<PAGE>
Registration No. 2-52589
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
Post-Effective Amendment No. 37 to Form S-6
For Registration Under the Securities Act of 1933 of Securities
of Unit Investment Trusts Registered on Form N-8B-2
FOR
----------------------
PRUDENTIAL'S ANNUITY PLAN ACCOUNT-2
(Exact name of trust)
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
751 Broad Street, Newark, New Jersey 07102-3777
(Name of depositor and complete address of principal executive offices)
----------------------
And Also to Form N-1A for Registration Under the
Securities Act of 1933 and Registration Statement
Under the Investment Company Act of 1940
FOR
----------------------
PRUDENTIAL'S GIBRALTAR FUND, INC.
751 Broad Street
Newark, N.J. 07102-3777
(Exact name of co-registrant
and address of principal executive offices)
----------------------
Caren Cunningham
Secretary
Prudential's Gibraltar Fund, Inc.
The Prudential Insurance Company of America
751 Broad Street
Newark, N.J. 07102-3777
(Name and complete address of agent for service)
----------------------
Copies to:
Christopher E. Palmer
Shea & Gardner
1800 Massachusetts Avenue, N.W.
Washington, D.C. 20036
----------------------
It is proposed that this filing will become effective (check appropriate space):
[ ] immediately upon filing pursuant to paragraph (b) of Rule 485
[X] on April 30, 1998 pursuant to paragraph (b) of Rule 485
(date)
[ ] 60 days after filing pursuant to paragraph (a) of Rule 485
[ ] on ____________ pursuant to paragraph (a) of Rule 485
<PAGE>
VARIABLE ANNUITY CONTRACTS
CROSS REFERENCE SHEET TO PROSPECTUS
<TABLE>
<CAPTION>
INFORMATION REQUIRED BY
ITEM OF FORM N-8B-2 LOCATION IN PROSPECTUS
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<S> <C>
1....................................................... Prudential's Annuity Plan Account-2
2....................................................... Eligibility for Purchase
Prudential's Administrative Role
3....................................................... Not Applicable
4....................................................... Eligibility for Purchase
Prudential's Administrative Role
5-6..................................................... Prudential's Annuity Plan Account-2
9....................................................... Not Applicable
10 (a).................................................. The Variable Annuity Contract
(b).................................................. Prudential's Annuity Plan Account-2
(c).................................................. Liquidation (Redemption) and Transfer of Accumulation
Shares
Right to Cancel
Payment Upon the Death of the Planholder
(d).................................................. Liquidation (Redemption) and Transfer of Accumulation
Shares
Exercising Rights Under the Contracts
(e).................................................. Not Applicable
(f).................................................. Description of Fund Shares and Voting Rights
(g)(h)(1)(4)......................................... Not Applicable
(g)(h)(2)(3)......................................... Exercising Rights Under the Contracts
(i).................................................. Eligibility for Purchase
Types of Annuity Available
How Variable Annuity Payments are Determined
Payment Upon the Death of the Planholder
Exercising Rights Under the Contracts
11...................................................... Prudential's Annuity Plan Account-2
Prudential's Gibraltar Fund, Inc.
12...................................................... Prudential's Annuity Plan Account-2
Custodian, Transfer Agent and Dividend-Paying Agent
Prudential's Administrative Role
13...................................................... Summary
The Role of the Transfer Account
Prudential's Gibraltar Fund, Inc.
Prudential's Administrative Role
Sales and Related Charges
Other Charges
14...................................................... Eligibility for Purchase
The Role of the Transfer Account
</TABLE>
<PAGE>
CROSS REFERENCE SHEET (VARIABLE ANNUITY) -- PAGE 2
<TABLE>
<CAPTION>
INFORMATION REQUIRED BY
ITEM OF FORM N-8B-2 LOCATION IN PROSPECTUS
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<S> <C>
15...................................................... The Variable Annuity Contract
The Role of the Transfer Account
Prudential's Administrative Role
16...................................................... Prudential's Annuity Plan Account-2
17...................................................... Liquidation (Redemption) and Transfer of Accumulation
Shares
Right to Cancel Supplement
Payment Upon the Death of the Planholder
18...................................................... Prudential's Annuity Plan Account-2
How Variable Annuity Payments are Determined
19...................................................... Prudential's Administrative Role
20...................................................... Exercising Rights Under the Contracts
21-22................................................... Not Applicable
23...................................................... Directors and Officers of Prudential
24...................................................... Not Applicable
25...................................................... Eligibility for Purchase
26...................................................... Sales and Related Charges
Other Charges
27...................................................... Eligibility for Purchase
Prudential as Manager of the Fund's Investments
28...................................................... Directors and Officers of Prudential
29-34................................................... Not Applicable
35...................................................... Eligibility for Purchase
37...................................................... Not Applicable
38-39................................................... Eligibility for Purchase
40...................................................... Sales and Related Charges
Other Charges
41(a)................................................... Eligibility for Purchase
Prudential as Manager of the Fund's Investments
42...................................................... Directors and Officers of Prudential
43...................................................... Not Applicable
44...................................................... Prudential's Annuity Plan Account-2
How Accumulation Shares are Credited
How Variable Annuity Payments are Determined
</TABLE>
<PAGE>
CROSS REFERENCE SHEET (VARIABLE ANNUITY) -- PAGE 3
<TABLE>
<CAPTION>
INFORMATION REQUIRED BY
ITEM OF FORM N-8B-2 LOCATION IN PROSPECTUS
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<S> <C>
45...................................................... Liquidation (Redemption) and Transfer of Accumulation
Shares
The Risks Which Prudential Assumes
46...................................................... Liquidation (Redemption) and Transfer of Accumulation
Shares
Other Charges
Payment Upon the Death of the Planholder
47...................................................... Not Applicable
48...................................................... Eligibility for Purchase
State Regulation
49...................................................... Not Applicable
50...................................................... Prudential's Annuity Plan Account-2
51...................................................... The Risks Which Prudential Assumes
52...................................................... Prudential's Annuity Plan Account-2
53...................................................... Federal Income Taxes
54...................................................... Not Applicable
55...................................................... Results Under a Hypothetical Purchase Program
56-58................................................... Not Applicable
59...................................................... Financial Statements of Prudential's Annuity Plan
Account-2
Consolidated Financial Statements of The Prudential
Insurance Company of America and Subsidiaries
</TABLE>
<PAGE>
PRUDENTIAL'S GIBRALTAR FUND, INC.
CROSS REFERENCE SHEET TO PROSPECTUS
<TABLE>
<CAPTION>
INFORMATION REQUIRED BY
ITEM OF FORM N-1A LOCATION IN PROSPECTUS
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<S> <C>
1. Cover Page Cover Page
2. Synopsis Summary
Fee Table
3. Condensed Financial Prudential's Gibraltar Fund, Inc. -- Financial Highlights
Information
4. General Description of Prudential's Gibraltar Fund, Inc.
Registrant Investment Policies
Restrictions on Investment
Description of Fund Shares and Voting Rights
5. Management of the Fund Directors and Officers of the Fund
Prudential's Gibraltar Fund, Inc.
Prudential's Administrative Role
Custodian, Transfer Agent and Dividend-Paying Agent
Summary of Investment Advisory Contract
Prudential as Manager of the Fund's Investments
Brokerage
6. Capital Stock and Other Description of Fund Shares and Voting Rights
Securities Redemption of Fund Shares
Federal Income Taxes
7. Purchase of Securities Prudential's Gibraltar Fund, Inc.
Being Offered Determination of Net Asset Value
8. Redemption or Repurchase Redemption of Fund Shares
9. Pending Legal Proceedings Not Applicable
10. Cover Page Not Applicable
11. Table of Contents Prospectus Contents
12. General Information Not Applicable
13. Investment Objective and Prudential's Gibraltar Fund, Inc.
Policies Investment Policies
Restrictions on Investment
New Jersey Investment Laws
Prudential as Manager of the Fund's Investments
14. Management of the Fund Directors and Officers of the Fund
15. Control Persons and Prudential's Gibraltar Fund, Inc.
Principal Holders of Description of Fund Shares and Voting Rights
Securities Directors and Officers of the Fund
16. Investment Advisory and Prudential's Gibraltar Fund, Inc.
Other Services Summary of Investment Advisory Contract
Prudential as Manager of the Fund's Investments
17. Brokerage Allocation Brokerage
</TABLE>
<PAGE>
CROSS REFERENCE SHEET (PRUDENTIAL'S GIBRALTAR FUND) -- PAGE 2
<TABLE>
<CAPTION>
INFORMATION REQUIRED BY
ITEM OF FORM N-1A LOCATION IN PROSPECTUS
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<S> <C>
18. Capital Stock and Other Description of Fund Shares and Voting Rights
Securities
19. Purchase, Redemption and Prudential's Gibraltar Fund, Inc.
Pricing of Securities Determination of Net Asset Value
Being Offered Redemption of Fund Shares
Description of Fund Shares and Voting Rights
20. Tax Status Federal Income Taxes
21. Underwriters Not Applicable
22. Calculation of Performance Not Applicable
Data
23. Financial Statements Financial Statements of Prudential's Gibraltar Fund, Inc.
</TABLE>
<PAGE>
PROSPECTUS
MAY 1, 1998
VARIABLE ANNUITY
CONTRACTS OF
PRUDENTIAL'S
ANNUITY PLAN LOGO
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
751 BROAD STREET
NEWARK, NEW JERSEY 07102-3777
TELEPHONE: (888) 778-2888
FSPQ 101 Ed 5-98
YOU ARE ADVISED TO READ THIS PROSPECTUS AND RETAIN IT FOR FUTURE REFERENCE.
Printed in U.S.A.
<PAGE>
PROSPECTUS CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
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.......................................... 8
THE ROLE OF THE TRANSFER ACCOUNT....................................... 8
PRUDENTIAL'S ANNUITY PLAN ACCOUNT-2.................................... 9
PRUDENTIAL'S GIBRALTAR FUND, INC....................................... 9
PRUDENTIAL'S ADMINISTRATIVE ROLE....................................... 10
DESCRIPTION OF THE CONTRACTS.............................................. 11
SALES AND RELATED CHARGES.............................................. 11
OTHER CHARGES.......................................................... 12
RIGHT TO CANCEL........................................................ 12
HOW ACCUMULATION SHARES ARE CREDITED................................... 13
LIQUIDATION (REDEMPTION) AND TRANSFER OF ACCUMULATION SHARES........... 13
RESULTS UNDER A HYPOTHETICAL PURCHASE PROGRAM.......................... 14
EFFECTING A VARIABLE ANNUITY........................................... 15
TYPES OF ANNUITY AVAILABLE............................................. 15
HOW VARIABLE ANNUITY PAYMENTS ARE DETERMINED........................... 15
THE RISKS WHICH PRUDENTIAL ASSUMES..................................... 17
PAYMENT UPON THE DEATH OF THE PLANHOLDER............................... 17
EXERCISING RIGHTS UNDER THE CONTRACTS.................................. 18
PRUDENTIAL-SPONSORED PENSION PLANS..................................... 19
DESCRIPTION OF PRUDENTIAL'S GIBRALTAR FUND, INC........................... 19
INVESTMENT POLICIES.................................................... 19
RESTRICTIONS ON INVESTMENT............................................. 19
NEW JERSEY INVESTMENT LAWS............................................. 21
SUMMARY OF INVESTMENT ADVISORY CONTRACT................................ 21
PRUDENTIAL AS MANAGER OF THE FUND'S INVESTMENTS........................ 23
BROKERAGE.............................................................. 23
DETERMINATION OF NET ASSET VALUE....................................... 25
REDEMPTION OF FUND SHARES.............................................. 25
DESCRIPTION OF FUND SHARES AND VOTING RIGHTS........................... 25
CUSTODIAN, TRANSFER AGENT AND DIVIDEND-PAYING AGENT.................... 26
SUPPLEMENTARY INFORMATION................................................. 26
STATE REGULATION....................................................... 26
FEDERAL INCOME TAXES................................................... 26
WITHHOLDING............................................................ 27
ADDITIONAL INFORMATION................................................. 28
EXPERTS................................................................ 28
LITIGATION............................................................. 29
YEAR 2000.............................................................. 29
DIRECTORS AND OFFICERS OF THE FUND........................................ 30
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA--DIRECTORS.................... 32
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA--OFFICERS..................... 34
</TABLE>
<PAGE>
<TABLE>
<S> <C>
FINANCIAL STATEMENTS OF PRUDENTIAL'S ANNUITY PLAN ACCOUNT-2............... A1
FINANCIAL STATEMENTS OF PRUDENTIAL'S GIBRALTAR FUND, INC.................. AI1
CONSOLIDATED FINANCIAL STATEMENTS OF THE PRUDENTIAL INSURANCE COMPANY OF
AMERICA AND SUBSIDIARIES................................................. B1
</TABLE>
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, Inc. (NYSE) is open
for business.
CONTRACT: The Variable Annuity Contract described in this Prospectus which is
a written agreement between Prudential and the contract owner which sets forth
the rights, duties and privileges of all parties.
MORTALITY AND EXPENSE RISKS: The risks Prudential assumes because the amount
of variable annuity payments will not be affected by losses 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 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 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 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 (the 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 8.
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, as amended,
(IRA plans) and 403(b) annuities where the Transfer Account is in the name of
the employee.
The Prudential Insurance Company of America (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 Prudential. The assets of the
Account are invested at net asset value in shares of Prudential's Gibraltar
Fund, Inc. (the 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 13. After annuity payments begin the Contracts may no longer be
liquidated, in whole or in part.
The Fund was organized by Prudential to serve as the investment medium for the
variable contract accounts of the Prudential Financial Security Program (the
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 20.
Prudential, a mutual insurance company, was founded in 1875 under the laws of
New Jersey. Prudential is subject to regulation by the Department of Insurance
of the State of New Jersey and by the insurance departments
2
<PAGE>
of all the other states and jurisdictions in which it does business.
Prudential is the investment advisor of the Fund. See PRUDENTIAL AS MANAGER OF
THE FUND'S INVESTMENTS, page 23. Prudential's financial statements begin on
page C1 and should be considered only as bearing upon Prudential's ability to
meet its obligations under the Contracts.
Pruco Securities Corporation (Prusec), an indirect wholly-owned subsidiary of
Prudential, acts as the principal underwriter of the Fund and the Account.
Prusec's principal business address is 751 Broad Street, Newark, New Jersey
07102-3777. Subject to Board approval, during the second quarter of 1998,
Prusec's responsibilities as principal underwriter will be assigned to
Prudential Investment Management Services LLC (PIMS). PIMS, also an indirect
wholly-owned subsidiary of Prudential, is a limited liability corporation
organized under Delaware law in 1996. PIMS will act as principal underwriter
under substantially the same terms as Prusec does currently. Both Prusec and
PIMS are registered as broker-dealers under the Securities Exchange Act of
1934, as amended, and are members of the National Association of Securities
Dealers, Inc. PIMS' principal business address is 751 Broad Street, Newark,
New Jersey 07102-3777.
A transfer account is established with 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 8.
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 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 11.
3
<PAGE>
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 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
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 21.
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 12.
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 11. 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 18, 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)
<TABLE>
<S> <C> <C>
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%
</TABLE>
TRANSACTION CHARGES
<TABLE>
<S> <C>
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>
<TABLE>
<S> <C>
SEPARATE ACCOUNT ANNUAL EXPENSES (AS A PERCENTAGE OF AVERAGE ACCOUNT VALUE)
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........................................................ 0.025%
-----
Total Prudential's Gibraltar Fund, Inc. Annual Expenses............... 0.150%
=====
</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 $180
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 $179
</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 two year period ended December 31,
1997 have been audited by Price Waterhouse LLP, independent accountants, whose
report thereon was unqualified and is included in Appendix C to this
Prospectus. The following information for each of the years prior to and
including the period ended December 31, 1995 has been audited by other
independent auditors, whose report thereon was also unqualified. The
information set out below should be read in conjunction with the financial
statements and related notes that appear in Appendix C to this Prospectus.
<TABLE>
<CAPTION>
01/01/97 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
TO TO TO TO TO TO TO TO TO TO
12/31/97 12/31/96 12/31/95* 12/31/94* 12/31/93* 12/31/92* 12/31/91* 12/31/90* 12/31/89* 12/31/88*
-------- -------- --------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value at
beginning of year.. $ 11.43 $ 10.14 $ 9.40 $11.29 $11.13 $11.39 $ 9.40 $10.59 $10.29 $ 9.19
------- ------- ------ ------ ------ ------ ------ ------ ------ ------
Income From
Investment
Operations:
Net investment
income............. 0.22 0.16 0.18 0.21 0.18 0.18 0.22 0.34 0.36 0.31
Net realized and
unrealized gains
(losses) on
investments........ 1.84 2.56 1.65 (0.40) 2.43 1.77 2.90 (0.64) 1.92 2.00
------- ------- ------ ------ ------ ------ ------ ------ ------ ------
Total from
investment
operations......... 2.06 2.72 1.83 (0.19) 2.61 1.95 3.12 (0.30) 2.28 2.31
Distributions to
Shareholders:
Distributions from
net investment
income............. (0.21) (0.15) (0.17) (0.22) (0.19) (0.19) (0.26) (0.37) (0.37) (0.37)
Distributions from
realized gains..... (2.33) (1.28) (0.92) (1.48) (2.26) (2.02) (0.87) (0.52) (1.61) (0.84)
------- ------- ------ ------ ------ ------ ------ ------ ------ ------
Total
distributions...... (2.54) (1.43) (1.09) (1.70) (2.45) (2.21) (1.13) (0.89) (1.98) (1.21)
------- ------- ------ ------ ------ ------ ------ ------ ------ ------
Net Asset Value at
end of year........ $ 10.95 $ 11.43 $10.14 $ 9.40 $11.29 $11.13 $11.39 $ 9.40 $10.59 $10.29
======= ======= ====== ====== ====== ====== ====== ====== ====== ======
Total Investment
Rate of Return:**.. 18.88% 27.13% 19.13% 1.33% 23.79% 17.60% 34.40% (2.80%) 22.30% 25.60%
Ratios/Supplemental
Data:
Net assets at end of
year (in
millions).......... $ 325.9 $ 301.3 $261.2 $242.5 $264.3 $230.1 $214.2 $174.4 $197.0 $183.3
Ratio of expenses
net of
reimbursement to
average net
assets............. 0.15% 0.16% 0.14% 0.15% 0.16% 0.19% 0.19% 0.21% 0.16% 0.16%
Ratio of net
investment income
to average net
assets............. 1.56% 1.38% 1.68% 1.98% 1.45% 1.58% 1.98% 3.38% 3.19% 2.95%
Portfolio turnover
rate............... 1.01% 97% 105% 93% 92% 73% 76% 108% 67% 32%
Average commission
rate per share..... $0.0578 $0.0576 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.
Further information concerning the Fund, its investment policies and
restrictions upon its investments and Prudential's role as an investment
advisor to the Fund, may be found beginning on page 19. The Fund's
Directors and Officers are listed beginning on page 30. Further information
about the Fund's performance is contained in the Fund's annual report to
shareholders, which may be obtained without charge.
The above table does not reflect charges against Account assets. Those
charges are described under Other Charges on page 12.
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 (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 (the
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 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), as amended.
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 751 Broad Street, 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, 751 Broad Street, Newark, New Jersey 07102-3777.
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 NASD). The
Contracts are sold by registered representatives of Pruco Securities
Corporation (Prusec), an indirect wholly-owned subsidiary of Prudential with a
principal business address at 751 Broad Street, Newark, New Jersey 07102-3777.
It was organized in 1971 under New Jersey law, is also registered as a broker
and dealer under the Securities Exchange Act of 1934, as amended (the 1934
Act), and is also a member of the NASD. Prusec currently acts as principal
underwriter of the Contracts, however, subject to Board approval.
Prusec's responsibilities as principal underwriter will be assigned to PIMS
during the second quarter of 1998. PIMS, also an indirect wholly-owned
subsidiary of Prudential, is a limited liability corporation organized under
Delaware law in 1996. PIMS will act as principal underwriter under
substantially the same terms as Prusec does currently. PIMS is registered as a
broker-dealer under the 1934 Act and is a member of the NASD. PIMS' principal
business address is 751 Broad Street, Newark, New Jersey 07102-3777.
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, 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 Prudential's willingness to issue contracts under it. See
PRUDENTIAL-SPONSORED PENSION PLANS, page 19.
Upon completion of a request for enrollment satisfactory to 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.
Prudential assumes no responsibility for determining whether a particular
retirement plan meets the requirements for favorable federal income tax
treatment. If, however, Prudential determines that a plan, intended to qualify
for
7
<PAGE>
such treatment, has not received favorable determination of its qualifications
by the Internal Revenue Service and does not so qualify, 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 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 13. 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 15.
THE ROLE OF THE TRANSFER ACCOUNT
A transfer account is established with Prudential through a Transfer Account
Agreement between 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 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 1997 and 1996, Prudential received $610 and $815, respectively, in such
annual charges.
The Accountholder and 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 Prudential through the transfer account.
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 Prudential. The minimum withdrawal is
$25, or the balance in the transfer account if less.
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 Prudential's
Board of Directors each year. The rate of interest for 1997 is 4%.
8
<PAGE>
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 Prudential's
Board of Directors as a variable contract account of 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 (the 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 Account is used only in connection with individual Variable Annuity
Contracts issued by Prudential in connection with tax-qualified retirement
plans including the Contracts described in this prospectus. The assets held in
the Account are legally segregated from all other assets of Prudential and
will always be equal to or greater in value than 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. (the 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 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 Prudential including
Prudential's Annuity Plan Account-2. The investment performance of the Fund
determines the dollar value of interests in these accounts.
Prudential is the investment advisor to the Fund. Prudential has entered into
a service agreement with its wholly-owned subsidiary, The Prudential
Investment Corporation (PIC), which provides that PIC will furnish to
Prudential such services as Prudential may require in connection with
Prudential's performance of its obligations under advisory agreements with
clients which are registered investment companies. For its investment advisory
services, 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 Prudential $390,676 in 1997 and $349,118 in 1996. In
addition, the Fund has expenses which may be considered to be an indirect
charge against assets; in 1997 these expenses amounted to 0.025% of average
net assets of the Fund and in 1996 these expenses were slightly less than
0.035%. See SUMMARY OF INVESTMENT ADVISORY CONTRACT on page 21, PRUDENTIAL AS
MANAGER OF THE FUND'S INVESTMENTS on page 23, 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, 1997 and 1996, the Fund's
total expenses were 0.15% and 0.16%, respectively, of the Fund's average net
assets.
9
<PAGE>
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.
PRUDENTIAL'S ADMINISTRATIVE ROLE
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 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 Prudential also
arranges to furnish periodic financial reports of the Account and of the Fund,
prospectuses, tax notices, other notices and voting material. 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 Prudential for its services.
10
<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.
11
<PAGE>
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 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.
During 1997, Prudential received $3,845 in sales charges and $977 in
transaction charges for purchases under these Contracts. The equivalent figures
for 1996 were $4,410 and $906.
The sales and transaction charges may be changed by Prudential subject to
certain conditions. See EXERCISING RIGHTS UNDER THE CONTRACTS, page 18.
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 1997 and 1996,
Prudential received $160 and $160, 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 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 Prudential's general administrative expenses
in operating the Account and to provide a surplus for use, if necessary, to
help Prudential to fulfill its contractual obligations, discussed under the
heading THE RISKS WHICH PRUDENTIAL ASSUMES on page 17.
During 1997 and 1996, Prudential received $370,522 and $344,522, 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 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 Prudential, subject to
certain conditions. See EXERCISING RIGHTS UNDER THE CONTRACTS, page 18.
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 Prudential or to the agent through
12
<PAGE>
whom the Contract was purchased. Upon such surrender 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 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, Inc.
(NYSE) 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, 1997.
<TABLE>
<CAPTION>
LAST BUSINESS LAST BUSINESS
DAY OF: DAY OF:
<S> <C> <C> <C>
1988 $48.11 1993 $107.85
1989 58.36 1994 105.47
1990 56.33 1995 124.80
1991 75.13 1996 157.59
1992 87.71 1997 185.67
</TABLE>
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 12. No provision is currently made for federal income taxes in
determining the change factor. See FEDERAL INCOME TAXES, page 26.
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, Prudential
recommends that the parties involved seek competent tax advice before
requesting liquidation of accumulation shares. See FEDERAL INCOME TAXES,
page 26.
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 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 28.
Under certain types of retirement arrangements, the Retirement Equity Act of
1984, as amended, 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 15. These spousal consent requirements are
effective beginning January 1, 1985 and
13
<PAGE>
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), as amended.
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 Prudential.
In the case of total liquidation 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.)
Any liquidation payment is made within 7 days after the request for
liquidation is received, except as 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 25.
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 1988. Results are shown for the ten years ending December,
1997.
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 any combined purchase payment procedure. 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 1988. Results are shown for the ten years ending December, 1997.
<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>
1988 $300 $ 300 $25.56 $6.00 $268.44 $ 268.44 $ 571.69
1989 $300 $ 600 $25.56 $6.00 $268.44 $ 536.88 $ 981.38
1990 $300 $ 900 $25.56 $6.00 $268.44 $ 805.32 $1,216.52
1991 $300 $1,200 $25.56 $6.00 $268.44 $1,073.76 $1,929.21
1992 $300 $1,500 $25.56 $6.00 $268.44 $1,342.20 $2,554.77
1993 $300 $1,800 $25.56 $6.00 $268.44 $1,610.64 $3,433.01
1994 $300 $2,100 $25.56 $6.00 $268.44 $1,879.08 $3,621.07
1995 $300 $2,400 $25.56 $6.00 $268.44 $2,147.52 $4,569.03
1996 $300 $2,700 $25.56 $6.00 $268.44 $2,415.96 $6,075.02
1997 $300 $3,000 $25.56 $6.00 $268.44 $2,684.40 $7,368.81
</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.
14
<PAGE>
EFFECTING A VARIABLE ANNUITY
For any variable annuity to be effected, Prudential must receive written
instructions in a form satisfactory to Prudential as to the type of annuity
desired and proof satisfactory to 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 Prudential which services these Contracts has all of the
above. That day is called the effective date. 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.
The effecting of a variable annuity is subject to 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,
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 Prudential for these
Contracts (see SCHEDULES OF ANNUITY RATES
15
<PAGE>
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 12) 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. 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
Prudential, as may be determined annually at the sole discretion of
Prudential's Board of Directors. The board has determined that Planholders
receiving annuity payments will so participate in 1998. They will be
temporarily credited with an additional number of monthly annuity shares on
which annuity payments in 1998 are based. There is no assurance that such
participation in the divisible surplus of Prudential or temporary crediting of
annuity shares will occur for any future year.
Prudential is currently considering reorganizing itself into a stock company.
This form of reorganization, known as demutualization, is a complex process
that may take a year or more to complete. No plan of demutualization has been
adopted yet by Prudential's Board of Directors. Adoption of a plan of
demutualization would occur only after enactment of appropriate legislation in
New Jersey and would have to be approved by Prudential's policyholders and
appropriate state insurance regulators. Throughout the process, there will be
a continuing evaluation by the Board of Directors and management of Prudential
as to the desirability of demutualization. Prudential's Board of Directors, in
its discretion, may choose not to demutualize or to delay demutualization for
a time.
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 12. 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 26.
16
<PAGE>
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, 1997.
<TABLE>
<CAPTION>
LAST BUSINESS 3.5%* 5% LAST BUSINESS 3.5%* 5%
DAY OF: ----- ----- DAY OF: ----- -----
<S> <C> <C> <C> <C> <C>
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
1992 4.23 3.03 1997 7.66 5.09
</TABLE>
* 3.5% schedule currently applies only in a few states.
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 PRUDENTIAL ASSUMES
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
Prudential. These risks assumed by Prudential must be evaluated in the light
of 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 PRUDENTIAL'S RIGHT TO CHANGE THE CONTRACT on
page 18.
Even though the assets of Prudential's Annuity Plan Account-2 are separately
accounted for, the entire general account assets of Prudential are available
to meet the expenses and fulfill Prudential's obligations under the Variable
Annuity Contracts. The charges Prudential makes for assuming these risks are
described in the section headed OTHER CHARGES, page 12.
On the other hand, the charges may exceed the expenses that 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 Prudential's obligations will become a part
of the divisible surplus of Prudential.
In the event the Fund suspends the redemption of its shares because of the
closing of the NYSE or other emergency reason, 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 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.
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
17
<PAGE>
beneficiary's interest. If such beneficiary is not already a Planholder,
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, Prudential will cancel the annuity on the first business day not earlier
than the day on which 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
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 15. Of course, upon the death of either the Planholder or the designated
contingent annuitant under a Type C Annuity (described on page 15) 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 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 Prudential.
THE CONTINUING RIGHT TO EFFECT AN ANNUITY. While 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 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.
PRUDENTIAL'S RIGHT TO CHANGE THE CONTRACT. Prudential may not change the
Contract with respect to any annuity after its effective date. Neither may
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, Prudential may change the terms and provisions concerning the
schedules of annuity rates, the charges by Prudential and the applicable
minimum requirements. 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.
18
<PAGE>
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.
PRUDENTIAL-SPONSORED PENSION PLANS
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 Prudential will provide the insurance and annuity
contracts called for under the plan.
The form of 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 20.
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 PRUDENTIAL AS MANAGER OF THE FUND'S
INVESTMENTS on page 23. The Fund does not plan to trade for short-term
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 21.
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
amended, 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;
19
<PAGE>
(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, qualified banks and certain institutional
investors, 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. Prudential has advised the Fund's Directors that the lender does
not have the right to vote securities on loan, but 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 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,
are not readily marketable. Such securities include the privately placed
evidences of indebtedness referred to above. As of December 31, 1997, such
restricted securities comprised approximately 1% of the Fund's net assets.
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, as amended, 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.
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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 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 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 laws of other states could impose additional restrictions on
the portfolio of the Fund.
SUMMARY OF INVESTMENT ADVISORY CONTRACT
Under an Investment Advisory Contract, 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 Prudential's supervision, substantially all of the investment
management services provided by Prudential are furnished by its wholly-owned
subsidiary, PIC, pursuant to the Service Agreement between Prudential and PIC
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which provides that Prudential will reimburse PIC for its costs and expenses.
PIC is registered as an investment advisor under the Investment Advisers Act
of 1940, as amended.
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
Prudential), and the office facilities of the Fund. The amount paid to
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, Prudential may terminate this license if
Prudential or a company controlled by it ceases to be the Fund's investment
advisor. 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 Prudential. 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.
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 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 May 19, 1997.
The Service Agreement between 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 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 Prudential and the Fund. Prudential is not relieved of its
responsibility for all investment advisory services under the Investment
Advisory Contract between Prudential and the Fund. The Agreement provides for
Prudential to reimburse PIC for its costs and expenses incurred in furnishing
investment advisory services.
The Service Agreement between 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 May 19, 1997.
A separate contract between Prudential and the Fund provides that, as long as
the Fund sells its shares only to Prudential, its separate accounts or
organizations approved by it, 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 Prudential, brokers' commissions, transfer taxes and other charges and fees
attributable to investment transactions, and any other local, state or federal
taxes). 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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PRUDENTIAL AS MANAGER OF THE FUND'S INVESTMENTS
Prudential Mutual Fund Investment Management (PMFIM), a part of Prudential
Investments and 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.
PMFIM is responsible for the management of approximately $85 billion of
publicly-traded U.S. and global equity and fixed income securities. These
assets represent Prudential's mutual fund and annuity accounts, as well as
institutional clients and Prudential's general account and subsidiaries.
Jeffrey Rose, Vice President, PIC, has been portfolio manager for the Fund
since March 1998. Mr. Rose also co-manages the Prudential Balanced Fund.
PMFIM 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 1997
and 1996 the portfolio turnover rates were 101% and 97% respectively.
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
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
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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 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, 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 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. 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
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, 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 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 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 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.
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 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 1997, $329,585 was paid to various brokers in
connection with securities transactions for the Fund. Of this amount,
approximately 91.0% was allocated to brokers who provided research and
statistical
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<PAGE>
services to Prudential. The equivalent figures for 1996 were $662,074 and
64.9%, respectively, and for 1995 were $756,838 and 77.52%, respectively.
Of the total brokerage fees paid by the Fund during 1997, $24,750 or 7.5% was
paid to Prudential Securities Incorporated, an affiliated broker. For 1997,
Prudential Securities effected 5.1% of the transactions involving the payment
of commissions, on an aggregate dollar basis. The equivalent figures for 1996
were $19,301, 2.9% and 2.2%. For 1995, 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 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.
Prudential determines the net asset value of Fund shares on each business day
(a day on which the NYSE 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.
NASDAQ National Market System equity securities and securities for which the
primary market is an exchange are generally valued at the last sale price on
such system or exchange on that day or, in the absence of recorded sales, at
the mean between the most recently quoted bid and asked prices on that day or
the bid price on such day in the absence of an asked price. Other over-the-
counter equity securities are valued by an independent pricing agent or
principal market maker. 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
Prudential.
This right of redemption may, however, be suspended for any period during
which the NYSE 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 28.
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
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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, page 26.
Each share of common stock outstanding is entitled to one vote. Fund shares
are held only by separate accounts of Prudential. At December 31, 1997,
Prudential's Annuity Plan Account-2, the account discussed in this Prospectus,
held approximately 18% of all Fund shares outstanding. Prudential's Investment
Plan Account and Prudential's Annuity Plan Account, separate accounts of
Prudential which are not discussed in this Prospectus, held approximately 81%
and 1%, respectively. Fund shares are voted by Prudential in accordance with
voting instructions received from participants in those accounts. Instruction
forms for this purpose will be furnished by Prudential. If there are Fund
shares held in the Account for which voting instructions are not received,
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
Investors Fiduciary Trust Company, 127 West 10th Street, Kansas City, Missouri
64105-1716, is 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
Prudential is subject to regulation and supervision by the Department of
Insurance of the State of New Jersey, which periodically examines its
operations and financial condition. It is also subject to the insurance laws
and regulations of all jurisdictions in which it is authorized to do business.
Prudential is required to submit annual statements of its operations,
including financial statements, to the insurance departments of the various
jurisdictions in which it does business to determine solvency and compliance
with local insurance laws and regulations.
In addition to the annual statements referred to above, Prudential is required
to file with New Jersey and other jurisdictions a separate statement with
respect to the operations of all its variable contract accounts, in a form
promulgated by the National Association of Insurance Commissioners.
FEDERAL INCOME TAXES
PRUDENTIAL'S GIBRALTAR FUND, INC. Under the provisions of the 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 25. 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
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 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
26
<PAGE>
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 on lump sum distributions may also be limited in some cases by a
special income averaging rule.
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 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,
Prudential will withhold from every withdrawal or annuity payment the
appropriate percentage of the amount of the payment that is taxable.
Prudential will provide the Contract owner with forms and instructions
concerning the right to elect that no amount be withheld from payments.
Generally, there will be no withholding for taxes until payments are actually
received under the Contract. Distributions to Contract owners under an
eligible deferred compensation plan subject to Section 457 of the Code are
treated as the payment of wages for federal income tax purposes and thus are
subject to the general withholding requirements.
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. Payments to the Planholder must begin by
April 1 of the year following the calendar year in which age 70 1/2 is
attained and are subject to certain minimum distribution requirements. Any
distributions before age 59 1/2 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.
27
<PAGE>
For a married individual who is an active participant and who files a joint
tax return, the adjusted gross income limit is $50,000. For a single
individual, the limit is $30,000. Partial deduction for IRA contributions will
be available for married, joint filers who have adjusted gross income of more
than $50,000 and less than $60,000 and single individuals whose adjusted gross
income is less than $40,000. These limits will increase by $1,000 per year in
1999-2002. For a married individual who is not an active participant, but
whose spouse is, and who files a joint return, the adjusted gross income limit
is $150,000. For married individuals filing separately the limit is zero.
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.
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.) These Section 403(b) 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
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, 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 Section 403(b) Annuity generally must commence by April 1
of the calendar year following the later of (1) the calendar year in which the
employee attains age 70 1/2, or (2) the calendar year in which the employee
retires. Distributions must satisfy minimum distribution requirements similar
to those that apply to qualified plans generally.
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 59 1/2. 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 years 1997 and 1996 have been audited by Price Waterhouse LLP,
independent accountants, 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.
28
<PAGE>
LITIGATION
On October 28, 1996, Prudential entered into a Stipulation of Settlement in a
multidistrict proceeding involving allegations of various claims relating to
Prudential's life insurance sales practices. (In re Prudential Insurance
Company of America Sales Practices Litigation, D.N.J., MDL No. 1061, Master
Docket No. 95-4707 (AMW)). On March 7, 1997, the United States District Court
for the District of New Jersey approved the Stipulation of Settlement as fair,
reasonable and adequate, and later issued a Final Order and Judgment in the
consolidated class actions before the Court, 962 F. Supp. 450 (March 17, 1997,
as amended April 14, 1997). The Court's Final Order and Judgment approving the
class Settlement has been appealed to the United States Court of Appeals for
the Third Circuit, which held a hearing on January 26, 1998. The Court has not
yet issued a ruling on the appeal.
Pursuant to the Settlement, Prudential agreed to provide and has begun to
implement an Alternative Dispute Resolution (ADR) process for class members
who believe they were misled concerning the sale or performance of their life
insurance policies. Management now has information which allows for
computation of a reasonable estimate of losses associated with ADR claims.
Based on this information, management estimated the cost of remedying
policyholder claims in the ADR process before taxes to be approximately $2.05
billion. While management believes these to be reasonable estimates based on
information currently available, the ultimate amount of the total cost of
remedied policyholder claims is dependent on complex and varying factors,
including actual claims by eligible policyholders, the relief options chosen
and the dollar value of those options. There are also additional elements of
the ADR process which cannot be fully evaluated at this time (e.g., claims
which may be successfully appealed) which could increase this estimate.
In addition, a number of actions have been filed against Prudential by
policyowners who have excluded themselves from the Settlement; Prudential
anticipates that additional suits may be filed by other policyowners.
Also, on July 9, 1996, a Multi-State Life Insurance Task Force, comprised of
insurance regulators from 29 states and the District of Columbia, released a
report on Prudential's activities. As of February 24, 1997, Prudential had
entered into consent orders or agreements with all 50 states and the District
of Columbia to implement a remediation plan, which terms closely parallel the
Settlement approved in the MDL proceeding, and agreed to a series of payments
allocated to all 50 states and the District of Columbia amounting to a total
of approximately $65 million. These agreements are now being implemented
through Prudential's implementation of the class Settlement.
Litigation is subject to many uncertainties, and given the complexity and
scope of these suits, their outcome cannot be predicted. It is also not
possible to predict the likely results of any regulatory inquiries or their
effect on litigation which might be initiated in response to widespread media
coverage of these matters.
Accordingly, management is unable to make a meaningful estimate of the amount
or range of loss that could result from an unfavorable outcome of all pending
litigation and regulatory inquiries. It is possible that the results of
operations or the cash flow of Prudential, in particular quarterly or annual
periods, could be materially affected by an ultimate unfavorable outcome of
certain pending litigation and regulatory matters. Management believes,
however, that the ultimate outcome of all pending litigation and regulatory
matters referred to above should not have a material adverse effect on
Prudential's financial position after consideration of applicable reserves.
YEAR 2000
The services provided to the Planholders and Accountholders by Prudential,
Prusec and PIMS depend on the smooth functioning of their respective computer
systems. The year 2000, however, holds the potential for a significant
disruption in the operation of these systems. Many computer programs cannot
distinguish the year 2000 from the year 1900 because of the way in which dates
are encoded. Left uncorrected, the year "00" could cause systems to perform
date comparisons and calculations incorrectly that in turn could compromise
the integrity of business records and lead to serious interruption of business
processes.
Prudential identified this issue as a critical priority in 1995 and has
established quality assurance procedures including a certification process to
monitor and evaluate enterprise-wide conversion and upgrading of systems for
"Year 2000" compliance. Prudential has also initiated an analysis of potential
exposure that could result from the failure of major service providers such as
suppliers, custodians and brokers, to achieve Year 2000 compliance. Prudential
expects to complete its adaptation, testing and certification of software for
Year 2000 compliance by December 31, 1998. During 1999, Prudential plans to
conduct additional internal testing, to participate in securities industry-
wide test efforts and to complete major service provider analysis and
contingency planning.
29
<PAGE>
The expenses of Prudential's Year 2000 compliance are allocated across its
various businesses, including those businesses not engaged in providing
services to Planholders and Accountholders. Accordingly, while the expense is
substantial in the aggregate, it is not expected to have a material impact on
the ability of Prudential, Prusec and PIMS to meet their contractual
commitments to Planholders and Accountholders.
Prudential believes that it is well positioned to achieve the necessary
modifications and mitigate Year 2000 risks. However, if such efforts are not
completed on a timely basis, the Year 2000 issue could have a material adverse
impact on Prudential's operations, those of its subsidiary and affiliate
companies and/or its separate accounts such as IPA and APA. Moreover, there
can be no assurance that the measures taken by Prudential's external service
providers will be sufficient to avoid any material adverse impact on
Prudential's operations or those of its subsidiary and affiliate companies.
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.
MENDEL A. MELZER, CFA*, 37, 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 M. GREENE*, 54, PRESIDENT AND DIRECTOR--President of Investment
Management, Prudential Investments, since 1996. Vice President and Portfolio
Manager, T. Rowe Price Associates, Inc. from 1974 to 1996. Address: 751 Broad
Street, Newark, New Jersey 07102.
SAUL K. FENSTER, 65, DIRECTOR--President of New Jersey Institute of
Technology. Address: 323 Martin Luther King Boulevard, Newark, New Jersey
07102.
W. SCOTT MCDONALD, JR., 61, DIRECTOR--Vice President, 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, 74, DIRECTOR--Vice President, Interclass (international
corporate learning). Address: 37 Beachmont Terrace, North Caldwell, New Jersey
07006.
CAREN A. CUNNINGHAM, SECRETARY--Assistant General Counsel of Prudential
Investments Fund Management, Inc. (PIFM), since 1997; 1994 to 1997: Vice
President and Associate General Counsel of Smith Barney Mutual Fund Management
Inc.; 1992 to 1994: Assistant Vice President and Counsel, The Boston Company.
Address: 100 Mulberry Street, Gateway Center Three, Newark, New Jersey 07102.
GRACE C. TORRES, TREASURER AND PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER--
First Vice President of PIFM since 1996; 1994 to 1996: First Vice President of
Prudential Securities Inc.; Prior to 1994: Vice President of Bankers Trust
Corporation. Address: 100 Mulberry Street, Gateway Center Three, Newark, New
Jersey 07102.
STEPHEN M. UNGERMAN, ASSISTANT TREASURER--Vice President and Tax Director of
Prudential Investments since 1996; 1993 to 1996: First Vice President of
Prudential Mutual Fund Management, Inc. Address: 100 Mulberry Street, Gateway
Center Three, Newark, New Jersey 07102.
* These members of the Board are interested persons of 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 Prudential, must be approved by a majority of the
members of the Board who are not interested persons of Prudential, its
affiliates or the Fund. Mr. Melzer and Mr. Greene, two of the five members
of the Board, are interested persons of Prudential and the Fund, as that
term is defined in the 1940 Act, because they are officers and/or affiliated
persons of Prudential, the investment advisor to the Fund. Messrs. Fenster,
McDonald and Weber are not interested persons of 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.
30
<PAGE>
The following table sets forth the aggregate compensation paid by the Fund to
the Directors who are not affiliated with Prudential for the fiscal year ended
December 31, 1997 and the aggregate compensation paid to such Directors for
service on the Fund's Board and the Boards of any other investment companies
managed by Prudential for the calendar year ended December 31, 1997.
COMPENSATION TABLE
<TABLE>
<CAPTION>
AGGREGATE PENSION OR TOTAL
COMPENSATION RETIREMENT ESTIMATED COMPENSATION
FROM BENEFITS ACCRUED ANNUAL RELATED TO FUNDS
GIBRALTAR AS PART OF GIBRALTAR BENEFITS UPON MANAGED BY
NAME AND POSITION FUND FUND EXPENSES RETIREMENT PRUDENTIAL
- ----------------- ------------ -------------------- ------------- ----------------
<S> <C> <C> <C> <C>
Jonathan M. Green(1) -- -- -- --
Saul K. Fenster $3,000 None N/A $26,200 (5)*
W. Scott McDonald, Jr. $3,000 None N/A $26,200 (5)*
Mendel A. Melzer, CFA(1) -- -- -- --
Joseph Weber $3,000 None N/A $26,200 (5)*
</TABLE>
- -------
(1) Directors who are "interested" do not receive compensation from Prudential
(including the Fund).
* Indicates number of funds (including the Fund) to which aggregate
compensation relates.
As of April 30, 1998, the Directors and officers of the Fund, as a group,
beneficially owned less than one percent of the outstanding shares of the
Fund's capital stock.
31
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
DIRECTORS
FRANKLIN E. AGNEW, DIRECTOR since 1994 (current term expires April, 2000).
Member, Committee on Dividends; Member, Finance Committee; Member Corporate
Governance Committee. Business consultant since 1987. Senior Vice President,
H.J. Heinz from 1971 to 1986. Mr. Agnew is also a director of Bausch & Lomb,
Inc. John Wiley & Sons, Inc. and Erie Plastics Corporation. Age 63. Address:
600 Grant Street, Suite 660, Pittsburgh, PA 15219.
FREDERICK K. BECKER, DIRECTOR since 1994 (current term expires April, 1999).
Member, Auditing Committee, Member, Committee on Business Ethics; Member,
Corporate Governance Committee. President, Wilentz Goldman and Spitzer, P.A.
(law firm) since 1989, with firm since 1960. Age 62. Address: 90 Woodbridge
Center Drive, Woodbridge, NJ 07095.
JAMES G. CULLEN, DIRECTOR since 1994 (current term expires April, 2001).
Member, Compensation Committee; Member, Committee on Business Ethics.
President & Chief Executive Officer, Telecom Group, Bell Atlantic Corporation,
since 1997. Vice Chairman, Bell Atlantic Corporation from 1995 to 1997.
President, Bell Atlantic Corporation from 1993 to 1995. Mr. Cullen is also a
director of Bell Atlantic Corporation and Johnson & Johnson. Age 55. Address:
1310 North Court House Road, 11th Floor, Alexandria, VA 22201.
CAROLYNE K. DAVIS, DIRECTOR since 1989 (current term expires April, 2001).
Member, Finance Committee; Member Committee on Business Ethics; Member,
Compensation Committee. Independent Health Care Advisor. National and
International Health Care Advisor, Ernst & Young, LLP from 1985 to 1997. Dr.
Davis is also a director of Beckman Instruments, Inc., Merck & Co., Inc.,
Science Applications International Corporation, Minimed Incorporated, and
Beverley Enterprises. Age 65. Address: 751 Broad Street, 23rd Floor, Newark,
NJ 07102.
ROGER A. ENRICO, DIRECTOR since 1994 (current term expires April, 2002).
Member, Committees on Nominations & Corporate Governance; Member, Compensation
Committee. Chairman and Chief Executive Officer, PepsiCo, Inc. since 1996.
Originally with PepsiCo, Inc. since 1971. Mr. Enrico is also a director of
A.M. Belo Corporation and Dayton Hudson Corporation. Age 53. Address: 700
Anderson Hill Road, Purchase, NY 10577.
ALLAN D. GILMOUR, DIRECTOR since 1995 (current term expires April, 1999).
Member, Finance Committee; Member, Committee on Dividends. Retired since 1995.
Vice Chairman, Ford Motor Company, from 1993 to 1995. Mr. Gilmour originally
joined Ford in 1960. Mr. Gilmour is also a director of Whirlpool Corporation,
USWest, Inc., The Dow Chemical Company and DTE Energy Company. Age 63.
Address: 751 Broad Street, 23rd Floor, Newark, NJ 07102.
WILLIAM H. GRAY, III, DIRECTOR since 1991 (current term expires April, 2000).
Member, Executive Committee; Member, Finance Committee; Chairman, Committees
on Nominations & Corporate Governance. President and Chief Executive Officer,
The College Fund/UNCF since 1991. Mr. Gray served in Congress from 1979 to
1991. Mr. Gray is also a director of Chase Manhattan Corporation, The Chase
Manhattan Bank, Lotus Development Corporation, Municipal Bond Investors
Assurance Corporation, Rockwell International Corporation, Union-Pacific
Corporation, Warner-Lambert Company, Westinghouse Electric Corporation, and
Electronic Data Systems. Age 56. Address: 8260 Willow Oaks Corp. Drive,
Fairfax, VA 22031-4511.
JON F. HANSON, DIRECTOR since 1991 (current term expires April, 2003). Member,
Finance Committee; Member, Committee on Dividends. Chairman, Hampshire
Management Company since 1976. Mr. Hanson is also a director of United Water
Resources, Orange & Rockland Utilities, Inc., and Consolidated Delivery and
Logistics. Age 61. Address: 235 Moore Street, Suite 200, Hackensack, NJ 07601.
GLEN H. HINER, JR., DIRECTOR since 1997. (current term expires April, 2001).
Member, Compensation Committee. Chairman and Chief Executive Officer, Owens
Corning since 1991. Senior Vice President and Group Executive, Plastics Group,
General Electric Company from 1983 to 1991. Mr. Hiner is also a director of
Dana Corporation. Age 64. Address: One Owens Corning Parkway, Toledo, OH
43659.
CONSTANCE J. HORNER, DIRECTOR since 1994 (current term expires April, 2002).
Member, Auditing Committee; Member, Committees on Nominations & Corporate
Governance. Guest Scholar, The Brookings Institution since 1993. Ms. Horner is
also a director of Foster Wheeler Corporation, Ingersoll-Rand Corporation, and
Pfizer, Inc. Age 55. Address: 1775 Massachusetts Ave., N.W. Washington, D.C.
20036-2188.
32
<PAGE>
GAYNOR N. KELLEY, DIRECTOR since 1997 (current term expires April, 2001).
Member, Auditing Committee. Retired since 1996. Former Chairman and Chief
Executive Officer, The Perkins Elmer Corporation from 1990 to 1996. Mr. Kelley
is also a director of Hercules Incorporated, Arrow Electronics, Inc., and
Alliant Techsystems. Age 66. Address: 751 Broad Street, 23rd Floor, Newark, NJ
07102-3777.
BURTON G. MALKIEL, DIRECTOR since 1978 (current term expires April, 2002).
Chairman, Finance Committee; Member, Executive Committee; Member, Committee on
Dividends. Professor of Economics, Princeton University, since 1988. Dr.
Malkiel is also a director of Banco Bilbao Vizcaya, Baker Fentress & Company,
The Jeffrey Company. The Southern New England Telecommunications Company, and
Vanguard Group, Inc. Age 65. Address: Princeton University, 110 Fisher Hall,
Prospect Avenue, Princeton, NJ 08544-1021.
ARTHUR F. RYAN, CHAIRMAN OF THE BOARD, President and Chief Executive Officer
of Prudential since 1994. President and Chief Operating Officer, Chase
Manhattan Corp. from 1990 to 1994, with Chase since 1972. Age 55. Address: 751
Broad Street, Newark, NJ 07102.
IDA F.S. SCHMERTZ, DIRECTOR since 1997 (current term expires April, 2004).
Member, Finance Committee. Principal, Investment Strategies International
since 1994. Age 63. Address: 751 Broad Street, 23rd Floor, Newark, NJ 07102.
CHARLES R. SITTER, DIRECTOR since 1995 (current term expires April, 1999).
Member, Finance Committee; Member, Committee on Dividends. Retired since 1996.
President, Exxon Corporation from 1993 to 1996. Mr. Sitter began his career
with Exxon in 1957. Age 67. Address: 5959 Las Colinas Boulevard, Irving, TX
75039-2298.
DONALD L. STAHELI, DIRECTOR since 1995 (current term expires April, 1999).
Member, Compensation Committee; Member, Auditing Committee. Retired since
1997. Chairman and Chief Executive Officer, Continental Grain Company from
1994 to 1997. President and Chief Executive Officer, Continental Grain Company
from 1988 to 1994. Mr. Staheli is also director of Bankers Trust Company and
Bankers Trust New York Corporation. Age 66. Address: 39 Locust Street, Suite
204, New Canaan, CT 06840.
RICHARD M. THOMSON, DIRECTOR since 1976 (current term expires April, 2000).
Chairman, Executive Committee; Chairman, Compensation Committee; Member,
Committee on Nominations & Corporate Governance. Chairman of the Board, The
Toronto-Dominion Bank since 1997. Chairman and Chief Executive Officer from
1978 to 1997. Mr. Thomson is also a director of CGC, Inc., INCO, Limited, S.C.
Johnson & Son, Inc., The Thomson Corporation, and Canadian Occidental
Petroleum, Ltd. Age 64. Address: P.O. Box 1, Toronto-Dominion Centre, Toronto,
Ontario, M5K 1A2, Canada.
JAMES A. UNRUH, DIRECTOR since 1996 (current term expires April, 2000).
Member, Compensation Committee. Retired since 1997. Chairman and Chief
Executive Officer, Unisys Corporation, from 1990 to 1997. Mr. Unruh is also a
director of Ameritech Corporation. Age 55. Address: Two Bala Plaza, Suite 300,
Bala Cynwyd, PA 19004.
P. ROY VAGELOS, M.D., DIRECTOR since 1989 (current term expires April, 2001).
Chairman, Auditing Committee; Member, Executive Committee; Member, Committees
on Nominations & Corporate Governance. Chairman, Regeneron Pharmaceuticals
since 1995. Chairman and Chief Executive Officer, Merck & Co., Inc. from 1986
to 1994. Dr. Vagelos is also a director of The Estee Lauder Companies, Inc.
and PepsiCo., Inc. Age 68. Address: One Crossroads Drive, Building A, 3rd
Floor, Bedminster, NJ 07921.
STANLEY C. VAN NESS, DIRECTOR since 1990 (current term expires April, 2002).
Chairman, Committee on Business Ethics; Member, Executive Committee; Member,
Auditing Committee. Counselor at Law, Picco Herbert Kennedy (law firm) from
1990. Mr. Van Ness is also a director of Jersey Central Power & Light Company.
Age 63. Address: 22 Chambers Street, Princeton, NJ 08542.
PAUL A. VOLCKER, DIRECTOR since 1988 (current term expires April, 2000).
Chairman, Committee on Dividends; Member, Executive Committee; Member,
Committee on Nominations & Corporate Governance. Consultant since 1996.
Chairman, James D. Wolfensohn, Inc. from 1988 to 1996. Chief Executive
Officer, James D. Wolfensohn, Inc. from 1995 to 1996. Mr. Volcker is also a
public member of the Board of Governors of the American Stock Exchange, a
member of the Board of Overseers of TIAA-CREF, and a director of Nestl, S.A.,
UAL Corporation, and Bankers Trust New York Corporation. Age 70, Address: 610
Fifth Avenue, Suite 420, New York, NY 10020.
JOSEPH H. WILLIAMS, DIRECTOR since 1994 (current term expires April, 2002).
Member, Committee on Dividends; Member, Auditing Committee. Director, The
Williams Companies since 1971. Chairman & Chief Executive Officer, The
Williams Companies from 1979 to 1993. Mr. Williams is also a director of Flint
Industries, The Orvis Company, and MTC Investors, LLC. Age 64. Address: One
Williams Center, Tulsa, OK 74172.
33
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
PRINCIPAL OFFICERS
ARTHUR F. RYAN, CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE OFFICER since 1994;
prior to 1994, President and Chief Operating Officer, Chase Manhattan
Corporation, New York, NY. Age 55.
E. MICHAEL CAULFIELD, CHIEF EXECUTIVE OFFICER, Prudential Investments since
1996; Chief Executive Officer, Money Management Group from 1995 to 1996; prior
to 1995, President, Prudential Preferred Financial Services. Age 51.
MICHELE S. DARLING, EXECUTIVE VICE PRESIDENT, Human Resources since 1997;
prior to 1997, Executive Vice President, Canadian Imperial Bank of Commerce,
Toronto, Canada. Age 44.
ROBERT C. GOLDEN, EXECUTIVE VICE PRESIDENT, Corporate Operations and Systems
since 1997; prior to 1997, Executive Vice President, Prudential Securities,
New York, NY. Age 51.
MARK B. GRIER, EXECUTIVE VICE PRESIDENT, Financial Management since 1997;
Chief Financial Officer from 1995 to 1997; prior to 1995, Executive Vice
President, Chase Manhattan Corporation, New York, NY. Age 44.
RODGER A. LAWSON, EXECUTIVE VICE PRESIDENT, Marketing and Planning since 1996;
President and CEO, Van Eck Global, New York, NY, from 1994 to 1996; prior to
1994, President and CEO, Global Private Banking, Bankers Trust Company, New
York, NY. Age 50.
JOHN V. SCICUTELLA, CHIEF EXECUTIVE OFFICER, Individual Insurance Group since
1997; Executive Vice President Operations and Systems from 1995 to 1997; prior
to 1995, Executive Vice President, Chase Manhattan Corporation. Age 48.
JOHN R. STRANGFELD, EXECUTIVE VICE PRESIDENT, Private Asset Management Group
(PAMG) since 1998; President, PAMG, from 1996 to 1998; prior to 1996, Senior
Managing Director. Age 44.
R. BROCK ARMSTRONG, SENIOR VICE PRESIDENT, Individual Insurance Development
since 1997; prior to 1997, Executive Vice President, London Life Insurance
Company, London, Canada. Age 50.
JAMES J. AVERY, JR., SENIOR VICE PRESIDENT & CHIEF ACTUARY since 1997;
President Prudential Select from 1995 to 1997; prior to 1995, Chief Financial
Officer, Prudential Select. Age 46.
MARTIN A. BERKOWITZ, SENIOR VICE PRESIDENT AND COMPTROLLER since 1995; prior
to 1995, Senior Vice President and CFO, Prudential Investment Corporation. Age
48.
WILLIAM M. BETHKE, CHIEF INVESTMENT OFFICER since 1997; prior to 1997, Senior
Vice President. Age 50.
RICHARD J. CARBONE, SENIOR VICE PRESIDENT AND CHIEF FINANCIAL OFFICER since
1997. Controller, Salomon Brothers, New York, NY, from 1995 to 1997; prior to
1995, Controller, Bankers Trust, New York, NY. Age 50.
LEO J. CORBETT, SENIOR VICE PRESIDENT, Individual Insurance Marketing since
1997; prior to 1997, Managing Director, Lehman Brothers, New York, NY. Age 49.
MARK R. FETTING, PRESIDENT, Prudential Retirement Services since 1996; prior
to 1996, President, Prudential Defined Contribution Services. Age 43.
WILLIAM D. FRIEL, SENIOR VICE PRESIDENT AND CHIEF INFORMATION OFFICER since
1993. Age 59.
JONATHAN M. GREENE, PRESIDENT, Investment Management since 1996; prior to
1996, Vice President, T. Rowe Price, Baltimore, MD. Age 54.
JEAN D. HAMILTON, PRESIDENT, Diversified Group since 1995; prior to 1995,
President, Prudential Capital Group. Age 51.
RONALD P. JOELSON, SENIOR VICE PRESIDENT, Guaranteed Products since 1997;
President, Prudential Investments Guaranteed Products from 1996 to 1998; prior
to 1996, Managing Director, Enterprise Planning Unit. Age 40.
34
<PAGE>
IRA J. KLEINMAN, EXECUTIVE VICE PRESIDENT, International Insurance Group,
since 1997; prior to 1997, Senior Vice President. Age 51.
NEIL A. McGUINNESS, SENIOR VICE PRESIDENT, Marketing, Prudential Investments,
since 1996; prior to 1996, Managing Director, Putnam Investments, Boston, MA.
Age 51.
PRISCILLA A. MYERS, SENIOR VICE PRESIDENT, Audit, Compliance and Investigation
since 1995. Vice President and Auditor from 1989 to 1995. Age 48.
RICHARD O. PAINTER, PRESIDENT, Prudential Insurance & Financial Services since
1995; prior to 1995, Senior Vice President, New York Life, New York, NY. Age
50.
I. EDWARD PRICE, SENIOR VICE PRESIDENT AND ACTUARY since 1995; prior to 1995,
Chief Executive Officer, Prudential International Insurance. Age 55.
KIYOFUMI SAKAGUCHI, PRESIDENT, International Insurance Group since 1995; prior
to 1995, Chairman and CEO, The Prudential Life Insurance Co., Ltd., Japan. Age
55.
BRIAN M. STORMS, PRESIDENT, Mutual Funds and Annuities, Prudential Investments
since 1996; prior to 1996, Managing Director, Fidelity Investments, Boston.
Age 43.
ROBERT J. SULLIVAN, SENIOR VICE PRESIDENT, Sales, Prudential Investments since
1997; prior to 1997, Managing Director, Fidelity Investments, Boston. Age 59.
SUSAN J. BLOUNT, VICE PRESIDENT AND SECRETARY since 1995; prior to 1995,
Assistant General Counsel. Age 40.
C. EDWARD CHAPLIN, VICE PRESIDENT AND TREASURER since 1995; prior to 1995,
Managing Director and Assistant Treasurer. Age 41.
35
<PAGE>
FINANCIAL STATEMENTS OF
PRUDENTIAL'S ANNUITY PLAN ACCOUNT-2
STATEMENT OF NET ASSETS
December 31, 1997
<TABLE>
<S> <C>
Investment in 5,375,179 shares of
Prudential's Gibraltar Fund at net
asset value of $10.9472 per share
[Cost: $51,006,076] ............................................ $58,843,374
Accrued expenses payable to Prudential .......................... (14,965)
-----------
NET ASSETS....................................................... $58,828,409
===========
NET ASSETS, representing:
Equity of planholders [Note 8] ................................. $56,975,703
Equity of annuitants [Note 8] .................................. 623,313
Equity of The Prudential
Insurance Company
of America [Note 2] ........................................... 1,229,393
-----------
$58,828,409
===========
</TABLE>
STATEMENT OF OPERATIONS
Year Ended December 31, 1997
<TABLE>
<S> <C>
INVESTMENT INCOME
Dividend distributions received .............................. $ 1,016,408
EXPENSES
Charges to planholders and annuitants for assuming mortality
and expense risks and for administration [Note 3] ........... 382,418
-----------
NET INVESTMENT INCOME.......................................... 633,990
-----------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Capital gains distributions received ......................... 10,695,864
Realized gain on shares redeemed
[identified cost basis] ..................................... 1,168,584
Net change in unrealized gain on investments ................. (2,547,937)
-----------
NET GAIN ON INVESTMENTS........................................ 9,316,511
-----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS........... $ 9,950,501
===========
</TABLE>
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1997 1996
------------ ------------
<S> <C> <C>
OPERATIONS:
Net investment income ......................... $ 633,990 $ 340,329
Capital gains distributions received .......... 10,695,864 5,956,471
Realized gain on shares redeemed .............. 1,168,584 891,850
Net change in unrealized gain (loss) on
investments .................................. (2,547,937) 5,257,088
------------ ------------
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS .................................... 9,950,501 12,445,738
------------ ------------
ACCUMULATION AND ANNUITY TRANSACTIONS:
Purchase payments ............................. 680,355 636,829
Accumulation Shares liquidated ................ (6,961,083) (5,978,227)
Annuity benefit payments ...................... (102,923) (73,649)
------------ ------------
NET DECREASE IN NET ASSETS RESULTING FROM
ACCUMULATION
AND ANNUITY TRANSACTIONS....................... (6,383,651) (5,415,047)
------------ ------------
NET (DECREASE) INCREASE IN NET ASSETS RESULTING
FROM EQUITY TRANSFERS.......................... (1,688,445) 579,007
------------ ------------
TOTAL INCREASE IN NET ASSETS ................... 1,878,405 7,609,698
NET ASSETS:
Beginning of year ............................. 56,950,004 49,340,306
------------ ------------
End of year ................................... $ 58,828,409 $ 56,950,004
============ ============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A2 THROUGH A3
A1
<PAGE>
NOTES TO FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1997
PRUDENTIAL'S ANNUITY PLAN ACCOUNT--2
NOTE 1:GENERAL
The Annuity Plan Account-2 (the "Account") was established on August
13, 1968, by resolution of Prudential's Board of Directors as a
separate 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 ex-dividend date.
Equity of The Prudential Insurance Company of America--Prudential
maintains a position in the Account for liquidity purposes including
unit purchases and redemptions, fund share transactions and expense
processing. Prudential monitors the balance daily and transfers funds
based upon anticipated activity.
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 Charge
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.
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,
1997, the amount of these charges paid to Prudential was $172,235.
A2
<PAGE>
B. Administration Charge
For the class of contracts 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,
1997, the amount of these charges paid to Prudential was $210,183.
NOTE 4:TAXES
Prudential is taxed as a "life insurance company" as defined by the
Internal Revenue Code and the results of operations of the Account form
a part of Prudential's consolidated federal tax return. Under current
federal law, no federal income taxes are payable by the Account. As
such, no provision for tax liability has been recorded in these
financial statements.
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:PURCHASES AND SALES OF INVESTMENTS
The aggregate costs of purchases and proceeds from sales of investments
in the Fund for the year ended December 31, 1997 were as follows:
<TABLE>
<S> <C>
Purchases................................... $ 0
Sales....................................... $8,449,408
</TABLE>
NOTE 7:ACCUMULATION SHARE TRANSACTIONS
The number of Accumulation Shares purchased and liquidated for the
years ended December 31, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
1997 1996
------ ------
<S> <C> <C>
Accumulation Shares Purchased............................. 2,629 4,202
Accumulation Shares Liquidated............................ 40,530 41,763
</TABLE>
NOTE 8:EQUITY OF PLANHOLDERS AND ANNUITANTS
Equity of Planholders at December 31, 1997:
<TABLE>
<CAPTION>
SHARE
SHARES VALUE EQUITY
----------- ---------- -----------
<S> <C> <C> <C>
Class of contracts introduced
prior to Sept. 16, 1977 ......... 301,932.278 $185.66869 $56,059,370
Class of contracts introduced on
Sept. 16, 1977 .................. 5,932.682 $154.45506 $ 916,333
-----------
$56,975,703
===========
Equity of Annuitants at December 31, 1997:
Annuity Contracts assuming 3.5%
investment result ............... 10,540.972 $ 7.65552 $ 80,697
Annuity Contracts assuming 5%
investment result ............... 106,533.357 $ 5.09339 $ 542,616
-----------
$ 623,313
===========
</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, 1997, the results of its operations for the year
then ended and the changes in its net assets for each of the two years in the
period then ended, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of The
Prudential Insurance Company of America's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these financial statements in accordance with
generally accepted auditing standards which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits, which included confirmation of
shares owned in Prudential's Gibraltar Fund, Inc. at December 31, 1997,
provide a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
New York, New York March 20, 1998
A4
<PAGE>
FINANCIAL STATEMENTS OF
PRUDENTIAL'S GIBRALTAR FUND
STATEMENT OF ASSETS AND LIABILITIES STATEMENT OF OPERATIONS
December 31, 1997 Year Ended December 31, 1997
<TABLE>
<CAPTION>
<S> <C> <C> <C>
ASSETS......................................................... INVESTMENT INCOME
Investments, at value (cost: $276,988,335)......$ 322,652,484 Dividends (net of $28,169 foreign withholding.
Cash....................................................1,502 tax)......................................... $3,968,815
Receivable for investments sold.....................5,655,023 Interest....................................... 1,369,649
Interest and dividends receivable.....................427,753 5,338,464
Total Assets....................................328,736,762
EXPENSES
LIABILITIES.................................................... Investment advisory fee........................ 390,676
Payable for investments purchased...................2,669,207 State franchise tax expense.................... 61,320
Payable to investment adviser.........................103,022 Directors' fees................................ 9,000
Accrued expenses.......................................45,786 Miscellaneous expenses......................... 8,515
............................................................. Custodian expense.............................. 6,439
Total Liabilities.................................2,818,015
Total expenses......................................475,950
NET ASSETS........................................$ 325,918,747 Less custodian fee credit...................... (1,439)
Net assets were comprised of: Net expenses................................. 474,511
Common stock, at $1 par value...................$29,771,740 NET INVESTMENT INCOME............................ 4,863,953
Paid-in capital, in excess of par...............247,676,370
................................................277,448,110 NET REALIZED AND UNREALIZED GAIN ON
Accumulated net realized gains on investments.........2,806,488 INVESTMENTS
Net unrealized appreciation on investments...........45,664,149 Net realized gain on investments................. 50,505,594
Net change in unrealized appreciation on
Net assets, December 31, 1997.....................$ 325,918,747 investments.................................... 547,282
Net asset value and redemption price per
share, 29,771,740 outstanding shares of...................... NET GAIN ON INVESTMENTS............................ 51,052,876
common stock (authorized 75,000,000.......................... NET INCREASE IN NET ASSETS RESULTING
shares)...............................................$ 10.95 FROM OPERATIONS.................................... $55,916,829
</TABLE>
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
1997 1996
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net investment income.............................................................................$4,863,953 $ 3,868,291
Net realized gain on investments..................................................................50,505,594 35,522,025
Net change in unrealized appreciation on investments...................................................547,282 28,188,380
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS................................................550916,829 67,578,696
DIVIDENDS AND DISTRIBUTIONS:
Dividends from net investment income...............................................................(5,623,695) (3,659,501)
Distributions from net realized capital gains.....................................................(59,469,378) (31,301,947)
TOTAL DIVIDENDS AND DISTRIBUTIONS.................................................................(65,093,073) (34,961,448)
CAPITAL TRANSACTIONS:
Capital stock sold [232,480 and -0- shares, respectively]............................................3,000,000 --
Capital stock issued in reinvestment of dividends and distributions [5,819,002 and 2,971,950
shares, respectively].............................................................................63,060,874 33,969,659
Capital stock repurchased [(2,645,935) and (2,374,885) shares, respectively].......................(3,262,504) (26,513,694)
NET INCREASE IN NET ASSETS RESULTING FROM CAPITAL TRANSACTIONS......................................33,798,370 7,455,965
TOTAL INCREASE IN NET ASSETS...........................................................................24,622,126 40,073,213
NET ASSETS:
Beginning of year..................................................................................301,296,621 261,223,408
End of year.......................................................................................$325,918,747 $301,296,621
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
AI1
<PAGE>
PRUDENTIALS GIBRALTAR FUND
December 31, 1997
LONG-TERM INVESTMENTS - 95.1% Value
COMMON STOCKS - 94.1% Shares (Note 1)
Banks and Savings & Loans - 1.4%
Chase Manhattan Corp......................30,500 $3,339,750
Washington Mutual, Inc.....................21,400 1,365,587
................................................. 4,705,337
MULi2is-Ferrous - 1.9%
Chemicals - 0.7%....................................
Agrium, Inc...............................177,300 2,160,844
Computer Services - 3.4%............................
Bay Networks, Inc. (a)....................200,000 5,112,500
Larscom, Inc. (Class "A" Stock) (a) ......167,700 1,593,150
Microsoft Corp. (a).......................34,000. 4,394,500
................................................. 11,100,150
Computers - 6.6%....................................
3Com Corp. (a)............................234,000 8,175,375
Cisco Systems, Inc. (a)...................237,600 13,246,200
................................................. 21,421,575
................................................. 15,620,993
Cosmetics & Soaps - 3.1%
Avon Products, Inc.........................73,200 4,492,650
Colgate Palmolive Co.......................77,900 5,725,650
................................................. 10,218,300
.................................................
Diversified Operations - 3.1 %......................
General Electric Co.......................136,500 10,015,687
.................................................
Drugs and Medical Supplies - 8.9%...................
Bristol-Myers Squibb Co....................58,200 5,507,175
Johnson & Johnson..........................82,000 5,401,750
Novartis Corp., AG, ADR..........................
(Switzerland)...........................150,600 12,236,250
Pfizer, Inc................................78,200 5,830,787
................................................. 28,975,962
Electronics - 0.5%..................................
VLSI Technology, Inc. (a)..................67,400 1,592,325
Environmental Services - 1.1%.......................
U.S.A. Waste Services, Inc. (a)............90,000 3,532,500
Financial Services - 4.0%...........................
Federal National Mortgage........................
Association.............................126,000 7,189,875
Imperial Credit Industries, Inc. (a).......26,800 549,400
The Money Store, Inc......................257,400 5,405,400
................................................. 13,144,675
Food & Beverages - 4.0%.............................
Archer-Daniels-Midland Co.................157,500 3,415,781
PepsiCo, Inc..............................260,800 9,502,900
................................................. 12,918,681
Hospitals/ Hospital Management - 2.1%...............
Columbia/HCA Healthcare Corp., . .........156,800 4,645,200
Manor Care, Inc..........................66,400 2,324,000
............................................... 6,969,200
Insurance - 6.0%
Aetna, Inc.................................59,200 4,177,300
American International Group, Inc.............27,255 2,963,981
CIGNA Corp....................................35,400 6,126,412
Provident Companies, Inc......................63,000 2,433,375
Travelers Group, Inc..........................73,999 3,986,696
.................................................... 19,687,764
Leisure - 6.0%......................................
Carnival Corp. (Class "A" Stock)...........89,000 4,928,375
Hilton Hotels Corp........................144,200 4,289,950
December 31, 1997
COMMON Value
STOCKS (Continued) Shares (Note 1)
La Quinta Inns, Inc. 222,300 $4,293,169
Wall Disney Co. 62,000 6,141,875
19,653,369
UCAR International, Inc. (a)................156,100 6,234,244
Metals-Non Ferrous - 0.7%
Aluminum Company of America..................31,800 2,237,925
Miscellaneous - Consumer Growth/Stable..........- 2.4%
Unilever N.V., ADR (United Kingdom).........124,000 7,742,250
Oil & Gas - 4.8%
Exxon Corp..................................108,600 6,644,962
Pioneer Natural Resources Co. . . . ........165,500 4,789,156
Texaco, lnc..................................77,000 4,186,875
Oil & Gas Services - 9.7%
Bouyges Offshore SA, ADR
(France) (a)..............................184,200 4,006,350
J. Ray McDermott, SA........................126,600 5,443,800
..................................................1
McDermott International, Inc................213,500 7,819,438
Schlumberger Ltd............................119,800 9,643,900
Smith International, Inc. (a)................74,600 4,578,575
................................................... 31,492,063
Real Estate Development - 2.5%
CCA Prison Realty Trust......................80,200 3,578,925
Developers Diversified Realty................89,000 3,404,250
Patriot American Hospitality, Inc............46,300 1,334,019
................................................... B,317,194
Retail - 7.4%
American Stores Co..........................180,600 3,713,588
CVS Corp.....................................52,900 3,388,906
Nordstrom, Inc..............................139,600 8,428,350
Sears, Roebuck & Co..........................62,000 2,805,500
Toys `R' Us, Inc. (a).......................181,000 5,690,188
................................................... 24,026,532
Telecommunications - 6.0%
ADC Telecommunications, Inc. (a)............107,500 4,488,125
BellSouth Corp...............................60,200 3,390,013
Glenayre Technologies, Inc. (a).............200,000 1,975,000
Tellabs, Inc. (a)............................45,000 2,379,375
Uniphase Corp. (a)..........................178,200 7,373,025
................................................... 19,605,538
Tobacco - 1.8%
Phillip Morris Co. Inc....................127,400 5,772,813
Utility - Electric - 6.0%
Duke Energy Corp..........................133,000 7,364,875
Long Island Lighting Co....................76,800 2,313,600
Pinnacle West Capital Corp................137,000 5,805,375
Texas Utilities Co.........................98,600 4,098,063
................................................. 19,581,913
TOTAL COMMON STOCKS
(cost $260,817,908).............................. 306,727,834
SEE NOTES TO FINANCIAL STATEMENTS
AI2
<PAGE>
PRUDENTIALS GIBRALTAR FUND (Con
December 31, 1997
Moody's Principal
CONVERTIBLE Rating Amount Value
BONDS - 1.0% (Unaudited) (000) (Note 1)
Retail - 1.0%
Sunglass Hut International,
5.25%, 06/15103
(cost $3,461,427) B2 $ 4,405 $3,215,650
TOTAL LONG-TERM INVESTMENTS
(cost $264,279,335)................ 309,943,484
SHORT-TERM
INVESTMENTS - 3.9%
Commercial Paper - 3.9%
BBL North America,
6.73%, 01/02198
(cost $12,709,000)...............NR 12,709 12,709,000
TOTAL INVESTMENTS - 99.0%
(cost $276,988,335; Note 3)........ 322,652,484
OTHER ASSETS IN EXCESS OF
LIABILITIES - 1.0%................. 3,266,263
TOTAL NET ASSETS - 100.0%............. $ 325,918,747
The following abbreviations are used in portfolio descriptions:
ADR American Depository Receipt
SA Societe Anonyme (French Corporation)
(a) Non-income producing security
SEE NOTES TO FINANCIAL STATEMENTS.
AI3
<PAGE>
NOTES TO THE FINANCIAL STATEMENTS OF
PRUDENTIAL'S GIBRALTAR FUND
General
Prudential's Gibraltar Fund (the "Fund") was originally
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 as an open-end, diversified management investment
company under the Investment Company Act of 1940, as amended. The
Fund was organized by The Prudential Insurance Company of America
(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.
Note 1: Accounting Policies
The following is a summary of significant accounting policies
followed by the fund in the preparation of its financial
statements.
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. 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 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 capital 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.
Some dividends are paid in cash. ,
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 to its
shareholders. Therefore, no federal income tax provision is
required. State franchise taxes were paid for the period that the
Fund was incorporated in Delaware. No such commitments exist
following reincorporation in Maryland. 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.
AI4
<PAGE>
Reclassification of Capital Accounts: The Fund accounts and reports
for distributions to shareholders in accordance with the American
Institute of Certified Public Accountants (A.I.C.PA.). 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 decrease undistributed net investment income by
$42,059, increased net realized gains by $2,789 and increased
paid-in capital in excess of par by $39,270. In addition the Fund
reclassified $199,247 of dividends in excess of net investment
income to accumulated capital gain. Such reclassifications had no
effect on net assets, results of operations, or net asset value per
share.
Note 2:Investment Advisory Fee and Other Transactions with Affiliates
Investment Advisory Fee:
The investment advisory fee,whichis computed daily at an effective
annual rate of 0.1 25% 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.
The 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, 1997, Prudential Securities
Incorporated, an affiliate of The Prudential, earned approximately
$25,000 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, 1997 aggregated
$297,205,094 and $303,041,488, respectively.
The federal income tax basis of the Fund's investments at December
31, 1997 was substantially the same as for financial reporting
purposes, $276,988,335 and, accordingly, net unrealized
appreciation for federal income tax purposes was $45,664,149 (gross
unrealized appreciation $57,881,924; gross unrealized depreciation
$12,217,775).
AI5
<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, 1997, the results of its operations for the year
then ended and the changes in its net assets and the financial highlights for
the two years in the period then ended, 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 audits. We conducted our audits of these
financial statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of securities at December 31, 1997 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. The financial highlights for each of the three
years in the period ended December 31, 1995 were audited by other independent
accountants whose report thereon dated February 15, 1996 expressed an
unqualified opinion on those statements.
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, NY 10036
February 11, 1998
AI6
REPORT OF INDEPENDENT ACCOUNTANTS
---------------------------------
March 5, 1998
To the Board of Directors and Policyholders of
The Prudential Insurance Company of America
In our opinion, the accompanying consolidated statements of financial position
and the related consolidated statements of operations, of changes in equity and
of cash flows present fairly, in all material respects, the financial position
of The Prudential Insurance Company of America and its subsidiaries at December
31, 1997 and 1996, and the results of their operations and their cash flows for
the years then ended in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audit. We conducted our audits of these statements in
accordance with generally accepted auditing standards which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.
Price Waterhouse LLP
1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
The Prudential Insurance Company of America
Newark, New Jersey
We have audited the accompanying consolidated statements of operations, changes
in equity, and cash flows of The Prudential Insurance Company of America and
subsidiaries for the year ended December 31, 1995. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on the financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such consolidated statements of operations, changes in equity,
and cash flows present fairly, in all material respects, the results of
operations and cash flows of The Prudential Insurance Company of America and
subsidiaries for the year ended December 31, 1995 in conformity with generally
accepted accounting principles.
Deloitte & Touche LLP
June 4, 1997
2
<PAGE>
<TABLE>
<CAPTION>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
DECEMBER 31, 1997 AND 1996 (IN MILLIONS)
1997 1996
----------- -----------
<S> <C> <C>
ASSETS
Fixed maturities:
Available for sale, at fair value (amortized cost, 1997: $71,496; 1996: $64,545) .......... $ 75,270 $ 66,553
Held to maturity, at amortized cost (fair value, 1997: $19,894; 1996: $21,362) ............ 18,700 20,403
Trading account assets, at fair value........................................................ 6,044 4,219
Equity securities, available for sale, at fair value (cost, 1997: $2,376; 1996: $2,103) ..... 2,810 2,622
Mortgage loans on real estate ............................................................... 16,004 17,097
Investment real estate ...................................................................... 1,519 2,586
Policy loans ................................................................................ 6,827 6,692
Securities purchased under agreements to resell ............................................. 8,661 5,347
Cash collateral for borrowed securities ..................................................... 5,047 2,416
Short-term investments ...................................................................... 12,106 9,294
Other long-term investments ................................................................. 3,360 2,995
----------- -----------
Total investments ......................................................................... 156,348 140,224
Cash ........................................................................................ 3,636 2,091
Deferred policy acquisition costs ........................................................... 5,994 6,291
Accrued investment income ................................................................... 1,909 1,828
Receivables from broker-dealer clients ...................................................... 6,273 5,281
Other assets ................................................................................ 11,276 9,990
Separate Account assets ..................................................................... 74,046 63,358
----------- -----------
TOTAL ASSETS .................................................................................. $ 259,482 $ 229,063
=========== ===========
LIABILITIES AND EQUITY
LIABILITIES
Future policy benefits ...................................................................... $ 65,581 $ 63,955
Policyholders' account balances ............................................................. 32,941 36,009
Other policyholders' liabilities ............................................................ 6,659 6,043
Policyholders' dividends .................................................................... 1,269 714
Securities sold under agreements to repurchase .............................................. 12,347 7,503
Cash collateral for loaned securities ....................................................... 14,117 8,449
Short-term debt ............................................................................. 6,774 6,562
Long-term debt .............................................................................. 4,273 3,760
Income taxes payable ........................................................................ 500 1,544
Payables to broker-dealer clients ........................................................... 3,338 3,018
Securities sold but not yet purchased ....................................................... 3,533 1,900
Other liabilities ........................................................................... 14,774 8,238
Separate Account liabilities ................................................................ 73,658 62,845
----------- -----------
TOTAL LIABILITIES ......................................................................... 239,764 210,540
=========== ===========
COMMITMENTS AND CONTINGENCIES (SEE NOTES 12, 13 AND 14)
EQUITY
Retained earnings ........................................................................... 18,051 17,443
Net unrealized investment gains ............................................................. 1,752 1,136
Foreign currency translation adjustments .................................................... (85) (56)
----------- -----------
TOTAL EQUITY .............................................................................. 19,718 18,523
----------- -----------
TOTAL LIABILITIES AND EQUITY .................................................................. $ 259,482 $ 229,063
=========== ===========
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3
<PAGE>
<TABLE>
<CAPTION>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (IN MILLIONS)
1997 1996 1995
------------ ----------- -----------
<S> <C> <C> <C>
REVENUES
Premiums .................................................................... $ 18,534 $ 18,962 $ 19,783
Policy charges and fee income ............................................... 1,828 1,912 1,824
Net investment income ....................................................... 9,863 9,742 10,178
Realized investment gains, net .............................................. 2,187 1,138 1,503
Commissions and other income ................................................ 4,661 4,521 3,952
------------ ----------- -----------
Total revenues ............................................................ 37,073 36,275 37,240
------------ ----------- -----------
BENEFITS AND EXPENSES
Policyholders' benefits ..................................................... 18,208 19,306 19,470
Interest credited to policyholders' account balances ........................ 2,043 2,251 2,739
Dividends to policyholders .................................................. 2,429 2,339 2,317
General and administrative expenses ......................................... 11,926 10,875 10,345
Sales practice remediation costs ............................................ 1,640 410 --
------------ ----------- -----------
Total benefits and expenses ............................................... 36,246 35,181 34,871
------------ ----------- -----------
INCOME FROM OPERATIONS BEFORE INCOME TAXES .................................... 827 1,094 2,369
------------ ----------- -----------
Income taxes
Current ................................................................... (46) 406 1,293
Deferred .................................................................. 263 (390) (167)
------------ ----------- -----------
217 16 1,126
------------ ----------- -----------
NET INCOME .................................................................... $ 610 $ 1,078 $ 1,243
============ =========== ===========
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (IN MILLIONS)
<TABLE>
<CAPTION>
FOREIGN NET
CURRENCY UNREALIZED
RETAINED TRANSLATION INVESTMENT TOTAL
EARNINGS ADJUSTMENTS GAINS EQUITY
--------- ----------- ---------- ---------
<S> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1995 ........................ $ 15,126 $ (42) $ 16 $ 15,100
Net income .................................... 1,243 -- -- 1,243
Change in foreign currency translation
adjustments ................................. -- 18 -- 18
Change in net unrealized investment gains ..... -- -- 2,381 2,381
--------- --------- --------- ---------
BALANCE, DECEMBER 31, 1995 ...................... 16,369 (24) 2,397 18,742
Net income .................................... 1,078 -- -- 1,078
Change in foreign currency translation
adjustments ................................. -- (32) -- (32)
Change in net unrealized investment gains ..... -- -- (1,261) (1,261)
Additional pension liability adjustment ....... (4) -- -- (4)
--------- --------- --------- ---------
BALANCE, DECEMBER 31, 1996 ...................... 17,443 (56) 1,136 18,523
Net income .................................... 610 -- -- 610
Change in foreign currency translation
adjustments ................................. -- (29) -- (29)
Change in net unrealized investment gains ..... -- -- 616 616
Additional pension liability adjustment ....... (2) -- -- (2)
--------- --------- --------- ---------
BALANCE, DECEMBER 31, 1997 ...................... $ 18,051 $ (85) $ 1,752 $ 19,718
========= ========= ========= =========
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (IN MILLIONS)
<TABLE>
<CAPTION>
1997 1996 1995
---------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ..................................................... $ 610 $ 1,078 $ 1,243
Adjustments to reconcile net income to
net cash provided by operating activities:
Realized investment gains, net ............................... (2,187) (1,138) (1,503)
Policy charges and fee income ................................ (258) (208) (201)
Interest credited to policyholders' account balances ......... 2,043 2,128 2,616
Depreciation and amortization ................................ 258 266 398
Other, net ................................................... 4,681 (1,180) (2,628)
Loss (gain) on divestitures .................................. -- (116) 297
Change in:
Deferred policy acquisition costs .......................... 143 (122) (214)
Policy liabilities and insurance reserves .................. 2,477 2,471 2,382
Securities purchased under agreements to resell ............ (3,314) (217) 461
Trading account assets ..................................... (1,825) (433) 2,579
Income taxes receivable/payable ............................ (1,391) (937) 194
Cash collateral for borrowed securities .................... (2,631) (332) 25
Broker-dealer client receivables/payables .................. (672) (607) (420)
Securities sold but not yet purchased ...................... 1,633 251 (225)
Securities sold under agreements to repurchase ............. 4,844 (490) (712)
--------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES ...................... $ 4,411 $ 414 $ 4,292
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from the sale/maturity of:
Fixed maturities, available for sale .......................... $ 123,550 $ 123,368 $ 97,084
Fixed maturities, held to maturity ............................ 4,042 4,268 3,767
Equity securities, available for sale ......................... 2,572 2,162 2,370
Mortgage loans on real estate ................................. 4,299 5,731 5,553
Investment real estate ........................................ 1,842 615 435
Other long-term investments ................................... 5,081 3,203 3,385
Divestitures .................................................. -- 52 790
Payments for the purchase of:
Fixed maturities, available for sale .......................... (129,854) (125,093) (101,197)
Fixed maturities, held to maturity ............................ (2,317) (2,844) (6,803)
Equity securities, available for sale ......................... (2,461) (2,384) (1,391)
Mortgage loans on real estate ................................. (3,363) (1,906) (3,015)
Investment real estate ........................................ (241) (142) (387)
Other long-term investments ................................... (4,148) (2,060) (1,849)
Cash collateral for securities loaned (net) .................... 5,668 2,891 3,471
Short-term investments (net) ................................... (2,848) (1,915) 2,793
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES ...................... $ 1,822 $ 5,946 $ 5,006
--------- --------- ---------
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (IN MILLIONS)
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Policyholders' account deposits ................................ $ 5,020 $ 2,799 $ 2,724
Policyholders' account withdrawals ............................. (9,873) (8,099) (9,164)
Net increase(decrease) in short-term debt ...................... 305 583 (3,077)
Proceeds from the issuance of long-term debt ................... 324 93 763
Repayments of long-term debt ................................... (464) (1,306) (30)
--------- --------- ---------
CASH FLOWS USED IN FINANCING ACTIVITIES ................... (4,688) (5,930) (8,784)
--------- --------- ---------
NET INCREASE IN CASH ............................................. 1,545 430 514
CASH, BEGINNING OF YEAR .......................................... 2,091 1,661 1,147
--------- --------- ---------
CASH, END OF YEAR ................................................ $ 3,636 $ 2,091 $ 1,661
========= ========= =========
SUPPLEMENTAL CASH FLOW INFORMATION:
Income taxes paid ................................................ $ 968 $ 793 $ 430
--------- --------- ---------
Interest paid .................................................... $ 1,243 $ 1,404 $ 1,413
--------- --------- ---------
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS
The Prudential Insurance Company of America and its subsidiaries
(collectively, "the Company") provide insurance and financial services
throughout the United States and many locations worldwide. Principal
products and services provided include life and health insurance, annuities,
pension and retirement related investments and administration, managed
healthcare, property and casualty insurance, securities brokerage, asset
management, investment advisory services and real estate brokerage.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the Prudential
Insurance Company of America, a mutual life insurance company, and its
subsidiaries, and those partnerships and joint ventures in which the Company
has a controlling interest. The consolidated financial statements have been
prepared in accordance with generally accepted accounting principles
("GAAP"). All significant intercompany balances and transactions have been
eliminated.
USE OF ESTIMATES
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the period. Actual results could differ from
those estimates.
INVESTMENTS
FIXED MATURITIES classified as "available for sale" are carried at estimated
fair value. Fixed maturities that the Company has both the positive intent
and ability to hold to maturity are stated at amortized cost and classified
as "held to maturity." The amortized cost of fixed maturities are written
down to estimated fair value when considered impaired and the decline in
value is considered to be other than temporary. Unrealized gains and losses
on fixed maturities "available for sale," net of income tax, the effect on
deferred policy acquisition costs and participating annuity contracts that
would result from the realization of unrealized gains and losses, are
included in a separate component of equity, "Net unrealized investment
gains."
TRADING ACCOUNT ASSETS are carried at estimated fair value.
EQUITY SECURITIES, available for sale, comprised of common and
non-redeemable preferred stock, are carried at estimated fair value. The
associated unrealized gains and losses, net of income tax, the effect on
deferred policy acquisition costs and participating annuity contracts that
would result from the realization of unrealized gains and losses, are
included in a separate component of equity, "Net unrealized investment
gains."
MORTGAGE LOANS ON REAL ESTATE are stated primarily at unpaid principal
balances, net of unamortized discounts and allowance for losses on impaired
loans. Impaired loans are identified by management as loans in which a
probability exists that all amounts due according to the contractual terms
of the loan agreement will not be collected. Impaired loans are measured
based on the present value of expected future cash flows, discounted at the
loan's effective interest rate or the fair value of the collateral, if the
loan is collateral dependent. The Company's periodic evaluation of the
adequacy of the allowance for losses is based on a number of factors,
including past loan loss experience, known and inherent risks in the
portfolio, adverse situations that may affect the borrower's ability to
repay, the estimated value of the underlying collateral, composition of the
loan portfolio, current economic conditions and other relevant factors.
This evaluation is inherently subjective as it requires estimating the
amounts and timing of future cash flows expected to be received on impaired
loans.
Interest received on impaired loans, including loans that were previously
modified in a troubled debt restructuring, is either applied against the
principal or reported as revenue, according to management's judgment as to
the collectibility of principal. Management discontinues the accrual of
interest on impaired loans after the loans are 90 days delinquent as to
principal or interest or earlier when management has serious doubts about
collectibility. When a loan is recognized as
8
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
impaired, any accrued but unpaid interest previously recorded on such loan
is reversed against interest income of the current period. Generally, a loan
is restored to accrual status only after all delinquent interest and
principal are brought current and, in the case of loans where interest has
been interrupted for a substantial period, a regular payment performance has
been established.
INVESTMENT REAL ESTATE, which the Company has the intent to hold for the
production of income, is carried at depreciated cost less any write-downs to
fair value for impairment losses. Depreciation on real estate is computed
using the straight-line method over the estimated lives of the properties.
Real estate to be disposed of is carried at the lower of depreciated cost or
fair value less selling costs and is not depreciated once classified as
such.
POLICY LOANS are carried at unpaid principal balances.
SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL AND SECURITIES SOLD UNDER
AGREEMENTS TO REPURCHASE are carried at the amounts at which the securities
will be subsequently resold or reacquired, including accrued interest, as
specified in the respective agreements. The Company's policy is to take
possession of securities purchased under agreements to resell. The market
value of securities to be repurchased is monitored, and additional
collateral is requested, where appropriate, to protect against credit
exposure.
SECURITIES BORROWED AND SECURITIES LOANED are recorded at the amount of cash
advanced or received. With respect to securities loaned, the Company obtains
collateral in an amount equal to 102% and 105% of the fair value of the
domestic and foreign securities, respectively. The Company monitors the
market value of securities borrowed and loaned on a daily basis with
additional collateral obtained as necessary. Non-cash collateral received is
not reflected in the Consolidated Statements of Financial Position.
Substantially, all the Company's securities borrowed contracts are with
other brokers and dealers, commercial banks and institutional clients.
Substantially, all of the Company's securities loaned are with large
brokerage firms.
These transactions are used to generate net investment income and facilitate
trading activity. These instruments are short-term in nature (usually 30
days or less) and are collateralized principally by U.S. Government and
mortgage-backed securities. The carrying amounts of these instruments
approximate fair value because of the relatively short period of time
between the origination of the instruments and their expected realization.
SHORT-TERM INVESTMENTS, including highly liquid debt instruments purchased
with an original maturity of twelve months or less, are carried at amortized
cost, which approximates fair value.
OTHER LONG-TERM INVESTMENTS primarily represent the Company's investments
in joint ventures and partnerships in which the Company does not have
control and derivatives held for purposes other than trading. Joint venture
and partnership investments are recorded using the equity method of
accounting, reduced for other than temporary declines in value.
REALIZED INVESTMENT GAINS, NET are computed using the specific
identification method. Costs of fixed maturities and equity securities are
adjusted for impairments considered to be other than temporary. Allowances
for losses on mortgage loans on real estate are netted against asset
categories to which they apply and provisions for losses on investments are
included in "Realized investment gains, net." Unrealized gains and losses on
trading account assets are included in "Commissions and other income."
CASH
Cash includes cash on hand, amounts due from banks, and money market
instruments.
DEFERRED POLICY ACQUISITION COSTS
The costs which vary with and that are related primarily to the production
of new insurance business are deferred to the extent such costs are deemed
recoverable from future profits. Such costs include certain commissions,
costs of policy issuance and underwriting, and certain variable field office
expenses. Deferred policy acquisition costs are subject to recoverability
testing at the time of policy issue and loss recognition testing at the end
of each accounting period. Deferred policy acquisition costs are adjusted
for the impact of unrealized gains or losses on investments as if these
gains or losses had been realized, with corresponding credits or charges
included in equity.
9
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
For life insurance, deferred policy acquisition costs are amortized over the
expected life of the contracts (up to 45 years) in proportion to estimated
gross margins based on historical and anticipated future experience, which
is updated periodically. The effect of changes in estimated gross margins is
reflected in earnings in the period they are revised. Policy acquisition
costs related to interest-sensitive products and certain investment-type
products are deferred and amortized over the expected life of the contracts
(periods ranging from 15 to 30 years) in proportion to estimated gross
profits arising principally from investment results, mortality and expense
margins and surrender charges based on historical and anticipated future
experience, updated periodically. The effect of revisions to estimated gross
profits on unamortized deferred acquisition costs is reflected in earnings
in the period such estimated gross profits are revised.
For property and casualty contracts, deferred policy acquisition costs are
amortized over the period in which related premiums are earned. Future
investment income is considered in determining the recoverability of
deferred policy acquisition costs.
For disability insurance, health insurance, group life insurance and most
group annuities, acquisition costs are expensed as incurred.
POLICYHOLDERS' DIVIDENDS
The amount of the dividends to be paid to policyholders is determined
annually by the Company's Board of Directors. The aggregate amount of
policyholders' dividends is related to actual interest, mortality,
morbidity, persistency and expense experience for the year and judgment as
to the appropriate level of statutory surplus to be retained by the Company.
SEPARATE ACCOUNT ASSETS AND LIABILITIES
Separate Account assets and liabilities are reported at estimated fair value
and represent segregated funds which are invested for certain policyholders,
pension fund and other customers. The assets consist of common stocks, fixed
maturities, real estate related securities, real estate mortgage loans and
short-term investments. The assets of each account are legally
segregated and are not subject to claims that arise out of any other
business of the Company. Investment risks associated with market value
changes are generally borne by the customers, except to the extent of
minimum guarantees made by the Company with respect to certain accounts. The
investment income and gains or losses for Separate Accounts generally accrue
to the policyholders and are not included in the Consolidated Statement of
Operations. Mortality, policy administration and surrender charges on the
accounts are included in "Policy charges and fee income."
INSURANCE REVENUE AND EXPENSE RECOGNITION
Premiums from participating insurance policies are generally recognized when
due. Benefits are recorded as an expense when they are incurred. A liability
for future policy benefits is recorded using the net level premium method.
Premiums from non-participating group annuities with life contingencies are
generally recognized when due. For single premium immediate annuities and
structured settlements, premiums are recognized when due with any excess
profit deferred and recognized in a constant relationship to insurance
in-force or, for annuities, the amount of expected future benefit payments.
Amounts received as payment for interest sensitive investment contracts,
deferred annuities and participating group annuities are reported as
deposits to "Policyholders' account balances." Revenues from these contracts
are reflected in "Policy charges and fee income" and consist primarily of
fees assessed during the period against the policyholders' account balances
for mortality charges, policy administration charges, surrender charges and
interest earned from the investment of these account balances. Benefits and
expenses for these products include claims in excess of related account
balances, expenses of contract administration, interest credited and
amortization of deferred policy acquisition costs.
For disability insurance, group life insurance, health insurance and
property and casualty insurance, premiums are recognized over the period to
which the premiums relate in proportion to the amount of insurance
protection provided. Claim and claim adjustment expenses are recognized when
incurred.
10
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FOREIGN CURRENCY TRANSLATION ADJUSTMENTS
Assets and liabilities of foreign operations and subsidiaries reported in
other than U.S. dollars are translated at the exchange rate in effect at the
end of the period. Revenues, benefits and other expenses are translated at
the average rate prevailing during the period. Translation adjustments
arising from the use of differing exchange rates from period to period are
charged or credited directly to equity. The cumulative effect of changes in
foreign exchange rates are included in "Foreign currency translation
adjustments."
COMMISSIONS AND OTHER INCOME
Commissions and other income principally includes securities and
commodities, commission revenues, asset management fees, investment banking
revenue and realized and unrealized gains on trading account assets of the
Company's broker-dealer subsidiary.
DERIVATIVE FINANCIAL INSTRUMENTS
Derivatives include swaps, forwards, futures, options and loan commitments
subject to market risk, all of which are used by the Company in both trading
and other than trading activities. Income and expenses related to
derivatives used to hedge are recorded on the accrual basis as an adjustment
to the carrying amount or to the yield of the related assets or liabilities
over the periods covered by the derivative contracts. Gains and losses
relating to early terminations of interest rate swaps used to hedge are
deferred and amortized over the remaining period originally covered by the
swap. Gains and losses relating to derivatives used to hedge the risks
associated with anticipated transactions are deferred and utilized to adjust
the basis of the transaction once it has closed. If it is determined that
the transaction will not close, such gains and losses are included in
"Realized investment gains, net."
DERIVATIVES HELD FOR TRADING PURPOSES are used in the Company's securities
broker-dealer business and in a limited-purpose swap subsidiary to meet the
risk management needs of its customers by structuring transactions that
allow customers to manage their exposure to interest rates, foreign exchange
rates, indices or prices of securities and commodities and when possible,
matched trading positions are established to minimize risk to the Company.
Derivatives used for trading purposes are recorded at fair value as of the
reporting date. Realized and unrealized changes in fair values are included
in "Commissions and other income" in the period in which the changes occur.
DERIVATIVES HELD FOR PURPOSES OTHER THAN TRADING are primarily used to hedge
or reduce exposure to interest rate and foreign currency risks associated
with assets held or expected to be purchased or sold, and liabilities
incurred or expected to be incurred. Additionally, other than trading
derivatives are used to change the characteristics of the Company's
asset/liability mix consistent with the Company's risk management
activities.
INCOME TAXES
The Company and its domestic subsidiaries file a consolidated federal income
tax return. The Internal Revenue Code (the "Code") limits the amount of
non-life insurance losses that may offset life insurance company taxable
income. The Code also imposes an "equity tax" on mutual life insurance
companies which, in effect, imputes an additional tax to the Company based
on a formula that calculates the difference between stock and mutual
insurance companies' earnings. Income taxes include an estimate for changes
in the total equity tax to be paid for current and prior years. Subsidiaries
operating outside the United States are taxed under applicable foreign
statutes.
Deferred income taxes are generally recognized, based on enacted rates, when
assets and liabilities have different values for financial statement and tax
reporting purposes. A valuation allowance is recorded to reduce a deferred
tax asset to that portion which management believes is more likely than not
to be realized.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1996, the Financial Accounting Standards Board ("FASB") issued the
Statement of Financial Accounting Standards ("SFAS") No. 125, "Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities" ("SFAS
11
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
125"). The statement provides accounting and reporting standards for
transfers and servicing of financial assets and extinguishments of
liabilities and provides consistent standards for distinguishing transfers
of financial assets that are sales from transfers that are secured
borrowings. SFAS 125 became effective January 1, 1997 and is to be applied
prospectively. Subsequent to June 1996, FASB issued SFAS No. 127 "Deferral
of the Effective Date of Certain Provisions of SFAS 125" ("SFAS 127"). SFAS
127 delays the implementation of SFAS 125 for one year for certain
provisions, including repurchase agreements, dollar rolls, securities
lending and similar transactions. The Company will delay implementation
with respect to those affected provisions. Adoption of SFAS 125 has not and
will not have a material impact on the Company's results of operations,
financial condition and liquidity.
In June of 1997, FASB issued SFAS No. 130, "Reporting Comprehensive Income,"
which is effective for years beginning after December 15, 1997. This
statement defines comprehensive income as "the change in equity of a
business enterprise during a period from transactions and other events and
circumstances from non-owner sources, excluding investments by owners and
distributions to owners" and establishes standards for reporting and
displaying comprehensive income and its components in financial statements.
The statement requires that the Company classify items of other
comprehensive income by their nature and display the accumulated balance of
other comprehensive income separately from retained earnings in the equity
section of the Statement of Financial Position. In addition,
reclassification of financial statements for earlier periods must be
provided for comparative purposes.
RECLASSIFICATIONS
Certain amounts in the prior years have been reclassified to conform to
current year presentation.
12
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. INVESTMENTS
FIXED MATURITIES AND EQUITY SECURITIES
The following tables provide additional information relating to fixed
maturities and equity securities (excluding trading account assets) as of
December 31:
<TABLE>
<CAPTION>
1997
------------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
-------------- -------------- -------------- ------------
FIXED MATURITIES AVAILABLE FOR SALE (IN MILLIONS)
<S> <C> <C> <C> <C>
U.S. Treasury securities and obligations of
U.S. government corporations and agencies......... $ 9,755 $ 783 $ -- $ 10,538
Obligations of U.S. states and
their political subdivisions..................... 1,375 93 -- 1,468
Foreign government bonds............................ 3,177 218 17 3,378
Corporate securities................................ 49,997 2,601 144 52,454
Mortgage-backed securities.......................... 6,828 210 5 7,033
Other fixed maturities.............................. 364 35 -- 399
-------------- -------------- -------------- ------------
Total fixed maturities available for sale........... $ 71,496 $ 3,940 $ 166 $ 75,270
============== ============== ============== ============
EQUITY SECURITIES AVAILABLE FOR SALE................ $ 2,376 $ 680 $ 246 $ 2,810
============== ============== ============== ============
<CAPTION>
1997
------------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
-------------- -------------- -------------- ------------
FIXED MATURITIES HELD TO MATURITY (IN MILLIONS)
<S> <C> <C> <C> <C>
U.S. Treasury securities and obligations of
U.S. government corporations and agencies......... $ 88 $ - $ - $ 88
Obligations of U.S. states and
their political subdivisions...................... 152 4 1 155
Foreign government bonds............................ 33 5 - 38
Corporate securities................................ 18,282 1,212 34 19,460
Mortgage-backed securities.......................... 1 - - 1
Other fixed maturities.............................. 144 8 - 152
-------------- -------------- -------------- ------------
Total fixed maturities held to maturity............. $ 18,700 $ 1,229 $ 35 $ 19,894
============== ============== ============== ============
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. INVESTMENTS (CONTINUED)
1996
-------------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
--------------- -------------- -------------- ------------
FIXED MATURITIES AVAILABLE FOR SALE (IN MILLIONS)
<S> <C> <C> <C> <C>
U.S. Treasury securities and obligations of
U.S. government corporations and agencies......... $ 10,618 $ 361 $ 77 $ 10,902
Obligations of U.S. states and
their political subdivisions...................... 1,104 29 2 1,131
Foreign government bonds............................ 2,814 137 12 2,939
Corporate securities................................ 43,593 1,737 284 45,046
Mortgage-backed securities.......................... 6,377 140 21 6,496
Other fixed maturities.............................. 39 1 1 39
--------------- -------------- -------------- ------------
Total fixed maturities available for sale........... $ 64,545 $ 2,405 $ 397 $ 66,553
=============== ============== ============== ============
EQUITY SECURITIES AVAILABLE FOR SALE................ $ 2,103 $ 659 $ 140 $ 2,622
=============== ============== ============== ============
<CAPTION>
1996
-------------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
--------------- -------------- -------------- ------------
FIXED MATURITIES HELD TO MATURITY (IN MILLIONS)
<S> <C> <C> <C> <C>
U.S. Treasury securities and obligations of
U.S. government corporations and agencies......... $ 309 $ 3 $ 6 $ 306
Obligations of U.S. states and
their political subdivisions...................... 7 -- -- 7
Foreign government bonds............................ 162 11 -- 173
Corporate securities................................ 19,886 1,033 82 20,837
Mortgage-backed securities.......................... 26 -- -- 26
Other fixed maturities.............................. 13 -- -- 13
--------------- -------------- -------------- ------------
Total fixed maturities held to maturity............. $ 20,403 $ 1,047 $ 88 $ 21,362
=============== ============== ============== ============
</TABLE>
14
<PAGE>
INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. INVESTMENTS (CONTINUED)
The amortized cost and estimated fair value of fixed maturities by
contractual maturities at December 31, 1997, is shown below:
<TABLE>
<CAPTION>
AVAILABLE FOR SALE HELD TO MATURITY
-------------------------------- ------------------------------
ESTIMATED ESTIMATED
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
-------------- -------------- -------------- ------------
(IN MILLIONS) (IN MILLIONS)
<S> <C> <C> <C> <C>
Due in one year or less....................... $ 1,991 $ 2,011 $ 686 $ 695
Due after one year through five years......... 18,916 19,226 4,496 4,659
Due after five years through ten years........ 16,776 17,494 7,161 7,551
Due after ten years........................... 26,985 29,506 6,356 6,988
Mortgage-backed securities.................... 6,828 7,033 1 1
-------------- -------------- -------------- ------------
Total......................................... $ 71,496 $ 75,270 $ 18,700 $ 19,894
============== ============== ============== ============
</TABLE>
Actual maturities may differ from contractual maturities because issuers have
the right to call or prepay obligations
Proceeds from the repayment of held to maturity fixed maturities during 1997,
1996 and 1995 were $4,042 million, $4,268 million, and $3,767 million,
respectively. Gross gains of $62 million, $78 million, and $27 million, and
gross losses of $1 million, $7 million, and $0.2 million were realized on
prepayment of held to maturity fixed maturities during 1997, 1996 and 1995,
respectively.
Proceeds from the sale of available for sale fixed maturities during 1997,
1996 and 1995 were $120,604 million, $121,910 million and $96,134 million,
respectively. Proceeds from the maturity of available for sale fixed
maturities during 1997, 1996 and 1995 were $2,946 million, $1,458 million,
and $950 million, respectively. Gross gains of $1,310 million, $1,562
million, and $2,052 million and gross losses of $639 million, $1,026 million,
and $941 million were realized on sales and prepayments of available for sale
fixed maturities during 1997, 1996 and 1995, respectively.
Write downs for impairments of fixed maturities which were deemed to be other
than temporary were $13 million, $54 million and $100 million for the years
1997, 1996 and 1995, respectively.
During the year ended December 31, 1997, there were no securities classified
as held to maturity that were sold and two securities so classified were
transferred to the available for sale portfolio. These actions were taken as
a result of a significant deterioration in credit worthiness. The aggregate
amortized cost of the securities transferred was $26 million with gross
unrealized investment gains of $0.5 million charged to "Net unrealized
investment gains."
During the year ended December 31, 1996, one security classified as held to
maturity was sold and two securities so classified were transferred to the
available for sale portfolio. These actions were taken as a result of a
significant deterioration in credit worthiness. The amortized cost of the
security sold was $35 million with a related realized investment loss of $0.7
million; the aggregate amortized cost of the securities transferred was $26
million with gross unrealized investment losses of $6 million charged to "Net
unrealized investment gains."
15
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. INVESTMENTS (CONTINUED)
MORTGAGE LOANS ON REAL ESTATE
The Company's mortgage loans were collateralized by the following property
types at December 31:
<TABLE>
<CAPTION>
1997 1996
--------------------------------- --------------------------------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Office buildings............................... $ 4,692 28.5% $ 6,056 34.4%
Retail stores.................................. 3,078 18.7% 3,676 20.9%
Residential properties......................... 891 5.4% 961 5.4%
Apartment complexes............................ 3,551 21.6% 2,954 16.8%
Industrial buildings........................... 1,958 11.9% 1,807 10.3%
Agricultural properties........................ 1,666 10.1% 1,550 8.8%
Other.......................................... 618 3.8% 608 3.4%
--------------- --------- -------------- ------
Subtotal 16,454 100.0% 17,612 100.0%
========= ======
Allowance for losses........................... (450) (515)
--------------- --------------
Net carrying value............................. $ 16,004 $ 17,097
=============== ==============
</TABLE>
The mortgage loans are geographically dispersed throughout the United
States and Canada with the largest concentrations in California (25.3%) and
New York (8.3%) at December 31, 1997. Included in the above balances are
mortgage loans receivable from affiliated joint ventures of $225 million
and $461 million at December 31, 1997 and 1996, respectively.
Activity in the allowance for losses for all mortgage loans, for the years
ended December 31, is summarized as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---------------- ---------------- ---------------
(IN MILLIONS)
<S> <C> <C> <C>
Allowance for losses, beginning of year.............. $ 515 $ 862 $ 1,004
Additions charged to operations...................... 19 9 6
Release of allowance for losses...................... (60) (256) (32)
Charge-offs, net of recoveries....................... (24) (100) (116)
--------------- ---------------- ---------------
Allowance for losses, end of year.................... $ 450 $ 515 $ 862
================ ================ ===============
</TABLE>
The $60 million, $256 million and $32 million reduction of the mortgage
loan allowance for losses in 1997, 1996 and 1995, respectively, is
primarily attributable to the improved economic climate, changes in the
nature and mix of borrowers and underlying collateral and a significant
decrease in impaired loans consistent with a general decrease in the
mortgage loan portfolio due to prepayments, sales and foreclosures.
16
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. INVESTMENTS (CONTINUED)
Impaired mortgage loans and related allowance for losses at December 31,
are as follows:
<TABLE>
<CAPTION>
1997 1996
----------------- ------------------
(IN MILLIONS)
<S> <C> <C>
Impaired mortgage loans with allowance for losses ............. $ 330 $ 941
Impaired mortgage loans with no allowance for losses .......... 1,303 1,491
Allowance for losses .......................................... (97) (189)
----------------- ------------------
Net carrying value of impaired mortgage loans ................. $ 1,536 $ 2,243
================= ==================
</TABLE>
Impaired mortgage loans with no provision for losses are loans where the
fair value of the collateral or the net present value of the expected
future cash flows related to the loan equals or exceeds the recorded
investment. The average recorded investment in impaired loans before
allowance for losses was $2,102 million, $2,842 million and $4,146 million
during 1997, 1996 and 1995, respectively. Net investment income recognized
on these loans totaled $140 million, $265 million and $415 million for the
years ended December 31, 1997, 1996 and 1995, respectively.
INVESTMENT REAL ESTATE
The Company's "investment real estate" of $1,519 million and $2,586 million
at December 31, 1997 and 1996, respectively, is held through direct
ownership. Of the Company's real estate, $1,490 million and $406 million
consists of commercial and agricultural assets held for disposal at
December 31, 1997 and 1996, respectively. Impairment losses and the
valuation allowances aggregated $40 million, $38 million and $124 million
for the years ended December 31, 1997, 1996 and 1995, respectively, and are
included in "Realized investment gains, net."
RESTRICTED ASSETS AND SPECIAL DEPOSITS
Assets of $2,783 million and $2,453 million at December 31, 1997 and 1996,
respectively, were on deposit with governmental authorities or trustees as
required by certain insurance laws. Additionally, assets valued at $2,352
million at December 31, 1997, were held in voluntary trusts. Of this
amount, $1,801 million related to the multi-state policyholder settlement
as described in Note 14. The remainder relates to trusts established to
fund guaranteed dividends to certain policyholders. The terms of these
trusts provide that the assets are to be used for payment of the designated
settlement and dividend benefits, as the case may be. Assets valued at $741
million and $3,414 million at December 31, 1997 and 1996, respectively,
were maintained as compensating balances or pledged as collateral for bank
loans and other financing agreements. Restricted cash and securities of
$1,835 million and $1,614 million at December 31, 1997, and 1996,
respectively, were included in the consolidated financial statements. The
restricted cash represents funds deposited by clients and funds accruing to
clients as a result of trades or contracts.
OTHER LONG-TERM INVESTMENTS
The Company's "Other long-term investments" of $3,360 million and $2,995
million as of December 31, 1997 and 1996, respectively, are composed of
$1,349 million and $832 million in real estate related interests and $2,011
million and $2,163 million of non-real estate related interests, including
a $149 million net investment in a leveraged lease entered into in 1997.
The Company's share of net income from such entities was $411 million, $245
million, and $326 million for 1997, 1996, and 1995, respectively, and is
reported in "Net investment income."
17
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. INVESTMENTS (CONTINUED)
INVESTMENT INCOME AND INVESTMENT GAINS AND LOSSES
NET INVESTMENT INCOME arose from the following sources for the years ended
December 31:
<TABLE>
<CAPTION>
1997 1996 1995
-------------- -------------- -----------
(IN MILLIONS)
<S> <C> <C> <C>
Fixed maturities-available for sale........................ $ 5,074 $ 4,871 $ 4,774
Fixed maturities-held to maturity.......................... 1,622 1,793 1,717
Trading account assets..................................... 504 444 588
Equity securities-available for sale ...................... 52 81 57
Mortgage loans on real estate.............................. 1,555 1,690 2,075
Real estate ............................................... 565 685 742
Policy loans............................................... 396 384 392
Securities purchased under agreements to resell............ 15 11 19
Receivables from broker-dealer clients..................... 706 579 678
Short-term investments..................................... 697 536 590
Other investment income.................................... 573 725 983
-------------- -------------- -------------
Gross investment income.................................... 11,759 11,799 12,615
Less investment expenses................................... (1,896) (2,057) (2,437)
-------------- -------------- -------------
Net investment income...................................... $ 9,863 $ 9,742 $ 10,178
============== ============== =============
</TABLE>
REALIZED INVESTMENT GAINS, NET, including changes in allowances for losses
and charges for other than temporary reductions in value, for the years
ended December 31, were from the following sources:
<TABLE>
<CAPTION>
1997 1996 1995
-------------- -------------- -----------
(IN MILLIONS)
<S> <C> <C> <C>
Fixed maturities....................................... $ 684 $ 513 $ 1,180
Mortgage loans on real estate ......................... 68 248 67
Investment real estate ................................ 700 76 (19)
Equity securities-available for sale .................. 363 267 400
Other gains (losses)................................... 372 34 (125)
-------------- -------------- -----------
Realized investment gains, net......................... $ 2,187 $ 1,138 $ 1,503
============== ============== ===========
</TABLE>
NET UNREALIZED INVESTMENT GAINS on securities available for sale are
included in the consolidated statement of financial position as a component
of equity, net of tax. Changes in these amounts for the years ended
December 31, are as follows:
<TABLE>
<CAPTION>
1997 1996
----------------- -----------------
(IN MILLIONS)
<S> <C> <C>
Balance, beginning of year................................. $ 1,136 $ 2,397
Changes in unrealized investment
gains(losses) attributable to:
Fixed maturities ....................................... 1,766 (2,892)
Equity securities....................................... (85) 254
Participating group annuity contracts................... (564) 479
Deferred policy acquisition costs....................... (154) 261
Deferred federal income taxes........................... (347) 637
----------------- -----------------
Sub-total............................................... 616 (1,261)
----------------- -----------------
Balance, end of year....................................... $ 1,752 $ 1,136
================= =================
</TABLE>
18
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. INVESTMENTS (CONTINUED)
Based on the carrying value, assets categorized as "non-income producing"
for the year ended December 31, 1997 included in fixed maturities available
for sale, mortgage loans on real estate and other long term investments
totaled $26 million, $93 million and $7 million, respectively.
4. DEFERRED POLICY ACQUISITION COSTS
The balances of and changes in deferred policy acquisition costs as of and
for the years ended December 31, are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
-------------- -------------- -----------
(IN MILLIONS)
<S> <C> <C> <C>
Balance, beginning of year ............................ $ 6,291 $ 6,088 $ 6,403
Capitalization of commissions, sales and issue expenses 1,049 931 919
Amortization and other adjustments..................... (1,192) (989) (783)
Change in unrealized investment gains ................. (154) 261 (451)
-------------- -------------- -----------
Balance, end of year .................................. $ 5,994 $ 6,291 $ 6,088
============== ============== ===========
</TABLE>
5. FUTURE POLICY BENEFITS AND OTHER POLICYHOLDERS' LIABILITIES
FUTURE POLICY BENEFITS at December 31 are as follows:
<TABLE>
<CAPTION>
1997 1996
----------------- -----------------
(IN MILLIONS)
<S> <C> <C>
Life insurance ............................................ $ 46,712 $ 44,118
Annuities ................................................. 15,469 14,828
Other contract liabilities ................................ 3,400 5,009
----------------- -----------------
Future policy benefits .................................... $ 65,581 $ 63,955
================= =================
</TABLE>
Life insurance liabilities include reserves for death and endowment policy
benefits, terminal dividends, premium deficiency reserves and certain health
benefits. Annuity liabilities include reserves for immediate annuities and
non-participating group annuities. Other contract liabilities primarily consist
of unearned premium and benefit reserves for group health products.
The following table highlights the key assumptions generally utilized in
calculating these reserves:
<TABLE>
<CAPTION>
PRODUCT MORTALITY INTEREST RATE ESTIMATION METHOD
- ------------------------- ------------------------ --------------- ------------------------
<S> <C> <C> <C>
Life insurance Generally rates 2.5% to 7.5% Net level premium
guaranteed in calculating based on non-forfeiture
cash surrender values interest rate
Individual immediate 1983 Individual 3.25% to 11.25% Present value of
annuities Annuity Mortality expected future payments
Table with certain based on historical
modifications experience
Group annuities in 1950 Group 3.75% to 17.35% Present value of
payout status Annuity Mortality expected future payments
Table with certain based on historical
modifications experience
Other contract liabilities -- 6.0% to 7.0% Present value of
expected future payments
based on historical
experience
</TABLE>
19
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. FUTURE POLICY BENEFITS AND OTHER POLICYHOLDERS' LIABILITIES (CONTINUED)
For the above categories, premium deficiency reserves are established, if
necessary, when the liability for future policy benefits plus the present
value of expected future gross premiums are insufficient to provide for
expected future policy benefits and expenses. A premium deficiency reserve
has been recorded for the group single premium annuity business, which
consists of limited-payment, long duration, traditional non-participating
annuities. A liability of $1,645 million and $1,320 million is included in
"Future policy benefits" with respect to this deficiency for the years
ended December 31, 1997 and 1996, respectively.
POLICYHOLDERS' ACCOUNT BALANCES at December 31, are as follows:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
(IN MILLIONS)
<S> <C> <C>
Individual annuities........................................ $ 5,695 $ 6,408
Group annuities & guaranteed investment contracts........... 19,053 21,706
Interest-sensitive life contracts........................... 3,160 2,888
Dividend accumulations...................................... 5,033 5,007
--------- ---------
Policyholders' account balances............................. $ 32,941 $ 36,009
========= =========
</TABLE>
Policyholders' account balances for interest-sensitive life and
investment-type contracts are equal to policy account values. The policy
account values represent an accumulation of gross premium payments plus
credited interest less withdrawals, expenses and mortality charges.
Certain contract provisions that determine the policyholder account
balances are as follows:
<TABLE>
<CAPTION>
WITHDRAWAL/
PRODUCT INTEREST RATE SURRENDER CHARGES
----------------------------------- ------------------------ -------------------------------------
<S> <C> <C>
Individual annuities 3.1% to 6.6% 0% to 8% for up to 8 years
Group annuities 5.0% to 12.7% Contractually limited or subject to
market value adjustments
Guaranteed investment contracts 3.9% to 14.34% Subject to market value withdrawal
provisions for any funds withdrawn
other than for benefit responsive and
contractual payments
Interest sensitive life contracts 4.0% to 6.5% Various up to 10 years
Dividend accumulations 3.0% to 4.0%
</TABLE>
20
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. FUTURE POLICY BENEFITS AND OTHER POLICYHOLDERS' LIABILITIES (CONTINUED)
OTHER POLICYHOLDERS' LIABILITIES. The following table provides a
reconciliation of the activity in the liability for unpaid claims and claim
adjustment expense for property and casualty and accident and health
insurance, which is included in "Other policyholder's liabilities" at
December 31:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
(IN MILLIONS)
<S> <C> <C> <C>
Balance at January 1......................................... $ 6,043 $ 5,933 $ 7,983
Less reinsurance recoverables.............................. 563 572 865
---------- ---------- ----------
Net balance at January 1..................................... 5,480 5,361 7,118
---------- ---------- ----------
Incurred related to:
Current year............................................... 10,691 10,281 10,534
Prior years................................................ 11 (91) 141
---------- ---------- ----------
Total incurred............................................... 10,702 10,190 10,675
---------- ---------- ----------
Paid related to:
Current year............................................... 7,415 7,497 7,116
Prior years................................................ 2,651 2,574 2,800
---------- ---------- ----------
Total paid................................................... 10,066 10,071 9,916
---------- ---------- ----------
Less Reinsurance
Segment.................................................... -- -- 2,516
---------- ---------- ----------
Net balance at December 31................................... 6,116 5,480 5,361
Plus reinsurance recoverables.............................. 543 563 572
---------- ---------- ----------
Balance at December 31....................................... $ 6,659 $ 6,043 $ 5,933
========== ========== ==========
</TABLE>
The changes in provision for claims and claim adjustment expenses related
to prior years of $11 million, $(91) million and $141 million in 1997, 1996
and 1995, respectively, are due to such factors as changes in claim cost
trends in healthcare, an accelerated decline in indemnity health business,
and lower than anticipated property and casualty unpaid claims and claim
adjustment expenses.
The other policyholders' liabilities presented above consist primarily of
unpaid claim liabilities which include estimates for liabilities associated
with reported claims and for incurred but not reported claims based, in
part, on the Company's experience. Changes in the estimated cost to settle
unpaid claims are charged or credited to the statement of operations
periodically as the estimates are revised. Accident and health unpaid
claims liabilities for 1997 and 1996 included above are discounted using
interest rates ranging from 6.0% to 7.5%.
21
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. SHORT-TERM AND LONG-TERM DEBT
Debt consists of the following at December 31:
SHORT-TERM DEBT
<TABLE>
<CAPTION>
1997 1996
-------------- --------------
(IN MILLIONS)
<S> <C> <C>
Commercial paper.......................................... $ 4,268 $ 4,511
Notes payable............................................. 2,151 1,614
Current portion of long-term debt......................... 355 437
-------------- --------------
Total short-term debt................................ $ 6,774 $ 6,562
============== ==============
</TABLE>
The weighted average interest rate on outstanding short-term debt was
approximately 6.0% and 5.6% at December 31, 1997 and 1996, respectively.
The Company issues commercial paper primarily to manage operating cash
flows and existing commitments, meet working capital needs and take
advantage of current investment opportunities. Commercial paper borrowings
are supported by various lines of credit.
LONG-TERM DEBT
<TABLE>
<CAPTION>
DESCRIPTION MATURITY DATES RATE 1997 1996
------------------------------------ ----------------- -------------- --------- ----------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Floating rate notes ("FRN") 1998 6.5% $ 40 $ 128
Long term notes 1998 - 2023 4% - 12% 1,194 1,023
Zero coupon notes 1998 - 1999 8.6% (a) 334 365
Australian dollar notes 1997 9% -- 55
Canadian dollar notes 1997 - 1998 7.0% - 9.125% 117 320
Japanese yen notes 1998 - 2000 0.5% - 4.6% 178 90
Swiss francs notes 1998 3.875% 120 103
Canadian dollar FRN 2003 5.89% 96 96
Surplus notes 2003 - 2025 6.875% - 8.3% 986 985
Commercial paper backed by long-term
credit agreements 1,500 1,000
Other notes payable 1998 - 2017 4% - 7.5% 63 32
---------- ----------
Sub-total............................................................................. 4,628 4,197
Less: current portion of long-term debt............................................ (355) (437)
---------- ----------
Total long-term debt.................................................................. $ 4,273 $ 3,760
========== ==========
</TABLE>
(a) The rate shown for zero coupon notes, which do not bear interest,
represents a level yield to maturity.
Payment of interest and principal on the surplus notes of $686 million
issued after 1993 may be made only with the prior approval of the
Commissioner of Insurance of the State of New Jersey.
In order to modify exposure to interest rate and currency exchange rate
movements, the Company utilizes derivative instruments, primarily interest
rate swaps, in conjunction with some of its debt issues. The effect of
these derivative instruments is included in the calculation of the interest
expense on the associated debt, and as a result, the effective interest
rates on the debt may differ from the rates reflected in the tables above.
Floating rates are determined by formulas and may be subject to certain
minimum or maximum rates.
Scheduled principal repayments of long-term debt as of December 31, 1997,
are as follows: $357 million in 1998, $808 million in 1999, $260 million in
2000, $32 million in 2001, $1,814 million in 2002 and $1,379 million
thereafter.
At December 31, 1997, the Company had $8,257 million in lines of credit
from numerous financial institutions of which $5,160 million were unused.
These lines of credit generally have terms ranging from 1 to 5 years.
22
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. EMPLOYEE BENEFIT PLANS
PENSION PLANS
The Company has one funded non-contributory defined benefit pension plan,
which covers substantially all of its employees. The Company also has
several non-contributory non-funded defined benefit plans covering certain
executives. Benefits are generally based on career average earnings and
credited length of service. The Company's funding policy is to contribute
annually an amount necessary to satisfy the Internal Revenue Service
contribution guidelines.
Prepaid and accrued pension costs are included in "Other assets" and "Other
liabilities," respectively, in the Company's consolidated statements of
financial position. The status of these plans as of September 30, adjusted
for fourth quarter activity related to funding activity and contractual
termination benefits is summarized below:
<TABLE>
<CAPTION>
1997 1996
--------------------------------- --------------------------------
ASSETS ACCUMULATED ASSETS ACCUMULATED
EXCEED BENEFITS EXCEED BENEFITS
ACCUMULATED EXCEED ACCUMULATED EXCEED
BENEFITS ASSETS BENEFITS ASSETS
--------------- -------------- -------------- -------------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Actuarial present value of
benefit obligation:
Vested benefit obligation.............. $ (4,129) $ (205) $ (3,826) $ (180)
============ ============ =========== =============
Accumulated benefit obligation......... $ (4,434) $ (226) $ (4,121) $ (198)
============ ============ =========== =============
Projected benefit obligation............. $ (5,238) $ (319) $ (4,873) $ (274)
Plan assets at fair value................ 8,489 -- 7,306 --
------------ ------------ ----------- -------------
Plan assets in excess of (less than)
projected benefit obligation........... 3,251 (319) 2,433 (274)
Unrecognized transition amount........... (662) 1 (769) 1
Unrecognized prior service cost.......... 317 10 356 11
Unrecognized net (gain) loss............. (1,689) 45 (916) 16
Additional minimum liability............. -- (11) -- (10)
Effect of fourth quarter activity........ (67) 4 (98) 4
------------ ------------ ----------- -------------
Prepaid (accrued) pension cost
at December 31......................... $ 1,150 $ (270) $ 1,006 $ (252)
============ ============ =========== =============
</TABLE>
Plan assets consist primarily of equity securities, bonds, real estate and
short-term investments, of which $6,022 million and $5,668 million are
included in Separate Account assets and liabilities at December 31, 1997
and 1996, respectively.
Effective December 31, 1996, The Prudential Securities Incorporated Cash
Balance Plan (the "PSI Plan") was merged into The Retirement System for
United States Employees and Special Agents of The Prudential Insurance
Company of America (the "Prudential Plan"). The name of the merged plan is
The Prudential Merged Retirement Plan ("Merged Retirement Plan"). All of
the assets of the Merged Retirement Plan are available to pay benefits to
participants and their beneficiaries who are covered by the Merged
Retirement Plan. The merger of the plans had no effect on the December 31,
1996 consolidated financial position or results of operations.
During 1996, the Prudential Plan was amended to provide cost of living
adjustments for retirees. The effect of this plan amendment increased
benefit obligations and unrecognized prior service cost by $170 million at
September 30, 1996. In addition, the Prudential Plan was amended to provide
contractual termination benefits to certain plan participants who were
notified between September 15, 1996 and December 31, 1997 that their
employment had been terminated. During 1997, the Prudential Retirement Plan
Document, a component of the Merged Retirement Plan was amended to extend
the contractual termination benefits to December 31, 1998. Costs related to
these amendments are reflected below in contractual termination benefits.
23
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. EMPLOYEE BENEFIT PLANS (CONTINUED)
Net periodic pension income included in "General and administrative
expenses" in the Company's consolidated statement of operations for the
years ended December 31, 1997, 1996 and 1995 include the following
components:
<TABLE>
<CAPTION>
1997 1996 1995
-------------- ------------- --------------
(IN MILLIONS)
<S> <C> <C> <C>
Service cost-benefits earned during the year......... $ 127 $ 140 $ 133
Interest cost on projected benefit obligation........ 376 354 392
Actual return on plan assets......................... (1,693) (748) (1,288)
Net amortization and deferral........................ 1,012 73 629
Contractual termination benefits..................... 30 63 --
-------------- ------------- --------------
Net periodic pension income.......................... $ (148) $ (118) $ (134)
============== ============= ==============
</TABLE>
The assumptions at September 30 used by the Company are to calculate the
projected benefit obligations as of that date and determine the pension
expense for the following fiscal year:
<TABLE>
<CAPTION>
1997 1996 1995
-------------- ------------- --------------
<S> <C> <C> <C>
Discount rate.......................................... 7.25% 7.75% 7.50%
Rate of increase in compensation levels................ 4.50% 4.50% 4.50%
Expected long-term rate of return on plan assets....... 9.50% 9.50% 9.00%
</TABLE>
OTHER POSTRETIREMENT BENEFITS
The Company provides certain life insurance and health care benefits for
its retired employees, their beneficiaries and covered dependents.
Substantially all of the Company's employees may become eligible to receive
benefits if they retire after age 55 with at least 10 years of service, or
under circumstances after age 50 with at least 20 years of continuous
service.
The Company has elected to amortize its transition obligation over 20
years. Post-retirement benefits are funded as considered necessary by
Company management. The Company's funding of its postretirement benefit
obligations totaled $43 million, $38 million and $94 million in 1997, 1996
and 1995, respectively.
In 1995 the Company modified the restrictions on certain post-retirement
plan assets to allow these assets to be used for benefits related to both
active and retired employees. Formerly, these benefits were available only
for retired employees. In connection with this modification, the Company
transferred $120 million from one of these plans in 1995. Of the $120
million transferred, $45 million went to Union Post-Retirement Benefits and
$75 million went to Union Medical Benefits.
24
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. EMPLOYEE BENEFIT PLANS (CONTINUED)
The status of the plan at September 30, adjusted for assets transferred to
the plan in the fourth quarter, is provided below. Accrued post-retirement
benefit costs are included in "Other liabilities" in the Company's
consolidated statement of financial position.
<TABLE>
<CAPTION>
1997 1996
---------- ----------
(IN MILLIONS)
<S> <C> <C>
Accumulated postretirement benefit obligation (APBO):
Retirees.......................................................... $ (1,516) $ (1,423)
Fully eligible active plan participants........................... (36) (35)
Other active plan participants.................................... (576) (544)
--------- ---------
Total APBO..................................................... (2,128) (2,002)
Plan assets at fair value............................................ 1,354 1,313
--------- ---------
Funded status........................................................ (774) (689)
Unrecognized transition amount....................................... 707 787
Unrecognized net gain ............................................... (364) (428)
Effects of fourth quarter activity................................... 33 28
--------- ---------
Accrued postretirement benefit cost at December 31................... $ (398) $ (302)
========= =========
</TABLE>
Plan assets with respect to this coverage consist of group and individual
variable life insurance policies, group life and health contracts, common
stocks, U.S. government securities and short-term investments. Plan assets
include $1,044 million and $1,003 million of Company insurance policies and
contracts at December 31, 1997 and 1996, respectively.
Net periodic postretirement benefit cost included in "General and
administrative expenses" for the years ended December 31, 1997, 1996 and
1995 includes the following components:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ----------- -----------
(IN MILLIONS)
<S> <C> <C> <C>
Service cost.............................................. $ 38 $ 45 $ 44
Interest cost............................................. 149 157 169
Actual return on plan assets.............................. (120) (105) (144)
Net amortization and deferral............................. 70 53 111
----------- ----------- -----------
Net periodic postretirement benefit cost.................. $ 137 $ 150 $ 180
=========== =========== ===========
</TABLE>
The following assumptions at September 30 are used to calculate the APBO as
of that date and determine postretirement benefit expense for the following
fiscal year:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Discount rate............................................. 7.25% 7.75% 7.50%
Rate of increase in compensation levels................... 4.5% 4.5% 4.5%
Expected long-term rate of return on plan assets.......... 9.0% 9.0% 8.0%
Health care cost trend rates.............................. 8.2-11.8% 8.5-12.5% 8.9-13.3%
Ultimate health care cost trend rate after gradual
decrease until 2006....................................... 5.0% 5.0% 5.0%
</TABLE>
25
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. EMPLOYEE BENEFIT PLANS (CONTINUED)
The effect of a 1% increase in health care cost trend rates for each future
year on the following costs at December 31, are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
(IN MILLIONS)
<S> <C> <C> <C>
Accumulated postretirement benefit obligation............ $ (218) $ (207) $ (217)
Service and interest costs............................... 24 25 27
</TABLE>
POSTEMPLOYMENT BENEFITS
The Company accrues postemployment benefits primarily for life and health
benefits provided to former or inactive employees who are not retirees. The
net accumulated liability for these benefits at December 31, 1997 and 1996
was $144 million and $156 million, respectively, and is included in "Other
liabilities."
OTHER EMPLOYEE BENEFITS
The Company sponsors voluntary savings plans for employees (401(k) plans).
The plans provide for salary reduction contributions by employees and
matching contributions by the Company of up to three percent of annual
salary, resulting in $63 million, $57 million, and $61 million of expenses
included in "General and administrative expenses" for 1997, 1996 and 1995,
respectively.
8. INCOME TAXES
The components of income tax expense for the years ended December 31, were
as follows:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
(IN MILLIONS)
<S> <C> <C> <C>
Current tax expense (benefit):
U.S...................................................... $ (158) $ 255 $ 1,189
State and Iocal.......................................... 48 103 38
Foreign.................................................. 64 48 66
--------- --------- ---------
Total.................................................... $ (46) $ 406 $ 1,293
========= ========= =========
Deferred tax expense (benefit):
U.S...................................................... $ 227 $ (442) $ (166)
State and Iocal.......................................... 3 (2) (10)
Foreign.................................................. 33 54 9
--------- --------- ---------
Total.................................................... $ 263 $ (390) $ (167)
========= ========= =========
Total income tax expense................................. $ 217 $ 16 $ 1,126
========= ========= =========
</TABLE>
26
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. INCOME TAXES (CONTINUED)
The Company's income tax expense for the years ended December 31, differs
from the amount computed by applying the expected federal income tax rate
of 35% to income from operations before income taxes for the following
reasons:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
(IN MILLIONS)
<S> <C> <C> <C>
Expected federal income tax expense.......................... $ 290 $ 382 $ 829
Equity tax................................................... (91) (365) 163
State and local income taxes................................. 51 100 28
Tax-exempt interest and dividend received deduction.......... (67) (50) (77)
Other........................................................ 34 (51) 183
-------- -------- --------
Total income tax expense..................................... $ 217 $ 16 $ 1,126
======== ======== ========
</TABLE>
Deferred tax assets and liabilities at December 31, resulted from the items
listed in the following table:
<TABLE>
<CAPTION>
1997 1996
------- --------
(IN MILLIONS)
<S> <C> <C>
Deferred tax assets
Insurance reserves.......................................... $ 1,482 $ 1,316
Policyholder dividends...................................... 250 257
Net operating loss carryforwards............................ 80 268
Depreciation................................................ -- 44
Litigation related reserves................................. 178 297
Employee benefits........................................... 42 10
Other....................................................... 360 329
-------- --------
Deferred tax assets before valuation allowance.............. 2,392 2,521
Valuation allowance......................................... (18) (36)
-------- --------
Deferred tax assets after valuation allowance............... 2,374 2,485
-------- --------
Deferred tax liabilities
Investments................................................. 1,867 1,183
Deferred acquisition costs.................................. 1,525 1,707
Depreciation................................................ 36 --
Other....................................................... 73 110
-------- --------
Deferred tax liabilities.................................... 3,501 3,000
-------- --------
Net deferred tax liability.................................... $ 1,127 $ 515
======== ========
</TABLE>
The Company's income taxes payable of $500 million and $1,544 million
includes a $627 million current income tax receivable at December 31, 1997
and a $1,029 million current income taxes payable at December 31, 1996.
27
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. INCOME TAXES (CONTINUED)
Management believes that based on its historical pattern of taxable income,
the Company will produce sufficient income in the future to realize its net
deferred tax asset after valuation allowance. Adjustments to the valuation
allowance will be made if there is a change in management's assessment of
the amount of the deferred tax asset that is realizable. At December 31,
1997, the Company had state non-life operating loss carryforwards for tax
purposes approximating $800 million.
The Internal Revenue Service (the "Service") has completed an examination
of the consolidated federal income tax return through 1989. The Service has
examined the years 1990 through 1992. Discussions are being held with the
Service with respect to proposed adjustments, however, management believes
there are adequate defenses against, or sufficient reserves to provide for,
such adjustments. The Service has begun their examination of the years 1993
through 1995.
9. EQUITY
RECONCILIATION OF STATUTORY SURPLUS AND NET INCOME
Accounting practices used to prepare statutory financial statements for
regulatory purposes differ in certain instances from GAAP. The following
table reconciles the Company's statutory net income and surplus as of and
for the years ended December 31, determined in accordance with accounting
practices prescribed or permitted by the New Jersey Department of Banking
and Insurance with net income and equity determined using GAAP:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
(IN MILLIONS)
<S> <C> <C> <C>
STATUTORY NET INCOME........................................... $ 1,471 $ 1,402 $ 478
Adjustments to reconcile to net income on a GAAP basis:
Insurance revenues and expenses.............................. 12 (478) (496)
Income taxes................................................. 601 439 (596)
Valuation of investments..................................... (62) 121 --
Realized investment gains.................................... 702 327 1,562
Litigation and other reserves................................ (1,975) (906) --
Other, net................................................... (139) 173 295
-------- -------- --------
GAAP NET INCOME................................................ $ 610 $ 1,078 $ 1,243
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
1997 1996
-------- --------
(IN MILLIONS)
<S> <C> <C>
STATUTORY SURPLUS.............................................. $ 9,242 $ 9,375
Adjustments to reconcile to equity on a GAAP basis:
Deferred policy acquisition costs............................ 5,994 6,291
Valuation of investments..................................... 8,067 5,624
Future policy benefits and policyholder account balances..... (2,906) (1,976)
Non-admitted assets.......................................... 1,643 1,285
Income taxes................................................. (1,070) (654)
Surplus notes................................................ (986) (985)
Other, net................................................... (266) (437)
-------- --------
GAAP EQUITY.................................................... $ 19,718 $ 18,523
======== ========
</TABLE>
28
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. EQUITY (CONTINUED)
The New York State Insurance Department ("Department") recognizes only
statutory accounting for determining and reporting the financial condition
of an insurance company, for determining its solvency under the New York
Insurance Law and for determining whether its financial condition warrants
the payment of a dividend to its policyholders. No consideration is given
by the Department to financial statements prepared in accordance with GAAP
in making such determinations.
10. OPERATING LEASES
The Company and its subsidiaries occupy leased office space in many
locations under various long-term leases and have entered into numerous
leases covering the long-term use of computers and other equipment. At
December 31, 1997, future minimum lease payments under non-cancelable
operating leases are estimated as follows:
(IN MILLIONS)
1998........................................ $ 313
1999........................................ 277
2000........................................ 230
2001........................................ 201
2002........................................ 171
Remaining years after 2002.................. 833
-----------
Total....................................... $ 2,025
===========
Rental expense incurred for the years ended December 31, 1997 and 1996 was
approximately $352 million and $343 million, respectively.
11. DIVESTITURES
In October 1995, the Company completed the sale of its reinsurance segment,
Prudential Reinsurance Holdings, Inc., through an initial public offering
of common stock. As a result of the sale, an after-tax loss of $297 million
was recorded in 1995.
On January 26, 1996, the Company entered into a definitive agreement to
sell substantially all the assets of Prudential Home Mortgage Company, Inc.
It has also liquidated certain mortgage-backed securities and extended
warehouse losses, asset write downs, and other costs directly related to
the planned sale. The Company recorded an after-tax loss in 1995 of $98
million which includes operating gains and losses, asset write downs and
other costs directly related with the planned sale. The net assets of the
mortgage banking segment at December 31, 1995 was $78 million, comprised of
$4,293 million in assets and $4,215 million in liabilities.
On July 31, 1996, the Company sold a substantial portion of its Canadian
Branch business to the London Life Insurance Company ("London Life"). This
transaction was structured as a reinsurance transaction whereby London Life
assumed total liabilities of the Canadian Branch equal to $3,291 million as
well as a related amount of assets equal to $3,205 million. This transfer
resulted in a reduction of policy liabilities of $3,257 million and a
corresponding reduction in invested assets. The Company recognized an
after-tax gain in 1996 of $116 million as a result of this transaction,
recorded in "Realized investment gains, net."
12. FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair values presented below have been determined using available
information and valuation methodologies. Considerable judgment is applied
in interpreting data to develop the estimates of fair value. Accordingly,
such estimates presented may not be realized in a current market exchange.
The use of different market assumptions and/or estimation methodologies
could have a material effect on the estimated fair values. The following
methods and assumptions were used in calculating the fair values (for all
other financial instruments presented in the table, the carrying value
approximates fair value).
29
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
FIXED MATURITIES AND EQUITY SECURITIES
Fair values for fixed maturities and equity securities, other than private
placement securities, are based on quoted market prices or estimates from
independent pricing services. Fair values for private placement securities
are estimated using a discounted cash flow model which considers the
current market spreads between the U.S. Treasury yield curve and corporate
bond yield curve, adjusted for the type of issue, its current credit
quality and its remaining average life. The estimated fair value of certain
non-performing private placement securities is based on amounts estimated
by management.
MORTGAGE LOANS ON REAL ESTATE
The fair value of the mortgage loan portfolio is primarily based upon the
present value of the scheduled future cash flows discounted at the
appropriate U.S. Treasury rate, adjusted for the current market spread for
a similar quality mortgage. For certain non-performing and other loans, the
fair value is based upon the present value of expected future cash flows
discounted at the appropriate U.S. Treasury rate adjusted for current
market spread for a similar quality mortgage.
POLICY LOANS
The estimated fair value of policy loans is calculated using a discounted
cash flow model based upon current U.S. Treasury rates and historical loan
repayments.
DERIVATIVE FINANCIAL INSTRUMENTS
The fair value of swap agreements is estimated based on the present value
of future cash flows under the agreements discounted at the applicable zero
coupon U.S. Treasury rate and swap spread. The fair value of forwards,
futures and options is estimated based on market quotes for a transaction
with similar terms. The fair value of loan commitments is derived by
comparing the contractual stream of fees with such fee streams adjusted to
reflect current market rates that would be applicable to instruments of
similar type, maturity, and credit standing.
POLICYHOLDERS' ACCOUNT BALANCES
Fair values of policyholders' account balances are estimated using
discounted projected cash flows, based on interest rates being offered for
similar contracts, with maturities consistent with those remaining for the
contracts being valued.
DEBT
The estimated fair value of short-term and long-term debt is derived by
using discount rates based on the borrowing rates currently available to
the Company for debt with similar terms and remaining maturities.
30
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
The following table discloses the carrying amounts and estimated fair
values of the Company's financial instruments at December 31:
<TABLE>
<CAPTION>
1997 1996
-------------------------- ------------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
------------ ----------- ------------ --------------
FINANCIAL ASSETS: (IN MILLIONS)
<S> <C> <C> <C> <C>
Other than trading:
- -------------------
Fixed maturities:
Available for sale....................... $ 75,270 $ 75,270 $ 66,553 $ 66,553
Held to maturity......................... 18,700 19,894 20,403 21,362
Equity securities........................... 2,810 2,810 2,622 2,622
Mortgage loans on real estate............... 16,004 17,153 17,097 17,963
Policy loans................................ 6,827 6,994 6,692 6,613
Securities purchased under
agreements to resell .................... 8,661 8,661 5,347 5,347
Cash collateral for borrowed securities..... 5,047 5,047 2,416 2,416
Short-term investments...................... 12,106 12,106 9,294 9,294
Cash ....................................... 3,636 3,636 2,091 2,091
Separate Accounts assets.................... 74,046 74,046 63,358 63,358
Derivative financial instruments............ 24 35 16 32
Trading:
- --------
Trading account assets...................... 6,044 6,044 4,219 4,219
Receivables from broker-dealer clients...... 6,273 6,273 5,281 5,281
Derivative financial instruments............ 979 979 904 904
FINANCIAL LIABILITIES:
Other than trading:
- -------------------
Policyholders' account balances............. 32,941 33,896 36,009 37,080
Securities sold under
agreements to repurchase................. 12,347 12,347 7,503 7,503
Cash collateral for loaned securities....... 14,117 14,117 8,449 8,449
Short-term and long-term debt............... 11,047 11,020 10,322 10,350
Securities sold but not yet purchased....... 3,533 3,533 1,900 1,900
Separate Accounts liabilities............... 73,658 73,658 62,845 62,845
Derivative financial instruments............ 32 47 32 45
Trading:
- --------
Payables to broker-dealer clients........... 3,338 3,338 3,018 3,018
Derivative financial instruments ........... 1,088 1,088 1,120 1,120
</TABLE>
31
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. DERIVATIVE AND OFF-BALANCE SHEET CREDIT-RELATED INSTRUMENTS
DERIVATIVE FINANCIAL INSTRUMENTS
The tables below summarize the Company's outstanding positions by
derivative instrument types as of December 31, 1997 and 1996. The amounts
presented are classified as either trading or other than trading, based on
management's intent at the time of contract inception and throughout the
life of the contract. The table includes the estimated fair values of
outstanding derivative positions only and does not include the changes in
fair values of associated financial and non-financial assets and
liabilities, which generally offset derivative notional amounts. The fair
value amounts presented also do not reflect the netting of amounts pursuant
to right of setoff, qualifying master netting agreements with
counterparties or collateral arrangements.
DERIVATIVE FINANCIAL INSTRUMENTS
DECEMBER 31, 1997
(IN MILLIONS)
<TABLE>
<CAPTION>
TRADING OTHER THAN TRADING TOTAL
------------------------ ----------------------- ------------------------------------
ESTIMATED ESTIMATED CARRYING ESTIMATED
NOTIONAL FAIR VALUE NOTIONAL FAIR VALUE NOTIONAL AMOUNT FAIR VALUE
----------- ----------- ---------- ----------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Swaps:
Assets.............. $ 7,759 $ 394 $ 61 $ -- $ 7,820 $ 395 $ 394
Liabilities......... 6,754 489 13 3 6,767 493 491
Forwards:
Assets.............. 29,511 429 1,031 23 30,542 452 452
Liabilities......... 29,894 459 647 7 30,541 466 466
Futures:
Assets.............. 4,103 51 46 -- 4,149 51 51
Liabilities......... 3,064 50 3,320 21 6,384 71 71
Options:
Assets.............. 6,893 105 239 -- 7,132 105 105
Liabilities......... 4,165 90 5 -- 4,170 90 90
Loan Commitments:
Assets.............. -- -- 317 12 317 -- 12
Liabilities......... -- -- 524 16 524 -- 16
----------- ----------- ---------- ----------- ----------- ---------- -----------
Total:
Assets.............. $ 48,266 $ 979 $ 1,694 $ 35 $ 49,960 $ 1,003 $ 1,014
=========== =========== ========== =========== =========== ========== ===========
Liabilities......... $ 43,877 $ 1,088 $ 4,509 $ 47 $ 48,386 $ 1,120 $ 1,134
=========== =========== ========== =========== =========== ========== ===========
</TABLE>
32
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. DERIVATIVE AND OFF-BALANCE SHEET CREDIT-RELATED INSTRUMENTS (CONTINUED)
DERIVATIVE FINANCIAL INSTRUMENTS
DECEMBER 31, 1997
(IN MILLIONS)
<TABLE>
<CAPTION>
TRADING OTHER THAN TRADING TOTAL
------------------------ ----------------------- ------------------------------------
ESTIMATED ESTIMATED CARRYING ESTIMATED
NOTIONAL FAIR VALUE NOTIONAL FAIR VALUE NOTIONAL AMOUNT FAIR VALUE
----------- ----------- ---------- ----------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Swaps:
Assets.............. $ 8,080 $ 481 $ 398 $ 10 $ 8,478 $ 481 $ 491
Liabilities......... 8,316 756 139 17 8,455 771 773
Forwards:
Assets.............. 24,275 367 489 13 24,764 376 380
Liabilities......... 20,103 308 920 10 21,023 318 318
Futures:
Assets.............. 2,299 24 3 -- 2,302 24 24
Liabilities......... 2,573 30 1,087 6 3,660 36 36
Options:
Assets.............. 2,981 32 2,083 7 5,064 39 39
Liabilities......... 2,653 26 437 12 3,090 27 38
Loan Commitments:
Assets.............. -- -- 163 2 163 -- 2
Liabilities......... -- -- 445 -- 445 -- --
----------- ----------- ---------- ----------- ----------- ---------- -----------
Total:
Assets.............. $ 37,635 $ 904 $ 3,136 $ 32 $ 40,771 $ 920 $ 936
=========== =========== ========== =========== =========== ========== ===========
Liabilities......... $ 33,645 $ 1,120 $ 3,028 $ 45 $ 36,673 $ 1,152 $ 1,165
=========== =========== ========== =========== =========== ========== ===========
</TABLE>
CREDIT RISK
The current credit exposure of the Company's derivative contracts is
limited to the fair value at the reporting date. Credit risk is managed by
entering into transactions with creditworthy counterparties and obtaining
collateral where appropriate and customary. The Company also attempts to
minimize its exposure to credit risk through the use of various credit
monitoring techniques. Approximately 95% of the net credit exposure for the
Company from derivative contracts is with investment-grade counterparties.
Net trading revenues for the years ended December 31, 1997, 1996 and 1995
relating to forwards, futures and swaps were $54 million, $37 million, $(8)
million; $42 million, $32 million, $(11) million; and $110 million, $42
million, $3 million respectively. Net trading revenues for options were not
material. Average fair values for trading derivatives in an asset position
during the years ended December 31, 1997 and 1996 were $1,015 million and
$881 million, respectively, and for derivatives in a liability position
were $1,166 million and $1,038 million, respectively. Of those derivatives
held for trading purposes at December 31, 1997, 52% of the notional amount
consisted of interest rate derivatives, 40% consisted of foreign currency
derivatives, and 8% consisted of equity and commodity derivatives. Of those
derivatives held for purposes other than trading at December 31, 1997, 72%
of notional consisted of interest rate derivatives and 28% consisted of
foreign currency derivatives.
33
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. DERIVATIVE AND OFF-BALANCE SHEET CREDIT-RELATED INSTRUMENTS (CONTINUED)
OFF-BALANCE SHEET CREDIT-RELATED INSTRUMENTS
During the normal course of its business, the Company utilizes financial
instruments with off-balance sheet credit risk such as commitments,
financial guarantees, loans sold with recourse and letters of credit.
Commitments include commitments to purchase and sell mortgage loans, the
unfunded portion of commitments to fund investments in private placement
securities, and unused credit card and home equity lines. The Company also
provides financial guarantees incidental to other transactions and letters
of credit that guarantee the performance of customers to third parties.
These credit-related financial instruments have off-balance sheet credit
risk because only their origination fees, if any, and accruals for probable
losses, if any, are recognized until the obligation under the instrument is
fulfilled or expires. These instruments can extend for several years and
expirations are not concentrated in any period. The Company seeks to
control credit risk associated with these instruments by limiting credit,
maintaining collateral where customary and appropriate, and performing
other monitoring procedures.
The fair value of asset positions in these instruments, which represents
the Company's current exposure to credit loss from other parties'
non-performance, was $1,014 million and $936 million at December 31, 1997
and 1996, respectively.
14. CONTINGENCIES AND LITIGATION
FINANCIAL GUARANTEE AGREEMENT
In connection with the sale in 1995 of its wholly-owned subsidiary
Prudential Reinsurance Company ("Pru Re"), the Company's subsidiary,
Gibraltar Casualty Insurance Company ("Gibraltar") entered into a stop-loss
reinsurance agreement with Pru Re whereby Gibraltar has reinsured up to
$375 million of the first $400 million of aggregate adverse loss
development on reserves recorded by Pru Re at June 30, 1995. Gibraltar also
has entered into several quota share reinsurance arrangements with Pru Re
whereby certain medical malpractice, direct insurance and casualty
reinsurance pool risks previously underwritten by Pru Re prior to June 30,
1995 were ceded to Gibraltar. The Company has guaranteed Gibraltar's
obligations arising under each of these contracts subject to a limit of
$375 million for the stop-loss agreement and $400 million for the other
agreements. Through December 31, 1997, Gibraltar has incurred $285 million
in losses under the stop-loss agreement, including $45 million in 1997.
Gibraltar has paid $165 million to Pru Re under the stop-loss agreement.
The Company has not been required to fund losses arising under the other
arrangements.
ENVIRONMENTAL AND ASBESTOS-RELATED CLAIMS
Certain of the Company's subsidiaries received claims under expired
contracts which assert alleged injuries and/or damages relating to or
resulting from toxic torts, toxic waste and other hazardous substances. The
liabilities for such claims cannot be estimated by traditional reserving
techniques. As a result of judicial decisions and legislative actions, the
coverage afforded under these contracts may be expanded beyond their
original terms. Extensive litigation between insurers and insureds over
these issues continues and the outcome is not predictable. In establishing
the liability for unpaid claims for these losses, management considered the
available information. However, given the expansion of coverage and
liability by the courts and legislatures in the past, and potential for
other unfavorable trends in the future, the ultimate cost of these claims
could increase from the levels currently established.
MANAGED CARE REIMBURSEMENT
In 1997, the Company continued to review its obligations under certain
managed care arrangements for possible failure to comply with contractual
and regulatory requirements. The estimated cost to the Company for these
reimbursements increased by $115 million in 1997, bringing the total
provision to $265 million. As of December 31, 1997, $163 million has been
paid or credited to customers. It is the opinion of management that the
remaining reserves of $102 million at December 31, 1997 represent a
reasonable estimate of remaining reimbursements to customers and other
related costs.
LITIGATION
Various lawsuits against the Company have arisen in the course of the
Company's business. In certain of these matters, large and/or indeterminate
amounts are sought.
Three putative class actions and approximately 677 individual actions were
pending against the Company in the United States as of January 31, 1998
brought on behalf of those persons who purchased life insurance policies
allegedly because of deceptive sales practices engaged in by the Company
and its insurance agents in violation of state and federal laws. The
Company anticipates additional suits may be filed by individuals who opted
out of the class action settlement described below. The sales practices
alleged to have occurred are contrary to Company policy. Some of
34
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. CONTINGENCIES AND LITIGATION (CONTINUED)
these cases seek substantial damages while others seek unspecified
compensatory, punitive and treble damages. The Company intends to defend
these cases vigorously.
A Multi-State Life Insurance Task Force (the "Task Force"), comprised of
insurance regulators from 29 states and the District of Columbia, was
formed in April 1995 to conduct a review of sales and marketing practices
throughout the life insurance industry. As the largest life insurance
company in the United States, the Company was the initial focus of the Task
Force examination. On July 9, 1996, the Task Force released its report on
the Company's activities. The Task Force found that some sales of life
insurance policies by the Company had been improper. Based on the findings,
the Task Force recommended, and the Company agreed to, a series of fines
allocated to all 50 states and the District of Columbia. In addition, the
Task Force recommended a remediation program pursuant to which the Company
would offer relief to the policyowners who were misled when they purchased
permanent life insurance policies in the United States from 1982 to 1995.
On October 28, 1996, the Company entered into a Stipulation of Settlement
with attorneys for the plaintiffs in the consolidated class action lawsuit
pending in a Multi-District Litigation proceeding in the federal court in
New Jersey. The class action suit involved alleged improprieties in
connection with the Company's sale, servicing and operation of permanent
life insurance policies from 1982 through 1995. Pursuant to the settlement,
the Company agreed to provide certain enhancements and changes to the
remediation program previously accepted by the Task Force, including some
additional remedies. In addition, the Company agreed that it would incur a
minimum cost of $410 million in providing remedies to policyowners under
the program and, in specified circumstances, agreed to make certain other
payments and guarantees. Under the terms of the settlement, the Company
agreed to a minimum average cost per remedy of $2,364 for up to 330,000
claims remedied and also agreed to provide additional compensation to be
determined by formula that will range in aggregate amount from $50 million
to $300 million depending on the total number of claims remedied. At the
end of the remediation program's claim evaluation process, the Court will
determine how the additional compensation will be distributed.
The terms of the remediation program described above were enhanced again in
February 1997 pursuant to agreements reached with several states that had
not previously accepted the terms of the program. These changes were
incorporated as amendments to the above-described Stipulation of Settlement
and related settlement documents, and the amended Stipulation of Settlement
was approved as fair to class members by the United States District Court
for the District of New Jersey in March 1997. By that point in time, the
Company had entered into agreements with all 50 states and the District of
Columbia pursuant to which each jurisdiction had accepted the remediation
plan and the Company had agreed to pay approximately $65 million in fines,
penalties and related payments.
The decision of the U.S. District Court to certify a class in the
above-described litigation for settlement purposes only and to approve the
class action settlement as described in the amended Stipulation of
Settlement is presently on appeal to the U.S. Court of Appeals for the
Third Circuit. The appellants claim that the District Court erred in
certifying a class and in finding that the terms of the settlement are fair
to the class.
Pursuant to the state agreements and the amended Stipulation of Settlement,
as approved by the U.S. District Court, the Company initiated its
remediation program in 1997. The Company mailed packages and provided broad
class notice to the owners of approximately 10.7 million policies eligible
to participate in the remediation program, informing them of their rights.
Owners of approximately 21,800 policies elected to be excluded from the
class action settlement. Of those eligible to participate in the
settlement, policyowners who believed they were misled were invited to file
a claim through an Alternative Dispute Resolution ("ADR") process. The ADR
process was established to enable the company to discharge its liability to
the affected policyowners. Policyowners who did not wish to file a claim in
the ADR process were permitted to choose from options available under Basic
Claim Relief, such as preferred rate premium loans, or annuities, mutual
fund shares or life insurance policies that the Company will enhance.
The owners of approximately 1.16 million policies responded to these
notices by indicating an intent to file an ADR claim. All policyholders who
responded were provided an ADR claim form for completion and submission.
Approximately 635,000 claim forms were completed and returned as of January
31, 1998. Management does not believe the number of ADR claims that will be
completed and returned will increase significantly. In addition, the owners
of approximately 510,000 policies indicated an interest in a Basic Claim
Relief remedy. The ADR process requires that individual claim files be
reviewed by one or more independent claim evaluators. Management does not
believe costs associated with providing Basic Claim Relief will be material
to the Company's financial position or results of operations.
35
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. CONTINGENCIES AND LITIGATION (CONTINUED)
In 1996, the Company recorded in its Statement of Operations, the minimum
cost of $410 million as agreed to in the settlement. Management had no
better information available at that time upon which to make a reasonable
estimate of losses. Management now has additional information which allows
for computation of a reasonable estimate of losses associated with ADR
claims. Based on this additional information, in 1997, management had
increased the estimated liability for the cost of remedying policyholder
claims in the ADR process by $1.64 billion before taxes to approximately
$2.05 billion before taxes of which $1.80 billion has been funded in a
settlement trust as described in Note 3. While management believes these
are reasonable estimates based on information currently available, the
ultimate amount of the total cost of remedied policyholder claims is
dependent on complex and varying factors, including actual claims by
eligible policyholders, the relief options chosen and the dollar value of
those options. There are also additional elements of the ADR process which
cannot be fully evaluated at this time (e.g., claims which may be
successfully appealed) which could increase this estimate.
Litigation is subject to many uncertainties, and given the complexity and
scope of these suits, their outcome cannot be predicted. It is also not
possible to predict the likely results of any regulatory inquiries or their
effect on litigation which might be initiated in response to widespread
media coverage of these matters. Accordingly, management is unable to make
a meaningful estimate of the amount or range of loss that could result from
an unfavorable outcome of all pending litigation and the regulatory
inquiries. It is possible that the results of operations or the cash flow
of the Company, in particular quarterly or annual periods, could be
materially affected by an ultimate unfavorable outcome of certain pending
litigation and regulatory matters. Management believes, however, that the
ultimate outcome of all pending litigation and regulatory matters referred
to above should not have a material adverse effect on the Company's
financial position, after consideration of applicable reserves.
The Company and a number of other insurers ("the Consortium") entered into
a Reinsurance and Participation Agreement (the "Agreement") with MBL Life
Assurance Corporation ("MBLLAC") and others, under which the Company and
the other insurers agreed to reinsure certain payments to be made to
contract holders by MBLLAC in connection with the plan of rehabilitation of
Mutual Benefit Life Insurance Company. Under the agreement, the Consortium,
subject to certain terms and conditions, will indemnify MBLLAC for the
ultimate net loss sustained by MBLLAC on each contract subject to the
Agreement. The ultimate net loss represents the amount by which the
aggregate required payments exceed the fair market value of the assets
supporting the covered contracts at the time such payments are due. The
Company's share of any net loss is 30.55%. The Company has determined that
it does not expect to make any payments to MBLLAC under the agreement. The
Company concluded this after testing a wide range of potentially adverse
scenarios during the rehabilitation period for MBLLAC.
15. SUBSEQUENT EVENTS
On February 10, 1998, the Company's Board of Directors authorized
management to take the preliminary steps necessary to allow the Company to
demutualize and become a publicly-traded company. The Company has begun
discussions with the New Jersey Department of Banking and Insurance,
leaders in the New Jersey State Legislature, as well as other key
regulatory agencies around the country. The New Jersey State Legislature
must first pass a law permitting demutualization. The New Jersey Department
of Banking and Insurance, the Company's Board and a majority of
participating policyholders must ultimately approve the Company's plan for
demutualization.
* * * * *
36
<PAGE>
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.
- -------------------------------------------------------------------------------
--------------------------------------
LOGO
- -------------------------------------------------------------------------------
The Prudential Insurance Company of America
751 Broad Street, Newark, New Jersey 07102-3777 LOGO
<PAGE>
PART C
OTHER INFORMATION
<PAGE>
CONTENTS OF REGISTRATION STATEMENT
This registration statement comprises the following papers and documents:
The facing sheet.
The prospectus consisting of 81 pages.
The signatures for:
(1) Prudential's Annuity Plan Account-2 and The Prudential Insurance
Company of America; and
(2) Prudential's Gibraltar Fund, Inc.
Consent of Price Waterhouse LLP, independent auditors, regarding reports on:
(1) Prudential's Annuity Plan Account-2 and The Prudential Insurance
Company of America; and
(2) Prudential's Gibraltar Fund, Inc.
Responses of Prudential's Gibraltar Fund, Inc. to Items of Part C of Form N-1A:
Item 24. Financial Statements and Exhibits;
Item 25. Persons Controlled by or under Common Control with Prudential's
Gibraltar Fund, Inc.;
Item 26. Number of Holders of Securities;
Item 27. Indemnification;
Item 28. Business and other Connections of Investment Advisor;
Item 29. Principal Underwriter;
Item 30. Location of Accounts and Records;
Item 31. Management Services; and
Item 32. Undertakings.
The Exhibits listed on the following pages pertaining to:
(1) Variable Annuity Contracts; and
(2) Prudential's Gibraltar Fund, Inc.
Item 24(a) List of Financial Statements of Prudential's Annuity Plan
Account-2 and The Prudential Insurance Company of America
Filed as Part of this Registration Statement.
Prudential's Annuity Plan Account-2 -- Statements Filed as Part of Part A:
Statement of Net Assets as of December 31, 1997;
Statement of Operations -- Year Ended December 31, 1997; and
Statements of Changes in Net Assets -- Years Ended December 31, 1997 and
1996.
Cosolidated Financial Statements of The Prudential Insurance Company of America
and Subsidiaries -- Statements Filed as Part of Part A:
Statements of Financial Position as of December 31, 1997 and 1996;
Statements of Operations and Changes in Surplus and Asset Valuation Reserve
(AVR)/Mandatory Securities Valuation Reserve (MSVR) -- Years Ended December
31, 1997, 1996, and 1995; and Statements of Cash Flows -- Years Ended
December 31, 1997, 1996, and 1995.
List of Financial Statements of Prudential's Gibraltar Fund, Inc. Filed as Part
of this Registration Statement -- Statements Filed as Part of Part A:
Statement of Assets and Liabilities including Schedule of Investments as of
December 31, 1997;
Statement of Operations -- Year Ended December 31, 1997;
Statements of Changes in Net Assets -- Years Ended December 31, 1997 and
1996; and
Financial Highlights -- Ten Years Ended December 31, 1997.
C-1
<PAGE>
<TABLE>
<CAPTION>
EXHIBITS
VARIABLE ANNUITY CONTRACTS
<S> <C> <C>
1. COPIES OF EXHIBITS REQUIRED BY INCORPORATED BY INCORPORATED BY REFERENCE
PARAGRAPH A OF INSTRUCTIONS AS REFERENCE TO THE TO THE FOLLOWING:
TO EXHIBITS IN FORM N-8B-2 FOLLOWING EXHIBITS
(OTHER PARAGRAPH A EXHIBITS TO FORM N-8B-2,
ARE NOT APPLICABLE): FILE NO. 811-1849.
(1) The resolutions of the Board A(1)
of Directors of Prudential,
adopted on August 13, 1968,
establishing Prudential's
Annuity Plan Account-2.
(2)(a) Custodian Agreement Exhibit A(2) to Post-Effective
between Chemical Bank Amendment No. 17 to Form S-6,
and Prudential. Registration No. 2-52715.
(3)(a) Distribution Agreement Exhibit A(3)(a) to Post-
between Prudential's Effective Amendment No. 30 to
Investment Plan Account, Form S-6, Registration No.
Prudential's Annuity Plan 2-52715.
Account, Prudential's
Annuity Plan Account-2 and
Pruco Securities Corporation.
(3)(c) Schedule of Sales Commissions Exhibit A(3)(c) to Post-
referred to in Item 38(c). Effective Amendment No. 12,
Registration No. 2-32684.
(5) Copy of the Variable Annuity Exhibit A(5) to Post-Effective
Contract between Amendment No. 12, Registration
Prudential and the Contract- No. 2-32684.
holder.
(5)(i) Copy of Texas Variable Exhibit A(5)(i) to Post-
Annuity Endorsement to Effective Amendment No. 1,
the Variable Annuity Registration No. 2-32684.
Contract.
(5)(ii) Copy of Rights Endorsement Exhibit A(5)(ii) to Post-
FSPQ 1060 to the Variable Effective Amendment No. 1,
Annuity Contract, currently Registration No. 2-32684.
used for trustee-owned
Contracts under allocated
corporate pension and
profit-sharing plans.
(5)(iii) Copy of Rights Endorsement Exhibit A(5)(iii) to Post-
FSPQ 1061 to the Variable Effective Amendment No. 1,
Annuity Contract, currently Registration No. 2-32684.
used for employee-owned
contracts under corporate
pension and profit sharing
plans.
(5)(iv) Copy of Rights Endorsement Exhibit A(5)(iv) to Post-
FSPQ 1062 to the Variable Effective Amendment No. 1,
Annuity Contract, currently Registration No. 2-32684.
used for employee-owned
contracts under H.R. 10
pension plans.
</TABLE>
C-2
<PAGE>
LISTING OF VARIABLE ANNUITY EXHIBITS -- PAGE 2
<TABLE>
<CAPTION>
<S> <C> <C>
(5)(v) Copy of Rights Endorsement Exhibit A(5)(v) to Post-
FSPQ 1063 to the Variable Effective Amendment No. 1,
Annuity Contract, currently Registration No. 2-32684.
used for trustee-owned
contracts under H.R. 10
pension plans.
(5)(vi) Copy of Rights Endorsement Exhibit A(5)(vi) to Post-
FSPQ 1064 to the Variable Effective Amendment No. 1,
Annuity Contract, currently Registration No. 2-32684.
used for employee-owned
contracts under custodian
H.R. 10 pension plans.
(5)(vii) Copy of Rights Endorsement Exhibit A(5)(vii) to Post-
FSPQ 1065 to the Variable Effective Amendment No. 1,
Annuity Contract, currently Registration No. 2-32684.
used for employee-owned
contracts under 403(b)
annuity purchase plans.
(5)(viii) Copy of Rights Endorsement Exhibit A(5)(viii) to Post-
FSPQ 1066 to the Variable Effective Amendment No. 1,
Annuity Contract, currently Registration No. 2-32684.
used for employer-owned
contracts under 403(b)
annuity purchase plans, and
for trustee-owned contracts
under allocated corporate
pension and profit-sharing
plans involving a Prudential-
sponsored master plan.
(5)(ix) Copy of Rights Endorsement Exhibit A(5)(ix) to Post-
FSPQ 1067 to the Variable Effective Amendment No. 1,
Annuity Contract, currently Registration No. 2-32684.
used for employee-owned
contracts under corporate
pension and profit-sharing
plans involving a Prudential-
sponsored master plan.
(5)(x) Copy of Rights Endorsement Exhibit A(5)(x) to Post-
FSPQ 1068 to the Variable Effective Amendment No. 1,
Annuity Contract, currently Registration No. 2-32684.
used for employee-owned
contracts under H.R. 10
pension plans involving a
Prudential sponsored
prototype plan.
(5)(xi) Copy of Iowa Endorsement Exhibit A(5)(xii) to Post-
FSPQ 520 to the Variable Effective Amendment No. 3,
Annuity Contract. Registration No. 2-32684.
</TABLE>
C-3
<PAGE>
LISTING OF VARIABLE ANNUITY EXHIBITS -- PAGE 3
<TABLE>
<CAPTION>
<S> <C> <C>
(5)(xii) Copy of Rights Endorsement Exhibit A(5)(xiv) to Post-
FSPQ 1070 to the Variable Effective Amendment No. 4,
Annuity Contract, currently Registration No. 2-32684.
used for employer-owned
contracts under 403(b)
annuity purchase plans
(University of Texas only).
(5)(xiii) Copy of Maryland Endorsement Exhibit A(5)(xiii) to Post-
FSPQ 526 to the Variable Effective Amendment No. 6,
Annuity Contract. Registration No. 2-32684.
(5)(xiv) Copy of New York Endorsement Exhibit A(5)(xiv) to Post-
FSPQ 528 to the Variable Effective Amendment No. 6,
Annuity Contract. Registration No. 2-32684.
(5)(xv) Copy of New Hampshire Exhibit A(5)(xv) to Amendment
Endorsement FSPQ 530 to the No. 1, Registration No.
Variable Annuity Contract. 2-52589.
(5)(xvi) Copy of Rights Endorsement Exhibit A(5)(xvi) to Amendment
FSPQ 1071 to the Variable No. 1, Registration No.
Annuity Contract, currently 2-52589.
used for Individual
Retirement Accounts.
(5)(xvii) Copy of Rights Endorsement Exhibit A(5)(xvii) to Post-
FSP 555, for inclusion in Effective Amendment No. 8,
Variable Annuity Contracts Registration No. 2-52584.
sold under the Texas
Optional Retirement Program.
(6)(i) Copy of the Charter of Incorporated by reference
Prudential, as amended to to Post-Effective Amendment No. 9
and including November 14, 1995. to Form S-1, Registration No.
33-20083, filed April 9, 1997
on behalf of The Prudential
Variable Contract Real Property Account.
(6)(ii) Copy of the By-laws of Incorporated by reference
Prudential, as amended to to Post-Effective Amendment
and including April 8, 1997. No. 12 to Form N-4,
Registration No. 33-25434,
filed April 30, 1997
on behalf of The Prudential
Individual Variable Contract Account.
(9) Copy of the Transfer Exhibit A(9) to Post-Effective
Account Agreement between Amendment No. 12, Registration
Prudential and the No. 2-32684.
Accountholder.
(10)(i) Form of Request for a A(10)(i)
Transfer Account.
(10)(ii) Form of Request for A(10)(ii)
Enrollment.
</TABLE>
C-4
<PAGE>
LISTING OF VARIABLE ANNUITY EXHIBITS -- PAGE 4
<TABLE>
<CAPTION>
<S> <C> <C>
(10)(iii) Form of Transfer Deposit A(10)(iii)
Schedule.
(10)(iv) Form of Request for A(10)(iv)
Annuity.
<CAPTION>
2. For specimen of securities, see Exhibits A(5) and A(5)(i)
through A(5)(xvii).
6. Powers of Attorney for Directors and Officers of Prudential Incorporated by reference to Post-
Effective Amendment No. 10 to Form S-1,
Registration No. 33-20083 filed April 9, 1998
on behalf of The Prudential Variable Contract
Real Property Account.
27.1 Financial Data Schedule Filed herewith
</TABLE>
C-5
<PAGE>
ITEM 24(b) EXHIBITS
PRUDENTIAL'S GIBRALTAR FUND, INC.
<TABLE>
<CAPTION>
INCORPORATED BY
REFERENCE TO EXHIBITS INCORPORATED BY
EXHIBITS REQUIRED BY TO FORM N-8B-1 REFERENCE TO THE FOLLOWING
ITEM OF FORM N-1A FILE NO. 811-1660 (EXCEPT AS OTHERWISE NOTED):
<S> <C> <C>
(i) Certificate of Incorporation. 1(a)
Amendment to Certificate 1(b)
of Incorporation dated
April 11, 1968.
Amendment to Certificate Exhibit 1(c) to Post-
of Incorporation dated May 27, 1975. Effective Amendment No. 19
to Form S-6, Registration
No. 2-52715.
Amendment to Certificate Exhibit 24(b)(i) to Post-Effective
of Incorporation dated April 23, 1991. Amendment No. 32 to Form
S-6, Registration No. 2-52715.
Articles of Incorporation Exhibit 24(b)(i) to Post-Effective
filed with the Maryland Secretary of State Amendment No. 26 to Form S-6,
dated May 1, 1997. Registration No. 2-52589.
(ii) By-laws. Exhibit 24(b)(ii) to Post-Effective
Amendment No. 26 to Form S-6,
Registration No. 2-52589.
(iii) None.
(iv) Stock Certificate. Exhibit 4(a) to Post-
Effective Amendment No. 17
to Form S-6, Registration
No. 2-52715.
(v) Investment Advisory Contract 5
between Registrant and
Prudential.
Amendment No. 1 to Investment Exhibit 5(b) to Post-
Advisory Contract between Effective Amendment No. 9
Registrant and Prudential. to Form S-5, Registration
No. 2-32685.
Amendment No. 2 to Investment Exhibit 24(b)(v) to Post-Effective
Advisory Contract between Amendment No. 32 to Form
Registrant and Prudential. S-6, Registration No. 2-52715.
Service Agreement between Exhibit 24(b)(v)(3) to
Prudential and The Prudential Post-Effective Amendment
Investment Corporation. No. 23 to Form S-6,
Registration No. 2-52715.
(vi) Distribution Agreement between Exhibit 24(b)(vi) to Post-
Prudential's Gibraltar Fund and Effective Amendment No. 30
Pruco Securities Corporation. to Form S-6, Registration
No. 2-52715.
(vii) None.
</TABLE>
C-6
<PAGE>
PRUDENTIAL'S GIBRALTAR FUND, INC. EXHIBITS -- PAGE 2
<TABLE>
<CAPTION>
<S> <C> <C>
(viii) Custody Agreement between Exhibit 8(a) to Post-
Registrant and Chemical Bank Effective Amendment No. 17
to Form S-6, Registration
No. 2-52715.
(viii)(a) Form of Custodian Agreement Exhibit (viii) to Post-Effective
between Investors Fiduciary Amendment No. 40 to Form S-6,
Trust Company and the Registrant. Registration No. 2-52715.
(ix) Administrative Services 9(a)
Agreement between Registrant
and Prudential.
Contract of Custodianship Exhibit A(2) to Post-
with respect to Prudential's Effective Amendment No. 17
Investment Plan Account to Form S-6, Registration
(endorsed by Registrant). No. 2-52715.
(x)-(xiv) None.
(xv) None.
(xvi) Powers of Attorney for Filed herewith
Non-Interested Directors of
Prudential's Gibraltar Fund, Inc.
(xvii) Consents of independent auditors Filed herewith
27.2 Financial Data Schedule Filed herewith
</TABLE>
C-7
<PAGE>
SIGNATURES
PRUDENTIAL'S ANNUITY PLAN ACCOUNT - 2
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that this Amendment is filed solely for one or more of the purposes
specified in Rule 485(b)(1) under the Securities Act of 1933 and that no
material event requiring disclosure in the prospectus, other than one listed in
Rule 485(b)(1), has occurred since the effective date of the most recent
Post-Effective Amendment to the Registration Statement which included a
prospectus, and has caused this Registration Statement to be signed on its
behalf by the undersigned thereunto duly authorized, and its seal hereunto
affixed and attested, all in the city of Newark and the State of New Jersey, on
this 29th day of April, 1998.
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
Attest: /s/ CAREN CUNNINGHAM By: /s/ ESTHER H. MILNES
--------------------- --------------------
Caren Cunningham Esther H. Milnes
Secretary Vice President
Pursuant to the requirements of the Securities Act of 1933, this Post-Effective
Amendment No. 37 to the Registration Statement has been signed below by the
following directors and officers of The Prudential Insurance Company of America
in their capacities and on the date appearing below.
<TABLE>
<CAPTION>
SIGNATURE AND TITLE DATE
<S> <C> <C>
/s/* ARTHUR C. RYAN ) April 29, 1998
- -------------------------------------- )
Arthur C. Ryan )
Chairman of the Board, President and )
Chief Executive Officer )
)
)
/s/* FRANKLIN E. AGNEW ) *By: /s/ CAREN CUNNINGHAM
- -------------------------------------- ) ---------------------
Franklin E. Agnew ) Caren Cunningham
Director ) (Attorney-in-Fact)
)
)
/s/* FREDERIC K. BECKER )
- -------------------------------------- )
Frederic K. Becker )
Director )
)
)
/s/* MARTIN A. BERKOWITZ )
- -------------------------------------- )
Martin A. Berkowitz )
Senior Vice President and Comptroller )
)
)
/s/* RICHARD J. CARBONE )
- -------------------------------------- )
Richard J. Carbone )
Chief Financial Officer )
</TABLE>
C-8
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE AND TITLE DATE
<S> <C> <C>
/s/* JAMES G. CULLEN ) April 29, 1998
- -------------------------------------- )
James G. Cullen )
Director )
)
)
/s/* CAROLYNE K. DAVIS )
- -------------------------------------- )
Carolyne K. Davis )
Director )
)
)
/s/* ROGER A. ENRICO )
- -------------------------------------- )
Roger A. Enrico )
Director )
)
)
/s/* ALLAN D. GILMOUR )
- -------------------------------------- )
Allan D. Gilmour )
Director )
)
)
/s/* WILLIAM H. GRAY, III )
- -------------------------------------- )
William H. Gray, III )
Director )
)
)
/s/* JON F. HANSON )
- -------------------------------------- )
Jon F. Hanson )
Director )
)
)
/s/* GLEN H. HINER, JR. )
- -------------------------------------- )
Glen H. Hineer, Jr. )
Director )
)
)
/s/* CONSTANCE J. HORNER )
- -------------------------------------- )
Constance J. Horner )
Director ) *By: /s/ CAREN CUNNINGHAM
) ----------------------
) Caren Cunningham
/s/* GAYNOR KELLEY ) (Attorney-in-Fact)
- -------------------------------------- )
Gaynor Kelley )
Director )
)
)
/s/* GAYNOR KELLEY )
- -------------------------------------- )
Gaynor Kelley )
Director )
)
)
/s/* IDA F.S. SCHMERTZ )
- -------------------------------------- )
Ida F.S. Schmertz )
Director )
)
)
/s/* CHARLES R. SITTER )
- -------------------------------------- )
Charles R. Sitter )
Director )
</TABLE>
C-9
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE AND TITLE DATE
<S> <C> <C>
/s/* DONALD L. STAHELI ) April 29, 1998
- -------------------------------------- )
Donald L. Staheli )
Director )
)
)
/s/* RICHARD M. THOMSON )
- -------------------------------------- )
Richard M. Thomson )
Director )
)
)
/s/* JAMES A. UNRUH )
- -------------------------------------- )
James A. Unruh )
Director )
)
)
/s/* P. ROY VAGELOS, M.D. )
- -------------------------------------- )
P. Roy Vagelos, M.D. )
Director )
)
)
/s/* STANLEY C. VAN NESS ) *By: /s/ CAREN CUNNINGHAM
- -------------------------------------- ) ---------------------
Stanley C. Van Ness ) Caren Cunningham
Director ) (Attorney-in-Fact)
)
)
/s/* PAUL A. VOLCKER )
- -------------------------------------- )
Paul A. Volcker )
Director )
)
)
/s/* JOSEPH H. WILLIAMS )
- -------------------------------------- )
Joseph H. Williams )
Director )
</TABLE>
C-10
<PAGE>
SIGNATURES
PRUDENTIAL'S GIBRALTAR FUND, INC.
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that this Amendment is filed solely for one or more of the purposes
specified in Rule 485(b)(1) under the Securities Act of 1933 and that no
material event requiring disclosure in the prospectus, other than one listed in
Rule 485(b)(1), has occurred since the effective date of the most recent
Post-Effective Amendment to the Registration Statement which included a
prospectus, and has caused this Registration Statement to be signed on its
behalf by the undersigned thereunto duly authorized, and its seal hereunto
affixed and attested, all in the city of Newark and the State of New Jersey, on
this 29th day of April, 1998.
PRUDENTIAL'S GIBRALTAR FUND, INC.
By: /s/ MENDEL A. MELZER
------------------------
Mendel A. Melzer
Chairman of the Board of Directors
Pursuant to the requirements of the Securities Act of 1933, this Post-Effective
Amendment No. 37 to the Registration Statement has been signed below by the
following persons in the capacities and on the date indicated.
<TABLE>
<CAPTION>
SIGNATURE AND TITLE DATE
<S> <C> <C>
/s/ MENDEL A. MELZER ) April 29, 1998
- -------------------------------------- )
Mendel A. Melzer )
Chairman of the Board of Directors, )
Principal Executive Officer and )
Principal Financial Officer )
)
)
/s/ JONATHAN M. GREENE )
- -------------------------------------- )
Jonathan M. Greene )
President and Director )
)
)
/s/ GRACE TORRES )
- -------------------------------------- ) *By: /s/ CAREN CUNNINGHAM
Grace Torres ) ---------------------
Treasurer and ) Caren Cunningham
Principal Financial and Accounting Officer ) (Attorney-in-Fact)
)
/s/ SAUL K. FENSTER )
- -------------------------------------- )
Saul K. Fenster )
Director )
)
)
/s/* W. SCOTT McDONALD, JR. )
- -------------------------------------- )
W. Scott McDonald, Jr. )
Director )
)
)
/s/* JOSEPH WEBER )
- -------------------------------------- )
Joseph Weber )
Director )
</TABLE>
C-11
<PAGE>
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
Prudential is a mutual life insurance company incorporated under the
laws of the State of New Jersey.
All of the shares of Prudential's Gibraltar Fund, Inc. are held by three
separate accounts of The Prudential Insurance Company of America:
Prudential's Investment Plan Account, Prudential's Annuity Plan Account and
Prudential's Annuity Plan Account-2. Prudential also holds directly and in
certain other separate accounts shares of The Prudential Series Fund, Inc.,
a Maryland corporation. The balance of the shares of The Prudential Series
Fund, Inc. are held in separate accounts of Pruco Life Insurance Company, a
direct wholly-owned subsidiary of Prudential, and Pruco Life Insurance
Company of New Jersey, an indirect wholly-owned subsidiary of Prudential.
All of the separate accounts referred to above are unit investment trusts
registered under the Investment Company Act of 1940. Prudential's Gibraltar
Fund, Inc. and The Prudential Series Fund, Inc. are registered as open-end,
diversified management investment companies under the Investment Company
Act of 1940. The shares of the investment companies are voted in accordance
with the instructions of persons having an interest in the unit investment
trusts, and Prudential, Pruco Life Insurance Company and Pruco Life
Insurance Company of New Jersey will vote the shares they hold directly in
the same manner that they vote the shares that they hold in their separate
accounts.
Registrant may also be deemed to be under common control with The
Prudential Variable Contract Account-2, The Prudential Variable Contract
Account-10 and The Prudential Variable Contract Account-11, separate
accounts of Prudential registered as open-end, diversified management
investment companies under the Investment Company Act of 1940.
Prudential is a mutual insurance company. Its financial statements are
prepared in accordance with statutory requirements.
The subsidiaries of Prudential and short descriptions of each are listed
under Item 32 in Post-Effective Amendment No. 34 to the Registration
Statement of The Prudential Series Fund, Inc., Registration No. 2-80896,
the text of which is hereby incorporated by reference.
Item 26. NUMBER OF HOLDERS OF SECURITIES
The registrant was organized to serve as the investment medium for separate
accounts of Prudential which issue certain variable annuity contracts to
the public. The public offering commenced on January 2, 1970. As of
December 31, 1997, there were 29,771,740 shares of Common Stock
outstanding, distributed as follows:
TITLE OF CLASS HOLDER SHARES
Common Stock Prudential's Investment Plan Account 24,171,408
Prudential's Annuity Plan Account 225,153
Prudential's Annuity Plan Account-2 5,375,179
-----------
29,771,740
Item 27. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Registrant, in conjunction with certain affiliates, maintains insurance on
behalf of any person who is or was a trustee, director, officer, employee or
agent of the Registrant, or who is or was serving at the request of the
Registrant as a trustee, director, officer, employee or agent of such other
affiliated trust or corporation, against any liability asserted against and
incurred by him or her arising out of his or her position with such trust or
corporation.
C-12
<PAGE>
New Jersey, being the state of organization of Prudential Insurance Company
of America (Prudential), permits entities organized under its jurisdiction
to indemnify directors and officers with certain limitations. The relevant
provisions of New Jersey law permitting indemnification can be found in
Section 14A:3-5 of the New Jersey Statutes Annotated. The text of
Prudential's By-law 27, which relates to indemnification of officers and
directors, is incorporated by reference to Exhibit (8)(ii) of Post-
Effective Amendment No. 26 to Form N-3, Registration No. 2-76580, filed May
1, 1995, on behalf of The Prudential Variable Contract Account-10.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions or otherwise, the
Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment
by the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISOR
Prudential is involved in insurance, reinsurance, securities, pension
services, real estate and banking.
The Prudential Investment Corporation (PIC) is the investment unit of
Prudential and actively engages in the business of giving investment
advice. The officers and directors of Prudential and PIC who are engaged
directly or indirectly in activities relating to the registrant have no
other business, profession, vocation, or employment of a substantial
nature, and have not had such other connections during the past two
years.
The business and other connections of Prudential's Directors are listed
in the Prospectus in this Post-Effective Amendment to the Registration
Statement, which is hereby incorporated by reference.
ITEM 29. PRINCIPAL UNDERWRITERS
(a) Incorporated by reference to Item 29(a) of Post-Effective Amendment
No. 34 to Form N-1A, Registration No. 2-80896, filed April 24, 1998
on behalf of The Prudential Series Fund, Inc.
(b) Incorporated by reference to Item 29(b) of Post-Effective Amendment
No. 34 to Form N-1A, Registration No. 2-80896, filed April 24, 1998
on behalf of The Prudential Series Fund, Inc.
(c) Not applicable.
C-13
<PAGE>
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
All accounts, books or other documents required to be maintained by Section
31(a) of the Investment Company Act of 1940 and the rules promulgated
thereunder are maintained by the Registrant, Prudential Plaza, Newark, New
Jersey 07102-3777; the Registrant's Investment Advisor, The Prudential
Insurance Company of America, Prudential Plaza, Newark, New Jersey
07102-3777 and Gateway Center Three, 100 Mulberry Street, Newark, New
Jersey 07102; or the Registrant's Custodian, Investors Fiduciary Trust
Company, 127 West 10th Street, Kansas City, Missouri 64104-1716.
Item 31. Management Services
Not applicable.
Item 32. Undertakings
Restrictions on withdrawal under Section 403(b) Contracts are imposed in
reliance upon, and in compliance with, a no-action letter issued by the
Chief of the Office of Insurance Products and Legal Compliance of the
Securities and Exchange Commission to the American Council of Life
Insurance on November 28, 1988.
C-14
<PAGE>
EXHIBIT INDEX
(x)-(xvi) Powers of Attorney for Non-Interested
Directors of Prudential's Gibraltar Fund, Inc. Page C-16
(x)-(xvii)(a) Consent of Price Waterhouse LLP, independent accountants Page C-19
(x)-(xvii)(b) Consent of Deloitte & Touche LLP, independent auditors Page C-20
27.1 Financial Data Schedule - Prudential's Annuity
Plan Account-2 Page C-21
27.2 Financial Data Schedule - Prudential's Gibraltar
Fund, Inc. Page C-22
C-15
<PAGE>
EXHIBIT (x)-(xvi)
POWER OF ATTORNEY
-----------------
Know all men by these presents:
That I, Joseph Weber, Member of the Board of Prudential's Gibraltar Fund,
Inc., do hereby make, constitute and appoint as my true and lawful attorneys in
fact Caren Cunningham and Grace Torres, together or separately for me and in my
name, place and stead to sign registration statements on the appropriate forms
prescribed by the Securities and Exchange Commission for the registration under
the Investment Company Act of 1940 and the Securities Act of 1933, as
applicable, and any and all amendments thereto that may be filed with the
Securities and Exchange Commission.
IN WITNESS WHEREOF, I have hereunto set my hand this 11/th/ day of March,
1998.
/s/ Joseph Weber
----------------
Joseph Weber
State of New Jersey )
) SS
County of Essex )
On this 11/th/ day of March, 1998, before me personally appeared
Joseph Weber, to me known and known to me to be the person mentioned and
described in and who executed the foregoing instrument and duly acknowledged to
me that he executed same.
/s/ Floyd Hoelscher
-------------------
Floyd Hoelscher, Notary Public
C-16
<PAGE>
EXHIBIT (x)-(xvi)
POWER OF ATTORNEY
-----------------
Know all men by these presents:
That I, Saul Fenster, Member of the Board of Prudential's Gibraltar Fund,
Inc., do hereby make, constitute and appoint as my true and lawful attorneys in
fact Caren Cunningham and Grace Torres, together or separately for me and in my
name, place and stead to sign registration statements on the appropriate forms
prescribed by the Securities and Exchange Commission for the registration under
the Investment Company Act of 1940 and the Securities Act of 1933, as
applicable, and any and all amendments thereto that may be filed with the
Securities and Exchange Commission.
IN WITNESS WHEREOF, I have hereunto set my hand this 11/th/ day of March,
1998.
/s/ Saul Fenster
----------------
Saul Fenster
State of New Jersey )
) SS
County of Essex )
On this 11/th/ day of March, 1998, before me personally appeared Saul
Fenster, to me known and known to me to be the person mentioned and described in
and who executed the foregoing instrument and duly acknowledged to me that he
executed same.
/s/ Floyd Hoelscher
-------------------
Floyd Hoelscher, Notary Public
C-17
<PAGE>
EXHIBIT (x)-(xvi)
POWER OF ATTORNEY
-----------------
Know all men by these presents:
That I, W. Scott McDonald, Jr., Member of the Board of Prudential's
Gibraltar Fund, Inc., do hereby make, constitute and appoint as my true and
lawful attorneys in fact Caren Cunningham and Grace Torres, together or
separately for me and in my name, place and stead to sign registration
statements on the appropriate forms prescribed by the Securities and Exchange
Commission for the registration under the Investment Company Act of 1940 and the
Securities Act of 1933, as applicable, and any and all amendments thereto that
may be filed with the Securities and Exchange Commission.
IN WITNESS WHEREOF, I have hereunto set my hand this 11/th/ day of
March, 1998.
/s/ W. Scott McDonald, Jr.
-------------------------
W. Scott McDonald, Jr.
State of New Jersey )
) SS
County of Essex )
On this 11/th/ day of March, 1998, before me personally appeared W. Scott
McDonald, Jr., to me known and known to me to be the person mentioned and
described in and who executed the foregoing instrument and duly acknowledged to
me that he executed same.
/s/ Floyd Hoelscher
-------------------
Floyd Hoelscher, Notary Public
C-18
<PAGE>
EXHIBIT (x)-(xvii)(a)
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this Post-
Effective Amendment No. 37 to the registration statement on Form S-6 (the
"Registration Statement") of our report dated March 20, 1998, relating to the
financial statements of Prudential's Annuity Plan Account-2, which appears in
such Prospectus.
We also consent to the use in the Prospectus constituting part of this
Registration Statement of our report dated February 11, 1998, relating to the
financial statements and financial highlights of the Prudential's Gibraltar
Fund, Inc., which appears in such Prospectus.
We also consent to the use in the Prospectus constituting part of this
Registration Statement of our report dated March 5, 1998, relating to the
consolidated financial statements of Prudential Insurance Company of America,
which appears in such Prospectus.
We also consent to the references to us under the headings "Financial
Highlights" and "Experts" in the Prospectus.
/s/ PRICE WATERHOUSE LLP
New York, New York
April 24, 1998
C-19
<PAGE>
EXHIBIT (x)-(xvii)(b)
INDEPENDENT AUDITORS' CONSENT
We consent to the use of this Post-Effective Amendment No. 37 to Registration
Statement No. 2-52589 on Form S-6 of Prudential's Annuity Plan Account - 2
of The Prudential Insurance Company of America of our report dated June 4, 1997
relating to the consolidated financial statements of The Prudential Insurance
Company of America and subsidiaries appearing in the Prospectus, which is a part
of such Registration Statement, and to the reference to us under the heading
"Experts" in such Prospectus.
/s/ Deloitte & Touche LLP
Parsippany, New Jersey
April 24, 1998
C-20
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 002
<NAME> PRUDENTIAL'S ANNUITY ACCOUNT--2
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> $51,006,076
<INVESTMENTS-AT-VALUE> $58,843,374
<RECEIVABLES> $0
<ASSETS-OTHER> $(14,965)
<OTHER-ITEMS-ASSETS> $0
<TOTAL-ASSETS> $58,828,409
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 0
<TOTAL-LIABILITIES> 0
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 0
<SHARES-COMMON-STOCK> 5,375,179
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> $58,828,409
<DIVIDEND-INCOME> $1,016,408
<INTEREST-INCOME> 0
<OTHER-INCOME> $10,695,864
<EXPENSES-NET> $382,418
<NET-INVESTMENT-INCOME> $633,990
<REALIZED-GAINS-CURRENT> $1,168,584
<APPREC-INCREASE-CURRENT> $(2,547,937)
<NET-CHANGE-FROM-OPS> $9,950,501
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> $1,878,405
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 0
<AVERAGE-NET-ASSETS> 0
<PER-SHARE-NAV-BEGIN> 0
<PER-SHARE-NII> 0
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 0
<EXPENSE-RATIO> 0
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 001
<NAME> PRUDENTIAL GIBRALTAR FUND
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 276,988,335
<INVESTMENTS-AT-VALUE> 322,652,484
<RECEIVABLES> 6,082,776
<ASSETS-OTHER> 1,502
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 328,736,762
<PAYABLE-FOR-SECURITIES> 2,669,207
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 148,808
<TOTAL-LIABILITIES> 2,818,015
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 277,448,110
<SHARES-COMMON-STOCK> 29,771,740
<SHARES-COMMON-PRIOR> 26,366,193
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 2,806,488
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 45,664,149
<NET-ASSETS> 325,918,747
<DIVIDEND-INCOME> 3,968,815
<INTEREST-INCOME> 1,369,649
<OTHER-INCOME> 0
<EXPENSES-NET> 474,511
<NET-INVESTMENT-INCOME> 4,863,953
<REALIZED-GAINS-CURRENT> 50,505,594
<APPREC-INCREASE-CURRENT> 547,282
<NET-CHANGE-FROM-OPS> 55,916,829
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> (59,469,378)
<DISTRIBUTIONS-OTHER> (5,623,695)
<NUMBER-OF-SHARES-SOLD> 3,000,000
<NUMBER-OF-SHARES-REDEEMED> (32,262,504)
<SHARES-REINVESTED> 63,060,874
<NET-CHANGE-IN-ASSETS> 24,622,126
<ACCUMULATED-NII-PRIOR> 602,554
<ACCUMULATED-GAINS-PRIOR> 11,966,730
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 390,676
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 473,072
<AVERAGE-NET-ASSETS> 0
<PER-SHARE-NAV-BEGIN> 11.43
<PER-SHARE-NII> 2.06
<PER-SHARE-GAIN-APPREC> 0.00
<PER-SHARE-DIVIDEND> (2.54)
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 10.95
<EXPENSE-RATIO> 0.15
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
