENTIAL INDIVIDUAL VARIABLE
CONTRACT ACCOUNT...................................................... A1
CONSOLIDATED FINANCIAL STATEMENTS OF THE PRUDENTIAL INSURANCE COMPANY OF
AMERICA AND SUBSIDIARIES............................................... B1
<PAGE>
OTHER INFORMATION CONCERNING THE ACCOUNT
A. EXPERTS
The financial statements included in this prospectus for the years ended
December 31, 1997 and December 31, 1996 have been audited by Price Waterhouse
LLP, independent accountants, as stated in their reports appearing herein, and
are included in reliance upon the reports of such firm given upon their
authority as experts in accounting and auditing. Price Waterhouse LLP's
principal business address is 1177 Avenue of the Americas, New York, New York,
10036.
The financial statements included in this prospectus for the year ended December
31, 1995, has been audited by Deloitte & Touche LLP, independent auditors, as
stated in their reports appearing herein, and are included in reliance upon the
reports of such firm given upon their authority as experts in accounting and
auditing. Deloitte & Touche LLP's principal business address is Two Hilton
Court, Parsippany, New Jersey 07054-0319.
On March 12, 1996, Deloitte & Touche LLP was replaced as the independent
accountants of Prudential. There have been no disagreements with Deloitte &
Touche LLP on any matter of accounting principles or practices, financial
statement disclosure or auditing scope or procedure which, if not resolved to
the satisfaction of the accountant, would have caused them to make a reference
to the matter in their reports.
B. PRINCIPAL UNDERWRITER
Currently, Pruco Securities Corporation ("Prusec"), an indirect wholly-owned
subsidiary of Prudential, which was organized in 1971 under New Jersey law, acts
as the principal underwriter of the Contract. Prudential expects that during the
second quarter of 1998 Prusec's responsibilities as principal underwriter will
be assigned to Prudential Investment Management Services LLC ("PIMS"). PIMS,
also an indirect wholly-owned subsidiary of Prudential, is a limited liability
corporation organized under Delaware law in 1996. PIMS will act as principal
underwriter under substantially the same terms as Prusec does currently. Both
Prusec and PIMS are registered as broker-dealers under the Securities Exchange
Act of 1934 and are members of the National Association of Securities Dealers,
Inc. The principal business address of both Prusec and PIMS is 751 Broad Street,
Newark, New Jersey 07102-3777.
The Contract is currently sold by registered representatives of the principal
underwriter and may also be sold through other broker-dealers authorized by the
principal underwriter, including broker-dealers otherwise unaffiliated with
Prudential. Registered representatives of such other unaffiliated broker-dealers
may be paid on a different basis than registered representatives of the
principal underwriter or broker-dealers affiliated with Prudential. The maximum
commission that will be paid to the broker-dealer to cover both the individual
representative's commission and other distribution expenses will not exceed 6%
of the purchase payment. In addition, trail commissions based on the size of the
contract Fund may be paid.
C. DETERMINATION OF SUBACCOUNT UNIT VALUES
The value for each Subaccount Unit is computed as of the end of each "valuation
period" as defined in the prospectus (also referred to in this section as
"business day"). On any given business day the value of a Unit in each
subaccount will be determined by multiplying the value of a Unit of that
subaccount for the preceding business day by the net investment factor for that
subaccount for the current business day. The net investment factor for any
business day is determined by dividing the value of the assets of the subaccount
for that day by the value of the assets of the subaccount for the preceding
business day (ignoring, for this purpose, changes resulting from new purchase
payments and withdrawals), and subtracting from the result the daily equivalent
of the 1.2% annual charge for administrative expenses and mortality and expense
risks. (See CHARGES, FEES, AND DEDUCTIONS in the prospectus.) The Account's
financial statements reflect a different breakdown of the expense structure than
is described in the prospectus. The mortality and expense risk charges described
in item 5 therein combined with an administrative charge described in Item 4
total an amount which is the same 1.2% per year described in Note 3A of the
Notes to the Account's financial statements. The value of the assets of a
subaccount is determined by multiplying the number of shares of the Series Fund
held by that subaccount by the net asset value of each share and adding the
value of dividends declared by the Series Fund but not yet paid.
1
<PAGE>
D. IRS REQUIRED DISTRIBUTIONS ON DEATH OF OWNER
If the Contract owner dies before the entire interest in the Contract is
distributed, the value of the Contract must be distributed to the designated
beneficiary as described in this section so that the Contract qualifies as an
annuity under the Internal Revenue Code.
If the death occurs 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 death occurs
before the annuity date, the entire interest in the Contract must be distributed
within 5 years after 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 owner's death, the value of the Contract may be distributed over the
beneficiary's life or a period not exceeding the beneficiary's life expectancy.
The owner's designated beneficiary is the person to whom ownership of the
Contract passes by reason of death, and must be a natural person. Special
additional rules apply to Contracts issued in conjunction with plans subject to
Section 457 of the Code. For Contracts purchased in connection with a tax
favored plan where the owner's spouse is the beneficiary, annuity payments need
only begin on or before April 1 of the calendar year following the calendar year
in which the owner would have attained age 70 1/2 or in some instances the
remaining interest in the Contract may be rolled over to an IRA owned by the
spouse.
If any portion of the Contract owner's interest is payable to (or for the
benefit of) the surviving spouse of the owner, such portion of the Contract may
be continued with the surviving spouse as the owner. This rule does not apply to
Contracts issued in connection with tax favored plans other than IRAs.
E. PARTICIPATION IN DIVISIBLE SURPLUS
A mutual life insurance company, such as Prudential, differs from a stock life
insurance company in that it has no stockholders who are the owners of the
enterprise. Every owner of a Prudential Contract participates in the divisible
surplus of Prudential, according to an annual determination of Prudential's
Board of Directors of the portion, if any, of the divisible surplus of the
entire company that is attributable to the class of contracts of which he or she
is an owner. Before annuity payments begin, it is unlikely that any dividends
will be payable to the owners of the Contracts described in the prospectus.
However, there may be dividends payable during an annuity payout period.
F. PERFORMANCE INFORMATION
The tables that follow provide performance information for each subaccount
through December 31, 1997. The performance information is based on historical
experience and does not indicate or represent future performance.
2
<PAGE>
AVERAGE ANNUAL TOTAL RETURN
Table 1 below shows the average annual rates of total return on hypothetical
investments of $1,000 for periods ended December 31, 1997 in each subaccount
other than the Money Market Subaccount. These figures assume withdrawal of the
investments at the end of the period other than to effect an annuity under the
Contract.
TABLE 1
AVERAGE ANNUAL TOTAL RETURN
<TABLE>
<CAPTION>
FROM DATE
SUBACCOUNT
ONE YEAR FIVE YEARS ESTABLISHED
DATE ENDED ENDED THROUGH
SUBACCOUNT ESTABLISHED 12/31/97 12/31/97 12/31/97
---------- ----------- -------- -------- --------
<S> <C> <C> <C> <C>
Diversified Bond.................................. 2/89 1.03 6.02 8.19
Government Income................................. 5/89 2.13 5.59 7.55
Conservative Balanced............................. 2/89 5.89 8.95 9.90
Flexible Managed.................................. 2/89 10.38 11.48 12.08
High Yield Bond................................... 2/89 6.23 9.79 8.99
Stock Index....................................... 2/89 25.18 18.11 16.12
Equity Income..................................... 2/89 28.93 18.48 15.61
Equity............................................ 2/89 17.04 17.69 16.00
Prudential Jennison............................... 5/95 24.06 N/A 23.56
Small Capitalization Stock........................ 5/95 17.55 N/A 21.48
Global............................................ 5/89 -0.55 13.35 7.66
Natural Resources................................. 2/89- 18.14 10.18 9.23
</TABLE>
The average annual rates of total return shown above are computed by finding the
average annual compounded rates of return over the periods shown that would
equate the initial amount invested to the withdrawal value, in accordance with
the following formula: P(1+T)"- ERV. In the formula, P is a hypothetical
investment of $1,000; T is the average annual total return; " is the number of
years; and ERV is the withdrawal value at the end of the periods shown. These
figures assume deduction of the maximum deferred sales charge that may be
applicable to a particular period. The annual contract fee is not included
because it applies only if the Contract fund is less than $10,000.
NON-STANDARD TOTAL RETURN
Table 2 below shows the average annual rates of return as in Table 1, but
assumes that the investments are not withdrawn at the end of the period or that
the Contract owner annuitizes at the end of the period.
TABLE 2
AVERAGE ANNUAL TOTAL RETURN
<TABLE>
<CAPTION>
FROM DATE
SUBACCOUNT
ONE YEAR FIVE YEARS ESTABLISHED
DATE ENDED ENDED THROUGH
SUBACCOUNT ESTABLISHED 12/31/97 12/31/97 12/31/97
---------- ----------- -------- -------- --------
<S> <C> <C> <C> <C>
Diversified Bond.................................. 2/89 7.28 6.56 8.19
Government Income................................. 5/89 8.37 6.14 7.55
Conservative Balanced............................. 2/89 12.10 9.42 9.90
Flexible Managed.................................. 2/89 16.56 11.90 12.08
High Yield Bond................................... 2/89 12.44 10.25 8.99
Stock Index....................................... 2/89 31.26 18.42 16.12
Equity Income..................................... 2/89 34.99 18.79 15.61
Equity............................................ 2/89 23.18 18.01 16.00
Prudential Jennison............................... 5/95 30.15 N/A 25.05
Small Capitalization Stock........................ 5/95 23.69 N/A 23.03
Global............................................ 5/89 5.71 13.74 7.66
Natural Resources................................. 2/89 -12.64 10.63 9.23
</TABLE>
3
<PAGE>
Table 3 shows the cumulative total return for the subaccounts, assuming no
withdrawal.
TABLE 3
AVERAGE ANNUAL TOTAL RETURN
<TABLE>
<CAPTION>
FROM DATE
SUBACCOUNT
ONE YEAR FIVE YEARS ESTABLISHED
DATE ENDED ENDED THROUGH
SUBACCOUNT ESTABLISHED 12/31/97 12/31/97 12/31/97
---------- ----------- -------- -------- --------
<S> <C> <C> <C> <C>
Diversified Bond.................................. 2/89 7.28 37.40 100.59
Government Income................................. 5/89 8.37 34.69 87.98
Conservative Balanced............................. 2/89 12.10 56.87 130.40
Flexible Managed.................................. 2/89 16.56 75.46 174.08
High Yield Bond................................... 2/89 12.44 62.87 114.08
Stock Index....................................... 2/89 31.26 132.88 274.72
Equity Income..................................... 2/89 34.99 136.53 260.59
Equity............................................ 2/89 23.18 128.91 271.43
Prudential Jennison............................... 5/95 30.15 N/A 81.61
Small Capitalization Stock........................ 5/95 23.69 N/A 73.88
Global............................................ 5/89 5.71 90.32 89.63
Natural Resources................................. 2/89 -12.64 65.72 118.20
</TABLE>
MONEY MARKET SUBACCOUNT YIELD
The "yield" and "effective yield" of the Money Market Subaccount for the seven
days ended December 31, 1997 were 4.52% and 4.62%, respectively.
The yield is computed by determining the net change, exclusive of capital
changes, in the value of a hypothetical pre-existing account having a balance of
one accumulation unit of the Money Market Subaccount at the beginning of the
period, subtracting a hypothetical charge reflecting deductions from Contract
owner accounts, and dividing the difference by the value of the subaccount at
the beginning of the base period to obtain the base period return, and then
multiplying the base period return by (365/7), with the resulting figure carried
to the nearest ten-thousandth of 1%.
The deduction referred to above consists of the 1% charge for mortality and
expense risks and the 0.20% charge for administration. It does not reflect the
deferred sales charge. It also does not reflect the annual contract fee, which
is charged only if the Contract Fund is less than $10,000.
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 yields 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.
COMPARISONS
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 Annuity 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.
4
<PAGE>
G. FINANCIAL STATEMENTS
The consolidated financial statements for Prudential and subsidiaries included
herein should be distinguished from the financial statements of the Account, and
should be considered only as bearing upon the ability of Prudential to meet its
obligations under the Contracts.
5
<PAGE>
FINANCIAL STATEMENTS OF
THE PRUDENTIAL INDIVIDUAL VARIABLE CONTRACT ACCOUNT
STATEMENTS OF NET ASSETS
December 31, 1997
<TABLE>
<CAPTION>
SUBACCOUNTS
------------------------------------------------------------------------------
MONEY DIVERSIFIED FLEXIBLE CONSERVATIVE
MARKET BOND EQUITY MANAGED BALANCED
------------- -------------- --------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
ASSETS
Investments in shares of The Prudential Series
Fund, Inc......................................... $ 250,299,005 $ 227,069,081 $1,449,310,301 $ 906,247,126 $ 1,503,678,358
Portfolios at net asset value [Note 3]
Receivable from The Prudential Insurance Company
of America [Note 2]................................ 0 717,597 0 0 0
-------------- ------------- -------------- ------------- ---------------
Net Assets.................................... $ 250,299,005 $ 227,786,678 $1,449,310,301 $ 906,247,126 $ 1,503,678,358
============== ============= ============== ============= ===============
NET ASSETS, representing
Equity of Contract owners......................... $ 246,238,487 $ 227,350,803 $1,448,451,322 $ 902,799,341 $ 1,496,534,502
Equity of annuitants.............................. 66,619 435,875 0 96,362 102,958
Equity of The Prudential Insurance Company of
America........................................... 3,993,899 0 858,979 3,351,423 7,040,898
-------------- ------------- -------------- ------------- ---------------
$ 250,299,005 $ 227,786,678 $1,449,310,301 $ 906,247,126 $ 1,503,678,358
============== ============= ============== ============= ===============
</TABLE>
STATEMENTS OF OPERATIONS
For the year ended December 31, 1997
<TABLE>
<CAPTION>
SUBACCOUNTS
------------------------------------------------------------------------------
MONEY DIVERSIFIED FLEXIBLE CONSERVATIVE
MARKET BOND EQUITY MANAGED BALANCED
------------- -------------- --------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME
Dividend distributions received............. $ 15,268,362 $ 16,901,127 $ 32,344,814 $ 27,153,765 $ 69,645,435
EXPENSES
Charges to Contract owners for assuming
mortality risk and expense risk and for
administration [Note 5A].................. 3,403,168 2,790,071 16,875,841 10,829,207 18,102,598
(Note 5A)
-------------- -------------- -------------- -------------- ---------------
NET INVESTMENT INCOME (LOSS)................... 11,865,194 14,111,056 15,468,973 16,324,558 51,542,837
-------------- -------------- -------------- -------------- ---------------
NET REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS
Capital gains distributions received........ 0 2,678,457 78,732,943 136,601,647 162,961,825
Realized gain on shares deemed
[average cost basis]...................... 0 871,425 45,936,231 17,694,945 18,586,761
Net change in unrealized gain (loss) on 0 (1,421,119) 151,756,418 (31,167,938) (59,829,935)
investments.................................
-------------- -------------- -------------- -------------- ---------------
NET GAIN (LOSS) ON INVESTMENTS................. 0 2,128,763 276,425,592 123,128,654 121,718,651
-------------- -------------- -------------- -------------- ---------------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS................... $ 11,865,194 $ 16,239,819 $ 291,894,565 $ 139,453,212 $ 173,261,488
============== ============== ============== ============== ===============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
A1
<PAGE>
<TABLE>
<CAPTION>
SUBACCOUNTS (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------
HIGH SMALL
YIELD STOCK EQUITY NATURAL GOVERNMENT PRUDENTIAL CAPITALIZATION
BOND INDEX INCOME RESOURCES GLOBAL INCOME JENNISON STOCK
- --------------- --------------- -------------- -------------- -------------- --------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
$ 206,710,618 $ 584,301,321 $ 924,080,586 $ 114,268,041 $ 261,664,386 $ 234,702,746 $ 142,558,366 $ 105,914,426
0 0 0 0 0 0 0 0
- --------------- --------------- -------------- -------------- -------------- -------------- -------------- -------------
$ 206,710,618 $ 584,301,321 $ 924,080,586 $ 114,268,041 $ 261,664,386 $ 234,702,746 $ 142,558,366 $ 105,914,426
=============== =============== ============== ============== ============== ============== ============== ==============
$ 206,703,946 $ 583,199,488 $ 923,476,299 $ 113,116,367 $ 259,907,600 $ 234,294,649 $ 142,366,117 $ 105,611,009
0 0 0 0 0 0 0 0
6,672 1,101,833 604,287 1,151,674 1,756,786 408,097 192,249 303,417
- --------------- --------------- -------------- -------------- -------------- -------------- -------------- -------------
$ 206,710,618 $ 584,301,321 $ 924,080,586 $ 114,268,041 $ 261,664,386 $ 234,702,746 $ 142,558,366 $ 105,914,426
=============== =============== ============== ============== ============== ============== ============== ==============
</TABLE>
<TABLE>
<CAPTION>
SUBACCOUNTS (CONTINUED)
- ----------------------------------------------------------------------------------------------------------------------------------
HIGH SMALL
YIELD STOCK EQUITY NATURAL GOVERNMENT PRUDENTIAL CAPITALIZATION
BOND INDEX INCOME RESOURCES GLOBAL INCOME JENNISON STOCK
- ---------------- -------------- --------------- --------------- ------------- -------------- -------------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
$ 19,426,410 $ 7,989,506 $ 21,618,173 $ 736,335 $ 3,362,350 $ 15,529,678 $ 280,341 $ 530,549
2,485,000 6,336,577 9,942,601 1,751,764 3,406,550 2,880,153 1,397,760 951,414
- --------------- --------------- -------------- -------------- ------------ -------------- ------------- -------------
16,941,410 1,652,929 11,675,572 (1,015,429) (44,200) 12,649,525 (1,117,419) (420,865)
- --------------- --------------- -------------- -------------- ------------ -------------- ------------- -------------
0 16,305,306 83,667,610 15,057,641 12,621,909 0 8,029,556 7,179,462
1,058,521 18,694,963 22,177,266 4,265,854 10,753,188 89,927 2,207,647 1,680,689
6,571,445 103,662,327 131,284,129 (35,259,336) (7,387,766) 6,283,807 19,900,327 7,162,308
- --------------- --------------- -------------- -------------- ------------ -------------- ------------- -------------
7,629,966 138,662,596 237,129,005 (15,935,841) 15,987,331 6,373,734 30,137,530 16,022,459
- --------------- --------------- -------------- -------------- ------------ -------------- ------------- -------------
$ 24,571,376 $ 140,315,525 $ 248,804,577 $ (16,951,270) $ 15,943,131 $ 19,023,259 $ 29,020,111 $ 15,601,594
=============== =============== ============== ============== ============ ============== ============= ==============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
A2
<PAGE>
FINANCIAL STATEMENTS OF
THE PRUDENTIAL INDIVIDUAL VARIABLE CONTRACT ACCOUNT
STATEMENTS OF CHANGES IN NET ASSETS
For the years ended December 31, 1997 and 1996
<TABLE>
<CAPTION>
SUBACCOUNTS
-----------------------------------------------------------------------------------------
MARKET DIVERSIFIED EQUITY
MONEY BOND
----------------------------- ----------------------------- --------------------------
1997 1996 1997 1996 1997 1996
-------------- -------------- ------------- -------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
OPERATIONS:
Net investment income (loss).......... 11,865,194 $ 12,115,680 $ 14,111,056 $ 12,544,502 $ 15,468,973 $ 15,310,773
Capital gains distributions received.. 0 0 2,678,457 0 78,732,943 114,264,566
Realized gain on shares redeemed
[average cost basis]................ 0 0 871,425 174,400 45,936,231 5,444,130
Net change in unrealized gain (loss) on
on investments...................... 0 0 (1,421,119) (4,953,596) 151,756,418 51,568,436
------------- ------------ ------------- ------------- ------------- -------------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM
OPERATIONS 11,865,194 12,115,680 16,239,819 7,765,306 291,894,565 186,587,905
------------- ------------ ------------- ------------- ------------- --------------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM PREMIUM
PAYMENTS AND OTHER OPERATING
TRANSFERS [Note 7].................... (75,545,193) 1,706,616 (32,706,750) 5,466,608 (135,911,653) 59,118,381
------------- ------------ ------------- ------------- ------------- -------------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM EQUITY
TRANSFERS [Note 8 .................... 1,260,361 (2,978,837) 13,417 45,114 (431,506) (2,969,818)
------------- ------------ ------------- ------------- ------------- -------------
TOTAL INCREASE (DECREASE) IN NET
ASSETS................................ (62,419,638) 10,843,459 (16,453,514) 13,277,028 155,551,406 242,736,468
NET ASSETS:
Beginning of year..................... 312,718,643 301,875,184 244,240,192 230,963,164 1,293,758,895 1,051,022,427
------------- ------------ ------------- ------------- ------------- -------------
End of year........................... $250,299,005 $312,718,643 $ 227,786,678 $ 244,240,192 $1,449,310,301 $1,293,758,895
============= ============= ============== ============== ============== ==============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
A3
<PAGE>
<TABLE>
<CAPTION>
SUBACCOUNTS (CONTINUED)
- --------------------------------------------------------------------------------------------------------------------------------
HIGH
FLEXIBLE CONSERVATIVE YIELD STOCK
MANAGED BALANCED BOND INDEX
- --------------------------------- ------------------------------ ------------------------------ ------------------------------
1997 1996 1997 1996 1997 1996 1997 1996
- ----------------- -------------- -------------- -------------- -------------- --------------- --------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
$ 16,324,558 $ 15,529,180 $ 51,542,837 $ 41,591,964 $ 16,941,410 $ 17,437,936 $ 1,652,929 $ 2,651,307
136,601,647 81,058,661 162,961,825 91,075,317 0 0 16,305,306 4,966,520
17,694,945 2,079,840 18,586,761 2,546,226 1,058,521 169,760 18,694,963 3,738,352
(31,167,938) (4,416,389) (59,829,935) 17,056,572 6,571,445 1,864,874 103,662,327 60,376,871
--------------- -------------- -------------- -------------- ------------- --------------- -------------- ------------
139,453,212 94,251,292 173,261,488 152,270,079 24,571,376 19,472,570 140,315,525 71,733,050
--------------- -------------- -------------- -------------- ------------- --------------- -------------- ------------
(97,169,435) 18,025,987 (159,071,283) 8,268,497 (25,508,643) (2,397,302) 3,420,134 64,563,773
--------------- -------------- -------------- -------------- ------------- --------------- -------------- ------------
1,952,643 (290,507) (643,118) 6,028,831 (334,358) (1,171,126) (116,556) (780,432)
--------------- -------------- -------------- -------------- ------------- --------------- -------------- ------------
44,236,420 111,986,772 13,547,087 166,567,407 (1,271,625) 15,904,142 143,619,103 135,516,391
862,010,706 750,023,934 1,490,131,271 1,323,563,864 207,982,243 192,078,101 440,682,218 305,165,827
--------------- -------------- -------------- -------------- ------------- --------------- -------------- ------------
$ 906,247,126 $ 862,010,706 $1,503,678,358 $1,490,131,271 $ 206,710,618 $ 207,982,243 $ 584,301,321 $440,682,218
================ =============== =============== =============== ============== ================ =============== =============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
A4
<PAGE>
FINANCIAL STATEMENTS OF
THE PRUDENTIAL INDIVIDUAL VARIABLE CONTRACT ACCOUNT
STATEMENTS OF CHANGES IN NET ASSETS
For the years ended December 31, 1997 and 1996
<TABLE>
<CAPTION>
SUBACCOUNTS
-----------------------------------------------------------------------------------------
EQUITY NATURAL
INCOME RESOURCES GLOBAL
----------------------------- ----------------------------- ----------------------------
1997 1996 1997 1996 1997 1996
-------------- -------------- -------------- -------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
OPERATIONS:
Net investment income (loss).......... $ 11,675,572 $ 15,454,576 $ (1,015,429) $ (631,711) $ (44,200) $ 3,824,014
Capital gains distributions received.. 83,667,610 23,234,609 15,057,641 17,991,345 12,621,909 4,275,097
Realized gain on shares redeemed
[average cost basis]................ 22,177,266 4,894,670 4,265,854 659,033 10,753,188 2,514,488
Net change in unrealized gain (loss)
on investments...................... 131,284,129 82,705,905 (35,259,336) 13,421,277 (7,387,766) 31,571,540
-------------- -------------- -------------- -------------- -------------- --------------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM
OPERATIONS............................ 248,804,577 126,289,760 (16,951,270) 31,439,944 15,943,131 42,185,139
-------------- -------------- -------------- -------------- -------------- --------------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM PREMIUM
PAYMENTS AND OTHER OPERATING
TRANSFERS [Note 7].................... (60,468,381) (19,015,822) (24,245,773) 20,830,938 (33,385,529) 20,717,798
-------------- -------------- -------------- -------------- -------------- --------------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM EQUITY
TRANSFERS [Note 8].................... (186,017) (1,632,886) 647,536 (69,831) 1,851,079 (770,614)
-------------- -------------- -------------- -------------- -------------- --------------
TOTAL INCREASE (DECREASE) IN NET
ASSETS................................ 188,150,179 105,641,052 (40,549,507) 52,201,051 (15,591,319) 62,132,323
NET ASSETS:
Beginning of year..................... 735,930,407 630,289,355 154,817,548 102,616,497 277,255,705 215,123,382
-------------- -------------- -------------- -------------- -------------- --------------
End of year........................... $ 924,080,586 $ 735,930,407 $ 114,268,041 $ 154,817,548 $ 261,664,386 $ 277,255,705
============== ============== ============== ============== ============== ==============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
A5
<PAGE>
<TABLE>
<CAPTION>
SUBACCOUNTS (CONTINUED)
- -----------------------------------------------------------------------------------------------------
SMALL
GOVERNMENT PRUDENTIAL CAPITALIZATION
INCOME JENNISON STOCK
- -------------------------------- ------------------------------- --------------------------------
1997 1996 1997 1996 1997 1996
- ---------------- -------------- --------------- -------------- -------------- ----------------
<S> <C> <C> <C> <C> <C>
$ 12,649,525 $ 14,352,559 $ (1,117,419) $ (557,901) $ (420,865) $ (110,250)
0 0 8,029,556 0 7,179,462 991,049
89,927 254,071 2,207,647 65,488 1,680,689 207,931
6,283,807 (11,980,070) 19,900,327 8,010,502 7,162,308 5,018,004
- ---------------- -------------- --------------- -------------- ------------- ---------------
19,023,259 2,626,560 29,020,111 7,518,089 15,601,594 6,106,734
- ---------------- -------------- --------------- -------------- ------------- ---------------
(52,662,598) (21,661,238) 24,668,485 52,514,199 34,572,477 29,814,777
- ---------------- -------------- --------------- -------------- ------------- ---------------
(4,594,249) 3,578,576 (1,042,725) (2,467,088) (542,063) (530,162)
- ---------------- -------------- --------------- -------------- ------------- ---------------
(38,233,588) (15,456,102) 52,645,871 57,565,200 49,632,008 35,391,349
272,936,334 288,392,436 89,912,495 32,347,295 56,282,418 20,891,069
- ---------------- -------------- --------------- -------------- ------------- ---------------
$ 234,702,746 $ 272,936,334 $ 142,558,366 $ 89,912,495 $ 105,914,426 $ 56,282,418
================ =============== =============== =============== ============== ================
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
A6
<PAGE>
NOTES TO FINANCIAL STATEMENTS OF
THE PRUDENTIAL INDIVIDUAL VARIABLE CONTRACT ACCOUNT
For the Year Ended December 31, 1997
NOTE 1: GENERAL
The Prudential Individual Variable Contract Account ("the Account")
of The Prudential Insurance Company of America ("Prudential") was
established on October 12, 1982 by a resolution of Prudential's Board
of Directors in conformity with insurance laws of the State of New
Jersey. The assets of the Account are segregated from Prudential's
other assets. The two products that invest in the Account are The
Prudential Variable Investment Plan ("VIP") and The Prudential
Discovery Plus ("PDISCO+").
The Account is registered under the Investment Company Act of 1940,
as amended, as a unit investment trust. There are thirteen
subaccounts within the Account, each of which invests only in a
corresponding portfolio of The Prudential Series Fund, Inc. (the
"Series Fund"). The Series Fund is a diversified open-end management
investment company, and is managed by The Prudential.
NOTE 2: SIGNIFICANT ACCOUNTING POLICIES
The accompanying financial statements are prepared in conformity with
generally accepted accounting principles (GAAP). The preparation of
the financial statements in conformity with GAAP requires management
to make estimates and assumptions that affect the reported amounts
and disclosures. Actual results could differ from those estimates.
Investments--The investments in shares of the Series Fund 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 reinvested in additional shares of the Series Fund and
are recorded on the ex-dividend date.
Equity of The Prudential Insurance Company of America--Prudential
---------------------------------------------------------
maintains a position in the Account for the purpose of administering
activity in the Account. The activity includes unit transactions,
fund share transactions, and expense processing. Prudential monitors
the balance daily and transfers funds based upon anticipated
activity. At times, Prudential may owe an amount to the Account,
which is reflected in the Account's Statements of Net Assets as a
receivable from Prudential. The receivable does not have an effect on
the Contract owner's account or the related unit value.
Equity of Annuitants--Equity of annuitants is the reserve for
----------------------
currently payable Contracts and is computed using the following: the
1983 A Mortality Table, the investment results of annuitants'
subaccounts, an assumed investment result of 3.5% and various
valuation interest rates ranging from 6.5% to 11%, depending on the
Contract's year of issue.
A7
<PAGE>
NOTE 3: INVESTMENT INFORMATION FOR THE PRUDENTIAL SERIES FUND, INC.
PORTFOLIOS
The net asset value per share for each portfolio of the Series Fund,
the number of shares of each portfolio held by the subaccounts of the
Account and the aggregate cost of investments in such shares at
December 31, 1997 were as follows:
<TABLE>
<CAPTION>
PORTFOLIOS
------------------------------------------------------------------------------------
MONEY DIVERSIFIED FLEXIBLE CONSERVATIVE
MARKET BOND EQUITY MANAGED BALANCED
---------------- ---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C>
Number of Shares: 25,029,901 20,601,721 46,647,980 52,443,976 100,444,637
Net asset value per share: $ 10.00000 $ 11.02185 $ 31.06909 $ 17.28029 $ 14.97022
Cost: $ 250,299,005 $ 225,510,503 $ 1,037,926,129 $ 863,087,287 $ 1,476,354,857
</TABLE>
<TABLE>
<CAPTION>
PORTFOLIOS (CONTINUED)
------------------------------------------------------------------------------------
HIGH
YIELD STOCK EQUITY NATURAL
BOND INDEX INCOME RESOURCES GLOBAL
---------------- ---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C>
Number of Shares: 25,380,300 19,335,203 41,276,871 7,495,808 14,598,977
Net asset value per share: $ 8.14453 $ 30.21956 $ 22.38737 $ 15.24426 $ 17.92348
Cost: $ 202,987,406 $ 331,995,882 $ 659,904,657 $ 122,567,675 $ 214,478,004
</TABLE>
<TABLE>
<CAPTION>
PORTFOLIOS (CONTINUED)
--------------------------------------------------
SMALL
GOVERMENT PRUDENTIAL CAPITALIZATION
INCOME JENNISON STOCK
---------------- ---------------- ----------------
<S> <C> <C> <C>
Number of Shares: 20,368,446 8,039,832 6,648,306
Net asset value per share: $ 11.52286 $ 17.73151 $ 15.93104
Cost: $ 229,668,490 $ 113,701,894 $ 92,987,560
</TABLE>
A8
<PAGE>
NOTE 4: CONTRACT OWNER UNIT INFORMATION
Outstanding Contract owner units, unit values and total value of
Contract owner equity at December 31, 1997 were as follows:
<TABLE>
<CAPTION>
SUBACCOUNTS
--------------------------------------------------------------------------------
MONEY DIVERSIFIED FLEXIBLE CONSERVATIVE
MARKET BOND EQUITY MANAGED BALANCED
--------------- --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Contract Owner Units Outstanding (VIP). .16,990,011.295 15,879,990.996 47,418,536.450 70,814,807.780 118,170,617.538
Unit Value (VIP)....................... $ 2.09203 $ 3.20766 $ 6.99611 $ 4.53976 $ 3.83869
--------------- --------------- --------------- --------------- --------------
Contract Owner Equity (VIP)............ $ 35,543,613 $ 50,937,612 $ 331,745,297 $ 321,482,232 $ 453,620,368
--------------- --------------- --------------- --------------- --------------
Contract Owner Units Outstanding
(PDISCO+).............................. 100,713,122.423 54,997,472.119 159,618,134.233 128,050,185.211 271,684,906.571
Unit Value (PDISCO+)................... $ 2.09203 $ 3.20766 $ 6.99611 $ 4.53976 $ 3.83869
--------------- --------------- --------------- --------------- --------------
Contract Owner Equity (PDISCO+)........ $ 210,694,874 $ 176,413,191 $ 1,116,706,025 $ 581,317,109 $1,042,914,134
--------------- --------------- --------------- --------------- --------------
TOTAL CONTRACT OWNER EQUITY............ $ 246,238,487 $ 227,350,803 $ 1,448,451,322 $ 902,799,341 $1,496,534,502
=============== =============== =============== =============== ==============
</TABLE>
<TABLE>
<CAPTION>
SUBACCOUNTS (CONTINUED)
--------------------------------------------------------------------------------
HIGH
YIELD STOCK EQUITY NATURAL
BOND INDEX INCOME RESOURCES GLOBAL
--------------- --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Contract Owner Units Outstanding (VIP) 15,468,070.499 33,858,272.132 29,544,795.753 9,664,492.128 19,592,028.768
Unit Value (VIP)...................... $ 2.30802 $ 3.81606 $ 4.10841 $ 2.48061 $ 1.91715
--------------- --------------- -------------- --------------- ---------------
Contract Owner Equity (VIP)........... $ 35,700,616 $ 129,205,198 $ 121,382,134 $ 23,973,836 $ 37,560,858
--------------- --------------- -------------- --------------- ---------------
Contract Owner Units Outstanding 74,090,922.239 118,969,379.342 195,232,258.979 35,935,729.848 115,977,749.332
(PDISCO+).............................
Unit Value (PDISCO+).................. $ 2.30802 $ 3.81606 $ 4.10841 $ 2.48061 $ 1.91715
--------------- --------------- -------------- --------------- ---------------
Contract Owner Equity (PDISCO+)....... $ 171,003,330 $ 453,994,290 $ 802,094,165 $ 89,142,531 $ 222,346,742
--------------- --------------- -------------- --------------- ---------------
TOTAL CONTRACT OWNER EQUITY........... $ 206,703,946 $ 583,199,488 $ 923,476,299 $ 113,116,367 $ 259,907,600
=============== =============== =============== =============== ===============
</TABLE>
<TABLE>
<CAPTION>
SUBACCOUNTS (CONTINUED)
------------------------------------------------
SMALL
GOVERNMENT PRUDENTIAL CAPITALIZATION
INCOME JENNISON STOCK
--------------- --------------- ----------------
<S> <C> <C> <C>
Contract Owner Units Outstanding (VIP) 26,739,349.400 12,483,682.142 9,606,164.986
Unit Value (VIP)...................... $ 1.88100 $ 1.83193 $ 1.74162
--------------- --------------- ---------------
Contract Owner Equity (VIP)........... $ 50,296,716 $ 22,869,232 $ 16,730,289
--------------- --------------- ---------------
Contract Owner Units Outstanding 97,819,209.440 65,230,049.694 51,033,359.517
(PDISCO+)
Unit Value (PDISCO+).................. $ 1.88100 $ 1.83193 $ 1.74162
--------------- --------------- ---------------
Contract Owner Equity (PDISCO+)....... $ 183,997,933 $ 119,496,885 $ 88,880,720
--------------- --------------- ---------------
TOTAL CONTRACT OWNER EQUITY........... $ 234,294,649 $ 142,366,117 $ 105,611,009
=============== =============== ===============
</TABLE>
A9
<PAGE>
NOTE 5: CHARGES AND EXPENSES
A. Mortality Risk, Expense Risk and Administrative Charges
The mortality risk and expense risk charges at effective annual
rates of 0.8% and 0.4%, respectively (for a total of 1.2% per
year), are applied daily against the net assets representing
equity of VIP Contract owners and annuitants held in each
subaccount. Mortality risk is that annuitants may live longer
than estimated and expense risk is that the cost of issuing and
administering the policies may exceed the estimated expenses. For
1997, the amount of these charges paid to Prudential was
$19,285,048.
The mortality risk, expense risk and administrative charges at
effective annual rates of 0.7%, 0.3% and 0.2%, respectively (for
a total of 1.2% per year), are applied daily against the net
assets representing equity of PDISCO+ Contract owners held in
each subaccount. Administrative charges include costs associated
with issuing the Contract, establishing and maintaining records,
and providing reports to Contract owners. For 1997, the amount of
these charges paid to Prudential was $61,867,656.
B. Deferred Sales Charge
Subsequent to a Contract owner redemption, a deferred sales
charge is imposed upon the withdrawal of certain purchase
payments to compensate Prudential for sales and other marketing
expenses. The amount of any sales charge will depend on the
amount withdrawn and the number of Contract years that have
elapsed since the Contract owner or annuitant made the purchase
payments deemed to be withdrawn. No sales charge is made against
the withdrawal of investment income. A reduced sales charge is
imposed in connection with the withdrawal of a purchase payment
to effect an annuity if three or more Contract years have elapsed
since the Contract date, unless the annuity effected is an
annuity certain. No sales charge is imposed upon death benefit
payments or upon transfers made between subaccounts. For 1997,
the amount of charges paid to Prudential for VIP was $1,726,683.
For 1997, the amount of charges paid to Prudential for PDISCO+
was $6,969,362.
C. Annual Maintenance Charge
An annual maintenance charge of $30 will be deducted if and only
if the Contract fund is less than $10,000 on a Contract
anniversary or at the time a full withdrawal is effected,
including a withdrawal to effect an annuity. The charge is made
by reducing accumulation units credited to a Contract owner's
account. For 1997, the amount of charges paid to Prudential for
VIP was $1,008,352. For 1997, the amount of charges paid to
Prudential for PDISCO+ was $35,383.
NOTE 6: TAXES
Prudential is taxed as a "life insurance company" under the Internal
Revenue Code and the operations of the Account form a part of and are
taxed with those of Prudential. Under current federal law, no federal
income taxes are payable by the Account. As such, no provision for
tax liability has been recorded.
A10
<PAGE>
NOTE 7: NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM PREMIUM PAYMENTS
AND OTHER OPERATING TRANSFERS
The following amounts represent Contract owner activity components
for the year ended December 31, 1997 were as follows:
<TABLE>
<CAPTION>
SUBACCOUNTS
----------------------------------------------------------------------------
MONEY DIVERSIFIED FLEXIBLE
MARKET BOND EQUITY MANAGED
----------------- ------------------ ------------------ -----------------
<S> <C> <C> <C> <C>
Contract Owner Net Payments............. $ 23,961,225 $ 9,215,129 $ 53,296,559 $ 32,937,745
Annuity Payments........................ $ (11,354) $ (73,070) $ 0 $ (14,586)
Surrenders, Withdrawals, and Death
Benefits............................. $ (96,558,513) $ (37,912,055) $ (173,999,157) $ (116,462,620)
Net Transfers From (To) Other
Subaccounts or Fixed Rate Options.... $ (2,913,426) $ (3,901,996) $ (14,985,846) $ (13,383,947)
Administrative and Other Charges........ $ (23,125) $ (34,758) $ (223,209) $ (246,027)
</TABLE>
<TABLE>
<CAPTION>
SUBACCOUNTS (CONTINUED)
---------------------------------------------------------------------------
CONSERVATIVE HIGH YIELD STOCK EQUITY
BALANCED BOND INDEX INCOME
----------------- ------------------ ------------------ ----------------
<S> <C> <C> <C> <C>
Contract Owner Net Payments............. $ 46,263,316 $ 8,018,507 $ 35,558,028 $ 26,582,983
Annuity Payments........................ $ (14,685) $ 0 $ 0 $ 0
Surrenders, Withdrawals, and Death
Benefits............................. $ (184,353,244) $ (37,249,666) $ (65,696,647) $ (102,914,098)
Net Transfers From (To) Other
Subaccounts or Fixed Rate Options.... $ (20,694,955) $ 3,740,393 $ 33,627,406 $ 15,917,238
Administrative and Other Charges........ $ (271,715) $ (17,877) $ (68,653) $ (54,504)
</TABLE>
<TABLE>
<CAPTION>
SUBACCOUNTS (CONTINUED)
---------------------------------------------------------------------------
NATURAL GOVERNMENT PRUDENTIAL
RESOURCES GLOBAL INCOME JENNISON
---------------- ---------------- ---------------- ------------------
<S> <C> <C> <C> <C>
Contract Owner Net Payments............. $ 8,653,651 $ 10,541,214 $ 3,313,349 $ 16,187,510
Annuity Payments........................ $ 0 $ 0 $ 0 $ 0
Surrenders, Withdrawals, and Death
Benefits............................. $ (15,898,839) $ (38,550,162) $ (34,966,016) $ (12,794,870)
Net Transfers From (To) Other
Subaccounts or Fixed Rate Options.... $ (16,980,836) $ (5,350,918) $ (20,974,599) $ 21,291,056
Administrative and Other Charges........ $ (19,749) $ (25,663) $ (35,332) $ (15,211)
</TABLE>
SUBACCOUNTS
(CONTINUED)
---------------
SMALL
CAPITALIZATION
STOCK
---------------
Contract Owner Net Payments............. $ 12,922,869
Annuity Payments........................ $ 0
Surrenders, Withdrawals, and Death
Benefits............................. $ (9,070,271)
Net Transfers From (To) Other
Subaccounts or Fixed Rate Options.... $ 30,727,791
Administrative and Other Charges........ $ (7,912)
A11
<PAGE>
NOTE 8: NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM EQUITY TRANSFERS
The increase (decrease) in net assets resulting from equity transfers
represents the net contributions (withdrawals) of Prudential to
(from) the Account.
NOTE 9: UNIT ACTIVITY
Transactions in units (including transfers among subaccounts) for the
years ended December 31, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
SUBACCOUNTS
-------------------------------------------------------------------------------------------------
MONEY DIVERSIFIED
MARKET BOND EQUITY
-------------------------------- ------------------------------- -------------------------------
1997 1996 1997 1996 1997 1996
--------------- --------------- -------------- --------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Contract Owner Contributions: 172,221,298.646 204,176,098.887 8,561,110.629 18,808,605.407 25,456,660.608 52,452,881.25
Contract Owner Redemptions: (209,069,288.292)(203,372,346.067)(19,161,507.252) (16,855,605.935)(46,279,932.192) (40,780,551.495)
</TABLE>
<TABLE>
<CAPTION>
SUBACCOUNTS (CONTINUED)
--------------------------------------------------------------------------------------------------
HIGH
FLEXIBLE CONSERVATIVE YIELD
MANAGED BALANCED BOND
-------------------------------- ------------------------------- -------------------------------
1997 1996 1997 1996 1997 1996
--------------- --------------- -------------- --------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Contract Owner Contributions: 14,758,268.108 34,099,351.741 25,306,625.891 60,831,409.999 32,362,388.446 56,857,168.302
Contract Owner Redemptions: (37,195,797.677) (28,891,707.325) (68,458,695.204) (57,910,760.377)(43,990,812.817) (58,078,219.169)
</TABLE>
<TABLE>
<CAPTION>
SUBACCOUNTS (CONTINUED)
--------------------------------------------------------------------------------------------------
STOCK EQUITY NATURAL
INDEX INCOME RESOURCES
-------------------------------- ------------------------------- -------------------------------
1997 1996 1997 1996 1997 1996
--------------- --------------- -------------- --------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Contract Owner Contributions: 42,552,393.314 56,115,653.050 27,819,691.328 35,809,207.178 12,847,676.657 23,441,600.252
Contract Owner Redemptions: (41,080,235.215) (31,307,337.011) (44,765,651.579) (42,629,464.634) (21,611,689.584) (15,563,220.683)
</TABLE>
<TABLE>
<CAPTION>
SUBACCOUNTS (CONTINUED)
--------------------------------------------------------------------------------------------------
GOVERNMENT PRUDENTIAL
GLOBAL INCOME JENNISON
-------------------------------- ------------------------------- -------------------------------
1997 1996 1997 1996 1997 1996
--------------- --------------- -------------- --------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Contract Owner Contributions: 48,281,857.344 82,615,204.129 7,504,632.620 21,444,007.615 40,667,682.046 64,681,355.330
Contract Owner Redemptions: (65,322,630.297) (69,813,177.075) (37,417,576.892) (34,280,566.051) (26,227,875.670) (24,764,578.595)
</TABLE>
SUBACCOUNTS (CONTINUED)
--------------------------------
SMALL
CAPITALIZATION
STOCK
---------------------------------
1997 1996
--------------- ---------------
Contract Owner Contributions: 59,912,348.844 44,313,958.907
Contract Owner Redemptions: (38,855,387.335) (21,613,269.945)
A12
<PAGE>
NOTE 10: PURCHASES AND SALES OF INVESTMENTS
The aggregate costs of purchases and proceeds from sales of
investments in the Series Fund were as follows:
<TABLE>
<CAPTION>
PORTFOLIOS
-------------------------------------------------------------------------------
MONEY DIVERSIFIED FLEXIBLE CONSERVATIVE
MARKET BOND EQUITY MANAGED BALANCED
-------------- --------------- -------------- --------------- -------------
<S> <C> <C> <C> <C> <C>
For the year ended December 31, 1997
Purchases........................... $ 60,312,000 $ 4,032,000 $ 3,813,000 $ 248,000 $ 5,000
Sales............................... $ (138,000,000) $ (40,233,000) $ (157,032,000) $ (106,294,000) $ (177,822,000)
</TABLE>
<TABLE>
<CAPTION>
PORTFOLIOS (CONTINUED)
-------------------------------------------------------------------------------
HIGH YIELD STOCK EQUITY NATURAL
BOND INDEX INCOME RESOURCES GLOBAL
-------------- --------------- -------------- --------------- -------------
<S> <C> <C> <C> <C> <C>
For the year ended December 31, 1997
Purchases........................... $ 18,863,000 $ 41,479,000 $ 5,818,000 $ 6,033,000 $ 9,646,000
Sales............................... $ (47,191,000) $ (44,512,000) $ (76,415,000) $ (31,383,000) $ (44,587,000)
</TABLE>
<TABLE>
<CAPTION>
PORTFOLIOS (CONTINUED)
-----------------------------------------------
GOVERNMENT PRUDENTIAL SMALL
INCOME JENNISON STOCK
-------------- --------------- --------------
<S> <C> <C> <C>
For the year ended December 31, 1997
Purchases........................... $ 5,000 $ 32,756,000 $ 45,212,000
Sales............................... $ (60,142,000) $ (10,528,000) $ (12,133,000)
</TABLE>
A13
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Contract Owners of the
Prudential Individual 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 the Money Market, Diversified Bond,
Equity, Flexible Managed, Conservative Balanced, High Yield Bond, Stock Index,
Equity Income, Natural Resources, Global, Government Income, Prudential Jennison
and Small Capitalization Stock Subaccounts of the Prudential Individual Variable
Contract Account at December 31, 1997, the results of each of their operations
for the year then ended and the changes in each of their net assets for each of
the two years in the period then ended, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of The
Prudential Insurance Company of America'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 shares owned in The Prudential Series
Fund, Inc. at December 31, 1997, provide a reasonable basis for the opinion
expressed above.
PRICE WATERHOUSE LLP
New York, New York
March 20, 1998
A14
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
---------------------------------
March 5, 1998
To the Board of Directors and Policyholders of
The Prudential Insurance Company of America
In our opinion, the accompanying consolidated statements of financial position
and the related consolidated statements of operations, of changes in equity and
of cash flows present fairly, in all material respects, the financial position
of The Prudential Insurance Company of America and its subsidiaries at December
31, 1997 and 1996, and the results of their operations and their cash flows for
the years then ended in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audit. We conducted our audits of these statements in
accordance with generally accepted auditing standards which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.
Price Waterhouse LLP
1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
The Prudential Insurance Company of America
Newark, New Jersey
We have audited the accompanying consolidated statements of operations, changes
in equity, and cash flows of The Prudential Insurance Company of America and
subsidiaries for the year ended December 31, 1995. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on the financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such consolidated statements of operations, changes in equity,
and cash flows present fairly, in all material respects, the results of
operations and cash flows of The Prudential Insurance Company of America and
subsidiaries for the year ended December 31, 1995 in conformity with generally
accepted accounting principles.
Deloitte & Touche LLP
June 4, 1997
2
<PAGE>
<TABLE>
<CAPTION>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
DECEMBER 31, 1997 AND 1996 (IN MILLIONS)
1997 1996
----------- -----------
<S> <C> <C>
ASSETS
Fixed maturities:
Available for sale, at fair value (amortized cost, 1997: $71,496; 1996: $64,545) .......... $ 75,270 $ 66,553
Held to maturity, at amortized cost (fair value, 1997: $19,894; 1996: $21,362) ............ 18,700 20,403
Trading account assets, at fair value........................................................ 6,044 4,219
Equity securities, available for sale, at fair value (cost, 1997: $2,376; 1996: $2,103) ..... 2,810 2,622
Mortgage loans on real estate ............................................................... 16,004 17,097
Investment real estate ...................................................................... 1,519 2,586
Policy loans ................................................................................ 6,827 6,692
Securities purchased under agreements to resell ............................................. 8,661 5,347
Cash collateral for borrowed securities ..................................................... 5,047 2,416
Short-term investments ...................................................................... 12,106 9,294
Other long-term investments ................................................................. 3,360 2,995
----------- -----------
Total investments ......................................................................... 156,348 140,224
Cash ........................................................................................ 3,636 2,091
Deferred policy acquisition costs ........................................................... 5,994 6,291
Accrued investment income ................................................................... 1,909 1,828
Receivables from broker-dealer clients ...................................................... 6,273 5,281
Other assets ................................................................................ 11,276 9,990
Separate Account assets ..................................................................... 74,046 63,358
----------- -----------
TOTAL ASSETS .................................................................................. $ 259,482 $ 229,063
=========== ===========
LIABILITIES AND EQUITY
LIABILITIES
Future policy benefits ...................................................................... $ 65,581 $ 63,955
Policyholders' account balances ............................................................. 32,941 36,009
Other policyholders' liabilities ............................................................ 6,659 6,043
Policyholders' dividends .................................................................... 1,269 714
Securities sold under agreements to repurchase .............................................. 12,347 7,503
Cash collateral for loaned securities ....................................................... 14,117 8,449
Short-term debt ............................................................................. 6,774 6,562
Long-term debt .............................................................................. 4,273 3,760
Income taxes payable ........................................................................ 500 1,544
Payables to broker-dealer clients ........................................................... 3,338 3,018
Securities sold but not yet purchased ....................................................... 3,533 1,900
Other liabilities ........................................................................... 14,774 8,238
Separate Account liabilities ................................................................ 73,658 62,845
----------- -----------
TOTAL LIABILITIES ......................................................................... 239,764 210,540
=========== ===========
COMMITMENTS AND CONTINGENCIES (SEE NOTES 12, 13 AND 14)
EQUITY
Retained earnings ........................................................................... 18,051 17,443
Net unrealized investment gains ............................................................. 1,752 1,136
Foreign currency translation adjustments .................................................... (85) (56)
----------- -----------
TOTAL EQUITY .............................................................................. 19,718 18,523
----------- -----------
TOTAL LIABILITIES AND EQUITY .................................................................. $ 259,482 $ 229,063
=========== ===========
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3
<PAGE>
<TABLE>
<CAPTION>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (IN MILLIONS)
1997 1996 1995
------------ ----------- -----------
<S> <C> <C> <C>
REVENUES
Premiums .................................................................... $ 18,534 $ 18,962 $ 19,783
Policy charges and fee income ............................................... 1,828 1,912 1,824
Net investment income ....................................................... 9,863 9,742 10,178
Realized investment gains, net .............................................. 2,187 1,138 1,503
Commissions and other income ................................................ 4,661 4,521 3,952
------------ ----------- -----------
Total revenues ............................................................ 37,073 36,275 37,240
------------ ----------- -----------
BENEFITS AND EXPENSES
Policyholders' benefits ..................................................... 18,208 19,306 19,470
Interest credited to policyholders' account balances ........................ 2,043 2,251 2,739
Dividends to policyholders .................................................. 2,429 2,339 2,317
General and administrative expenses ......................................... 11,926 10,875 10,345
Sales practice remediation costs ............................................ 1,640 410 --
------------ ----------- -----------
Total benefits and expenses ............................................... 36,246 35,181 34,871
------------ ----------- -----------
INCOME FROM OPERATIONS BEFORE INCOME TAXES .................................... 827 1,094 2,369
------------ ----------- -----------
Income taxes
Current ................................................................... (46) 406 1,293
Deferred .................................................................. 263 (390) (167)
------------ ----------- -----------
217 16 1,126
------------ ----------- -----------
NET INCOME .................................................................... $ 610 $ 1,078 $ 1,243
============ =========== ===========
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (IN MILLIONS)
<TABLE>
<CAPTION>
FOREIGN NET
CURRENCY UNREALIZED
RETAINED TRANSLATION INVESTMENT TOTAL
EARNINGS ADJUSTMENTS GAINS EQUITY
--------- ----------- ---------- ---------
<S> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1995 ........................ $ 15,126 $ (42) $ 16 $ 15,100
Net income .................................... 1,243 -- -- 1,243
Change in foreign currency translation
adjustments ................................. -- 18 -- 18
Change in net unrealized investment gains ..... -- -- 2,381 2,381
--------- --------- --------- ---------
BALANCE, DECEMBER 31, 1995 ...................... 16,369 (24) 2,397 18,742
Net income .................................... 1,078 -- -- 1,078
Change in foreign currency translation
adjustments ................................. -- (32) -- (32)
Change in net unrealized investment gains ..... -- -- (1,261) (1,261)
Additional pension liability adjustment ....... (4) -- -- (4)
--------- --------- --------- ---------
BALANCE, DECEMBER 31, 1996 ...................... 17,443 (56) 1,136 18,523
Net income .................................... 610 -- -- 610
Change in foreign currency translation
adjustments ................................. -- (29) -- (29)
Change in net unrealized investment gains ..... -- -- 616 616
Additional pension liability adjustment ....... (2) -- -- (2)
--------- --------- --------- ---------
BALANCE, DECEMBER 31, 1997 ...................... $ 18,051 $ (85) $ 1,752 $ 19,718
========= ========= ========= =========
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (IN MILLIONS)
<TABLE>
<CAPTION>
1997 1996 1995
---------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ..................................................... $ 610 $ 1,078 $ 1,243
Adjustments to reconcile net income to
net cash provided by operating activities:
Realized investment gains, net ............................... (2,187) (1,138) (1,503)
Policy charges and fee income ................................ (258) (208) (201)
Interest credited to policyholders' account balances ......... 2,043 2,128 2,616
Depreciation and amortization ................................ 258 266 398
Other, net ................................................... 4,681 (1,180) (2,628)
Loss (gain) on divestitures .................................. -- (116) 297
Change in:
Deferred policy acquisition costs .......................... 143 (122) (214)
Policy liabilities and insurance reserves .................. 2,477 2,471 2,382
Securities purchased under agreements to resell ............ (3,314) (217) 461
Trading account assets ..................................... (1,825) (433) 2,579
Income taxes receivable/payable ............................ (1,391) (937) 194
Cash collateral for borrowed securities .................... (2,631) (332) 25
Broker-dealer client receivables/payables .................. (672) (607) (420)
Securities sold but not yet purchased ...................... 1,633 251 (225)
Securities sold under agreements to repurchase ............. 4,844 (490) (712)
--------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES ...................... $ 4,411 $ 414 $ 4,292
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from the sale/maturity of:
Fixed maturities, available for sale .......................... $ 123,550 $ 123,368 $ 97,084
Fixed maturities, held to maturity ............................ 4,042 4,268 3,767
Equity securities, available for sale ......................... 2,572 2,162 2,370
Mortgage loans on real estate ................................. 4,299 5,731 5,553
Investment real estate ........................................ 1,842 615 435
Other long-term investments ................................... 5,081 3,203 3,385
Divestitures .................................................. -- 52 790
Payments for the purchase of:
Fixed maturities, available for sale .......................... (129,854) (125,093) (101,197)
Fixed maturities, held to maturity ............................ (2,317) (2,844) (6,803)
Equity securities, available for sale ......................... (2,461) (2,384) (1,391)
Mortgage loans on real estate ................................. (3,363) (1,906) (3,015)
Investment real estate ........................................ (241) (142) (387)
Other long-term investments ................................... (4,148) (2,060) (1,849)
Cash collateral for securities loaned (net) .................... 5,668 2,891 3,471
Short-term investments (net) ................................... (2,848) (1,915) 2,793
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES ...................... $ 1,822 $ 5,946 $ 5,006
--------- --------- ---------
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (IN MILLIONS)
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Policyholders' account deposits ................................ $ 5,020 $ 2,799 $ 2,724
Policyholders' account withdrawals ............................. (9,873) (8,099) (9,164)
Net increase(decrease) in short-term debt ...................... 305 583 (3,077)
Proceeds from the issuance of long-term debt ................... 324 93 763
Repayments of long-term debt ................................... (464) (1,306) (30)
--------- --------- ---------
CASH FLOWS USED IN FINANCING ACTIVITIES ................... (4,688) (5,930) (8,784)
--------- --------- ---------
NET INCREASE IN CASH ............................................. 1,545 430 514
CASH, BEGINNING OF YEAR .......................................... 2,091 1,661 1,147
--------- --------- ---------
CASH, END OF YEAR ................................................ $ 3,636 $ 2,091 $ 1,661
========= ========= =========
SUPPLEMENTAL CASH FLOW INFORMATION:
Income taxes paid ................................................ $ 968 $ 793 $ 430
--------- --------- ---------
Interest paid .................................................... $ 1,243 $ 1,404 $ 1,413
--------- --------- ---------
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS
The Prudential Insurance Company of America and its subsidiaries
(collectively, "the Company") provide insurance and financial services
throughout the United States and many locations worldwide. Principal
products and services provided include life and health insurance, annuities,
pension and retirement related investments and administration, managed
healthcare, property and casualty insurance, securities brokerage, asset
management, investment advisory services and real estate brokerage.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the Prudential
Insurance Company of America, a mutual life insurance company, and its
subsidiaries, and those partnerships and joint ventures in which the Company
has a controlling interest. The consolidated financial statements have been
prepared in accordance with generally accepted accounting principles
("GAAP"). All significant intercompany balances and transactions have been
eliminated.
USE OF ESTIMATES
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the period. Actual results could differ from
those estimates.
INVESTMENTS
FIXED MATURITIES classified as "available for sale" are carried at estimated
fair value. Fixed maturities that the Company has both the positive intent
and ability to hold to maturity are stated at amortized cost and classified
as "held to maturity." The amortized cost of fixed maturities are written
down to estimated fair value when considered impaired and the decline in
value is considered to be other than temporary. Unrealized gains and losses
on fixed maturities "available for sale," net of income tax, the effect on
deferred policy acquisition costs and participating annuity contracts that
would result from the realization of unrealized gains and losses, are
included in a separate component of equity, "Net unrealized investment
gains."
TRADING ACCOUNT ASSETS are carried at estimated fair value.
EQUITY SECURITIES, available for sale, comprised of common and
non-redeemable preferred stock, are carried at estimated fair value. The
associated unrealized gains and losses, net of income tax, the effect on
deferred policy acquisition costs and participating annuity contracts that
would result from the realization of unrealized gains and losses, are
included in a separate component of equity, "Net unrealized investment
gains."
MORTGAGE LOANS ON REAL ESTATE are stated primarily at unpaid principal
balances, net of unamortized discounts and allowance for losses on impaired
loans. Impaired loans are identified by management as loans in which a
probability exists that all amounts due according to the contractual terms
of the loan agreement will not be collected. Impaired loans are measured
based on the present value of expected future cash flows, discounted at the
loan's effective interest rate or the fair value of the collateral, if the
loan is collateral dependent. The Company's periodic evaluation of the
adequacy of the allowance for losses is based on a number of factors,
including past loan loss experience, known and inherent risks in the
portfolio, adverse situations that may affect the borrower's ability to
repay, the estimated value of the underlying collateral, composition of the
loan portfolio, current economic conditions and other relevant factors.
This evaluation is inherently subjective as it requires estimating the
amounts and timing of future cash flows expected to be received on impaired
loans.
Interest received on impaired loans, including loans that were previously
modified in a troubled debt restructuring, is either applied against the
principal or reported as revenue, according to management's judgment as to
the collectibility of principal. Management discontinues the accrual of
interest on impaired loans after the loans are 90 days delinquent as to
principal or interest or earlier when management has serious doubts about
collectibility. When a loan is recognized as
8
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
impaired, any accrued but unpaid interest previously recorded on such loan
is reversed against interest income of the current period. Generally, a loan
is restored to accrual status only after all delinquent interest and
principal are brought current and, in the case of loans where interest has
been interrupted for a substantial period, a regular payment performance has
been established.
INVESTMENT REAL ESTATE, which the Company has the intent to hold for the
production of income, is carried at depreciated cost less any write-downs to
fair value for impairment losses. Depreciation on real estate is computed
using the straight-line method over the estimated lives of the properties.
Real estate to be disposed of is carried at the lower of depreciated cost or
fair value less selling costs and is not depreciated once classified as
such.
POLICY LOANS are carried at unpaid principal balances.
SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL AND SECURITIES SOLD UNDER
AGREEMENTS TO REPURCHASE are carried at the amounts at which the securities
will be subsequently resold or reacquired, including accrued interest, as
specified in the respective agreements. The Company's policy is to take
possession of securities purchased under agreements to resell. The market
value of securities to be repurchased is monitored, and additional
collateral is requested, where appropriate, to protect against credit
exposure.
SECURITIES BORROWED AND SECURITIES LOANED are recorded at the amount of cash
advanced or received. With respect to securities loaned, the Company obtains
collateral in an amount equal to 102% and 105% of the fair value of the
domestic and foreign securities, respectively. The Company monitors the
market value of securities borrowed and loaned on a daily basis with
additional collateral obtained as necessary. Non-cash collateral received is
not reflected in the Consolidated Statements of Financial Position.
Substantially, all the Company's securities borrowed contracts are with
other brokers and dealers, commercial banks and institutional clients.
Substantially, all of the Company's securities loaned are with large
brokerage firms.
These transactions are used to generate net investment income and facilitate
trading activity. These instruments are short-term in nature (usually 30
days or less) and are collateralized principally by U.S. Government and
mortgage-backed securities. The carrying amounts of these instruments
approximate fair value because of the relatively short period of time
between the origination of the instruments and their expected realization.
SHORT-TERM INVESTMENTS, including highly liquid debt instruments purchased
with an original maturity of twelve months or less, are carried at amortized
cost, which approximates fair value.
OTHER LONG-TERM INVESTMENTS primarily represent the Company's investments
in joint ventures and partnerships in which the Company does not have
control and derivatives held for purposes other than trading. Joint venture
and partnership investments are recorded using the equity method of
accounting, reduced for other than temporary declines in value.
REALIZED INVESTMENT GAINS, NET are computed using the specific
identification method. Costs of fixed maturities and equity securities are
adjusted for impairments considered to be other than temporary. Allowances
for losses on mortgage loans on real estate are netted against asset
categories to which they apply and provisions for losses on investments are
included in "Realized investment gains, net." Unrealized gains and losses on
trading account assets are included in "Commissions and other income."
CASH
Cash includes cash on hand, amounts due from banks, and money market
instruments.
DEFERRED POLICY ACQUISITION COSTS
The costs which vary with and that are related primarily to the production
of new insurance business are deferred to the extent such costs are deemed
recoverable from future profits. Such costs include certain commissions,
costs of policy issuance and underwriting, and certain variable field office
expenses. Deferred policy acquisition costs are subject to recoverability
testing at the time of policy issue and loss recognition testing at the end
of each accounting period. Deferred policy acquisition costs are adjusted
for the impact of unrealized gains or losses on investments as if these
gains or losses had been realized, with corresponding credits or charges
included in equity.
9
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
For life insurance, deferred policy acquisition costs are amortized over the
expected life of the contracts (up to 45 years) in proportion to estimated
gross margins based on historical and anticipated future experience, which
is updated periodically. The effect of changes in estimated gross margins is
reflected in earnings in the period they are revised. Policy acquisition
costs related to interest-sensitive products and certain investment-type
products are deferred and amortized over the expected life of the contracts
(periods ranging from 15 to 30 years) in proportion to estimated gross
profits arising principally from investment results, mortality and expense
margins and surrender charges based on historical and anticipated future
experience, updated periodically. The effect of revisions to estimated gross
profits on unamortized deferred acquisition costs is reflected in earnings
in the period such estimated gross profits are revised.
For property and casualty contracts, deferred policy acquisition costs are
amortized over the period in which related premiums are earned. Future
investment income is considered in determining the recoverability of
deferred policy acquisition costs.
For disability insurance, health insurance, group life insurance and most
group annuities, acquisition costs are expensed as incurred.
POLICYHOLDERS' DIVIDENDS
The amount of the dividends to be paid to policyholders is determined
annually by the Company's Board of Directors. The aggregate amount of
policyholders' dividends is related to actual interest, mortality,
morbidity, persistency and expense experience for the year and judgment as
to the appropriate level of statutory surplus to be retained by the Company.
SEPARATE ACCOUNT ASSETS AND LIABILITIES
Separate Account assets and liabilities are reported at estimated fair value
and represent segregated funds which are invested for certain policyholders,
pension fund and other customers. The assets consist of common stocks, fixed
maturities, real estate related securities, real estate mortgage loans and
short-term investments. The assets of each account are legally
segregated and are not subject to claims that arise out of any other
business of the Company. Investment risks associated with market value
changes are generally borne by the customers, except to the extent of
minimum guarantees made by the Company with respect to certain accounts. The
investment income and gains or losses for Separate Accounts generally accrue
to the policyholders and are not included in the Consolidated Statement of
Operations. Mortality, policy administration and surrender charges on the
accounts are included in "Policy charges and fee income."
INSURANCE REVENUE AND EXPENSE RECOGNITION
Premiums from participating insurance policies are generally recognized when
due. Benefits are recorded as an expense when they are incurred. A liability
for future policy benefits is recorded using the net level premium method.
Premiums from non-participating group annuities with life contingencies are
generally recognized when due. For single premium immediate annuities and
structured settlements, premiums are recognized when due with any excess
profit deferred and recognized in a constant relationship to insurance
in-force or, for annuities, the amount of expected future benefit payments.
Amounts received as payment for interest sensitive investment contracts,
deferred annuities and participating group annuities are reported as
deposits to "Policyholders' account balances." Revenues from these contracts
are reflected in "Policy charges and fee income" and consist primarily of
fees assessed during the period against the policyholders' account balances
for mortality charges, policy administration charges, surrender charges and
interest earned from the investment of these account balances. Benefits and
expenses for these products include claims in excess of related account
balances, expenses of contract administration, interest credited and
amortization of deferred policy acquisition costs.
For disability insurance, group life insurance, health insurance and
property and casualty insurance, premiums are recognized over the period to
which the premiums relate in proportion to the amount of insurance
protection provided. Claim and claim adjustment expenses are recognized when
incurred.
10
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FOREIGN CURRENCY TRANSLATION ADJUSTMENTS
Assets and liabilities of foreign operations and subsidiaries reported in
other than U.S. dollars are translated at the exchange rate in effect at the
end of the period. Revenues, benefits and other expenses are translated at
the average rate prevailing during the period. Translation adjustments
arising from the use of differing exchange rates from period to period are
charged or credited directly to equity. The cumulative effect of changes in
foreign exchange rates are included in "Foreign currency translation
adjustments."
COMMISSIONS AND OTHER INCOME
Commissions and other income principally includes securities and
commodities, commission revenues, asset management fees, investment banking
revenue and realized and unrealized gains on trading account assets of the
Company's broker-dealer subsidiary.
DERIVATIVE FINANCIAL INSTRUMENTS
Derivatives include swaps, forwards, futures, options and loan commitments
subject to market risk, all of which are used by the Company in both trading
and other than trading activities. Income and expenses related to
derivatives used to hedge are recorded on the accrual basis as an adjustment
to the carrying amount or to the yield of the related assets or liabilities
over the periods covered by the derivative contracts. Gains and losses
relating to early terminations of interest rate swaps used to hedge are
deferred and amortized over the remaining period originally covered by the
swap. Gains and losses relating to derivatives used to hedge the risks
associated with anticipated transactions are deferred and utilized to adjust
the basis of the transaction once it has closed. If it is determined that
the transaction will not close, such gains and losses are included in
"Realized investment gains, net."
DERIVATIVES HELD FOR TRADING PURPOSES are used in the Company's securities
broker-dealer business and in a limited-purpose swap subsidiary to meet the
risk management needs of its customers by structuring transactions that
allow customers to manage their exposure to interest rates, foreign exchange
rates, indices or prices of securities and commodities and when possible,
matched trading positions are established to minimize risk to the Company.
Derivatives used for trading purposes are recorded at fair value as of the
reporting date. Realized and unrealized changes in fair values are included
in "Commissions and other income" in the period in which the changes occur.
DERIVATIVES HELD FOR PURPOSES OTHER THAN TRADING are primarily used to hedge
or reduce exposure to interest rate and foreign currency risks associated
with assets held or expected to be purchased or sold, and liabilities
incurred or expected to be incurred. Additionally, other than trading
derivatives are used to change the characteristics of the Company's
asset/liability mix consistent with the Company's risk management
activities.
INCOME TAXES
The Company and its domestic subsidiaries file a consolidated federal income
tax return. The Internal Revenue Code (the "Code") limits the amount of
non-life insurance losses that may offset life insurance company taxable
income. The Code also imposes an "equity tax" on mutual life insurance
companies which, in effect, imputes an additional tax to the Company based
on a formula that calculates the difference between stock and mutual
insurance companies' earnings. Income taxes include an estimate for changes
in the total equity tax to be paid for current and prior years. Subsidiaries
operating outside the United States are taxed under applicable foreign
statutes.
Deferred income taxes are generally recognized, based on enacted rates, when
assets and liabilities have different values for financial statement and tax
reporting purposes. A valuation allowance is recorded to reduce a deferred
tax asset to that portion which management believes is more likely than not
to be realized.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1996, the Financial Accounting Standards Board ("FASB") issued the
Statement of Financial Accounting Standards ("SFAS") No. 125, "Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities" ("SFAS
11
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
125"). The statement provides accounting and reporting standards for
transfers and servicing of financial assets and extinguishments of
liabilities and provides consistent standards for distinguishing transfers
of financial assets that are sales from transfers that are secured
borrowings. SFAS 125 became effective January 1, 1997 and is to be applied
prospectively. Subsequent to June 1996, FASB issued SFAS No. 127 "Deferral
of the Effective Date of Certain Provisions of SFAS 125" ("SFAS 127"). SFAS
127 delays the implementation of SFAS 125 for one year for certain
provisions, including repurchase agreements, dollar rolls, securities
lending and similar transactions. The Company will delay implementation
with respect to those affected provisions. Adoption of SFAS 125 has not and
will not have a material impact on the Company's results of operations,
financial condition and liquidity.
In June of 1997, FASB issued SFAS No. 130, "Reporting Comprehensive Income,"
which is effective for years beginning after December 15, 1997. This
statement defines comprehensive income as "the change in equity of a
business enterprise during a period from transactions and other events and
circumstances from non-owner sources, excluding investments by owners and
distributions to owners" and establishes standards for reporting and
displaying comprehensive income and its components in financial statements.
The statement requires that the Company classify items of other
comprehensive income by their nature and display the accumulated balance of
other comprehensive income separately from retained earnings in the equity
section of the Statement of Financial Position. In addition,
reclassification of financial statements for earlier periods must be
provided for comparative purposes.
RECLASSIFICATIONS
Certain amounts in the prior years have been reclassified to conform to
current year presentation.
12
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. INVESTMENTS
FIXED MATURITIES AND EQUITY SECURITIES
The following tables provide additional information relating to fixed
maturities and equity securities (excluding trading account assets) as of
December 31:
<TABLE>
<CAPTION>
1997
------------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
-------------- -------------- -------------- ------------
FIXED MATURITIES AVAILABLE FOR SALE (IN MILLIONS)
<S> <C> <C> <C> <C>
U.S. Treasury securities and obligations of
U.S. government corporations and agencies......... $ 9,755 $ 783 $ -- $ 10,538
Obligations of U.S. states and
their political subdivisions..................... 1,375 93 -- 1,468
Foreign government bonds............................ 3,177 218 17 3,378
Corporate securities................................ 49,997 2,601 144 52,454
Mortgage-backed securities.......................... 6,828 210 5 7,033
Other fixed maturities.............................. 364 35 -- 399
-------------- -------------- -------------- ------------
Total fixed maturities available for sale........... $ 71,496 $ 3,940 $ 166 $ 75,270
============== ============== ============== ============
EQUITY SECURITIES AVAILABLE FOR SALE................ $ 2,376 $ 680 $ 246 $ 2,810
============== ============== ============== ============
<CAPTION>
1997
------------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
-------------- -------------- -------------- ------------
FIXED MATURITIES HELD TO MATURITY (IN MILLIONS)
<S> <C> <C> <C> <C>
U.S. Treasury securities and obligations of
U.S. government corporations and agencies......... $ 88 $ - $ - $ 88
Obligations of U.S. states and
their political subdivisions...................... 152 4 1 155
Foreign government bonds............................ 33 5 - 38
Corporate securities................................ 18,282 1,212 34 19,460
Mortgage-backed securities.......................... 1 - - 1
Other fixed maturities.............................. 144 8 - 152
-------------- -------------- -------------- ------------
Total fixed maturities held to maturity............. $ 18,700 $ 1,229 $ 35 $ 19,894
============== ============== ============== ============
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. INVESTMENTS (CONTINUED)
1996
-------------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
--------------- -------------- -------------- ------------
FIXED MATURITIES AVAILABLE FOR SALE (IN MILLIONS)
<S> <C> <C> <C> <C>
U.S. Treasury securities and obligations of
U.S. government corporations and agencies......... $ 10,618 $ 361 $ 77 $ 10,902
Obligations of U.S. states and
their political subdivisions...................... 1,104 29 2 1,131
Foreign government bonds............................ 2,814 137 12 2,939
Corporate securities................................ 43,593 1,737 284 45,046
Mortgage-backed securities.......................... 6,377 140 21 6,496
Other fixed maturities.............................. 39 1 1 39
--------------- -------------- -------------- ------------
Total fixed maturities available for sale........... $ 64,545 $ 2,405 $ 397 $ 66,553
=============== ============== ============== ============
EQUITY SECURITIES AVAILABLE FOR SALE................ $ 2,103 $ 659 $ 140 $ 2,622
=============== ============== ============== ============
<CAPTION>
1996
-------------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
--------------- -------------- -------------- ------------
FIXED MATURITIES HELD TO MATURITY (IN MILLIONS)
<S> <C> <C> <C> <C>
U.S. Treasury securities and obligations of
U.S. government corporations and agencies......... $ 309 $ 3 $ 6 $ 306
Obligations of U.S. states and
their political subdivisions...................... 7 -- -- 7
Foreign government bonds............................ 162 11 -- 173
Corporate securities................................ 19,886 1,033 82 20,837
Mortgage-backed securities.......................... 26 -- -- 26
Other fixed maturities.............................. 13 -- -- 13
--------------- -------------- -------------- ------------
Total fixed maturities held to maturity............. $ 20,403 $ 1,047 $ 88 $ 21,362
=============== ============== ============== ============
</TABLE>
14
<PAGE>
INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. INVESTMENTS (CONTINUED)
The amortized cost and estimated fair value of fixed maturities by
contractual maturities at December 31, 1997, is shown below:
<TABLE>
<CAPTION>
AVAILABLE FOR SALE HELD TO MATURITY
-------------------------------- ------------------------------
ESTIMATED ESTIMATED
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
-------------- -------------- -------------- ------------
(IN MILLIONS) (IN MILLIONS)
<S> <C> <C> <C> <C>
Due in one year or less....................... $ 1,991 $ 2,011 $ 686 $ 695
Due after one year through five years......... 18,916 19,226 4,496 4,659
Due after five years through ten years........ 16,776 17,494 7,161 7,551
Due after ten years........................... 26,985 29,506 6,356 6,988
Mortgage-backed securities.................... 6,828 7,033 1 1
-------------- -------------- -------------- ------------
Total......................................... $ 71,496 $ 75,270 $ 18,700 $ 19,894
============== ============== ============== ============
</TABLE>
Actual maturities may differ from contractual maturities because issuers have
the right to call or prepay obligations
Proceeds from the repayment of held to maturity fixed maturities during 1997,
1996 and 1995 were $4,042 million, $4,268 million, and $3,767 million,
respectively. Gross gains of $62 million, $78 million, and $27 million, and
gross losses of $1 million, $7 million, and $0.2 million were realized on
prepayment of held to maturity fixed maturities during 1997, 1996 and 1995,
respectively.
Proceeds from the sale of available for sale fixed maturities during 1997,
1996 and 1995 were $120,604 million, $121,910 million and $96,134 million,
respectively. Proceeds from the maturity of available for sale fixed
maturities during 1997, 1996 and 1995 were $2,946 million, $1,458 million,
and $950 million, respectively. Gross gains of $1,310 million, $1,562
million, and $2,052 million and gross losses of $639 million, $1,026 million,
and $941 million were realized on sales and prepayments of available for sale
fixed maturities during 1997, 1996 and 1995, respectively.
Write downs for impairments of fixed maturities which were deemed to be other
than temporary were $13 million, $54 million and $100 million for the years
1997, 1996 and 1995, respectively.
During the year ended December 31, 1997, there were no securities classified
as held to maturity that were sold and two securities so classified were
transferred to the available for sale portfolio. These actions were taken as
a result of a significant deterioration in credit worthiness. The aggregate
amortized cost of the securities transferred was $26 million with gross
unrealized investment gains of $0.5 million charged to "Net unrealized
investment gains."
During the year ended December 31, 1996, one security classified as held to
maturity was sold and two securities so classified were transferred to the
available for sale portfolio. These actions were taken as a result of a
significant deterioration in credit worthiness. The amortized cost of the
security sold was $35 million with a related realized investment loss of $0.7
million; the aggregate amortized cost of the securities transferred was $26
million with gross unrealized investment losses of $6 million charged to "Net
unrealized investment gains."
15
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. INVESTMENTS (CONTINUED)
MORTGAGE LOANS ON REAL ESTATE
The Company's mortgage loans were collateralized by the following property
types at December 31:
<TABLE>
<CAPTION>
1997 1996
--------------------------------- --------------------------------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Office buildings............................... $ 4,692 28.5% $ 6,056 34.4%
Retail stores.................................. 3,078 18.7% 3,676 20.9%
Residential properties......................... 891 5.4% 961 5.4%
Apartment complexes............................ 3,551 21.6% 2,954 16.8%
Industrial buildings........................... 1,958 11.9% 1,807 10.3%
Agricultural properties........................ 1,666 10.1% 1,550 8.8%
Other.......................................... 618 3.8% 608 3.4%
--------------- --------- -------------- ------
Subtotal 16,454 100.0% 17,612 100.0%
========= ======
Allowance for losses........................... (450) (515)
--------------- --------------
Net carrying value............................. $ 16,004 $ 17,097
=============== ==============
</TABLE>
The mortgage loans are geographically dispersed throughout the United
States and Canada with the largest concentrations in California (25.3%) and
New York (8.3%) at December 31, 1997. Included in the above balances are
mortgage loans receivable from affiliated joint ventures of $225 million
and $461 million at December 31, 1997 and 1996, respectively.
Activity in the allowance for losses for all mortgage loans, for the years
ended December 31, is summarized as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---------------- ---------------- ---------------
(IN MILLIONS)
<S> <C> <C> <C>
Allowance for losses, beginning of year.............. $ 515 $ 862 $ 1,004
Additions charged to operations...................... 19 9 6
Release of allowance for losses...................... (60) (256) (32)
Charge-offs, net of recoveries....................... (24) (100) (116)
--------------- ---------------- ---------------
Allowance for losses, end of year.................... $ 450 $ 515 $ 862
================ ================ ===============
</TABLE>
The $60 million, $256 million and $32 million reduction of the mortgage
loan allowance for losses in 1997, 1996 and 1995, respectively, is
primarily attributable to the improved economic climate, changes in the
nature and mix of borrowers and underlying collateral and a significant
decrease in impaired loans consistent with a general decrease in the
mortgage loan portfolio due to prepayments, sales and foreclosures.
16
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. INVESTMENTS (CONTINUED)
Impaired mortgage loans and related allowance for losses at December 31,
are as follows:
<TABLE>
<CAPTION>
1997 1996
----------------- ------------------
(IN MILLIONS)
<S> <C> <C>
Impaired mortgage loans with allowance for losses ............. $ 330 $ 941
Impaired mortgage loans with no allowance for losses .......... 1,303 1,491
Allowance for losses .......................................... (97) (189)
----------------- ------------------
Net carrying value of impaired mortgage loans ................. $ 1,536 $ 2,243
================= ==================
</TABLE>
Impaired mortgage loans with no provision for losses are loans where the
fair value of the collateral or the net present value of the expected
future cash flows related to the loan equals or exceeds the recorded
investment. The average recorded investment in impaired loans before
allowance for losses was $2,102 million, $2,842 million and $4,146 million
during 1997, 1996 and 1995, respectively. Net investment income recognized
on these loans totaled $140 million, $265 million and $415 million for the
years ended December 31, 1997, 1996 and 1995, respectively.
INVESTMENT REAL ESTATE
The Company's "investment real estate" of $1,519 million and $2,586 million
at December 31, 1997 and 1996, respectively, is held through direct
ownership. Of the Company's real estate, $1,490 million and $406 million
consists of commercial and agricultural assets held for disposal at
December 31, 1997 and 1996, respectively. Impairment losses and the
valuation allowances aggregated $40 million, $38 million and $124 million
for the years ended December 31, 1997, 1996 and 1995, respectively, and are
included in "Realized investment gains, net."
RESTRICTED ASSETS AND SPECIAL DEPOSITS
Assets of $2,783 million and $2,453 million at December 31, 1997 and 1996,
respectively, were on deposit with governmental authorities or trustees as
required by certain insurance laws. Additionally, assets valued at $2,352
million at December 31, 1997, were held in voluntary trusts. Of this
amount, $1,801 million related to the multi-state policyholder settlement
as described in Note 14. The remainder relates to trusts established to
fund guaranteed dividends to certain policyholders. The terms of these
trusts provide that the assets are to be used for payment of the designated
settlement and dividend benefits, as the case may be. Assets valued at $741
million and $3,414 million at December 31, 1997 and 1996, respectively,
were maintained as compensating balances or pledged as collateral for bank
loans and other financing agreements. Restricted cash and securities of
$1,835 million and $1,614 million at December 31, 1997, and 1996,
respectively, were included in the consolidated financial statements. The
restricted cash represents funds deposited by clients and funds accruing to
clients as a result of trades or contracts.
OTHER LONG-TERM INVESTMENTS
The Company's "Other long-term investments" of $3,360 million and $2,995
million as of December 31, 1997 and 1996, respectively, are composed of
$1,349 million and $832 million in real estate related interests and $2,011
million and $2,163 million of non-real estate related interests, including
a $149 million net investment in a leveraged lease entered into in 1997.
The Company's share of net income from such entities was $411 million, $245
million, and $326 million for 1997, 1996, and 1995, respectively, and is
reported in "Net investment income."
17
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. INVESTMENTS (CONTINUED)
INVESTMENT INCOME AND INVESTMENT GAINS AND LOSSES
NET INVESTMENT INCOME arose from the following sources for the years ended
December 31:
<TABLE>
<CAPTION>
1997 1996 1995
-------------- -------------- -----------
(IN MILLIONS)
<S> <C> <C> <C>
Fixed maturities-available for sale........................ $ 5,074 $ 4,871 $ 4,774
Fixed maturities-held to maturity.......................... 1,622 1,793 1,717
Trading account assets..................................... 504 444 588
Equity securities-available for sale ...................... 52 81 57
Mortgage loans on real estate.............................. 1,555 1,690 2,075
Real estate ............................................... 565 685 742
Policy loans............................................... 396 384 392
Securities purchased under agreements to resell............ 15 11 19
Receivables from broker-dealer clients..................... 706 579 678
Short-term investments..................................... 697 536 590
Other investment income.................................... 573 725 983
-------------- -------------- -------------
Gross investment income.................................... 11,759 11,799 12,615
Less investment expenses................................... (1,896) (2,057) (2,437)
-------------- -------------- -------------
Net investment income...................................... $ 9,863 $ 9,742 $ 10,178
============== ============== =============
</TABLE>
REALIZED INVESTMENT GAINS, NET, including changes in allowances for losses
and charges for other than temporary reductions in value, for the years
ended December 31, were from the following sources:
<TABLE>
<CAPTION>
1997 1996 1995
-------------- -------------- -----------
(IN MILLIONS)
<S> <C> <C> <C>
Fixed maturities....................................... $ 684 $ 513 $ 1,180
Mortgage loans on real estate ......................... 68 248 67
Investment real estate ................................ 700 76 (19)
Equity securities-available for sale .................. 363 267 400
Other gains (losses)................................... 372 34 (125)
-------------- -------------- -----------
Realized investment gains, net......................... $ 2,187 $ 1,138 $ 1,503
============== ============== ===========
</TABLE>
NET UNREALIZED INVESTMENT GAINS on securities available for sale are
included in the consolidated statement of financial position as a component
of equity, net of tax. Changes in these amounts for the years ended
December 31, are as follows:
<TABLE>
<CAPTION>
1997 1996
----------------- -----------------
(IN MILLIONS)
<S> <C> <C>
Balance, beginning of year................................. $ 1,136 $ 2,397
Changes in unrealized investment
gains(losses) attributable to:
Fixed maturities ....................................... 1,766 (2,892)
Equity securities....................................... (85) 254
Participating group annuity contracts................... (564) 479
Deferred policy acquisition costs....................... (154) 261
Deferred federal income taxes........................... (347) 637
----------------- -----------------
Sub-total............................................... 616 (1,261)
----------------- -----------------
Balance, end of year....................................... $ 1,752 $ 1,136
================= =================
</TABLE>
18
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. INVESTMENTS (CONTINUED)
Based on the carrying value, assets categorized as "non-income producing"
for the year ended December 31, 1997 included in fixed maturities available
for sale, mortgage loans on real estate and other long term investments
totaled $26 million, $93 million and $7 million, respectively.
4. DEFERRED POLICY ACQUISITION COSTS
The balances of and changes in deferred policy acquisition costs as of and
for the years ended December 31, are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
-------------- -------------- -----------
(IN MILLIONS)
<S> <C> <C> <C>
Balance, beginning of year ............................ $ 6,291 $ 6,088 $ 6,403
Capitalization of commissions, sales and issue expenses 1,049 931 919
Amortization and other adjustments..................... (1,192) (989) (783)
Change in unrealized investment gains ................. (154) 261 (451)
-------------- -------------- -----------
Balance, end of year .................................. $ 5,994 $ 6,291 $ 6,088
============== ============== ===========
</TABLE>
5. FUTURE POLICY BENEFITS AND OTHER POLICYHOLDERS' LIABILITIES
FUTURE POLICY BENEFITS at December 31 are as follows:
<TABLE>
<CAPTION>
1997 1996
----------------- -----------------
(IN MILLIONS)
<S> <C> <C>
Life insurance ............................................ $ 46,712 $ 44,118
Annuities ................................................. 15,469 14,828
Other contract liabilities ................................ 3,400 5,009
----------------- -----------------
Future policy benefits .................................... $ 65,581 $ 63,955
================= =================
</TABLE>
Life insurance liabilities include reserves for death and endowment policy
benefits, terminal dividends, premium deficiency reserves and certain health
benefits. Annuity liabilities include reserves for immediate annuities and
non-participating group annuities. Other contract liabilities primarily consist
of unearned premium and benefit reserves for group health products.
The following table highlights the key assumptions generally utilized in
calculating these reserves:
<TABLE>
<CAPTION>
PRODUCT MORTALITY INTEREST RATE ESTIMATION METHOD
- ------------------------- ------------------------ --------------- ------------------------
<S> <C> <C> <C>
Life insurance Generally rates 2.5% to 7.5% Net level premium
guaranteed in calculating based on non-forfeiture
cash surrender values interest rate
Individual immediate 1983 Individual 3.25% to 11.25% Present value of
annuities Annuity Mortality expected future payments
Table with certain based on historical
modifications experience
Group annuities in 1950 Group 3.75% to 17.35% Present value of
payout status Annuity Mortality expected future payments
Table with certain based on historical
modifications experience
Other contract liabilities -- 6.0% to 7.0% Present value of
expected future payments
based on historical
experience
</TABLE>
19
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. FUTURE POLICY BENEFITS AND OTHER POLICYHOLDERS' LIABILITIES (CONTINUED)
For the above categories, premium deficiency reserves are established, if
necessary, when the liability for future policy benefits plus the present
value of expected future gross premiums are insufficient to provide for
expected future policy benefits and expenses. A premium deficiency reserve
has been recorded for the group single premium annuity business, which
consists of limited-payment, long duration, traditional non-participating
annuities. A liability of $1,645 million and $1,320 million is included in
"Future policy benefits" with respect to this deficiency for the years
ended December 31, 1997 and 1996, respectively.
POLICYHOLDERS' ACCOUNT BALANCES at December 31, are as follows:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
(IN MILLIONS)
<S> <C> <C>
Individual annuities........................................ $ 5,695 $ 6,408
Group annuities & guaranteed investment contracts........... 19,053 21,706
Interest-sensitive life contracts........................... 3,160 2,888
Dividend accumulations...................................... 5,033 5,007
--------- ---------
Policyholders' account balances............................. $ 32,941 $ 36,009
========= =========
</TABLE>
Policyholders' account balances for interest-sensitive life and
investment-type contracts are equal to policy account values. The policy
account values represent an accumulation of gross premium payments plus
credited interest less withdrawals, expenses and mortality charges.
Certain contract provisions that determine the policyholder account
balances are as follows:
<TABLE>
<CAPTION>
WITHDRAWAL/
PRODUCT INTEREST RATE SURRENDER CHARGES
----------------------------------- ------------------------ -------------------------------------
<S> <C> <C>
Individual annuities 3.1% to 6.6% 0% to 8% for up to 8 years
Group annuities 5.0% to 12.7% Contractually limited or subject to
market value adjustments
Guaranteed investment contracts 3.9% to 14.34% Subject to market value withdrawal
provisions for any funds withdrawn
other than for benefit responsive and
contractual payments
Interest sensitive life contracts 4.0% to 6.5% Various up to 10 years
Dividend accumulations 3.0% to 4.0%
</TABLE>
20
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. FUTURE POLICY BENEFITS AND OTHER POLICYHOLDERS' LIABILITIES (CONTINUED)
OTHER POLICYHOLDERS' LIABILITIES. The following table provides a
reconciliation of the activity in the liability for unpaid claims and claim
adjustment expense for property and casualty and accident and health
insurance, which is included in "Other policyholder's liabilities" at
December 31:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
(IN MILLIONS)
<S> <C> <C> <C>
Balance at January 1......................................... $ 6,043 $ 5,933 $ 7,983
Less reinsurance recoverables.............................. 563 572 865
---------- ---------- ----------
Net balance at January 1..................................... 5,480 5,361 7,118
---------- ---------- ----------
Incurred related to:
Current year............................................... 10,691 10,281 10,534
Prior years................................................ 11 (91) 141
---------- ---------- ----------
Total incurred............................................... 10,702 10,190 10,675
---------- ---------- ----------
Paid related to:
Current year............................................... 7,415 7,497 7,116
Prior years................................................ 2,651 2,574 2,800
---------- ---------- ----------
Total paid................................................... 10,066 10,071 9,916
---------- ---------- ----------
Less Reinsurance
Segment.................................................... -- -- 2,516
---------- ---------- ----------
Net balance at December 31................................... 6,116 5,480 5,361
Plus reinsurance recoverables.............................. 543 563 572
---------- ---------- ----------
Balance at December 31....................................... $ 6,659 $ 6,043 $ 5,933
========== ========== ==========
</TABLE>
The changes in provision for claims and claim adjustment expenses related
to prior years of $11 million, $(91) million and $141 million in 1997, 1996
and 1995, respectively, are due to such factors as changes in claim cost
trends in healthcare, an accelerated decline in indemnity health business,
and lower than anticipated property and casualty unpaid claims and claim
adjustment expenses.
The other policyholders' liabilities presented above consist primarily of
unpaid claim liabilities which include estimates for liabilities associated
with reported claims and for incurred but not reported claims based, in
part, on the Company's experience. Changes in the estimated cost to settle
unpaid claims are charged or credited to the statement of operations
periodically as the estimates are revised. Accident and health unpaid
claims liabilities for 1997 and 1996 included above are discounted using
interest rates ranging from 6.0% to 7.5%.
21
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. SHORT-TERM AND LONG-TERM DEBT
Debt consists of the following at December 31:
SHORT-TERM DEBT
<TABLE>
<CAPTION>
1997 1996
-------------- --------------
(IN MILLIONS)
<S> <C> <C>
Commercial paper.......................................... $ 4,268 $ 4,511
Notes payable............................................. 2,151 1,614
Current portion of long-term debt......................... 355 437
-------------- --------------
Total short-term debt................................ $ 6,774 $ 6,562
============== ==============
</TABLE>
The weighted average interest rate on outstanding short-term debt was
approximately 6.0% and 5.6% at December 31, 1997 and 1996, respectively.
The Company issues commercial paper primarily to manage operating cash
flows and existing commitments, meet working capital needs and take
advantage of current investment opportunities. Commercial paper borrowings
are supported by various lines of credit.
LONG-TERM DEBT
<TABLE>
<CAPTION>
DESCRIPTION MATURITY DATES RATE 1997 1996
------------------------------------ ----------------- -------------- --------- ----------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Floating rate notes ("FRN") 1998 6.5% $ 40 $ 128
Long term notes 1998 - 2023 4% - 12% 1,194 1,023
Zero coupon notes 1998 - 1999 8.6% (a) 334 365
Australian dollar notes 1997 9% -- 55
Canadian dollar notes 1997 - 1998 7.0% - 9.125% 117 320
Japanese yen notes 1998 - 2000 0.5% - 4.6% 178 90
Swiss francs notes 1998 3.875% 120 103
Canadian dollar FRN 2003 5.89% 96 96
Surplus notes 2003 - 2025 6.875% - 8.3% 986 985
Commercial paper backed by long-term
credit agreements 1,500 1,000
Other notes payable 1998 - 2017 4% - 7.5% 63 32
---------- ----------
Sub-total............................................................................. 4,628 4,197
Less: current portion of long-term debt............................................ (355) (437)
---------- ----------
Total long-term debt.................................................................. $ 4,273 $ 3,760
========== ==========
</TABLE>
(a) The rate shown for zero coupon notes, which do not bear interest,
represents a level yield to maturity.
Payment of interest and principal on the surplus notes of $686 million
issued after 1993 may be made only with the prior approval of the
Commissioner of Insurance of the State of New Jersey.
In order to modify exposure to interest rate and currency exchange rate
movements, the Company utilizes derivative instruments, primarily interest
rate swaps, in conjunction with some of its debt issues. The effect of
these derivative instruments is included in the calculation of the interest
expense on the associated debt, and as a result, the effective interest
rates on the debt may differ from the rates reflected in the tables above.
Floating rates are determined by formulas and may be subject to certain
minimum or maximum rates.
Scheduled principal repayments of long-term debt as of December 31, 1997,
are as follows: $357 million in 1998, $808 million in 1999, $260 million in
2000, $32 million in 2001, $1,814 million in 2002 and $1,379 million
thereafter.
At December 31, 1997, the Company had $8,257 million in lines of credit
from numerous financial institutions of which $5,160 million were unused.
These lines of credit generally have terms ranging from 1 to 5 years.
22
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. EMPLOYEE BENEFIT PLANS
PENSION PLANS
The Company has one funded non-contributory defined benefit pension plan,
which covers substantially all of its employees. The Company also has
several non-contributory non-funded defined benefit plans covering certain
executives. Benefits are generally based on career average earnings and
credited length of service. The Company's funding policy is to contribute
annually an amount necessary to satisfy the Internal Revenue Service
contribution guidelines.
Prepaid and accrued pension costs are included in "Other assets" and "Other
liabilities," respectively, in the Company's consolidated statements of
financial position. The status of these plans as of September 30, adjusted
for fourth quarter activity related to funding activity and contractual
termination benefits is summarized below:
<TABLE>
<CAPTION>
1997 1996
--------------------------------- --------------------------------
ASSETS ACCUMULATED ASSETS ACCUMULATED
EXCEED BENEFITS EXCEED BENEFITS
ACCUMULATED EXCEED ACCUMULATED EXCEED
BENEFITS ASSETS BENEFITS ASSETS
--------------- -------------- -------------- -------------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Actuarial present value of
benefit obligation:
Vested benefit obligation.............. $ (4,129) $ (205) $ (3,826) $ (180)
============ ============ =========== =============
Accumulated benefit obligation......... $ (4,434) $ (226) $ (4,121) $ (198)
============ ============ =========== =============
Projected benefit obligation............. $ (5,238) $ (319) $ (4,873) $ (274)
Plan assets at fair value................ 8,489 -- 7,306 --
------------ ------------ ----------- -------------
Plan assets in excess of (less than)
projected benefit obligation........... 3,251 (319) 2,433 (274)
Unrecognized transition amount........... (662) 1 (769) 1
Unrecognized prior service cost.......... 317 10 356 11
Unrecognized net (gain) loss............. (1,689) 45 (916) 16
Additional minimum liability............. -- (11) -- (10)
Effect of fourth quarter activity........ (67) 4 (98) 4
------------ ------------ ----------- -------------
Prepaid (accrued) pension cost
at December 31......................... $ 1,150 $ (270) $ 1,006 $ (252)
============ ============ =========== =============
</TABLE>
Plan assets consist primarily of equity securities, bonds, real estate and
short-term investments, of which $6,022 million and $5,668 million are
included in Separate Account assets and liabilities at December 31, 1997
and 1996, respectively.
Effective December 31, 1996, The Prudential Securities Incorporated Cash
Balance Plan (the "PSI Plan") was merged into The Retirement System for
United States Employees and Special Agents of The Prudential Insurance
Company of America (the "Prudential Plan"). The name of the merged plan is
The Prudential Merged Retirement Plan ("Merged Retirement Plan"). All of
the assets of the Merged Retirement Plan are available to pay benefits to
participants and their beneficiaries who are covered by the Merged
Retirement Plan. The merger of the plans had no effect on the December 31,
1996 consolidated financial position or results of operations.
During 1996, the Prudential Plan was amended to provide cost of living
adjustments for retirees. The effect of this plan amendment increased
benefit obligations and unrecognized prior service cost by $170 million at
September 30, 1996. In addition, the Prudential Plan was amended to provide
contractual termination benefits to certain plan participants who were
notified between September 15, 1996 and December 31, 1997 that their
employment had been terminated. During 1997, the Prudential Retirement Plan
Document, a component of the Merged Retirement Plan was amended to extend
the contractual termination benefits to December 31, 1998. Costs related to
these amendments are reflected below in contractual termination benefits.
23
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. EMPLOYEE BENEFIT PLANS (CONTINUED)
Net periodic pension income included in "General and administrative
expenses" in the Company's consolidated statement of operations for the
years ended December 31, 1997, 1996 and 1995 include the following
components:
<TABLE>
<CAPTION>
1997 1996 1995
-------------- ------------- --------------
(IN MILLIONS)
<S> <C> <C> <C>
Service cost-benefits earned during the year......... $ 127 $ 140 $ 133
Interest cost on projected benefit obligation........ 376 354 392
Actual return on plan assets......................... (1,693) (748) (1,288)
Net amortization and deferral........................ 1,012 73 629
Contractual termination benefits..................... 30 63 --
-------------- ------------- --------------
Net periodic pension income.......................... $ (148) $ (118) $ (134)
============== ============= ==============
</TABLE>
The assumptions at September 30 used by the Company are to calculate the
projected benefit obligations as of that date and determine the pension
expense for the following fiscal year:
<TABLE>
<CAPTION>
1997 1996 1995
-------------- ------------- --------------
<S> <C> <C> <C>
Discount rate.......................................... 7.25% 7.75% 7.50%
Rate of increase in compensation levels................ 4.50% 4.50% 4.50%
Expected long-term rate of return on plan assets....... 9.50% 9.50% 9.00%
</TABLE>
OTHER POSTRETIREMENT BENEFITS
The Company provides certain life insurance and health care benefits for
its retired employees, their beneficiaries and covered dependents.
Substantially all of the Company's employees may become eligible to receive
benefits if they retire after age 55 with at least 10 years of service, or
under circumstances after age 50 with at least 20 years of continuous
service.
The Company has elected to amortize its transition obligation over 20
years. Post-retirement benefits are funded as considered necessary by
Company management. The Company's funding of its postretirement benefit
obligations totaled $43 million, $38 million and $94 million in 1997, 1996
and 1995, respectively.
In 1995 the Company modified the restrictions on certain post-retirement
plan assets to allow these assets to be used for benefits related to both
active and retired employees. Formerly, these benefits were available only
for retired employees. In connection with this modification, the Company
transferred $120 million from one of these plans in 1995. Of the $120
million transferred, $45 million went to Union Post-Retirement Benefits and
$75 million went to Union Medical Benefits.
24
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. EMPLOYEE BENEFIT PLANS (CONTINUED)
The status of the plan at September 30, adjusted for assets transferred to
the plan in the fourth quarter, is provided below. Accrued post-retirement
benefit costs are included in "Other liabilities" in the Company's
consolidated statement of financial position.
<TABLE>
<CAPTION>
1997 1996
---------- ----------
(IN MILLIONS)
<S> <C> <C>
Accumulated postretirement benefit obligation (APBO):
Retirees.......................................................... $ (1,516) $ (1,423)
Fully eligible active plan participants........................... (36) (35)
Other active plan participants.................................... (576) (544)
--------- ---------
Total APBO..................................................... (2,128) (2,002)
Plan assets at fair value............................................ 1,354 1,313
--------- ---------
Funded status........................................................ (774) (689)
Unrecognized transition amount....................................... 707 787
Unrecognized net gain ............................................... (364) (428)
Effects of fourth quarter activity................................... 33 28
--------- ---------
Accrued postretirement benefit cost at December 31................... $ (398) $ (302)
========= =========
</TABLE>
Plan assets with respect to this coverage consist of group and individual
variable life insurance policies, group life and health contracts, common
stocks, U.S. government securities and short-term investments. Plan assets
include $1,044 million and $1,003 million of Company insurance policies and
contracts at December 31, 1997 and 1996, respectively.
Net periodic postretirement benefit cost included in "General and
administrative expenses" for the years ended December 31, 1997, 1996 and
1995 includes the following components:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ----------- -----------
(IN MILLIONS)
<S> <C> <C> <C>
Service cost.............................................. $ 38 $ 45 $ 44
Interest cost............................................. 149 157 169
Actual return on plan assets.............................. (120) (105) (144)
Net amortization and deferral............................. 70 53 111
----------- ----------- -----------
Net periodic postretirement benefit cost.................. $ 137 $ 150 $ 180
=========== =========== ===========
</TABLE>
The following assumptions at September 30 are used to calculate the APBO as
of that date and determine postretirement benefit expense for the following
fiscal year:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Discount rate............................................. 7.25% 7.75% 7.50%
Rate of increase in compensation levels................... 4.5% 4.5% 4.5%
Expected long-term rate of return on plan assets.......... 9.0% 9.0% 8.0%
Health care cost trend rates.............................. 8.2-11.8% 8.5-12.5% 8.9-13.3%
Ultimate health care cost trend rate after gradual
decrease until 2006....................................... 5.0% 5.0% 5.0%
</TABLE>
25
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. EMPLOYEE BENEFIT PLANS (CONTINUED)
The effect of a 1% increase in health care cost trend rates for each future
year on the following costs at December 31, are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
(IN MILLIONS)
<S> <C> <C> <C>
Accumulated postretirement benefit obligation............ $ (218) $ (207) $ (217)
Service and interest costs............................... 24 25 27
</TABLE>
POSTEMPLOYMENT BENEFITS
The Company accrues postemployment benefits primarily for life and health
benefits provided to former or inactive employees who are not retirees. The
net accumulated liability for these benefits at December 31, 1997 and 1996
was $144 million and $156 million, respectively, and is included in "Other
liabilities."
OTHER EMPLOYEE BENEFITS
The Company sponsors voluntary savings plans for employees (401(k) plans).
The plans provide for salary reduction contributions by employees and
matching contributions by the Company of up to three percent of annual
salary, resulting in $63 million, $57 million, and $61 million of expenses
included in "General and administrative expenses" for 1997, 1996 and 1995,
respectively.
8. INCOME TAXES
The components of income tax expense for the years ended December 31, were
as follows:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
(IN MILLIONS)
<S> <C> <C> <C>
Current tax expense (benefit):
U.S...................................................... $ (158) $ 255 $ 1,189
State and Iocal.......................................... 48 103 38
Foreign.................................................. 64 48 66
--------- --------- ---------
Total.................................................... $ (46) $ 406 $ 1,293
========= ========= =========
Deferred tax expense (benefit):
U.S...................................................... $ 227 $ (442) $ (166)
State and Iocal.......................................... 3 (2) (10)
Foreign.................................................. 33 54 9
--------- --------- ---------
Total.................................................... $ 263 $ (390) $ (167)
========= ========= =========
Total income tax expense................................. $ 217 $ 16 $ 1,126
========= ========= =========
</TABLE>
26
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. INCOME TAXES (CONTINUED)
The Company's income tax expense for the years ended December 31, differs
from the amount computed by applying the expected federal income tax rate
of 35% to income from operations before income taxes for the following
reasons:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
(IN MILLIONS)
<S> <C> <C> <C>
Expected federal income tax expense.......................... $ 290 $ 382 $ 829
Equity tax................................................... (91) (365) 163
State and local income taxes................................. 51 100 28
Tax-exempt interest and dividend received deduction.......... (67) (50) (77)
Other........................................................ 34 (51) 183
-------- -------- --------
Total income tax expense..................................... $ 217 $ 16 $ 1,126
======== ======== ========
</TABLE>
Deferred tax assets and liabilities at December 31, resulted from the items
listed in the following table:
<TABLE>
<CAPTION>
1997 1996
------- --------
(IN MILLIONS)
<S> <C> <C>
Deferred tax assets
Insurance reserves.......................................... $ 1,482 $ 1,316
Policyholder dividends...................................... 250 257
Net operating loss carryforwards............................ 80 268
Depreciation................................................ -- 44
Litigation related reserves................................. 178 297
Employee benefits........................................... 42 10
Other....................................................... 360 329
-------- --------
Deferred tax assets before valuation allowance.............. 2,392 2,521
Valuation allowance......................................... (18) (36)
-------- --------
Deferred tax assets after valuation allowance............... 2,374 2,485
-------- --------
Deferred tax liabilities
Investments................................................. 1,867 1,183
Deferred acquisition costs.................................. 1,525 1,707
Depreciation................................................ 36 --
Other....................................................... 73 110
-------- --------
Deferred tax liabilities.................................... 3,501 3,000
-------- --------
Net deferred tax liability.................................... $ 1,127 $ 515
======== ========
</TABLE>
The Company's income taxes payable of $500 million and $1,544 million
includes a $627 million current income tax receivable at December 31, 1997
and a $1,029 million current income taxes payable at December 31, 1996.
27
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. INCOME TAXES (CONTINUED)
Management believes that based on its historical pattern of taxable income,
the Company will produce sufficient income in the future to realize its net
deferred tax asset after valuation allowance. Adjustments to the valuation
allowance will be made if there is a change in management's assessment of
the amount of the deferred tax asset that is realizable. At December 31,
1997, the Company had state non-life operating loss carryforwards for tax
purposes approximating $800 million.
The Internal Revenue Service (the "Service") has completed an examination
of the consolidated federal income tax return through 1989. The Service has
examined the years 1990 through 1992. Discussions are being held with the
Service with respect to proposed adjustments, however, management believes
there are adequate defenses against, or sufficient reserves to provide for,
such adjustments. The Service has begun their examination of the years 1993
through 1995.
9. EQUITY
RECONCILIATION OF STATUTORY SURPLUS AND NET INCOME
Accounting practices used to prepare statutory financial statements for
regulatory purposes differ in certain instances from GAAP. The following
table reconciles the Company's statutory net income and surplus as of and
for the years ended December 31, determined in accordance with accounting
practices prescribed or permitted by the New Jersey Department of Banking
and Insurance with net income and equity determined using GAAP:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
(IN MILLIONS)
<S> <C> <C> <C>
STATUTORY NET INCOME........................................... $ 1,471 $ 1,402 $ 478
Adjustments to reconcile to net income on a GAAP basis:
Insurance revenues and expenses.............................. 12 (478) (496)
Income taxes................................................. 601 439 (596)
Valuation of investments..................................... (62) 121 --
Realized investment gains.................................... 702 327 1,562
Litigation and other reserves................................ (1,975) (906) --
Other, net................................................... (139) 173 295
-------- -------- --------
GAAP NET INCOME................................................ $ 610 $ 1,078 $ 1,243
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
1997 1996
-------- --------
(IN MILLIONS)
<S> <C> <C>
STATUTORY SURPLUS.............................................. $ 9,242 $ 9,375
Adjustments to reconcile to equity on a GAAP basis:
Deferred policy acquisition costs............................ 5,994 6,291
Valuation of investments..................................... 8,067 5,624
Future policy benefits and policyholder account balances..... (2,906) (1,976)
Non-admitted assets.......................................... 1,643 1,285
Income taxes................................................. (1,070) (654)
Surplus notes................................................ (986) (985)
Other, net................................................... (266) (437)
-------- --------
GAAP EQUITY.................................................... $ 19,718 $ 18,523
======== ========
</TABLE>
28
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. EQUITY (CONTINUED)
The New York State Insurance Department ("Department") recognizes only
statutory accounting for determining and reporting the financial condition
of an insurance company, for determining its solvency under the New York
Insurance Law and for determining whether its financial condition warrants
the payment of a dividend to its policyholders. No consideration is given
by the Department to financial statements prepared in accordance with GAAP
in making such determinations.
10. OPERATING LEASES
The Company and its subsidiaries occupy leased office space in many
locations under various long-term leases and have entered into numerous
leases covering the long-term use of computers and other equipment. At
December 31, 1997, future minimum lease payments under non-cancelable
operating leases are estimated as follows:
(IN MILLIONS)
1998........................................ $ 313
1999........................................ 277
2000........................................ 230
2001........................................ 201
2002........................................ 171
Remaining years after 2002.................. 833
-----------
Total....................................... $ 2,025
===========
Rental expense incurred for the years ended December 31, 1997 and 1996 was
approximately $352 million and $343 million, respectively.
11. DIVESTITURES
In October 1995, the Company completed the sale of its reinsurance segment,
Prudential Reinsurance Holdings, Inc., through an initial public offering
of common stock. As a result of the sale, an after-tax loss of $297 million
was recorded in 1995.
On January 26, 1996, the Company entered into a definitive agreement to
sell substantially all the assets of Prudential Home Mortgage Company, Inc.
It has also liquidated certain mortgage-backed securities and extended
warehouse losses, asset write downs, and other costs directly related to
the planned sale. The Company recorded an after-tax loss in 1995 of $98
million which includes operating gains and losses, asset write downs and
other costs directly related with the planned sale. The net assets of the
mortgage banking segment at December 31, 1995 was $78 million, comprised of
$4,293 million in assets and $4,215 million in liabilities.
On July 31, 1996, the Company sold a substantial portion of its Canadian
Branch business to the London Life Insurance Company ("London Life"). This
transaction was structured as a reinsurance transaction whereby London Life
assumed total liabilities of the Canadian Branch equal to $3,291 million as
well as a related amount of assets equal to $3,205 million. This transfer
resulted in a reduction of policy liabilities of $3,257 million and a
corresponding reduction in invested assets. The Company recognized an
after-tax gain in 1996 of $116 million as a result of this transaction,
recorded in "Realized investment gains, net."
12. FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair values presented below have been determined using available
information and valuation methodologies. Considerable judgment is applied
in interpreting data to develop the estimates of fair value. Accordingly,
such estimates presented may not be realized in a current market exchange.
The use of different market assumptions and/or estimation methodologies
could have a material effect on the estimated fair values. The following
methods and assumptions were used in calculating the fair values (for all
other financial instruments presented in the table, the carrying value
approximates fair value).
29
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
FIXED MATURITIES AND EQUITY SECURITIES
Fair values for fixed maturities and equity securities, other than private
placement securities, are based on quoted market prices or estimates from
independent pricing services. Fair values for private placement securities
are estimated using a discounted cash flow model which considers the
current market spreads between the U.S. Treasury yield curve and corporate
bond yield curve, adjusted for the type of issue, its current credit
quality and its remaining average life. The estimated fair value of certain
non-performing private placement securities is based on amounts estimated
by management.
MORTGAGE LOANS ON REAL ESTATE
The fair value of the mortgage loan portfolio is primarily based upon the
present value of the scheduled future cash flows discounted at the
appropriate U.S. Treasury rate, adjusted for the current market spread for
a similar quality mortgage. For certain non-performing and other loans, the
fair value is based upon the present value of expected future cash flows
discounted at the appropriate U.S. Treasury rate adjusted for current
market spread for a similar quality mortgage.
POLICY LOANS
The estimated fair value of policy loans is calculated using a discounted
cash flow model based upon current U.S. Treasury rates and historical loan
repayments.
DERIVATIVE FINANCIAL INSTRUMENTS
The fair value of swap agreements is estimated based on the present value
of future cash flows under the agreements discounted at the applicable zero
coupon U.S. Treasury rate and swap spread. The fair value of forwards,
futures and options is estimated based on market quotes for a transaction
with similar terms. The fair value of loan commitments is derived by
comparing the contractual stream of fees with such fee streams adjusted to
reflect current market rates that would be applicable to instruments of
similar type, maturity, and credit standing.
POLICYHOLDERS' ACCOUNT BALANCES
Fair values of policyholders' account balances are estimated using
discounted projected cash flows, based on interest rates being offered for
similar contracts, with maturities consistent with those remaining for the
contracts being valued.
DEBT
The estimated fair value of short-term and long-term debt is derived by
using discount rates based on the borrowing rates currently available to
the Company for debt with similar terms and remaining maturities.
30
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
The following table discloses the carrying amounts and estimated fair
values of the Company's financial instruments at December 31:
<TABLE>
<CAPTION>
1997 1996
-------------------------- ------------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
------------ ----------- ------------ --------------
FINANCIAL ASSETS: (IN MILLIONS)
<S> <C> <C> <C> <C>
Other than trading:
- -------------------
Fixed maturities:
Available for sale....................... $ 75,270 $ 75,270 $ 66,553 $ 66,553
Held to maturity......................... 18,700 19,894 20,403 21,362
Equity securities........................... 2,810 2,810 2,622 2,622
Mortgage loans on real estate............... 16,004 17,153 17,097 17,963
Policy loans................................ 6,827 6,994 6,692 6,613
Securities purchased under
agreements to resell .................... 8,661 8,661 5,347 5,347
Cash collateral for borrowed securities..... 5,047 5,047 2,416 2,416
Short-term investments...................... 12,106 12,106 9,294 9,294
Cash ....................................... 3,636 3,636 2,091 2,091
Separate Accounts assets.................... 74,046 74,046 63,358 63,358
Derivative financial instruments............ 24 35 16 32
Trading:
- --------
Trading account assets...................... 6,044 6,044 4,219 4,219
Receivables from broker-dealer clients...... 6,273 6,273 5,281 5,281
Derivative financial instruments............ 979 979 904 904
FINANCIAL LIABILITIES:
Other than trading:
- -------------------
Policyholders' account balances............. 32,941 33,896 36,009 37,080
Securities sold under
agreements to repurchase................. 12,347 12,347 7,503 7,503
Cash collateral for loaned securities....... 14,117 14,117 8,449 8,449
Short-term and long-term debt............... 11,047 11,020 10,322 10,350
Securities sold but not yet purchased....... 3,533 3,533 1,900 1,900
Separate Accounts liabilities............... 73,658 73,658 62,845 62,845
Derivative financial instruments............ 32 47 32 45
Trading:
- --------
Payables to broker-dealer clients........... 3,338 3,338 3,018 3,018
Derivative financial instruments ........... 1,088 1,088 1,120 1,120
</TABLE>
31
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. DERIVATIVE AND OFF-BALANCE SHEET CREDIT-RELATED INSTRUMENTS
DERIVATIVE FINANCIAL INSTRUMENTS
The tables below summarize the Company's outstanding positions by
derivative instrument types as of December 31, 1997 and 1996. The amounts
presented are classified as either trading or other than trading, based on
management's intent at the time of contract inception and throughout the
life of the contract. The table includes the estimated fair values of
outstanding derivative positions only and does not include the changes in
fair values of associated financial and non-financial assets and
liabilities, which generally offset derivative notional amounts. The fair
value amounts presented also do not reflect the netting of amounts pursuant
to right of setoff, qualifying master netting agreements with
counterparties or collateral arrangements.
DERIVATIVE FINANCIAL INSTRUMENTS
DECEMBER 31, 1997
(IN MILLIONS)
<TABLE>
<CAPTION>
TRADING OTHER THAN TRADING TOTAL
------------------------ ----------------------- ------------------------------------
ESTIMATED ESTIMATED CARRYING ESTIMATED
NOTIONAL FAIR VALUE NOTIONAL FAIR VALUE NOTIONAL AMOUNT FAIR VALUE
----------- ----------- ---------- ----------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Swaps:
Assets.............. $ 7,759 $ 394 $ 61 $ -- $ 7,820 $ 395 $ 394
Liabilities......... 6,754 489 13 3 6,767 493 491
Forwards:
Assets.............. 29,511 429 1,031 23 30,542 452 452
Liabilities......... 29,894 459 647 7 30,541 466 466
Futures:
Assets.............. 4,103 51 46 -- 4,149 51 51
Liabilities......... 3,064 50 3,320 21 6,384 71 71
Options:
Assets.............. 6,893 105 239 -- 7,132 105 105
Liabilities......... 4,165 90 5 -- 4,170 90 90
Loan Commitments:
Assets.............. -- -- 317 12 317 -- 12
Liabilities......... -- -- 524 16 524 -- 16
----------- ----------- ---------- ----------- ----------- ---------- -----------
Total:
Assets.............. $ 48,266 $ 979 $ 1,694 $ 35 $ 49,960 $ 1,003 $ 1,014
=========== =========== ========== =========== =========== ========== ===========
Liabilities......... $ 43,877 $ 1,088 $ 4,509 $ 47 $ 48,386 $ 1,120 $ 1,134
=========== =========== ========== =========== =========== ========== ===========
</TABLE>
32
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. DERIVATIVE AND OFF-BALANCE SHEET CREDIT-RELATED INSTRUMENTS (CONTINUED)
DERIVATIVE FINANCIAL INSTRUMENTS
DECEMBER 31, 1997
(IN MILLIONS)
<TABLE>
<CAPTION>
TRADING OTHER THAN TRADING TOTAL
------------------------ ----------------------- ------------------------------------
ESTIMATED ESTIMATED CARRYING ESTIMATED
NOTIONAL FAIR VALUE NOTIONAL FAIR VALUE NOTIONAL AMOUNT FAIR VALUE
----------- ----------- ---------- ----------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Swaps:
Assets.............. $ 8,080 $ 481 $ 398 $ 10 $ 8,478 $ 481 $ 491
Liabilities......... 8,316 756 139 17 8,455 771 773
Forwards:
Assets.............. 24,275 367 489 13 24,764 376 380
Liabilities......... 20,103 308 920 10 21,023 318 318
Futures:
Assets.............. 2,299 24 3 -- 2,302 24 24
Liabilities......... 2,573 30 1,087 6 3,660 36 36
Options:
Assets.............. 2,981 32 2,083 7 5,064 39 39
Liabilities......... 2,653 26 437 12 3,090 27 38
Loan Commitments:
Assets.............. -- -- 163 2 163 -- 2
Liabilities......... -- -- 445 -- 445 -- --
----------- ----------- ---------- ----------- ----------- ---------- -----------
Total:
Assets.............. $ 37,635 $ 904 $ 3,136 $ 32 $ 40,771 $ 920 $ 936
=========== =========== ========== =========== =========== ========== ===========
Liabilities......... $ 33,645 $ 1,120 $ 3,028 $ 45 $ 36,673 $ 1,152 $ 1,165
=========== =========== ========== =========== =========== ========== ===========
</TABLE>
CREDIT RISK
The current credit exposure of the Company's derivative contracts is
limited to the fair value at the reporting date. Credit risk is managed by
entering into transactions with creditworthy counterparties and obtaining
collateral where appropriate and customary. The Company also attempts to
minimize its exposure to credit risk through the use of various credit
monitoring techniques. Approximately 95% of the net credit exposure for the
Company from derivative contracts is with investment-grade counterparties.
Net trading revenues for the years ended December 31, 1997, 1996 and 1995
relating to forwards, futures and swaps were $54 million, $37 million, $(8)
million; $42 million, $32 million, $(11) million; and $110 million, $42
million, $3 million respectively. Net trading revenues for options were not
material. Average fair values for trading derivatives in an asset position
during the years ended December 31, 1997 and 1996 were $1,015 million and
$881 million, respectively, and for derivatives in a liability position
were $1,166 million and $1,038 million, respectively. Of those derivatives
held for trading purposes at December 31, 1997, 52% of the notional amount
consisted of interest rate derivatives, 40% consisted of foreign currency
derivatives, and 8% consisted of equity and commodity derivatives. Of those
derivatives held for purposes other than trading at December 31, 1997, 72%
of notional consisted of interest rate derivatives and 28% consisted of
foreign currency derivatives.
33
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. DERIVATIVE AND OFF-BALANCE SHEET CREDIT-RELATED INSTRUMENTS (CONTINUED)
OFF-BALANCE SHEET CREDIT-RELATED INSTRUMENTS
During the normal course of its business, the Company utilizes financial
instruments with off-balance sheet credit risk such as commitments,
financial guarantees, loans sold with recourse and letters of credit.
Commitments include commitments to purchase and sell mortgage loans, the
unfunded portion of commitments to fund investments in private placement
securities, and unused credit card and home equity lines. The Company also
provides financial guarantees incidental to other transactions and letters
of credit that guarantee the performance of customers to third parties.
These credit-related financial instruments have off-balance sheet credit
risk because only their origination fees, if any, and accruals for probable
losses, if any, are recognized until the obligation under the instrument is
fulfilled or expires. These instruments can extend for several years and
expirations are not concentrated in any period. The Company seeks to
control credit risk associated with these instruments by limiting credit,
maintaining collateral where customary and appropriate, and performing
other monitoring procedures.
The fair value of asset positions in these instruments, which represents
the Company's current exposure to credit loss from other parties'
non-performance, was $1,014 million and $936 million at December 31, 1997
and 1996, respectively.
14. CONTINGENCIES AND LITIGATION
FINANCIAL GUARANTEE AGREEMENT
In connection with the sale in 1995 of its wholly-owned subsidiary
Prudential Reinsurance Company ("Pru Re"), the Company's subsidiary,
Gibraltar Casualty Insurance Company ("Gibraltar") entered into a stop-loss
reinsurance agreement with Pru Re whereby Gibraltar has reinsured up to
$375 million of the first $400 million of aggregate adverse loss
development on reserves recorded by Pru Re at June 30, 1995. Gibraltar also
has entered into several quota share reinsurance arrangements with Pru Re
whereby certain medical malpractice, direct insurance and casualty
reinsurance pool risks previously underwritten by Pru Re prior to June 30,
1995 were ceded to Gibraltar. The Company has guaranteed Gibraltar's
obligations arising under each of these contracts subject to a limit of
$375 million for the stop-loss agreement and $400 million for the other
agreements. Through December 31, 1997, Gibraltar has incurred $285 million
in losses under the stop-loss agreement, including $45 million in 1997.
Gibraltar has paid $165 million to Pru Re under the stop-loss agreement.
The Company has not been required to fund losses arising under the other
arrangements.
ENVIRONMENTAL AND ASBESTOS-RELATED CLAIMS
Certain of the Company's subsidiaries received claims under expired
contracts which assert alleged injuries and/or damages relating to or
resulting from toxic torts, toxic waste and other hazardous substances. The
liabilities for such claims cannot be estimated by traditional reserving
techniques. As a result of judicial decisions and legislative actions, the
coverage afforded under these contracts may be expanded beyond their
original terms. Extensive litigation between insurers and insureds over
these issues continues and the outcome is not predictable. In establishing
the liability for unpaid claims for these losses, management considered the
available information. However, given the expansion of coverage and
liability by the courts and legislatures in the past, and potential for
other unfavorable trends in the future, the ultimate cost of these claims
could increase from the levels currently established.
MANAGED CARE REIMBURSEMENT
In 1997, the Company continued to review its obligations under certain
managed care arrangements for possible failure to comply with contractual
and regulatory requirements. The estimated cost to the Company for these
reimbursements increased by $115 million in 1997, bringing the total
provision to $265 million. As of December 31, 1997, $163 million has been
paid or credited to customers. It is the opinion of management that the
remaining reserves of $102 million at December 31, 1997 represent a
reasonable estimate of remaining reimbursements to customers and other
related costs.
LITIGATION
Various lawsuits against the Company have arisen in the course of the
Company's business. In certain of these matters, large and/or indeterminate
amounts are sought.
Three putative class actions and approximately 677 individual actions were
pending against the Company in the United States as of January 31, 1998
brought on behalf of those persons who purchased life insurance policies
allegedly because of deceptive sales practices engaged in by the Company
and its insurance agents in violation of state and federal laws. The
Company anticipates additional suits may be filed by individuals who opted
out of the class action settlement described below. The sales practices
alleged to have occurred are contrary to Company policy. Some of
34
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. CONTINGENCIES AND LITIGATION (CONTINUED)
these cases seek substantial damages while others seek unspecified
compensatory, punitive and treble damages. The Company intends to defend
these cases vigorously.
A Multi-State Life Insurance Task Force (the "Task Force"), comprised of
insurance regulators from 29 states and the District of Columbia, was
formed in April 1995 to conduct a review of sales and marketing practices
throughout the life insurance industry. As the largest life insurance
company in the United States, the Company was the initial focus of the Task
Force examination. On July 9, 1996, the Task Force released its report on
the Company's activities. The Task Force found that some sales of life
insurance policies by the Company had been improper. Based on the findings,
the Task Force recommended, and the Company agreed to, a series of fines
allocated to all 50 states and the District of Columbia. In addition, the
Task Force recommended a remediation program pursuant to which the Company
would offer relief to the policyowners who were misled when they purchased
permanent life insurance policies in the United States from 1982 to 1995.
On October 28, 1996, the Company entered into a Stipulation of Settlement
with attorneys for the plaintiffs in the consolidated class action lawsuit
pending in a Multi-District Litigation proceeding in the federal court in
New Jersey. The class action suit involved alleged improprieties in
connection with the Company's sale, servicing and operation of permanent
life insurance policies from 1982 through 1995. Pursuant to the settlement,
the Company agreed to provide certain enhancements and changes to the
remediation program previously accepted by the Task Force, including some
additional remedies. In addition, the Company agreed that it would incur a
minimum cost of $410 million in providing remedies to policyowners under
the program and, in specified circumstances, agreed to make certain other
payments and guarantees. Under the terms of the settlement, the Company
agreed to a minimum average cost per remedy of $2,364 for up to 330,000
claims remedied and also agreed to provide additional compensation to be
determined by formula that will range in aggregate amount from $50 million
to $300 million depending on the total number of claims remedied. At the
end of the remediation program's claim evaluation process, the Court will
determine how the additional compensation will be distributed.
The terms of the remediation program described above were enhanced again in
February 1997 pursuant to agreements reached with several states that had
not previously accepted the terms of the program. These changes were
incorporated as amendments to the above-described Stipulation of Settlement
and related settlement documents, and the amended Stipulation of Settlement
was approved as fair to class members by the United States District Court
for the District of New Jersey in March 1997. By that point in time, the
Company had entered into agreements with all 50 states and the District of
Columbia pursuant to which each jurisdiction had accepted the remediation
plan and the Company had agreed to pay approximately $65 million in fines,
penalties and related payments.
The decision of the U.S. District Court to certify a class in the
above-described litigation for settlement purposes only and to approve the
class action settlement as described in the amended Stipulation of
Settlement is presently on appeal to the U.S. Court of Appeals for the
Third Circuit. The appellants claim that the District Court erred in
certifying a class and in finding that the terms of the settlement are fair
to the class.
Pursuant to the state agreements and the amended Stipulation of Settlement,
as approved by the U.S. District Court, the Company initiated its
remediation program in 1997. The Company mailed packages and provided broad
class notice to the owners of approximately 10.7 million policies eligible
to participate in the remediation program, informing them of their rights.
Owners of approximately 21,800 policies elected to be excluded from the
class action settlement. Of those eligible to participate in the
settlement, policyowners who believed they were misled were invited to file
a claim through an Alternative Dispute Resolution ("ADR") process. The ADR
process was established to enable the company to discharge its liability to
the affected policyowners. Policyowners who did not wish to file a claim in
the ADR process were permitted to choose from options available under Basic
Claim Relief, such as preferred rate premium loans, or annuities, mutual
fund shares or life insurance policies that the Company will enhance.
The owners of approximately 1.16 million policies responded to these
notices by indicating an intent to file an ADR claim. All policyholders who
responded were provided an ADR claim form for completion and submission.
Approximately 635,000 claim forms were completed and returned as of January
31, 1998. Management does not believe the number of ADR claims that will be
completed and returned will increase significantly. In addition, the owners
of approximately 510,000 policies indicated an interest in a Basic Claim
Relief remedy. The ADR process requires that individual claim files be
reviewed by one or more independent claim evaluators. Management does not
believe costs associated with providing Basic Claim Relief will be material
to the Company's financial position or results of operations.
35
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. CONTINGENCIES AND LITIGATION (CONTINUED)
In 1996, the Company recorded in its Statement of Operations, the minimum
cost of $410 million as agreed to in the settlement. Management had no
better information available at that time upon which to make a reasonable
estimate of losses. Management now has additional information which allows
for computation of a reasonable estimate of losses associated with ADR
claims. Based on this additional information, in 1997, management had
increased the estimated liability for the cost of remedying policyholder
claims in the ADR process by $1.64 billion before taxes to approximately
$2.05 billion before taxes of which $1.80 billion has been funded in a
settlement trust as described in Note 3. While management believes these
are reasonable estimates based on information currently available, the
ultimate amount of the total cost of remedied policyholder claims is
dependent on complex and varying factors, including actual claims by
eligible policyholders, the relief options chosen and the dollar value of
those options. There are also additional elements of the ADR process which
cannot be fully evaluated at this time (e.g., claims which may be
successfully appealed) which could increase this estimate.
Litigation is subject to many uncertainties, and given the complexity and
scope of these suits, their outcome cannot be predicted. It is also not
possible to predict the likely results of any regulatory inquiries or their
effect on litigation which might be initiated in response to widespread
media coverage of these matters. Accordingly, management is unable to make
a meaningful estimate of the amount or range of loss that could result from
an unfavorable outcome of all pending litigation and the regulatory
inquiries. It is possible that the results of operations or the cash flow
of the Company, in particular quarterly or annual periods, could be
materially affected by an ultimate unfavorable outcome of certain pending
litigation and regulatory matters. Management believes, however, that the
ultimate outcome of all pending litigation and regulatory matters referred
to above should not have a material adverse effect on the Company's
financial position, after consideration of applicable reserves.
The Company and a number of other insurers ("the Consortium") entered into
a Reinsurance and Participation Agreement (the "Agreement") with MBL Life
Assurance Corporation ("MBLLAC") and others, under which the Company and
the other insurers agreed to reinsure certain payments to be made to
contract holders by MBLLAC in connection with the plan of rehabilitation of
Mutual Benefit Life Insurance Company. Under the agreement, the Consortium,
subject to certain terms and conditions, will indemnify MBLLAC for the
ultimate net loss sustained by MBLLAC on each contract subject to the
Agreement. The ultimate net loss represents the amount by which the
aggregate required payments exceed the fair market value of the assets
supporting the covered contracts at the time such payments are due. The
Company's share of any net loss is 30.55%. The Company has determined that
it does not expect to make any payments to MBLLAC under the agreement. The
Company concluded this after testing a wide range of potentially adverse
scenarios during the rehabilitation period for MBLLAC.
15. SUBSEQUENT EVENTS
On February 10, 1998, the Company's Board of Directors authorized
management to take the preliminary steps necessary to allow the Company to
demutualize and become a publicly-traded company. The Company has begun
discussions with the New Jersey Department of Banking and Insurance,
leaders in the New Jersey State Legislature, as well as other key
regulatory agencies around the country. The New Jersey State Legislature
must first pass a law permitting demutualization. The New Jersey Department
of Banking and Insurance, the Company's Board and a majority of
participating policyholders must ultimately approve the Company's plan for
demutualization.
* * * * *
36
<PAGE>
INDIVIDUAL VARIABLE CONTRACT ACCOUNT
VARIABLE ANNUITY CONTRACTS
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
751 Broad Street
Newark, New Jersey 07102-3777
Telephone: (888) PRU-2888
<PAGE>
PART C
OTHER INFORMATION
<PAGE>
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(a) FINANCIAL STATEMENTS
(1) Financial Statements of The Prudential Individual Variable Contract
Account (Registrant) consisting of the Statements of Net Assets, as of
December 31, 1997; the Statements of Operations for the period ended
December 31, 1997; the Statements of Changes in Net Assets for the
periods ended December 31, 1997 and 1996; and the Notes relating thereto
appear in the statement of additional information (Part B of the
Registration Statement).
(2) Statutory Financial Statements of The Prudential Insurance Company of
America (Depositor) consisting of the Statements of Admitted Assets,
Liabilities and Surplus (Statutory Basis) as of December 31, 1997 and
1996; the Statements of Operations and Changes in Surplus (Statutory
Basis) Statements of Cash Flows (Statutory Basis) for the years ended
December 31, 1997, 1996 and 1995; and the Notes relating thereto appear
in the statement of additional information (Part B of the Registration
Statement).
(b) EXHIBITS
(1) Resolution of the Board of Directors of The Prudential Insurance Company
of America establishing The Prudential Individual Variable Contract
Account. (Note 1)
(2) Agreements for custody of securities and similar investments--Not
Applicable.
(3) (a) Distribution Agreement between Pruco Securities Corporation
(Underwriter) and The Prudential Insurance Company of America
(Depositor). (Note 1)
(b) Proposed form of Selected Broker Agreement between Pruco Securities
Corporation and brokers with respect to sale of the Contracts.
(Note1)
(4) (a) The Prudential Discovery Plus Contract. (Note 1)
(b) Endorsement ORD 86972-89 to the VAC-89 Contract for use in all
states when issuing a Contract to a juvenile. (Note 2).
(c) Endorsement COMB 84890-86 to the VAC-89 Contract for use in all
states when issuing a Contract in a qualified market. (Note 2)
(d) Limitation Provisions ORD 80445 Ed 8-88 to the VAC-89 Contract for
use in all states. (Note 3)
(e) Limitation Provisions VIP 7-88 to the VAC-89 Contract for use in all
states. (Note 3)
(f) Limitation Provisions WVQ 2-88 to the VAC-89 Contract for use in all
states. (Note 3)
(g) Waiver of Withdrawal Charges rider ORD 88753-92 to the VAC-89
Contract (at issue). (Note 4)
(h) Waiver of Withdrawal Charges rider ORD 88754-92 to the VAC-89
Contract (after issue). (Note 4)
(i) Spousal Continuance Rider ORD 89011-93. (Note 5)
(j) Endorsement altering the Assignment provision ORD 83921-95. (Note 6)
(k) Endorsement altering the Death of Annuitant provision ORD 89319-95
(at issue). (Note 6)
(5) (a) Application form for The Prudential Discovery Plus Contract.
(Note 7)
(b) Application for an Annuity contract ORD 87348-92. (Note 5)
(c) Supplement to the Annuity application ORD 87454-92. (Note 5)
(6) (a) Charter of The Prudential Insurance Company of America, as amended
November 14, 1995. (Note 8)
(b) By-laws of The Prudential Insurance Company of America, as amended
April 8, 1997. (Note 6)
(7) Contract of reinsurance in connection with variable annuity
contract--Not Applicable.
(8) Other material contracts performed in whole or in part after the date
the registration statement is filed:
(a) Purchase Agreement between The Prudential Series Fund, Inc. and
Prudential. (Note 9)
(9) Opinion of Counsel and consent to its use as to legality of the
securities being registered. (Note 1)
C-1
<PAGE>
(10) (a) Written consent of Price Waterhouse LLP, independent accountants.
(Note 1)
(b) Written Consent of Deloitte & Touche LLP, independent auditors
(Note 1)
(11) All financial statements omitted from Item 23, Financial Statements--
Not Applicable.
(12) Agreements in consideration for providing initial capital between or
among Registrant, Depositor, Underwriter, or initial Contract
owners--Not Applicable.
(13) Schedule of Performance Computations. (Note 1)
(14) Powers of Attorney.
(a) F. Agnew, F. Becker, M. Berkowitz, R. Carbone, J. Cullen,
C. Davis, R. Enrico, A. Gilmour, W. Gray, Ill, J. Hanson,
G. Hiner, C. Horner, G. Kelley, B. Malkiel, A. Ryan, I. Schmertz,
C. Sitter, D. Staheli, R. Thompson, J. Unruh, P. Vagelos,
S. Van Ness, P. Volcker, J. Williams. (Note 11)
(Note 1) Filed herewith
(Note 2) Incorporated by reference to Pre-Effective Amendment No. 1 to this
Registration Statement, filed January 17, 1989.
(Note 3) Incorporated by reference to Post-Effective Amendment No. 1 to
this Registration Statement, filed March 2, 1989.
(Note 4) Incorporated by reference to Post-Effective Amendment No. 7 to
this Registration Statement, filed April 28, 1993.
(Note 5) Incorporated by reference to Post-Effective Amendment No. 8 to
Form N-4, Registration No. 33-25434, filed April 28, 1994.
(Note 6) Incorporated by reference to Post-Effective Amendment No. 9 to
Form N-4, Registration No. 33-25434, filed February 27, 1995.
(Note 7) Incorporated by reference to Registrant's Form N-4, filed November
8, 1988.
(Note 8) Incorporated by reference to Post-Effective Amendment No. 9 to
Form S-1, Registration No. 33-20083, filed April 9, 1997 on behalf
of The Prudential Variable Contract Real Property Account.
(Note 9) Incorporated by reference to Pre-Effective Amendment No. 2 to Form
S-6, Registration No. 2-80897, filed March 10, 1993, on behalf of
The Prudential Individual Variable Contract Account.
(Note 10) Incorporated by reference to Post-Effective Amendment No. 11 to
this Registration Stteemnt filed May 1, 1996 and to the Rule 24f-2
filing for this Registration Statement for fiscal year 1995 filed
February 29, 1996.
(Note 11) Incorporated by reference to Post-Effective Amendment No. 10 to
Form S-1, Registration No. 33-20083, filed April _, 1998 on behalf
of The Prudential Variable Contract Real Property Account.
C-2
<PAGE>
ITEM 25. DIRECTORS AND OFFICERS OF THE DEPOSITOR
Incorporated by reference to The Prudential Individual Variable Contract Account
prospectus under "Directors and Officers" contained in Part A of this
registration statement.
ITEM 26. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH DEPOSITOR
OR REGISTRANT
The Prudential Insurance Company of America ("Prudential") is a mutual life
insurance company organized under the laws of New Jersey. The subsidiaries of
Prudential and short descriptions of each are listed under Item 25 to
Post-Effective Amendment No. 1 to the Form N-1A Registration Statement for The
Prudential Series Fund, Inc., Registration No. 2-80896, filed April __, 1998,
the text of which is hereby incorporated.
Prudential may be deemed to control the Prudential Series Fund, Inc., a Maryland
corporation which is registered as an open-end, diversified, management
investment company under the Investment Company Act of 1940, all the shares of
which are held by Prudential and the following separate accounts which are
registered as unit investment trusts under the Investment Company Act of 1940:
The Prudential Variable Appreciable Account, The Prudential Individual Variable
Contract Account (Registrant), The Prudential Qualified Individual Variable
Contract Account, The Prudential Variable Contract Account-24 (separate accounts
of Prudential); the Prudential Life PRUvider Variable Appreciable Account, the
Pruco Life Variable Universal Account, the Pruco Life Variable Insurance
Account, the Pruco Life Variable Appreciable Account, the Pruco Life Single
Premium Variable Life Account, the Pruco Life Flexible Premium Variable Annuity
Account, the Pruco Life Single Premium Variable Annuity Account (separate
accounts of Pruco Life Insurance Company ("Pruco Life"); the Pruco Life of New
Jersey Variable Insurance Account, the Pruco Life of New Jersey Variable
Appreciable Account, the Pruco Life of New Jersey Single Premium Variable Life
Account, and the Pruco Life of New Jersey Single Premium Variable Annuity
Account (separate accounts of Pruco Life Insurance Company of New Jersey ("Pruco
Life of New Jersey");. Pruco Life, a corporation organized under the laws of
Arizona, is a direct wholly-owned subsidiary of Prudential. Pruco Life of New
Jersey, a corporation under the laws of New Jersey, is a direct wholly-owned
subsidiary of Pruco Life, and an indirect wholly-owned subsidiary of Prudential.
Prudential holds all of the shares of Prudential's Gibraltar Fund, Inc., a
Maryland corporation, in three of its separate accounts. Each of these separate
accounts is a unit investment trust registered under the Investment Company Act
of 1940. Prudential's Gibraltar Fund is registered as an open-end, diversified,
management investment company under the Investment Company Act of 1940.
In addition, Prudential 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, all of which are registered as open-end, diversified, management
investment companies under the Investment Company Act of 1940.
ITEM 27. NUMBER OF CONTRACT OWNERS
As of March 11, 1998 there were 37,615 Contract owners of qualified Contracts
offered by the Registrant, and 62,067 Contract owners 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
C-3
<PAGE>
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 this Registrant.
Insofar as indemnification for liabilities 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 Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
ITEM 29. PRINCIPAL UNDERWRITER
(a) Pruco Securities Corporation also acts as principal underwriter for the
Pruco Life PRUvider VariableAppreciable Account, the Pruco Life Variable
Insurance Account, the Pruco Life Variable Appreciable Account, the Pruco
Life Variable Universal Account, the Pruco Life Single Premium Variable
Life Account, the Pruco Life Single Premium Variable Annuity Account, the
Pruco Life of New Jersey Variable Insurance Account, the Pruco Life of New
Jersey Variable Appreciable Account, the Pruco Life of New Jersey Single
Premium Variable Life Account, the Pruco Life of New Jersey Single Premium
Variable Annuity Account, the Pruco Life of New Jersey Flexible Premium
Variable Annuity Account, The Prudential Variable Appreciable Account, The
Prudential Individual Variable Contract Account, The Prudential Qualified
Individual Variable Contract Account, Prudential's Annuity Plan Account,
Prudential's Investment Plan Account, Prudential's Annuity Plan Account-2,
Prudential's Gibraltar Fund, and The Prudential Series Fund, Inc.
(b) NAME AND PRINCIPAL POSITIONS AND OFFICES
BUSINESS ADDRESS WITH UNDERWRITER
---------------- ----------------
James J. Avery, Jr.* Chairman and Director
Richard Topp* President and Director
E. Michael Caulfield* Director
Joseph Mahoney* Director
Richard Painter** Director
James D. Price Director
Charles A. McGee, Jr.* Chief Financial Officer and Comptroller
Clifford E. Kirsch** Chief Legal Officer and Secretary
* Principal Business Address: 751 Broad Street, Newark, NJ 07102
** Principal Business Address: 213 Washington Street, Newark, NJ 07102
(c) Not Applicable
C-4
<PAGE>
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
All accounts, books or other documents required to be maintained by Section
31(a) of the 1940 Act and the rules promulgated thereunder are maintained by the
Registrant through The Prudential Insurance Company of America, 751 Broad
Street, Newark, New Jersey 07102-3777.
ITEM 31. MANAGEMENT SERVICES
Summary of any contract not discussed in Part A or Part B of the registration
statement under which management-related services are provided to the
Registrant--Not Applicable.
ITEM 32. UNDERTAKINGS
(a) Registrant undertakes to file a post-effective amendment to this Registrant
Statement as frequently as is necessary to ensure that the audited
financial statements in the Registration Statement are never more than 16
months old for so long as payments under the variable annuity contracts may
be accepted.
(b) Registrant undertakes to include either (1) as part of any application 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
postcard 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) Registrant undertakes 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) Restrictions on withdrawal under Section 403(b) Contracts are imposed in
reliance upon, and in compliance with, a no-action letter issued by the
Chief of the Office of Insurance Products and Legal Compliance of the
Securities and Exchange Commission to the American Council of Life
Insurance on November 28, 1988.
(e) The Prudential Insurance Company of America ("Prudential") 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.
C-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant certifies that this Amendment is filed solely for one or more of the
purposes specified in Rule 485(b)(1) under the Securities Act of 1933 and that
no material event requiring disclosure in the prospectus, other than one listed
in Rule 485(b)(1), has occurred since the effective date of the most recent
Amendment to the Registration Statement which included a prospectus and has
caused this Registration Statement to be signed on its behalf by the undersigned
thereunto duly authorized, and its seal hereunto affixed and attested, all in
the city of Newark and the State of New Jersey, on this 24 day of April, 1998.
(Seal) THE PRUDENTIAL INDIVIDUAL VARIABLE CONTRACT ACCOUNT
(Registrant)
BY: THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
(Depositor)
Attest: /s/ THOMAS C. CASTANO *By: /s/ ESTHER H. MILNES
----------------------- --------------------------
THOMAS C. CASTANO ESTHER H. MILNES
ASSISTANT SECRETARY VICE PRESIDENT AND ACTUARY
As required by the Securities Act of 1933, this Post-Effective
Amendment No. 13 to the Registration Statement has been signed by the following
persons in the capacities and on the date indicated.
SIGNATURE AND TITLE
-------------------
/s/ * April 24, 1998
------------------------------------
ARTHUR F. RYAN
CHAIRMAN OF THE BOARD, PRESIDENT
AND CHIEF EXECUTIVE OFFICER
/s/ *
------------------------------------
RICHARD J. CARBONE
CHIEF FINANCIAL OFFICER
/s/ *
------------------------------------
MARTIN A. BERKOWITZ
SENIOR VICE PRESIDENT AND COMPTROLLER
/s/ * *By: /s/ THOMAS C. CASTANO
------------------------------------ ---------------------
FRANKLIN E. AGNEW THOMAS C. CASTANO
DIRECTOR (ATTORNEY-IN-FACT)
/s/ *
------------------------------------
FREDERIC C. BECKER
DIRECTOR
/s/ *
------------------------------------
JAMES G. CULLEN
DIRECTOR
/s/ *
------------------------------------
CAROLYNE K. DAVIS
DIRECTOR
C-6
<PAGE>
SIGNATURE AND TITLE
-------------------
/s/ * April 24, 1998
------------------------------------
ROGER A. ENRICO
DIRECTOR
/s/ *
------------------------------------
ALLAN D. GILMOUR
DIRECTOR
/s/ * *By: /s/ THOMAS C. CASTANO
------------------------------------ ---------------------
WILLIAM H. GRAY, III THOMAS C. CASTANO
DIRECTOR (ATTORNEY-IN-FACT)
/s/ *
------------------------------------
JON F. HANSON
DIRECTOR
/s/ *
------------------------------------
GLEN H. HINER, JR.
DIRECTOR
/s/ *
------------------------------------
CONSTANCE J. HORNER
DIRECTOR
/s/ *
------------------------------------
GAYNOR N. KELLEY
DIRECTOR
/s/ *
------------------------------------
BURTON G. MALKIEL
DIRECTOR
/s/ *
------------------------------------
IDA F.S. SCHMERTZ
DIRECTOR
/s/ *
------------------------------------
CHARLES R. SITTER
DIRECTOR
/s/ *
------------------------------------
DONALD L. STAHELI
DIRECTOR
/s/ *
------------------------------------
RICHARD M. THOMSON
DIRECTOR
/s/ *
------------------------------------
JAMES A. UNRUH
DIRECTOR
C-7
<PAGE>
SIGNATURE AND TITLE
-------------------
/s/ *
------------------------------------
P. ROY VAGELOS, M.D.
DIRECTOR
/s/ * April 24, 1998
------------------------------------
STANLEY C. VAN NESS
DIRECTOR
/s/ * *By: /s/ THOMAS C. CASTANO
------------------------------------ ---------------------
PAUL A. VOLCKER THOMAS C. CASTANO
DIRECTOR (ATTORNEY-IN-FACT)
/s/ *
------------------------------------
JOSEPH H. WILLIAMS
DIRECTOR
C-8
<PAGE>
EXHIBIT INDEX
(1) Resolution of the Board of Directors......................... Page C-10
(3)(a) Distribution Agreement dated March 4, 1983................... Page C-13
(3)(b) Selected Broker Agreement.................................... Page C-20
(4)(a) Prudential Discovery Plus Contract........................... Page C-29
(9) Opinion of Counsel and consent to its use as to the
legality of the securities being registered................ Page C-46
(10)(a) Written consent of Price Waterhouse, LLP, independent
accountants................................................ Page C-47
(10)(b) Written Consent of Deloitte & Touche LLP, independent
auditors................................................... Page C-48
(13) Schedule of Performance Computations......................... Page C-49
(27) Financial Data Schedule
C-9
RESOLVED, that, subject to the approval or the Commissioner of Insurance of
the State of New Jersey, the Company hereby establishes, pursuant to Section
17B:28-7 of the Revised Statutes of New Jersey, a variable contract account to
be designated initially as "The Prudential Individual Variable Contract
Account" (hereinafter in these resolutions referred to as the "Individual
Account"); and
FURTHER RESOLVED, that the Company shall receive and hold in the Individual
Account amounts arising from (i) purchase payments received made pursuant to
certain variable annuity contracts of the Company sold as part of its individual
variable annuity program and (ii) such assets of the Company as the proper
officers of the Company may deem prudent and appropriate to have invested in the
same manner as the assets applicable to its reserve liability under such
contracts and lodged in the Individual Account, and such amounts and the
dividends, interest and gains produced thereby shall be invested and reinvested,
subject to the rights of the holders of such variable annuity contracts, in
shares of The Prudential Series Fund, Inc., an open-end diversified management
investment company of the series type, at the net asset value of such shares at
the time of acquisition; and
FURTHER RESOLVED, that the Individual Account shall be registered as a unit
investment trust under the Investment Company Act of 1940, and that the proper
officers of the Company be and they hereby are authorized to sign and file, or
cause to be filed, with the Securities and Exchange
C-10
<PAGE>
2
Commission a registration statement, on behalf of the Individual Account, as
registrant, under the Investment Company Act of l940, and to sign and file, or
cause to be filed, an application, including any amendments thereto, for an
order under Section 6(c) of the Investment Company Act of l940 for such
exemptions from the provisions of that Act as may be necessary or desirable; and
FURTHER RESOLVED, that the Company shall as part of its individual variable
annuity program sell contracts on a variable basis to be known as Individual
Variable Annuity Contracts, and that the proper officers of the Company be and
they hereby are authorized to sign and file, or cause to be filed, with the
Securities and Exchange Commission, on behalf of the Company, as issuer, a
registration statement, including the financial statements and schedules,
exhibits and form of prospectus required as a part thereof, for the registration
of the offering and sale of such Individual Variable Annuity Contracts, to the
extent they represent participating interests in the Individual Account, under
the Securities Act of 1933; and to pay the registration fees required in
connection therewith; and
FURTHER RESOLVED, that the proper officers of the Company are authorized
and directed to sign and file, or cause to be filed, such amendment or
amendments of such registration statements as they may find necessary or
advisable from time to time; and
C-11
<PAGE>
3
FURTHER RESOLVED, that the signature of any director or officer required by
law to affix his signature to the foregoing registration statement under the
Securities Act of 1933, or to any amendment thereof, may be affixed by said
director or officer personally, or by an attorney-in-fact duly constituted in
writing by said director or officer to sign his name thereto; and
FURTHER RESOLVED, that the Secretary of the Company is appointed agent of
the Company to receive any and all notices and communications from the
Securities and Exchange Commission relating to such registration statements and
any and all amendments thereof; and
FURTHER RESOLVED, that the proper officers of the Company be and they
hereby are authorized and directed to do all acts and things including taking
whatever steps may be necessary or desirable to comply with such of the laws and
regulations of the several states as may be applicable, that from time to time
may become necessary, desirable or proper to be done in order to effectuate the
purpose of the foregoing resolutions or any of them.
APPROVED BY
BOARD OF DIRECTORS
OCT 12 1982
/s/ [ILLEGIBLE]
Assistant Secretary
C-12
AGREEMENT made this 4th day of March, 1983, by and between The Prudential
Insurance Company of America, a New Jersey corporation ("Company"), on its own
behalf and on behalf of The Prudential Individual Variable Contract Account and
The Prudential Qualified Individual Variable Contract Account ("Accounts"), and
Pruco Securities Corporation, a New Jersey corporation ("Distributor").
WITNESSETH:
WHEREAS, the Company has established and maintains the Accounts, separate
investment accounts, pursuant to the laws of New Jersey for the purpose of
selling variable annuity contracts ("Contracts"), to commence after the
effectiveness of the respective Registration Statement for each Account filed
with the Securities and Exchange Commission on Form S-6 pursuant to the
Securities Act of 1933, as amended (the "1933 Act"); and
WHEREAS, each Account is registered as a unit investment trust under the
Investment Company Act of 1940 (the "1940 Act"); and
WHEREAS, Distributor is registered as a broker-dealer under the Securities
Exchange Act of 1934 (the "Securities Exchange Act") and is a member of the
National Association of Securities Dealers, Inc. ("NASD"); and
WHEREAS, the Company and the Distributor wish to enter into an agreement to
have the Distributor act as the Company's principal underwriter for the sale of
the Contracts through the Accounts;
NOW, THEREFORE, the parties agree as follows:
C-13
<PAGE>
-2-
1. Appointment of the Distributor
The Company agrees that during the term of this agreement it will take all
action which is required to cause the Contracts to comply with all applicable
federal securities and state insurance laws and regulations. The Company
appoints the Distributor and the Distributor agrees to act as the principal
underwriter for the sale of Contracts to the public, during the term of this
Agreement, in each state and other jurisdiction in which such Contracts may
lawfully be sold. Distributor shall offer the Contracts for sale and
distribution pursuant to terms set by the Company. Applications for the
Contracts shall be solicited only by representatives duly and appropriately
licensed and otherwise qualified for the sale of such Contracts in each state or
other jurisdiction as representatives of Distributor or a Broker as defined in
pargraph 2 hereof and as agents of Company. Completed applications for Contracts
shall be transmitted directly to the Company for acceptance or rejection in
accordance with underwriting rules established by the Company. Initial payments
under the Contracts shall be made by check payable to the Company and shall be
transmitted promptly by Distributor or its representatives to the Company, as
will any other payments received by Distributor or its representatives.
2. Sales Agreements
Distributor is hereby authorized to enter into separate written agreements,
on such terms and conditions as Distributor may determine not inconsistent with
this Agreement, with one or more organizations which agree to participate in the
distribution of Contracts. Any such organization (hereafter "Broker") shall be
both registered as a broker/dealer under the Securities Exchange Act and a
member of NASD.
C-14
<PAGE>
-3-
Broker and its agents or representatives soliciting applications for Contracts
shall be duly and appropriately licensed, registered or otherwise qualified for
the sale of such Contracts under the insurance laws and any applicable blue-sky
laws of each state or other jurisdiction in which the Company is licensed to
sell the Contracts.
Distributor shall have the responsibility for ensuring that Broker
supervises its representatives. Any agreement as described in this Section shall
provide that Broker shall assume any legal responsibilities of the Company for
the acts, commissions or defalcations of such representatives insofar as they
relate to the sale of the Contracts. Applications for Contracts solicited by
such Broker through its agents or representatives shall be transmitted directly
to the Company, and if received by Distributor, shall be forwarded to Company.
All payments under the Contracts shall be made by check to Company and remitted
promptly to Company.
3. Life Insurance Agents
Company shall be responsible for insuring that Brokers are duly qualified,
under the insurance laws of the applicable jurisdictions, to sell the Contracts.
14. Suitability
Company wishes to ensure that Contracts sold by Distributor will be issued
to purchasers for whom the Contract will be suitable. Distributor shall take
reasonable steps to ensure that the various representatives appointed by it
shall not make recommendations to an applicant to purchase a Contract in the
absence of reasonable grounds to
C-15
<PAGE>
~4~
believe that the purchase of the Contract is suitable for such applicant. While
not limited to the following, a determination of suitability shall be based on
information furnished to a representative after reasonable inquiry of such
applicant concerning the applicant's insurance and investment objectives and
financial situation and needs.
5. Promotion Materials
Company shall have the responsibility for furnishing to Distributor and its
representatives sales promotion materials and individual sales proposals related
to the sale of the Contracts. Distributor shall not use any such materials that
have not been approved by Company.
6. Compensation
Company shall arrange for the payment of commission directly to those
registered representatives of Distributor who are entitled thereto in connection
with the sale of the Contracts on behalf of Distributor, in the amounts and on
such terms and conditions as Company and Distributor shall determine; provided
that such terms, conditions and commissions shall be as are set forth in or as
are not inconsistent with the Prospectus included as part of the respective
Registration Statement for of each Account and effective under the 1933 Act.
Company shall arrange for the payments of commissions directly to those
Brokers who sell Contracts under agreements entered into pursuant to paragraph
2. hereof, in amounts as may be agreed to among the parties and specified in
such written agreements.
C-16
<PAGE>
-5-
Company shall reimburse Distributor for the costs and expenses incurred by
Distributor in furnishing or obtaining the services, materials and supplies
required by the terms of this Agreement in the initial sales efforts and the
continuing obligations hereunder.
7. Records
Distributor shall have the responsibility for maintaining the records of
representatives licensed, registered and otherwise qualified to sell the
Contracts. Distributor shall maintain such other records as are required of it
by applicable laws and regulations. The books, accounts and records of Company,
the Accounts and Distributor shall be maintained so as to clearly and accurately
disclose the nature and details of the transactions.
8. Investigation and Proceeding
(a) Distributor and Company agree to cooperate fully in any insurance
regulatory investigation or proceeding or judicial proceeding arising in
connection with the Contracts distributed under this Agreement. Distributor and
Company further agree to cooperate fully in any securities regulatory
investigation or proceeding or judicial proceeding with respect to Company,
Distributor, their affiliates and their agents or representatives to the extent
that such investigation or proceeding is in connection with Contracts
distributed under this Agreement.
(b) In the case of a substantive customer complaint, Distributor and
Company will cooperate in investigating such complaint and any response to such
complaint will be sent to the other party to this Agreement for approval not
less than five business days prior to its being sent to the
C-17
<PAGE>
-6-
customer or regulatory authority, except that if a more prompt response is
required, the proposed response shall be communicated by telephone or telegraph.
9. Termination
This Agreement shall terminate automatically upon its assignment without
the prior written consent of both parties. This Agreement may be terminated at
any time by either party on 60 days' written notice to the other party, without
the payment of any penalty. Upon termination of the this Agreement all
authorizations, rights and obligations `shall cease except the obligation to
settle accounts hereunder, including commissions on payments subsequently
received for Contracts in effect at the time of termination, and the agreements
contained in paragraph 8. hereof.
10. Regulation
This Agreement shall be subject to the provisions of the 1940 Act and the
Securities Exchange Act and the rules, regulations, and rulings thereunder and
of the applicable rules and regulations of the NASD, from time to time in
effect, and the terms hereof shall be interpreted and construed in accordance
therewith.
11. Severability
If any provision of this Agreement shall be held or made invalid by a court
decision, statute, rule or otherwise, the remainder of this Agreement shall not
be affected thereby.
C-18
<PAGE>
-7-
12. Applicable Law
This Agreement shall be construed and enforced in accordance with and
governed by the laws of the State of New Jersey.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the day and year first above written.
Attest: THE PRUDENTIAL INSURANCE COMPANY
OF AMERICA
/s/ [ILLEGIBLE] By /s/ John J. Marcus
- ----------------------------- -----------------------------------
Secretary John J. Marcus
Senior Vice President
PRUCO SECURITIES CORPORATION
Attest:
/s/ [ILLEGIBLE] By /s/ [ILLEGIBLE]
- ----------------------------- -----------------------------------
Secretary President
C-19
SELECTED BROKER AGREEMENT
-------------------------
AGREEMENT dated ______________, by and between Pruco Securities corporation
(Distributor), a New Jersey corporation and ____________________ (Broker), a
_____ corporation.
WITNESSETH:
In consideration of the mutual promises contained herein, the parties
hereto agree as follows:
A. Definitions
(1) Contracts - Variable life insurance contracts and/or variable annuity
contracts described in Schedule A attached hereto and issued by the
applicable one of Pruco Life Insurance Company, Pruco Life Insurance
Company of New Jersey or The Prudential Insurance Company of America
(hereinafter collectively called the "Company") and for which
Distributor has been appointed the principal underwriter pursuant to
Distribution Agreements, copies of which have been furnished to
Broker.
(2) Accounts- Separate accounts established and maintained by Company
pursuant to the laws of Arizona or New Jersey, as applicable, to fund
the benefits under the Contracts.
(3) The Prudential Series Fund, Inc., or the Fund -An open-end management
investment company registered under the 1940 Act, shares of which are
sold to the Accounts in connection with the sale of the Contracts.
(4) Registration Statement - The registration statements and amendments
thereto relating to the Contracts, the Accounts, and the Fund,
including financial statements and all exhibits.
(5) Prospectus - The prospectuses included within the Registration
Statements referred to herein.
(6) 1933 Act - The Securities Act of 1933, as amended.
(7) 1934 Act - The Securities Exchange Act of 1934, as amended.
(8) SEC - The Securities and Exchange Commission.
B. Agreements of Distributor
Standard 8/88
C-20
<PAGE>
-2-
(1) Pursuant to the authority delegated to it by Company, Distributor
hereby authorizes Broker during the term of this Agreement to solicit
applications for Contracts from eligible persons provided that there
is an effective Registration Statement relating to such Contracts and
provided further that Broker has been notified by Distributor that the
Contracts are qualified for sale under all applicable securities and
insurance laws of the state or jurisdiction in which the application
will be solicited. In connection with the solicitation of applications
for Contracts, Broker is hereby authorized to offer riders that are
available with the Contracts in accordance with instructions furnished
by Distributor or Company.
(2) Distributor, during the term of this Agreement, will notify Broker of
the issuance by the SEC of any stop order with respect to the
Registration Statement or any amendments thereto or the initiation of
any proceedings for that purpose or for any other purpose relating to
the registration and/or offering of the Contracts and of any other
action or circumstance that may prevent the lawful sale of the
Contracts in any state or jurisdiction.
(3) During the term of this Agreement, Distributor shall advise Broker of
any amendment to the Registration Statement or any amendment or
supplement to any Prospectus.
C. Agreements of Broker
(1) It is understood and agreed that Broker is a registered broker/dealer
under the 1934 Act and a member of the National Association of
Securities Dealers, Inc. and that the agents or representatives of
Broker who will be soliciting applications for the Contracts also will
be duly registered representatives of Broker.
(2) Commencing at such time as Distributor and Broker shall agree upon,
Broker agrees to use its best efforts to find purchasers for the
contracts acceptable to Company. In meeting its obligation to use its
best efforts to solicit applications for contracts, Broker shall,
during the term of this Agreement, engage in the following activities:
C-21
<PAGE>
-3-
(a) Continuously utilize training, sales and promotional materials
which have been approved by Company;
(b) Establish and implement reasonable procedures for periodic
inspection and supervision of sales practices of its agents or
representatives and submit periodic reports to Distributor as may
be requested on the results of such inspections and the
compliance with such procedures.
(c) Broker shall take reasonable steps to ensure that the various
representatives appointed by it shall not make recommendations to
an applicant to purchase a Contract in the absence of reasonable
grounds to believe that the purchase of the Contract is suitable
for such applicant. While not limited to the following, a
determination of suitability shall be based on information
furnished to a representative after reasonable inquiry of such
applicant concerning the applicant's insurance and investment
objectives, financial situation and needs, and the likelihood
that the applicant will continue to make the premium payments
contemplated by the Contract.
(3) All payments for Contracts collected by agents or representatives of
Broker shall be held at all times in a fiduciary capacity and shall be
remitted promptly in full together with such applications, forms and
other required documentation to an office of the Company designated by
Distributor. Checks or money orders in payment of initial premiums
shall be drawn to the order of the applicable one of "Pruco Life
Insurance Company, (for contracts issued by Pruco Life Insurance
Company and/or Pruco Life Insurance company of New Jersey) or "The
Prudential Insurance Company of America". Broker acknowledges that the
Company retains the ultimate right to control the sale of the
Contracts and that the Distributor or Company shall have the
unconditional right to reject, in whole or part, any application for
the Contract. In the event Company or Distributor rejects an
application, Company immediately will return all payments directly to
the purchaser and Broker will be notified of such action. In the event
that any purchaser of a Contract elects to return such Contract
pursuant to Rule 6e-2(b) (13) (viii) of the 1940 Act, the purchaser
will receive a refund of any premium payments, plus or minus any
change due to investment performance in the value of the invested
portion of such premiums; however, if
C-22
<PAGE>
-4-
applicable state law so requires, the purchaser who exercises his
short-term cancellation right will receive a refund of all payments
made, unadjusted for investment experience prior to the cancellation.
The Broker will be notified of any such action.
(4) Broker shall act as an independent contractor, and nothing herein
contained shall constitute Broker, its agents or representatives, or
any employees thereof as employees of Company or Distributor in
connection with the solicitation of applications for Contracts.
Broker, its agents or representatives, and its employees shall not
hold themselves out to be employees of Company or Distributor in this
connection or in any dealings with the public.
(5) Broker agrees that any material it develops, approves or uses for
sales, training, explanatory or other purposes in connection with the
solicitation of applications for Contracts hereunder (other than
generic advertising materials which do not make specific reference to
the Contracts) will not be used without the prior written consent of
Distributor and where appropriate, the endorsement of Company to be
obtained by Distributor.
(6) Solicitation and other activities by Broker shall be undertaken only
in accordance with applicable laws and regulations. No agent or
representative of Broker shall solicit applications for the Contracts
until duly licensed and appointed by Company as a life insurance and
variable contract broker or agent of Company in the appropriate states
or other jurisdictions. Broker shall ensure that such agents or
representatives fulfill any training requirements necessary to be
licensed. Broker understands and acknowledges that neither it nor its
agents or representatives is authorized by Distributor or Company to
give any information or make any representation in connection with
this Agreement or the offering of the Contracts other than those
contained in the Prospectus or other solicitation material authorized
in writing by Distributor or Company.
(7) Broker shall not have authority on behalf of Distributor or Company
to: make, alter or discharge any Contract or other form; waive any
forfeiture, extend the time of paying any premium; receive any monies
or premiums due, or to become due, to Company, except as set forth in
Section C(3) of this Agreement. Broker shall not expend, nor contract
for the expenditure of the funds of Distributor, nor shall Broker
possess or exercise any authority on behalf of Broker by this
Agreement.
C-23
<PAGE>
-5-
(8) Broker shall have the responsibility for maintaining the records of
its representatives licensed, registered and otherwise qualified to
sell the Contracts. Broker shall maintain such other records as are
required of it by applicable laws and regulations. The books, accounts
and records of Company, the Account, Distributor and Broker relating
to the sale of the Contracts shall be maintained so as to clearly and
accurately disclose the nature and details of the transactions. All
records maintained by the Broker in connection with this Agreement
shall be the property of the Company and shall be returned to the
Company upon termination of this Agreement, free from any claims or
retention of rights by the Broker. Nothing in this Section C(8) shall
be interpreted to prevent the Broker from retaining copies of any such
records which the Broker, in its discretion, deems necessary or
desirable to keep. The Broker shall keep confidential any information
obtained pursuant to this Agreement and shall disclose such
information, only if the Company has authorized such disclosure, or if
such disclosure is expressly required by applicable federal or state
regulatory authorities.
D. Compensation
(1) Pursuant to the Distribution Agreement between Distributor and
Company, Distributor shall cause Company to arrange for the payment of
commissions to Broker as compensation for the sale of each contract
sold by an agent or representative of Broker. The amount of such
compensation shall be based on a schedule to be determined by
agreement of Company, Distributor and Broker. Company shall identify
to Broker with each such payment the name of the agent or
representative of Broker who solicited each Contract covered by the
payment.
(2) Neither Broker nor any of its agents or representatives shall have any
right to withhold or deduct any part of any premium it shall receive
for purposes of payment of commission or otherwise. Neither Broker nor
any of its agents or representatives shall have an interest in any
compensation paid by Company to Distributor, now or hereafter, in
connection with the sale of any Contracts hereunder.
K. Complaints and Investigations
(1) Broker and Distributor jointly agree to cooperate fully in any
insurance regulatory investigation or proceeding or judicial
C-24
<PAGE>
-6-
proceeding arising in connection with the Contracts marketed under
this Agreement. Broker and Distributor further agree to cooperate
fully in any securities regulatory investigation or proceeding or
judicial proceeding with respect to Broker, Distributor, their
affiliates and their agents or representatives to the extent that such
investigation or proceeding is in connection with Contracts marketed
under this Agreement. Broker shall furnish applicable federal and
state regulatory authorities with any information or reports in
connection with its services under this Agreement which such
authorities may request in order to ascertain whether the Company's
operations are being conducted in a manner consistent with any
applicable law or regulation.
F. Term of Agreement
(1) This Agreement shall continue in force for one year from its effective
date and thereafter shall automatically be renewed every year for a
further one year period; provided that either party may unilaterally
terminate this Agreement upon thirty (30) days' written notice to the
other party of its intention to do so.
(2) Upon termination of this Agreement, all authorizations, rights and
obligations shall cease except (a) the agreements contained in Section
E hereof; (b) the indemnity set forth in Section G hereof; and (c) the
obligations to settle accounts hereunder, including commission
payments on premiums subsequently received for Contracts in effect at
the time of termination or issued pursuant to applications received by
Broker prior to termination.
G. Indemnity
(1) Broker shall be held to the exercise of reasonable care in carrying
out the provisions of this Agreement.
(2) Distributor agrees to indemnify and hold harmless Broker and each
officer or director of Broker against any losses, claims, damages or
liabilities, joint or several, to which Broker or such officer or
director become subject, under the 1933 Act or otherwise, insofar as
such losses, claims, damages or liabilities (.or actions in respect
thereof) arise out of or are based upon any untrue statement or
alleged
C-25
<PAGE>
-7-
untrue statement of a material fact, required to be stated therein or
necessary to make the statements therein not misleading, contained in
any Registration Statement or any post-effective amendment thereof or
in the Prospectus, or any sales literature provided by the Company or
by the Distributor.
(3) Broker agrees to indemnify and hold harmless Company and Distributor
and each of their current and former directors and officers and each
person, if any, who controls or has controlled Company or Distributor
within the meaning of the 1933 Act or the 1934 Act, against any
losses, claims, damages or liabilities to which Company or Distributor
and any such director or officer or controlling person may become
subject, under the 1933 Act or otherwise, insofar as such losses,
claims, damages or liabilities (or actions in respect thereof) arise
out of or are based upon:
(a) Any unauthorized use of sales materials or any verbal or written
misrepresentations or any unlawful sales practices concerning the
Contracts by Brokers; or
(b) Claims by agents or representatives or employees of Broker for
commissions, service fees, development allowances or other
compensation or renumeration of any type;
(c) The failure of Broker, its officers, employees, or agents to
comply with the provisions of this Agreement; and Broker will
reimburse Company and Distributor and any director or officer or
controlling person of either for any legal or other expenses
reasonably incurred by Company, Distributor, or such director,
officer of controlling person in connection with investigating or
defending any such loss, claims, damage, liability or action.
This indemnity agreement will be in addition to any liability
which Broker may otherwise have.
H. Assignability
This Agreement shall not be assigned by either party without the written
consent of the other.
C-26
<PAGE>
-8-
I. Governing Law
This Agreement shall be governed by and construed in accordance with the
laws of the State of New Jersey.
In Witness Whereof, the parties hereto have caused this Agreement to be
duly executed as of the day and year first above written.
PRUCO SECURITIES CORPORATION
(Distributor)
By:___________________________________
President
______________________________________
(Broker)
By:___________________________________
C-27
<PAGE>
SCHEDULE A
CONTRACTS COVERED UNDER SELECTED BROKER AGREEMENT
Contracts Issued by The Prudential Insurance Company of America
The Prudential Discovery Plus
(Flexible payment deferred variable annuity)
C-28
- -------------------------------------===========================================
The Prudential Insurance Company of America
a mutual life insurance company
Corporate Office, Newark, New Jersey
The Prudential [LOGO]
Annuitant(s) JOHN DOE XX XXX XXX Contract Number
MARY DOE March 1, 1989 Contract Date
Annuity Date NOV 1, 2013
Agency R-NK 1
================================================================================
This is an annuity contract. Subject to the provisions of this contract, and in
consideration of your purchase payments), we will make annuity payments starting
on the Annuity Date we show above.
Please read this contract with care. If there is ever a question about it, or if
there is a claim, just see one of our representatives or get in touch with one
of our offices
Benefits and values under this contract may be on a variable basis. Amounts
directed into one or more of the variable investment options will reflect the
investment experience of those investment options. They are subject to change
both up and down and are not guaranteed as to dollar amount except as provided
under the Death of Annuitant and Payout Provisions sections.
Right to Cancel Contract.--Not later than ten days after you get this contract,
you may return it to us. All you have to do is take it or mail it to one of our
offices or to the representative who sold it to you. The contract will be
cancelled and we will promptly give you the amount of your contract fund on the
date your request is received less any portion of the fund attributable to the
additional amounts we describe under Purchase Payments. We will also give back
any charges we made in accord with this contract.
Signed for Prudential.
/s/ SPECIMEN [ILLEGIBLE] /s/ SPECIMEN [ILLEGIBLE]
Secretary President
Variable Annuity Contract with Flexible Purchase Payments. -- Monthly annuity
payments starting on Annuity Date Payment as stated upon death before Annuity
Date. Purchase payments may be made during lifetime(s) of annuitant(s) until
Annuity Date. Contract values reflect investment results.
C-29
================================================================================
<PAGE>
- --------------------------------================================================
GUIDE TO CONTENTS
Page
Contract Data ........................................................ 3
Purchase Payments .................................................... 5
Purchase Payments; Invested Purchase
Payment Allocations; Additional Amounts;
Purchase Payments Specifications
Contract Fund ........................................................ 6
Contract Fund; Guaranteed Interest; Excess
Interest; Earnings; Annual Maintenance Charge;
Cash Value; Contract Fund Specifications
Withdrawals .......................................................... 7 & 8
Conditions for Withdrawal; Withdrawal Charges;
Charge-Free Withdrawal of Earnings; Other
Charge-Free Withdrawals; Application of
Withdrawal Charge; Recapture of Additional
Amount; Withdrawals Specifications
Separate Accounts .................................................... 8
Separate Account; Variable Investment Options;
Separate Account Investments
Fixed Rate Options ................................................... 8
Transfers ............................................................ 9
Death of Annuitant ................................................... 9
Before the Annuity Date; After the Annuity
Date; If Two Annuitants Die
Beneficiary .......................................................... 9 & 10
Payout Provisions .................................................... 10 & 11
Choosing an Option; Conditions; Options
Described; Life Income Option; Interest
Payment Option, Other Options; When No
Option Chosen; Residue Described; Withdrawal
of Residue; Recapture of Additional Amounts;
Withdrawal Charges
Annuity Settlement Table ............................................. 12
Amounts Payable
Definitions .......................................................... 13
General Provisions ................................................... 13-15
Annual Report; The Contract; Contract
Modifications; Change of Annuity Date;
Removal of an Annuitant; Ownership and
Control; Currency; Misstatement of Age or Sex;
Incontestability; Proof of Life or Death;
Assignment; Changes by Prudential; Requested
Transactions; Participation (Dividends)
Page 2
C-30
<PAGE>
CONTRACT DATA
ANNUITANT(S) JOHN DOE XX XXX XXX CONTRACT NUMBER
MARY DOE March 1, 1989 CONTRACT DATE
ANNUITY DATE NOV. 1, 2013
AGENCY R-NK 1
FIRST ANNUITANT:
NAME JOHN DOE
SEX AND ISSUE AGE M-35
DATE OF BIRTH 3-15-53
CO-ANNUITANT:
NAME MARY DOE
SEX AND ISSUE AGE F-32
DATE OF BIRTH 10-1-55
BENEFICIARY: CLASS 1-ROBERT DOE
SON OF ANNUITANTS
CLASS 2-BARBARA SMITH
SISTER OF CO-ANNUITANT
PURCHASE PAYMENT
THE PURCHASE PAYMENT IS $10,000.00
INTEREST RATES
FOR THE PORTION OF THE CONTRACT FUND IN THE FIXED ACCOUNT: SEE GUARANTEED
INTEREST AND EXCESS INTEREST ON PAGE 6.
CONTRACT DATA CONTINUED ON NEXT PAGE
Page 3
C-31
<PAGE>
CONTRACT NO. XX XXX XXX
LIST OF INVESTMENT OPTIONS
I. THE PRUDENTIAL INDIVIDUAL VARIABLE CONTRACT ACCOUNT
This account is registered with the SEC under the Investment Company Act of
l940. Each investment option of this account invests in a specific
portfolio of The Prudential Series Fund. The fund is registered with the
SEC under the Investment Company Act of 1940 as an open-end diversified
management investment company. The fund has several portfolios. We show
below the available investment options and the fund portfolios they invest
in.
INVESTMENT FUND
OPTION PORTFOLIO
---------- ---------
Money Market Money Market
Bond Bond
Common Stock Common Stock
Aggressively Managed Flx Aggressively Managed Flx
Conservative Managed Flx Conservative Managed Flx
High Yield Bond High Yield Bond
High Dividend Stock High Dividend Stock
Natural Resources Natural Resources
Stock Index Stock Index
II. THE PRUDENTIAL REAL PROPERTY ACCOUNT
This account is not registered with the SEC under the Investment Company
Act of 1940. The following investment option is available.
INVESTMENT
OPTION
----------
Real Property
III. FIXED INVESTMENT OPTIONS
The fixed investment options are funded by the general account of the
Company. The following investment option is available.
INVESTMENT
OPTION
----------
Fixed Interest Rate
***** END OF LIST *****
SCHEDULE OF INITIAL ALLOCATION OF INVESTED PURCHASE PAYMENTS
Money Market 20%
Common Stock 60%
Fixed Interest Rate 20%
***** END OF SCHEDULE *****
Page 3A
C-32
<PAGE>
ENDORSEMENTS
(Only we can endorse this contract.)
Page 4
C-33
<PAGE>
- -----===========================================================================
PURCHASE PAYMENTS
Purchase Payments
The purchase payment we show on page 3 is due on the contract date.
Additional purchase payments may be made at any time while an annuitant is
living and before the annuity date. The minimum amounts we will accept are
shown under Purchase Payments Specifications. We reserve the right to
establish a maximum amount.
Invested Purchase Payment
This is the portion of a purchase payment that we add to the contract fund
(See Contract Fund). It is equal to the purchase payment plus any
additional amounts, minus any deduction for state and local premium taxes.
Allocations
You may allocate all or a part of your invested purchase payment to the
fixed rate option or to one or more of the variable investment options
listed in the contract data pages. You may choose to allocate nothing to a
particular option. Any allocation you make must be at least 10%; you may
not choose a fractional percent. The initial allocation of invested
purchase amounts is shown in the contract data pages. If, after you have
made at least one purchase payment, we received a purchase payment without
instructions, we will make any deduction for state and local premium taxes
and allocate the balance in the same proportions as the most recent
purchase payment you made. You may change the allocation for future
invested purchase payments at any time. The change will take effect on the
date we receive your notice at our Home Office.
Additional Amounts
During the first three contract years, and in later contract years at our
discretion, we will credit to every purchase payment you make an additional
amount equal to the amount of the purchase payment multiplied by the rate
shown under Purchase Payments Specifications. We reserve the right to limit
such additional amounts to $1,000 in each contract year. This additional
amount will not be subject to state or local premium taxes and will be
allocated among the fixed rate option and the variable investment options
in the same proportions as the corresponding purchase payment.
Purchase Payments Specifications
o Your minimum initial purchase payment is $10,000.
o Your minimum subsequent purchase payment is $5,000.
o Your additional amount rate is 1%.
Page 5
C-34
<PAGE>
- -----===========================================================================
CONTRACT FUND
Contract Fund
On the contract date, the contract fund is equal to the invested purchase
payment minus any of the charges described in items (e) through (i) below
which may have been due on that date. On any day after that, the contract
fund is equal to what it was on the previous day, plus any invested
purchase payments credited that day, plus these items:
(a) any increase due to investment results in that portion of the contract
fund allocated to one or more variable investment options;
(b) guaranteed interest at the annual rate shown under Contract Fund
Specifications on that portion of the contract fund that is in a fixed
rate option; and
(c) any excess interest on that portion of the contract fund that is in a
fixed rate option;
minus these items:
(d) any decrease due to investment results in that portion of the contract
fund allocated to one or more variable investment options;
(a) a mortality and expense risk charge against that portion of the
contract fund allocated to one or more variable investment options at
a rate shown under Contract Fund Specifications;
(f) an administration charge against that portion of the contract fund
allocated to one or more of the variable investment options at a rate
shown under Contract Fund Specifications;
(g) any annual maintenance charge that we show under Contract Fund
Specifications;
(h) any amount charged against the contract fund for federal or state
income taxes; and
(i) any withdrawals, withdrawal charges, and recapture of additional
amounts.
Guaranteed Interest
On any portion of the contract fund in a fixed rate option, we will credit
interest each day at the daily equivalent of the guaranteed rate shown
under Contract Fund Specifications.
Excess Interest
We may credit excess interest in addition to the guaranteed interest on any
portion of the contract fund not in a variable investment option. The rate
of any excess interest will be determined from time to time and will
continue thereafter until a new rate is determined. We may use different
rates of excess interest for different portions of the contract fund.
Earnings
As of any date, earnings are the excess, if any, of (1) the contract fund
plus any amounts previously withdrawn, over (2) total invested purchase
payments to date.
Annual Maintenance Charge
On each contract anniversary before the Annuity Date, or at the time of a
full withdrawal, we may deduct a maintenance charge from your contract
fund. The amount we may deduct is shown under Contract Fund Specifications.
If the contract fund is allocated to more than one investment option, we
will divide the charge on a pro-rata basis, according to the value of each.
Cash Value
Your cash value (full withdrawal amount) at any time is the contract fund,
minus any withdrawal charges that apply, minus any additional amount which
is subject to recapture.
Contract Fund Specifications
o Your guaranteed annual interest rate is 4% on the portion of your
contract fund in a fixed rate option.
o Your mortality and expense risk charge rate is no more than .00272616%
a day (1% a year).
o Your administration charge rate is no more than .00054740% a day (.2%
a year).
o If your contract fund is less than $ 10,000 on a contract anniversary
or at the time of a full withdrawal, the annual maintenance charge is
$30. Otherwise, the annual maintenance charge is $0.
Page 6
C-35
<PAGE>
- -----===========================================================================
WITHDRAWALS
Before the annuity date, you may be able to make full or partial
withdrawals.
Conditions for Withdrawal
You may make a full withdrawal at any time. You may make a partial
withdrawal if it is at least equal to the minimum withdrawal amount shown
under Withdrawals Specifications and if the remaining contract fund is at
least equal to the minimum contract fund after withdrawal shown under
Withdrawals Specifications.
Withdrawal Charges
When you make a withdrawal, it may be subject to a change. To determine
this charge, we first remove from the amount of the withdrawal any amounts
that are nor subject to a withdrawal charge.
Charge-Free Withdrawal of Earnings
Earnings (see Contract Fund) are not subject to a withdrawal charge.
Therefore, before we compute any withdrawal charge we deduct any earnings
not previously withdrawn from the amount of the withdrawal.
Other Charge-Free Withdrawals
After we deduct earnings but before we compute any withdrawal charge, we
then deduct any charge-free withdrawal amount not previously withdrawn from
any remaining withdrawal amount. In any contract year, the charge-free
withdrawal amount equals the charge-free withdrawal rate shown under
Withdrawal Specifications times your contract fund valued as of the date of
the first withdrawal in that contract year. This amount is also not subject
to a withdrawal charge. Charge-free withdrawal amounts do not accumulate
from contract year to contract year.
Application of Withdrawal Charge
After making these deductions, any remaining withdrawal amount is subject
to a withdrawal charge. For the purpose of determining the charge, we
consider any remaining withdrawal to consist of purchase payment(s) not
previously withdrawn. The charge rate depends on the duration from the
start of the contract year of purchase payment to the start of the contract
year of withdrawal. Therefore, we may use different charge rates on
different portions of the withdrawal if the withdrawal is of two or more
purchase payments made in more than one contract year. We consider the
first purchase payment not previously withdrawn to be withdrawn first, the
second next, and so on. The withdrawal charge rate for each duration is
shown in a chart under Withdrawals Specifications.
Recapture of Additional Amount
We may recapture additional amounts (see Purchase Payment) if you make a
withdrawal that consists partially or fully of one or more purchase
payments. If the duration from the start of the contract year when you made
the purchase payment being withdrawn to the start of the contract year when
you withdraw it is less than the additional amount recapture period shown
under Withdrawals Specifications, we will recapture the exact amount of any
additional amounts credited as a result of the purchase payment(s) you
withdraw.
Page 7
C-36
<PAGE>
Withdrawals Specifications
o Your withdrawal charge rates are as follows:
If the duration from the start of the contract year when you made the
purchase payment being withdrawn to the start of the contract year when you
withdrew it is
The rate is...
Zero (Withdrawal made in the same contract
year as the payment) .............................. 7%
One Year ................................................ 7%
Two Years ............................................... 7%
Three Years ............................................. 6%
Four Years .............................................. 5%
Five Years .............................................. 4%
Six Years or more ....................................... 0%
o Your minimum withdrawal amount is $500
o Your minimum contract fund after withdrawal is $500.
o Your charge-free withdrawal rate is 10%.
o Your additional amount recapture period is 6 years.
- -----===========================================================================
SEPARATE ACCOUNTS
Separate Account
The words "separate account" when we use them in this contract without
qualification, mean any separate account we establish to support variable
annuity contracts like this one. We list the separate accounts available to
you in the contract data pages. A separate account may or may not be
registered with the SEC under the Investment Company Act of 1940. The
contract data pages will tell you whether or not a particular separate
account is so registered.
Variable Investment Options
A separate account may offer one or more variable investment options. We
list them in the contract data pages. We may establish additional variable
investment options. We will notify you within one year if we do so. Income
and realized and unrealized gains and losses from assets in each variable
investment option are credited to, or charged against, that variable
investment option.
Separate Account Investments
We may invest the assets of different separate accounts in different ways.
But we will do so only with the consent of the SEC and, where required, of
the insurance regulator where this contract is delivered. We will always
keep assets in the separate accounts with a total value at least equal to
the amount of the variable investment options under contracts like this
one. To the extent those assets do not exceed that amount, we use them only
to support those contracts; we do not use those assets to support any other
business we conduct. We may use any excess over that amount in any way we
choose. We will determine the value of the assets in each separate account
and any variable investment option at regular intervals.
- -----===========================================================================
FIXED RATE OPTIONS
You may allocate all or part of your invested purchase payment to a fixed
rate option listed in the contract data pages. Fixed rate options are
credited with interest as described under Contract Fund.
Page 8
C-37
<PAGE>
- -----===========================================================================
TRANSFERS
You may make four transfers in a policy year. There is no charge for these
transfers. You may transfer amounts into or out of variable investment
options of separate accounts registered under the Investment Company Act of
1940 and into the fixed rate options at any time. Other transfers are
allowed only with our consent. Any transfer will take effect on the date we
receive your request at our Home Office.
- -----===========================================================================
DEATH OF ANNUITANT
Before the Annuity Date
If a sole or last surviving annuitant dies before the Annuity Date, we will
pay the beneficiary the greater of (a) the contract fund and (b) minimum
proceeds, both determined as of the date we receive due proof of death. If
no withdrawals have been made, minimum proceeds is the sum of all invested
purchase payments. Any withdrawal reduces minimum proceeds in the same
proportion as it reduces your contract fund.
After the Annuity Date
If the Annuitant dies on or after the Annuity Date, the settlement then in
effect will govern whether and to whom we will make any payment(s).
If Two Annuitants Die
If two annuitants named in the contract die and there is not sufficient
evidence that they died otherwise than simultaneously, the proceeds of the
contract will be distributed as if the First Annuitant had survived the
Co-Annuitant.
- -----===========================================================================
BENEFICIARY
You may designate or change a beneficiary. Your request must be in writing
and in a form which meets our needs. It will take effect only when we file
it at our Home Office; this will be after you send the contract to us to be
endorsed, if we ask you to do so. Then any previous beneficiary's interest
will end as of the date of the request. It will end then even if no
annuitant is living when we file the request. Unless otherwise stated, we
will make payment to the beneficiary only if the last surviving or sole
annuitant dies before the Annuity Date. Any beneficiary's interest is
subject to the rights of any assignee we know of.
When a beneficiary is designated, any relationship shown is to the
Annuitant (First Annuitant if two annuitants are named on page 3) unless
otherwise stated.
To show priority, we may use numbered classes, so that the class with first
priority is called class 1, the class with next priority is called class 2,
and so on. When we use numbered classes, these statements apply to
beneficiaries unless the form states otherwise: (In these provisions and in
the Example, the term "annuitant" refers to where two annuitants are named,
to the last surviving annuitant.)
1. One who survives the annuitant will have the right to be paid only if
no one in a prior class survives the annuitant.
2. One who has the right to be paid will be the only one paid if no one
else in the same class survives the annuitant.
Page 9
C-38
<PAGE>
3. Two or more in the same class who have the right to be paid will be
paid in equal shares.
4. If none survives the annuitant, we will pay in one sum to the
annuitant's estate.
Example. Suppose the class 1 beneficiary is Jane and the class 2
beneficiaries are Paul and John. If the annuitant dies before the Annuity
Date, we owe Jane the proceeds if she is living at the annuitant's death.
We owe Paul and John the proceeds if they are living then but Jane is not.
But if only one of them is living, we owe him the proceeds. If none of them
is living, we owe the annuitant's estate.
Before we make a payment, we have the right to decide what proof we need of
the identity, age or any other facts about any persons designated as
beneficiaries. If beneficiaries are not designated by name and we make
payment(s) based on that proof, we will not have to make the payment(s)
again.
- -----===========================================================================
PAYOUT PROVISIONS
Choosing an Option
You may have the amount of your contract fund on the Annuity Date used to
provide an income to the Annuitant(s) under one of the options we describe
below. But, for any annuity settlement, we will first deduct from your
contract fund any charge for state and local premium taxes, any recapture
of additional amounts, and any withdrawal charges. We offer the same
annuity options to the Payee that we offer to an annuitant. And we
determine monthly payments for the Payee in the same way we do for an
annuitant.
Conditions
Your right to choose an option is subject to all these conditions: (1) You
must ask for the option in writing and in a form which meets our needs. (2)
You must send the contract to us to be endorsed. (3) If we require it, you
must give us proof of the date of birth of the person on whose life an
annuity payment is based. (4) We must have your request, the contract and
any required proof(s) of the date(s) of birth before the Annuity Date.
Your choice of an option will take effect on the Annuity Date but only if:
(1) the person on whose life the annuity is to be based is living on that
date; (2) the first payment under the option will be at least $50; and (3)
you do not void the choice by making a later choice before the Annuity
Date.
If two annuitants are named in the Contract and both are living, settlement
will be made on the life of the First Annuitant, as named on page 3.
Options Described
When we use the word annuitant in the following paragraphs we mean the
annuitant for whom the annuity described was chosen and who is to receive
settlement under the annuity.
For an annuitant, the first payment under these options is due on the
Annuity Date.
For a Payee, unless a later date is requested, the first payment will be
due on the first day of the earliest calendar month on or after the day the
Home Office has received the request for the settlement and due proof of
the annuitant's death and such claim forms and other evidence as may be
satisfactory to us.
Page 10
C-39
<PAGE>
Here are the options we offer. We may also consent to other arrangements.
Life Income Option
You may choose monthly payments for as long as the annuitant lives, with
120 monthly payments certain.
Interest Payment Option
We will hold an amount at interest. We will pay interest at an effective
rate of at least 3% a year ($30.00 annually, $14.89 semi-annually, $7.42
quarterly or $2 47 monthly per $1000) We may pay more interest.
Other Options
We may offer other options. Contact one of our representatives or get in
touch with one of our offices for information.
When No Option Chosen
If no choice takes effect on the Annuity Date, settlement under the
Interest Payment Option will become effective.
Residue Described
For the Life Income Option, residue on any date means the then present
value of any unpaid payments certain. It does not include the value of any
payment that may become due after the certain period. For the Life Income
Option, we will compute the residue at an effective interest rate of 3 1/2%
a year. But we will use the interest rate we used to compute the actual
Life Income Option payments if they were not based on the table in this
contract.
For the Interest Payment Option, residue on any date means any unpaid
balance with interest to that date.
Withdrawal of Residue
Unless otherwise stated when the option is chosen: (1) under the Life
Income Option the residue may be withdrawn; and (2) under the Interest
Payment Option all, or any part not less than $100, of the residue may be
withdrawn. If the Interest Payment Option residue is reduced to less than
$1,000, we have the right to pay it in one sum. Under the Life Income
Option, withdrawal of the residue will not affect any payments that may
become due after the certain period; the value of those payments cannot be
withdrawn. Instead, the payments will start again if they were based on the
life of a person who lives past the certain period.
Recapture of Additional Amounts
Before we make payments under any option, we will recapture additional
amounts as if you made a full withdrawal (see Withdrawals).
Withdrawal Charges
Before we make payments under the Interest Payment Option, we will reduce
the contract fund by a withdrawal charge in the same way as we would if you
had made a full withdrawal (see Withdrawals).
Page 11
C-40
<PAGE>
- -----===========================================================================
ANNUITY SETTLEMENT TABLE
Amounts Payable
If the Annuity Date is a contract anniversary, for the Life Income Option
we will use the table below to compute the amount of the annuity payment.
The amounts we show are based on the Annuitant's sex and age last birthday
on the Annuity Date.
If the Annuity Date is not a contract anniversary, we will adjust the
amounts accordingly.
When we computed the amounts we show in the tables, we adjusted the 1983
Table a to an age last birthday basis, less three years; we used an
interest rate of 3 1/2% a year. If the age is over 80, the rate for age 80
will be used. Settlements under the Life Income Option will share in our
surplus to the extent and in the way we decide.
Amount of Annuity Payment under the Life Income Option for
each $1,000 applied on the Annuity Date
- --------------------------------------------------------------------------------
AGE MALE FEMALE AGE MALE FEMALE
================================================================================
41 $3.88 $3.67 61 $5.25 $4.79
42 3.92 3.70 62 5.36 4.89
43 3.97 3.74 63 5.48 4.98
44 4.01 3.78 64 5.60 5.09
45 4.06 3.82 65 5.73 5.20
46 4.12 3.86 66 5.87 5.31
47 4.17 3.90 67 6.01 5.43
48 4.23 3.94 68 6.15 5.56
49 4.28 3.99 69 6.30 5.70
50 4.35 4.04 70 6.46 5.84
51 4.41 4.09 71 6.62 5.99
52 4.48 4.15 72 6.79 6.15
53 4.55 4.21 73 6.96 6.31
54 4.62 4.27 74 7.13 6.49
55 4.70 4.33 75 7.30 6.67
56 4.78 4.40 76 7.48 6.85
57 4.86 4.47 77 7.66 7.04
58 4.95 4.54 78 7.83 7.24
59 5.05 4.62 79 8.00 7.44
60 5.15 4.71 80 8.17 7.64
- --------------------------------------------------------------------------------
Page 12
C-41
<PAGE>
- -----===========================================================================
DEFINITIONS
We define here some of the words and phrases used in this contract. We
explain others, not defined here, in other parts of the text.
We, Our and Us--Prudential.
You and Your.--The owner of the contract.
Annuitant(s).--The person or persons named on the first page. If two
persons are named, one of the two is named on Page 3 as First Annuitant,
the other as Co-Annuitant. In that case, the Beneficiary provisions of the
contract will be based on the death of the last survivor of the persons so
named. The owner need not be an annuitant.
Payee.--A beneficiary who has a right to receive a settlement under this
contract.
SEC--The Securities and Exchange Commission.
Contract Date--The date we receive the purchase payment at our Home Office.
We show the Contract Date on page 3.
Issue Date.--The Contract Date.
Annuity Date--The date the first annuity payment is due. We show the
Annuity Date on page 3.
Anniversary or Contract Anniversary--The same day and month as the Contract
Date in each later year.
Example: If the contract date is June 10, 1989, the first anniversary is
June 10, 1990. The second is June 10, 1991, and so on.
Contract Year.--A year which starts on the Contract Date or on an
Anniversary.
Example: If the contract date is June 10, 1989, the first Contract Year
starts then and ends on June 9, 1990. The second starts on June 10, 1990
and ends on June 9, 1991.
Attained Age--An annuitant's attained age at any time is his or her issue
age plus the length of time since the contract date. You will find the
issue age(s) on page 3.
- -----===========================================================================
GENERAL PROVISIONS
Annual Report
Once each contract year after the first and before the Annuity Date we will
send you a report. It will show (1) the amount of the contract fund in each
investment option; (2) purchase payments during the year; (3) investment
results; and (4) charges and withdrawals during the year. The report will
include any other data that may be currently required where this contract
is delivered. You may ask for a report like this at any time. But, except
for the report we send you once a year, we have the right to charge a fee
for each report.
Page 13
C-42
<PAGE>
The Contract
This document forms the whole contract. The consideration for the contract
is the purchase payment we show on page 3.
Contract Modifications
Only a Prudential officer may agree to modify this contract, and then only
in writing.
Change of Annuity Date
You may be able to change your annuity date. But any change may be made
only if we consent. Date and will be subject to conditions that are then
determined.
Removal of an Annuitant
If a First Annuitant and a Co-Annuitant are named, we will remove one from
the contract upon: (1) receipt of your written request to remove that
annuitant; or (2) receipt of due proof that the Annuitant has died.
Ownership and Control
Unless we endorse this contract to say otherwise: (1) the owner of the
contract is the Annuitant (the First Annuitant, if two are named); (2)
while any annuitant is living the owner alone is entitled to (a) any
contract benefit and value, and (b) the exercise of any right and privilege
granted by the contract or by us; and (3) if two annuitants are named and
the First Annuitant dies while the Co-Annuitant is living, the Co-Annuitant
will become the Owner
Currency
Any money we pay, or which is paid to us, must be in United States
currency. Any amount we owe will be payable at our Home Office.
Misstatement of Age or Sex
If any annuitant's stated date of birth or sex or both are not correct, we
will change each benefit and the amount of each annuity payment to that
which the purchase payment would have bought for the correct date of birth
and sex. Also, we will adjust the amount of any payments we have already
made. Here is how we will do it: (1) We will deduct any overpayments, with
interest at 5% a year, from any payment(s) due then or later. (2) We will
add any underpayments, with interest at 5% a year, to the next payment we
make after we receive proof of the correct date of birth and sex.
Incontestability
We will not contest this contract unless the purchase payment is not paid.
Page 14
C-43
<PAGE>
Proof of Life or Death
Before we make a payment, we have the right to require proof of the life or
death of any person whose life or death determines whether or to whom we
must make the payment.
Assignment
We will not be deemed to know of an assignment unless we receive at, or a
copy of it, at our Home Office. We are not obliged to see that an
assignment is valid or sufficient. If any annuitant is living on the
Annuity Date and an assignment is in effect on that date, we have the right
to pay the full withdrawal in one sum. This contract may not be assigned to
another insurance company without our consent.
Changes by Prudential
We reserve the right, upon 90 days notice to you to;
1. change the minimum amount requirements specified for payments,
allocations withdrawals and transfers in the Purchase Payments,
Withdrawals, and Transfers Sections;
2. restrict or refuse to accept any purchase payments;
3. change any or all terms and provisions of the Annuity Settlement
Table, but only with respect to any portion of an annuity settlement
deriving from purchase payments made on or after the effective date of
the change and earnings on those purchase payments; and
4. make any changes required by law.
Requested Transactions
On any requested transaction, we have the right to require that your
request be in writing. We may also ask for your contract to endorse it.
Participation (Dividends)
This contract is eligible to participate in the divisible surplus of
Prudential. We do not expect that any dividends will be payable on or
before the Annuity Date. While any annuity settlement is in effect, the
contract will share in our surplus to the extent and in the way we decide.
Page 15
C-44
<PAGE>
Variable Annuity Contract with Flexible Purchase Payments. --Monthly
annuity payments starting on Annuity Date. Payment as stated upon death
before Annuity Date. Purchase Payments payable during lifetime(s) of
annuitant(s) until Annuity Date. Contract values reflect investment
results.
Page 16
C-45
EXHIBIT 9
April 24, 1998
The Prudential Insurance Company
of America
751 Broad Street
Newark, New Jersey 07102-3777
Gentlemen:
In my capacity as Chief Counsel, Variable Products, Law Department of The
Prudential Insurance Company of America, I have reviewed the establishment of
The Prudential Individual Variable Contract Account (the "Account") on October
12, 1982 by the Board of Directors of The Prudential Insurance Company of
America ("The Prudential") as a separate account for assets applicable to
certain variable annuity contracts, pursuant to the provisions of Section
17B:28-7 of the Revised Statutes of New Jersey. I was responsible for oversight
of the preparation and review of the Registration Statement on Form N-4, as
amended, filed by The Prudential with the Securities and Exchange Commission
(Registration No. 33-25434) under the Securities Act of 1933 and the Investment
Company Act of 1940 for the registration of certain variable annuity contracts
issued with respect to the Account.
I am of the following opinion:
1. The Prudential was duly organized under the laws of the New Jersey and
is a validly existing corporation.
2. The Account has been duly created and is validly existing as a
separate account pursuant to the aforesaid provisions of New Jersey
law.
3. The portion of the assets held in the Account equal to the reserve and
other liabilities for variable benefits under the variable annuity
contracts is not chargeable with liabilities arising out of any other
business. The Prudential may conduct.
4. The variable annuity contracts are legal and binding obligations of
The Prudential, in accordance with their terms.
In arriving at the foregoing opinion, I have made such examination of law
and examined such records and other documents as i judged to be necessary or
appropriate.
I hereby consent to the filing of this opinion as an exhibit to the
Registration Statement.
Very truly yours,
/s/ CLIFFORD E. KIRSCH
-------------------------------
Chief Counsel Variable Products
C-46
EXHIBIT 10(a)
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Statement of Additional Information
constituting part of this Post-Effective Amendment No 13 to the registration
statement on Form N-4 (the "Registration Statement") of our report dated
March 20, 1998, relating to the financial statements of the Prudential
Individual Variable Contract Account, which appears in such Statement of
Additional Information.
We also consent to the use in the Statement of Additional Information
constituting part of this Registration Statement of our report dated March 5,
1998, relating to the consolidated financial statements of Prudential Insurance
Company of America, which appears in such Statement of Additional information.
We also consent to the reference to us under the heading "Experts" in the
Statement of Additional Information.
PRICE WATERHOUSE LLP
New York, New York
April 24, 1998
C-47
EXHIBIT 10(b)
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Post-Effective Amendment No. 13 to Registration
Statement No. 33-25434 on Form N-4 of The Prudential Individual Variable
Contract Account of The Prudential Insurance Company of America of our report
dated June 4, 1997, relating to the consolidated financial statements of The
Prudential Insurance Company of America and subsidiaries in the Statement of
Additional Information, which is a part of such Registration Statement, and to
the reference to us under the heading "Experts", also appearing in the Statement
of Additional Information.
/s/ DELOITTE & TOUCHE
Parsippany, New Jersey
April 24, 1998
C-48
DATE: 17-Apr-98
UNIT VALUES FOR THE LAST BUSINESS DAY OF EVERY QUARTER SINCE INCEPTION
FOR THE PRU DISCO PLUS PRODUCT
<TABLE>
<CAPTION>
PRU DISCO PLUS MMKT DIBOND EQUITY FLXMGD CONS EQINC RPA HIYLD
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INCEPTION DATE 27-Feb-89 27-Feb-89 27-Feb-89 27-Feb-89 27-Feb-89 27-Feb-89 27-Feb-89 27-Feb-89
WHOLE YEARS SINCE
INCEPTION 8.00000 8.00000 8.00000 8.00000 8.00000 8.00000 8.00000 8.00000
INITIAL UNIT VALUE 1.43998 1.59913 1.88358 1.65637 1.66611 1.13935 1.00329 1.07811
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1989 31-Mar-89 1.44979 1.60677 1.91512 1.67575 1.68042 1.15617 1.00801 1.06878
30-Jun-89 1.47974 1.72914 2.07947 1.80804 1.76639 1.25045 1.03733 1.09308
30-Sep-89 1.50774 1.73731 2.27225 1.89836 1.83900 1.32945 1.04684 1.06706
31-Dec-89 1.53581 1.79017 2.32328 1.94994 1.89226 1.33181 1.06798 1.01855
1990 31-Mar-90 1.56157 1.76305 2.26411 1.89201 1.87649 1.27764 1.07731 0.97265
30-Jun-90 1.58799 1.81856 2.31918 1.97655 1.94414 1.31537 1.09102 1.02401
30-Sep-90 1.61429 1.83157 1.95179 1.82538 1.88034 1.17152 1.10563 0.92218
31-Dec-90 1.64133 1.91594 2.17588 1.96344 1.96812 1.26685 1.11478 0.88724
1991 31-Mar-91 1.66497 1.96084 2.58450 2.12974 2.09088 1.40599 1.10959 1.02526
30-Jun-91 1.68544 1.99025 2.60830 2.12168 2.11635 1.43223 1.11762 1.10641
30-Sep-91 1.70425 2.09827 2.60343 2.25339 2.19644 1.50276 1.11776 1.16647
31-Dec-91 1.72182 2.20438 2.70927 2.43353 2.31570 1.59617 1.10861 1.22019
1992 31-Mar-92 1.73586 2.16912 2.85556 2.34998 2.29284 1.57543 1.09354 1.30324
30-Jun-92 1.74730 2.25069 2.87122 2.36693 2.32268 1.60774 1.05510 1.34331
30-Sep-92 1.75701 2.33922 2.89727 2.47154 2.37266 1.67452 1.06000 1.39449
31-Dec-92 1.76575 2.33452 3.05622 2.58742 2.44709 1.73693 1.07040 1.41713
</TABLE>
<TABLE>
<CAPTION>
PRU DISCO PLUS NATR STIX GLOBAL GVTINC PRUJEN SMCAP TOTAL
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
INCEPTION DATE 27-Feb-89 27-Feb-89 01-May-89 01-May-89 01-May-95 01-May-95
WHOLE YEARS SINCE
INCEPTION 8.00000 8.00000 8.00000 8.00000 2.00000 2.00000
INITIAL UNIT VALUE 1.13685 1.01838 1.01099 1.00062 1.00870 1.00160 17.64306
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1989 31-Mar-89 1.14595 1.04491 0.99112 N/A N/A N/A 14.74279
30-Jun-89 1.20265 1.13189 0.98864 1.07011 N/A N/A 16.63693
30-Sep-89 1.30914 1.24716 1.08647 1.07178 N/A N/A 17.41256
31-Dec-89 1.39112 1.26833 1.11445 1.10787 N/A N/A 17.79157
1990 31-Mar-90 1.36906 1.22524 1.02194 1.07736 N/A N/A 17.37843
30-Jun-90 1.34845 1.29438 1.06702 1.11388 N/A N/A 17.90055
30-Sep-90 1.32540 1.11345 0.92869 1.09998 N/A N/A 16.77022
31-Dec-90 1.29539 1.20765 0.95902 1.16389 N/A N/A 17.55953
1991 31-Mar-91 1.35148 1.37708 1.00150 1.17717 N/A N/A 18.87900
30-Jun-91 1.38324 1.36795 0.99418 1.18160 N/A N/A 19.10525
30-Sep-91 1.43378 1.43459 1.04325 1.25997 N/A N/A 19.81436
31-Dec-91 1.41184 1.54800 1.05559 1.33535 N/A N/A 20.66045
1992 31-Mar-92 1.42913 1.50315 1.00468 1.28604 N/A N/A 20.59857
30-Jun-92 1.50681 1.52522 1.05137 1.33707 N/A N/A 20.98544
30-Sep-92 1.54098 1.56677 0.99736 1.40185 N/A N/A 21.47367
31-Dec-92 1.49691 1.63861 1.00733 1.39657 N/A N/A 21.95488
</TABLE>
Page 1
C-49
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1993 31-Mar-93 1.77362 2.42875 3.32862 2.72488 2.56017 1.92882 1.07877 1.49992
30-Jun-93 1.78090 2.48888 3.42357 2.80169 2.62331 1.99606 1.09458 1.56897
30-Sep-93 1.78846 2.56012 3.54449 2.94155 2.70625 2.06034 1.11619 1.58829
31-Dec-93 1.79633 2.54072 3.68057 2.95516 2.71321 2.09889 1.12217 1.67012
1994 31-Mar-94 1.80430 2.46157 3.57550 2.80289 2.63248 2.05769 1.12660 1.66214
30-Jun-94 1.81484 2.42965 3.58857 2.77774 2.63448 2.06517 1.14052 1.64217
30-Sep-94 1.82928 2.43504 3.78210 2.86672 2.68727 2.18204 1.15929 1.63973
30-Dec-94 1.84692 2.42952 3.73800 2.82770 2.65511 2.10375 1.20195 1.60540
1995 31-Mar-95 1.86773 2.52991 4.05731 2.95141 2.76933 2.22908 1.20958 1.68499
30-Jun-95 1.88943 2.70702 4.33227 3.15285 2.89912 2.38653 1.23749 1.74803
30-Sep-95 1.91033 2.76447 4.70277 3.34246 2.99686 2.51048 1.27929 1.79379
31-Dec-95 1.93131 2.89855 4.84971 3.46853 3.07694 2.53006 1.29232 1.86497
1996 31-Mar-96 1.95034 2.83333 5.09322 3.54782 3.17730 2.67539 1.31111 1.92154
30-Jun-96 1.96919 2.83716 5.17367 3.62417 3.21302 2.69254 1.32409 1.94263
30-Sep-96 1.98847 2.89272 5.23847 3.72708 3.25693 2.75868 1.33385 2.02568
31-Dec-96 2.00831 2.98995 5.67957 3.89468 3.42427 3.04353 1.34933 2.05267
1997 31-Mar-97 2.02785 2.97297 5.74831 3.85675 3.41989 3.05903 1.37463 2.05429
30-Jun-97 2.04847 3.09448 6.39521 4.26399 3.66957 3.55431 1.40169 2.16052
30-Sep-97 2.06983 3.19572 7.10653 4.61139 3.86452 4.10719 1.45336 2.28379
31-Dec-97 2.09203 3.20766 6.99611 4.53976 3.83869 4.10841 1.48380 2.30802
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1993 31-Mar-93 1.65960 1.70368 1.09493 1.46481 N/A N/A 23.24657
30-Jun-93 1.81109 1.70478 1.13849 1.51447 N/A N/A 23.94679
30-Sep-93 1.81080 1.74178 1.27875 1.57474 N/A N/A 24.71176
31-Dec-93 1.85126 1.77569 1.42483 1.55337 N/A N/A 25.18232
1994 31-Mar-94 1.79392 1.70182 1.36480 1.48787 N/A N/A 24.47158
30-Jun-94 1.79521 1.70292 1.36149 1.45766 N/A N/A 24.41042
30-Sep-94 1.98188 1.77910 1.41950 1.45439 N/A N/A 25.21634
30-Dec-94 1.75071 1.77231 1.33909 1.45559 N/A N/A 24.72605
1995 31-Mar-95 1.91776 1.93725 1.32967 1.52275 N/A N/A 26.00677
30-Jun-95 2.01860 2.11369 1.45705 1.62031 1.12504 1.06572 29.75315
30-Sep-95 2.10210 2.27331 1.56772 1.64504 1.22835 1.18958 31.30655
31-Dec-95 2.19574 2.40054 1.53340 1.71849 1.24506 1.18974 32.19536
1996 31-Mar-96 2.52219 2.52124 1.62629 1.66881 1.28628 1.24683 33.38169
30-Jun-96 2.60714 2.62380 1.68061 1.66687 1.33056 1.30382 33.98927
30-Sep-96 2.64028 2.69421 1.71720 1.69021 1.35656 1.34006 34.66040
31-Dec-96 2.83947 2.90729 1.81356 1.73574 1.40755 1.40807 36.55399
1997 31-Mar-97 2.74960 2.97296 1.79889 1.71698 1.37160 1.32916 36.45291
30-Jun-97 2.78093 3.47745 2.02810 1.77095 1.63692 1.56100 39.84359
30-Sep-97 3.17386 3.72370 2.10160 1.82623 1.88408 1.80011 43.20191
31-Dec-97 2.48061 3.81606 1.91715 1.88100 1.83193 1.74162 42.24285
</TABLE>
Page 2
C-50
<PAGE>
UNIT VALUES FOR THE LAST DAY OF EVERY QUARTER SINCE INCEPTION FOR THE PRU DISCO
PLUS PRODUCT
DATE: 17-Apr-98
<TABLE>
<CAPTION>
PRU DISCO PLUS MMKT DIBOND EQUITY FLXMGD CONS EQINC RPA
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
INCEPTION DATE 27-Feb-89 27-Feb-89 27-Feb-89 27-Feb-89 27-Feb-89 27-Feb-89 27-Feb-89
WHOLE YEARS SINCE INCPT 8 8 8 8 8 8 8
INCPT UNIT VALUE 1.43998 1.59913 1.88358 1.65637 1.66611 1.13935 1.00329
31-Dec-96 2.00831 2.98995 5.67957 3.89468 3.42427 3.04353 1.34933
31-Dec-89 1.53581 1.79017 2.32328 1.94994 1.89226 1.33181 1.06798
31-Dec-90 1.64133 1.91594 2.17588 1.96344 1.96812 1.26685 1.11478
31-Dec-91 1.72182 2.20438 2.70927 2.43353 2.31570 1.59617 1.10861
31-Dec-92 1.76575 2.33452 3.05622 2.58742 2.44709 1.73693 1.07040
31-Dec-93 1.79633 2.54072 3.68057 2.95516 2.71321 2.09889 1.12217
31-Dec-94 1.84692 2.42952 3.73800 2.82770 2.65511 2.10375 1.20195
31-Dec-95 1.93131 2.89855 4.84971 3.46853 3.07694 2.53006 1.29232
31-Dec-96 2.00831 2.98995 5.67957 3.89468 3.42427 3.04353 1.34933
31-Dec-97 2.09203 3.20766 6.99611 4.53976 3.83869 4.10841 1.48380
</TABLE>
<TABLE>
<CAPTION>
PRU DISCO PLUS HIYLD NATR STIX GLOBAL GVTINC PRUJEN SMCAP TOTAL
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INCEPTION DATE 27-Feb-89 27-Feb-89 27-Feb-89 01-May-89 01-May-89 01-May-95 01-May-95
WHOLE YEARS SINCE
INCPT 8 8 8 8 8 2 2
INCPT UNIT VALUE 1.07811 1.13685 1.01838 1.01099 1.00062 1.00870 1.00160 17.64306
31-Dec-96 2.05267 2.83947 2.90729 1.81356 1.73574 1.40755 1.40807 36.55399
31-Dec-89 1.01855 1.39112 1.26833 1.11445 1.10787 N/A N/A 17.79157
31-Dec-90 0.88724 1.29539 1.20765 0.95902 1.16389 N/A N/A 17.55953
31-Dec-91 1.22019 1.41184 1.54800 1.05559 1.33535 N/A N/A 20.66045
31-Dec-92 1.41713 1.49691 1.63861 1.00733 1.39657 N/A N/A 21.95488
31-Dec-93 1.67012 1.85126 1.77569 1.42483 1.55337 N/A N/A 25.18232
31-Dec-94 1.60540 1.75071 1.77231 1.33909 1.45559 N/A N/A 24.72605
31-Dec-95 1.86497 2.19574 2.40054 1.53340 1.71849 1.24506 1.18974 32.19536
31-Dec-96 2.05267 2.83947 2.90729 1.81356 1.73574 1.40755 1.40807 36.55399
31-Dec-97 2.30802 2.48061 3.81606 1.91715 1.88100 1.83193 1.74162 42.24285
</TABLE>
C-51
<PAGE>
<TABLE>
<CAPTION>
PRU DISCO PLUS POLICY SIZE: $1,000
MMKT DIBOND EQUITY FLXMGD CONS EQINC
<S> <C> <C> <C> <C> <C> <C>
1 YEAR % OF RETURN 4.17% 7.28% 23.18% 16.56% 12.10% 34.99%
ERV(ENDING REDEEMABLE VALUE) 1041.69 1072.81 1231.80 1165.63 1121.02 1349.88
AMT SUBJ TO LOAD IF + RETURN 895.83 892.72 876.82 883.44 887.90 865.01
AMT SUBJ TO LOAD IF - RETURN 937.52 965.53 1108.62 1049.07 1008.92 1214.89
AMT SUBJ TO LOAD 895.83 892.72 876.82 883.44 887.90 865.01
1ST YEAR SALE LOAD 7.00% 7.00% 7.00% 7.00% 7.00% 7.00%
AMT OF LOAD 62.71 62.49 61.38 61.84 62.15 60.55
ERV LESS LOAD 978.98 1010.32 1170.43 1103.79 1058.87 1289.33
RETURN W/SALES LOAD -2.10% 1.03% 17.04% 10.38% 5.89% 28.93%
5 YEAR % OF RETURN 18.48% 37.40% 128.91% 75.46% 56.87% 136.53%
ERV(ENDING REDEEMABLE VALUE) 1184.78 1374.01 2289.14 1754.55 1568.68 2365.33
ANNUALIZED RETURN W/O SALE LOAD 3.45% 6.56% 18.01% 11.90% 9.42% 18.79%
AMT SUBJ TO LOAD IF + RETURN 881.52 862.60 771.09 824.54 843.13 763.47
AMT SUBJ TO LOAD IF - RETURN 1066.30 1236.61 2060.22 1579.10 1411.81 2128.80
AMT SUBJ TO LOAD 881.52 862.60 771.09 824.54 843.13 763.47
5TH (OR INCEPTION) SALE LOAD 4.00% 4.00% 4.00% 4.00% 4.00% 4.00%
AMT OF LOAD 35.26 34.50 30.84 32.98 33.73 30.54
ERV LESS LOAD 1149.52 1339.51 2258.29 1721.57 1534.95 2334.79
YRS IN EXISTENCE 5 5 5 5 5 5
ANNUALIZED RETURN W/SALE LOAD 2.83% 6.02% 17.69% 11.48% 8.95% 18.48%
SINCE INCPT % OF RETURN 45.28% 100.59% 271.43% 174.08% 130.40% 260.59%
ERV(ENDING REDEEMABLE VALUE) 1,452.82 2,005.88 3,714.26 2,740.79 2,303.98 3,605.92
ANNUALIZED RETURN W/O SALE LOAD 4.32% 8.19% 16.00% 12.08% 9.90% 15.61%
AMT SUBJ TO LOAD IF + RETURN 854.72 799.41 628.57 725.92 769.60 639.41
AMT SUBJ TO LOAD IF - RETURN 1307.54 1805.29 3342.84 2466.71 2,073.59 3,245.33
AMT SUBJ TO LOAD 854.72 799.41 628.57 725.92 769.60 639.41
SINCE INCEPTION SALES LOAD * 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
AMT OF LOAD 0.00 0.00 0.00 0.00 0.00 0.00
ERV LESS LOAD 1452.82 2005.88 3714.26 2740.79 2303.98 3605.92
YRS IN EXISTENCE 8.84052 8.84052 8.84052 8.84052 8.84052 8.84052
ANNUALIZED RETURN W/SALE LOAD 4.32% 8.19% 16.00% 12.08% 9.90% 15.61%
</TABLE>
<TABLE>
<CAPTION>
PRU DISCO PLUS
RPA HIYLD NATR STIX GLOBAL
<S> <C> <C> <C> <C> <C>
1 YEAR % OF RETURN 9.97% 12.44% -12.64% 31.26% 5.71%
ERV(ENDING REDEEMABLE VALUE) 1099.66 1124.40 873.62 1312.58 1057.12
AMT SUBJ TO LOAD IF + RETURN 890.03 887.56 912.64 868.74 894.29
AMT SUBJ TO LOAD IF - RETURN 989.69 1011.96 786.26 1181.32 951.41
AMT SUBJ TO LOAD 890.03 887.56 786.26 868.74 894.29
1ST YEAR SALE LOAD 7.00% 7.00% 7.00% 7.00% 7.00%
AMT OF LOAD 62.30 62.13 55.04 60.81 62.60
ERV LESS LOAD 1037.35 1062.27 818.58 1251.77 994.52
RETURN W/SALES LOAD 3.74% 6.23% -18.14% 25.18% -0.55%
5 YEAR % OF RETURN 38.62% 62.87% 65.72% 132.88% 90.32%
ERV(ENDING REDEEMABLE VALUE) 1386.21 1628.66 1657.15 2328.84 1903.20
ANNUALIZED RETURN W/O SALE LOAD 6.75% 10.25% 10.63% 18.42% 13.74%
AMT SUBJ TO LOAD IF + RETURN 861.38 837.13 834.28 767.12 809.68
AMT SUBJ TO LOAD IF - RETURN 1247.59 1465.79 1491.44 2095.96 1712.88
AMT SUBJ TO LOAD 861.38 837.13 834.28 767.12 809.68
5TH (OR INCEPTION) SALE LOAD 4.00% 4.00% 4.00% 4.00% 4.00%
AMT OF LOAD 34.46 33.49 33.37 30.68 32.39
ERV LESS LOAD 1351.76 1595.17 1623.78 2298.16 1870.81
YRS IN EXISTENCE 5 5 5 5 5
ANNUALIZED RETURN W/SALE LOAD 6.21% 9.79% 10.18% 18.11% 13.35%
SINCE INCPT % OF RETURN 47.89% 114.08% 118.20% 274.72% 89.63%
ERV(ENDING REDEEMABLE VALUE) 1,478.93 2,140.80 2,182.00 3,747.19 1,896.31
ANNUALIZED RETURN W/O SALE LOAD 4.53% 8.99% 9.23% 16.12% 7.66%
AMT SUBJ TO LOAD IF + RETURN 852.11 785.92 781.80 625.28 810.37
AMT SUBJ TO LOAD IF - RETURN 1331.04 1926.72 1963.80 3372.47 1706.68
AMT SUBJ TO LOAD 852.11 785.92 781.80 625.28 810.37
SINCE INCEPTION SALES LOAD * 0.00% 0.00% 0.00% 0.00% 0.00%
AMT OF LOAD 0.00 0.00 0.00 0.00 0.00
ERV LESS LOAD 1478.93 2140.80 2182.00 3747.19 1896.31
YRS IN EXISTENCE 8.84052 8.84052 8.84052 8.84052 8.66804
ANNUALIZED RETURN W/SALE LOAD 4.53% 8.99% 9.23% 16.12% 7.66%
</TABLE>
<TABLE>
<CAPTION>
PRU DISCO PLUS DATE: 17-Apr-98
GVTINC PRUJEN SMCAP
<S> <C> <C> <C> <C> <C>
1 YEAR % OF RETURN 8.37% 30.15% 23.69% 207.23% W/OUT
ERV(ENDING REDEEMABLE VALUE) 1083.69 1301.50 1236.88
AMT SUBJ TO LOAD IF + RETURN 891.63 869.85 876.31
AMT SUBJ TO LOAD IF - RETURN 975.32 1171.35 1113.20
AMT SUBJ TO LOAD 891.63 869.85 876.31
1ST YEAR SALE LOAD 7.00% 7.00% 7.00%
AMT OF LOAD 62.41 60.89 61.34
ERV LESS LOAD 1021.27 1240.61 1175.54
RETURN W/SALES LOAD 2.13% 24.06% 17.55% 121.36% WITH
5 YEAR % OF RETURN 34.69% N/A N/A
ERV(ENDING REDEEMABLE VALUE) 1346.87 N/A N/A
ANNUALIZED RETURN W/O SALE LOAD 6.14% N/A N/A 134.06% W/OUT
AMT SUBJ TO LOAD IF + RETURN 865.31 N/A N/A
AMT SUBJ TO LOAD IF - RETURN 1212.18 N/A N/A
AMT SUBJ TO LOAD 865.31 N/A N/A
5TH (OR INCEPTION) SALE LOAD 4.00% N/A N/A
AMT OF LOAD 34.61 N/A N/A
ERV LESS LOAD 1312.26 N/A N/A
YRS IN EXISTENCE 5 0 0
ANNUALIZED RETURN W/SALE LOAD 5.59% N/A N/A 128.67% WITH
SINCE INCPT % OF RETURN 87.98% 81.61% 73.88%
ERV(ENDING REDEEMABLE VALUE) 1,879.83 1,816.13 1,738.84
ANNUALIZED RETURN W/O SALE LOAD 7.55% 25.05% 23.03% 168.26% W/OUT
AMT SUBJ TO LOAD IF + RETURN 812.02 818.39 826.12
AMT SUBJ TO LOAD IF - RETURN 1691.85 1634.52 1564.95
AMT SUBJ TO LOAD 812.02 818.39 826.12
SINCE INCEPTION SALES LOAD * 0.00% 7.00% 7.00%
AMT OF LOAD 0.00 57.29 57.83
ERV LESS LOAD 1879.83 1758.84 1681.01
YRS IN EXISTENCE 8.66804 2.66940 2.66940
ANNUALIZED RETURN W/SALE LOAD 7.55% 23.56% 21.48% 165.22% WITH
</TABLE>
* Sales Load percentage should change after each year. Check prospectus and
update as necessary.
Rate of Return (ROR) = (Current UV - Prior UV)/(Prior UV)
Annualized Rate of Return = (ERV/1000)^(1/N)-1, N = # OF YEARS
Ending Redeemable Value (ERV) = ((ROR+1)*1000)
Prepared By:
Reviewed By:
C-52
<PAGE>
17-Apr-98
UNIT VALUES FOR THE FIRST BUSINESS DAY OF EVERY YEAR FOR THE PRU DISCO PLUS
PRODUCT (Beginning 1997)
<TABLE>
<CAPTION>
PRU DISCO PLUS MMKT DIBOND EQUITY FLXMGD CONS EQINC RPA HIYLD NATR STIX
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
31-Dec-96 2.00831 2.98995 5.67957 3.89468 3.42427 3.04353 1.34933 2.05267 2.83947 2.90729
</TABLE>
<TABLE>
<CAPTION>
PRU DISCO PLUS GLOBAL GVTINC PRUJEN SMCAP TOTAL
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
31-Dec-96 1.81356 1.73574 1.40755 1.40807 36.55399
</TABLE>
Page 1
C-53
<PAGE>
<TABLE>
<CAPTION>
PRU DISCO PLUS POLICY SIZE: $1,000 DATE: 17-Apr-98
MMKT DIBOND EQUITY FLXMGD CONS EQINC RPA HIYLD
<S> <C> <C> <C> <C> <C> <C> <C> <C>
YTD% OF RETURN 4.17% 7.28% 23.18% 16.56% 12.10% 34.99% 9.97% 12.44%
ERV(ENDING REDEEMABLE VALUE) 1041.69 1072.81 1231.80 1165.63 1121.02 1349.88 1099.66 1124.40
AMT SUBJ TO LOAD IF + RETURN 895.83 892.72 876.82 883.44 887.90 865.01 890.03 887.56
AMT SUBJ TO LOAD IF - RETURN 937.52 965.53 1108.62 1049.07 1008.92 1214.89 989.69 1011.96
AMT SUBJ TO LOAD 895.83 892.72 876.82 883.44 887.90 865.01 890.03 887.56
1ST YEAR SALE LOAD 7.00% 7.00% 7.00% 7.00% 7.00% 7.00% 7.00% 7.00%
AMT OF LOAD 62.71 62.49 61.38 61.84 62.15 60.55 62.30 62.13
ERV LESS LOAD 978.98 1010.32 1170.43 1103.79 1058.87 1289.33 1037.35 1062.27
RETURN W/SALES LOAD -2.10% 1.03% 17.04% 10.38% 5.89% 28.93% 3.74% 6.23%
</TABLE>
<TABLE>
<CAPTION>
PRU DISCO PLUS
NATR STIX GLOBAL GVTINC PRUJEN SMCAP
<S> <C> <C> <C> <C> <C> <C> <C> <C>
YTD% OF RETURN -12.64% 31.26% 5.71% 8.37% 30.15% 23.69% 207.23% W/OUT
ERV(ENDING REDEEMABLE VALUE) 873.62 1312.58 1057.12 1083.69 1301.50 1236.88
AMT SUBJ TO LOAD IF + RETURN 912.64 868.74 894.29 891.63 869.85 876.31
AMT SUBJ TO LOAD IF - RETURN 786.26 1181.32 951.41 975.32 1171.35 1113.20
AMT SUBJ TO LOAD 786.26 868.74 894.29 891.63 869.85 876.31
1ST YEAR SALE LOAD 7.00% 7.00% 7.00% 7.00% 7.00% 7.00%
AMT OF LOAD 55.04 60.81 62.60 62.41 60.89 61.34
ERV LESS LOAD 818.58 1251.77 994.52 1021.27 1240.61 1175.54
RETURN W/SALES LOAD -18.14% 25.18% -0.55% 2.13% 24.06% 17.55% 121.36% WITH
</TABLE>
C-54
<PAGE>
PRU DISCOVERY PLUS (SAPDU#3)
ASSUMING NO LOAD (TABLE 1)
31-DEC-97
INCPT
YTD 1YR 5YR SINCE INCPT DATE
MMKT 4.17% 4.17% 3.45% 4.32% 2/27/89
DIBOND 7.28% 7.28% 6.56% 8.19% 2/27/89
GVTINC 8.37% 8.37% 6.14% 7.55% 5/1/89
CONS 12.10% 12.10% 9.42% 9.90% 2/27/89
FLXMGD 16.56% 16.56% 11.90% 12.08% 2/27/89
HIYLD 12.44% 12.44% 10.25% 8.99% 2/27/89
STIX 31.26% 31.26% 18.42% 16.12% 2/27/89
EQINC 34.99% 34.99% 18.79% 15.61% 2/27/89
EQUITY 23.18% 23.18% 18.01% 16.00% 2/27/89
PRUJEN 30.15% 30.15% N/A 25.05% 5/1/95
SMCAP 23.69% 23.69% N/A 23.03% 5/1/95
GLOBAL 5.71% 5.71% 13.74% 7.66% 5/1/89
NATR -12.64% -12.64% 10.63% 9.23% 2/27/89
RPA 9.97% 9.97% 6.75% 4.53% 2/27/89
- --------------------------------------------------------------------------------
TOTAL 207.23% 207.23% 134.06% 168.26%
C-55
<PAGE>
PRU DISCOVERY PLUS (SAPDU#3)
ASSUMING CHARGES (TABLE 2)
31-DEC-97
INCPT
YTD 1YR 5YR SINCE INCPT DATE
MMKT -2.10% -2.10% 2.83% 4.32% 2/27/89
DIBOND 1.03% 1.03% 6.02% 8.19% 2/27/89
GVTINC 2.13% 2.13% 5.59% 7.55% 5/1/89
CONS 5.89% 5.89% 8.95% 9.90% 2/27/89
FLXMGD 10.38% 10.38% 11.48% 12.08% 2/27/89
HIYLD 6.23% 6.23% 9.79% 8.99% 2/27/89
STIX 25.18% 25.18% 18.11% 16.12% 2/27/89
EQINC 28.93% 28.93% 18.48% 15.61% 2/27/89
EQUITY 17.04% 17.04% 17.69% 16.00% 2/27/89
PRUJEN 24.06% 24.06% N/A 23.56% 5/1/95
SMCAP 17.55% 17.55% N/A 21.48% 5/1/95
GLOBAL -0.55% -0.55% 13.35% 7.66% 5/1/89
NATR -18.14% -18.14% 10.18% 9.23% 2/27/89
RPA 3.74% 3.74% 6.21% 4.53% 2/27/89
- --------------------------------------------------------------------------------
TOTAL 121.36% 121.36% 128.67% 165.22%
C-56
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
FINANCIAL DATA SCHEDULE
Article 6 of Regulation S-X
Prudential's Discovery Plus and Variable Investment Plan
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 5,821,469
<INVESTMENTS-AT-VALUE> 6,910,804
<RECEIVABLES> 718
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 6,911,522
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 0
<TOTAL-LIABILITIES> 0
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 0
<SHARES-COMMON-STOCK> 388,312
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 6,911,522
<DIVIDEND-INCOME> 230,787
<INTEREST-INCOME> 0
<OTHER-INCOME> 523,836
<EXPENSES-NET> 81,153
<NET-INVESTMENT-INCOME> 149,634
<REALIZED-GAINS-CURRENT> 144,017
<APPREC-INCREASE-CURRENT> 291,555
<NET-CHANGE-FROM-OPS> 0
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 472,863
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 0
<AVERAGE-NET-ASSETS> 0
<PER-SHARE-NAV-BEGIN> 0
<PER-SHARE-NII> 0
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 0
<EXPENSE-RATIO> 0
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
