Prospectus
May 1, 1997
Variable Annuity [Logo]
Contracts of
Prudential's
Annuity Plan
Account-2
(for use in connection with certain
plans qualifying for special Federal
income tax treatment, including: (1)
non-allocated corporate pension and
profit-sharing plans and (2) those
allocated pension, profit-sharing and
annuity purchase plans which have
Prudential Transfer Accounts that were
established before 1978)
Prudential's Gibraltar Fund, Inc.
The net proceeds derived from the sale of these Variable Annuity Contracts are
allocated to Prudential's Annuity Plan Account-2, which is a variable contract
account of The Prudential Insurance Company of America. The assets of this
account are invested solely in shares of a mutual fund concerned primarily with
growth of capital to an extent compatible with a concern for its preservation.
Current income is a secondary consideration. The Fund's investment objectives
are pursued primarily through the purchase of common stocks.
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.
Mailing Address:
The Prudential Insurance Company of America
Prudential Plaza
Newark, New Jersey 07102-3777
Telephone: (800) 445-4571
FSPQ 101 Ed 5-97
YOU ARE ADVISED TO READ THIS PROSPECTUS AND RETAIN IT FOR FUTURE REFERENCE.
Printed in U.S.A.
<PAGE>
PROSPECTUS CONTENTS
Page
----
GLOSSARY OF TERMS USED IN THIS PROSPECTUS ................................. 1
SUMMARY ................................................................... 2
FEE TABLE ................................................................. 5
PRUDENTIAL'S GIBRALTAR FUND, INC.-- FINANCIAL HIGHLIGHTS .................. 6
GENERAL PROGRAM INFORMATION ............................................... 7
Eligibility for Purchase ................................................ 7
The Variable Annuity Contract ........................................... 7
The Role of the Transfer Account ........................................ 8
Prudential's Annuity Plan Account-2 ..................................... 8
Prudential's Gibraltar Fund, Inc. ....................................... 9
The Prudential's Administrative Role .................................... 9
DESCRIPTION OF THE CONTRACTS .............................................. 10
Sales and Related Charges ............................................... 10
Other Charges ........................................................... 11
Right to Cancel ......................................................... 11
How Accumulation Shares are Credited .................................... 11
Liquidation (Redemption) and Transfer of Accumulation Shares ............ 12
Results Under a Hypothetical Purchase Program ........................... 13
Effecting a Variable Annuity ............................................ 13
Types of Annuity Available .............................................. 14
How Variable Annuity Payments are Determined ............................ 14
The Risks Which The Prudential Assumes .................................. 15
Payment Upon the Death of the Planholder ................................ 16
Exercising Rights Under the Contracts ................................... 16
The Prudential-Sponsored Pension Plans .................................. 17
DESCRIPTION OF PRUDENTIAL'S GIBRALTAR FUND, INC. .......................... 17
Investment Policies ..................................................... 17
Restrictions on Investment .............................................. 18
New Jersey Investment Laws .............................................. 19
Summary of Investment Advisory Contract ................................. 20
The Prudential as Manager of the Fund's Investments ..................... 21
Brokerage ............................................................... 21
Determination of Net Asset Value ........................................ 22
Redemption of Fund Shares ............................................... 23
Description of Fund Shares and Voting Rights ............................ 23
Custodian, Transfer Agent and Dividend-Paying Agent ..................... 23
SUPPLEMENTARY INFORMATION ................................................. 24
State Regulation ........................................................ 24
Federal Income Taxes .................................................... 24
Withholding ............................................................. 25
Additional Information .................................................. 26
Experts ................................................................. 26
Litigation .............................................................. 26
DIRECTORS AND OFFICERS OF THE FUND ........................................ 27
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA--DIRECTORS .................... 28
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA--OFFICERS ..................... 30
<PAGE>
FINANCIAL STATEMENTS OF PRUDENTIAL'S ANNUITY PLAN ACCOUNT-2 ............... A1
FINANCIAL STATEMENTS OF PRUDENTIAL'S GIBRALTAR FUND, INC. ................. B1
SCHEDULE OF INVESTMENTS ................................................... B2
FINANCIAL STATEMENTS OF THE PRUDENTIAL INSURANCE COMPANY
OF AMERICA ............................................................... C1
Effective January 1, 1984, sales of the Contracts described in this Prospectus
to new customers were discontinued. This decision does not affect inforce
planholders who may continue to make subsequent purchases on either a scheduled
or non-scheduled basis.
<PAGE>
GLOSSARY OF TERMS USED IN THIS PROSPECTUS
Accumulation Period: The period prior to retirement when funds are being
accumulated for a participant's benefit.
Accumulation Share: A measure used to determine the value of a Planholder's
contract during the accumulation period.
Accumulation Share Value: The dollar value of one accumulation share.
Allocated Plan: A retirement plan under which Contracts are held in the names of
the individual participants.
Annuity: A series of payments made each month as long as a person, called an
annuitant, is living. In some forms of annuity, payments may continue after the
annuitant's death.
Annuity Share: A measure used to determine the value of a variable annuity
payment.
Annuity Share Value: The monthly dollar value of one Annuity Share.
Business Day: Day on which the New York Stock Exchange is open for business.
Contract: The Variable Annuity Contract described in this Prospectus which is a
written agreement between The Prudential and the contract owner which sets forth
the rights, duties and privileges of all parties.
Mortality and Expense Risks: The risks The Prudential assumes because the amount
of variable annuity payments will not be affected by losses The Prudential may
incur if annuitants live longer than expected or if actual expenses are higher
than expected.
Non-Allocated Plan: A retirement plan under which contracts are held in the name
of the employer or plan trustee.
Planholder: Person in whose name a Contract is issued.
Prudential Financial Security Program (Program): A number of contracts issued by
The Prudential, including the Contract described in this Prospectus.
Prudential's Annuity Plan Account-2 (APA-2 or Account): The separate account in
which the Contracts described in this Prospectus participate.
Prudential's Gibraltar Fund, Inc. (Fund): The mutual fund in whose shares APA-2
invests.
Purchase Payment: Money paid under a Contract on behalf of a participant in a
retirement plan.
Retirement Plans: Corporate, qualified plans for self-employed individuals, IRA,
and public school and Section 501(c)(3) plans.
Separate Account: A separate portfolio of assets held by an insurance company
and whose investment experience is kept separate from that of the other
investment accounts of the company.
Transfer Account: Account used, by agreement between The Prudential and an
Accountholder, to facilitate the accumulation and allocation of funds for
purchase under a retirement plan.
Variable Annuity: An annuity whose payments vary with the investment results of
APA-2.
1
<PAGE>
SUMMARY
THESE PAGES CONTAIN A BRIEF SUMMARY OF SOME OF THE IMPORTANT FEATURES OF THE
VARIABLE ANNUITY CONTRACT DESCRIBED IN THIS PROSPECTUS, PARTICULARLY THOSE
RELATED TO THE CHARGES MADE BY THE PRUDENTIAL. THIS SUMMARY DOES NOT PROVIDE A
FULL DESCRIPTION OF THE CONTRACT. THE ENTIRE PROSPECTUS SHOULD BE READ FOR THAT
PURPOSE. YOU MAY FIND IT HELPFUL TO RE-READ THIS SUMMARY AFTER HAVING READ THE
PROSPECTUS.
These Variable Annuity Contracts are issued for use only in connection with the
following types of allocated and non-allocated tax-qualified retirement plans.
(A plan is considered to be allocated if assets of the plan represented by these
variable annuity contracts are held in the names of the individual participants.
It is non-allocated if the contract is issued in the name of the employer or
plan trustee.)
Non-Allocated Plans. The Contracts are issued for use in connection with
non-allocated corporate pension and profit-sharing plans qualified under
Section 401(a) of the Internal Revenue Code of 1986, as amended (Code)
(non-allocated corporate plan).
Allocated Plans. The Contracts are issued for use in connection with
allocated plans only to add a participant under a Prudential Transfer
Account which has already been established for the plan in the name of the
employer or trustee, where the plan is one of the following types: (1) a
corporate pension or profit-sharing plan qualified under Section 401(a) of
the Code (corporate plan); or (2) an annuity purchase plan adopted by a
public school system or tax-exempt Section 501(c)(3) organization pursuant
to Section 403(b) of the Code (Section 403(b) annuities). Transfer Accounts
are described on the following page and on page 7.
Many of these Contracts were also previously sold, and are currently in force,
in connection with Individual Retirement Annuities established under the
provisions of the Employee Retirement Income Security Act of 1974 (IRA plans)
and 403(b) annuities where the Transfer Account is in the name of the employee.
The Prudential Insurance Company of America (The Prudential) will accept
purchase payments in any amount if made under a Contract issued in connection
with a Prudential-sponsored corporate plan or qualified plan for a self-employed
individual. For all other Contracts, purchases of at least $300 per year must be
scheduled.
The net purchase payments made under the Contracts, after the deductions
described below, are allocated to Prudential's Annuity Plan Account-2 (Account),
a variable contract account of The Prudential. The assets of the Account are
invested at net asset value in shares of Prudential's Gibraltar Fund, Inc.
(Fund). The value of the Contracts before annuity payments begin and the amount
of monthly annuity benefits payable under them thereafter will increase or
decrease depending on increases or decreases in the market value of the
portfolio securities owned by the Fund.
Subject to any limitations contained in the applicable pension plan, the
Contracts may be liquidated at their net asset value at any time during the
period before annuity payments begin, although such a liquidation may have tax
consequences that should be considered carefully. In addition, federal tax law
imposes restrictions on withdrawals from annuity purchase plans subject to
Section 403(b) of the Code. The net asset value of a Contract is the value of
accumulation shares credited to it minus any transfer taxes and transaction
charge. Currently no transfer taxes are imposed. The maximum transaction charge
is $1. See Liquidation (Redemption) and Transfer of Accumulation Shares, page
12. After annuity payments begin the Contracts may no longer be liquidated, in
whole or in part.
The Fund was organized by The Prudential to serve as the investment medium for
the variable contract accounts of the Prudential Financial Security Program
(Program), including this Account. The Fund does not sell its shares to the
public. It is registered under the Investment Company Act of 1940, as amended,
as a diversified open-end management investment company whose investment
objective is concerned primarily with growth of capital to an extent compatible
with a concern for its preservation. Current income is a secondary
consideration. The portfolio of the Fund consists primarily of common stock of a
diversified group of companies in a variety of industries. The Contracts are
subject to the risks associated with common stock investment, so there can be no
assurance that the investment objectives will be achieved. Investment policies
of the Fund permit, investments in three categories that could entail special
risks: the Fund's assets may be invested in American Depository Receipts; up to
10% of the value of the Fund's assets may be invested in securities which are
not readily marketable; and up to 3% may be invested in warrants or rights to
acquire stock. See Special Risks on page 18.
The Prudential, a mutual insurance company, was founded in 1875 under the laws
of New Jersey. The Prudential is subject to regulation by the Department of
Insurance of the State of New Jersey and by the insurance departments of all the
other states and jurisdictions in which it does business. The Prudential is the
investment advisor of the
2
<PAGE>
Fund. See The Prudential as Manager of the Fund's Investments, page 21. The
Prudential's financial statements begin on page C1 and should be considered only
as bearing upon The Prudential's ability to meet its obligations under the
Contracts.
Pruco Securities Corporation (Prusec), an indirect wholly-owned subsidiary of
The Prudential, acts as the principal underwriter of the Fund and the Account.
Prusec's principal business address is 1111 Durham Avenue, South Plainfield, New
Jersey 07080.
A transfer account is established with The Prudential for the retirement plan to
facilitate the accumulation and allocation of funds for purchases under the
plan. The person establishing the transfer account is known as the
Accountholder. For newly established non-allocated corporate plan transfer
accounts this will be the employer (employer Accountholder) or a trustee or
custodian (trustee Accountholder). This is also true of most previously
established transfer accounts for corporate plans and qualified plans for
self-employed individuals. Under previously established transfer accounts for
IRA and most Section 403(b) annuities, the employee is the Accountholder
(employee Accountholder). Funds may be deposited in the transfer account at any
time by or for the Accountholder, who authorizes their transfer to Prudential's
Annuity Plan Account-2 as purchase payments under these Contracts. The minimum
deposit is $25. A person for whom purchase payments are made is called a
Planholder. Most Planholders will be employees under the retirement plan. In
some instances the employer, trustee or custodian under a corporate plan or
qualified plan for self-employed individuals will also be a Planholder.
At the time the transfer account is established, the Accountholder pays an
enrollment fee to cover the non-recurring expenses of processing the Planholder
enrollment and creating the initial Program records. The fee is $40 for an
employer or trustee Accountholder. See The Role Of The Transfer Account, page 7.
Sales And Related Charges. A sales charge is deducted from purchase payments
during a Contract's accumulation period, which is the period prior to the
retirement of a Planholder when funds are being accumulated for the Planholder's
benefit. The charge ranges from 8.5% on the first $5,000 to 0.6% on any excess
over $500,000. In determining what percentage is used, all purchase payments
made on the date of purchase through the same transfer account for Planholders
in the accumulation period are combined and added to the current value of all
accumulation shares, if any, then credited to all Planholders under that
transfer account. There is also a transaction charge for each purchase payment
of $1, or 2% of the amount transferred if less.
The sales charge as a percentage of the net amount invested (purchase payment
minus sales charge and transaction charge) is greatest when purchase payments
are smallest and being made at the first $5,000 rate. For a $25 purchase
payment, the maximum sales charge and the maximum deduction from purchase
payment (including sales charge and transaction charge) are 9.5% and 11.8%,
respectively, of the net amount invested.
A sales charge is also deducted from purchase payments made to provide immediate
annuities with no accumulation period. The same scale of sales charges applies,
except that in determining the percentage to be used, all purchase payments made
through the same transfer account to provide annuities without accumulation
periods, including payments under related Fixed-Dollar Annuity Contracts, are
combined and added to all purchase payments previously made to provide such
annuities for Planholders using that transfer account.
No sales charge is deducted from any purchase payment to the extent that it is
made with the proceeds of another contract issued by The Prudential in
connection with a tax-qualified retirement plan, including any dividend
accumulations or paid-up additions resulting from that contract. Nor is any
sales charge deducted at the time accumulation shares are used to provide an
annuity under the Program.
Currently a few states impose a premium tax on some tax-qualified variable
annuity purchases. The sales and transaction charges and state premium taxes are
discussed in greater detail under Sales and Related Charges on page 10.
Other Charges. The above charges are made in connection with purchase payments.
In addition, other charges are made daily against the assets of the Account and
of the Fund. During the accumulation period, there are charges made at an
aggregate rate of 0.675% per year for administrative services and for the
assumption by The Prudential of mortality and expense risks. These charges are
applied against Account assets attributable to these variable annuity contracts
in the accumulation period.
During the annuity payout period, there are charges made at an aggregate rate of
0.375% per year, for administrative charges and for the assumption by The
Prudential of mortality and expense risks. These charges are applied against
Account assets attributable to these Contracts in the annuity payout period.
An investment advisory charge is applied against the Fund assets underlying the
Account, at a rate of 0.125% (1 @8 of 1%) per year. In addition, the Fund has
expenses which may be considered to be an indirect charge against assets. See
Summary of Investment Advisory Contract, page 20.
3
<PAGE>
In total, these other charges, exclusive of enrollment fees, sales charges,
transaction charges and premium taxes, represent on a yearly basis approximately
0.8% (8 @10 of 1%) of net assets attributable to the accumulation period, and
0.5% (1 /2 of 1%) of net assets attributable to the annuity payout period under
these variable annuity contracts. See Other Charges, page 11.
Use of a Prudential-sponsored corporate plan or qualified plan for self-employed
individuals, or use of any other corporate plan or qualified plan for
self-employed individuals pursuant to which a Transfer Account Agreement was
issued after April 30, 1974, will involve an annual charge of $5, payable by the
employer, for each variable annuity contract provided under the Program for a
Planholder during the accumulation period.
Illustration. To illustrate how the sales and other charges may operate, assume
that an employer begins a non-allocated corporate plan. After paying the
one-time enrollment fee of $40 and the first annual $5 charge, the employer
makes a single investment of $1,000. An 8.5% sales charge ($85) and $1
transaction charge are deducted from the purchase payment, leaving $914 as the
net amount invested. If the accumulation share value for that business day is
$10, this will result in 91.4 shares being credited under the Contract. If there
should be no daily change in the accumulation share value during the ensuing
year the total charges against assets for the year would be approximately $7.31.
If the employer makes a $1,000 purchase payment each year thereafter, the net
amount invested from each payment will be determined as described under Sales
and Related Charges on page 10. Whether the employer makes only a single
purchase payment or periodic purchases, the total value available when employees
retire is dependent upon the investment results of the Fund and cannot be
guaranteed or projected.
Future Changes in Charges. Except as described under Exercising Rights Under the
Contracts, page 16, The Prudential reserves the right to change all charges,
including the sales charge, upon 90 days notice to Accountholders and
Planholders.
4
<PAGE>
FEE TABLE
PLANHOLDER TRANSACTION EXPENSES
Sales Load Imposed on Purchases (as a percentage of purchase payments)
First $ 5,000 8.50%
Next $ 5,000 7.00%
Next $ 10,000 5.00%
Next $ 30,000 3.00%
Next $ 50,000 2.00%
Next $400,000 1.00%
Excess over $500,000 0.60%
Transaction Charges
Purchase Payments .......... $1.00 from each purchase payment, or 2% of
the purchase payment (whichever is less).
Liquidations ............... $1.00 for any liquidation, or 1% of the
net amount liquidated (whichever is less).
<TABLE>
<CAPTION>
SEPARATE ACCOUNT ANNUAL EXPENSES (AS A PERCENTAGE OF AVERAGE ACCOUNT VALUE)
<S> <C>
Mortality and Expense Risk Fees ......................................... 0.30%
Account Fees and Expenses (Administrative Charge) ....................... 0.38%
----
Total Separate Account Annual Expenses ................................ 0.68%
====
PRUDENTIAL'S GIBRALTAR FUND, INC. ANNUAL EXPENSES (AS A PERCENTAGE OF
THE FUND'S AVERAGE NET ASSETS)
Investment Management Fees .............................................. 0.125%
Other Expenses .......................................................... 0.0.31%
------
Total Prudential's Gibraltar Fund, Inc. Annual Expenses ............... 0.156%
=====
</TABLE>
Examples
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
<S> <C> <C> <C> <C>
If you surrender your Contract at the end
of the applicable time period:
You would pay the following expenses
on a $1,000 investment, assuming 5%
annual return on assets: $95 $111 $129 $181
If you annuitize at the end of the applicable
time period or do not surrender your Contract:
You would pay the following expenses
on a $1,000 investment, assuming
5% annual return on assets: $94 $110 $128 $180
</TABLE>
The purpose of the foregoing table is to assist the Planholder in understanding
the expenses of the Account and the Fund that he/she will bear, directly or
indirectly. Upon effecting an annuity, the Annuitant will be subject to
different expenses. See the sections on Prudential's Gibraltar Fund, Inc., Sales
and Related Charges and Other Charges for more complete descriptions of the
various costs and expenses. The above table does not include any state premium
taxes.
The Examples should not be considered to be a representation of past or future
expenses; actual expenses may be greater or lesser than those shown.
5
<PAGE>
PRUDENTIAL'S GIBRALTAR FUND, INC.--FINANCIAL HIGHLIGHTS
(For a share outstanding throughout the year)
The following financial highlights for the year ended December 31, 1996 have
been audited by Price Waterhouse LLP, independent accountants, whose report
thereon was unqualified. In addition, the financial highlights for each of the
years prior to and including the period ended December 31, 1995 have been
audited by Deloitte & Touche LLP, independent auditors, whose report thereon was
also unqualified. Their reports are included in this Prospectus.
<TABLE>
<CAPTION>
01/01/96 01/01/95 01/01/94 01/01/93 01/01/92 01/01/91 01/01/90 01/01/89 01/01/88 01/01/87
to to to to to to to to to to
12/31/96 12/31/95* 12/31/94* 12/31/93* 12/31/92* 12/31/91* 12/31/90* 12/31/89* 12/31/88* 12/31/87*
-------- --------- ------------------- --------- --------- ---------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value at
beginning of year ...... $10.14 $9.40 $11.29 $11.13 $11.39 $9.40 $10.59 $10.29 $9.19 $12.44
------ ----- ------ ------ ------ ----- ------ ------ ----- ------
Income From Investment
Operations:
Net investment income ... 0.16 0.18 0.21 0.18 0.18 0.22 0.34 0.36 0.31 0.40
Net realized and
unrealized gains
(losses) on
investments ............ 2.56 1.65 (0.40) 2.43 1.77 2.90 (0.64) 1.92 2.00 0.23
------ ----- ------ ------ ------ ----- ------ ------ ----- ------
Total from investment
operations ............ 2.72 1.83 (0.19) 2.61 1.95 3.12 (0.30) 2.28 2.31 0.63
Distributions to
Shareholders:
Distributions from net
investment income ...... (0.15) (0.17) (0.22) (0.19) (0.19) (0.26) (0.37) (0.37) (0.37) (0.65)
Distributions from
realized gains ......... (1.28) (0.92) (1.48) (2.26) (2.02) (0.87) (0.52) (1.61) (0.84) (3.23)
------ ----- ------ ------ ------ ----- ------ ------ ----- ------
Total distributions .. (1.43) (1.09) (1.70) (2.45) (2.21) (1.13) (0.89) (1.98) (1.21) (3.88)
Net Asset Value at
end of year ............ $11.43 $10.14 $9.40 $11.29 $11.13 $11.39 $9.40 $10.59 $10.29 $9.19
====== ====== ===== ====== ====== ====== ===== ====== ====== =====
Total Investment Rate
of Return:** ........... 27.13% 19.13% (1.33%) 23.79% 17.60% 34.40% (2.80%) 22.30% 25.60% 2.53%
Ratios/Supplemental Data:
Net assets at end of year
(in millions) .......... $301.3 $261.2 $242.5 $264.3 $230.1 $214.2 $174.4 $197.0 $183.3 $170.0
Ratio of expenses net of
reimbursement to
average net assets ..... 0.16% 0.14% 0.15% 0.16% 0.19% 0.19% 0.21% 0.16% 0.16% 0.15%
Ratio of net investment
income to average net
assets ................. 1.38% 1.68% 1.98% 1.45% 1.58% 1.98% 3.38% 3.19% 2.95% 3.11%
Portfolio turnover rate . 97% 105% 93% 92% 73% 76% 108% 67% 32% 32%
Average commission
rate per share ......... $0.0576 N/A N/A N/A N/A N/A N/A N/A N/A N/A
</TABLE>
* Calculations are based on average month-end shares outstanding.
** Total return is at the portfolio level and excludes contract specific
charges which would reduce returns. Total return is calculated assuming a
purchase of shares on the first day and a sale on the last day of each
period reported and includes investment of dividends and distributions.
Total returns for less than a full year are not annualized.
Further information concerning the Fund, its investment policies and
restrictions upon its investments and The Prudential's role as an
investment advisor to the Fund, may be found beginning on page 17 The
Fund's Directors and Officers are listed beginning on page 28.
The above table does not reflect charges against Account assets. Those
charges are described under Other Charges on page 10.
6
<PAGE>
GENERAL PROGRAM INFORMATION
Eligibility for Purchase
The Variable Annuity Contract (Contract) described in this Prospectus has been
offered by The Prudential Insurance Company of America (The Prudential) since
the beginning of 1970 only for the benefit of persons who are entitled to
favorable federal income tax treatment under the Internal Revenue Code (Code) in
connection with retirement plans established for or by such persons.
Until a new series of tax-qualified variable annuity contracts (not described in
this prospectus) was introduced by The Prudential in September, 1977, this
Contract was available to persons in the following categories:
(1) employees of corporations under qualified plans described in Section 401(a)
of the Code (corporate plans);
(2) employees under annuity purchase plans adopted by public school systems and
tax-exempt Section 501(c)(3) organizations, pursuant to Section 403(b) of
the Code (public school and Section 501(c)(3) plans); and
(3) employees (including former employees at the time of separation from
employment before retirement), and non-employed spouses of participating
employees, under Individual Retirement Annuities (IRAs) established
pursuant to the provisions of the Employee Retirement Income Security Act
of 1974 (ERISA).
After the introduction of the new series of contracts, this Contract was
available for issue only (1) in connection with corporate plans that are
non-allocated (that is, where the Contract is issued in the name of the employer
or plan trustee, rather than the individual participant), and (2) to add
individual participants under existing programs established for corporate,
qualified plans for self-employed individuals, and some 501(c)(3) plans where
the transfer account is in the name of the employer or plan trustee. See The
Role of the Transfer Account,page 8.
The Contract is offered by The Prudential Insurance Company of America, a mutual
life insurance company organized in 1875 under the laws of the State of New
Jersey. Its corporate office is located at Prudential Plaza, Newark, New Jersey
07102-3777.
The Contract is one of several that together make up the Prudential Financial
Security Program. The mailing address of the office which services the
tax-qualified contracts of the Program (which include a Fixed-Dollar Annuity
Contract that is not described in this prospectus) is: The Prudential Insurance
Company of America, Prudential Plaza, Newark, New Jersey 07102-3777. The
Prudential is registered as a broker-dealer with the Securities and Exchange
Commission under the Securities Exchange Act of 1934, as amended, and is a
member of the National Association of Securities Dealers, Inc. The Contracts are
sold by registered representatives of Pruco Securities Corporation (Prusec), an
indirect wholly-owned subsidiary of The Prudential. Prusec acts as principal
underwriter of the Contract. It was organized in 1971 under New Jersey law, is
also registered as a broker and dealer under the Securities Exchange Act of 1934
and is also a member of the National Association of Securities Dealers, Inc.
Prusec's principal business address is 1111 Durham Avenue, South Plainfield, New
Jersey 07080.
Requests for the enrollment of employees under the Program in connection with an
employer's corporate plan are usually made through the employer or through a
trustee or custodian for the employer's plan. For the employer who does not have
a corporate plan in effect and is interested in the establishment of such a
plan, The Prudential has prepared several examples of plans which may meet
his/her requirements, and which will be supplied upon request. The employer may
prefer to modify one of these forms or arrange for the drafting of his/her own
plan, subject to The Prudential's willingness to issue contracts under it. See
The Prudential-Sponsored Pension Plans, page 17.
Upon completion of a request for enrollment satisfactory to The Prudential, the
Contracts will be issued in the name of an employer, trustee or custodian, as
required by the plan, under a newly established corporate plan, and in the names
of individual employees where they are being added as participants to existing
plans. Those in whose names Contracts are issued are known as Planholders.
The Prudential assumes no responsibility for determining whether a particular
retirement plan meets the requirements for favorable federal income tax
treatment. If, however, The Prudential determines that a plan, intended to
qualify for such treatment, has not received favorable determination of its
qualifications by the Internal Revenue Service and does not so qualify, The
Prudential may, with some exceptions, terminate any Contract issued in
connection with that plan.
The Variable Annuity Contract
The Contract provides for accumulation until retirement and for monthly payments
thereafter for life. The value of the accumulated funds and the amount of each
annuity payment will vary, reflecting the investment results of a
7
<PAGE>
designated portfolio consisting primarily of common stocks. Investment during
the accumulation period does not, of course, assure that you will realize any
profit from your investment or that you will be protected against loss in a
declining market. Similarly, the amount of each annuity payment is subject to
market fluctuations of the portfolio, and in declining markets is likely to be
lower than earlier payments. As an alternative to variable annuity payments, the
value of the Contract at the end of the accumulation period may be used to
provide fixed-dollar annuity payments, or may be taken in one sum.
A Contract may also be bought with a single purchase payment to provide for
variable annuity payments which begin immediately. In this event, the provisions
of the Contract pertaining to the accumulation period will not apply.
The Contract provides that net purchase payments shall be allocated to
Prudential's Annuity Plan Account-2 (Account). During the accumulation period,
the current value of a Contract is measured in terms of accumulation shares. See
How Accumulation Shares are Credited, page 11. During the payout period, the
amount of the monthly retirement benefit is measured in terms of annuity shares.
See How Variable Annuity Payments are Determined, page 14.
The Role of the Transfer Account
A transfer account is established with The Prudential through a Transfer Account
Agreement between The Prudential and the Accountholder. The transfer account is
used to facilitate the accumulation and allocation of funds for purchases under
the retirement plan. Purchase payments for these Variable Annuity Contracts are
made only by the transfer of funds from a transfer account, and, in certain
situations, amounts may be deposited in the transfer account to pay premiums or
purchase payments due under other policies of The Prudential, or contracts which
are a part of the retirement plan. Funds to be transferred for such purposes may
be deposited in the transfer account at any time by or for the Accountholder.
The minimum deposit is $25.
At the time a transfer account is established, the Accountholder pays a one-time
enrollment fee to cover the non-recurring expenses of processing the Planholder
enrollments and creating the initial Program records. The fee is $40 for an
employer or trustee Accountholder under a corporate plan.
Use of a Prudential-sponsored corporate plan or qualified plan for
self-employed individuals, or use of any other corporate plan or qualified plan
for self-employed individuals pursuant to which a Transfer Account Agreement was
issued after April 30, 1974, involves an annual charge of $5, payable by the
employer, for each Variable Annuity Contract issued to a Planholder during the
accumulation period. This charge is for the additional expenses involved in
servicing the corporate plan or qualified plan for self-employed individuals.
During 1996 and 1995, The Prudential received $815 and $405, respectively, in
such annual charges.
The Accountholder and The Prudential may establish a schedule which will set
forth the use and dates of the payments to be made under these and other
contracts of The Prudential through the transfer account.
The Prudential will permit any purchase payment regardless of size under a
Prudential-sponsored plan; scheduled purchases for all other plans are subject
to a $300 annual minimum per Planholder.
If permissible under a corporate plan or qualified plan for self-employed
individuals, a trustee or employer Accountholder may withdraw funds from the
transfer account upon written request to The Prudential. The minimum withdrawal
is $25, or the balance in the transfer account if less.
The Prudential will credit interest as of the end of each calendar quarter in
which the average balance in the transfer account during the quarter is $50 or
more. Deposits will earn interest from the date of deposit to the date of
transfer or withdrawal. The interest rate will be determined by The Prudential's
Board of Directors each year. The rate of interest for 1997 is 4%.
The Prudential reserves the right to limit the amount maintained as a balance in
a transfer account, the period during which it may be maintained and the amount
of any single deposit.
Prudential's Annuity Plan Account-2
The Account was established on August 13, 1968, by resolutions of The
Prudential's Board of Directors as a variable contract account of The Prudential
under the laws of the State of New Jersey. It is administered by The Prudential
under the general direction of The Prudential's officers and managerial staff.
The Account is registered with the Securities and Exchange Commission under the
Investment Company Act of 1940, as amended (1940 Act), as a unit investment
trust. Registration does not imply supervision by the Securities and Exchange
Commission of the management or investment policies and practices of the Account
or The Prudential.
The Account is used only in connection with individual Variable Annuity
Contracts issued by The Prudential in connection with tax-qualified retirement
plans including the Contracts described in this prospectus. The assets
8
<PAGE>
held in the Account are legally segregated from all other assets of The
Prudential and will always be equal to or greater in value than The Prudential's
liabilities under the Contracts, calculated in accordance with sound actuarial
principles.
The assets of the Account are invested in shares of Prudential's Gibraltar Fund,
Inc. (Fund) at net asset value without sales load. See Prudential's Gibraltar
Fund, Inc. below. Any dividend or capital gain distributions received from the
Fund are credited in the form of additional Fund shares at net asset value. Fund
shares will be redeemed without redemption fee to the extent necessary to make
payments under the Contracts. The Contracts do not provide for a change in the
underlying investment of the Account. If, with any required approval of the
Securities and Exchange Commission, a change were ever to take place, the
substituted shares would be of comparable quality to Fund shares and would be
registered under the Securities Act of 1933, as amended.
Prudential's Gibraltar Fund, Inc.
The Fund was incorporated in the State of Delaware on March 14, 1968 and was
reincorporated in the State of Maryland effective May 1, 1997. It is registered
under the 1940 Act as a diversified open-end management investment company.
Registration does not imply supervision by the Securities and Exchange
Commission of the management or investment policies and practices of the Fund or
The Prudential. The Board of Directors of the Fund is responsible for the
management of the Fund and, in addition to reviewing the actions of the Fund's
investment advisor, decides upon matters of general policy. The Fund's officers
conduct and supervise the daily business operations of the Fund.
The Fund's portfolio, which is set forth on pages B2 and B3, is composed
primarily of common stocks of a diversified group of companies in a variety of
industries. The investment objective of the Fund is concerned primarily with
growth of capital to an extent compatible with a concern for its preservation.
Current income is a secondary consideration.
The investments of the Fund are subject to the risks of changing economic
conditions and the ability of management and the investment advisor of the Fund
to anticipate such changes. There can be no assurance that the Fund's investment
aims will be achieved.
Fund shares are sold only to separate accounts of The Prudential including
Prudential's Annuity Plan Account-2. The investment performance of the Fund
determines the dollar value of interests in these accounts.
The Prudential is the investment advisor to the Fund. The Prudential has entered
into a service agreement with its wholly-owned subsidiary, The Prudential
Investment Corporation (PIC), which provides that PIC will furnish to The
Prudential such services as The Prudential may require in connection with The
Prudential's performance of its obligations under advisory agreements with
clients which are registered investment companies. For its investment advisory
services, The Prudential is paid 1 @8 of 1% (0.125%) per year of the average
daily market value of the Fund's net assets ($1.25 per year for each $1,000 of
assets). The Fund paid The Prudential $349,118 in 1996 and $325,596 in 1995. In
addition, the Fund has expenses which may be considered to be an indirect charge
against assets; in 1996 these expenses amounted to 0.035% of average net assets
of the Fund. In 1995 these expenses were slightly less than 0.015% of average
net assets of the Fund. See Summary of Investment Advisory Contract on page 20,
The Prudential As Manager of the Fund's Investments on page 21, and Financial
Statements of Prudential's Gibraltar Fund, Inc. and Notes to Financial
Statements on pages B1 through B5. For the years ended December 31, 1996 and
1995, the Fund's total expenses were 0.16% and 0.14%, respectively, of the
Fund's average net assets.
Investment Results. The financial highlights table on page 6 shows the net asset
value together with operating expense and net investment income ratios, and
total investment rate of return for the years indicated.
The Prudential's Administrative Role
The Prudential acts as transfer agent and dividend-paying agent and performs all
administrative services relative to the Contracts and necessary to the operation
of the Account. The Account itself has no officers or employees. The Prudential
pays all expenses relating to its operation.
The services performed by The Prudential include safekeeping of and accounting
for the assets in the Account, applying the purchase payments after making any
deductions authorized by the Contracts, recording all other transactions with
respect to the Contracts, furnishing confirmation notices, reports of the value
of the Contracts during their accumulation period and records of the details
relating to annuities effected, making the annuity payments, and maintaining the
pertinent records. As part of its services The Prudential also arranges to
furnish periodic financial reports of the Account and of the Fund, prospectuses,
tax notices, other notices and voting material. The Prudential has periodic
audits made of the books of the Account and prepares and renders for the Account
tax reports and other periodic statements required by law. The charges discussed
under the first two headings in the next section of this prospectus compensate
The Prudential for its services.
9
<PAGE>
DESCRIPTION OF THE CONTRACTS
Sales and Related Charges
A sales charge and any applicable premium taxes are deducted from each gross
purchase payment transferred from the transfer account. The sales charge is
expressed as a percentage of the adjusted gross purchase payment, which is the
gross purchase payment reduced by any applicable premium taxes. These Contracts
do not provide for use of a Letter of Intent by the purchaser.
The applicable sales charges are as follows:
<TABLE>
<CAPTION>
Total Purchase Payments
Received During The Percent of Adjusted Gross Percent of Net Amount
Contract Year Purchase Payment Invested*
------------------------------- ------------------------- ---------------------
<S> <C> <C> <C>
First $ 5,000 8.50% 9.29%
Next $ 5,000 7.00 7.53
Next $ 10,000 5.00 5.26
Next $ 30,000 3.00 3.09
Next $ 50,000 2.00 2.04
Next $400,000 1.00 1.01
Excess over $500,000 0.60 0.60
</TABLE>
- ----------
* Without taking into account deduction for any premium tax (or
transaction charges during the accumulation period).
Purchase Payments During the Accumulation Period. In determining the sales
charge rate, all purchase payments made on the date of purchase through the same
transfer account for Planholders in the accumulation period are combined and
added to the current value of all accumulation shares, if any, then credited to
all Planholders under the transfer account. For example, an employer submits a
purchase payment of $5,000. As of the current purchase date, Planholders under
the employer's transfer account are already credited with accumulation shares
with a total value of $10,000. When the $5,000 is added to the $10,000, it can
be seen from the above table that the sales charge rate applicable to the $5,000
purchase is 5%. The amount of the sales charge on the current purchase would,
therefore, be $250.
A transaction charge is also deducted from each purchase payment made for each
Planholder during the accumulation period, to cover the administrative services
connected with receipt of money and crediting of the accumulation shares. The
transaction charge for each purchase payment is $1, or 2% of the purchase
payment if less, with a maximum of $1 for all purchases made for a Planholder
under any one Contract on a single day.
For initial purchase payments of $25 and $300, for example, the sales charge
will be 9.5% and 9.3%, respectively, of the net amount that will be invested in
the Account. These figures do not include any initial enrollment fee, any state
premium tax that may be applicable, or the transaction charge. If the
transaction charge is considered with the sales charge, the amount deducted will
be 11.8% and 9.7%, respectively, of the net amount invested.
Purchase Payments to Provide a Variable Annuity with no Accumulation Period. The
sales charge is computed separately and somewhat differently than the sales
charge for purchase payments made during the accumulation period. Although the
table above is applicable, in this case it is the amount of prior purchase of
annuities with no accumulation period that is combined with the current purchase
amount to determine the sales charge rate, and not the current value of shares,
as in the case of purchases during the accumulation period. All such prior
annuity purchases through the same transfer account are combined, including
purchases of related fixed-dollar annuities under the Program. To illustrate
this, assume that a current purchase payment of $10,000 is made to provide a
variable annuity for a Planholder. Prior annuity purchases through the same
transfer account totaled $20,000. By combining the two amounts it can be seen
from the above table that the sales charge rate for the current $10,000 purchase
is 3%. Therefore, the sales charge for that purchase is $300.
For payments of $2,000 and $100,000, for example, the sales charge will be 9.3%
and 3.3%, respectively, of the net amount that will be invested in the Account.
These do not consider any enrollment fee or any applicable premium tax.
Purchase Payments Derived from the Proceeds of other Prudential Tax-qualified
Contracts. No sales charge is deducted from a purchase payment, either during
the accumulation period or when made to effect an annuity with no accumulation
period, to the extent that such payment is derived from the proceeds of any
other contract issued by The Prudential in connection with a tax-qualified
retirement plan, including any dividend accumulations or paid-up additions
resulting from that contract, but excluding cash dividends. Nor is any sales
charge deducted at the time accumulation shares are used to provide an annuity
under the Program.
10
<PAGE>
During 1996, The Prudential received $4,410 in sales charges and $906 in
transaction charges for purchases under these Contracts. The equivalent figures
for 1995 were $4,404 and $933.
The sales and transaction charges may be changed by The Prudential subject to
certain conditions. See Exercising Rights Under the Contracts, page 16.
The amount of any applicable premium tax varies depending on the jurisdiction,
and is subject to change by the legislature or other authority. In many
jurisdictions there is no tax at all. The tax rates currently in effect in those
states that impose a tax range from 0.5% to 5%. On any Contract subject to
premium tax, the tax will be deducted at the rate and incidence provided under
applicable law, either from the purchase payments when received or from amounts
applied to provide an annuity under the Program.
Other Charges
Transaction charges are made to cover expenses involved in the processing of
liquidations of accumulation shares. The transaction charge is $1 for any
partial or total liquidation, or 1% of the net amount being liquidated (after
any transfer taxes) if less. There is no transaction charge or any other charge
at the time the value of accumulation shares is used to effect a variable or a
fixed-dollar annuity under the Program, but such value is adjusted by deducting
any applicable premium tax not previously deducted. During 1996 and 1995, The
Prudential received $160 and $183, respectively, in transaction charges for
liquidations.
An administration charge is applied daily on the value of the portion of the net
assets in Prudential's Annuity Plan Account-2 attributable to accumulation
shares under these Contracts. This charge is to cover services that are rendered
in connection with Contracts during their accumulation period but that are not
identified with individual Contracts. On the first $250 million of assets, the
charge is made at an effective annual rate of 3/8 of 1% (0.375%); on the next
$250 million, the rate is 13/40 of 1% (0.325%); on the next $500 million, the
rate is 11/40 of 1% (0.275%); and on the excess over $1 billion, the rate is
9/40 of 1% (0.225%). The administration charge is designed to reimburse The
Prudential for the development, administration and modification costs of the
Program allocable to the Contracts.
During the accumulation period, a mortality risk charge and an expense risk
charge, at effective annual rates of 0.1% and 0.2%, respectively, (for a total
of 0.3%, or 3/10 of 1%, per year) are applied daily against Account assets
attributable to these Contracts in the accumulation period. During the annuity
payout period, a mortality risk charge, an expense risk charge and an
administrative charge, at effective annual rates of 0.075%, 0.150%, and 0.150%,
respectively, (for a total of 0.375%, or 3/8 of 1%, per year) are applied daily
against Account assets attributable to these Contracts in the annuity payout
period. These charges are to cover The Prudential's general administrative
expenses in operating the Account and to provide a surplus for use, if
necessary, to help The Prudential to fulfill its contractual obligations,
discussed under the heading The Risks which The Prudential Assumes on page 15.
During 1996 and 1995, The Prudential received $344,522 and $326,670,
respectively, under these Contracts from the charges described in the preceding
two paragraphs.
In addition, an investment advisory fee, determined daily at the rate of 0.125%
(1/8 of 1%) per year of the average net assets of the Fund, is paid by the Fund
to The Prudential. Thus, at present, a total charge against assets at a yearly
rate of about 0.8% (8/10 of 1%) is made during the accumulation period and 0.5%
(1 /2 of 1%) during the annuity payout period for these Contracts. See
Prudential's Gibraltar Fund, Inc. page 9.
The charges described above may all be changed by The Prudential, subject to
certain conditions. See Exercising Rights Under the Contracts, page 16.
Right to Cancel
You have the right, within ten days after you receive your Contract, to
surrender the Contract by delivering or mailing it, with written notice that you
wish to surrender it, to an office of The Prudential or to the agent through
whom the Contract was purchased. Upon such surrender The Prudential will cancel
the Contract and pay the owner an amount equal to the sum of (1) the difference
between any purchase payments paid and the amounts allocated to any separate
accounts under the Contract and (2) the net asset value of the Contract on the
date of surrender attributable to the amounts so allocated. However, if
applicable state law so requires, the amount of the purchase payment will be
returned instead.
How Accumulation Shares are Credited
Each net purchase payment made during the accumulation period increases the
value of the Planholder's current interest under the Contract. That value will
vary, up and down, to reflect the investment results of Prudential's
11
<PAGE>
Gibraltar Fund, Inc. To provide a convenient means of measuring the value of the
Planholder's interest, that interest is described and recorded in terms of full
or fractional accumulation shares. Each net purchase payment made for a
Planholder results in the crediting of a number of accumulation shares,
determined by dividing the net amount invested by the current accumulation share
value. Crediting of accumulation shares is effected at the close of the day on
which the purchase payment is transferred from the transfer account, if that is
a business day (a day on which the New York Stock Exchange is open for
business); otherwise on the first business day thereafter.
For these Contracts the accumulation share value for July 18, 1969 was set at
$10. On each subsequent business day, the accumulation share value is determined
by multiplying the accumulation share change factor for that day by the
accumulation share value for the last preceding business day. Sales of these
Contracts to the public commenced January 2, 1970. Shown below are the
accumulation share values for these Contracts as of the last business day of
each year of the 10 year period ending December 31, 1996.
Last Business Last Business
Day Of: Day Of:
1987 $38.56 1992 $ 87.71
1988 48.11 1993 107.85
1989 58.36 1994 105.47
1990 56.33 1995 124.80
1991 75.13 1996 157.59
The accumulation share change factor for any business day is obtained by (1)
adding to 1.00 the rate of net investment income earned and the rate of asset
value changes in the Account, after provision for any taxes, from the end of the
last preceding business day to the end of the current business day, and (2)
deducting therefrom the rates of the administration charge and the mortality and
expense risk charges described under the heading Other Charges on page 11. No
provision is currently made for federal income taxes in determining the change
factor. See Federal Income Taxes, page 24.
Liquidation (Redemption) and Transfer of
Accumulation Shares
The Contracts provide that accumulation shares credited under them may be
liquidated, either totally or in part, at any time. For the possible tax
consequences of a liquidation, including any effect a liquidation may have on
the qualification of the retirement plan for special tax treatment, The
Prudential recommends that the parties involved seek competent tax advice before
requesting liquidation of accumulation shares. See Federal Income Taxes,page 24.
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.
The value of your Contract as of December 31, 1988 is exempt from these
restrictions. In addition, the withdrawal restrictions do not apply to the
direct transfer of all or a part of your 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). See Section 403(b) Annuities,
page 25.
Under certain types of retirement arrangements, the Retirement Equity Act of
1984 provides that, in the case of a married participant, a withdrawal request
must include the consent of the participant's spouse. Generally, this consent,
which must contain the notarized or properly witnessed signature of the
participant's spouse, is required except for withdrawals in the form of a joint
and 50% spouse survivor annuity. See Types of Annuity Available, page 14. These
spousal consent requirements are effective beginning January 1, 1985 and apply
to married participants in most qualified pension plans and those Section 403(b)
annuities which are considered employee pension benefit plans under the Employee
Retirement Income Security Act of 1974 (ERISA).
A liquidation of accumulation shares is effected as of the end of the business
day on which the written request for liquidation is received by The Prudential.
In the case of total liquidation The Prudential will pay the total value of the
accumulation shares credited under the Contract, determined as of the end of the
business day on which liquidation is effected, less any applicable transfer
taxes and transaction charge. In the case of partial liquidation the minimum
payment permitted is $100, and accumulation shares of a value of at least $200
must remain credited under the Contract after the transaction. Sufficient shares
and fractions of shares will be liquidated to pay the amount requested, any
applicable transfer taxes and the transaction charge. Currently no transfer
taxes are being imposed. (The method of determining the value of an accumulation
share is described in the section just preceding this one.)
12
<PAGE>
Any liquidation payment is made within 7 days after the request for liquidation
is received, except as The Prudential may be permitted under any valid and
applicable law to suspend the payment. Circumstances under which suspension may
be permissible are described under Redemption of Fund Shares on page 23.
Accumulation shares may be transferred only to other Planholders to fulfill the
purposes of the retirement plan involved.
Results Under a Hypothetical Purchase Program
The following table illustrates results under a hypothetical purchase program
for a Planholder, calling for a $25 purchase payment on the first business day
of each month prior to retirement. The results shown are those which would have
been achieved had the hypothetical program commenced on the first business day
of 1987. Results are shown for the ten years ending December, 1996.
The results shown are based upon the present charge structure. They do not take
into account any reduction in sales charges that might have been obtained
through the combined purchase payment procedure described in the first paragraph
after the table of sales charges on page 10. The initial purchase payment does
not reflect any initial enrollment charge that may then have been paid by the
Accountholder for enrolling Planholders and establishing program records for the
retirement plan.
The results shown are representative of those which might have been obtained,
assuming a minimum purchase schedule and assuming no deductions for state
premium taxes or tax upon liquidation. They do not reflect the $5 annual charge
per Planholder required from the employer under certain corporate plans and
qualified plans for self-employed individuals. The results are for a
hypothetical program established in the past and are not to be considered as
predictive of future results. The results shown are those which would have been
achieved had the hypothetical program commenced on the first business day of
1987. Results are shown for the ten years ending December, 1996.
<TABLE>
<CAPTION>
Gross Purchase Yearly Net Amount
Payments Deductions Invested
------------------------- ----------------------- -----------------------------
Sales Transaction Liquidation
Year Current Year Cumulative Charges Charges Current Year Cumulative Value*
- ---- ----------- ---------- ------- ----------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
1987 $300 $ 600 $25.56 $6 $268.44 $ 536.88 $ 509.30
1988 300 900 25.56 6 268.44 805.32 921.68
1989 300 1,200 25.56 6 268.44 1,073.76 1,405.94
1990 300 1,500 25.56 6 268.44 1,342.20 1,626.26
1991 300 1,800 25.56 6 268.44 1,610.64 2,475.70
1992 300 2,100 25.56 6 268.44 1,879.08 3,192.81
1993 300 2,400 25.56 6 268.44 2,147.52 4,217.52
1994 300 2,700 25.56 6 268.44 2,415.96 4,388.25
1995 300 3,000 25.56 6 268.44 2,684.40 5,476.89
1996 300 3,000 25.56 6 268.44 2,684.40 6,075.02
</TABLE>
* At end of calendar year, after deduction of transaction charge upon
liquidation. The liquidation value is calculated upon the basis of the actual
investment results realized by the Account that are net of the actual separate
account and Prudential's Gibraltar Fund, Inc. annual expenses that were
incurred.
Effecting a Variable Annuity
For any variable annuity to be effected, The Prudential must receive written
instructions in a form satisfactory to The Prudential as to the type of annuity
desired and proof satisfactory to The Prudential of the date of birth of the
Planholder and, if a last survivor life annuity is provided, of the contingent
annuitant.
The net amount applied to provide the annuity, adjusted by deducting any sales
charge (for an annuity with no accumulation period) and any applicable tax on
annuity considerations, is converted to annuity shares, which measure the value
of the monthly retirement benefit.
The purchase of the variable annuity is made on the first business day on which
the office of The Prudential which services these Contracts has all of the
above. That day is called the effective date. The Prudential will send the
Planholder his/her first monthly annuity payment on the first day of the first
calendar month that is at least one month after the effective date. This is
called the initial payment date.
In the absence of prior instructions to effect an annuity or liquidate the
accumulation shares credited to a Planholder, the value of any shares remaining
outstanding will be used to provide an annuity when the individual Planholder
attains age 75 or at such earlier time as may be required by law or the
applicable pension plan.
13
<PAGE>
The effecting of a variable annuity is subject to The Prudential's rules then in
effect in respect to age and amount, and to any requirements imposed by federal
or state laws or regulations. Currently there is no minimum amount that must be
applied to effect an annuity under a Prudential-sponsored corporate plan or
qualified plan for a self-employed individual, but for other retirement plans
the current minimum amount requirement is $2,000 for the initial annuity
effected and $1,000 for any subsequent annuity effected for the same Planholder.
Annuities effected under these Contracts and under the qualified Fixed-Dollar
Annuity Contracts included in the Prudential Financial Security Program are
considered together for the purpose of meeting the minimum requirements.
Whenever an annuity is to be effected by the use of the value of accumulation
shares under the terms of the Contract or the applicable retirement plan, and
such value does not meet the minimum amount requirement, The Prudential will pay
the value of the accumulation shares in one sum as a total liquidation.
Types of Annuity Available
The following types of variable annuity are described in the Contract.
Type A -- Life Annuity. Annuity payments are payable only during the lifetime of
the Planholder. This type provides a larger monthly payment than do Types B and
C, described below, because payments cease when the Planholder dies. For
example, it would be possible under this type for the annuitant to receive only
one annuity payment if death were to occur within the first month after the
first monthly annuity payment. Accordingly, this type is primarily appropriate
where larger income during the Planholder's lifetime is of greater importance
than preservation of a remainder for dependents.
Type B -- Life Annuity -- 10 Years Certain. Annuity payments are payable during
the lifetime of the Planholder. If the Planholder dies before the 120th monthly
payment is due, monthly annuity payments do not continue to the beneficiary.
Instead, the discounted value of the remaining unpaid installments, to and
including the 120th monthly payment, is payable to the beneficiary in one sum.
Type C -- Last Survivor Life Annuity. Annuity payments are payable as long as
either the Planholder or the designated contingent annuitant is living. Under
plans other than corporate plans, only the spouse of the Planholder can be named
as contingent annuitant. As with the Type A --Life Annuity above, it would be
possible under this type of annuity for only one monthly annuity payment to be
made, if both the Planholder and the contingent annuitant died within the first
month after annuity payments begin.
Where the Planholder is not married, and under IRA, or Section 403(b) annuities,
in the absence of specific instructions at the time an annuity is to be effected
and subject to the terms of the retirement plan, a Type B -- Life Annuity -- 10
Years Certain will be provided.
How Variable Annuity Payments are Determined
The amount of the monthly variable annuity payment depends on (1) the net
purchase payment for the annuity, (2) the type of annuity selected, (3) the date
of birth of the Planholder, and of the contingent annuitant under a Type C
Annuity, (4) the annuity rate table selected by The Prudential for these
Contracts (see Schedules of Annuity Rates below), and (5) the investment results
of Prudential's Annuity Plan Account-2, which, in turn, reflect the investment
results of the Fund.
The first four items together provide the basis for determining the dollar
amount of monthly annuity that would be paid if there were no change in the
monthly value of an annuity share. This dollar amount is called the tabular
monthly annuity. It is converted to a monthly number of annuity shares by
dividing that amount by the annuity share value on the effective date. The
monthly number of annuity shares thus established remains the same through the
duration of the annuity except for the possibility of temporary additional
annuity shares as described in the third paragraph under Schedules of Annuity
Rates, below.
The investment results of the Account, item (5), are reflected in changes in the
monthly value of the annuity share (the annuity share value) to the extent that
the rate of net investment return (after deducting the administrative and risk
charges described under Other Charges on page 11) is greater or less than the
effective annual interest rate assumed in the applicable schedule of annuity
rates. The amount payable on the first day of each month beginning with the
initial payment date is the product of (a) the monthly number of annuity shares
and (b) the annuity share value calculated as of one month and one business day
prior to the due date of the payment.
Schedules of Annuity Rates. The schedules currently contained in the Variable
Annuity Contract are based on the Annuity Table for 1949 with adjustments
described in the Contract to reflect improving mortality trends, and with
assumed effective annual interest rates of 3.5% and 5%. The 5% schedule is
applicable in all but a few states in which it is currently not available under
the state law or regulations. In these few states (Florida, New Mexico, Texas
and West Virginia) the 3.5% schedule applies.
The 5% schedule, because it is based upon a higher assumed effective annual
interest rate, results in a greater initial monthly annuity payment than is
provided under the 3.5% schedule. For example, under a Type B Annuity,
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the initial monthly annuity payment per $1,000 of net purchase payment for a
person born in 1931 and age 65 on the initial payment date would be $6.70 under
the 5% schedule and $5.84 under the 3.5% schedule. However, in reflecting the
investment results of the Fund, the annuity share value for an annuity using the
5% schedule will increase more slowly and decrease more quickly than will the
annuity share value for an annuity using the 3.5% schedule. As a rough rule of
thumb, the 3.5% schedule should turn out to be more advantageous for Planholders
who live longer than the average, while the 5% schedule should be better for
Planholders for whom the larger early payments are especially important.
The Contracts are entitled to participate in the divisible surplus of The
Prudential, as may be determined annually at the sole discretion of The
Prudential's Board of Directors. The board has determined that Planholders
receiving annuity payments will so participate in 1997. They will be temporarily
credited with an additional number of monthly annuity shares on which annuity
payments in 1997 are based. There is no assurance that such participation in the
divisible surplus of The Prudential or temporary crediting of annuity shares
will occur for any future year. In the example given in the previous paragraph,
the initial payments are increased for 1997 from $6.70 to $7.24 and from $5.84
to $6.41 for the 5% and 3.5% schedules, respectively.
Annuity Share Value. For these Contracts, the annuity share value for July 18,
1969 was set at $1. The annuity share value for any subsequent business day is
determined by multiplying the annuity share change factor for that day (see
below) by the annuity share value for the immediately preceding business day.
The annuity share change factor for any business day is obtained by (1) adding
to 1.00 the rate, after provision for any taxes, of net investment income earned
and of asset value changes in Prudential's Annuity Plan Account-2 from the end
of the last preceding business day to the end of the current business day, and
(2) deducting from such sum the applicable administrative and risk charges. See
the section headed Other Charges on page 11. The remainder is then divided by
the sum of 1.00 and the rate of interest on a daily basis at the effective
annual rate assumed in the applicable schedule of annuity rates. No provision is
currently made for federal income taxes in determining the change factor. See
Federal Income Taxes, page 24.
Each share value listed was used to determine annuity payments for the second
succeeding month. For example, the share value as of the last business day in
December is used to compute the February annuity payment. Shown below are the
annuity share values as of the last business day of each year of the 10 year
period ending December 31, 1996.
Last Business Last Business
Day of: 3.5%* 5% Day of: 3.5%* 5%
1987 $2.17 $1.66 1992 $4.23 $3.03
1988 2.62 1.98 1993 5.04 3.55
1989 3.08 2.30 1994 4.78 3.32
1990 2.89 2.13 1995 5.48 3.75
1991 3.74 2.71 1996 6.71 4.53
* 3.5% schedule currently applies only in a few states.
The Prudential provides an alternative arrangement under which a person who
purchases a variable annuity with no accumulation period may do so by starting
out with a fixed-dollar annuity and converting it gradually over a 36-month
period, a 1/36th portion in each month, to a variable annuity. This gradual
conversion arrangement permits the purchaser to reduce the chance of making the
purchase at a time when the value of common stock may be relatively high, by
making in effect 36 separate investments in the Account. Of course, this also
reduces the chance of investing in annuity shares at a time when the value of
common stocks may be relatively low. The 5% rate schedule is not available with
gradual conversion.
The Risks Which The Prudential Assumes
The Prudential assumes the risk (1) that annuitants as a class may live longer
than estimated, with the result that payments will continue for longer than
expected, and (2) that charges under the Contracts may not be enough to cover
the actual expenses incurred. In either event, the loss will fall on The
Prudential. These risks assumed by The Prudential must be evaluated in the light
of The Prudential's right, upon 90 days notice to Planholders and
Accountholders, to make certain changes in the Contracts, including the charges
and the schedule of annuity rates, thereby reducing exposure to loss as a result
of the guarantee. However, such changes would apply only to new purchases after
the effective date of the change and not to any annuities or accumulation shares
already in effect. See The Prudential's Right to Change the Contract on page 17.
Even though the assets of Prudential's Annuity Plan Account-2 are separately
accounted for, the entire general account assets of The Prudential are available
to meet the expenses and fulfill The Prudential's obligations
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under the Variable Annuity Contracts. The charges The Prudential makes for
assuming these risks are described in the section headed Other Charges, page 11.
On the other hand, the charges may exceed the expenses that The Prudential
ultimately incurs under these Contracts. As the actual experience is realized,
the amount by which any such excess is greater than the amount which must
prudently be retained to fulfill The Prudential's obligations will become a part
of the divisible surplus of The Prudential.
In the event the Fund suspends the redemption of its shares because of the
closing of the New York Stock Exchange or other emergency reason, The Prudential
will make annuity payments during the period of suspension out of its general
account assets. The amount of such payments will be determined in a fair and
equitable manner satisfactory to the Department of Insurance of the State of New
Jersey.
Payment Upon the Death of the Planholder
Subject to The Prudential's approval and the terms of the applicable retirement
plan, a beneficiary may be designated (1) for the accumulation shares credited
to a Planholder if the Planholder dies during the accumulation period, (2) for
the termination value of an annuity if the Planholder dies on or after its
effective date but before its initial payment date, and (3) if a Type B Annuity
is effected, for the discounted value of the unpaid installments if the
Planholder dies after the first but before the 120th monthly installment is
payable.
The Prudential reserves the right, prior to making payment in accordance with a
beneficiary designation, to require due proof of the Planholder's death and such
completed claim forms and other evidence as may be required to properly
establish the claim.
Subject to the above, at the death of the individual Planholder during the
accumulation period, the designated beneficiary will be credited with that
number of the Planholder's accumulation shares which represent the beneficiary's
interest. If such beneficiary is not already a Planholder, The Prudential will
establish a Plan for the beneficiary, but only to the extent of the accumulation
shares so credited, and transfer those accumulation shares to that Plan, in both
cases without charge.
If an annuity is effected and the Planholder dies before the initial payment
date, The Prudential will cancel the annuity on the first business day not
earlier than the day on which The Prudential receives due proof of death and
claim forms satisfactory to it, and will pay the termination value to the
beneficiary entitled to settlement.
The termination value is approximately equal to the net amount which was
required to provide the annuity as of the effective date (after deduction of any
applicable premium tax and sales charge), increased at the assumed effective
annual interest rate and increased or decreased in accordance with the rate of
change in the annuity share value between the annuity effective date and the
cancellation date. There will also be an adjustment for any annuity payments
that may have been made before notice of death is received. Payment of this
termination value is in full settlement of all liability of The Prudential for
the cancelled annuity.
Certain minimum distribution rules apply to the case where the Planholder dies
before annuity payments begin. Federal tax law requires that if the Planholder
dies before the initial payment date of an annuity, the entire value of his/her
Contract must generally be distributed within 5 years of the date of death.
Special rules may apply to the spouse of a deceased Planholder.
No amount is payable upon the death of a Planholder after the initial payment
date of an annuity, except for any amount which may be payable under a Type B
Annuity, as described in this section and under Types of Annuity Available on
page 14. Of course, upon the death of either the Planholder or the designated
contingent annuitant under a Type C Annuity (described on page 14) monthly
payments will continue in accordance with the provisions of the annuity for the
remaining lifetime of the survivor.
If the death benefit is payable as a result of the Annuitant's coverage under a
qualified plan for self-employed individuals, other qualified plan, IRA or
Section 403(b) Annuity, the Annuitant's death benefit must be distributed within
5 years after the date of his/her death. However, if payments begin within one
year of the Annuitant's death, the death benefits may be distributed over the
Beneficiary's life or over a period not extending beyond the Beneficiary's life
expectancy. For example, if the Beneficiary's life expectancy is 12 years,
he/she may only elect to receive monthly installments for a fixed period of up
to 12 years. If the Annuitant's spouse is the Beneficiary, payments need only
begin on or before April 1 of the calendar year following the calendar year in
which the Annuitant would have attained age 70 1/2 or, in some instances, the
remaining interest in the Contract may be rolled over to an IRA.
Exercising Rights Under the Contracts
The Rights of the Planholder and Accountholder. Under many retirement plans an
employer or trustee Accountholder, rather than the Planholder in whose name a
Contract is issued, may be legally entitled, during the
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<PAGE>
accumulation period, to many or all of the benefits, rights and privileges under
the Contract. In each case the Contract, which includes any endorsements
attached thereto as to ownership and limitations of rights, will set forth
explicitly which rights and privileges may be exercised by the Accountholder.
The terms of the retirement plan itself may also affect the respective rights
and privileges of the parties. Neither the Contracts nor any values or payments
thereunder are assignable except to The Prudential.
The Continuing Right to Effect an Annuity. While The Prudential expects to
continue to provide variable annuities under the Program, it reserves the right
to discontinue doing so upon 90 days notice to Accountholders and Planholders.
Even after such discontinuance, Planholders with accumulation shares credited
will have a continuing right to effect an annuity under the Program. In
addition, Planholders with interests in other qualified contracts of The
Prudential on the date notice of discontinuance is given will have a continuing
right to exchange those interests for accumulation shares or variable annuities
without sales charge, but only to the extent of the Planholder's interest in
such other contracts on the date of the notice.
The Prudential's Right to Change the Contract. The Prudential may not change the
Contract with respect to any annuity after its effective date. Neither may The
Prudential change the schedules of annuity rates, the administration charge or
the mortality risk and expense risk charges applicable to accumulation shares
already credited. Otherwise, upon 90 days notice to Planholders and
Accountholders, The Prudential may change the terms and provisions concerning
the schedules of annuity rates, the charges by The Prudential and the applicable
minimum requirements. The Prudential may also add or substitute contracts under
the Program, provided, however, that unless the change is required by law or
regulation, it will not affect purchases already made unless the Planholder or
Accountholder accepts the substituted contracts as applying to any such
purchases.
Except as provided above, or as required by federal or state law or regulation,
no changes which would adversely affect rights acquired by Planholders and
Accountholders under Contracts of the Program will be made without consent.
The Prudential-Sponsored Pension Plans
The Prudential has prepared several examples of pension and profit-sharing plans
for corporations, designed to qualify under Section 401(a) of the Code. Each of
these plans provides that The Prudential will provide the insurance and annuity
contracts called for under the plan.
The form of The Prudential-sponsored master and prototype plans has been
approved by the Internal Revenue Service (IRS). Approval by the IRS of a plan as
a master or prototype plan is limited to the form of a plan, and does not
constitute approval of any particular plan using the master or prototype. IRS
approval of a particular plan may have to be requested by the employer.
DESCRIPTION OF PRUDENTIAL'S GIBRALTAR FUND, INC.
Investment Policies
The Fund invests primarily in common stocks and other securities convertible
into common stocks. Notwithstanding its growth objective, the Fund may invest a
relatively small percentage of assets, which Fund management interprets to be
not more than 15%, in preferred stocks, bonds, debentures, notes and other
evidences of indebtedness, of a character customarily acquired by institutional
investors, whether or not publicly distributed. These may or may not be
convertible into stock or accompanied by warrants or rights to acquire stock.
At times, when economic conditions or general levels of common stock prices are
such that it may be deemed temporarily advisable to curtail investments in
common stocks, a larger than usual proportion of the Fund's assets may be
invested in such preferred stocks and evidences of indebtedness, or may be held
in cash or its equivalents, as a defensive measure. Nevertheless, not more than
10% of the assets of the Fund may be invested in loans made through the purchase
of privately placed evidences of indebtedness of a character customarily
acquired by institutional investors. See the subheading Special Risks, page 18.
In addition, the Fund may hold at times a moderate amount of cash and
high-grade, short-term debt securities to facilitate the orderly and flexible
programming of investments. Such debt securities may include securities acquired
through short-term repurchase transactions which will be "fully collateralized,"
i.e., the value of the securities held by the Fund will be at least equal to the
repurchase price, including accrued interest.
Normally the Fund will hold securities purchased for one year or more, although
it will sell individual securities when their current price seems clearly
excessive in relation to estimated present or future value or when the situation
of the issuer appears to be deteriorating. The Fund's portfolio turnover is
discussed under the heading The Prudential as Manager of the Fund's Investments
on page 21. The Fund does not plan to trade for short-term
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<PAGE>
profits, but may take advantage of occasional opportunities for such profits if
circumstances make this advisable. To the extent that the Fund makes short-term
investments, it would incur greater brokerage charges than would otherwise be
the case, and any short-term capital gains would constitute ordinary income.
Restrictions on Investment
The Fund operates under a number of investment restrictions. Some arise out of
state laws and are summarized under New Jersey Investment Laws on page 19. Those
which follow, as well as the investment policies described above, are
self-imposed, fundamental policies of the Fund. They may not be changed without
the vote of a majority of the Fund's outstanding voting securities.
The Fund does not:
(1) underwrite the securities of other issuers, except where it may be deemed
to be an "underwriter" for purposes of the Securities Act of 1933 as
indicated below;
(2) buy or sell commodities or commodity contracts;
(3) sell short or buy on margin, or buy, sell or write put or call options or
combinations of such options;
(4) invest for the purpose of exercising control or management;
(5) buy or hold the securities of any issuer if those officers and directors of
the Fund or officers of its investment advisor who own individually more
than one-half of 1% of the securities of such issuer or together own more
than 5% of the securities of such issuer;
(6) with respect to 75% of the value of its assets, buy the securities of an
issuer if the purchase would cause more than 5% of the value of the Fund's
total assets to be invested in the securities of any one issuer (except for
obligations of the United States government and its instrumentalities) or
result in the Fund owning more than 10% of the voting securities of such
issuer;
(7) concentrate its investments in any one industry (no more than 25% of the
value of the Fund's assets will be invested in any one industry);
(8) borrow money;
(9) buy or sell real estate, although the Fund may purchase shares of a real
estate investment trust;
(10) invest in the securities of other investment companies; or
(11) issue senior securities.
Securities Lending. The Fund may from time to time lend its portfolio securities
to broker-dealers and/or banks, provided that such loans are made pursuant to
written agreements and are continuously secured by collateral in the form of
cash, U.S. government securities or irrevocable standby letters of credit in an
amount equal to at least the market value at all times of the loaned securities.
During the time portfolio securities are on loan, the lender continues to
receive the interest and dividends, or amounts equivalent thereto, on the loaned
securities while receiving a fee from the borrower or earned interest on the
investment of the cash collateral. The right to terminate the loan is given to
either party subject to appropriate notice. Upon termination of the loan, the
borrower returns to the lender securities identical to the loaned securities.
The Prudential has advised the Fund's Directors that the lender does not have
the right to vote securities on loan, but The Prudential would terminate the
loan and cause the loaned securities to be returned to the Fund in order to
exercise the voting rights if that were considered important with respect to the
investment. The primary risk in lending securities is that the borrower may
become insolvent on a day on which the loaned security is rapidly advancing in
price. In such event, if the borrower fails to return the loaned securities, the
existing collateral might be insufficient to purchase back the full amount of
stock loaned, and the borrower would be unable to furnish additional collateral.
The borrower would be liable for any shortage; but the Fund would be an
unsecured creditor to such shortage and might not be able to recover all or any
of it. However, this risk may be minimized by a careful selection of borrowers
and securities to be lent.
The Fund will not lend its portfolio securities to broker-dealers affiliated
with The Prudential, including Prudential Securities Incorporated. This will not
affect the Fund's ability to maximize its securities lending opportunities.
American Depository Receipts. The Fund may also invest in American Depository
Receipts (ADRs) which are U.S. dollar-denominated certificates issued by a
United States bank or trust company and represent the right to receive
securities of a foreign issuer deposited in a domestic bank or foreign branch of
a United States bank and traded on a United States exchange or in an
over-the-counter market.
Special Risks. In addition to the previously mentioned restrictions, the Fund
may invest no more than 10% of the value of its assets in securities which,
because of legal or contractual restrictions upon resale or for other reasons,
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<PAGE>
are not readily marketable. Such securities include the privately placed
evidences of indebtedness referred to above. As of December 31, 1996, the Fund
did not hold any such restricted securities.
Any investment in such securities may entail special risks because of
difficulties in selling them. If the securities were to be sold publicly, the
Fund may be deemed an "underwriter" for purposes of the Securities Act of 1933
and may be required to register the securities under that Act. In that case, the
Fund might have to bear the expense of such registration, and the delays in the
sale pending the registration could result in a lower selling price. If the
securities were to be sold privately, the price obtainable might be lower than
would be obtained if the securities could be publicly marketed.
The value of any such securities will be determined in good faith by or under
the authority of the Fund's Board of Directors. A determination that the value
of particular securities is less than would have been the case had the
securities been freely marketable will make the net asset value of Fund shares
correspondingly lower.
Investment in ADRs has certain advantages over direct investment in the
underlying foreign securities because they are easily transferable, have readily
available market quotations, and the foreign issuers are usually subject to
comparable auditing, accounting and financial reporting standards as domestic
issuers. Nevertheless, as foreign securities, ADRs involve certain risks which
should be considered fully by investors. These risks include political or
economic instability in the country of the issuer, the difficulty of predicting
international trade patterns, and the fact that there may be less publicly
available information about a foreign company than about a domestic company.
Investment by the Fund in warrants or rights to acquire stock may also entail
risks. The Fund will not purchase any such warrants or rights if after giving
effect to such purchase the total cost to the Fund of all warrants and rights
then held by it will exceed 3% of the value of its assets. Warrants are
basically options to purchase securities at a specified price within a given
time. They are highly speculative, have no voting rights, pay no dividends, and
have no rights with respect to the assets of the corporation that issues them.
The price of warrants does not necessarily move parallel with the price of the
underlying securities.
New Jersey Investment Laws
As long as The Prudential, or a subsidiary or affiliate thereof, continues to be
the investment advisor of the Fund, the Fund's investments must meet
requirements set forth in the Revised Statutes of New Jersey. The Fund has, to
the extent required by law, adopted such requirements as part of its investment
policy while The Prudential, or a subsidiary or affiliate, continues as the
investment advisor.
The following is a summary of current provisions of New Jersey law which impose
additional limitations on the investment policies of the Fund described in the
preceding two sections.
1. Evidences of indebtedness of a corporation, joint stock association,
business trust, business joint venture or business partnership may not be
purchased if in default as to interest.
2. The stock of a corporation may not be purchased unless (i) the corporation
has paid a cash dividend on the class of stock during each of the past five
years preceding the time of purchase, or (ii) during the five-year period
the corporation had aggregate earnings available for dividends on such
class of stock sufficient to pay average dividends of 4% per annum computed
upon the par value of such stock, or upon stated value if the stock has no
par value. This limitation does not apply to any class of stock which is
preferred as to dividends over a class of stock whose purchase is not
prohibited.
3. Any common stock purchased must be (i) listed or admitted to trading on a
securities exchange in the United States or Canada; or (ii) included in the
National Association of Securities Dealers' national price listings of
"over-the-counter" securities; or (iii) determined by the Commissioner of
Insurance of New Jersey to be publicly held and traded and as to which
market quotations are available.
4. Additional securities of a corporation may not be purchased if after the
purchase more than 10% of the market value of the assets of the Fund would
be invested in the securities of such corporation.
These currently applicable requirements of New Jersey law impose substantial
limitations on the ability of the Fund to invest in the stock of companies whose
securities are not publicly traded or who have not recorded a five-year history
of dividend payments or earnings sufficient to support such payments. This means
that the Fund will not generally invest in the stock of newly organized
corporations. Nonetheless, an investment not otherwise eligible under items 1
and 2 of this section may be made if, after giving effect to the investment, the
total cost of all such non-eligible investments does not exceed 5% of the
aggregate market value of the assets of the Fund.
Investment limitations may also arise under the insurance laws and regulations
of other states where Contracts of the Program are sold. Although compliance
with the requirements of New Jersey law set forth above will ordinarily result
in compliance with any applicable laws of other states, under some circumstances
the limitations of other states could impose additional restrictions on the
portfolio of the Fund.
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Summary of Investment Advisory Contract
Under an Investment Advisory Contract, The Prudential has agreed to furnish
investment management to the Fund. Such investment management entails the
selection of securities for purchase or sale by the Fund and the resulting
placement of orders. Periodic reports of such purchases and sales are submitted
to the Fund for review by the Board of Directors.
Subject to The Prudential's supervision, substantially all of the investment
management services provided by The Prudential are furnished by its wholly-owned
subsidiary, PIC, pursuant to the Service Agreement between The Prudential and
PIC which provides that The Prudential will reimburse PIC for its costs and
expenses. PIC is registered as an investment advisor under the Investment
Advisers Act of 1940.
The Prudential bears the expenses for investment advisory services incurred in
connection with the purchase and sale of securities (but not the brokers'
commissions and transfer taxes and other charges and fees attributable to
investment transactions), the salaries and expenses of all officers and
employees reasonably necessary for the Fund's operations (excluding members of
the Fund's Board of Directors who are not officers or employees of The
Prudential), and the office facilities of the Fund. The amount paid to The
Prudential for its investment advisory services to the Fund is shown under the
heading Prudential's Gibraltar Fund, Inc. on page 9.
The Investment Advisory Contract and the Service Agreement will continue in
effect from year to year provided renewal is approved at least annually by the
Fund's Board of Directors, including approval by a majority of those directors
who are not interested persons of either party to the Contract or Agreement.
The Investment Advisory Contract also grants the Fund a royalty-free,
non-exclusive license to use the words "Prudential's Gibraltar" and the
registered service mark of a rock representing the Rock of Gibraltar which
appears on the cover of this Prospectus. However, The Prudential may terminate
this license if The Prudential or a company controlled by it ceases to be the
Fund's investment advisor. The Prudential may also terminate the license for any
other reason upon 60 days written notice; but, in this event, the Contract shall
also terminate 120 days following receipt by the Fund of such notice, unless a
majority of the outstanding voting securities of the Fund vote to continue the
Contract notwithstanding termination of the license.
The Investment Advisory Contract may be terminated by the Board of Directors or
by the vote of a majority of the Fund's outstanding voting securities on 60 days
notice to The Prudential. The Prudential may terminate the Investment Advisory
Contract on 90 days notice to the Fund. The Investment Advisory Contract will
also terminate automatically in the event of its assignment.
The Prudential will continue to have responsibility for all investment advisory
services under its advisory or subadvisory agreements with respect to its
clients.
The Investment Advisory Contract with The Prudential was approved at the annual
meeting of stockholders held on May 21, 1970. The Board of Directors has
unanimously approved continuance of the Contract in each year since then, most
recently at a meeting held on February 12, 1997.
The Service Agreement between The Prudential and PIC will continue in effect as
to the Fund for a period of more than two years from its execution, only so long
as such continuance is specifically approved at least annually in the same
manner as the Investment Advisory Contract between The Prudential and the Fund.
The Agreement may be terminated by either party upon not less than 30 days prior
written notice to the other party, will terminate automatically in the event of
its assignment and will terminate automatically as to the Fund in the event of
the assignment or termination of the Investment Advisory Contract between The
Prudential and the Fund. The Prudential is not relieved of its responsibility
for all investment advisory services under the Investment Advisory Contract
between The Prudential and the Fund. The Agreement provides for The Prudential
to reimburse PIC for its costs and expenses incurred in furnishing investment
advisory services.
The Service Agreement between The Prudential and PIC was ratified by
stockholders at their annual meeting held on September 27, 1985. The Board of
Directors has unanimously approved continuance of the Agreement in each year
since then, most recently at a meeting held on February 12, 1997.
A separate contract between The Prudential and the Fund provides that, as long
as the Fund sells its shares only to The Prudential, its separate accounts or
organizations approved by it, The Prudential will pay all expenses of the Fund
not covered by the Investment Advisory Contract (except for the fees and
expenses of members of the Fund's Board of Directors who are not officers or
employees of The Prudential, brokers' commissions, transfer taxes and other
charges and fees attributable to investment transactions, and any other local,
state or federal taxes). The Prudential has accordingly paid the organizational
expenses of the Fund and such other expenses as those incurred in connection
with the registration of the Fund and Fund shares with the Securities and
Exchange Commission, the cost of preparing and printing Fund prospectuses, and
fees for auditors and lawyers. Under the present contractual arrangements, it
will continue to pay any such expenses incurred in the future.
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The Prudential as Manager of the Fund's Investments
Prudential Mutual Fund Investment Management (PMFIM), a division of PIC,
supplies the services with respect to equity securities. PMFIM analyzes
industries and companies within these industries in order to recommend purchases
and sales of equity securities. The personnel of PMFIM, formerly Prudential
Investment Advisors, comprised the Asset Management Department of The Prudential
until transferred to PIC on December 31, 1984, which Department had been
responsible since 1950 for recommending and supervising the investments that
comprise the substantial portfolio of common stocks held as part of The
Prudential's general assets. This portfolio approximated $303 million at the end
of 1996. That Department had also been responsible for a significant percentage
of the common stock investments of The Prudential's mutual funds, pension
accounts and other accounts.
Gregory P. Goldberg, Managing Director, PMFIM, has been the portfolio manager
for the Gibraltar Fund, Inc. since 1995. Mr. Goldberg also selects stocks for
the Prudential Multi-Sector Fund and is portfolio manager of the Prudential
Allocation Fund-Balanced Portfolio.
PMFIM's investment staff selects companies and diversifies investments over many
firms and industries. It provides continuous supervision and management over the
performance of the investments. This is to reduce the risk of developments which
may adversely affect the market value of the securities of one company or
industry. But the emphasis is on the careful choice of investments believed to
have potential for growth, rather than upon diversification alone.
In implementing the Fund's investment objectives, each securities analyst is
assigned the responsibility of keeping abreast of developments in specific
industries and companies within those industries. On the basis of periodic
contacts with company managements, consultants and research staffs of investment
banking and brokerage firms, as well as analyses of company reports, business
periodicals and standard statistical services, each analyst makes projections of
earnings and dividends, and determines the relative attraction of the companies
he/she follows based on these projections in the light of current conditions and
market price. Securities will be purchased for the Fund's portfolio and sold
from it on the basis of these analyses.
These methods of selection and supervision, like diversification, while they do
not guarantee successful investment or eliminate the risks involved therein, are
ones which the average individual may not have the time, facilities, training or
funds to employ on his/her own.
Portfolio Turnover. The Fund's portfolio turnover rates for the last ten years
are shown in the table on page 6. (This rate is used to measure the activity of
a fund's portfolio securities. It is calculated by dividing purchases or sales,
whichever is less, by the average monthly value of the portfolio securities, in
each case excluding securities with maturities of one year or less.)
As noted elsewhere in this Prospectus, the Fund seeks long-term growth of
capital rather than short-term trading profits. However, during any period when
changing economic or market conditions are anticipated, successful management
requires an aggressive response to such changes, which may increase the rate of
portfolio turnover. The rate of portfolio activity will usually affect the
brokerage costs of the Fund. It is anticipated that under normal circumstances
the portfolio turnover rate would not exceed 100%. During 1996 and 1995 the
portfolio turnover rates were 97% and 105% respectively.
The Prudential manages several other securities portfolios, including the
portfolios of The Prudential Series Fund, Inc., The Prudential Variable Contract
Account-2, The Prudential Variable Contract Account-10 and The Prudential
Variable Contract Account-11, registered under the 1940 Act as open-end
management investment companies. Some of these portfolios invest in common
stock. Investment opportunities may become available from time to time that are
suitable both for the Fund and for these other common stock portfolios. On these
occasions, an allocation of the securities available will be made, taking into
account the suitability of the security in the light of the investment
objectives of each portfolio, the size and composition of the respective
portfolios and the availability of cash.
Brokerage
The Prudential is responsible for decisions to buy and sell securities for the
Fund, the selection of brokers and dealers to effect the transactions and the
negotiation of brokerage commissions, if any. Transactions on a stock exchange
in equity securities will be executed primarily through brokers that will
receive a commission paid by the Fund. Fixed income securities, on the other
hand, as well as equity securities traded in the over-the-counter market, will
not normally incur any brokerage commissions. These securities are generally
traded on a "net" basis with dealers acting as principals for their own accounts
without a stated commission, although the price of the security usually includes
a profit to the dealer. In underwritten offerings, securities are purchased at a
fixed price that includes an amount of compensation to the underwriter,
generally referred to as the underwriter's concession or
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discount. Certain of these securities may also be purchased directly from an
issuer, in which case neither commissions nor discounts are paid.
In placing orders for securities transactions, primary consideration is given to
obtaining the most favorable price and efficient execution. An attempt is made
to effect each transaction at a price and commission, if any, that provides the
most favorable total cost of proceeds reasonably attainable in the
circumstances. However, a higher commission than would otherwise be necessary
for a particular transaction may be paid if to do so appears to further the goal
of obtaining the best available execution.
In connection with any securities transaction that involves a commission
payment, the commission is negotiated with the broker on the basis of the
quality and quantity of execution services that the broker provides, in light of
generally prevailing commission rates. Periodically, The Prudential and PIC
review the allocation among brokers of orders for equity securities and the
commissions that were paid.
When selecting a broker or dealer in connection with a transaction for any
portfolio, consideration is given to whether the broker or dealer has furnished
The Prudential or PIC with certain services, provided this does not jeopardize
the objective of obtaining the best price and execution. These services, which
include statistical and economic data and research reports on particular
companies and industries, are services that brokerage houses customarily provide
to institutional investors. The Prudential or PIC use these services in
connection with all investment activities, and some of the data or services
obtained in connection with the execution of transactions for the Fund may be
used in connection with the execution of transactions for other investment
accounts.
Conversely, brokers and dealers furnishing such services may be selected for the
execution of transactions of such other accounts, while the data or service may
be used in providing investment management for the Fund. Although The
Prudential's present policy is not to permit higher commissions to be paid on
transactions in order to secure research and statistical services from brokers,
The Prudential might in the future authorize the payment of higher commissions,
but only with the prior concurrence of the Board of Directors of the Fund, if it
is determined that the higher commissions are necessary in order to secure
desired research and are reasonable in relation to all of the services that the
broker provides.
When investment opportunities arise that may be appropriate for more than one
entity for which The Prudential serves as investment manager or advisor, one
entity will not be favored over another and allocation of investments among them
will be made in an impartial manner believed to be equitable to each entity
involved. The allocations will be based on each entity's investment objectives
and its current cash and investment positions. Because the various entities for
which The Prudential acts as investment manager or advisor have different
investment objectives and positions, from time to time a particular security may
be purchased for one or more such entities while at the same time such
securities may be sold for another.
Prudential Securities Incorporated (Prudential Securities) may act as a
securities broker for the Fund. In order for Prudential Securities to effect any
portfolio transactions for the Fund, the commissions, fees or other remuneration
received by Prudential Securities must be reasonable and fair compared to the
commissions, fees or other remuneration paid to other brokers in connection with
comparable transactions involving similar securities being purchased or sold on
an exchange during a comparable period of time. This standard would allow
Prudential Securities to receive no more than the remuneration that would be
expected to be received by an unaffiliated broker in a commensurate arm's-length
transaction. The Fund may not engage in any transactions in which The Prudential
or its affiliates, including Prudential Securities, acts as principal, including
over-the-counter purchases and negotiated trades in which such a party acts as a
principal.
The Prudential or its affiliates, including PIC may enter into business
transactions with brokers or dealers for purposes other than the execution of
portfolio securities transactions for accounts The Prudential manages. These
other transactions will not affect the selection of brokers or dealers in
connection with portfolio transactions for the Fund.
During the calendar year 1996, $662,074 was paid to various brokers in
connection with securities transactions for the Fund. Of this amount,
approximately 64.9% was allocated to brokers who provided research and
statistical services to The Prudential. The equivalent figures for 1995 were
$756,838 and 77.52% and for 1994 were $774,338 and 74.6%.
Of the total brokerage fees paid by the Fund during 1996, $19,301 or 2.9% was
paid to Prudential Securities Incorporated, an affiliated broker. For 1996,
Prudential Securities effected 2.2% of the transactions involving the payment of
commissions, on an aggregate dollar basis. For 1995 and 1994, no money or
percentage was paid.
Determination of Net Asset Value
Shares of the Fund are sold to Prudential's Investment Plan Account,
Prudential's Annuity Plan Account and Prudential's Annuity Plan Account-2, which
invest the money paid for purchases under the tax-qualified and
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non-tax-qualified contracts of the Program. Sales of Fund shares are made at the
net asset value next determined after such purchases are made.
The Prudential determines the net asset value of Fund shares on each business
day (a day on which the New York Stock Exchange is open for business). The net
asset value is computed by dividing the net assets by the number of outstanding
shares of the Fund. Net assets are the total of cash and other assets, including
investment securities taken at value, minus liabilities.
Each security traded on a national securities exchange will be valued at the
price which, on the date of valuation, is the last sales price (or the mean
between the last bid and asked price if there were no sales of the security that
day) on the New York Stock Exchange, or if not traded on such exchange, such
last sales or mean price at the time of close of the New York Stock Exchange on
the principal exchange on which such security is traded. For any security not
traded on a national securities exchange but traded in the over-the-counter
market, the value will be the mean between the last reported bid and asked price
available at the time of close of the New York Stock Exchange, except that the
securities for which quotations are furnished through a nationwide automated
quotation system approved by the National Association of Securities Dealers,
Inc. (NASDAQ) will be valued at the last sale price or, if there was no sale on
such day, at the mean between the most recently quoted bid and asked prices on
the date of valuation provided by a pricing service which utilizes NASDAQ
quotations. Debt obligations with maturities of less than 60 days are valued at
amortized cost. Portfolio securities or assets for which market quotations are
not readily available will be valued at fair value as determined in good faith
by or under authority of the Fund's Board of Directors.
Redemption of Fund Shares
Redemptions of Fund shares result from liquidations of interests under the
Contracts of the Program, and are made at the net asset value next determined
after such liquidations are made. Payment for shares redeemed will ordinarily be
made within 7 days after the redemption request is received from The Prudential.
This right of redemption may, however, be suspended for any period during which
the New York Stock Exchange is closed on other than a regular holiday or
weekend, or trading thereon is restricted, or for any period during which an
emergency exists as a result of which it is not reasonably practicable for the
Fund either to dispose of securities owned by it or to determine the value of
its assets fairly. Redemption may also be suspended in the event the Securities
and Exchange Commission has provided for such suspension for the protection of
security holders. See withdrawal restrictions applicable to Section 403(b)
annuities discussed in Section 403(b) Annuities, page 15.
Description of Fund Shares and Voting Rights
The Fund's authorized capital is 75,000,000 shares of common stock, $1 par
value. Common stock is purchased with amounts arising from payments made by
participants in the separate accounts of the Prudential Financial Security
Program. All shares of Fund stock are entitled to participate equally in
dividends and distributions of the Fund and in its net assets remaining upon
liquidation after satisfaction of outstanding liabilities. Fund shares are fully
paid and nonassessable when issued and have no preemptive, conversion or
exchange rights. Such shares are redeemable upon request, except under the
circumstances described in the preceding section, Redemption of Fund Shares.
After a distribution of investment income and realized net capital gains in
December of each year, the balance of the Fund's investment income and realized
net capital gains for the calendar year then ending are normally distributed
during the first calendar quarter after the end of that calendar year. Any such
distributions to the accounts will ordinarily be credited in the form of
additional Fund shares at net asset value. However, partial distributions may be
made in cash to meet expenses of the accounts. See Federal Income Taxes, below.
Each share of common stock outstanding is entitled to one vote. Fund shares are
held only by separate accounts of The Prudential. At December 31, 1996,
Prudential's Annuity Plan Account-2, the account discussed in this Prospectus,
held approximately 19% of all Fund shares outstanding. Prudential's Investment
Plan Account and Prudential's Annuity Plan Account, separate accounts of The
Prudential which are not discussed in this Prospectus, held approximately 80%
and 1%, respectively. Fund shares are voted by The Prudential in accordance with
voting instructions received from participants in those accounts. Instruction
forms for this purpose will be furnished by The Prudential. If there are Fund
shares held in the Account for which voting instructions are not received, The
Prudential will vote those shares on each matter in the same proportion as it
votes the Fund shares held in the Account for which it received instructions.
Custodian, Transfer Agent and Dividend-Paying Agent
The Chase Manhattan Bank, Chase MetroTech Center, Brooklyn, New York 11245, is
currently custodian of the Fund's assets and transfer agent and dividend-paying
agent of the Fund. Subject to Board approval, on or about
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May 31, 1997, Investors Fiduciary Trust Company, 127 West 10th Street, Kansas
City, Missouri 64105-1716, will become the custodian of the Fund's assets and
transfer agent and dividend-paying agent of the Fund. The Fund's custodian
maintains certain financial and accounting books and records on behalf of the
Fund pursuant to an agreement with the Fund.
SUPPLEMENTARY INFORMATION
State Regulation
The Prudential is subject to regulation by the Department of Insurance of the
State of New Jersey as well as by the insurance departments of all the other
states and jurisdictions in which it does business. The Prudential must file an
annual statement in a form promulgated by the National Association of Insurance
Commissioners. This annual statement is reviewed and analyzed by the New Jersey
Department, which makes an independent computation of The Prudential's reserve
liabilities under all outstanding life insurance and annuity contracts.
New Jersey law requires a quinquennial examination of The Prudential to be made.
Examination involves extensive audit, including but not limited to an inventory
check of assets, sampling techniques to check the performance by The Prudential
of its contracts, and an examination of the manner in which divisible surplus
has been apportioned and distributed to policyholders and contractholders.
The laws of New Jersey also contain special provisions, which are codified as
Sections 17B:28-1 through 17B:28-14 of the New Jersey Statutes, which relate to
the issuance and regulation of contracts on a variable basis. These statutes set
forth a number of mandatory provisions which must be included in contracts on a
variable basis and prohibit such contracts from containing other specified
provisions.
In addition to the annual statement referred to above, The Prudential is
required to file with New Jersey and other states a separate annual statement
with respect to the operations of all its variable contract accounts, in a form
promulgated by the National Association of Insurance Commissioners.
Regulation by the New Jersey Department does not involve any supervision or
control over the investment policy of the Fund or over the selection of
investments therefor, except for verification that certain investment
requirements of New Jersey law are met.
Federal Income Taxes
Prudential's Gibraltar Fund, Inc. Under the provisions of the Internal Revenue
Code applicable to regulated investment companies, the Fund, by distributing
substantially all of its net investment income and realized capital gains, will
be relieved of federal income tax on the income and gains so distributed. The
Fund has qualified for such tax treatment and intends to continue to so qualify.
Qualification of the Fund as a regulated investment company does not involve
government supervision of management or of investment practices or policies. See
Description of Fund Shares and Voting Rights on page 23. There is a 4% excise
tax on a portion of the undistributed income of a regulated investment company
if that company fails to distribute required percentages of its ordinary income
and capital gain net income. The Fund intends to employ practices that will
eliminate or minimize the imposition of this excise tax.
Prudential's Annuity Plan Account-2. The operations of Prudential's Annuity Plan
Account-2 form a part of, and are taxed with, the operations of The Prudential.
No federal income tax is currently payable on distributions of income received
on the Fund shares held in the Account for the benefit of Planholders, on
capital gains realized by The Prudential on redemptions of Fund shares, or on
capital gains dividends received by the Account from the Fund.
Retirement Plans Under the Program. The provisions of the Code that apply to
retirement plans are complex, and Planholders would be well advised to consult a
qualified tax advisor, particularly if liquidation under a Contract is
contemplated. Withdrawals may be subject to income tax consequences, including
tax penalties. In general, assuming that the requirements and limitations of the
applicable provisions of the Code are adhered to by Accountholders, Planholders
and employers, contributions made to a qualified retirement plan (other than
after-tax employee contributions) are deductible by the employer and not
currently taxable to Planholders.
The principal tax advantages to Planholders under these plans derive from the
facts that within certain limits the amounts set aside each year are in pre-tax
rather than after-tax dollars, and that no federal income tax is currently
imposed upon investment income or realized gains earned by the Account in which
the accumulated purchase payments are held. When an annuity becomes payable
under these plans all or a portion of the monthly payments are taxable as
ordinary income under Section 72 of the Code. Lump sum distributions are
generally treated as ordinary income, but may in certain circumstances be
treated part as long-term capital gains and part as ordinary income. The amount
of tax may also be limited in some cases by a special income averaging rule.
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Taxable payments under the Contract will generally be subject to withholding by
the payer. In some circumstances, recipients of pensions and annuities may elect
for withholding not to apply.
Recipients, including those who have elected out of withholding, must supply
their Taxpayer Identification Number (Social Security Number) to payers of
distributions for tax reporting purposes. Failure to furnish this number when
required may result in the imposition of a tax penalty and subject the
distribution to the back up withholding requirements of the law.
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 The 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, 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, The Prudential will withhold from
every withdrawal or annuity payment the appropriate percentage of the amount of
the payment that is taxable. The Prudential will provide the Contract owner with
forms and instructions concerning the right to elect that no amount be withheld
from payments. 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 the general withholding requirements.
The few additional comments which follow concerning possible tax consequences
under qualified plans for self-employed individuals, IRA, savings incentive
match plans for employees (SIMPLE) under Code Section 408(p) and Section 403(b)
annuities are intended merely to call attention to certain features of those
plans. They do not purport to be a complete discussion, and are not intended as
tax advice. As suggested above, a qualified tax advisor should be consulted for
advice and answers to any questions.
Qualified Plans for Self-employed Individuals. For self-employed individuals who
establish such 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." "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: attains age 70 1/2; or
retires.
Ira Plans. For persons who establish such plans, the annual contribution limit
is the lesser of $2,000 or 100% of earned income. An IRA contribution of up to
$2,000 for each spouse is permitted (including a non-working spouse) if the
combined compensation of both spouses is at least equal to the contributed
amount, provided that the non-working spouse earns less than the working spouse
and they file a joint return. As with qualified plans for self-employed
individuals, payments to the Planholder must begin by April 1 of the year
following the calendar year in which age 701 @2 is attained and are subject to
certain minimum distribution requirements. Any distributions before age 591 @2
generally may result in certain penalty taxes. Certain penalties may result if
the contribution or age limitations are exceeded.
Deductions for IRA contributions in those cases where an individual or an
individual's spouse is an active participant in an employer sponsored pension
plan, Simplified Employee Pension (SEP), SIMPLE, Section 403(a) or Section
403(b) annuity are limited to individuals whose adjusted gross income is less
than certain specified amounts.
For married individuals who file a joint tax return, a full deduction will be
available if adjusted gross income is $40,000 or less. For a single individual,
the limit is $25,000. Partial deduction for IRA contributions will be available
for married, joint filers who have adjusted gross income of more than $40,000
and less than $50,000 and single individuals whose adjusted gross income is less
than $35,000. Married individuals filing separately will be permitted to take a
partial deduction if their adjusted gross income is less than $10,000.
Section 403(b) Annuities. The amounts contributed under these plans and
increments thereon are not taxable as income until distributed as annuity income
or otherwise. In general, the maximum amount that can be contributed by salary
reduction is $9,500. However under certain special rules, the limit could be
increased as much as $3,000.
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In addition, the Code permits certain total distributions from a Section 403(b)
Annuity to be "rolled over" to another Section 403(b) Annuity or IRA. Certain
partial distributions from a Section 403(b) Annuity may be "rolled over" to an
IRA.
An annuity contract will not qualify as a Section 403(b) Annuity 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 death, disability, separation from service,
attainment of age 59 1/2 or 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 do not apply to the
transfer of all or part of a participant's interest in his/her Contract among
the available investment options offered by The Prudential and do not apply to
the direct transfer of all or part of the Participant'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).
In imposing the restrictions on withdrawals as described above, The 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 plans.
Distributions from a IRA generally must commence by April 1 of the calendar year
following the later of (1) the calendar year in which the employee attains age
701 @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.
Penalty for Early Withdrawals. A 10% penalty tax will generally apply to the
taxable part of distributions received from an IRA, SEP, SIMPLE (25% penalty in
certain situations), Section 403(b) annuity, qualified plans for self-employed
individuals, and other qualified plans before age 591 @2. Limited exceptions are
provided, such as where amounts are paid in the form of a qualified life
annuity, upon death of the employee, to pay certain medical expenses, or in
certain instances, disability, or upon separation from service on or after
attainment of age 55. The terms of your retirement arrangement will control
application of the limited exceptions.
Additional Information
This Prospectus does not contain all the information set forth in the
registration statement, certain portions of which have been omitted pursuant to
the rules and regulations of the Securities and Exchange Commission. The
information so omitted may be obtained from the Commission's principal office in
Washington, D.C., upon payment of the fees prescribed by the Commission.
Experts
The financial statements and financial highlights included in this Prospectus
for the fiscal year 1996 have been audited by Price Waterhouse LLP, independent
accountants, as stated in their reports appearing herein. The financial
statements and financial highlights included in this Prospectus for all fiscal
years prior to 1996, have been audited by Deloitte & Touche LLP, independent
auditors, as stated in their reports appearing herein. Such financial statements
and financial highlights have been included herein in reliance upon the reports
of such firms 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. Deloitte & Touche LLP's principal business
address is Two Hilton Court, Parsippany, New Jersey 07054-0319.
Litigation
On October 28, 1996, The Prudential entered into a Stipulation of Settlement in
a multidistrict proceeding involving allegations of various claims relating to
The Prudential's life insurance sales practices. (In re Prudential Insurance
Company of America Sales Practices Litigation, D.N.J., MDL No. 1061, Master
Docket No. 95-4704 (AMW).) On March 7, 1997, the United States District Court
for the District of New Jersey approved the Stipulation of Settlement as fair,
reasonable and adequate.
Pursuant to the Settlement, The Prudential has agreed to provide an alternative
dispute resolution process for class members who believe they were misled
concerning the sale or performance of their life insurance policies. The
Settlement also provides certain no-fault relief. The ultimate cost of the
Settlement will depend on a variety of factors, including the number of
policyowners who participate in the Settlement, the number of policyowners who
26
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are afforded relief and the remediation option they select. The administrative
costs of implementing the Settlement are also subject to a number of complex
uncertainties. In light of the uncertainties attendant to these and other
factors, it is difficult at this time to estimate the ultimate cost of the
Settlement to The Prudential.
In addition, a number of actions have been filed against The Prudential by
policyowners who have excluded themselves from the settlement; The 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 The Prudential's activities. As of February 24, 1997, The Prudential
had entered into consent orders or agreements with all 50 states and the
District of Columbia to implement a remediation plan, whose terms closely
parallel the Settlement approved in the MDL proceeding, and agreed to a series
of payments allocated to all 50 states and the District of Columbia amounting to
a total of approximately $65 million.
Litigation is subject to many uncertainties, and given the complexity and scope
of these suits, their outcome cannot be predicted.
Accordingly, management is unable to make a meaningful estimate of the amount or
range of loss that could result from an unfavorable outcome of all pending
litigation. It is possible that the results of operations or the cash flow of
The 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 The Prudential's financial position.
DIRECTORS AND OFFICERS OF THE FUND
The directors and executive officers of the Fund are listed below, together with
their addresses and information as to their principal occupations during the
past five years. Collectively, they own, on record or beneficially, less than a
1% interest in separate accounts of The Prudential which hold Fund shares.
Directors' meeting fees and expenses are paid by the Fund only in respect to
those directors or former directors who are not officers or employees of The
Prudential. Such payments totaled $9,600 in 1996 and $7,200 in 1995,
representing equal amounts paid to Messrs. Fenster, McDonald and Weber.
MENDEL A. MELZER*, Chairman of the Board--Chief Investment Officer of Prudential
Investments since 1996; 1995 to 1996: Chief Financial Officer of the Money
Management Group of Prudential; 1993 to 1995: Senior Vice President and Chief
Financial Officer of Prudential Preferred Financial Services; Prior to 1993:
Managing Director, The Prudential Investment Corporation. Address: 751 Broad
Street, Newark, New Jersey 07102.
JONATHAN GREENE*, President and Director.--President of Investment Management,
Prudential Investments, since 1996; Vice President and Portfolio Manager T. Rowe
Price Associates, Inc, 1974 to 1996. Address: 751 Broad Street, Newark, New
Jersey 07102.
SAUL K. FENSTER, Director--President of New Jersey Institute of Technology.
Address: 323 Martin Luther King Boulevard, Newark, New Jersey 07102.
W. SCOTT MCDONALD, JR., Director--Principal, Kaludis Consulting Group since
1997; 1995 to 1996: Principal, Scott McDonald & Associates; Prior to 1995:
Executive Vice President of Fairleigh Dickinson University. Address:9 Zamrok
Way, Morristown, New Jersey 07960.
JOSEPH WEBER, Director--Vice President, Interclass (international corporate
learning). Address: 37 Beachmont Terrace, North Caldwell, New Jersey 07006.
SUSAN COTE, Vice President--Vice President Prudential Investments since 1996;
1995 to 1996: Chief Operating Officer and Managing Director, Prudential Mutual
Fund Investment Management; Prior to 1995: Senior Vice President and Treasurer
of Prudential Mutual Funds. Address: 100 Mulberry Street, Gateway Center 3,
Newark, New Jersey 07102.
THOMAS EARLY, Secretary--General Counsel, Mutual Funds and Annuities, Prudential
Investments since 1996; 1994 to 1996: General Counsel, Prudential Retirement
Services, Prudential Investments; Prior to 1994: Associate General Counsel and
Chief Financial Services Counsel, Frank Russell Company. Address: 100 Mulberry
Street, Gateway Center 3, Newark, New Jersey 07102.
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EUGENE STARK, Comptroller, Principal Financial Officer and Treasurer--Vice
President, Prudential Investments since 1996; prior thereto First Vice President
of Prudential Mutual Fund Management LLC. Address: 100 Mulberry Street, Gateway
Center 3, Newark, New Jersey 07102.
* These members of the Board are interested persons of The Prudential, its
affiliates or the Fund as defined in the 1940 Act. Certain actions of the Board,
including the annual continuance of the Investment Advisory Contract between the
Fund and The Prudential, must be approved by a majority of the members of the
Board who are not interested persons of The Prudential, its affiliates or the
Fund. Mr. Melzer and Mr. Greene, two of the five members of the Board, are
interested persons of The Prudential and the Fund, as that term is defined in
the 1940 Act, because they are officers and/or affiliated persons of The
Prudential, the investment advisor to the Fund. Messrs. Fenster, McDonald and
Weber are not interested persons of The Prudential, its affiliates or the Fund.
However, Mr. Fenster is President of the New Jersey Institute of Technology. The
Prudential has issued a group annuity contract to the Institute and provides
group life and group health insurance to its employees.
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
DIRECTORS
FRANKLIN E. AGNEW, Director since 1994 (current term expires April, 2000).
Member, Committee on Dividends; Member, Finance Committee. Business consultant
since 1987. Senior Vice President H.J. Heinz from 1971 to 1986. Mr.Agnew is also
a director of Bausch & Lomb Inc. and John Wiley & Sons, Inc. Age 62. Address:
One Mellon Bank Center, Suite 2120, Pittsburgh, PA 15219.
FREDERICK K. BECKER, Director since 1994 (current term expires April, 1999).
Member, Auditing Committee, Member, Committee on Business Ethics. President,
Wilentz Goldman and Spitzer (law firm) since 1989, with firm since 1960. Age 61.
Address: 90 Woodbridge Center Drive,
Woodbridge, NJ 07095.
JAMES G. CULLEN, Director since 1994 (current term expires April, 2001). Member,
Compensation Committee; Member, Committee on Business Ethics. Vice Chairman,
Bell Atlantic Corporation. President, Bell Atlantic Corporation from 1993 to
1995. President New Jersey Bell 1989 to 1993. Mr. Cullen is also a director of
Johnson& Johnson. Age 54. Address: 1310 North Court House Road, 11th Floor,
Alexandria, VA 22201.
CAROLYNE K. DAVIS, Director since 1989 (current term expires April, 1997).
Member, Finance Committee; Member Committee on Business Ethics; Member,
Compensation Committee. National and International Health Care Advisor, Ernst &
Young since 1985. Dr. Davis is also a director of Merck & Co., Inc., Beckman
Instruments, Inc., Pharmaceutical Marketing Services, Inc. and Science
Applications International Corporation. Age 65. Address: 1225 Connecticut
Avenue, N.W., Washington, DC 20036.
ROGER A. ENRICO, Director since 1994 (current term expires April, 1998). Member,
Committee on Nominations; Member, Compensation Committee. CEO PepsiCo, Inc.
since 1996. Vice Chairman, PepsiCo, Inc. from 1993 to 1996. Chairman and CEO,
Pepsi Co. Worldwide Food, from 1991 to 1993. President and CEO, Pepsi Co.
Worldwide Beverage from 1986-1991. Mr. Enrico is also a director of Dayton
Hudson Corporation and A.H.Belo Corporation. Age 52. Address: 14841 North Dallas
Parkway, Dallas, TX, 75240.
ALLAN D. GILMOUR, Director since 1995 (current term expires April, 1999).
Retired since 1995. Vice Chairman, Ford Motor Company, from 1993 to 1995. Mr.
Gilmour originally joined Ford in 1960. Mr. Gilmour is also a director of
USWest, Inc., Whirlpool Corporation and The Dow Chemical Company. Age 62.
Address: 751 Broad Street, Newark, NJ 07102.
WILLIAM H. GRAY, III, Director since 1991 (current term expires April, 2000).
Member, Finance Committee; Member, Committee on Nominations. President and Chief
Executive Officer, The College Fund/UNCF since 1991. Mr.Gray served in Congress
from 1979 to 1991. Mr.Gray is also a director of Warner-Lambert Co., Chase
Manhattan Corp., Municipal Bond Investors Assurance Corp., Westinghouse Electric
Corp., Union Pacific Corp., Lotus Development Corp., and Rockwell International
Corp. Age 55. Address: 8260 Willow Oaks Corp. Drive, Fairfax, VA 22031.
JON F. HANSON, Director since 1991 (current term expires April, 1997). Member,
Finance Committee; Member, Committee on Dividends. Chairman, Hampshire
Management Co. since 1976. Mr. Hanson is also a director of United Water
Resources. Age 60. Address: 235 Moore Street, Suite 200, Hackensack, NJ 07601.
28
<PAGE>
GLEN H. HINER, JR., Director since 1997. Chairman and Chief Executive Officer,
Owens Corning. Age 62. Address: One Owens Corning Parkway, Toledo, OH 43659.
CONSTANCE J. HORNER, Director since 1994 (current term expires April, 1998).
Member, Auditing Committee; Member, Committee on Nominations. Guest Scholar, The
Brookings Institution since 1993. Assistant to the President and Director of
Presidential Personnel, U.S. Government, 1991-1992. Deputy Secretary, Department
of Health & Human Services from 1989 to 1991. Ms. Horner is also a director of
Pfizer, Inc., Ingersoll-Rand Company and Foster Wheeler Corporation. Age 55.
Address: 1775 Massachusetts Ave., N.W. Washington, D.C. 20036-2188.
GAYNOR N. KELLEY, Director.--Former Chairman and Chief Executive Officer, The
Perkin Elmer Corporation. Age 65. Address: 751 Broad Street, Newark, New Jersey
07102-3777.
BURTON G. MALKIEL, Director since 1978 (current term expires April, 1998).
Chairman, Finance Committee; Member, Executive Committee; Member, Committee on
Nominations. Professor, Princeton University, since 1988. Dr. Malkiel is also a
director of The Jeffrey Co., Vanguard Group, Inc., Amdahl Corporation, Baker
Fentress & Company, and Southern New England Telecommunications Co. Age 64.
Address: 110 Fisher Hall, Prospect Avenue, Princeton University, Princeton, NJ
08544-1021.
ARTHUR F. RYAN, Chairman of the Board, President and Chief Executive Officer of
Prudential since 1994. President and Chief Operating Officer, Chase Manhattan
Corp. from 1990 to 1994, with Chase since 1972. Age 54. Address: 751 Broad
Street, Newark, NJ 07102-3777.
IDA F. S. SCHMERTZ, Director. Principal, Investment Strategies International.
Age 62. Address: 90 Riverside Drive, New York, NY 10024.
CHARLES R. SITTER, Director since 1995 (current term expires April, 1999).
Member, Committee on Dividends. President, Exxon Corporation from 1993 to 1996.
Mr. Sitter began his career with Exxon in 1957; he is currently a director of
Exxon. Age 66. Address: 5959 Las Colinas Boulevard, Irving, TX 75039.
DONALD L. STAHELI, Director since 1995 (current term expires April, 1999).
Member, Compensation Committee. Chairman and Chief Executive Officer,
Continental Grain Company since 1994. Mr. Staheli was Chairman of Continental
Grain from 1988 to 1994. Age 65. Address: 277 Park Avenue, New York, NY 10172.
RICHARD M. THOMSON, Director since 1976 (current term expires April, 2000).
Chairman, Compensation Committee; Member, Committee on Nominations, Member,
Executive Committee. Chairman of the Board and Chief Executive Officer, The
Toronto-Dominion Bank since 1978. Mr. Thomson is also a director of CGC, Inc.,
Eaton's of Canada, Ltd., INCO, Ltd., The Thomson Corp. National Retail Credit
Services Limited, TEC Leaseholds Limited, Thomglen Corporation and S.C. Johnson
& Son, Ltd. Age 63. Address: P.O. Box 1, Toronto-Dominion Centre, Toronto,
Ontario, M5K 1A2, Canada.
JAMES A. UNRUH, Director since 1996 (current term expires April, 2000). Chairman
and Chief Executive Officer of Unisys Corporation since 1990. Mr. Unruh is also
a director of Ameritech Corporation. Age 56. Address: Township Line& Union
Meeting Roads, Blue Bell, PA 19424.
P. ROY VAGELOS, M.D., Director since 1989 (current term expires April, 1997).
Chairman, Auditing Committee; Member, Committee on Dividends; Member, Executive
Committee. Chairman, Regeneron Pharmaceuticals since 1995. Chairman and Chief
Executive Officer, Merck & Co., Inc. from 1986 to 1994. Dr. Vagelos is also a
director of Pepsi Co., Inc., The Estee Lauder Companies Inc. and McDonnell
Douglas Corp. Age 67. Address: One Crossroads Drive, Bedminster, NJ 07921.
STANLEY C. VAN NESS, Director since 1990 (current term expires April, 2002).
Chairman, Committee on Business Ethics; Member, Auditing Committee; Member,
Executive Committee. Attorney, Picco Herbert Kennedy (law firm) from 1990.
Partner of Jamieson, Moore, Peskin & Spicer from 1984 to 1990. Mr. Van Ness is
also a director of Jersey Central Power & Light Company. Age 63. Address: One
State Street Square, Suite 1000, Trenton, NJ 08607-1388.
PAUL A. VOLCKER, Director since 1988 (current term expires April, 2000). Member,
Committee on Dividends; Member, Committee on Nominations. Chairman, James D.
Wolfensohn, Inc. since 1988; Chief Executive Officer, James D. Wolfensohn, Inc.
since 1995. Chairman, J. Rothschild, Wolfensohn & Co. from 1992 to 1995. Mr
Volcker is also a director of Fuji-Wolfensohn International, Nestle, S.A., UAL
Corp. and the Board of Governors, American Stock Exchange. Age 69. Address: 599
Lexington Avenue, New York, NY 10022.
JOSEPH H. WILLIAMS, Director since 1994 (current term expires April, 1998).
Member, Auditing Committee; Member, Committee on Dividends. Chairman of the
Board, The Williams Companies since 1994. Chairman & Chief Executive Officer,
The Williams Companies 1979-1993. Mr.Williams is also a director of Flint
Industries and The Orvis Company. Age 63. Address: One Williams Center, Tulsa,
OK 74102.
29
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
PRINCIPAL OFFICERS
ARTHUR F. RYAN, Chairman, Chief Executive Officer, and President since 1994. Age
54.
E. MICHAEL CAULFIELD, Chief Executive Officer, Prudential Investments since
1996; Chief Executive Officer, Money Management Group since 1995; 1989-92
Managing Director. Age 50.
MICHELE S. DARLING, Executive Vice President, Human Resources. Age 43.
RODGER LAWSON, Executive Vice President, Marketing and Planning. Age 50.
MARK B. GRIER, Chief Financial Officer since 1995. Age 44.
JOHN V. SCICUTELLA, Executive Vice President, Operations and Systems, since
1995. Age 48.
WILLIAM F. YELVERTON, Chief Executive Officer, Individual Insurance Group since
1995. Age 55.
R. BROCK ARMSTRONG, Senior Vice President, Individual Insurance Development. Age
50.
MARTIN BERKOWITZ, Senior Vice President and Comptroller since 1995. Age 48.
WILLIAM M. BETHKE, President, Capital Markets Group, Senior Vice President since
1986. Age 49.
LEO J. CORBETT, Senior Vice President, Individual Insurance Marketing. Age 48.
MARK R. FETTING, President, Prudential Retirement Services. Age 42.
WILLIAM D. FRIEL, Senior Vice President and Chief Information Officer since
1993; 1988-92: Vice President. Age 57.
JAMES R. GILLEN, Senior Vice President and General Counsel since 1984. Age 59.
BRUCE J. GOODMAN, Chief Executive Officer, Prudential Service Company, Senior
Vice President since 1993.Age 55.
JONATHAN M. GREENE, President, Investment Management, Prudential Investments.
Age 53.
JEAN D. HAMILTON, President, Diversified Group. Age 50.
RONALD JOELSON, Senior Vice President, Guaranteed Products. Age 39.
IRA J. KLEINMAN, Executive Vice President, International Insurance Group; Senior
Vice President since 1992; 1978-92: Vice President. Age 49.
DONALD C. MANN, Senior Vice President, Community Resources; Senior Vice
President since 1990; 1985-90: Vice President. Age 54.
NEIL A. McGUINNESS, Senior Vice President, Marketing, Prudential Investments.
Age 50.
PRISCILLA A. MYERS, Senior Vice President, Audit, Compliance and Investigation
since 1995. Age 47.
RICHARD O. PAINTER, President, Prudential Insurance& Financial Services since
1995. Age 49.
KIYOFUMI SAKAGUCHI, President, International Insurance Group since 1995. Age 54.
GREGORY W. SCOTT, Chief Financial Officer, Prudential Healthcare Group since
1995. Age 43.
BRIAN M. STORMS, President, Mutual Funds and Annuities, Prudential Investments
since 1996. Age 42.
ROBERT J. SULLIVAN, Senior Vice President, Sales, Prudential Investments. Age
58.
SUSAN L. BLOUNT, Vice President and Secretary since 1995. Age 39.
C. EDWARD CHAPLIN, Vice President and Treasurer since 1995. Age 40.
30
<PAGE>
FINANCIAL STATEMENTS OF
PRUDENTIAL'S ANNUITY PLAN ACCOUNT-2
<TABLE>
<CAPTION>
STATEMENT OF NET ASSETS
December 31, 1996
<S> <C>
Investment in 4,984,507 shares of
Prudential's Gibraltar Fund at net asset
value of $11.4274 per share (Cost:
$46,574,629)............................... $ 56,959,863
Accrued expenses............................. (9,859)
--------------
NET ASSETS................................... $ 56,950,004
--------------
--------------
NET ASSETS, representing:
Equity of planholders [Notes 8]............ $ 54,320,588
Equity of annuitants [Note 8].............. 533,348
Equity of The Prudential Insurance Company
of America............................... 2,096,068
--------------
$ 56,950,004
--------------
--------------
</TABLE>
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS
Year Ended December 31, 1996
<S> <C> <C>
INVESTMENT INCOME
Dividend distributions received............ $ 695,470
EXPENSES
Charges to planholders and annuitants for
assuming mortality and expense risks and
for administration [Note 3].............. $ 355,141
---------------
NET INVESTMENT INCOME........................ 340,329
---------------
NET REALIZED AND UNREALIZED GAIN ON
INVESTMENTS
Capital gains distributions received....... 5,956,471
Realized gain on shares redeemed
[identified cost basis] [Note 2]......... 891,850
Net unrealized gain on investments......... 5,257,088
---------------
NET GAIN ON INVESTMENTS...................... 12,105,409
---------------
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS................................... $ 12,445,738
---------------
---------------
</TABLE>
<TABLE>
<CAPTION>
STATEMENTS OF CHANGES IN NET ASSETS
For the years ended December 31, 1996 and 1995
1996 1995
------------------ -------------------
<S> <C> <C>
OPERATIONS:
Net investment income.................................................................. $ 340,329 $ 431,193
Capital gains distributions received................................................... 5,956,471 4,111,693
Realized gain (loss) on shares redeemed................................................ 891,850 (177,333)
Net unrealized gain on investments..................................................... 5,257,088 4,141,643
------------------ -------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS..................................... 12,445,738 8,507,196
------------------ -------------------
ACCUMULATION AND ANNUITY TRANSACTIONS:
Purchase payments...................................................................... 636,829 1,430,749
Accumulation Shares liquidated......................................................... (5,978,227) (9,866,473)
Annuity benefit payments............................................................... (73,649) (88,116)
------------------ -------------------
NET DECREASE IN NET ASSETS RESULTING FROM ACCUMULATION AND ANNUITY TRANSACTIONS.......... (5,415,047) (8,523,840)
------------------ -------------------
NET INCREASE IN NET ASSETS RESULTING FROM EQUITY TRANSFERS [Note 5]...................... 579,007 533,030
------------------ -------------------
TOTAL INCREASE IN NET ASSETS............................................................. 7,609,698 516,386
NET ASSETS:
Beginning of year...................................................................... 49,340,306 48,823,920
------------------ -------------------
End of year............................................................................ $ 56,950,004 $ 49,340,306
------------------ -------------------
------------------ -------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A2 THROUGH A3.
A1
<PAGE>
NOTES TO FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1996
PRUDENTIAL'S ANNUITY PLAN ACCOUNT-2
NOTE 1: GENERAL
The Annuity Plan Account-2 (the "Account") was established on August 13, 1968,
by resolutions of Prudential's Board of Directors, as a variable contract
account of The Prudential Insurance Company of America ("Prudential") under the
laws of the State of New Jersey. It is administered by Prudential under the
general direction of Prudential's officers and managerial staff. The Account is
registered with the Securities and Exchange Commission under the Investment
Company Act of 1940, as amended (1940 Act), as a unit investment trust.
Registration does not imply supervision by the Securities and Exchange
Commission of the management or investment policies and practices of the Account
or Prudential. The assets of the Account are invested in shares of Prudential's
Gibraltar Fund (the "Fund") at the net asset value without sales load.
PRUDENTIAL'S GIBRALTAR FUND
The Fund was incorporated in the State of Delaware on March 14, 1968. It is
registered under the 1940 Act as a diversified open-end management investment
company. Registration does not imply supervision by the Securities and Exchange
Commission of the management or investment policies and practices of the Fund or
Prudential. The Board of Directors of the Fund is responsible for the management
of the Fund and, in addition to reviewing the actions of the Fund's investment
advisor, decides upon matters of general policy. The Fund's officers conduct and
supervise the daily business operations of the Fund.
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.
Investment--The investment in shares of the Fund is stated at the net asset
value.
Security Transactions--Realized gains and losses on security transactions are
reported on an identified 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 Fund and are recorded on the dividend
payment date.
Equity of The Prudential Insurance Company--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 Prudential's equity as a negative balance. The position
does not have an effect on the Contract owner's account or the related unit
value.
NOTE 3: MORTALITY RISK, EXPENSE RISK, AND ADMINISTRATION CHARGES
The following charges, at effective annual rate as indicated, are applied daily
against the net assets of the Account attributable to the respective contracts
and are paid to Prudential.
A. MORTALITY RISK AND EXPENSE RISK CHARGES
For the class of contracts introduced prior to September 16, 1977 the
mortality risk charge and expense risk charge are 0.10% and 0.20%,
respectively, during the accumulation period and 0.075% and 0.15%,
respectively, during the payout period.
For the class of contracts introduced on September 16, 1977 the mortality
risk charge and expense risk charge are 0.60% and 0.20%, respectively,
during both the accumulation and the payout period.
A2
<PAGE>
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 the year ended December 31, 1996, the amount of
these charges paid to Prudential was $159,973.
B. Administration Charge
For the class of contract introduced prior to September 16, 1977 the
administration charge is 0.375% during the accumulation period and 0.15%
during the payout period.
For the class of contracts introduced on September 16, 1977 the
administration charge is 0.50% during both the accumulation and the payout
period.
These charges, which were paid to Prudential, include costs associated with
issuing the Contract, establishing and maintaining records, and providing
reports to Contract owners. For the year ended December 31, 1996, the amount
of these charges paid to Prudential was $195,168.
NOTE 4: 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.
NOTE 5: NET INCREASE IN NET ASSETS RESULTING FROM EQUITY TRANSFERS
The increase in net assets resulting from equity transfers represents the net
contributions of Prudential to the Account.
NOTE 6: PURCHASE AND SALES OF INVESTMENTS
The aggregate costs of purchases and proceeds from sales of investments in the
Fund for the year ended December 31, 1996 were as follows:
<TABLE>
<S> <C>
Purchases: $0
Sales: $5,186,772
</TABLE>
NOTE 7: ACCUMULATION SHARE TRANSACTIONS
The number of Accumulation Shares purchased and liquidated for the year ended
December 31, 1996, was as follows:
<TABLE>
<S> <C>
Accumulation Shares Purchased: 4,202
Accumulation Shares Liquidated: 41,763
</TABLE>
NOTE 8: EQUITY OF PLANHOLDERS AND ANNUITANTS
Equity of Planholders at December 31, 1996:
<TABLE>
<CAPTION>
SHARES SHARE VALUE EQUITY
------------- ------------- -------------
<S> <C> <C> <C>
Class of contracts introduced prior to September 16, 1977 339,186.467 $ 157.59074 $ 53,452,647
Class of contracts introduced on September 16, 1977 6,579.578 $ 131.91443 $ 867,941
-------------
$ 54,320,588
-------------
-------------
</TABLE>
Equity of Annuitants at December 31, 1996
<TABLE>
<S> <C> <C> <C>
Annuity Contracts assuming 3.5% investment result 11,241.118 $ 6.70516 $ 75,374
Annuity Contracts assuming 5% investment result 101,192.154 $ 4.52579 $ 457,974
-----------
$ 533,348
-----------
-----------
</TABLE>
A3
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Contract Owners of
Prudential's Annuity Plan Account-2
and the Board of Directors of
The Prudential Insurance Company of America
In our opinion, the accompanying statement of net assets and the related
statements of operations and of changes in net assets present fairly, in all
material respects, the financial position of Prudential's Annuity Plan Account-2
at December 31, 1996, and the results of each of their operations and the
changes in each of their net assets for the year 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 audit. We conducted our audit 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 audit, which included confirmation of shares owned in
Prudential's Gibraltar Fund, Inc. at December 31, 1996, provides a reasonable
basis for the opinion expressed above.
Price Waterhouse LLP
New York, New York
March 31, 1997
A4
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Planholders of
Prudential's Annuity Plan Account-2
and the Board of Directors of
The Prudential Insurance Company of America
Newark, New Jersey
We have audited the accompanying statement of changes in net assets of
Prudential's Annuity Plan Account-2 of The Prudential Insurance Company of
America for the year ended December 31, 1995. This financial statement and
share information are the responsibility of the Company's management. Our
responsibility is to express an opinion on this financial statement 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 audits provide a reasonable basis for our opinion.
In our opinion, such financial statement presents fairly, in all material
respects, the changes in net assets of each of the respective subaccounts
constituting Prudential's Annuity Plan Account-2 for the stated period in
conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Parsippany, New Jersey
February 15, 1996
A5
<PAGE>
FINANCIAL STATEMENTS OF
PRUDENTIAL'S GIBRALTAR FUND
<TABLE>
<CAPTION>
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1996
<S> <C>
ASSETS
Investments, at value (cost:
$258,445,755)............................ $ 303,562,622
Receivable for investments sold............ 4,733,056
Interest and dividends receivable.......... 306,071
--------------
Total Assets............................. 308,601,749
--------------
LIABILITIES
Payable for investments purchased.......... 4,643,337
Bank overdraft............................. 2,528,378
Due to investment adviser.................. 94,424
Accrued expenses........................... 38,989
--------------
Total Liabilities........................ 7,305,128
--------------
NET ASSETS................................... $ 301,296,621
==============
Net assets were comprised of:
Common stock, at $1 par value.............. $ 26,366,193
Paid-in capital, in excess of par.......... 217,244,277
--------------
243,610,470
Undistributed net investment income.......... 602,554
Accumulated net realized gain on
investments................................ 11,966,730
Net unrealized appreciation on investments... 45,116,867
--------------
Net assets, December 31, 1996.............. $ 301,296,621
==============
Net asset value and redemption price per
share (26,366,193 shares of common stock
outstanding; 75,000,000 shares
authorized).............................. $ 11.43
==============
</TABLE>
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS
Year Ended December 31, 1996
<S> <C> <C>
INVESTMENT INCOME
Dividends (net of $6,523 foreign
withholding taxes)....................... $ 2,959,611
Interest................................... 1,344,964
---------------
4,304,575
---------------
EXPENSES
Investment advisory fee.................... 349,118
State franchise tax expense................ 73,666
Excise tax expense......................... 71,422
Directors' fees............................ 8,500
Custodian expense.......................... 5,000
---------------
Total expenses........................... 507,706
Less: expense reimbursement for excise
tax...................................... (71,422)
---------------
Net expenses............................. 436,284
---------------
NET INVESTMENT INCOME........................ 3,868,291
---------------
NET REALIZED AND UNREALIZED GAIN ON
INVESTMENTS
Net realized gain on investments........... 35,522,025
Net change in unrealized appreciation on
investments.............................. 28,188,380
---------------
NET GAIN ON INVESTMENTS...................... 63,710,405
---------------
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS................................... $ 67,578,696
===============
</TABLE>
<TABLE>
<CAPTION>
STATEMENTS OF CHANGES IN NET ASSETS
Years Ended December 31
---------------------------------------
1996 1995
------------------ -------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net investment income.................................................................. $ 3,868,291 $ 4,381,133
Net realized gain on investments....................................................... 35,522,025 31,242,770
Net change in unrealized appreciation on investments................................... 28,188,380 9,457,438
------------------ -------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS..................................... 67,578,696 45,081,341
------------------ -------------------
DIVIDENDS AND DISTRIBUTIONS:
Dividends from net investment income................................................... (3,659,501) (4,026,639)
Distributions from net realized capital gains.......................................... (31,301,947) (21,543,401)
------------------ -------------------
TOTAL DIVIDENDS AND DISTRIBUTIONS........................................................ (34,961,448) (25,570,040)
------------------ -------------------
CAPITAL TRANSACTIONS:
Reinvestment of dividends and distributions [2,971,950 and 2,396,099 shares,
respectively]......................................................................... 33,969,659 24,867,217
Capital stock repurchased [(2,374,885) and (2,430,032) shares, respectively]........... (26,513,694) (25,659,420)
------------------ -------------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM CAPITAL TRANSACTIONS................ 7,455,965 (792,203)
------------------ -------------------
TOTAL INCREASE IN NET ASSETS............................................................. 40,073,213 18,719,098
NET ASSETS:
Beginning of year...................................................................... 261,223,408 242,504,310
------------------ -------------------
End of year............................................................................ $ 301,296,621 $ 261,223,408
================== ===================
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES B4 AND B5.
B1
<PAGE>
December 31, 1996
SCHEDULE OF INVESTMENTS
PRUDENTIAL'S GIBRALTAR FUND
<TABLE>
<CAPTION>
LONG-TERM INVESTMENTS -- 87.9%
Value
COMMON STOCKS -- 84.4% Shares (Note 1)
------------- --------------
<S> <C> <C>
AEROSPACE -- 1.1%
Coltec Industries, Inc. (a)..................... 175,000 $ 3,303,125
--------------
ALUMINUM -- 1.6%
Aluminum Co. of America......................... 75,000 4,781,250
--------------
AUTOS - CARS & TRUCKS -- 1.4%
LucasVarity PLC, ADR (United Kingdom) (a)....... 72,200 2,743,600
Miller Industries, Inc. (a)..................... 74,550 1,491,000
--------------
4,234,600
--------------
CHEMICALS -- 1.7%
Agrium, Inc..................................... 257,000 3,533,750
Polymer Group, Inc. (a)......................... 108,300 1,502,662
--------------
5,036,412
--------------
COMMUNICATIONS EQUIPMENT -- 4.7%
Cisco Systems, Inc. (a)......................... 124,000 7,889,500
Comverse Technology, Inc. (a)................... 50,000 1,881,250
VeriFone, Inc. (a).............................. 45,100 1,330,450
Westell Technologies, Inc. (a).................. 133,000 3,009,125
--------------
14,110,325
--------------
COMPUTER HARDWARE -- 1.0%
Larscom, Inc. (Class 'A' Stock) (a)............. 125,100 1,423,012
Western Digital Corp. (a)....................... 29,700 1,689,187
--------------
3,112,199
--------------
COMPUTER SOFTWARE SERVICES -- 6.5%
C/NET, Inc. (a)................................. 32,800 943,000
Computer Associates International, Inc.......... 60,000 2,985,000
Edify Corp. (a)................................. 52,200 835,200
Macromedia Inc. (a)............................. 130,200 2,343,600
Microsoft Corp. (a)............................. 86,000 7,105,750
Oracle Corp. (a)................................ 66,000 2,747,250
Softkey Intl., (a).............................. 171,000 2,458,125
--------------
19,417,925
--------------
DIVERSIFIED GAS -- 1.4%
Weatherford Enterra, Inc. (a)................... 135,000 4,050,000
--------------
DRUGS AND MEDICAL SUPPLIES -- 4.3%
Pfizer, Inc..................................... 55,000 4,558,125
St. Jude Medical, Inc. (a)...................... 65,100 2,774,887
United States Surgical Corp..................... 144,400 5,685,750
--------------
13,018,762
--------------
ELECTRICAL EQUIPMENT -- 2.0%
UCAR International, Inc. (a).................... 162,500 6,114,062
--------------
ELECTRONICS -- 8.6%
Burr-Brown Corp. (a)............................ 106,000 2,703,000
Checkpoint Systems, Inc. (a).................... 117,400 2,905,650
Intel Corp...................................... 56,000 7,329,000
SGS Thomson Microelectronics, N.V............... 50,500 3,535,000
Uniphase Corp. (a).............................. 179,700 9,434,250
--------------
25,906,900
--------------
FINANCIAL SERVICES -- 10.6%
Advanta Corp. (Class 'B' Stock)................. 109,600 4,466,200
E*TRADE Group, Inc. (a)......................... 49,700 559,125
Federal National Mortgage Association........... 300,000 11,175,000
Imperial Credit Industries, Inc. (a)............ 193,800 4,045,575
</TABLE>
December 31, 1996
<TABLE>
<CAPTION>
Value
Common Stocks (Continued) Shares (Note 1)
------------- --------------
<S> <C> <C>
Student Loan Marketing Association.............. 51,100 $ 4,758,688
The Money Store, Inc............................ 249,800 6,900,725
--------------
31,905,313
--------------
FOREST PRODUCTS -- 2.4%
Stone Container Corp............................ 255,000 3,793,125
Willamette Industries, Inc...................... 50,000 3,481,250
--------------
7,274,375
--------------
HOSPITAL MANAGEMENT -- 1.0%
Physican Corp. of America (a)................... 211,800 2,118,000
Sierra Health Services, Inc. (a)................ 34,600 852,025
--------------
2,970,025
--------------
INSURANCE -- 5.0%
Aetna Inc....................................... 76,000 6,080,000
Equitable of Iowa Companies..................... 23,600 1,082,650
Travelers Group, Inc............................ 173,333 7,864,985
--------------
15,027,635
--------------
LEISURE -- 2.3%
Carnival Corp. (Class 'A' Stock)................ 120,000 3,960,000
La Quinta Inns, Inc............................. 135,600 2,593,350
Prime Hospitality Corp. (a)..................... 34,500 556,313
--------------
7,109,663
--------------
Oil Services -- 6.6%
B.J. Services Co. (a)........................... 83,000 4,233,000
Bouyges Offshore SA, ADR (France) (a)........... 68,100 876,788
Input/Output, Inc. (a).......................... 146,000 2,701,000
J. Ray McDermott SA............................. 82,000 1,804,000
Smith International, Inc. (a)................... 125,000 5,609,375
YPF SA, ADR (Argentina)......................... 189,000 4,772,250
--------------
19,996,413
--------------
Petroleum -- 3.3%
Alberta Energy Company Ltd...................... 102,900 2,469,600
Exxon Corp...................................... 75,000 7,350,000
--------------
9,819,600
--------------
Real Estate Development -- 3.9%
Crescent Real Estate Equities Trust............. 51,500 2,716,625
Equity Residential Properties Trust............. 80,000 3,300,000
Manufactured Home Communities, Inc.............. 74,000 1,720,500
Meditrust Corp.................................. 9,300 372,000
Patriot American Hospitality, Inc............... 85,000 3,665,625
--------------
11,774,750
--------------
Regional Banks -- 2.7%
Citicorp........................................ 80,000 8,240,000
--------------
Restaurants -- 1.8%
Lone Star Steakhouse & Saloon, Inc. (a)......... 93,100 2,490,425
McDonald's Corp................................. 67,000 3,031,750
--------------
5,522,175
--------------
Retail -- 2.5%
Galoob Toys, Inc. (a)........................... 135,000 1,890,000
The Gap, Inc.................................... 190,000 5,723,750
--------------
7,613,750
--------------
</TABLE>
B2
<PAGE>
PRUDENTIAL'S GIBRALTAR FUND (CONTINUED)
December 31, 1996
<TABLE>
<CAPTION>
Value
Common Stocks (Continued) Shares (Note 1)
------------- --------------
<S> <C> <C>
Steel -- 1.7%
AK Steel Holding Corp........................... 131,200 $ 5,198,800
--------------
Telecommunications -- 3.1%
ADC Telecommunications, Inc. (a)................ 222,700 6,903,700
Nextel Communications, Inc. (Class 'A'
Stock) (a).................................... 180,000 2,340,000
--------------
9,243,700
--------------
Tobacco -- 2.6%
RJR Nabisco Holdings Corp....................... 230,000 7,820,000
--------------
Utility - Electric -- 0.6%
Long Island Lighting Co......................... 75,900 1,679,288
--------------
TOTAL COMMON STOCKS
(cost $208,840,593)............................................ 254,281,047
--------------
PREFERRED STOCKS -- 2.2%
Financial Services -- 0.5%
Advanta Corp. (Class 'B' Stock)................. 40,000 1,600,000
--------------
RETAIL -- 1.7%
Kmart Corp. (Cum. Conv.)........................ 105,000 5,118,750
--------------
TOTAL PREFERRED STOCKS
(cost $6,829,050).............................................. 6,718,750
--------------
Principal
Amount
CONVERTIBLE BONDS -- 1.3% (000)
-------------
Computer Software Services -- 0.3%
Softkey Intl.,
5.50%, 11/01/00............................... $1,230 1,017,825
--------------
Retail -- 1.0%
Sunglass Hut Intl.,
5.25%, 06/15/03............................... 4,000 2,870,000
--------------
Total Convertible Bonds
(cost $4,101,112).............................................. 3,887,825
--------------
Total Long-term Investments
(cost $219,810,025)............................................ 264,887,622
--------------
</TABLE>
December 31, 1996
<TABLE>
<CAPTION>
Principal
Amount Value
SHORT-TERM INVESTMENTS -- 12.9% (000) (Note 1)
------------- --------------
<S> <C> <C>
Commercial Paper -- 10.0%
Associates Corp. of North America,
6.202%, 01/02/97.............................. $15,000 $ 15,000,000
Smith Barney, Inc.,
6.00%, 01/02/97............................... 15,000 15,000,000
--------------
30,000,000
--------------
Time Deposit -- 2.9%
Toronto Dominion Holdings,
6.50%, 01/02/97............................... 8,675 8,675,000
--------------
Total Short-term Investments
(cost $38,675,000)............................................. 38,675,000
--------------
Total Investments -- 100.8%
(cost $258,445,755; Note 3).................................... 303,562,622
Liabilities in excess of other assets -- (0.8%)................ (2,266,001)
--------------
TOTAL NET ASSETS -- 100.0%....................................... $ 301,296,621
==============
</TABLE>
The following abbreviations are used in portfolio descriptions:
ADR American
Depository
Receipt
N.V. Naamloze Vennootschap (Dutch Corporation)
SA Sociedad Anonima (Spanish Corporation) or Societe
Anonyme (French Corporation)
(a) Non-income poducing security.
B3
<PAGE>
NOTES TO THE FINANCIAL STATEMENTS OF
PRUDENTIAL'S GIBRALTAR FUND, INC.
Note 1: Accounting Policies
Prudential's Gibraltar Fund, Inc. (the "Fund") is a Delaware Corporation and is
registered as an open-end,diversified management investment company under the
Investment Company Act of 1940, as amended. The Fund was organized by The
Prudential to serve as the investment medium for the variable contracts accounts
of The Prudential Financial Security Program. The Fund does not sell its shares
to the public. The accounts will redeem shares of the Fund to the extent
necessary to provide benefits under the contracts or for such other purposes as
may be consistent with the contracts.
Securities Valuation: Securities traded on a national securities exchange are
valued at the last sales price (or the last bid price if there were no sales of
the security that day) on the New York Stock Exchange, or if not traded on such
exchange, such last sales or bid price at the time of close of the New York
Stock Exchange on the principal exchange on which such securities are traded on
the last business day of the year. For any securities not traded on a national
securities exchange but traded in the over-the-counter market, the value is the
last bid price available, except that securities for which quotations are
furnished through a nationwide automated quotation system approved by the
National Association of Securities Dealers, Inc. (NASDAQ) are valued at the
closing best bid price on the date of valuation provided by a pricing service
which utilizes NASDAQ quotations. Short-term investments are valued at amortized
cost which, with accrued interest, approximates market value. Amortized cost is
computed using the cost on the date of purchase adjusted for constant
amortization of discount or premium to maturity.
Short-term securities which mature in more than 60 days are valued at current
market quotations. Short-term securities which mature in 60 days or less are
valued at amortized cost which approximates market value.
In connection with transactions in repurchase agreements with U.S. financial
institutions, it is the Fund's policy that its custodian or designated
subcustodians, as the case may be under triparty repurchase agreements, take
possession of the underlying collateral securities, the value of which exceeds
the principal amount of the repurchase transaction, including accrued interest.
If the seller defaults and the value of the collateral declines or if bankruptcy
proceedings are commenced with respect to the seller of the security,
realization of the collateral by the Fund may be delayed or limited.
Securities Transactions And Net Investment Income: Securities transactions are
recorded on the trade date. Realized gains and losses on sales of investments
are calculated on the identified cost basis. Dividend income is recorded on the
ex-dividend date and interest income is recorded on the accrual basis. Expenses
are recorded on the accrual basis which may require the use of certain estimates
by management.
Dividends And Distributions: Dividends from net investment income are declared
and paid semi-annually. The Fund will distribute at least annually net capital
gains in excess of loss carryforwards, if any. Dividends and distributions are
recorded on the ex-dividend date. Dividends from net investment income and net
realized capital gains of the Fund will normally be declared and reinvested in
additional full and fractional shares twice a year.
Income distributions and capital gain distributions are determined in accordance
with income tax regulations which may differ from generally accepted accounting
principles.
Taxes: It is the Fund's policy to continue to meet the requirements of the
Internal Revenue Code applicable to regulated investment companies and to
distribute all of its taxable net income and net capital gains, if any, to its
shareholders. Therefore, no federal income tax provision is required.
Withholding taxes on foreign dividends have been provided for in accordance with
the Fund's understanding of the applicable country's tax rules and rates.
Reclassification Of Capital Accounts: The Fund accounts and reports for
distributions to shareholders in accordance with A.I.C.P.A. Statement of
Position 93-2: Determination, Disclosure, and Financial Statement Presentation
of Income, Capital Gain, and Return of Capital Distributions by Investment
Companies. The effect of applying this statement was to increase undistributed
net investment income by $333,913, decreased net realized gains by $54,498 and
decreased paid-in capital in excess of par by $279,415. Such reclassification
had no effect on net assets, results of operations, or net asset value per
share.
B4
<PAGE>
Note 2: Investment Advisory Fee And Other Transactions With Affiliates
Investment Advisory Fee: The investment advisory fee, which is computed daily
at an effective annual rate of 0.125% of the net assets of the Fund, is payable
quarterly to The Prudential Insurance Company of America ("The Prudential") as
required under the investment advisory agreement. Prudential pays all expenses
of the Fund except for fees and expenses of those members of the Fund's Board of
Directors who are not officers or employees of The Prudential and its
affiliates; transfer and any other local, state or federal taxes; and brokers'
commissions and other fees and charges attributable to investment transactions.
During the year ended December 31, 1996, Prudential Securities Incorporated, an
affiliate of The Prudential, earned approximately $19,000 in brokerage
commissions as a result of executing transactions in portfolio securities on
behalf of the Fund.
Note 3: Portfolio Securities
Purchases and sales of investment securities, other than short-term investments,
for the year ended December 31, 1996 aggregated $247,883,005 and $294,407,725,
respectively.
The federal income tax basis of the Fund's investments at December 31, 1996 was
$258,485,025 and, accordingly, net unrealized appreciation for federal income
tax purposes was $45,077,597 (gross unrealized appreciation--$56,645,190; gross
unrealized depreciation--$11,567,593).
B5
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of Prudential's Gibraltar Fund, Inc.:
In our opinion, the accompanying Statement of Assets and Liabilities, including
the Schedule of Investments, and the related Statements of Operations and of
Changes in Net Assets and the Financial Highlights present fairly, in all
material respects, the financial position of Prudential's Gibraltar Fund, Inc.
(the "Fund") at December 31, 1996, the result of its operations, the changes in
its net assets, and financial highlights for the year ended December 31, 1996,
in conformity with generally accepted accounting principles. These financial
statements and financial highlights (hereafter referred to as "financial
statements") are the responsibility of the Fund's management; our responsibility
is to express an opinion on these financial statements based on our audit. We
conducted our audit 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
audit, which included confirmation of securities at December 31, 1996 by
correspondence with the custodian and brokers and the application of alternative
auditing procedures where confirmations from brokers were not received, provide
a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
1177 Avenue of the America
New York, NY 10036
February 13, 1997
B6
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Shareholders and Board of Directors of Prudential's Gibraltar Fund, Inc.
We have audited the accompanying statement of changes in net assets of
Prudential's Gibraltar Fund, Inc. for the year ended December 31, 1995, and the
financial highlights contained in the Prospectus for each of the nine years in
the period then ended. This financial statement and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on this financial statement and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statement and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such financial statement and financial highlights present
fairly, in all material respects, the changes in net assets of Prudential's
Gibraltar Fund for the year ended December 31, 1995, and the financial
highlights for each of the nine years in the period then ended in conformity
with generally accepted accounting principles.
Deloitte & Touche LLP
Parsippany, New Jersey
February 15, 1996
B7
<PAGE>
<TABLE>
<CAPTION>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
STATEMENTS OF ADMITTED ASSETS, LIABILITIES AND SURPLUS (STATUTORY BASIS)
- ------------------------------------------------------------------------------------------------------------------------------------
DECEMBER 31,
1996 1995
-------- --------
(In Millions)
<S> <C> <C>
ASSETS
Bonds ............................................................................ $ 75,006 $ 77,494
Preferred stock .................................................................. 239 396
Common stock ..................................................................... 7,076 6,133
Mortgage loans on real estate .................................................... 17,039 20,280
Real estate ...................................................................... 2,094 2,488
Policy loans and premium notes ................................................... 6,023 6,208
Cash and short-term investments .................................................. 5,982 4,803
Other invested assets ............................................................ 2,591 3,304
-------- --------
TOTAL CASH AND INVESTED ASSETS ................................................... 116,050 121,106
Premiums due and deferred ........................................................ 1,925 1,917
Accrued investment income ........................................................ 1,640 1,688
Other assets ..................................................................... 1,208 1,120
Assets held in separate accounts ................................................. 57,797 53,903
-------- --------
TOTAL ASSETS ..................................................................... $178,620 $179,734
======== ========
LIABILITIES AND SURPLUS
LIABILITIES
Policy liabilities and insurance reserves:
Future policy benefits and claims ............................................ $ 87,582 $ 93,346
Unearned premiums ............................................................ 619 624
Policy dividends ............................................................. 1,878 1,893
Policyholder account balances ................................................ 7,968 7,966
Notes payable and other borrowings ............................................... 763 807
Asset valuation reserve .......................................................... 2,682 2,705
Federal income tax payable ....................................................... 729 1,278
Other liabilities ................................................................ 9,588 9,191
Liabilities related to separate accounts ......................................... 57,436 53,256
-------- --------
TOTAL LIABILITIES ................................................................ 169,245 171,066
-------- --------
CONTINGENCIES (NOTE 11)
SURPLUS
Capital notes .................................................................... 985 984
Special surplus fund ............................................................. 1,268 1,274
Unassigned surplus ............................................................... 7,122 6,410
-------- --------
TOTAL SURPLUS .................................................................... 9,375 8,668
-------- --------
TOTAL LIABILITIES AND SURPLUS .................................................... $178,620 $179,734
======== ========
</TABLE>
SEE NOTES TO STATUTORY FINANCIAL STATEMENTS
<PAGE>
<TABLE>
<CAPTION>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
STATEMENTS OF OPERATIONS AND CHANGES IN SURPLUS (STATUTORY BASIS)
- ------------------------------------------------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31,
1996 1995 1994
(In Millions)
<S> <C> <C> <C>
REVENUE
Premiums and annuity considerations .................................... $ 20,674 $ 21,088 $ 23,612
Net investment income .................................................. 8,677 8,637 7,387
Other income ........................................................... 571 363 367
-------- -------- --------
TOTAL REVENUE .......................................................... 29,922 30,088 31,366
-------- -------- --------
BENEFITS AND EXPENSES
Death benefits ......................................................... 2,943 2,858 2,798
Annuity benefits ....................................................... 3,582 3,495 3,354
Disability benefits .................................................... 5,630 5,765 5,201
Other benefits ......................................................... 806 853 845
Surrender benefits and fund withdrawals ................................ 11,844 12,538 11,714
Net (decrease) increase in reserves .................................... (1,572) (2,178) 1,251
Commissions ............................................................ 477 535 610
Other expenses ......................................................... 2,690 2,650 3,727
-------- -------- --------
TOTAL BENEFITS AND EXPENSES ............................................ 26,400 26,516 29,500
-------- -------- --------
Operating income before dividends and income taxes ..................... 3,522 3,572 1,866
Dividends to policyholders ............................................. 2,526 2,464 2,290
-------- -------- --------
Operating income (loss) before income taxes ............................ 996 1,108 (424)
Income tax provision ................................................... 51 590 453
-------- -------- --------
INCOME (LOSS) FROM OPERATIONS .......................................... 945 518 (877)
NET REALIZED CAPITAL GAINS (LOSSES) .................................... 457 (183) (24)
-------- -------- --------
NET INCOME (LOSS) ..................................................... $ 1,402 $ 335 $ (901)
======== ======== ========
SURPLUS
SURPLUS, BEGINNING OF YEAR ............................................. 8,668 7,449 8,004
Net income (loss) ...................................................... 1,402 335 (901)
Change in net unrealized capital gains (losses) ........................ 191 661 (51)
Change in non-admitted assets .......................................... (206) 717 82
Change in asset valuation reserve ...................................... 11 (694) 653
Other changes, net ..................................................... (691) 200 (338)
-------- -------- --------
SURPLUS, END OF YEAR ................................................... $ 9,375 $ 8,668 $ 7,449
======== ======== ========
</TABLE>
SEE NOTES TO STATUTORY FINANCIAL STATEMENTS
- 1 -
<PAGE>
<TABLE>
<CAPTION>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
STATEMENTS OF CASH FLOWS (STATUTORY BASIS)
- ------------------------------------------------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31,
1996 1995 1994
--------- --------- ---------
(In Millions)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Premiums and annuity considerations ...................................... $ 20,669 $ 21,030 $ 23,635
Net investment income .................................................... 8,629 8,511 7,261
Other income received .................................................... 599 479 502
Separate account transfers ............................................... 1,183 1,002 (494)
Benefits and claims paid ................................................. (24,952) (25,524) (24,403)
Policyholders' dividends paid ............................................ (2,453) (2,393) (2,594)
Federal income taxes (paid) received ..................................... (230) (847) 179
Other operating expenses ................................................. (4,224) (3,738) (3,636)
--------- --------- ---------
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES ...................... (779) (1,480) 450
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from investments sold, matured, or repaid
Bonds ............................................................... 119,195 93,178 80,668
Stocks .............................................................. 4,328 2,985 4,263
Mortgage loans on real estate ....................................... 3,140 4,997 4,205
Real estate ......................................................... 537 573 935
Net gains (losses) on cash and short-term investments ............... 13 (9) (5)
Miscellaneous proceeds .............................................. 2,128 3,707 2,671
Payments for investments acquired
Bonds ............................................................... (118,009) (101,018) (81,677)
Stocks .............................................................. (6,029) (2,199) (2,312)
Mortgage loans on real estate ....................................... (1,841) (2,810) (3,282)
Real estate ......................................................... (120) (425) (194)
Miscellaneous applications .......................................... (718) (1,213) (1,275)
Net (tax) benefit on capital gains and losses ............................ (622) 107 (275)
--------- --------- ---------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES ...................... 2,002 (2,127) 3,722
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Net (repayments of) proceeds from borrowed money ......................... (44) 123 1
Net proceeds from the issuance of capital notes .......................... 0 686 0
--------- --------- ---------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES ..................... (44) 809 1
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND SHORT-TERM INVESTMENTS ............... 1,179 (2,798) 4,173
Cash and short-term investments, beginning of year ....................... 4,803 7,601 3,428
--------- --------- ---------
CASH AND SHORT-TERM INVESTMENTS, END OF YEAR ............................. $ 5,982 $ 4,803 $ 7,601
========= ========= =========
</TABLE>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest payments of $253 million, $144 million and $85 million were made during
1996, 1995 and 1994, respectively.
SEE NOTES TO STATUTORY FINANCIAL STATEMENTS
- 2 -
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO STATUTORY FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1. ACCOUNTING POLICIES AND PRINCIPLES
A. Business and basis of presentation - The statutory financial
statements include the accounts of The Prudential Insurance Company of
America ("the Company"), a mutual life insurance company. The
activities of the Company include a broad range of financial services,
including life and health insurance, asset management, and investment
advisory services.
These financial statements were prepared on an unconsolidated
statutory basis of accounting, which differs from the 1995 and 1994
financial statements prepared for general distribution on a
consolidated statutory basis of accounting, both of which differ from
generally accepted accounting principles ("GAAP"). The financial
statements for 1995 and 1994 have been restated on an unconsolidated
statutory basis of accounting adopted in 1996 for purposes of general
distribution. Certain reclassifications have been made to the 1995 and
1994 financial statement amounts to conform to the 1996 presentation.
The Company, domiciled in the State of New Jersey, prepares its
statutory financial statements in accordance with accounting practices
prescribed or permitted by the New Jersey Department of Banking and
Insurance ("the Department"). Prescribed statutory accounting
practices include publications of the National Association of
Insurance Commissioners ("NAIC"), state laws, regulations, and general
administrative rules. Permitted statutory accounting practices
encompass all accounting practices not so prescribed. The financial
statements are substantially the same as those included in the
Statutory Annual Statement except for certain reclassifications and
adjustments. These financial statements differ from those filed with
the Department in that changes to estimated income and premium taxes
applicable to prior periods, which are recorded as direct charges or
credits to surplus in the Annual Statement, have been included in the
"Income tax provision" and "Other expenses" in the Statements of
Operations and Changes in Surplus. This item has the net effect of
increasing (decreasing) net income by $396 million, ($143) million and
$6 million in 1996, 1995 and 1994, respectively.
Pursuant to the Financial Accounting Standards Board Interpretation
No. 40 "Applicability of Generally Accepted Accounting Principles to
Mutual Life Insurance and Other Enterprises," as amended, which is
effective for 1996 financial statements, statutory accounting
practices ("SAP") are no longer considered GAAP for mutual life
insurance companies. SAP differs from GAAP primarily as follows:
(a) the Commissioner's Reserve Valuation Method ("CRVM") is used for the
majority of individual insurance reserves under SAP, whereas for
individual insurance, policyholder liabilities are generally
established using the net level premium method under GAAP. Policy
assumptions used in the estimation of policyholder liabilities are
generally prescribed under SAP, but are based upon actual company
experience under GAAP;
(b) for investment-type contracts that do not contain mortality or
morbidity risk and universal life-type contracts, cash receipts are
recorded as premiums and reserves are established using prescribed
reserving methods under SAP. Under GAAP, premium from investment-type
and universal life-type contracts are generally recognized as
deposits. Revenues from these contracts represent amounts assessed
against policyholders and are reported in the period of assessment;
(c) policy acquisition costs are expensed when incurred under SAP rather
than being deferred and charged against earnings over the periods
covered by the related policies;
(d) deferred income taxes are not recorded for the tax effect of temporary
differences between book and tax basis of assets and liabilities under
SAP;
(e) certain "non-admitted assets" must be excluded under SAP through a
charge against surplus, e.g. fixed assets, prepaid pensions and
impaired investments;
(f) investments in the common stock of the Company's wholly-owned
subsidiaries are accounted for using the equity method under SAP
rather than consolidated;
(g) bonds are carried at amortized cost under SAP rather than categorized
as "held to maturity", "available for sale", or "trading". Under GAAP,
bonds classified as "available for sale" and "trading" are carried at
market value;
(h) certain reclassifications would be required with respect to the
balance sheet and statement of cash flows under SAP;
(i) the Asset Valuation Reserve ("AVR") and Interest Maintenance Reserve
("IMR") are required for life insurance companies under SAP.
The following is a summary of accounting practices permitted by the
state of New Jersey and reflected in these financial statements:
o Prescribed statutory accounting practices require Department
approval of each and every interest payment at the time of
payment in order to classify the Company's Capital Notes as a
component of surplus. Otherwise, such notes are required to be
classified as a liability. Interest payments on $300 million in
Capital Notes issued in 1993 are pre-approved by the Department,
and permitted to be classified in surplus.
o The Company sells synthetic guaranteed interest contracts
("GICs") containing minimum investment related guarantees on
qualified pension plan assets. The assets are owned by the
trustees of such plans, who invest the assets
- 3 -
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO STATUTORY FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
under the terms of investment guidelines agreed to with the
Company. The investment related guarantees may include a minimum
rate of return on the underlying assets and/or a guarantee of
liquidity to meet plan cash flow requirements. The Company, with
the approval of the Department, reports both the plan liabilities
associated with the synthetic GICs and the trust assets
supporting this potential liability. In addition, the Company
files detailed schedules of trust assets and related statements
with the Department. Currently, prescribed statutory accounting
practices do not address accounting for synthetic GICs.
o The Company establishes guaranty fund liabilities for the
insolvencies of certain life insurance companies. The liabilities
are established net of estimated premium tax credits and federal
income tax. Prescribed statutory accounting practices do not
address the establishment of liabilities for guaranty fund
assessments.
B. Divestiture - On July 31, 1996, Prudential sold a substantial portion
of its Canadian Branch business to the London Life Insurance Company
("London Life"). The transaction was structured as an assumption
reinsurance transaction, whereby London Life assumed total liabilities
of the Canadian Branch equal to $3,146 million as well as a related
amount of total assets equal to $3,040 million. A net gain of $138
million was recorded for this transaction.
C. Use of estimates - The preparation of financial statements in
conformity with SAP requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenue and expenses
during the reported period. Actual results could differ from those
estimates.
D. Investments - Bonds, which consist of long-term bonds, are stated
primarily at amortized cost.
Preferred stock is generally valued at amortized cost.
Common Stock is carried at fair value. Investments in subsidiaries,
which are included in "Common stock", are accounted for using the
equity method. The subsidiaries' change in net assets, excluding
capital contributions and distributions, is included in "Net
investment income." The subsidiaries are engaged principally in the
businesses of life and health insurance, property and casualty
insurance, group health care, securities brokerage, asset management,
investment advisory services, retail banking and real estate and
brokerage.
Mortgage loans on real estate are stated primarily at unpaid principal
balances.
Real estate, except for real estate acquired in satisfaction of debt,
is carried at cost less accumulated straight-line depreciation,
encumbrances and permanent impairments in value. Properties acquired
in satisfaction of debt are valued at lower of depreciated cost or
fair value less disposition costs.
Policy loans and premium notes are stated at unpaid principal
balances.
Cash includes cash on hand, amounts due from banks and money market
instruments. Short term investments, including highly liquid debt
instruments purchased with an original maturity of twelve months or
less, are stated at amortized cost, which approximates fair value.
Other invested assets primarily include the Company's investment in
joint ventures and other forms of partnerships. These investments are
accounted for using the equity method where the Company has the
ability to exercise significant influence over the operating and
financial policies of the entity. The cost method is used for all
other assets.
Derivatives used in asset/liability risk management activities, which
support life and health insurance and annuity contracts, are recorded
at either fair value or statement value, depending upon the underlying
instrument, with unrealized gains and losses recorded in "Change in
net unrealized capital gains (losses)." Upon termination of
derivatives, the interest-related gains and losses are amortized
through the IMR.
E. Separate accounts - These assets and liabilities, reported at
estimated fair value, represent segregated funds invested for pension
and other clients. Investment risks associated with fair value changes
are generally borne by the clients, except to the extent of minimum
guarantees made by the Company with respect to certain accounts.
F. Revenue recognition of insurance income and related expenses - Life
premiums are recognized as income over the premium paying period of
the related policies. Annuity considerations are recognized as revenue
when received. Health premiums are earned ratably over the terms of
the related insurance and reinsurance contracts or policies. Expenses
incurred in connection with acquiring new insurance business,
including such acquisition costs as sales commissions, are charged to
operations as incurred.
- 4 -
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO STATUTORY FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
G. Policyholder dividends - Substantially all of the policies issued by
the Company are participating. The amount of dividends to be paid to
policyholders is determined annually by the Company's Board of
Directors. The aggregate amount of policyholders' dividends is related
to actual interest, mortality, morbidity, and expense experience for
the year and judgment as to the appropriate level of statutory surplus
to be retained by the Company. Dividends declared by the Board of
Directors which have not been paid are included in "Policy dividends".
2. POLICY LIABILITIES AND INSURANCE RESERVES
A. For life insurance and annuities, future policy benefits and claims
include estimates of benefits and associated settlement expenses on
reported claims and those which are incurred but not reported.
Activity in the liability for unpaid claims and claim adjustment
expenses for accident and health business, which is included in
"Future policy benefits and claims", is as follows:
1996 1995 1994
------- ------- -------
(In Millions)
Balance at January 1 $ 2,636 $ 2,440 $ 2,416
Less reinsurance recoverables 15 23 15
------- ------- -------
Net balance at January 1 2,621 2,417 2,401
------- ------- -------
Incurred related to:
Current year 5,734 5,759 5,398
Prior years (87) 42 (87)
------- ------- -------
Total incurred 5,647 5,801 5,311
------- ------- -------
Paid related to:
Current year 4,135 4,028 3,856
Prior years 1,467 1,569 1,439
------- ------- -------
Total paid 5,602 5,597 5,295
------- ------- -------
Net balance at December 31 2,666 2,621 2,417
Plus reinsurance recoverables 10 15 23
------- ------- -------
Balance at December 31 $ 2,676 $ 2,636 $ 2,440
======= ======= =======
As a result of changes in reserve estimates for insured events of
prior years, the provision for claims and claim adjustment expenses
changed by ($87) million and $42 million in 1996 and 1995,
respectively, due to changes in claim cost trends and changed by ($87)
million in 1994 because of faster-than-expected shrinkage in the
indemnity health business.
B. Reserves for individual life insurance are calculated using various
methods, interest rates and mortality tables, which produce reserves
that meet the aggregate requirements of state laws and regulations.
Approximately 39% of individual life insurance reserves are determined
using the net level premium method, or by using the greater of the net
level premium reserve or the policy cash value. About 52% of
individual life insurance reserves are calculated according to CRVM
or methods which compare CRVM to policy cash values. The remaining
reserves include universal life reserves which are equal to the
greater of the policyholder account value less the unamortized expense
allowance and the policy cash value, or are for supplementary benefits
whose reserves are calculated using methods, interest rates and tables
appropriate for the benefit provided.
For group life insurance, about 56% of the reserves are associated
with extended death benefits. These reserves are primarily calculated
using modified group tables at various interest rates. The remainder
are unearned premium reserves (calculated using the 1960
Commissioner's Standard Group Table), reserves for group life fund
accumulations and other miscellaneous reserves.
Reserves for deferred individual annuity contracts are determined
using the Commissioner's Annuity Reserve Valuation Method. These
account for 72% of the individual annuity reserves. The remaining
reserves are equal to the present value of future payments with the
annuity mortality table and interest rates based on the date of issue
or maturity as appropriate.
Reserves for other deposit funds or other liabilities with life
contingencies reflect the contract deposit account or experience
accumulation for the contract and any purchased annuity reserves.
Accident and health reserves represent the present value of the future
potential payments, adjusted for contingencies and interest. The
remaining material reserves for active life reserves and unearned
premiums are valued using the preliminary term method, gross premium
valuation method, or a pro rata portion of gross premiums. Reserves
are also held for amounts not yet due on hospital benefits and other
coverages.
- 5 -
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO STATUTORY FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
The reserve for guaranteed interest contracts, deposit funds and other
liabilities without life contingencies equal either the present value
of future payments discounted at the guaranteed rate or the fund
value.
Policyholders, at their discretion, may withdraw funds from their
annuity policies. At December 31, 1996 and 1995, approximately 55% of
total annuity actuarial reserves and deposit liabilities of $92,536
million and $95,092 million, respectively, were not subject to
discretionary withdrawal.
3. INCOME TAXES
The Company and its domestic subsidiaries file a consolidated federal income
tax return. The Internal Revenue Code (the "Code") taxes the Company on its
operating income after dividends to policyholders. In calculating this tax,
the Code requires the capitalization and amortization of policy acquisition
expenses.
The Code also imposes an "equity tax" on mutual life insurance companies
which, in effect, imposes an additional amount of taxable income to the
Company. "Income tax provision" includes an estimate for the total equity tax
to be paid with respect to the year. Income from sources outside the United
States is taxed under applicable foreign statutes.
The Internal Revenue Service (the "Service") has completed an examination of
the consolidated federal income tax return through 1989. The Service is
examining the years 1990 through 1992. Discussions are being held with the
Service with respect to proposed adjustments. However, management believes
there are adequate defenses against, or sufficient reserves to provide for,
such adjustments.
4. INVESTED ASSETS
A. Bonds and stocks - The Company invests in both investment grade and
non-investment grade public and private bonds. The Securities
Valuation Office of the NAIC rates the bonds held by insurers for
regulatory purposes and classifies investments into six categories
ranging from highest quality bonds to those in or near default. The
lowest three NAIC categories represent primarily high-yield securities
and are defined by the NAIC as including any security with a public
agency rating equivalent to B+ or B1 or less. Securities in these
lowest three categories approximated 2.8% and 1.0%, of the Company's
bonds at December 31, 1996, 1995, respectively.
The following tables provide additional information relating to bonds
and preferred stock as of December 31:
<TABLE>
<CAPTION>
1996
-------------------------------------------------------
GROSS GROSS ESTIMATED
CARRYING UNREALIZED UNREALIZED FAIR
AMOUNT GAINS LOSSES VALUE
------- ------- ------ -------
Bonds (In Millions)
<S> <C> <C> <C> <C>
U.S. Treasury securities and obligations of
U.S. government corporations and agencies $ 9,504 $ 353 $ 74 $ 9,783
Obligations of U.S. states and their
political subdivisions 206 7 6 207
Foreign government bonds 2,420 133 11 2,542
Corporate securities 57,282 2,625 323 59,584
Mortgage-backed securities 5,594 131 15 5,710
------- ------- ------- -------
Total $75,006 $ 3,249 $ 429 $77,826
======= ======= ======= =======
Preferred Stock
Redeemable $ 142 $ 3 $ 6 $ 139
Non-redeemable 97 23 0 120
------- ------- ------- -------
Total $ 239 $ 26 $ 6 $ 259
======= ======= ======= =======
</TABLE>
- 6 -
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO STATUTORY FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1995
--------------------------------------------------
GROSS GROSS
CARRYING UNREALIZED UNREALIZED FAIR
AMOUNT GAINS LOSSES VALUE
------- ------- ------- -------
Bonds (In Millions)
<S> <C> <C> <C> <C>
U.S. Treasury securities and obligations of
U.S. government corporations and agencies $15,715 $ 1,392 $ 1 $17,106
Obligations of U.S. states and their
political subdivisions 214 22 1 235
Foreign government bonds 3,196 260 1 3,455
Corporate securities 54,411 4,609 97 58,923
Mortgage-backed securities 3,958 241 8 4,191
------- ------- ------- -------
Total $77,494 $ 6,524 $ 108 $83,910
======= ======= ======= =======
Preferred Stock
Redeemable $ 304 $ 16 $ 4 $ 316
Non-redeemable 92 2 0 94
------- ------- ------- -------
Total $ 396 $ 18 $ 4 $ 410
======= ======= ======= =======
</TABLE>
The carrying amount and estimated fair value of bonds at December 31,
1996, categorized by contractual maturity, are shown below. Actual
maturities may differ from contractual maturities because borrowers
may prepay obligations with or without call or prepayment penalties.
CARRYING ESTIMATED
AMOUNT FAIR VALUE
-------- ----------
(In Millions)
Due in one year or less $ 1,999 $ 2,012
Due after one year through five years 19,125 19,445
Due after five years through ten years 19,406 20,081
Due after ten years 28,882 30,578
------- -------
69,412 72,116
------- -------
Mortgage-backed securities 5,594 5,710
------- -------
Total $75,006 $77,826
======= =======
Proceeds from the sale and maturity of bonds during 1996, 1995 and
1994 were $119,195 million, $93,178 million and $80,668 million,
respectively. Gross gains of $1,516 million, $1,913 million and $618
million and gross losses of $988 million, $782 million and $1,841
million were realized on such sales during 1996, 1995 and 1994,
respectively. Realized gains and losses are determined using the
specific identification method.
B. Mortgage loans on real estate - Mortgage loans on real estate at
December 31 are as follows:
1996 1995
------------------ ------------------
CARRYING PERCENT CARRYING PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL
------ -------- ------ --------
(In Millions)
Commercial and agricultural loans:
In good standing $15,546 91.3% $17,649 87.0%
In good standing
with structured terms 809 4.7% 966 4.8%
Past due 90 days or more 229 1.3% 144 0.7%
In process of foreclosure 68 0.4% 157 0.8%
Residential loans 387 2.3% 1,364 6.7%
------- ----- ------- -----
Total $17,039 100.0% $20,280 100.0%
======= ===== ======= =====
At December 31, 1996, the Company's mortgage loans on real estate were
collateralized by the following property types: office buildings
(34%), retail stores (22%), residential properties (2%), apartment
complexes (18%), industrial buildings (11%), agricultural properties
(9%) and other commercial properties (4%). The maximum percentage of
any one loan to the value of collateral at the time of the loan,
exclusive of insured, guaranteed, purchase money mortgages or
mortgages supported by high credit leases is 80%. The mortgage loans
are geographically dispersed throughout the United States and
- 7 -
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO STATUTORY FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
Canada with the largest concentrations in California (26%) and New
York (8%). Included in these balances are mortgage loans with
affiliated joint ventures of $560 million and $653 million at December
31, 1996 and 1995, respectively.
C. Real estate - Real estate at December 31 was as follows:
1996 1995
------ ------
(In Millions)
Investment real estate $1,201 $1,484
Properties occupied by the Company 525 533
Properties acquired in
satisfaction of debt 368 471
------ ------
Total $2,094 $2,488
====== ======
Accumulated depreciation on real estate was $808 million and $853
million at December 31, 1996 and 1995, respectively.
D. Other invested assets - Other invested assets of $2,591 million and
and $3,304 million as of December 31, 1996 and 1995, respectively,
principally include the Company's net equity in joint ventures and
other forms of partnerships. The Company's share of net income from
other invested assets was $283 million, $240 million and $348 million
for 1996, 1995 and 1994, respectively.
E. Investment in subsidiaries - Included in "Common stock" is the
Company's investment in subsidiaries of $4,610 million and $4,328
million at December 31, 1996 and 1995, respectively. Included in "Net
investment income" for 1996, 1995 and 1994 is $370 million, $143
million and $(936) million, respectively, attributable to
undistributed income (loss) of subsidiaries.
In October 1995, the Company completed the sale of Prudential
Reinsurance Holdings, Inc., through an initial public offering of
common stock. As a result of the sale, an after-tax gain of $72
million was recorded in 1995.
In March 1995, the Company announced its intention to sell its
mortgage banking unit. On January 26, 1996, the Company entered into a
definitive agreement to sell substantially all the assets of
Prudential Home Mortgage Company, Inc. ("PHMC") and it also
liquidated certain mortgage-backed securities and extended warehouse
loans. In 1995, PHMC recorded an after-tax loss of $98 million which
includes operating gains and losses, asset write downs, and other
costs directly related to the sale. The Company continues to have
discussions with prospective buyers for the sale of the remaining
assets.
F. Net unrealized capital gains (losses) - Changes in net unrealized
capital gains (losses), which result principally from changes in the
differences between cost and carrying amounts of invested assets, were
$191 million and $661 million for the years ended December 31, 1996
and 1995, respectively, and are reflected in "Unassigned surplus."
G. Asset valuation reserve and interest maintenance reserve - These
reserves are required for life insurance companies under NAIC
requirements. The AVR is calculated based on a statutory formula and
is designed to mitigate the effect of valuation and credit-related
losses on unassigned surplus. The IMR captures realized capital gains
and losses, net of tax, resulting from changes in the general level of
interest rates. These gains and losses are amortized into net
investment income utilizing grouped amortization schedules over the
expected remaining life of the investments sold. At December 31, 1996,
AVR is comprised of 68% for bonds, stocks, and short-term investments;
17% for mortgage loans on real estate; and 15% for real estate and
other invested assets. The IMR balance at December 31, 1996 and 1995
was $1,365 million and $1,163 million, respectively, and is recorded
in "Other liabilities". During 1996, 1995 and 1994, $327 million, $766
million and ($910) million, respectively, of net realized capital
gains (losses) were deferred and $126 million, $82 million and $102
million, respectively, was amortized and included in income.
H. Restricted assets and special deposits - Assets in the amounts of $941
million and $5,072 million at December 31, 1996 and 1995,
respectively, were on deposit with governmental authorities or
trustees as required by law. Assets valued at $2,994 million and
$3,121 million at December 31, 1996 and 1995, respectively, were
maintained as compensating balances or pledged as collateral for bank
loans and other financing agreements. Letter stock or other securities
restricted as to sale amounted to $720 million in 1996 and $354
million in 1995.
I. Loan backed and structured securities - A retrospective method is
employed to recalculate the values of the loan backed and structured
securities holdings with the exception of interest only bonds. Each
acquisition lot was reviewed to recalculate the effective yield. The
recalculated effective yield was used to derive a book value as if the
new yield were applied at the time of acquisition. Outstanding
principal
- 8 -
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO STATUTORY FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
factors from the time of acquisition to adjustment date were used to
calculate the prepayment history for all applicable securities.
Conditional prepayment rates, computed with life to date factor
histories and weighted average maturities, were used to affect the
calculation of projected payments for pass through, interest only and
principal only security types. Interest only bond adjustments are
developed on a prospective basis with adjustments made for permanent
impairments if needed.
J. Securities lending is a program whereby the Company loans securities
to third parties, primarily major brokerage firms. As of December 31,
1996 and 1995, the estimated fair values of loaned securities were
$6,362 million and $5,939 million respectively. Company and NAIC
policies require a minimum of 102% and 105% of the fair value of the
domestic and foreign loaned securities, respectively, to be separately
maintained as collateral for the loans. Cash collateral received is
invested in short-term investments. The offsetting collateral
liability as of December 31, 1996 and 1995 is $4,813 million and
$3,625 million, respectively. Non-cash collateral is not reflected in
the Statements of Admitted Assets, Liabilities and Surplus.
5. EMPLOYEE BENEFIT PLANS
A. Pension plans - The Company has several defined benefit pension plans,
which cover substantially all of its employees. Benefits are generally
based on career average earnings and credited length of service. The
Company's funding policy for U.S. plans is to contribute annually the
amount necessary to satisfy the Internal Revenue Service contribution
guidelines.
Employee pension benefit plan status is as follows:
1996 1995
------- -------
(In Millions)
Actuarial present value of benefit obligation:
Vested benefit obligation $(3,878) $(3,270)
======= =======
Accumulated benefit obligation $(4,174) $(3,572)
======= =======
Projected benefit obligation $(4,989) $(4,330)
Plan assets at fair value 7,326 6,688
------- -------
Plan assets in excess of projected
benefit obligation 2,337 2,358
Unrecognized transition amount (769) (904)
Unrecognized prior service cost 356 199
Unrecognized net gain (916) (753)
------- -------
Prepaid pension cost $ 1,008 $ 900
======= =======
Plan assets consist primarily of equity securities, bonds, real estate
and short-term investments, of which $5,668 million and $4,788 million
are included in separate account assets and liabilities at December
31, 1996 and 1995, respectively.
The components of the net periodic pension benefit for 1996, 1995 and
1994 are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
(In Millions)
<S> <C> <C> <C>
Service cost $ 119 $ 110 $ 141
Interest cost 336 371 293
Actual return on assets (720) (1,249) 62
Net amortization and deferral 57 604 (633)
Net curtailment gains and special termination benefits 63 0 156
------ ------ ------
Net periodic pension benefit $ (145) $ (164) $ 19
====== ====== ======
</TABLE>
The net increase to surplus relating to the Company's pension plans is
$37 million, $30 million and $0 million in 1996, 1995 and 1994,
respectively, which considers the changes in the non-admitted prepaid
pension asset of $108 million, $134 million and ($19) million,
respectively.
The accounting assumptions used by the Company were:
AS OF SEPTEMBER 30,
------------------------
1996 1995 1994
------ ------ ------
Discount rate 7.75% 7.50% 8.50%
Rate of increase in compensation levels 4.50% 4.50% 5.50%
Expected long-term rate of return on assets 9.50% 9.00% 9.00%
The Company maintains non-qualified supplemental retirement plans
providing benefits that may not be paid from the Company's two
qualified plans since qualified plans have limits imposed by Section
415 and 401(a)(17) of the Code. One of these plans also provides
certain participants with a subsidized early retirement benefit.
- 9 -
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO STATUTORY FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
B. Postretirement benefits - The Company provides certain life insurance
and health care benefits for its retired employees. Substantially all
of the Company's employees may become eligible to receive these
benefits if they retire after age 55 with at least 10 years of
service.
Postretirement benefits are accounted for in accordance with
prescribed NAIC policy. The Company has elected to amortize its
transition obligation over 20 years. During 1996, 1995 and 1994,
funding of its postretirement benefit obligations totaled $35 million,
$47 million and $31 million, respectively.
The postretirement benefit plan status is as follows:
SEPTEMBER 30,
------------------
1996 1995
---- ----
(In Millions)
Accumulated postretirement benefit obligation for:
Retirees $(1,418) $(1,465)
Fully eligible active plan participants (35) (103)
Plan assets at fair value 1,341 1,309
------- -------
Funded status (112) (259)
Unrecognized transition amount 355 378
Unrecognized net gain (177) (19)
------- -------
Prepaid postretirement benefit cost $ 66 $ 100
======= =======
Plan assets consist of group and individual variable life insurance
policies, group life and health contracts and short-term investments,
of which $1,003 million and $990 million are included in the separate
account assets and liabilities at December 31, 1996 and 1995,
respectively.
Net periodic postretirement benefit cost for 1996, 1995 and 1994
includes the following components:
1996 1995 1994
----- ----- -----
(In Millions)
Service cost $ 24 $ 30 $ 36
Interest cost 115 117 107
Actual return on plan assets (104) (144) (98)
Amortization of transition obligation 22 22 23
Other 12 49 52
----- ----- -----
Net periodic postretirement benefit cost $ 69 $ 74 $ 120
===== ===== =====
The net reduction to surplus relating to the Company's postretirement
benefit plans is $35 million, $46 million, and $30 million in 1996,
1995 and 1994, respectively, which considers the changes in the
prepaid postretirement benefit cost of $34 million, $28 million and
$90 million in 1996 , 1995 and 1994, respectively.
The assumptions used for the postretirement benefit plan were:
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30,
---------------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Discount rate 7.75% 7.50% 8.50%
Expected long-term rate of return on plan assets 9.00% 8.00% 9.00%
Rate of increase in compensation levels 4.50% 4.50% 5.50%
Health care cost trend rates 8.50-12.50% 8.90-13.30% 9.10-13.90%
Ultimate health care cost trend rate at 2006 5.00% 5.00% 6.00%
</TABLE>
A 1% increase in health care cost trend rates would increase the
September 30, 1996 accumulated postretirement benefit obligation and
service/interest costs by $115 million and $12 million, respectively.
C. Postemployment benefits - The Company accrues for postemployment
benefits primarily for life and health benefits provided to former or
inactive employees who are not retirees. The net accumulated liability
for these benefits at December 31, 1996 and 1995 was $99 million and
$96 million, respectively.
- 10 -
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO STATUTORY FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
6. NOTES PAYABLE AND OTHER BORROWINGS
Notes payable and other borrowings consisted of the following at December
31:
Short-term: 1996 1995
---- ----
(In Millions)
Notes payable to affiliate $ 99 $ 0
Current portion of long term
notes payable 11 128
---- ----
$110 $128
Long-Term: 1996 1995
---- ----
8.173% note due 2002 $249 $249
7.501% note due 1999 248 248
5.0819% note due 2004 56 66
12.00% note due 1999 0 16
Secured demand note
due 1998 100 100
---- ----
653 679
---- ----
Total principal repayments and accrued interest $763 $807
==== ====
Scheduled principal repayments as of December 31, 1996, are as
follows: $110 million in 1997, $100 million in 1998, $239 million in
1999, $0 in 2000, $0 in 2001 and $294 million thereafter.
7. SURPLUS
A. Capital notes - The Company issues Capital Notes that are subordinate
in right of payment to policy claims, prior claims and senior
indebtedness. A summary of the outstanding Capital Notes as of
December 31, 1996 is as follows:
PRINCIPAL CARRYING INTEREST MATURITY
ISSUE DATE (PAR) AMOUNT RATE DATE
- ---------- --------- -------- -------- --------
(In Millions)
April 28, 1993 $ 300 $ 299 6.875% April 15, 2003
July 1, 1995 350 340 8.300% July 1, 2025
July 1, 1995 250 246 7.650% July 1, 2007
July 15, 1995 100 100 8.100% July 15, 2015
------- -----
Total $ 1,000 $ 985
======= =====
B. Special surplus fund - In accordance with the requirements of various
states, a special surplus fund has been established for contingency
reserves of $1,268 million and $1,274 million as of December 31, 1996
and 1995, respectively.
C. Non-admitted assets - Non-admitted assets were $1,367 million and
$1,167 million as of December 31, 1996 and 1995, respectively.
8. FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair values presented below have been determined using available
information and reasonable valuation methodologies. Considerable judgment
is applied in interpreting data to develop the estimates of fair value.
Accordingly, such estimates presented may not be realized in a current
market exchange. The use of different market assumptions and/or estimation
methodologies could have a material effect on the estimated fair values.
The following methods and assumptions were used in calculating the fair
values. (For all other financial instruments, the carrying value is a
reasonable estimate of fair value.)
Bonds and preferred stock - Fair values for bonds and preferred stock,
other than private placement securities, are based on quoted market
prices or estimates from independent pricing services. Fair values for
private placement securities are estimated using a discounted cash
flow model which considers the current market spreads between the U.S.
Treasury yield curve and corporate bond yield curve, adjusted for the
type of issue, its current credit quality and its remaining average
life. The fair value of certain non-performing private placement
securities is based on amounts provided by state regulatory
authorities.
Common stock - Fair value of unaffiliated common stock is based on
quoted market prices, where available, or prices provided by state
regulatory authorities.
- 11 -
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO STATUTORY FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
Mortgage loans on real estate - The fair value of residential
mortgages is based on recent market trades or quotes, adjusted where
necessary for differences in risk characteristics. The fair value of
the commercial mortgage and agricultural loan portfolio is primarily
based upon the present value of the scheduled cash flows discounted at
the appropriate U.S. Treasury rate, adjusted for the current market
spread for a similar quality mortgage. For certain non-performing and
other loans, fair value is based upon the value of the underlying
collateral.
Policy loans and premium notes - The estimated fair value of policy
loans is calculated using a discounted cash flow model based upon
current U.S. Treasury rates and historical loan repayments.
Derivative financial instruments - The fair value of swap agreements
is estimated based on the present value of future cash flows under the
agreements discounted at the applicable zero coupon U.S. Treasury rate
and swap spread. The fair value of forwards, futures and options is
estimated based on market quotes for a transaction with similar terms.
The fair value of loan commitments is derived by comparing the
contractual future stream of fees with such fee streams adjusted to
reflect current market rates that would be applicable to instruments
of similar type, maturity and credit standing.
Investment-type insurance contract liabilities - Fair values for the
Company's investment-type insurance contract liabilities are estimated
using a discounted cash flow model, based on interest rates currently
being offered for similar contracts. Carrying amounts are included in
"Future policy benefits and claims."
Notes payable and other borrowings - The estimated fair value of notes
payable is derived using discount rates based on the borrowing rates
currently available to the Company for debt with similar terms and
remaining maturities.
The following table discloses the carrying amounts and estimated fair
values of the Company's financial instruments at December 31:
<TABLE>
<CAPTION>
1996 1995
---- ----
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
------ ---------- ------ ----------
(In Millions)
FINANCIAL ASSETS:
<S> <C> <C> <C> <C>
Bonds $75,006 $77,826 $77,494 $83,910
Preferred stock 239 259 396 410
Common stock * 2,466 2,466 1,805 1,805
Mortgage loans on real estate 17,039 17,364 20,280 20,839
Policy loans and premium notes 6,023 5,942 6,208 6,452
Short-term investments 5,817 5,817 4,633 4,633
Cash 165 165 170 170
Assets held in separate accounts 57,797 57,797 53,903 53,903
Derivative financial instruments 9 16 15 64
FINANCIAL LIABILITIES:
Investment-type insurance
contracts 30,194 30,328 34,799 35,720
Notes payable and other borrowings 763 794 807 829
Liabilities related to separate accounts 57,436 57,436 53,256 53,256
Derivative financial instruments 60 63 94 108
</TABLE>
* Excludes investments in subsidiaries of $4,610 million and $4,328 million
at December 31, 1996 and 1995, respectively.
- 12 -
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO STATUTORY FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
9. DERIVATIVE AND OFF-BALANCE SHEET CREDIT-RELATED INSTRUMENTS
A. Derivative financial instruments - Derivatives include swaps,
forwards, futures, options and fixed-rate loan commitments subject to
market risk, all of which are used by the Company in the normal course
of business in activities other than trading. The Company does not
issue or hold derivatives for trading purposes. This classification is
based on management's intent at the time of contract inception and
throughout the life of the contract. The Company uses derivatives
primarily for asset/liability risk management and to reduce exposure
to interest rate, currency and other market risks. Of those
derivatives held at December 31,1996, 35% of the notional amounts
consisted of interest rate derivatives and 65% consisted of foreign
currency derivatives.
The tables below summarize the Company's outstanding positions on a
gross basis before netting pursuant to rights of offset, qualifying
master netting agreements with counterparties or collateral
arrangements at December 31:
<TABLE>
<CAPTION>
DERIVATIVE FINANCIAL INSTRUMENTS
1996 1995
---- ----
(In Millions)
CARRYING ESTIMATED CARRYING ESTIMATED
NOTIONAL AMOUNT FAIR VALUE NOTIONAL AMOUNT FAIR VALUE
-------- ------ ---------- -------- ------ ----------
<S> <C> <C> <C> <C> <C> <C>
Swaps:
Assets $ 159 $ 1 $ 6 $ 418 $ (1) $ 32
Liabilities 479 50 53 371 76 79
Forwards:
Assets 453 8 8 235 13 17
Liabilities 980 9 9 1,074 13 13
Futures:
Assets 0 0 0 683 5 5
Liabilities 399 1 1 864 5 7
Options:
Assets 175 0 0 195 0 0
Liabilities 0 0 0 3 0 0
Loan Commitments:
Assets 164 0 2 122 (2) 10
Liabilities 9 0 0 532 0 9
------ ------ ------ ------ ------ ------
Total:
Assets $ 951 $ 9 $ 16 $1,653 $ 15 $ 64
====== ====== ====== ====== ====== ======
Liabilities $1,867 $ 60 $ 63 $2,844 $ 94 $ 108
====== ====== ====== ====== ====== ======
</TABLE>
B. Off-balance sheet credit-related instruments - During the normal
course of its business, the Company utilizes financial instruments
with off-balance sheet credit risk such as commitments, financial
guarantees and letters of credit. Commitments include variable rate
commitments to purchase and sell mortgage loans and the unfunded
portion of commitments to fund investments in private placement
securities. The Company also provides financial guarantees incidental
to other transactions and letters of credit that guarantee the
performance of customers to third parties. These credit-related
financial instruments have off-balance sheet credit risk because only
their origination fees, if any, and accruals for probable losses, if
any, are recognized until the obligation under the instrument is
fulfilled or expires. These instruments can extend for several years
and expirations are not concentrated in any period. The Company seeks
to control credit risk associated with these instruments by limiting
credit, maintaining collateral where customary and appropriate, and
performing other monitoring procedures.
The notional amount of these instruments, which represents the
Company's maximum exposure to credit loss from other parties'
non-performance, was $785 million and $1,254 million at December 31,
1996 and 1995, respectively. Because many of these amounts expire
without being advanced in whole or in part, the notional amounts do
not represent future cash flows.
The estimated fair value of these instruments, which represents the
Company's current exposure to credit loss from other parties'
non-performance, was $8 million and $56 million at December 31, 1996
and 1995, respectively.
10. RELATED PARTY TRANSACTIONS
A. Service agreements - The Company has entered into service agreements
with various subsidiaries. Under these agreements, the Company
furnishes services of officers and employees and provides supplies,
use of equipment, office space, and makes payment to
- 13 -
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO STATUTORY FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
third parties for general expenses, state and local taxes. The
agreements obligate the subsidiaries to reimburse the Company for the
approximate cost of providing such services. The amounts receivable
from subsidiaries, reported in "Other assets" at December 31, 1996 and
1995, were $490 million and $509 million, respectively. The
subsidiaries also furnish similar services to the Company in
connection with such agreements. The amount payable to subsidiaries,
reported in "Other liabilities" at December 31, 1996 was $87 million.
There was no outstanding balance at December 31, 1995.
Certain of the Company's group health care subsidiaries provide health
insurance to certain employees of the Company. Enrollment contract
costs reported in "Other expenses" were $126 million, $111 million and
$104 million for the years ended December 31, 1996, 1995 and 1994,
respectively.
The Company purchases corporate owned life insurance policies from one
of its life insurance subsidiaries for certain employees. The premium
charged for these policies reported in "Other expenses" was $3
million, $12 million and $12 million for the years ended December 31,
1996, 1995 and 1994, respectively. The cash value associated with
these policies was $118 million and $102 million at December 31,
1996 and 1995, respectively.
Certain of the Company's subsidiaries perform services for the Company
in connection with the Company's obligations under investment advisory
or subadvisory agreements. The costs incurred in connection with
performing such services, primarily reported in "Other expenses," were
$145 million, $327 million and $342 million for the years ended
December 31, 1996, 1995 and 1994, respectively. The Company also
provides these services to subsidiaries in connection with such
agreements. The investment advisory fees received from affiliates by
the Company, reported in "Other income" were $161 million, $92 million
and $110 million for the years ended December 31, 1996, 1995 and 1994,
respectively.
The Company borrows short-term funds from Prudential Funding
Corporation ("Funding"), a wholly owned subsidiary. The interest
expense for these borrowings was $131 million, $66 million and $21
million for the years ended December 31, 1996, 1995 and 1994,
respectively. The outstanding balance at December 31, 1996 was $99
million. There was no outstanding balance at December 31, 1995.
B. Net worth maintenance agreement - The Company has entered into a
support agreement with Funding under which it agrees to maintain
Funding's tangible net worth, including subordinated debt, at not less
than $1.00. As of December 31, 1996, the tangible net worth of Funding
was $44 million. Since the inception of the agreement, no support
payments have been required.
11. CONTINGENCIES
The Company is reviewing its obligations under certain managed care
arrangements for possible failure to comply with contractual and regulatory
requirements. It is the opinion of management that appropriate reserves
have been established in accordance with applicable accounting standards to
provide for appropriate reimbursements to customers.
Various lawsuits against the Company have arisen in the course of the
Company's business. In certain of these matters, large and/or indeterminate
amounts are sought.
Twenty-six purported class actions and over 280 individual actions are
pending against the Company on behalf of those persons who purchased life
insurance policies allegedly because of deceptive sales practices engaged
in by the Company and its insurance agents in violation of state and
federal laws. The Company anticipates additional suits may be filed by
individuals who opted out of the class action settlement described below.
The sales practices alleged to have occurred are contrary to Company
policy. Some of these cases seek very substantial damages while others seek
unspecified compensatory, punitive and treble damages. The Company intends
to defend these cases vigorously.
A Multi-State Life Insurance Task Force (the "Task Force"), comprised of
insurance regulators from 29 states and the District of Columbia, was
created to conduct a review of sales and marketing practices throughout the
life insurance industry. As the largest life insurance company in the
United States, the Company was the initial focus of the Task Force
examination. On July 9, 1996, the Task Force released its report on the
Company's activities. In it, the Task Force found that some sales of life
insurance policies made by the Company were improper. The report criticizes
the Company's training, oversight, discipline and compliance programs
related to insurance sales. Based on these findings, the Task Force
recommended, and the Company agreed to, a series of fines allocated to all
50 states and the District of Columbia amounting to a total of $35 million.
In addition, the Task Force recommended a remediation program pursuant to
which the Company would offer relief to policyowners who purchased 10.7
million whole life insurance policies in the United States from the Company
from 1982 through 1995. In subsequent negotiations with several states, the
Company agreed to pay additional amounts aggregating approximately $30
million by way of fine, reimbursement of investigation expenses and costs
associated with outreach to residents of Florida and California.
On October 28, 1996, the Company entered into a Stipulation of Settlement
with attorneys for the plaintiffs in the class actions consolidated in a
Multi-District Litigation involving alleged improprieties in connection
with the Company's sale of whole life
- 14 -
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO STATUTORY FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
insurance policies from 1982 through 1995. Pursuant to the proposed
settlement, the Company has agreed to provide certain enhancements and
changes to the remediation program previously accepted by the Multi-State
Task Force, including some additional remedies. In addition, the Company
agreed that a minimum cost of $410 million (which was recorded in the
Statement of Operations and Changes in Surplus) would be incurred in
providing remedies to policyowners under the program, and agreed to certain
other payments and guarantees. Under the terms of the guarantees, the
Company has agreed that the average cost per remedy will not be less than
$2,364 for up to 330,000 claims remedied. For claims remedied in excess of
330,000, the Company has not guaranteed an average cost per remedy. The
Company has also agreed to provide additional compensation to be
distributed by formula that will range in an aggregate amount from $50
million to $300 million depending on the total number of claims remedied.
The Company cannot predict how many claims ultimately will be remedied. The
Company has also recorded in the Statement of Operations and Changes in
Surplus, its estimate of the minimum administrative costs related to the
remediation program. As of March 5, 1997, all 50 states and the District of
Columbia have directed the Company to offer a remediation plan based on the
program accepted by the Task Force and containing many of the enhancements
of the class action settlement.
Also on October 28, 1996, the U.S. District Court of the District of New
Jersey, in which the Multi-District Litigation is pending, conditionally
certified a class for settlement purposes and scheduled a hearing on the
fairness, reasonableness and adequacy of the proposed settlement. This
hearing was held on February 24, 1997. On March 7, 1997, the Court
rendered its decision approving the settlement. The owners of approximately
23,000 policies have taken steps to exclude themselves from the class
action and are not bound by the settlement.
To date, the Company has mailed packages to 8.5 million policyowners
eligible for the remediation program, informing policyowners in all 50
states and the District of Columbia of their rights under the program. The
deadline for electing to participate in the Alternative Dispute Resolution
Process ("ADR") or Basic Claim Relief is June 1, 1997. Policyowners who
believe that they were misled can file a claim through the ADR.
Policyowners who do not believe they were misled, or who do not wish to
file a claim under the ADR, may choose from several options available under
Basic Claim Relief, such as preferred rate premium loans, or the purchase
of enhanced annuities, mutual fund shares or life insurance policies.
It is not possible on any reliable basis to estimate how many policyowners
will participate in the settlement. The cost of the settlement is dependent
upon complex and varying factors, including the number of policyowners that
participate in the settlement, the relief options chosen and the ultimate
dollar value of the settlement. The administrative costs to the Company of
remediation of policyowner claims are also subject to a number of complex
uncertainties in addition to the unknown quantity and cost of policyowner
claims. In light of the uncertainties attendant to these and other factors,
management is unable to make a reasonable estimate of the ultimate cost of
the remediation program to the Company.
A purported class action was brought against the Company and certain
subsidiaries alleging common law fraud, negligent misrepresentation and
violations of the New Jersey RICO statute arising out of the plaintiffs'
purchase of certain subordinated mortgage pass-through securities and
seeking compensatory and punitive damages and injunctive relief. The
Company will deny the substantive allegations of the complaint in its
answer and will vigorously defend the suit. The case is at a preliminary
stage, and management is not now in a position to predict the outcome or
effect of the litigation.
Litigation is subject to many uncertainties, and given the complexity and
scope of these suits, their outcome cannot be predicted. It is also not
possible to predict the likely results of any regulatory inquiries or their
effect on litigation which might be initiated in response to widespread
media coverage of these matters. Accordingly, management is unable to make
a meaningful estimate of the amount or range of loss that could result from
an unfavorable outcome of all pending litigation and the regulatory
inquiries. It is possible that the results of operations or the cash flow
of the Company, in particular quarterly or annual periods, could be
materially affected by an ultimate unfavorable outcome of certain pending
litigation and regulatory matters. Management believes, however, that the
ultimate outcome of all pending litigation and regulatory matters referred
to above should not have a material adverse effect on the Company's
financial position, after consideration of applicable reserves.
In 1993, Prudential Securities, Inc. ("PSI"), a subsidiary of Prudential,
entered into an agreement with the Securities and Exchange Commission, the
National Association of Securities Dealers, Inc., and state securities
commissions whereby PSI agreed to pay $330 million into a settlement fund
to pay eligible claims on certain limited partnership matters. Under this
agreement, if partnership matter claims exceed the established settlement
fund, PSI is obligated to pay such additional claims. The agreement also
required PSI to take measures to enhance the adequacy of its sales
practices compliance controls.
In October 1994, the United States Attorney for the Southern District of
New York (the "U.S. Attorney") filed a complaint against PSI in connection
with its sale of certain limited partnerships. Simultaneously, PSI entered
into an agreement to comply with certain conditions for a period of three
years, and to pay an additional $330 million into the settlement fund. At
the end of the three year period, assuming PSI has fully complied with the
terms of the agreement, the U.S. Attorney will institute no further action.
In the opinion of management, PSI is in compliance with all provisions of
the aforementioned agreements.
- 15 -
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO STATUTORY FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
The Company has entered into a reinsurance agreement with The Prudential
Life Insurance Company, Ltd., a wholly owned subsidiary, under which it has
agreed to reinsure certain individual life insurance policies through a
yearly renewable term contract. The reinsurance assumed premiums and
reserves for 1996 were $27 million and $17 million, respectively.
The Company as a result of the sale of Prudential Reinsurance Inc. (a PRUCO
Inc. subsidiary), agreed to guarantee up to $775 million of Gibraltar
Casualty Company (a Prudential subsidiary) obligations with respect to a
Stop Loss Agreement and PRUCO Inc.'s (a Prudential subsidiary) payment
obligations under an Indemnity Agreement, subject to maximum aggregate
payments of $400 million. The maximum aggregate payments under the
Prudential Guarantee of the Gibraltar Casualty Company obligations will be
reduced in certain circumstances to take account of payments made and
collateral provided in respect of the guaranteed obligations. The Stop Loss
Agreement is intended to mitigate the impact on Prudential Reinsurance Inc.
of adverse development of loss reserves, as of June 30, 1995, of up to $375
million of the first $400 million of adverse development. The Company has
recorded a loss reserve of $175 million as of December 31, 1996.
Gibraltar Casualty Company and other property and casualty insurance
subsidiaries receive claims under expired contracts which assert alleged
injuries and/or damages relating to or resulting from toxic torts, toxic
waste and other hazardous substances. The liabilities for such claims
cannot be estimated by traditional reserving techniques. As a result of
judicial decisions and legislative actions, the coverage afforded under
these contracts may be expanded beyond their original terms. Extensive
litigation between insurers and insureds over these issues continues and
the outcome is not predictable. In establishing the unpaid claim reserves
for these losses, management considered the available information and
established these reserves in accordance with applicable accounting
standards. However, given the expansion of coverage and liability by the
courts and legislatures in the past, and potential for other unfavorable
trends in the future, the ultimate cost of these claims could increase from
the levels currently established.
The Company and a number of other insurers (the "Consortium") entered into
a Reinsurance and Participation Agreement ("the Agreement") with MBL Life
Assurance Corporation ("MBLLAC") and others, under which the Company and
the other insurers agreed to reinsure certain payments to be made to
contractholders by MBLLAC in connection with the plan of rehabilitation of
Mutual Benefit Life Insurance Company. Under the Agreement, the Consortium,
subject to certain terms and conditions, will indemnify MBLLAC for the
ultimate net loss sustained by MBLLAC on each contract subject to the
Agreement. The ultimate net loss represents the amount by which the
aggregate required payments exceed the fair market value of the assets
supporting the covered contracts at the time such payments are due. The
Company's share of any net loss is 30.55%. The Company has determined that
it does not expect to make any payments to MBLLAC under the agreement. The
Company concluded this after testing a wide range of potentially adverse
scenarios during the rehabilitation period for MBLLAC.
******
- 16 -
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Policyholders of
The Prudential Insurance Company of America
We have audited the accompanying statement of admitted assets, liabilities and
surplus (statutory basis) of The Prudential Insurance Company of America as of
December 31, 1996, and the related statements of operations and changes in
surplus (statutory basis), and of cash flows (statutory basis) for the year then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
As described in Note 1, these financial statements were prepared in conformity
with accounting practices prescribed or permitted by the New Jersey Department
of Insurance, which practices differ from generally accepted accounting
principles. The effects on the financial statements of the variances between the
statutory basis of accounting and generally accepted accounting principles,
although not reasonably determinable, are presumed to be material.
In our opinion, because of the effects of the matters referred to in the
preceding paragraph, the financial statements referred to above do not present
fairly, in conformity with generally accepted accounting principles, the
financial position of The Prudential Insurance Company of America at December
31, 1996, and the results of its operations and its cash flows for the year then
ended.
Also, in our opinion, the financial statements referred to above present fairly,
in all material respects, the admitted assets, liabilities and surplus of The
Prudential Insurance Company of America at December 31, 1996, and the results of
its operations and its cash flows for the year then ended, on the basis of
accounting described in Note 1.
/s/ PRICE WATERHOUSE, LLP
New York, New York
March 10, 1997
- 17 -
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
The Prudential Insurance Company of America
Newark, New Jersey
We have audited the accompanying statement of admitted assets, liabilities and
surplus--statutory basis of The Prudential Insurance Company of America as of
December 31, 1995, and the related statements of operations and changes in
surplus--statutory basis, and cash flows--statutory basis for each of the two
years in the period ended December 31, 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our report dated March 1, 1996, we expressed an opinion that the 1995 and
1994 financial statements, prepared using accounting practices prescribed and
permitted by the New Jersey Department of Insurance, presented fairly, in all
material respects, the financial position of The Prudential Insurance Company of
America as of December 31, 1995 and 1994, and the results of its operations and
its cash flows for the years then ended in conformity with generally accepted
accounting principles. As described in Note 1 to these financial statements,
pursuant to the pronouncements of the Financial Accounting Standards Board, the
1995 and 1994 financial statements of The Prudential Insurance Company of
America, prepared using accounting practices prescribed or permitted by
insurance regulators (statutory financial statements) are no longer considered
presentations in conformity with generally accepted accounting principles. The
effects on the financial statements of the differences between the statutory
basis of accounting and generally accepted accounting principles are material
and are also described in Note 1. Accordingly, our present opinion on the
presentation of the 1995 and 1994 financial statements in accordance with
generally accepted accounting principles, as presented herein, is different from
that expressed in our previous report.
In our opinion, because of the effects of the matter discussed in the third
paragraph, the financial statements referred to above do not present fairly, in
conformity with generally accepted accounting principles, the admitted assets,
liabilities and surplus of the Company as of December 31, 1995, and its
operations, changes in surplus and its cash flows for each of the two years in
the period ended December 31, 1995.
However, in our opinion, the financial statements referred to above present
fairly, in all material respects, the admitted assets, liabilities and surplus
of The Prudential Insurance Company of America as of December 31, 1995, and the
results of its operations, changes in surplus and its cash flows for each of the
two years in the period then ended, on the basis of accounting described in Note
1.
Also, as described in Note 1 to the financial statements, these financial
statements were prepared on an unconsolidated statutory basis of accounting,
which differs from the 1995 and 1994 financial statements prepared for general
distribution on a consolidated statutory basis of accounting, both of which
differ from generally accepted accounting principles. The financial statements
for 1995 and 1994 have been restated on an unconsolidated statutory basis of
accounting adopted in 1996 for purposes of general distribution. Further, these
financial statements differ from the previously issued unconsolidated statutory
financial statements because certain permitted financial statement presentation
practices are no longer being used.
/s/ DELOITTE & TOUCHE LLP
Parsippany, New Jersey
March 1, 1996, except for Note 1A,
as to which the date is March 10, 1997
- 18 -
<PAGE>
Variable Annuity Contracts
(for use in connection with pension, profit-sharing
and annuity purchase plans and Individual Retirement
Annuities qualifying for special federal income tax treatment)
Prudential's Gibraltar Fund, Inc.
The Prudential Insurance Company of America
- --------------------------------------------------------------------------------
This prospectus does not constitute an offer in any State to any person to whom
such offer would be unlawful in such State.
No one is authorized to give any information or to make any representations
other than those contained in this prospectus or in the sales material
authorized by The Prudential Insurance Company of America for use in connection
with the offer contained in this prospectus.
- --------------------------------------------------------------------------------
[The Prudential Logo]
- --------------------------------------------------------------------------------
The Prudential Insurance Company of America
Prudential Plaza, Newark, New Jersey 07102-3777
--------------------
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