AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 2, 2000.
FILE NO. 333-23271
FILE NO. 811-08091
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM N-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
PRE-EFFECTIVE AMENDMENT NO. [ ]
POST-EFFECTIVE AMENDMENT NO. 6 [X]
REGISTRATION STATEMENT UNDER
THE INVESTMENT COMPANY ACT OF 1940
POST-EFFECTIVE AMENDMENT NO. 6 [X]
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THE PRUDENTIAL DISCOVERY SELECT
GROUP VARIABLE
CONTRACT ACCOUNT
(Exact Name of Registrant)
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
(Name of Depositor)
3 GATEWAY CENTER, 12TH FLOOR
NEWARK, NJ 07102-4077
DEPOSITOR'S TELEPHONE NUMBER: (973) 802-6997
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C. CHRISTOPHER SPRAGUE, ESQ.
ASSISTANT GENERAL COUNSEL
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
3 GATEWAY CENTER, 12TH FLOOR
NEWARK, NJ 07102-4077
(Name and address of agent for service of process)
Copy to:
CHRISTOPHER E. PALMER, ESQ.
SHEA & GARDNER
1800 MASSACHUSETTS AVE., N.W.
WASHINGTON, D.C. 20036
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It is proposed that this filing will become effective (check appropriate space):
[ ] immediately upon filing pursuant to paragraph (b) of Rule 485
[X] on May 1, 2000 pursuant to paragraph (b) of Rule 485
[ ] 60 days after filing pursuant to paragraph (a) of Rule 485
[ ] on May 1, 2000 pursuant to paragraph (a) of Rule 485
Title of Securities Being Registered:
Interests in Group Variable Annuity Contracts.
================================================================================
<PAGE>
PROSPECTUS MAY 1, 2000
THE PRUDENTIAL DISCOVERY SELECT GROUP VARIABLE CONTRACT ACCOUNT
GROUP VARIABLE ANNUITY CONTRACTS
DISCOVERY SELECT
---------------
GROUP RETIREMENT ANNUITY
This prospectus describes the DISCOVERY SELECT(SM) Group Variable Annuity
Contracts* (the "Contracts"). The Contracts are group variable annuity contracts
sold by The Prudential Insurance Company of America ("Prudential") to retirement
plans qualifying for federal tax benefits under sections 401, 403(b), 408 or 457
of the Internal Revenue Code of 1986 as amended (the "Code") and to
non-qualified defined contribution annuity plans. In this Prospectus, Prudential
may be referred to as either "Prudential" or as "we" or "us". We may refer to a
participant under a retirement plan as "you."
We sell one of the Contracts (the "Small Plan Contract") exclusively to
retirement plans qualified under Sections 401(k) or 401(a) of the Code that
generally have 100 or fewer participants. We may delegate most of the
administrative services in connection with those Contracts to a third party
recordkeeper (the "Small Plan Contract Recordkeeper").
As a plan participant, you can allocate contributions made on your behalf in a
number of ways. You can allocate contributions to one or more of the twenty-two
Subaccounts. Each Subaccount invests in one of the following portfolios of The
Prudential Series Fund, Inc. (the "Prudential Series Fund") or other listed
portfolios (collectively, the "Funds"):
THE PRUDENTIAL SERIES FUND, INC.
Money Market Portfolio Flexible Managed Portfolio Equity Portfolio
Diversified Bond Portfolio High Yield Bond Portfolio Prudential Jennison
Government Income Portfolio Stock Index Portfolio Portfolio
Conservative Balanced Portfolio Equity Income Portfolio Global Portfolio
- --------------------------------------------------------------------------------
AIM VARIABLE INSURANCE FUNDS
AIM V.I. Growth and Income Fund AIM V.I. Value Fund
JANUS ASPEN SERIES MFS VARIABLE INSURANCE TRUST
Growth Portfolio Emerging Growth Series
International Growth Portfolio Research Series
OCC ACCUMULATION TRUST T. ROWE PRICE EQUITY SERIES, INC.
Managed Portfolio Equity Income Portfolio
Small Cap Portfolio
T. ROWE PRICE INTERNATIONAL SERIES, INC. WARBURG PINCUS TRUST
International Stock Portfolio Global Post-Venture Capital Portfolio
You also can allocate contributions to the Guaranteed Interest Account, which
guarantees a stipulated rate of interest if held for a specified period of time.
In this Prospectus, we do not describe that account in detail. Rather, we
mention the Guaranteed Interest Account only where necessary to explain how the
Prudential Discovery Select Group Variable Contract Account works.
----------
In this Prospectus, we provide information that you should know before you
invest. We have filed additional information about the Contracts with the
Securities and Exchange Commission ("SEC") in a Statement of Additional
Information ("SAI"), dated May 1, 2000. That SAI is legally a part of this
Prospectus. You can get a copy of the SAI free of charge by contacting us at the
address or telephone number shown on the cover page. The SEC maintains a Web
site (http://www.sec.gov) that contains the SAI, material incorporated by
reference, and other information regarding registrants that file electronically
with the SEC. The SEC's mailing address is 450 Fifth Street, N.W., Washington,
DC 20549, and its public reference number is (800) SEC-0330.
The accompanying prospectuses for the Funds and the related statements of
additional information describe the investment objectives and risks of investing
in the Funds. We may offer additional Funds and Subaccounts in the future.
The contents of the SAI with respect to the Contracts appears on page 43 of this
Prospectus.
----------
PLEASE READ THIS PROSPECTUS AND KEEP IT FOR FUTURE REFERENCE. IT IS ACCOMPANIED
BY A CURRENT PROSPECTUS FOR EACH OF THE FUNDS. YOU SHOULD READ THOSE
PROSPECTUSES CAREFULLY AND RETAIN THEM FOR FUTURE REFERENCE.
AS WITH ALL VARIABLE ANNUITY CONTRACTS, THE FACT THAT WE HAVE REGISTERED THE
CONTRACTS WITH THE SEC DOES NOT MEAN THAT THE SEC HAS DETERMINED THAT THE
CONTRACTS ARE A GOOD INVESTMENT. NOR HAS THE SEC DETERMINED THAT THIS PROSPECTUS
IS COMPLETE OR ACCURATE. IT IS A CRIMINAL OFFENSE TO STATE OTHERWISE.
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
30 Scranton Office Park
Scranton, PA 18507-1789
Telephone 1-800-458-6333
* DISCOVERY SELECT IS A SERVICE MARK OF PRUDENTIAL
<PAGE>
PROSPECTUS CONTENTS
PAGE
----
GLOSSARY................................................................... 1
BRIEF DESCRIPTION OF THE CONTRACTS......................................... 2
FEE TABLES................................................................. 4
GENERAL INFORMATION ABOUT PRUDENTIAL, PRUDENTIAL DISCOVERY SELECT GROUP
VARIABLE CONTRACT ACCOUNT AND THE INVESTMENT OPTIONS AVAILABLE
UNDER THE CONTRACTS.................................................... 12
PRUDENTIAL INSURANCE COMPANY OF AMERICA................................ 12
PRUDENTIAL DISCOVERY SELECT GROUP VARIABLE CONTRACT ACCOUNT............ 13
THE FUNDS.............................................................. 13
GUARANTEED INTEREST ACCOUNT............................................ 16
THE CONTRACTS.............................................................. 17
THE ACCUMULATION PERIOD................................................ 17
ALLOCATION OF PURCHASE PAYMENTS ....................................... 19
ASSET ALLOCATION PROGRAM............................................... 19
TRANSFERS.............................................................. 19
DOLLAR COST AVERAGING ................................................. 21
AUTO-REBALANCING....................................................... 22
WITHDRAWALS............................................................ 22
SYSTEMATIC WITHDRAWAL PLAN............................................. 23
TEXAS OPTIONAL RETIREMENT PLAN......................................... 24
DEATH BENEFIT.......................................................... 25
DISCONTINUANCE OF CONTRIBUTIONS........................................ 26
LOAN PROVISION......................................................... 27
MODIFIED PROCEDURES.................................................... 28
CHARGES, FEES AND DEDUCTIONS............................................... 28
ADMINISTRATIVE FEE AND ANNUAL ACCOUNT CHARGE........................... 28
CHARGE FOR ASSUMING MORTALITY AND EXPENSE RISKS........................ 29
EXPENSES INCURRED BY THE FUNDS......................................... 29
WITHDRAWAL CHARGE...................................................... 29
LIMITATIONS ON WITHDRAWAL CHARGE....................................... 31
PREMIUM TAXES.......................................................... 32
REQUESTS, CONSENTS AND NOTICES......................................... 32
FEDERAL TAX STATUS......................................................... 32
EFFECTING AN ANNUITY....................................................... 37
LIFE ANNUITY WITH PAYMENTS CERTAIN..................................... 38
ANNUITY CERTAIN........................................................ 38
JOINT AND SURVIVOR ANNUITY WITH PAYMENTS CERTAIN....................... 38
PURCHASING THE ANNUITY................................................. 38
OTHER INFORMATION.......................................................... 39
MISSTATEMENT OF AGE OR SEX............................................. 39
SALE OF THE CONTRACT AND SALES COMMISSIONS............................. 39
VOTING RIGHTS.......................................................... 39
SUBSTITUTION OF FUND SHARES............................................ 40
PERFORMANCE INFORMATION................................................ 40
REPORTS TO PARTICIPANTS................................................ 41
STATE REGULATION....................................................... 41
LITIGATION............................................................. 41
STATEMENT OF ADDITIONAL INFORMATION.................................... 43
ADDITIONAL INFORMATION................................................. 43
i
<PAGE>
GLOSSARY
ACCOUNT--See the Prudential Discovery Select Group Variable Contract Account
(the "Discovery Account") below.
ACCUMULATION PERIOD--The period, prior to the effecting of an annuity, during
which the amount credited to a Participant Account may vary with the investment
performance of any Subaccount of the Discovery Account, or the interest rate
credited under the Guaranteed Interest Account, as selected.
ANNUITANT--The person or persons designated by the Participant upon whose life
or lives monthly annuity payments are based after an annuity is effected.
BENEFICIARY--A person designated by a Participant to receive benefits from funds
held under the Contract.
BUSINESS DAY--A day on which both the New York Stock Exchange and Prudential are
open for business.
CODE--The Internal Revenue Code of 1986, as amended.
CONTRACTHOLDER--The employer, association or trust to which Prudential
has issued a Contract.
CONTRACTS--The Group Variable Annuity Contracts that we describe in this
Prospectus and offer for use in connection with retirement arrangements that
qualify for federal tax benefits under Sections 401, 403(b), 408 or 457 of the
Code and with non-qualified annuity arrangements. The Small Plan Contract is one
of such Contracts.
CONTRACT VALUE--The dollar amount held under a Contract.
EMPLOYER--The sponsor of the retirement plan or non-qualified annuity
arrangement.
FUNDS--The Portfolios of the Prudential Series Fund, Inc., AIM Variable
Insurance Funds, Inc., T. Rowe Price Equity Series, Inc., T. Rowe Price
International Series, Inc., Janus Aspen Series, MFS Variable Insurance Trust,
Warburg Pincus Trust, and OCC Accumulation Trust available under the Contracts.
GENERAL ACCOUNT--The assets of Prudential other than those allocated to the
Discovery Account or any other separate account of Prudential.
GUARANTEED INTEREST ACCOUNT--An allocation option under the Contract funded by
Prudential's General Account, or under certain Contracts, a separate account. It
is not part of nor dependent upon the investment performance of the Discovery
Account. This Prospectus does not describe in detail the Guaranteed Interest
Account or any separate account funding a guaranteed interest rate option.
PARTICIPANT--A person who makes contributions, or for whom contributions have
been made, and to whom they remain credited under the Contract.
PARTICIPANT ACCOUNT--An account established for each Participant to record the
amount credited to the Participant under the Contract.
PARTICIPANT ACCOUNT VALUE--The dollar amount held in a Participant Account.
PRUDENTIAL--The Prudential Insurance Company of America. "We," "us," or "our"
means Prudential.
PRUDENTIAL DISCOVERY SELECT GROUP VARIABLE CONTRACT ACCOUNT--A separate account
of Prudential registered under the Investment Company Act of 1940 as a unit
investment trust, invested through its Subaccounts in shares of the
corresponding Fund Portfolios.
SMALL PLAN CONTRACT--A type of Contract used exclusively with retirement plans
qualified under Sections 401(k) or 401(a) of the Code that generally have 100 or
fewer Participants.
SUBACCOUNT--A division of the Discovery Account, the assets of which are
invested in shares of the corresponding portfolio of the Funds.
UNIT AND UNIT VALUE--We credit a Participant with Units for each Subaccount in
which he invests. The value of these Units may change each Business Day to
reflect the investment results of, and deductions of charges from, the
Subaccounts, and the expenses of the Funds in which the assets of the
Subaccounts are invested. The number of Units credited to a Participant in any
Subaccount of the Discovery Account is determined by dividing the amount of the
contribution or transfer made on his behalf to that Subaccount by the applicable
Unit Value for the Business Day on which the contribution or transfer is
received at the address shown on the cover of this Prospectus or such other
address that Prudential has specified. We will reduce the number of Units
credited to a Participant under any Subaccount by the number of Units canceled
as a result of any transfer or withdrawal by a Participant from that Subaccount.
Because of its differing charges, the Small Plan Contract will have different
Unit Values than the other Contracts. Other Contracts, as to which we have
lowered the asset-based administrative fee, also will have different Unit
Values.
VALUATION PERIOD--The period of time from one determination of the value of the
amount invested in a Subaccount to the next. We make such determinations when
the net asset values of the Funds are calculated, which is generally as of 4:00
p.m. Eastern time on each day during which the New York Stock Exchange and
Prudential are open. Currently, the Prudential business unit that receives
transaction requests for the Contracts is open each day on which the New York
Stock Exchange is open.
VARIABLE INVESTMENT OPTIONS--The Subaccounts.
1
<PAGE>
BRIEF DESCRIPTION OF THE CONTRACTS
Prudential offers the Contracts to retirement plans qualifying for federal tax
benefits under Sections 401, 403(b), 408 or 457 of the Internal Revenue Code of
1986, as amended (the "Code") and to nonqualified annuity arrangements. The
Contracts are group annuity contracts that we typically issue to employers.
These employers then make contributions under the Contract on behalf of their
employees. A person for whom contributions have been made and to whom they
remain credited under a Contract is a "Participant."
The value of a Participant's investment depends upon the performance of the
selected investment option[s]. Currently, there are twenty-two variable
investment options, each of which is called a Subaccount. We invest the assets
of each Subaccount in one of the Funds listed beginning on page 13. You may
direct contributions to one or a combination of variable investment options as
well as the Guaranteed Interest Account. We set up a separate Participant
Account to record your investment choices. You can withdraw amounts held under
your Participant Account, in whole or in part, prior to the annuity date. We
also provide for a death benefit under the Contract.
Through payroll deduction or similar agreements with the Contractholder, you may
make contributions under the Contract. In addition, you may make contributions
in ways other than payroll deduction under certain circumstances.
Prudential assesses charges under the Contracts for the costs of selling and
distributing the Contracts, for administering the Contracts, and for assuming
mortality and expense risks under the Contracts. We deduct a mortality and
expense risk charge equal to an annual rate of 0.15% from the assets held in the
variable investment options with respect to all the Contracts. We deduct an
administrative charge from the assets held in the variable investment options,
which charge is equal to a maximum annual rate of 0.85% for Contracts other than
the Small Plan Contract. For the Small Plan Contract, we deduct an
administrative charge equal to an annual rate of 1.05% from the assets held in
the variable investment options. You can find further details about the
administrative charge in the Fee Tables, pages 4 and 5, and under Administrative
Fee and Annual Account Charge, page 28.
With respect to Contracts other than the Small Plan Contract, we assess an
additional administrative charge of up to $32 per Participant (the annual
account charge) on the last Business Day of each calendar year and at the time
of a full withdrawal. We will prorate this annual account charge for new
Participants on a monthly basis for their first year of participation. With
respect to the Small Plan Contract, we assess an annual administrative charge of
up to $32 per Participant either (i) quarterly, on or about 14 days after the
end of each quarter or (ii) annually, on the last Business Day of the calendar
year. We do not prorate this charge for new Participants under the Small Plan
Contract.
Under Contracts other than the Small Plan Contract, we may impose a withdrawal
charge upon withdrawals made in the first five years after the initial
contribution made on behalf of a Participant. The maximum withdrawal charge for
such Contracts is 5% of the contributions made on behalf of the Participant.
Participants in a Small Plan Contract do not pay a withdrawal charge when they
redeem some or all of their Units in the Account or their Participant Account
Value in the Guaranteed Interest Account. Instead, Prudential will assess a
withdrawal charge of up to 5% of the amount of Participant and Employer
contributions that are withdrawn in connection with a full or partial
termination by the Employer of its participation in the Small Plan Contract.
Prudential will impose this withdrawal charge only during the first 5 years
following the effective date of the Small Plan Contract. We will consider an
Employer to have fully or partially terminated its participation in the Small
Plan Contract if it provides Prudential notice of its intent to terminate the
Contract, if the plan terminates or is no longer a qualified plan, or if
Prudential terminates the Contract by reason of the Contractholder failing to
meet its contractual obligations.
2
<PAGE>
A charge against each of the Funds' assets is also made by the investment
adviser for providing investment advisory and management services. You can find
further details about charges under the section entitled Charges, Fees and
Deductions, page 28.
Unless restricted by the retirement arrangement under which you are covered, or
by a section of the Code, you may withdraw, at any time, all or part of your
Participant Account. See "Withdrawals," page 22. If you withdraw, you may be
taxed under the Code, including, under certain circumstances, a 10% penalty tax
on premature withdrawals. See "Federal Tax Status," page 32. In addition, you
may transfer all or a part of your Participant Account Value among the
Subaccounts and the Guaranteed Interest Account without the imposition of the
withdrawal charge or tax liability.
As explained below, notices, forms and requests for transactions related to the
Contracts may be provided in traditional paper form or by electronic means,
including telephone and internet. Prudential reserves the right to vary the
means available, including limiting them to electronic means, from Contract to
Contract by Contract terms, related service agreements with the Contractholder,
or notice to the Contractholder and Participants.
The procedures set out in this paragraph apply to Contracts other than the Small
Plan Contract. You should send all written requests, notices, and transfer
requests required or permitted by the Contracts (other than withdrawal requests
and death benefit claims), to Prudential at the address shown on the cover of
this Prospectus. You may effect permitted telephone transactions by calling
Prudential at 1-800-458-6333. All permitted internet transactions may be made
through www.prudential.com. You must send all permitted written withdrawal
requests or death benefit claims to Prudential by one of the following three
means: (1) By U.S. mail to: Prudential, P.O. Box 5410, Scranton, Pennsylvania
18505-5410; (2) Delivery service other than the U.S. mail (e.g., Federal
Express, etc.) sent to our office at the following address: Prudential, 30
Scranton Office Park, Scranton, Pennsylvania 18507-1789; or (3) Fax to
Prudential, Attention: Client Payments at: (570) 340-4328. Under certain
Contracts, the Contractholder or a third party acting on their behalf provides
record-keeping services that would otherwise be performed by Prudential. See
"Modified Procedures," page 28.
The procedures described in this paragraph apply exclusively to the Small Plan
Contracts. Participants under such Contracts must send all permitted written
communications (including written requests to effect a purchase, withdrawal or
other transaction) and death benefit claims to the Small Plan Contract
Recordkeeper at the address provided by Prudential. Participants may effect
certain transactions under their Small Plan Contract, and otherwise communicate
with respect to their Contract, by contacting the Small Plan Contract
Recordkeeper at the telephone number or internet site provided by Prudential in
Participant enrollment materials or other direct communication to the
Contractholder or Participants. Transactions (including death benefit claims)
conveyed to the Small Plan Contract Recordkeeper will be deemed effective on a
given Business Day if received in good order prior to 4:00 PM Eastern Time on
that Business Day. For purposes of the preceding sentence, we define "good
order" generally as an instruction received by the Small Plan Contract
Recordkeeper that is sufficiently complete and clear that the Small Plan
Contract Recordkeeper does not need to exercise any discretion to follow such
instruction. The Small Plan Contract Recordkeeper will forward promptly to
Prudential transaction requests and other communications that it receives from
Participants in a Small Plan Contract.
Prudential may provide other permitted telephone numbers or internet addresses
through the Contractholder or directly to participants as authorized by the
Contractholder.
We intend this brief description of the Contracts to provide a broad overview of
the more significant features of the Contracts. You can find more detailed
information about the Contracts in subsequent sections of this Prospectus and in
the Contracts themselves.
Transaction requests (including death benefit claims) received directly by
Prudential in good order on a given Business Day before the established
transaction cutoff time (4 PM Eastern Time, or such earlier time that the New
York Stock Exchange may close) will be effective for that Business Day. For
purposes of the preceding sentence, we define "good order" generally as an
instruction received by Prudential that is sufficiently complete and clear that
Prudential does not need to exercise any discretion to follow such instruction.
3
<PAGE>
FEE TABLE
FOR CONTRACTS OTHER THAN
THE SMALL PLAN CONTRACT
PARTICIPANT TRANSACTION EXPENSES
Sales Charge Imposed on Contributions................................ None
Maximum Withdrawal Charge (as a percentage of contributions withdrawn):
-------------------------------------------------------------------------------
THE WITHDRAWAL CHARGE WILL BE EQUAL
TO THE FOLLOWING PERCENTAGE OF THE
YEARS OF CONTRACT PARTICIPATION CONTRIBUTIONS WITHDRAWN
-------------------------------------------------------------------------------
First Year 5%
Second Year 4%
Third Year 3%
Fourth Year 2%
Fifth Year 1%
Sixth and Subsequent Years No Charge
-------------------------------------------------------------------------------
Maximum Annual Account Charge.......................................... $32
DISCOVERY ACCOUNT ANNUAL EXPENSES
(AS A PERCENTAGE OF AVERAGE PARTICIPANT ACCOUNT VALUE)
ALL SUBACCOUNTS
------------------------
Mortality and Expense Risk Charge ......................... 0.15%
Maximum Administrative Fee*................................ 0.85%
-----
Total Separate Account Annual Expenses .................... 1.00%
=====
- ----------
* We may reduce this administrative fee under Contracts as to which, due to
economies of scale and other factors, our administrative costs are reduced.
4
<PAGE>
FEE TABLE
FOR THE SMALL
PLAN CONTRACT
PARTICIPANT TRANSACTION EXPENSES
Sales Charge Imposed on Contributions................................ None
Maximum Withdrawal Charge (as a percentage of contributions withdrawn) in
connection with a full or partial Contract termination:
-------------------------------------------------------------------------------
THE WITHDRAWAL CHARGE WILL BE EQUAL
TO THE FOLLOWING PERCENTAGE OF THE
YEARS OF CONTRACT PARTICIPATION CONTRIBUTIONS WITHDRAWN
-------------------------------------------------------------------------------
First Year 5%
Second Year 4%
Third Year 3%
Fourth Year 2%
Fifth Year 1%
Sixth and Subsequent Years No Charge
-------------------------------------------------------------------------------
Maximum Annual Account Charge.......................................... $32
DISCOVERY ACCOUNT ANNUAL EXPENSES
(AS A PERCENTAGE OF AVERAGE PARTICIPANT ACCOUNT VALUE)
ALL SUBACCOUNTS
------------------------
Mortality and Expense Risk Charge ......................... 0.15%
Administrative Fee ........................................ 1.05%
-----
Total Separate Account Annual Expenses .................... 1.20%
=====
5
<PAGE>
ANNUAL EXPENSES OF THE FUNDS
(AS A PERCENTAGE OF PORTFOLIO AVERAGE NET ASSETS)
<TABLE>
<CAPTION>
INVESTMENT TOTAL TOTAL
MANAGEMENT OTHER CONTRACTUAL ACTUAL
FEE EXPENSES EXPENSES EXPENSES*
==============================================
THE PRUDENTIAL SERIES FUND, INC.
<S> <C>
Conservative Balanced Portfolio.............................................. 0.55% 0.02% 0.57% 0.57%
Diversified Bond Portfolio................................................... 0.40% 0.03% 0.43% 0.43%
Equity Income Portfolio...................................................... 0.40% 0.02% 0.42% 0.42%
Equity Portfolio............................................................. 0.45% 0.02% 0.47% 0.47%
Flexible Managed Portfolio................................................... 0.60% 0.02% 0.62% 0.62%
Global Portfolio............................................................. 0.75% 0.09% 0.84% 0.84%
Government Income Portfolio.................................................. 0.40% 0.04% 0.44% 0.44%
High Yield Bond Portfolio.................................................... 0.55% 0.05% 0.60% 0.60%
Money Market Portfolio ...................................................... 0.40% 0.02% 0.42% 0.42%
Prudential Jennison Portfolio................................................ 0.60% 0.03% 0.63% 0.63%
Stock Index Portfolio........................................................ 0.35% 0.04% 0.39% 0.39%
AIM VARIABLE INSURANCE FUNDS
AIM V.I. Growth and Income Fund.............................................. 0.61% 0.16% 0.77% 0.77%
AIM V.I. Value Fund.......................................................... 0.61% 0.15% 0.76% 0.76%
JANUS ASPEN SERIES(1)
Growth Portfolio............................................................. 0.65% 0.02% 0.67% 0.67%
International Growth Portfolio............................................... 0.65% 0.11% 0.76% 0.76%
MFS VARIABLE INSURANCE TRUST(2)
Emerging Growth Series....................................................... 0.75% 0.09% 0.84% 0.83%
Research Series.............................................................. 0.75% 0.11% 0.86% 0.85%
OCC ACCUMULATION TRUST
Managed Portfolio............................................................ 0.77% 0.06% 0.83% 0.83%
Small Cap Portfolio.......................................................... 0.80% 0.09% 0.89% 0.89%
T. ROWE PRICE(3)
T. Rowe Price Equity Series, Inc., Equity Income
Portfolio................................................................... 0.85% 0.00% 0.85% 0.85%
T. Rowe Price International Series, Inc., International
Stock Portfolio............................................................. 1.05% 0.00% 1.05% 1.05%
WARBURG PINCUS TRUST(4)
Global Post-Venture Capital Portfolio........................................ 1.25% 0.33% 1.58% 1.41%
</TABLE>
- ----------
* Reflects fee waivers and reimbursement of expenses, if any. The
following Expense Examples use "Total Actual Expenses."
The purpose of the foregoing tables is to assist Participants in understanding
the expenses that they bear, directly or indirectly, relating to the Prudential
Discovery Select Group Variable Contract Account and the Funds. The expenses
relating to the Funds (other than those in the Prudential Series Fund) have been
provided to Prudential by the Funds, and have not been independently verified by
Prudential. See the sections on charges in this Prospectus and the accompanying
prospectuses for the Funds.
6
<PAGE>
(1) Janus Aspen Series. Table reflects expenses based upon expenses for the
fiscal year ended December 31, 1999, restated to reflect a reduction in the
mangement fee.
(2) MFS Variable Insurance Trust: An expense offset arrangement with the Fund's
custodian resulted in a reduction in Other Expenses by 0.01%.
(3) T. Rowe Price Funds: Investment Management Fees include ordinary expenses of
operating the funds.
(4) Warburg Pincus Trust. Fee waivers and expense reimbursements or credits
reduced Investment Management Fees and Other Expenses during 1999 but may be
discontinued at any time.
EXAMPLES OF FEES AND EXPENSES
The following examples illustrate the cumulative dollar amount of all the above
Expenses that you would incur on each $1,000 of investment.
o The examples assume a consistent 5% annual return on invested assets.
o The examples assume that the annual account charge is deducted from the
assets of each Subaccount based on a Participant Account Value of
$25,000.
THE EXAMPLES SHOULD NOT BE CONSIDERED TO BE A REPRESENTATION OF PAST OR FUTURE
EXPENSES; ACTUAL EXPENSES INCURRED IN ANY GIVEN YEAR MAY BE MORE OR LESS THAN
THOSE SHOWN IN THE EXAMPLES.
7
<PAGE>
TABLE I: CONTRACTS OTHER THAN SMALL PLAN CONTRACT
If a Participant withdraws his entire Participant Account Value from the
specified Subaccount just prior to the end of the applicable time period, the
Participant would pay the following cumulative expenses on each $1,000 invested.
The cumulative expenses shown below would be incurred with respect to a
Participant withdrawal under a Contract other than the Small Plan Contract, and
in both this Table and Table II assume an administrative fee of 0.85%. If the
administrative fee were less than 0.85%, these expenses would be reduced
accordingly.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
THE PRUDENTIAL SERIES FUND, INC.
<S> <C> <C> <C> <C>
Money Market Subaccount .......................................... $ 66 $ 79 $ 94 $184
Diversified Bond Subaccount....................................... 66 79 95 185
Government Income Subaccount...................................... 66 80 95 187
Conservative Balanced Subaccount.................................. 67 84 102 201
Flexible Managed Subaccount....................................... 68 85 105 206
High Yield Bond Subaccount........................................ 68 84 104 204
Stock Index Subaccount............................................ 68 78 93 181
Equity Income Subaccount.......................................... 66 79 94 184
Equity Subaccount................................................. 66 80 97 190
Prudential Jennison Subaccount.................................... 68 88 105 207
Global Subaccount................................................. 70 92 116 229
AIM VARIABLE INSURANCE FUNDS
AIM V.I. Growth and Income Subaccount............................. 69 90 113 222
AIM V.I. Value Subaccount......................................... 69 89 112 221
JANUS ASPEN SERIES
Growth Subaccount................................................. 68 97 107 211
International Growth Subaccount................................... 69 89 112 221
MFS VARIABLE INSURANCE TRUST
Emerging Growth Subaccount........................................ 70 92 116 229
Research Subaccount............................................... 70 92 117 231
OCC ACCUMULATION TRUST
Managed Subaccount................................................ 70 91 116 228
Small Cap Subaccount.............................................. 70 93 119 235
T. ROWE PRICE
T. Rowe Price Equity Series, Inc., Equity Income Subaccount....... 70 92 117 230
T. Rowe Price International Series, Inc., International Stock
Subaccount.................................................... 72 98 117 251
WARBURG PINCUS TRUST
Global Post-Venture Capital Subaccount............................ 77 114 153 304
</TABLE>
8
<PAGE>
TABLE II: CONTRACTS OTHER THAN SMALL PLAN CONTRACT
For Contracts other than the Small Plan Contract, if a Participant does not
withdraw any portion of his Participant Account Value from the specified
Subaccount, or he uses Participant Account Value to effect an annuity as of the
end of the applicable time period, the Participant would pay the following
cumulative expenses on each $1,000 invested.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
THE PRUDENTIAL SERIES FUND, INC.
<S> <C> <C> <C> <C>
Money Market Subaccount ............................................... $16 $49 $84 $184
Diversified Bond Subaccount............................................ 16 49 85 185
Government Income Subaccount........................................... 16 50 85 187
Conservative Balanced Subaccount....................................... 17 54 92 201
Flexible Managed Subaccount............................................ 18 55 95 206
High Yield Bond Subaccount............................................. 18 54 94 204
Stock Index Subaccount................................................. 15 48 83 181
Equity Income Subaccount............................................... 16 49 84 184
Equity Subaccount...................................................... 16 50 87 190
Prudential Jennison Subaccount......................................... 18 55 95 207
Global Subaccount...................................................... 20 62 106 229
AIM VARIABLE INSURANCE FUNDS
AIM V.I. Growth and Income Subaccount.................................. 19 60 103 222
AIM V.I. Value Subaccount.............................................. 19 59 102 221
JANUS ASPEN SERIES
Growth Subaccount...................................................... 18 57 97 211
International Growth Subaccount........................................ 19 59 102 221
MFS VARIABLE INSURANCE TRUST
Emerging Growth Subaccount............................................. 20 62 106 229
Research Subaccount.................................................... 20 62 107 231
OCC ACCUMULATION TRUST
Managed Subaccount..................................................... 20 61 106 228
Small Cap Subaccount................................................... 20 63 109 235
T. ROWE PRICE
T. Rowe Price Equity Series, Inc., Equity Income Subaccount............ 20 62 107 230
T. Rowe Price International Series, Inc., International Stock
Subaccount............................................................ 22 68 117 251
WARBURG PINCUS TRUST
Global Post-Venture Capital Subaccount................................. 27 84 143 304
</TABLE>
9
<PAGE>
TABLE III: SMALL PLAN CONTRACTS
In the event of a full or partial Contract termination, resulting in a
withdrawal from the specified Subaccount just prior to the end of the applicable
time period, each Participant would pay the following cumulative expenses on
each $1,000 invested.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
THE PRUDENTIAL SERIES FUND, INC.
<S> <C> <C> <C> <C>
Money Market Subaccount ............................................... $ 68 $ 85 $105 $206
Diversified Bond Subaccount............................................ 68 85 105 207
Government Income Subaccount........................................... 68 86 106 208
Conservative Balanced Subaccount....................................... 69 90 113 222
Flexible Managed Subaccount............................................ 70 91 114 227
High Yield Bond Subaccount............................................. 70 91 114 225
Stock Index Subaccount................................................. 67 84 103 203
Equity Income Subaccount............................................... 68 85 105 206
Equity Subaccount...................................................... 68 87 107 211
Prudential Jennison Subaccount......................................... 70 91 116 228
Global Subaccount...................................................... 72 98 126 250
AIM VARIABLE INSURANCE FUNDS
AIM V.I. Growth and Income Subaccount.................................. 71 96 123 243
AIM V.I. Value Subaccount.............................................. 71 95 122 242
JANUS ASPEN SERIES
Growth Subaccount...................................................... 70 93 118 233
International Growth Subaccount........................................ 71 95 122 242
MFS VARIABLE INSURANCE TRUST
Emerging Growth Subaccount............................................. 72 98 126 250
Research Subaccount.................................................... 72 98 127 252
OCC ACCUMULATION TRUST
Managed Subaccount..................................................... 72 98 126 249
Small Cap Subaccount................................................... 72 99 129 255
T. ROWE PRICE
T. Rowe Price Equity Series, Inc., Equity Income Subaccount............ 72 98 127 251
T. Rowe Price International Series, Inc., International Stock
Subaccount............................................................ 74 104 137 271
WARBURG PINCUS TRUST
Global Post-Venture Capital Subaccount................................. 79 120 163 323
</TABLE>
10
<PAGE>
TABLE IV: SMALL PLAN CONTRACTS
If there is no full or partial Contract termination, or the Participant
annuitizes, the Participant would pay the following cumulative expenses on each
$1,000 invested.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
THE PRUDENTIAL SERIES FUND, INC.
<S> <C> <C> <C> <C>
Money Market Subaccount ........................................... 18 55 95 206
Diversified Bond Subaccount........................................ 18 55 95 207
Government Income Subaccount....................................... 18 56 96 208
Conservative Balanced Subaccount................................... 19 60 103 222
Flexible Managed Subaccount........................................ 20 61 105 227
High Yield Bond Subaccount......................................... 20 61 104 225
Stock Index Subaccount............................................. 17 54 93 203
Equity Income Subaccount........................................... 18 55 95 206
Equity Subaccount.................................................. 18 57 97 211
Prudential Jennison Subaccount..................................... 20 61 106 228
Global Subaccount.................................................. 22 68 116 250
AIM VARIABLE INSURANCE FUNDS
AIM V.I. Growth and Income Subaccount.............................. 21 66 113 243
AIM V.I. Value Subaccount.......................................... 21 65 112 242
JANUS ASPEN SERIES
Growth Subaccount.................................................. 20 63 108 233
International Growth Subaccount.................................... 21 65 112 242
MFS VARIABLE INSURANCE TRUST
Emerging Growth Subaccount......................................... 22 68 116 250
Research Subaccount................................................ 22 68 117 252
OCC ACCUMULATION TRUST
Managed Subaccount................................................. 22 68 116 249
Small Cap Subaccount............................................... 22 69 119 255
T. ROWE PRICE
T. Rowe Price Equity Series, Inc., Equity Income Subaccount........ 22 68 117 251
T. Rowe Price International Series, Inc., International Stock
Subaccount........................................................ 24 74 127 271
WARBURG PINCUS TRUST
Global Post-Venture Capital Subaccount............................. 29 90 153 323
</TABLE>
Loans taken by a Participant from a Participant Account may be subject to
charges for establishing and maintaining the loan. The examples with respect to
the Contracts do not take into account any deduction for such charges. The
required table of accumulation unit values, which sets out certain historical
information about the value of interests in each Subaccount, appears in the
Appendix to this prospectus on Page 45.
11
<PAGE>
GENERAL INFORMATION ABOUT PRUDENTIAL,
THE PRUDENTIAL DISCOVERY SELECT GROUP VARIABLE CONTRACT ACCOUNT AND
THE INVESTMENT OPTIONS AVAILABLE UNDER THE
CONTRACTS
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
Prudential is a mutual life insurance company incorporated in 1873 under the
laws of the State of New Jersey. Our corporate office is located at 751 Broad
Street, Newark, New Jersey. We have been investing for pension funds since 1928.
Prudential is currently considering reorganizing itself into a publicly traded
stock company through a process known as "demutualization." On February 10,
1998, the Company's Board of Directors authorized management to take the
preliminary steps necessary to allow the Company to demutualize. On July 1,
1998, legislation was enacted in New Jersey that would permit this conversion to
occur and that specified the process for conversion. Demutualization is a
complex process involving development of a plan of reorganization, adoption of a
plan by the Company's Board of Directors, a public hearing, voting by qualified
policyholders and regulatory approval. Prudential is working toward completing
this process in 2001 and currently expects adoption by the Board of Directors to
take place in the latter part of 2000. However, there is no certainty that the
demutualization will be completed in this timeframe or that the necessary
approvals will be obtained. Also, it is possible that after careful review,
Prudential could decide not to demutualize or could decide to delay its plans.
The plan of reorganization, which has not been fully developed and approved,
would provide the criteria for determining eligibility and the methodology for
allocating shares or other consideration to those who would be eligible.
Generally the amount of shares or other consideration eligible customers would
receive would be based on a number of factors, including types, amounts and
issue years of the policies. As a general rule, owners of Prudential-issued
insurance policies and annuity contracts would be eligible, provided that their
policies were in force on the date Prudential's Board of Directors adopted a
plan of reorganization, while mutual fund customers and customers of the
company's subsidiaries would not be. It has not yet been determined whether any
exceptions to that general rule will be made with respect to policyholders and
contractholders of Prudential's subsidiaries. This does not constitute a
proposal, offer, solicitation or recommendation regarding any plan of
reorganization that may be proposed or a recommendation regarding the ownership
of any stock that could be issued in connection with any such demutualization.
Prudential generally is responsible for the administrative and recordkeeping
functions of the Prudential Discovery Select Group Variable Contract Account and
pays the expenses associated with them. These functions include enrolling
Participants, receiving and allocating contributions, maintaining Participant
Accounts, preparing and distributing confirmations, statements, and reports. The
administrative and recordkeeping expenses that we bear include salaries, rent,
postage, telephone, travel, legal, actuarial and accounting fees, office
equipment, stationery and maintenance of computer and other systems. With
respect to the Small Plan Contracts, Prudential has delegated certain of these
administrative and recordkeeping functions to the Small Plan Contract
Recordkeeper. Currently, the Small Plan Contract Recordkeeper is BISYS Plan
Services, L.P., 323 Norristown Road, Ambler, PA 19002.
Prudential is reimbursed for these administrative and recordkeeping expenses by
the annual account charge and the daily charge against the assets of each
Subaccount for administrative expenses.
12
<PAGE>
THE PRUDENTIAL DISCOVERY SELECT GROUP VARIABLE CONTRACT ACCOUNT
Prudential established the Prudential Discovery Select Group Variable Contract
Account (the "Discovery Account") on February 11, 1997, under New Jersey law as
a separate investment account. The Discovery Account meets the definition of a
"separate account" under federal securities laws. Prudential is the legal owner
of the assets in the Discovery Account, and is obligated to provide all benefits
under the Contracts. Prudential will at all times maintain assets in the
Discovery Account with a total market value sufficient to support its
obligations under the Contracts. Prudential segregates the Discovery Account
assets from all of its other assets. Thus, those assets are not chargeable with
liabilities arising out of any other business Prudential conducts. The Discovery
Account's assets may include funds contributed by Prudential to commence
operation of the Discovery Account, and may include accumulations of the charges
Prudential makes against the Discovery Account. From time to time, Prudential
will transfer these additional assets to Prudential's General Account. Before
making any such transfer, Prudential will consider any possible adverse impact
the transfer might have on the Discovery Account.
Prudential registered the Discovery Account with the U.S. Securities and
Exchange Commission ("SEC") under the Investment Company Act of 1940 ("1940
Act") as a unit investment trust, which is a type of investment company. This
registration does not mean that the SEC supervises the management or investment
policies or practices of the Discovery Account. For state law purposes, the
Discovery Account is treated as a part or division of Prudential. There are
currently twenty-two Subaccounts within the Discovery Account. These Subaccounts
invest in corresponding portfolios of the Funds available under the Contracts.
Prudential may establish additional Subaccounts in the future.
THE FUNDS
The following is a list of each Fund, its investment objective and its
investment adviser:
THE PRUDENTIAL SERIES FUND, INC.
MONEY MARKET PORTFOLIO. The investment objective is maximum current income
consistent with the stability of capital and the maintenance of liquidity. The
portfolio invests in short-term debt obligations that mature in 13 months or
less.
DIVERSIFIED BOND PORTFOLIO. The investment objective is a high level of income
over a longer term while providing reasonable safety of capital. The portfolio
invests primarily in higher grade debt obligations and high quality money market
instruments.
GOVERNMENT INCOME PORTFOLIO. The investment objective is a high level of income
over the long term consistent with the preservation of capital. The portfolio
invests primarily in U.S. Government securities, including intermediate and
long-term U.S. Treasury securities and debt obligations issued by agencies or
instrumentalities established by the U.S. Government.
CONSERVATIVE BALANCED PORTFOLIO. The investment objective is a total investment
return consistent with a conservatively managed diversified portfolio. The
portfolio invests in a mix of equity securities, debt obligations and money
market instruments.
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<PAGE>
FLEXIBLE MANAGED PORTFOLIO. The investment objective is a high total return
consistent with an aggressively managed diversified portfolio. The portfolio
invests in a mix of equity securities, debt obligations and money market
instruments.
HIGH YIELD BOND PORTFOLIO. The investment objective is a high total return. The
portfolio invests primarily in high yield/high risk debt securities.
STOCK INDEX PORTFOLIO. The investment objective is investment results that
generally correspond to the performance of publicly-traded common stocks. The
portfolio attempts to duplicate the price and yield performance of the Standard
& Poor's 500 Composite Stock Price Index (the "S&P 500 Index").
EQUITY INCOME PORTFOLIO. The investment objective is both current income and
capital appreciation. The portfolio invests primarily in common stocks and
convertible securities that provide good prospects for returns above those of
the Standard & Poor's 500 Composite Stock Price Index or the NYSE Composite
Index.
EQUITY PORTFOLIO. The investment objective is capital appreciation. The
portfolio invests primarily in common stocks of major established corporations
as well as smaller companies that offer attractive prospects of appreciation.
PRUDENTIAL JENNISON PORTFOLIO. The investment objective is to achieve long-term
growth of capital. The portfolio invests primarily in equity securities of major
established corporations that offer above average-growth prospects.
GLOBAL PORTFOLIO. The investment objective is long-term growth of capital. The
portfolio invests primarily in common stocks (and their equivalents) of foreign
and U.S. companies.
Prudential is the investment advisor for each of the portfolios of the
Prudential Series Fund. Prudential has a Service Agreement with its wholly-owned
subsidiary, The Prudential Investment Corporation ("PIC"), which provides that,
subject to Prudential's supervision, PIC will furnish investment advisory
services in connection with the management of the Prudential Series Fund. In
addition, Prudential has entered into a Subadvisory Agreement with its
wholly-owned subsidiary Jennison Associates Capital Corp. ("Jennison"), under
which Jennison furnishes investment advisory services in connection with the
management of the Prudential Jennison Portfolio.
AIM VARIABLE INSURANCE FUNDS
AIM V.I. GROWTH AND INCOME FUND. The Fund's investment objective is to seek
growth of capital, with current income as a secondary objective.
AIM V.I. VALUE FUND. The Fund's investment objective is to achieve long-term
growth of capital by investing primarily in equity securities judged by AIM
Advisors, Inc. to be undervalued relative to the current or projected earnings
of the companies issuing the securities, or relative market values of assets
owned by the companies issuing the securities or relative to the equity market
generally. Income is a secondary objective and would be satisfied principally
from the income (interest and dividends) generated by the common stocks,
convertible bonds and convertible preferred stocks that make up the Fund's
portfolio.
14
<PAGE>
AIM Advisors, Inc. serves as the investment adviser to the AIM V.I. Growth and
Income Fund and the AIM V.I. Value Fund.
JANUS ASPEN SERIES
GROWTH PORTFOLIO. A diversified portfolio that seeks long-term growth of capital
by investing primarily in common stocks, with an emphasis on companies with
larger market capitalizations.
INTERNATIONAL GROWTH PORTFOLIO. A diversified portfolio that seeks long-term
growth of capital by investing primarily in common stocks of foreign issuers.
Janus Capital Corporation is the investment adviser to the Growth Portfolio and
the International Growth Portfolio, and is responsible for the day-to-day
management of the portfolios and other business affairs of the portfolios.
MFS VARIABLE INSURANCE TRUST
EMERGING GROWTH SERIES. This Series seeks to provide long-term growth of
capital. Dividend and interest income from portfolio securities, if any, is
incidental to the Series' investment objective of long-term growth of capital.
RESEARCH SERIES. The Research Series' investment objective is to provide
long-term growth of capital and future income.
Massachusetts Financial Services Company, a Delaware corporation, is the
investment adviser to each MFS Series.
OCC ACCUMULATION TRUST (FORMERLY KNOWN AS QUEST FOR VALUE ACCUMULATION TRUST)
MANAGED PORTFOLIO. Growth of capital over time through investment in a portfolio
consisting of common stocks, bonds and cash equivalents, the percentages of
which will vary based on management's assessments of relative investment.
SMALL CAP PORTFOLIO. Capital appreciation through investment in a diversified
portfolio of equity securities of companies with market capitalizations of under
$1 billion.
OpCap Advisors (formerly known as Quest for Value Advisors, the "OCC Manager")
is responsible for management of the OCC Accumulation Trust's business. Pursuant
to the investment advisory agreement with the OCC Accumulation Trust, and
subject to the authority of the Board of Trustees, the OCC Manager supervises
the investment operation of the Managed Portfolio and the Small Cap Portfolio,
furnishes advice and recommendations with respect to investments, investment
policies and the purchase and sale of securities and provides certain
administrative services for the OCC Accumulation Trust.
15
<PAGE>
T. ROWE PRICE
T. ROWE PRICE EQUITY SERIES, INC., EQUITY INCOME PORTFOLIO. The fund's objective
is to provide substantial dividend income as well as long-term capital
appreciation through investment in common stocks of established companies.
T. ROWE PRICE INTERNATIONAL SERIES, INC., INTERNATIONAL STOCK PORTFOLIO. The
fund's objective is to seek long-term growth of capital through investment
primarily in common stocks of established, non-U.S. companies.
T. Rowe Price Associates, Inc. is the Investment Manager for the Equity Income
Portfolio and Rowe Price-Fleming International, Inc. is the Investment Manager
for the International Stock Portfolio.
WARBURG PINCUS TRUST
GLOBAL POST-VENTURE CAPITAL PORTFOLIO. Seeks long-term growth of capital by
investing primarily in equity securities of issuers in their post-venture
capital stage of development and pursues an aggressive investment strategy.
The Warburg Pincus Trust employs Warburg, Pincus Counselors, Inc. as investment
adviser and Abbott Capital Management, L.P. as its sub-investment adviser with
respect to a portion of the Post-Venture Capital Portfolio allocated to private
limited partnerships or other investment funds.
You can find further information about the Fund portfolios in the accompanying
prospectuses for each Fund.
-----------------------------------------
The investment advisors to the various Funds charge a daily investment
management fee as compensation for their services, as set forth in the table
beginning on page 6 and as more fully described in the prospectus for each Fund.
Prudential recognizes that in the future it may become disadvantageous for both
variable life insurance and variable annuity contract separate accounts to
invest in the same underlying mutual fund. Although neither Prudential nor the
Funds currently foresees any such disadvantage, the Funds' Boards of Directors
intend to monitor events in order to identify any material conflict between
variable life insurance and variable annuity contractholders and to determine
what action, if any, should be taken in response to a conflict. Material
conflicts could result from such things as: (1) changes in state insurance law;
(2) changes in federal income tax law; (3) changes in the investment management
of any portfolio of the Funds; or (4) differences between voting instructions
given by variable life insurance and variable annuity contractholders.
An affiliate of each of the Funds (other than the portfolios in the Prudential
Series Fund) will compensate Prudential based upon an annual percentage of the
average assets held in the Fund by Prudential under the Contracts. These
percentages vary by Fund, and reflect administrative and other services provided
by Prudential.
16
<PAGE>
You can review a full description of the Funds in the accompanying prospectuses
for each Fund and in the related statements of additional information. You
should read those documents in conjunction with this Prospectus. There is no
assurance that the investment objectives will be met.
A Fund may have an investment objective and investment policies closely
resembling those of a mutual fund within the same complex that is sold directly
to individual investors. Despite such similarities, there can be no assurance
that the investment performance of any such Fund will resemble that of its
retail fund counterpart.
GUARANTEED INTEREST ACCOUNT
The Guaranteed Interest Account is a credited interest option available to fund
certain group annuity contracts issued by Prudential. Amounts that you allocate
to the Guaranteed Interest Account become part of the General Account of
Prudential. Prudential's General Account consists of all assets owned by
Prudential other than those in the Discovery Account and other separate accounts
of Prudential. Subject to applicable law, Prudential has sole discretion over
the investment of the assets of the General Account.
Because of exemptive and exclusionary provisions, Prudential has not registered
interests in the General Account (which include interests in the Guaranteed
Interest Account) under the Securities Act of 1933. Nor has Prudential
registered the General Account as an investment company under the Investment
Company Act of 1940. Accordingly, those Acts do not apply to the General Account
or any interests therein, and Prudential has been advised that the staff of the
SEC has not reviewed the disclosures in the Prospectus relating to the General
Account. Disclosures that we make regarding the General Account may, however, be
subject to certain generally applicable provisions of the federal securities
laws relating to the accuracy and completeness of statements made in
prospectuses.
Under certain Contracts, amounts that you allocate to the Guaranteed Interest
Account may be held within one or more guaranteed separate accounts. Prudential
has not registered interests in such separate account(s) under the Securities
Act of 1933 and has not registered the separate accounts as investment companies
under the Investment Company Act of 1940.
THE CONTRACTS
Prudential generally issues the Contracts to Employers whose employees may
become Participants. Under an IRA, a Participant's spouse may also become a
Participant. Prudential may issue a Contract to an association that represents
employers of employees who become Participants, to an association or union that
represents members that become Participants, and to a trustee of a trust with
participating employers whose employees become Participants. Even though an
Employer, an association or a trustee is the Contractholder, the Contract
normally provides that Participants will have the rights and interests under
them that are described in this Prospectus. When a Contract is used to fund
a deferred compensation plan established by a tax-exempt entity under Section
457 of the Code, all rights under the Contract are owned by the Employer to
whom, or on whose behalf, the Contract is issued. All amounts that Prudential
pays under the Contract are payable to the Employer, and are its exclusive
property. For a plan established under Section 457 of the Code, the employee has
no rights or interests under the Contract, including any right or interest in
any Subaccount of the Discovery Account, except as provided in the Employer's
plan. This may also be true with respect to certain non-qualified annuity
arrangements. Notwithstanding the foregoing, the rules for Section 457 plans
established by state and local governments would be similar to those specified
in this paragraph.
Also, a particular plan, even if it is not a deferred compensation plan, may
limit a Participant's exercise of certain rights under a Contract. Participants
should check the provisions of their Employer's plan or any agreements with the
Employer to see if there are any such limitations and, if so, what they are.
17
<PAGE>
THE ACCUMULATION PERIOD
Contributions; Crediting Units; Enrollment Forms; Deduction for Administrative
Expenses.
Ordinarily, an Employer will make contributions periodically to the Contract
pursuant to a payroll deduction or similar agreement between the Participant and
his Employer. In addition, you may make contributions in ways other than payroll
deduction under certain circumstances.
As a Participant, you designate what portion of the contributions made on your
behalf should be invested in the Subaccounts or the Guaranteed Interest Account.
The Participant may change this designation usually by notifying Prudential as
described below under "Requests, Consents, and Notices," page 32. Under certain
Contracts (including the Small Plan Contract), an entity other than Prudential
keeps certain records. Participants under those Contracts must contact the
record-keeper. See "Modified Procedures," page 28.
Prudential credits the full amount (100%) of each contribution designated for
investment in any Subaccount to a Participant Account maintained for the
Participant. Except for the initial contribution, the number of Units that
Prudential credits to a Participant in a Subaccount is determined by dividing
the amount of the contribution made on his behalf to that Subaccount by the
Subaccount's Unit Value determined as of the end of the Valuation Period during
which the contribution is received by Prudential at the address shown on the
cover page of this Prospectus or such other address as may be communicated in
writing by Prudential.
Prudential will invest the initial contribution made for a Participant in a
Subaccount no later than two Business Days after it is received by Prudential,
if it is preceded or accompanied by satisfactory enrollment information. If the
Contractholder submits an initial contribution on behalf of one or more new
Participants that is not preceded or accompanied by satisfactory enrollment
information, then Prudential will allocate such contribution to the Prudential
Series Fund Money Market Subaccount upon receipt, and also will send a notice to
the Contractholder or its agent that requests allocation information for each
such Participant. If Prudential does not receive the necessary enrollment
information in response to its initial notice, Prudential will deliver up to
three additional notices to the Contractholder or its agent at monthly intervals
that request such allocation information. After 105 days have passed from the
time that Units of the Money Market Subaccount were purchased on behalf of
Participants who failed to provide the necessary enrollment information,
Prudential will redeem the relevant Units and pay the proceeds (including
earnings) to the Contractholder. Any proceeds that Prudential pays to the
Contractholder under this procedure may be considered a prohibited and taxable
reversion to the Contractholder under current provisions of the Code. Similarly,
proceeds that Prudential returns may cause the Contractholder to violate a
requirement under the Employee Retirement Income Security Act of 1974 ("ERISA"),
as amended, to hold all plan assets in trust. The Contractholder may avoid both
problems if it arranges to have the proceeds paid into a qualified trust or
annuity contract.
A change in the value of a Unit will not affect the number of Units of a
particular Subaccount credited to a Participant. However, the dollar value of a
Unit will vary from Business Day to Business Day depending upon the investment
experience of the Subaccount. Prudential will reduce the number of Units
credited to a Participant in a Subaccount to reflect any annual account charge.
Prudential determines the value of a Participant Account in a Subaccount on any
particular day by multiplying the total number of Units credited to the
Participant by the Subaccount's Unit Value on that day.
18
<PAGE>
Prudential set the Unit Value for each Subaccount at $10.00 on the date of
commencement of operations of that Subaccount. Prudential determines the Unit
Value for any subsequent Business Day as of the end of that day by multiplying
the Unit Change Factor for that day by the Unit Value for the preceding Business
Day. Because of its differing charges, the Small Plan Contract will have a
different Unit Value than the other Contracts.
Prudential determines the Unit Change Factor for any Business Day by dividing
the current day net asset value for Fund shares by the net asset value for
shares on the previous Business Day. This factor is then reduced by a daily
equivalent of the mortality and expense risk fee and the administrative fee.
Prudential determines the value of the assets of a Subaccount by multiplying the
number of Fund shares held by that Subaccount by the net asset value of each
share, and adding the value of dividends declared by the Fund but not yet paid.
ALLOCATION OF PURCHASE PAYMENTS
A Participant determines how the initial contribution will be allocated among
the Subaccounts by specifying the desired allocation on the application or
enrollment form. A Participant may choose to allocate nothing to a particular
Subaccount. Unless a Participant tells us otherwise, we will allocate subsequent
contributions in the same proportions as the most recent contribution made by
that Participant. With respect to Contracts other than the Small Plan Contract,
a Participant may change the way in which subsequent contributions are allocated
by providing Prudential with proper instruction as described below under
"Requests, Consents, and Notices," page 32. See Transfers, below.
ASSET ALLOCATION PROGRAM
Prudential may make available an Asset Allocation Program to assist Participants
in determining how to allocate purchase payments. If a Participant chooses to
participate in the program, the Participant may do so by utilizing a form
available in the employee enrollment kit. The form will include a series of
illustrations depicting various asset allocation models based on age and risk
tolerance. In the future, Prudential may make available a more comprehensive
model based on an internet web site for use by Participants. Prudential offers
the Asset Allocation Program at no charge to the Participant. A Participant is
under no obligation to participate in the program or to invest according to the
program recommendations. A Participant may ignore, in whole or in part, the
investment allocations provided by the program.
Prudential regards the Asset Allocation Program as an aid in making purchase
payment allocations. You should not view the Program as any guarantee of
investment return. You also should realize that there can be no assurance that
any Fund portfolio will attain its investment objectives. As a Participant, you
should consider reviewing your investor profile questionnaire annually, and each
time your investor profile changes.
TRANSFERS
A Participant may transfer out of an investment option into any combination of
other investment options available under the Contract. Generally, the transfer
request may be in dollars, such as a request to transfer $1,000 from one
19
<PAGE>
Subaccount or from the Guaranteed Interest Account, or, in the case of
Subaccounts, may be in terms of a percentage reallocation among Subaccounts.
Under certain Contracts, Prudential may require that transfer requests
pertaining to the Guaranteed Interest Account or the Subaccounts be effected in
terms of whole number percentages only, and not by dollar amount. A Participant
may make transfers by proper notice to Prudential (or to the Small Plan Contract
Recordkeeper, with respect to such Contracts), as described below under
"Requests, Consents, and Notices," page 31.
If a Contractholder chooses telephone privileges, each Participant will
automatically be enrolled to use the Telephone Transfer System. A Participant
may decline telephone privileges on a form supplied by the Contractholder or
Prudential. Prudential has adopted procedures designed to ensure that requests
by telephone are genuine. We will not be held liable for following telephone
instructions we reasonably believe to be genuine. We cannot guarantee that a
Participant will be able to get through to complete a telephone transfer during
peak periods such as periods of drastic economic or market change. The Small
Plan Contract Recordkeeper also has adopted procedures designed to ensure that
requests by telephone are genuine, and similarly disclaims responsibility for
unauthorized telephone transactions and for telephone calls that may not get
through.
Unless restricted by the retirement arrangement under which a Participant is
covered, when Prudential receives a duly completed written transfer request form
or properly authorized telephone transfer request, Prudential will transfer all
or a portion of the Participant Account in any of the Subaccounts to another
Subaccount or from the Guaranteed Interest Account to the Subaccounts.
Prudential may restrict transfers from the Guaranteed Interest Account. There is
no minimum transfer amount. As of the Business Day you make the transfer
request, Prudential will reduce the Subaccount(s) from which the transfer is
made by the number of Units obtained by dividing the amount to be transferred by
the Unit Value for the applicable Business Day. If the transfer is made to
another Subaccount as of the same day, the number of Units Prudential credits to
the Participant in that Subaccount will be increased by means of a similar
calculation. Prudential reserves the right to limit the frequency of these
transfers. All transfers are subject to the terms and conditions set forth in
this Prospectus and in the Contract(s) covering a Participant.
Prudential did not design the Contracts for professional market timing
organizations or other organizations or individuals using programmed, large, or
frequent transfers. A pattern of exchanges that coincides with a "market timing"
strategy may be disruptive to the Discovery Account and the Funds, and
Prudential will discourage such a practice. If such a pattern were to be found,
we may be required to modify the transfer procedures, including but not limited
to, not accepting transfer requests of an agent acting under a power of attorney
on behalf of more than one owner.
Prudential may stipulate different procedures for Contracts under which an
entity other than Prudential provides record keeping services. Although there is
presently no charge for transfers, Prudential reserves the right to impose such
charges in the future.
Certain Contracts, including the Small Plan Contract, may prohibit transfers
from the Guaranteed Interest Account into non-equity investment options that are
characterized in such Contract as "competing" with Prudential's General Account
options with regard to investment characteristics. If a Contract precludes such
transfers, the Contract will further require that amounts transferred from the
Guaranteed Interest Account into non-competing investment options, such as a
Subaccount investing in a stock Fund, may not for 90 days thereafter be
transferred into a "competing" option or back to the Guaranteed Interest
Account.
A Contract may include a provision that, upon discontinuance of contributions
for all Participants of an Employer covered under a Contract, the Contractholder
may request Prudential to make transfer payments from any of the
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Subaccounts to a designated alternate funding agency. If the Contract is used in
connection with certain tax-deferred annuities subject to Section 403(b) of the
Code, or with IRAs, Prudential will promptly notify each affected Participant
and each beneficiary of a deceased Participant that such a request has been
received. Within thirty days of receipt of such notice, each recipient may elect
in writing on a form approved by Prudential to have any of his or her
Participant Account Value transferred to the alternate funding agency. If he or
she does not so elect, his or her investment options will continue in force
under the Contract. If he or she does so elect, his or her account will be
canceled as of a "transfer date" which is the Business Day specified in the
Contractholder's request or 90 days after Prudential receives the request,
whichever is later. The product of Units in the Participant's Subaccounts
immediately prior to cancellation and the appropriate Unit Value on the transfer
date, less the applicable withdrawal and annual account charges, will be
transferred to the designated alternate funding agency in cash.
Subject to any conditions or limitations regarding transfers contained in the
tax-deferred annuity arrangement under which a Participant is covered, a
Participant can:
o continue to make transfers of all or part of his interest in his
Participant Account among the available investment options offered,
and
o transfer directly all or part of his interest in his Participant
Account to a Section 403(b) tax-deferred annuity contract of another
insurance company or to a mutual fund custodial account under Section
403(b)(7).
Contributions may be discontinued for all Participants under a Contract or for
all Participants of an Employer covered under the Contract used in connection
with a deferred compensation plan subject to Section 457 of the Code due to
certain circumstances, such as a change in any law or regulation, which would
have an adverse effect on Prudential in fulfilling the terms of the Contract. If
contributions are so discontinued, Prudential may initiate transfer payments
from any Subaccount to an alternate funding agency. The transfer would be made
as described in the paragraph above.
Under certain types of retirement arrangements, the Retirement Equity Act of
1984 requires that in the case of a married Participant, certain requests for
transfer payments other than those described above must include the consent of
the Participant and spouse and must be notarized or witnessed by an authorized
plan representative.
Transfers that you make among Subaccounts will take effect as of the end of the
Valuation Period in which a proper transfer request is received at Prudential
(or the Small Plan Contract Recordkeeper, in the case of the Small Plan
Contract).
From time to time, Prudential may make an offer to holders of other variable
annuities that Prudential or an affiliate issues to exchange their variable
annuity contracts for interests in a Contract issued by the Account. Prudential
will conduct any such exchange offer in accordance with SEC rules and other
applicable law. Current SEC rules pertaining to exchange offers among affiliated
variable annuity contracts generally require, with certain exceptions, that no
fee be imposed at the time of the exchange. Under this rule, Prudential could
charge an administrative fee at the time of the exchange, although we have no
present intention of doing so. SEC rules also require Prudential to give an
exchanging variable annuity contractholder "credit", for purposes of calculating
any withdrawal charge applicable under the Contract, for the time during which
the contractholder held the variable annuity that was exchanged.
DOLLAR COST AVERAGING
Prudential may make available an administrative feature called Dollar Cost
Averaging ("DCA"). This feature allows Participants to transfer amounts out of
the Guaranteed Interest Account or one of the variable investment options and
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into one or more other variable investment options. Transfers may be in specific
dollar amounts or percentages of the amount in the DCA account at the time of
the transfer. A Participant may ask that transfers be made monthly, quarterly,
semi-annually or annually. A Participant can add to the DCA account at any time.
Each automatic transfer will take effect in monthly, quarterly, semi-annual or
annual intervals as designated by the Participant. If the New York Stock
Exchange and Prudential are not open on a transfer date, the transfer will take
effect as of the end of the Valuation Period which immediately follows that
date. Automatic transfers continue until the amount specified has been
transferred, or until the Participant notifies us and we process a change in
allocation or cancellation of the feature. Prudential currently imposes no
charge for this feature. Prudential would impose such a charge only pursuant to
an amendment to an administrative services agreement. Such an amendment would
have to be agreed to in writing (or its electronic equivalent) by both
Prudential and the Contractholder.
AUTO-REBALANCING
The Contracts may offer another investment technique. The Auto-Rebalancing
feature will allow Participants to automatically rebalance Subaccount assets at
specified intervals based on percentage allocations that they choose. For
example, suppose a Participant's initial investment allocation of variable
investment options is split 40% and 60%, respectively. Then, due to investment
results, that split changes. A Participant may instruct that those assets be
rebalanced to his or her original or different allocation percentages.
Auto-Rebalancing can be performed on a one-time basis or periodically, as a
Participant chooses. A Participant may select that rebalancing occur in monthly,
quarterly, semi-annual or annual intervals. Rebalancing will take effect as of
the end of the Valuation Period for each applicable interval. It will continue
at those intervals until the Participant notifies us otherwise. If the New York
Stock Exchange and Prudential are not open on the rebalancing date, the transfer
will take effect as of the end of the Valuation Period which immediately follows
that date. Prudential currently imposes no charge for this feature. Prudential
would impose such a charge only pursuant to an amendment to an administrative
services agreement, which would have to be agreed to in writing (or its
electronic equivalent) by both Prudential and the Contractholder.
WITHDRAWALS
Under certain circumstances as described in the retirement arrangement under
which he is covered, a Participant may withdraw at any time all or part of his
Participant Account Value that is attributable to Employer contributions or
after-tax Participant contributions, if any.
The Code imposes restrictions on withdrawals from tax-deferred annuities subject
to Section 403(b) of the Code. Pursuant to Section 403(b)(11) of the Code,
amounts attributable to a Participant's salary reduction contributions
(including the earnings thereon) that are made under a tax deferred annuity
after December 31, 1988 can only be withdrawn (redeemed) when the Participant
attains age 59 1/2, separates from service with his employer, dies, or becomes
disabled (within the meaning of Section 72(m)(7) of the Code). However, the Code
permits the withdrawal at any time of amounts attributable to tax-deferred
annuity salary reduction contributions (excluding the earnings thereon) that are
made after December 31, 1988, in the case of a hardship. If the arrangement
under which a Participant is covered contains a financial hardship provision, a
Participant can make withdrawals in the event of the hardship.
Furthermore, subject to any restrictions upon withdrawals contained in the
tax-deferred annuity arrangement under which a Participant is covered, a
Participant can withdraw at any time all or part of his Participant Account
Value under a predecessor Prudential tax-sheltered annuity contract, as of
December 31, 1988. Amounts earned after December 31, 1988 on the December 31,
1988 balance in a Participant Account attributable to salary reduction
contributions are, however, subject to the Section 403(b)(11) withdrawal
restrictions discussed above.
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With respect to retirement arrangements other than tax-deferred annuities
subject to Section 403(b) of the Code, a Participant's right to withdraw at any
time all or part of his Participant Account Value may be restricted by the
retirement arrangement under which he is covered. For example, Code Section 457
plans typically permit withdrawals only upon attainment of age 70, separation of
service, or for unforeseeable emergencies.
With respect to all Contracts, you may specify from which investment options you
would like the withdrawal processed. You may specify the withdrawal amount as a
dollar amount or as a percentage of the Participant Account Value in the
applicable Subaccount(s). If you do not specify from where you would like the
withdrawal processed, a partial withdrawal will be withdrawn proportionally from
all investment options.
Only amounts that you withdraw from contributions (including full withdrawals)
may be subject to a withdrawal charge. For purposes of determining withdrawal
charges, we consider withdrawals as having been made first from contributions.
See Withdrawal Charge, page 29. This differs from the treatment of withdrawals
for federal income taxes as described below, where generally, withdrawals are
considered to have been made first from investment income. We will effect the
withdrawal as of the end of the Valuation Period in which a proper withdrawal
request is received at Prudential (or the Small Plan Contract Recordkeeper, in
the case of the Small Plan Contract).
Prudential will generally pay the amount of any withdrawal within 7 days after
receipt of a properly completed withdrawal request. We will pay the amount of
any withdrawal requested, less any applicable tax withholding, withdrawal charge
and/or annual account charge. We may delay payment of any withdrawal allocable
to the Subaccount(s) for a longer period if the disposal or valuation of the
Discovery Account's assets is not reasonably practicable because the New York
Stock Exchange is closed for other than a regular holiday or weekend, trading is
restricted by the SEC, or the SEC declares that an emergency exists.
SYSTEMATIC WITHDRAWAL PLAN
If permitted by the Code and the retirement arrangement under which a
Participant is covered, Prudential may offer systematic withdrawals as an
administrative privilege. Under a systematic withdrawal arrangement, a
Participant may arrange for systematic withdrawals from the Subaccounts and the
Guaranteed Interest Account in which he invests. A Participant may arrange for
systematic withdrawals only if at the time he elects to have such an
arrangement, the balance in his Participant Account is at least $5,000. A
Participant who has not reached age 59 1/2, however, may not elect a systematic
withdrawal arrangement unless he has first separated from service with his
Employer. In addition, the $5,000 minimum balance does not apply to systematic
withdrawals made for the purpose of satisfying minimum distribution rules.
Federal income tax provisions applicable to the retirement arrangement under
which a Participant is covered may significantly affect the availability of
systematic withdrawals, how they may be made, and the consequences of making
them. Withdrawals by Participants are generally taxable. Participants who have
not reached age 59 1/2 may incur substantial tax penalties. Withdrawals made
after a Participant has attained age 70 1/2 and withdrawals by beneficiaries
must satisfy certain minimum distribution rules. See "Federal Tax Status," page
32.
You may arrange systematic withdrawals only pursuant to an election in a form
approved by Prudential. Under certain types of retirement arrangements, an
election to arrange for systematic withdrawals by a married Participant must be
consented to in writing by the Participant's spouse, with signatures notarized
or witnessed by an authorized plan representative, or equivalent electronic
procedure permitted by ERISA and related Federal regulations. The election must
specify that the systematic withdrawals will be made on a monthly, quarterly,
semi-annual, or annual basis.
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Prudential will effect all systematic withdrawals as of the day of the month
specified by the Contractholder, or, if such day is not a Business Day, then on
the next succeeding Business Day. Systematic withdrawals will continue until the
Participant has withdrawn all of the balance in his Participant Account or has
instructed Prudential in writing to terminate his systematic withdrawal
arrangement. The Participant may elect to make systematic withdrawals in equal
dollar amounts (in which case each withdrawal must be at least $250), unless it
is made to satisfy minimum distribution rules, or over a specified period of
time (at least three years). Where the Participant elects to make systematic
withdrawals over a specified period of time, the amount of each withdrawal
(which will vary, reflecting investment experience during the withdrawal period)
will be equal to the sum of the balances then in the Participant Account divided
by the number of systematic withdrawals remaining to be made during the
withdrawal period.
Prudential will take systematic withdrawals first out of the Participant's
investment, if any, in the Guaranteed Interest Account until that amount is
exhausted. Thereafter, Prudential will take systematic withdrawals pro rata from
the Subaccounts. Certain Contracts may specify that systematic withdrawals be
deducted in a different manner than that described immediately above.
A Participant may change the frequency, amount or duration of his systematic
withdrawals by submitting a form to Prudential or Prudential's designee.
Prudential will provide such a form to a Participant upon request. A Participant
may make such a change only once during each calendar year.
A Participant may at any time instruct Prudential to terminate the Participant's
systematic withdrawal arrangement. No systematic withdrawals will be made for a
Participant after Prudential has received this instruction. A Participant who
chooses to stop making systematic withdrawals may not again make them until the
next calendar year and may be subject to federal tax consequences as a result.
If a Participant arranges for systematic withdrawals, that will not affect any
of the Participant's other rights under the Contracts, including the right to
make withdrawals, and purchase a fixed dollar annuity.
Currently, Prudential does not impose a withdrawal charge upon systematic
withdrawals. However, Prudential may apply a withdrawal charge on systematic
withdrawals where payments are made for less than three years. Prudential would
impose any such charge only on Contracts other than the Small Plan Contract in
accordance with the withdrawal charge schedule set out in the Fee Table.
Prudential currently permits a Participant who is receiving systematic
withdrawals and over the age of 59 1/2 to make one additional, non-systematic,
withdrawal during each calendar year in an amount that does not exceed 10% of
the sum of his balances in the Participant Account and the Guaranteed Interest
Account without the application of the withdrawal charge.
TEXAS OPTIONAL RETIREMENT PROGRAM
Special rules apply with respect to Contracts covering persons participating in
the Texas Optional Retirement Program ("Texas Program").
Under the terms of the Texas Program, Texas will contribute an amount somewhat
larger than a Participant's contribution. Texas' contributions will be credited
to the Participant Account. Until the Participant begins his second year of
participation in the Texas Program, Prudential will have the right to withdraw
the value of the Units purchased for this account with Texas' contributions. If
the Participant does not commence his second year of Texas Program
participation, the value of those Units representing Texas' contributions will
be withdrawn and returned to the State.
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A Participant has withdrawal benefits for Contracts issued under the Texas
Program only in the event of the Participant's death, retirement or termination
of employment. Participants will not, therefore, be entitled to exercise the
right of withdrawal in order to receive in cash the Participant Account Value
credited to them under the Contract unless one of the foregoing conditions has
been satisfied. A Participant may, however, transfer the value of the
Participant's interest under the Contract to another Prudential contract or
contracts of other carriers approved under the Texas Program during the period
of the Participant's Texas Program participation.
DEATH BENEFIT
When Prudential receives due proof of a Participant's death and a claim and
payment election submitted on a form approved by us, we will pay to the
designated beneficiary a death benefit made up of the balance in the Participant
Account (after deduction of any annual account charges). The appropriate address
to which a death benefit claim generally should be sent is set out on the cover
page of this Prospectus. For certain Contracts, such as the Small Plan Contract,
a death benefit claim should be sent to a designated record keeper rather than
Prudential.
With respect to Contracts other than the Small Plan Contract, Prudential will
pay the death benefit, according to the Participant's instructions, in:
o one sum as if it were a single withdrawal,
o systematic withdrawals,
o an annuity, or
o a combination of the three.
Any such payment will be subject to the minimum distribution rules of Code
Section 401(a)(9) as described below under "Federal Tax Status." With respect to
the Small Plan Contract, the death benefit payment option listed in the fourth
bullet immediately above may not be available, although the other options are
available. If the Participant has not so directed, the beneficiary may, within
any time limit prescribed by or for the retirement arrangement that covered the
Participant, elect:
o to receive a one sum cash payment;
o to have a fixed dollar annuity purchased under the Contract on a
specified date, using the same annuity purchase rate basis that would
have applied if the Participant Account were being used to purchase an
annuity for the Participant;
o to receive regular payments in accordance with the systematic
withdrawal plan; or
o a combination of all or any two of (a), (b), and (c) above.
Unless restricted by the retirement arrangement under which the Participant is
covered, or unless the Participant has elected otherwise, if within one year
after the Participant's death the beneficiary elects to receive a one-sum cash
payment of the entire Participant Account, including the balance in all
Subaccounts, the total amount that Prudential will make available to the
beneficiary will be the greatest of:
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o the Participant's Account Value as of the date Prudential receives a
death benefit payment request in good order;
o the sum of all contributions made to the Participant Account less
withdrawals, transfers and charges; and
o the greatest of the Participant's Account Value calculated on every
third anniversary of the first contribution made on behalf of the
Participant (accompanied by complete documentation) under the
Contract, less subsequent withdrawals, transfers and charges.
Under certain types of retirement arrangements, the Retirement Equity Act of
1984 requires that in the case of a married Participant, a death benefit will be
payable to the Participant's spouse in the form of a "qualified pre-retirement
survivor annuity." A "qualified pre-retirement survivor annuity" is an annuity
for the lifetime of the Participant's spouse in an amount which can be purchased
with no less than 50% of the balance in the Participant Account as of the
Participant's date of death. Under the Retirement Equity Act, the spouse of a
Participant in a retirement arrangement which is subject to these rules may
consent to waive the pre-retirement survivor annuity benefit. Such consent must
acknowledge the effect of waiving the coverage, contain the signatures of the
Participant and spouse, and must be notarized or witnessed by an authorized plan
representative. Unless the spouse of a Participant in a Plan which is subject to
these requirements properly consents to the waiver of the benefit, Prudential
will pay 50% of the balance in the Participant Account to such spouse even if
the designated beneficiary is someone other than the spouse. Under these
circumstances, Prudential would pay the remaining 50% to the Participant's
designated beneficiary.
Unless the retirement arrangement that covered the Participant provides
otherwise, a beneficiary who elects to have a fixed-dollar annuity purchased for
himself may choose from among the available forms of annuity. See "Effecting an
Annuity," page 37. The beneficiary may elect to purchase an annuity immediately
or at a future date. If an election includes systematic withdrawals, the
beneficiary will have the right to terminate such withdrawals and receive the
remaining balance in the Participant Account in cash (or effect an annuity with
it), or to change the frequency, size or duration of such withdrawals, subject
to the minimum distribution rules. See "Federal Tax Status" section of this
Prospectus. If the beneficiary fails to make any election within any time limit
prescribed by or for the retirement arrangement that covered the Participant,
within seven days after the expiration of that time limit, Prudential will make
a one sum cash payment to the beneficiary, after deducting the annual account
charge. A specific Contract may provide that an annuity is payable to the
beneficiary if the beneficiary fails to make an election.
Until Prudential pays a death benefit that results in reducing to zero the
balance in the Participant Account, Prudential will maintain the Participant
Account Value in the Subaccounts and the Guaranteed Interest Account that make
up the Participant Account for the beneficiary in the same manner as they had
been for the Participant, except:
o the beneficiary may make no contributions; and
o the beneficiary may not take a loan; and
o no withdrawal charge will be imposed upon withdrawals.
DISCONTINUANCE OF CONTRIBUTIONS
By notifying Prudential, the Contractholder generally may discontinue
contributions on behalf of all Participants under a Contract or for all
Participants of an Employer covered under a Contract. Contributions under the
Contract will also be discontinued for all Participants covered by a retirement
arrangement that is terminated.
On 90 days' advance notice to the Contractholder, Prudential may elect not to
accept any new Participant, or not to accept further contributions for existing
Participants.
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The fact that contributions on a Participant's behalf are discontinued does not
otherwise affect the Participant's rights under the Contracts. However, if
contributions under a Program are not made for a Participant for a specified
period of time (24 months in certain states, 36 months in others) and the total
value of his Participant Account is at or below a specified amount ($1,000 in
certain states, $2,000 in others), Prudential may, if permitted by the Code,
elect to cancel that Participant Account unless prohibited by the retirement
arrangement, and pay the Participant the value (less the annual account charge)
as of the date of cancellation.
LOAN PROVISION
The loans described in this section are generally available to Participants in
401(a) plans and 403(b) programs. The interest rate and other terms and
conditions of the loan may vary from Contract to Contract.
For plans that are subject to ERISA, it is the responsibility of the Contract
trustee or fiduciary to ensure that the interest rate or other terms and
conditions of the loan comply with all Contract qualification requirements
including the ERISA regulations.
The loans described in this section, which involve the variable investment
options, work as follows. The minimum loan amount is as specified in the
Contract, or if not specified, as determined by Prudential. The maximum loan
amount is the lesser of:
o $50,000, reduced by the highest outstanding balance of loans during
the one year period immediately preceding the date of the loan, or
o 50% of the value of the Participant's vested interest under a
Contract.
Generally, in the loan application, the Contractholder (or in certain cases, the
Participant) designates the Subaccount(s) from which the loan amount is
deducted. To repay the loan, the Participant makes periodic payments of interest
plus a portion of the principal. Prudential invests those payments in the
Subaccounts chosen by the Participant. With respect to Contracts other than the
Small Plan Contract, the Participant may specify the Subaccounts from which he
may borrow and into which repayments may be invested. With respect to Contracts
other than the Small Plan Contract, if the Participant does not specify the
Subaccounts from which the loan amount is deducted, we will deduct the loan
amount pro rata from the Participant Account Value in the Subaccounts. With
respect to the Small Plan Contract, we deduct amounts borrowed from a
Participant's Subaccounts on a pro rata basis. With respect to such Contracts,
amounts that a Participant repays on a loan are applied to a Participant's
Subaccounts based on the Participant's current contribution allocations.
The maximum loan amount referred to above is imposed by federal tax law. That
limit, however, applies to all loans from any qualified plan of the Employer.
Since Prudential cannot monitor a Participant's loan activity relating to other
plans offered to Participants, it is the Participant's responsibility to do so.
Provided that a Participant adheres to these limitations, the loan will not be
treated as a taxable distribution. If, however, the Participant defaults on the
loan by, for example, failing to make required payments, the defaulted loan
amount (as described in loan disclosure information provided to a borrowing
Participant) will be treated as a taxable distribution. In that event,
Prudential will send the appropriate tax information to the Participant and the
Internal Revenue Service.
Prudential charges a loan application fee of up to $75, which is deducted from
the Participant Account at the time the loan is initiated. Prudential will not
accept a personal check as payment of the loan application fee. Prudential also
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imposes an annual charge of up to $60 as a loan maintenance fee for
recordkeeping and other administrative services provided in connection with the
loan. This charge is guaranteed not to increase during the term of any loan.
This annualized loan maintenance charge will be pro rated based on the number of
full months that the loan is outstanding, and we generally deduct it quarterly.
Under certain Contracts, we will deduct the loan maintenance fee annually. With
respect to Contracts other than the Small Plan Contract, Prudential will deduct
the loan maintenance charge first against the Participant Account Value under
the Guaranteed Interest Account (if available). If the Participant is not
invested in the Guaranteed Interest Account, or if the Participant does not have
enough money in such an option to pay the charge, Prudential will then deduct
the charge against any one or more of the Subaccounts in which the Participant
is invested. With respect to the Small Plan Contract, Prudential will deduct the
loan maintenance fee pro rata from each of the Participant's Subaccounts.
MODIFIED PROCEDURES
Under certain Contracts, but not the Small Plan Contract, the Contractholder or
a third party acting on their behalf provides record keeping services that would
otherwise be performed by Prudential. Such Contracts may require procedures
somewhat different than those set forth in this Prospectus. For example, such
Contracts may require that contribution allocation requests, withdrawal
requests, and/or transfer requests be directed to the Contract's record keeper
rather than Prudential. The record-keeper is the Contractholder's agent, not
Prudential's agent. Accordingly, transactions will be processed and priced as of
the end of the Valuation Period in which Prudential receives appropriate
instructions and/or funds from the record-keeper. The Contract will set forth
any such different procedures.
CHARGES, FEES AND DEDUCTIONS
ADMINISTRATIVE FEE AND ANNUAL ACCOUNT CHARGE
Prudential imposes an administrative fee to compensate for the expenses incurred
in administering the Contracts. This includes such things as issuing the
Contract, establishing and maintaining records, and providing reports to
Contractholders and Participants. Prudential deducts this fee daily from the
assets in each of the Subaccounts at a maximum effective annual rate of 0.85%
for Contracts other than the Small Plan Contract, and at an effective annual
rate of 1.05% for the Small Plan Contracts. For Contracts other than the Small
Plan Contract, Prudential may reduce the administrative fee if warranted by
economies of scale or other pertinent factors.
Prudential deducts an annual account charge for recordkeeping and other
administrative services pro rata from each Participant Account or bills this
charge directly to the Employer. This annual account charge is payable to
Prudential. With respect to Contracts other than the Small Plan Contract,
Prudential imposes this charge on the last Business Day of each calendar year as
long as the Participant still has money invested in the Subaccounts and the
Guaranteed Interest Account. With respect to the Small Plan Contract, Prudential
assesses the annual account charge either:
o quarterly, on or about 14 days after the end of each quarter, or
o annually, on the last Business Day of the calendar year.
With respect to Contracts other than the Small Plan Contract, Prudential will
pro rate the annual account charge for new Participants for the first year of
their participation, based on the number of full months remaining in the
calendar year after the first contribution is received. With respect to the
Small Plan Contract, Prudential will not pro rate the annual account charge for
new Participants. With respect to Contracts other than the Small Plan Contract,
if a
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Participant Account is canceled before the end of the year, Prudential will
impose the charge on the date that the Participant Account is canceled (and the
charge will not be pro rated if this occurs during the year in which the first
contribution is made to the Participant Account). Prudential will not impose the
annual account charge, however, upon the cancellation of a Participant Account
to purchase an annuity under a Contract if the annuity becomes effective on
January 1 of any year. After a cancellation, the Participant may again
participate in the Contract only as a new Participant, and will be subject to a
new annual account charge.
For all Contracts, the aggregate annual account charge for each Participant will
not be greater than $32. With respect to Contracts other than the Small Plan
Contract, Prudential will first assess the charge against the Participant
Account Value under the Guaranteed Interest Account (if available). If the
Participant is not invested in the Guaranteed Interest Account, or if the
Participant does not have enough money in such an option to pay the charge,
Prudential will then assess the charge against any one or more of the
Subaccounts in which the Participant is invested. With respect to the Small Plan
Contract, the aggregate annual account charge may be paid directly by the
Participant's Employer, or may be deducted from a Participant's Account Value
pro rata from each of the Participant's Subaccounts. Prudential may waive or
eliminate the annual account charge where its costs of administration are less.
Such lesser costs may be attributable to economies of scale associated with the
amount of the Contractholder's Plan assets and the fact that the Contractholder
itself performs administrative services that Prudential otherwise would perform.
CHARGE FOR ASSUMING MORTALITY AND EXPENSE RISKS
Prudential makes a deduction daily from the assets of each of the Subaccounts as
compensation for assuming the risk that our estimates of longevity and of the
expenses we expect to incur over the lengthy periods that the Contract may be in
effect will turn out to be incorrect. Prudential assesses the charge daily at an
annual rate of 0.15% of the assets held in the Subaccounts for all of the
Contracts.
EXPENSES INCURRED BY THE FUNDS
Participants indirectly bear the charges and expenses of the Funds. You can
review details about investment management fees and other Fund expenses in the
fee table and in the accompanying prospectuses for the Funds and the related
statements of additional information.
WITHDRAWAL CHARGE
With respect to Contracts other than the Small Plan Contract, Prudential may
assess a withdrawal charge upon full or partial withdrawals. The charge
compensates Prudential for paying all of the expenses of selling and
distributing the Contracts, including sales commissions, printing of
prospectuses, sales administration, preparation of sales literature, and other
promotional activities. Prudential does not impose a withdrawal charge whenever
earnings are withdrawn.
With respect to Contracts other than the Small Plan Contract, the amount of the
withdrawal charge that Prudential imposes upon any withdrawal depends upon the
number of years of a Participant's participation in the Contract, the year in
which the withdrawal is made, and the kind of retirement arrangement that covers
the Participant. Participation in the Contract begins upon the date when the
first contribution on behalf of the Participant, along with enrollment
information in a form satisfactory to Prudential, is received by Prudential.
Such participation ends on the date when the Participant Account under the
Contract is canceled. In the event of such cancellation, Prudential reserves the
right to consider the Participant to be participating in the Contract for a
limited time (currently about one year) for the purposes of calculating any
withdrawal charge on the withdrawal of any future contributions.
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The table below describes the maximum amount of the withdrawal charge that
Prudential deducts with respect to Contracts other than the Small Plan Contract.
- -----------------------------------------------------------------------------
THE WITHDRAWAL CHARGE WILL BE EQUAL
TO THE FOLLOWING PERCENTAGE OF THE
YEARS OF CONTRACT PARTICIPATION CONTRIBUTIONS WITHDRAWN
- -----------------------------------------------------------------------------
First Year 5%
Second Year 4%
Third Year 3%
Fourth Year 2%
Fifth Year 1%
Sixth and Subsequent Years No Charge
- -----------------------------------------------------------------------------
We determine the withdrawal charge applicable to the Small Plan Contract in a
different manner from what is described in the preceding paragraphs. Under the
Small Plan Contract, a Participant making a full or partial withdrawal does not
pay the withdrawal charge indicated above. Instead, withdrawal charges under the
Small Plan Contract are triggered only when the Employer to which the Contract
was issued terminates the Contract in whole or in part. Under full termination
of the Contract, Prudential assesses the withdrawal charge against the Employer
based on the total value of contributions withdrawn under the terminated
Contract. Under a partial termination of the Contract, Prudential assesses the
withdrawal charge only against those assets withdrawn by reason of a specified
group, classification or type of employee leaving the Plan as a result of a
corporate merger, restructuring, or other comparable employer-initiated event.
For example, an Employer may sell a portion of its business that in turn
requires that one-half of its employees commence work for a new employer, under
a new qualified retirement plan not covered under the Contract. Prudential would
assess the withdrawal charge against the Employer based on the total value of
contributions of affected employees withdrawn as a consequence of the partial
termination. The Employer may pass this charge on to affected employees.
Each Participant's Account Value that is withdrawn in connection with such a
full or partial Contract termination may be subject to a withdrawal charge. The
amount of the withdrawal charge varies depending on the number of years that
have elapsed since the Small Plan Contract became effective. Specifically, the
withdrawal charge is equal to 5% of contributions withdrawn during the first
year of the Contract, and the charge declines by one percentage each year
thereafter. After five complete years have elapsed from the effective date of
the Small Plan Contract, we no longer deduct a withdrawal charge. This
withdrawal charge compensates Prudential and its affiliates for the costs
associated with contacting Small Plans and their participants and initially
establishing Plan and Participant records.
In general, Prudential will reduce the proceeds received by a Participant upon
any withdrawal by the amount of any withdrawal charge. Also, at our discretion,
we may reduce or waive withdrawal charges for certain classes of contracts
(e.g., contracts exchanged from existing contracts).
LIMITATIONS ON WITHDRAWAL CHARGE
We will not impose a withdrawal charge with respect to contributions withdrawn
for any of the following purposes:
o to purchase an annuity
o to provide a death benefit
o pursuant to a systematic withdrawal plan generally
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o to provide a minimum distribution payment
o in cases of financial hardship or disability retirement as determined
pursuant to provisions of the Employer's retirement arrangement
o contributions that originated from a rollover contribution to a
Contract.
Further, for all plans other than IRAs, we will impose no withdrawal charge upon
contributions withdrawn due to resignation or retirement by the Participant or
termination of the Participant by the Contractholder.
Contributions that you transfer among the Guaranteed Interest Account and the
Subaccounts are considered to be withdrawals from the Guaranteed Interest
Account or the Subaccount from which the transfer is made, but we impose no
withdrawal charge upon them. Those contributions will, however, be considered as
contributions to the receiving Subaccount or Guaranteed Interest Account for
purposes of calculating any charge imposed upon their subsequent withdrawal from
that investment option.
We consider loans to be withdrawals from the Subaccounts from which the loan
amount was deducted. However, we do not consider a loan to be a withdrawal from
the Contract. Therefore, we do not impose a withdrawal charge upon loans.
However, we will treat the principal portion of any loan repayment as a
contribution to the receiving Subaccount for purposes of calculating any charge
imposed upon any subsequent withdrawal. If the Participant defaults on the loan
by, for example, failing to make required payments, we will treat the
outstanding balance of the loan as a withdrawal for purposes of the withdrawal
charge. We will deduct the withdrawal charge from the same Subaccounts, and in
the same proportions, as the loan amount was withdrawn. If sufficient funds do
not remain in those Subaccounts, we will deduct the withdrawal charge from the
Participant's other Subaccounts and the Guaranteed Interest Account.
Prudential may impose withdrawal charges lower than those described above with
respect to Participants under certain Contracts. These lower charges will
reflect Prudential's anticipation that lower sales costs will be incurred, or
less sales services will be performed, with respect to such Contracts due to
economies arising from:
o the utilization of mass enrollment procedures; or
o the performance of sales functions, which Prudential would otherwise
be required to perform, by the Contractholder, an Employer, or by a
third party on their behalf; or
o an accumulated surplus of charges over expenses under a particular
Contract.
Generally, we lower or waive the withdrawal charge depending on the amount of
local service the Contractholder requires. In addition, we may lower the charge
if required by state law.
PREMIUM TAXES
Certain states and other jurisdictions impose premium taxes or similar
assessments upon Prudential, either at the time contributions are made or when
the Participant's Account Value is surrendered or applied to purchase an
annuity. Prudential reserves the right to deduct an amount from contributions or
the Participant's Account to cover such taxes or assessments, if any, when
applicable. Not all states impose premium taxes on annuities. However, the rates
in those that do currently range from 0.5% to 5%.
REQUESTS, CONSENTS, and NOTICES
The way you provide all or some requests, consents, or notices under a Contract
(or related agreement or procedure) may include telephone access to an automated
system, telephone access to a staffed call center, or internet access through
www.prudential.com, as well as traditional paper. Prudential reserves the right
to vary the means available from Contract to Contract, including limiting them
to electronic means, by Contract terms, related service agreements with the
Contractholder, or notice to the Contractholder and Participants. If electronic
means are authorized, you will automatically be able to use them.
Prudential also will be able to use electronic means to provide notices to you,
provided your Contract or other agreement with the Contractholder does not
specifically limit these means. Electronic means will only be used, however,
when Prudential reasonably believes that you have effective access to the
electronic means and that they are allowed by applicable law. Also, you will be
able to receive a paper copy of any notice upon request.
For your protection and to prevent unauthorized exchanges, telephone calls and
other electronic communications will be recorded and stored, and you will be
asked to provide your personal identification number or other identifying
information before any request will be processed. Neither Prudential nor our
agents will be liable for any loss, liability, or cost which results from acting
upon instructions reasonably believed to be authorized by you.
During times of extraordinary economic or market changes, electronic and other
instructions may be difficult to implement.
Some states, retirement programs, or Contractholders may not allow these
privileges, or allow them only in modified form.
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FEDERAL TAX STATUS
The following discussion is general in nature and describes only federal income
tax law (not state or other tax laws). It is based on current law and
interpretations, which may change. It is not intended as tax advice.
Participants and Contractholders should consult a qualified tax adviser for
complete information and advice.
ANNUITY QUALIFICATION
This discussion assumes the Contracts will be treated as annuity contracts for
federal income tax purposes. In order to qualify for the tax rules applicable to
annuity contracts, the assets underlying the Contracts must be diversified
according to certain rules. For further detail on diversification requirements,
see Dividends, Distributions and Taxes in the attached prospectus for the
Prudential Series Fund. Tax rules also require that Prudential must have
sufficient control over the underlying assets to be treated as the owner of the
underlying assets for tax purposes. Treasury Department regulations do not
provide guidance concerning the extent to which Participants may direct
investments in the particular investment options without causing Participants,
instead of Prudential, to be considered the owner of the underlying assets.
Prudential believes the Contracts are annuity contracts under the tax rules.
However, Prudential reserves the right to make any changes it deems necessary to
assure that the Contracts qualify as annuity contracts for tax purposes. Any
such changes will apply uniformly to affected Participants and will be made with
such notice to affected Participants as is feasible under the circumstances.
TAX-QUALIFIED RETIREMENT ARRANGEMENTS USING THE CONTRACTS
The Contracts may be used with qualified pension and profit sharing plans, plans
established by self-employed persons ("Keogh plans"), simplified employee
pension plans ("SEPs"), individual retirement plan accounts ("IRAs"), Roth IRAs,
and tax-deferred annuities ("TDAs"). The provisions of the tax law that apply to
these retirement arrangements that may be funded by the Contracts are complex,
and Participants are advised to consult a qualified tax adviser.
The Contracts may also be used with certain deferred compensation plans of a
state or local government or a tax-exempt organization (called "Section 457
Plans" after the Internal Revenue Code section that governs their structure).
The tax rules for such plans involve, among other things, limitations on
contributions and minimum distribution requirements. Tax-exempt organizations or
governmental employers considering the use of the Contracts to fund or otherwise
provide deferred compensation to their employees should consult with a qualified
tax adviser concerning these specific requirements. Please refer to the
discussion of Entity Owners on page 36, which may be applicable in certain
circumstances.
CONTRIBUTIONS
In general, assuming that the requirements and limitations of tax law applicable
to the particular type of plan are adhered to by Participants and Employers,
contributions made under a retirement arrangement funded by a Contract are
deductible (or not includible in income) up to certain amounts each year.
Contributions to a Roth IRA are subject to certain limits, and are not
deductible for federal income tax purposes.
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EARNINGS
Under the retirement programs with which the Contracts may be used, federal
income tax currently is not imposed upon the investment income and realized
gains earned by the Subaccounts in which the contributions have been invested
until a distribution or withdrawal is received.
DISTRIBUTIONS OR WITHDRAWALS
When a distribution or withdrawal is received, either as a lump sum, an annuity,
or as regular payments in accordance with a systematic withdrawal arrangement,
all or a portion of the distribution or withdrawal is normally taxable as
ordinary income. In some cases, the tax on lump sum distributions may be limited
by a special income-averaging rule. The effect of federal income taxation
depends largely upon the type of retirement plan and a generalized description,
beyond that given here, is not particularly useful. Careful review of tax law
applicable to the particular type of plan is necessary.
Furthermore, premature distributions or withdrawals may be restricted or subject
to a penalty tax. Participants contemplating a withdrawal should consult a
qualified tax adviser.
Under a Roth IRA, distributions are generally not taxable for federal income tax
purposes if they are made after attainment of age 59-1/2 or for certain other
reasons and if the individual had a Roth IRA in effect for at least five years.
MINIMUM DISTRIBUTION RULES
In general, distributions from qualified retirement arrangements and Section 457
Plans must begin by the "Required Beginning Date" which is April 1 of the
calendar year following the later of (1) the year in which the Participant
attains age 70-1/2 or (2) the Participant retires. The following exceptions
apply:
o For a TDA, only benefits accruing after December 31, 1986 must begin
distribution by the Required Beginning Date.
o Roth IRAs are not subject to these pre-death minimum distribution
rules.
Distributions that are made after the Required Beginning Date must generally be
made in the form of an annuity for the life of the Participant or the lives of
the Participant and his designated beneficiary, or over a period that is not
longer than the life expectancy of the Participant or the life expectancies of
the Participant and his designated beneficiary.
Distributions to beneficiaries are also subject to minimum distribution rules.
If a Participant dies before his entire interest in his Participant Account has
been distributed, his remaining interest must be distributed at least as rapidly
as under the method of distribution being used as of the Participant's date of
death. If the Participant dies before distributions have begun (or are treated
as having begun) the entire interest in his Participant Account must be
distributed by December 31 of the calendar year containing the fifth anniversary
of the Participant's death. Alternatively, if there is a designated beneficiary,
the designated beneficiary may elect to receive payments beginning
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no later than December 31 of the calendar year immediately following the year in
which the Participant dies and continuing for the beneficiary's life or a period
not exceeding the beneficiary's life expectancy (except that with respect to
distributions from a Section 457 Plan, such period cannot exceed 15 years).
Special rules apply where the deceased Participant's spouse is his designated
beneficiary.
In addition to the above rules, with respect to a Section 457 Plan, any
distribution that is payable over a period of more than one year can only be
made in substantially non-increasing amounts no less frequently than annually.
An excise tax applies to Participants or beneficiaries who fail to take the
minimum distribution in any calendar year.
NONQUALIFIED ARRANGEMENTS USING THE CONTRACTS
TAXES PAYABLE BY PARTICIPANT
Prudential believes the Contracts are annuity contracts for tax purposes.
Accordingly, as a general rule, Participants should not pay any tax until money
is received under the Contracts. Generally, annuity contracts issued by the same
company (and affiliates) to a Participant during the same calendar year must be
treated as one annuity contract for purposes of determining the amount subject
to tax under the rules described below.
TAXES ON WITHDRAWALS AND SURRENDER
If a Participant makes a withdrawal from the Contract or surrenders it before
annuity payments begin, the amount received will be taxed as ordinary income,
rather than as return of purchase payments, until all gain has been withdrawn.
If a Participant assigns all or part of the Contract as collateral for a loan,
the part assigned will be treated as a withdrawal. Also, if a Participant elects
the interest payment option, this will be treated, for tax purposes, as a
surrender of the Contract.
If a Participant transfers the Contract for less than full consideration, such
as by gift, tax will be triggered on the gain in the Contract. This rule does
not apply to transfers to a spouse or incident to divorce.
TAXES ON ANNUITY PAYMENTS
A portion of each annuity payment a Participant receives will be treated as a
partial return of purchase payments and will not be taxed. The remaining portion
will be taxed as ordinary income. Generally, the nontaxable portion is
determined by multiplying the annuity payment received by a fraction, the
numerator of which is the purchase payments (less any amounts previously
received tax-free) and the denominator of which is the total expected payments
under the Contract.
After the full amount of the purchase payments have been recovered tax-free, the
full amount of the annuity payments will be taxable. If annuity payments stop
due to the death of the annuitant before the full amount of the purchase
payments have been recovered, a tax deduction is allowed for the unrecovered
amount.
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PENALTY TAXES ON WITHDRAWALS AND ANNUITY PAYMENTS
Any taxable amount received under the Contract may be subject to a 10 percent
penalty tax. Amounts are not subject to this penalty tax if:
o the amount is paid on or after age 59-1/2 or the death of the
Participant;
o the amount received is attributable to the Participant becoming
disabled;
o the amount paid or received is in the form of level payments not less
frequently than annually for life (or a period not exceeding life
expectancy); or
o the amount received is paid under an immediate annuity contract (in
which annuity payments begin within one year of purchase).
If the lifetime payment stream is modified (other than as a result of death or
disability) before age 59-1/2 (or before the end of the five year period
beginning with the first payment and ending after age 59-1/2), the tax for the
year of modification will be increased by the penalty tax that would have been
imposed without the exception, plus interest for the deferral.
TAXES PAYABLE BY BENEFICIARIES
Generally, the same tax rules apply to amounts received by a beneficiary as
those set forth above with respect to a Participant. The election of an annuity
payment option instead of a lump sum death benefit may defer taxes. Certain
minimum distribution requirements apply upon the death of a Participant, as
discussed further below.
REQUIRED DISTRIBUTIONS UPON DEATH OF PARTICIPANT
Certain distributions must be made under the Contract upon the death of a
Participant. The required distributions depend on whether the Participant dies
on or before the start of annuity payments under the Contract or after annuity
payments are started under the Contract.
If the Participant dies on or after the annuity date, the remaining portion of
the interest in the Contract must be distributed at least as rapidly as under
the method of distribution being used as of the date of death.
If the Participant dies before the annuity date, the entire interest in the
Contract must be distributed within 5 years after the date of death. However, if
an annuity payment option is selected by the designated beneficiary and if
annuity payments begin within 1 year of the death of the Participant, the value
of the Contract may be distributed over the beneficiary's life or a period not
exceeding the beneficiary's life expectancy. The designated beneficiary is the
person to whom ownership of the Contract passes by reason of death, and must be
a natural person.
If any portion of the Contract is payable to (or for the benefit of) a
Participant's surviving spouse, such portion of the Contract may be continued
with the spouse as the owner.
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ENTITY OWNERS
When a Contract is held by a non-natural person (for example, a corporation),
the Contract generally will not be taxed as an annuity and increases in the
value of the Contract will be subject to tax. Exceptions include contracts held
by an entity as an agent for a natural person, contracts held under a qualified
pension or profit sharing plan, a TDA or individual retirement plan (see
discussion above) or contracts that provide for immediate annuities.
WITHHOLDING
Taxable amounts distributed from annuity contracts in nonqualified annuity
arrangements are subject to tax withholding. Participants may generally elect
not to have tax withheld from payments. The rate of withholding on annuity
payments will be determined on the basis of the withholding certificate filed
with Prudential. Absent these elections, Prudential will withhold the tax
amounts required by the applicable tax regulations. Participants may be subject
to penalties under the estimated tax payment rules if withholding and estimated
tax payments are not sufficient. Participants who fail to provide a social
security number or other taxpayer identification number will not be permitted to
elect out of withholding.
In addition, certain distributions from qualified plans, which are not directly
rolled over or transferred to another eligible qualified plan, are subject to a
mandatory 20% withholding for federal income tax. The 20% withholding
requirement does not apply to: (1) distributions for the life or life expectancy
of the Participant, or joint and last survivor expectancy of the Participant and
a designated beneficiary; or (2) distributions for a specified period of 10
years or more; (3) distributions required as minimum distributions. Amounts that
are received under a Contract used in connection with a Section 457 Plan are
treated as wages for federal income tax purposes and are, thus, subject to
general withholding requirements; or (4) hardship distributions of salary
deferral amounts.
Taxes on Prudential
Although the Account is registered as an investment company, it is not a
separate taxpayer for purposes of the Code. The earnings of the Subaccounts
invested in the Funds are taxed as part of the operations of Prudential. No
charge is being made currently against those Subaccounts for company federal
income taxes. Prudential will review the question of a charge to the Subaccounts
invested in the Funds for company federal income taxes periodically. Such a
charge may be made in future years for any federal income taxes that would be
attributable to the Contracts.
EFFECTING AN ANNUITY
Subject to the restrictions on withdrawals from tax-deferred annuities subject
to Section 403(b) of the Code, and subject to the provisions of the retirement
arrangement that covers him or her, a Participant may elect at any time to have
all or a part of his or her interest in the Participant Account used to purchase
a fixed dollar annuity under the Contracts. The Contracts do not provide for
annuities that vary with the investment results of any Subaccount. Withdrawals
from the Participant Account that are used to purchase a fixed dollar annuity
under the Contracts become part of Prudential's General Account, which supports
insurance and annuity obligations.
In electing to have an annuity purchased, the Participant may select from the
forms of annuity described below, unless the retirement arrangement covering the
Participant provides otherwise. The annuity is purchased on the first day of the
month following receipt by Prudential of proper written notice on a form
approved by Prudential that the Participant has elected to have an annuity
purchased, or on the first day of any subsequent month that the Participant
designates.
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Prudential generally will make the first monthly annuity payment within one
month of the date on which the annuity is purchased.
Under certain types of retirement arrangements, the Retirement Equity Act of
1984 requires that in the case of a married Participant, certain elections of
payouts which are not qualified joint and survivor annuities must include the
consent and signatures of the Participant and his spouse and must be notarized
or witnessed by an authorized plan representative. A "qualified joint and
survivor annuity" is an annuity for the Participant's lifetime with at least 50%
of the amount payable to the Participant continued after the Participant's death
to his or her spouse, if then living.
Once annuity payments begin, the annuitant cannot surrender his or her annuity
benefit and receive a one sum payment.
We make the following forms of annuity available to Participants.
LIFE ANNUITY WITH PAYMENTS CERTAIN
This is an immediate annuity payable monthly during the lifetime of the
annuitant. Prudential guarantees that if, at the death of the annuitant,
payments have been made for less than the period certain (which may be 60, 120,
180, or 240 months, as selected by the annuitant), they will be continued during
the remainder of the selected period to his or her beneficiary.
ANNUITY CERTAIN
This is an immediate annuity payable monthly for a period certain which may be
60, 120, 180, or 240 months, as selected by the annuitant. If the annuitant dies
during the period certain, we will continue payments in the same amount the
annuitant was receiving to his or her beneficiary. We make no further payments
after the end of the period certain.
JOINT AND SURVIVOR ANNUITY WITH PAYMENTS CERTAIN
This is an immediate annuity payable monthly during the lifetime of the
annuitant with payments continued after his or her death to the contingent
annuitant, if surviving, for the latter's lifetime. Until the selected number of
payments certain have been paid, payments made to the contingent annuitant after
the annuitant's death are the same as those the annuitant was receiving.
Thereafter, the payments continued to the contingent annuitant will be a
percentage of the monthly amount paid to the annuitant such as 33%, 50%, 66%, or
100% as selected by the annuitant. The amounts of each payment made to the
annuitant will be lower as the percentage he or she selects to be paid to the
contingent annuitant is higher. If both the annuitant and the contingent
annuitant die during the period certain (which may be 60, 120, 180, or 240
months, as selected by the annuitant), we will continue payments during the
remainder of the period certain to the properly designated beneficiary.
We may make other forms of annuity available under the Contracts. The retirement
arrangement under which the Participant is covered may restrict the forms of
annuity that a Participant may elect.
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If the dollar amount of the first monthly annuity payment is less than the
minimum amount specified in the Contract, or if the beneficiary is other than a
natural person receiving payments in his or her own right, Prudential may elect
to pay the commuted value of the unpaid payments certain in one sum.
PURCHASING THE ANNUITY
Prudential does not deduct a withdrawal charge from contributions withdrawn to
purchase an annuity from Prudential. If, as a result of a withdrawal to purchase
an annuity, the Participant Account has been reduced to zero, Prudential deducts
the full annual account charge, unless the annuity becomes effective on January
1 of any year. Prudential applies the resulting amount, less any applicable
taxes, to the appropriate annuity purchase rate determined in accordance with
the schedule in the Contract at the time the annuity is purchased. However,
Prudential may determine monthly payments from schedules of annuity purchase
rates providing for larger payments than the rates shown in the Contract.
Prudential guarantees the schedule of annuity purchase rates in a Contract for
ten years from the date the Contract is issued. If at any time after a Contract
has been in effect for ten years, we modify the schedule of annuity purchase
rates, the modification is also guaranteed for ten years. A change in the
schedule of annuity purchase rates used for an annuity certain with 180 payments
or less, as described above, will apply only to amounts added to a Participant
Account after the date of change. A change in any other schedule will apply to
all amounts in a Participant Account.
OTHER INFORMATION
MISSTATEMENT OF AGE OR SEX
If an annuitant's stated age or sex (except where unisex rates apply) or both
are incorrect, we will change each benefit and the amount of each annuity
payment to that which the total contributions would have bought for the correct
age and sex. Also, we will adjust for the amount of any overpayments we have
already made.
SALE OF THE CONTRACT AND SALES COMMISSIONS
Prudential Investment Management Services LLC ("PIMS"), a wholly-owned direct
subsidiary of Prudential, acts as the principal underwriter of the Contract.
PIMS was organized in 1996 under Delaware law, is registered as a broker and
dealer under the Securities Exchange Act of 1934, and is a member of the
National Association of Securities Dealers, Inc. PIMS' principal business
address is 751 Broad Street, Newark, NJ 07102. The Contract is sold by
registered representatives of PIMS who are also authorized by state insurance
departments to do so. The maximum commission that we will pay to the
broker-dealer to cover both the individual representative's commission and other
distribution expenses will not exceed 3.0% of the purchase payment.
VOTING RIGHTS
As stated above, all of the assets held in the Subaccounts of the Discovery
Account are invested in shares of the corresponding Funds. Prudential is the
legal owner of those shares. As such, Prudential has the right to vote on any
matter voted on at any shareholders meetings of the Funds. However, as required
by law, Prudential votes the shares
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of the Funds at any regular and special shareholders meetings the Funds are
required to hold in accordance with voting instructions received from
Participants. The Funds may not hold annual shareholders meetings when not
required to do so under the laws of the state of their incorporation or the
Investment Company Act of 1940. Fund shares for which no timely instructions
from Participants are received, and any shares owned directly or indirectly by
Prudential, are voted in the same proportion as shares in the respective
portfolios for which instructions are received. Should the applicable federal
securities laws or regulations, or their current interpretation, change so as to
permit Prudential to vote shares of the Funds in its own right, it may elect to
do so.
Generally, Participants may give voting instructions on matters that would be
changes in fundamental policies and any matter requiring a vote of the
shareholders of the Funds. With respect to approval of the investment advisory
agreement or any change in a portfolio's fundamental investment policy,
Participants participating in such portfolios will vote separately on the
matter, as required by applicable securities laws.
The number of Fund shares for which a Participant may give instructions is
determined by dividing the portion of the value of the Participant Account
derived from participation in a Subaccount, by the value of one share in the
corresponding portfolio of the applicable Fund. The number of votes for which
you may give Prudential instructions is determined as of the record date chosen
by the Board of the applicable Fund. We furnish you with proper forms and
proxies to enable you to give these instructions. We reserve the right to modify
the manner in which the weight to be given to voting instructions is calculated
where such a change is necessary to comply with current federal regulations or
interpretations of those regulations.
Prudential may, if required by state insurance regulations, disregard voting
instructions if such instructions would require shares to be voted so as to
cause a change in the sub-classification or investment objectives of one or more
of the Funds' portfolios, or to approve or disapprove an investment advisory
contract for a Fund. In addition, Prudential itself may disregard voting
instructions that would require changes in the investment policy or investment
adviser of one or more of the Funds' portfolios, provided that we reasonably
disapprove such changes in accordance with applicable federal regulations. If we
do disregard voting instructions, we will advise you of that action and our
reasons for such action in the next annual or semi-annual report.
SUBSTITUTION OF FUND SHARES
Although Prudential believes it to be unlikely, it is possible that in the
judgment of its management, one or more of the portfolios of the Funds may
become unsuitable for investment by Contractholders and Participants. This may
occur because of investment policy changes, tax law changes, the unavailability
of shares for investment or at the discretion of Prudential. In that event,
Prudential may seek to substitute the shares of another portfolio or of an
entirely different mutual fund. Before this can be done, we would have to obtain
the approval of the SEC, and possibly one or more state insurance departments.
We would notify Contractholders and Participants of any such substitution.
PERFORMANCE INFORMATION
We may depict performance information for the Subaccounts in advertising and
reports to current and prospective Contractholders and Participants. Performance
information is based on the historical investment experience of the Funds,
adjusted to take charges under the Contract into account, and does not indicate
or represent future performance.
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Total returns are based on the overall dollar or percentage change in value of a
hypothetical investment over a stipulated period, and assume a surrender of the
Contract at the end of the period. Total return quotations reflect changes in
unit values and the deduction of applicable charges including any applicable
withdrawal charges.
A cumulative total return reflects performance over a stated period of time. An
average annual total return reflects the hypothetical annually compounded return
that would have produced the same cumulative total return if the performance had
been constant over the entire period.
The Money Market Subaccount may advertise its current and effective yield.
Current yield reflects the income generated by an investment in the Subaccount
over a specified seven-day period. Effective yield is calculated in a similar
manner, except that income earned is assumed to be reinvested.
Reports or advertising may include comparative performance information,
including, but not limited to:
o comparisons to market indices,
o comparisons to other investments,
o performance rankings,
o personalized illustrations of historical performance, and
o data presented by analysts or included in publications.
See Performance Information in the Statement of Additional Information for
recent performance information.
REPORTS TO PARTICIPANTS
Prudential will send Participants, at least annually, reports showing as of a
specified date the number of units credited to them in the Subaccounts of the
Discovery Account. We also will send each Participant annual and semi-annual
reports for the applicable Funds.
STATE REGULATION
Prudential is subject to regulation by the Department of Banking and Insurance
of the State of New Jersey as well as by the insurance departments of all the
other states and jurisdictions in which it does business. Prudential must file
an annual statement in a form promulgated by the National Association of
Insurance Commissioners. This annual statement is reviewed and analyzed by the
New Jersey Department, which makes an independent computation of Prudential's
legal reserve liabilities and statutory apportionments under its outstanding
contracts. New Jersey law requires a quinquennial examination of Prudential to
be made. Examination involves an extensive audit including, but not limited to,
an inventory check of assets, sampling techniques to check the performance by
Prudential of its contracts and an examination of the manner in which divisible
surplus has been apportioned and distributed to policyholders and
Contractholders. This regulation does not involve any supervision or control
over the investment policies of the Subaccounts or over the selection of
investments for them, except for verification of the compliance of Prudential's
investment portfolio with New Jersey law.
The laws of New Jersey also contain special provisions which relate to the
issuance and regulation of contracts on a variable basis. These laws set forth a
number of mandatory provisions which must be included in contracts on a
40
<PAGE>
variable basis and prohibit such contracts from containing other specified
provisions. The Department may initially disapprove or subsequently withdraw
approval of any contract if it contains provisions which are "unjust, unfair,
inequitable, ambiguous, misleading, likely to result in misrepresentation or
contrary to law." New Jersey also can withhold or withdraw approval if sales are
solicited by communications which involve misleading or inadequate descriptions
of the provisions of the contract.
In addition to the annual statement referred to above, Prudential is required to
file with New Jersey and other states a separate statement with respect to the
operations of all its variable contracts accounts, in a form promulgated by the
National Association of Insurance Commissioners.
LITIGATION
We are subject to legal and regulatory actions in the ordinary course of our
businesses, including class actions. Pending legal regulatory actions include
proceedings specific to our practices and proceedings generally applicable to
business practices in the industries in which we operate. As an example of such
litigation, in March, 2000, plaintiffs filed a purported class action against us
titled Olmsted v. Pruco Life Insurance Company of New Jersey and The Prudential
Insurance Company of America, alleging that certain fees and expenses charged to
the plaintiffs in connection with the sale of variable annuities since March 1,
1997 were excessive and unreasonable. In certain of these lawsuits, large and/or
indeterminate amounts are sought, including punitive or exemplary damages.
In particular, Pruco Life and Prudential have been subject to substantial
regulatory actions and civil litigation involving individual life insurance
sales practices. In 1996, Prudential, on behalf of itself and many of its life
insurance subsidiaries including Pruco Life, entered into settlement agreements
with relevant insurance regulatory authorities and plaintiffs in the principal
life insurance sales practices class action lawsuit covering policyholders of
individual permanent life insurance policies issued in the United States from
1982 to 1995. Pursuant to the settlements, the companies agreed to various
changes to their sales and business practices controls and a series of fines,
and are in the process of distributing final remediation relief to eligible
class members. In many instances, claimants have the right to "appeal" the
decision to an independent reviewer. The bulk of such appeals were resolved in
1999, and the balance is expected to be addressed in 2000. As of January 31,
2000, Prudential and/or Pruco Life remained a party to two putative class
actions and approximately 158 individual actions relating to permanent life
insurance policies issued in the United States between 1982 and 1995. Additional
suits may be filed by individuals who opted out of the settlements. While the
approval of the class action settlement is now final, Prudential and Pruco Life
remain subject to oversight and review by insurance regulators and other
regulatory authorities with respect to their sales practices and the conduct of
the remediation program. The U.S. District Court has also retained jurisdiction
as to all matters relating to the administration, consummation, enforcement and
interpretation of the settlements.
In 1999, 1998, 1997 and 1996, Prudential recorded provision in its Consolidated
Statements of Operation of $100 million, $1,150 million, $2,030 million and
$1,125 million, respectively, to provide for estimated remediation costs, and
additional sales practices costs including related administrative costs,
regulatory fines, penalties and related payments, litigation costs and
settlements, including settlements associated with the resolution of claims of
deceptive sales practices asserted by policyholders who elected to "opt-out" of
the class action settlement and litigate their claims against Prudential
separately, and other fees and expenses associated with the resolution of sales
practices issues.
41
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
<TABLE>
<CAPTION>
Page
----
The contents of the Statement of Additional Information include:
<S> <C>
Definitions..............................................................................................................2
Other Contract Provisions................................................................................................2
Administration...........................................................................................................2
Performance Information..................................................................................................3
Directors of Prudential..................................................................................................9
Officers of Prudential..................................................................................................11
Sale of Contracts.......................................................................................................14
Legal Matters...........................................................................................................14
Experts.................................................................................................................14
Financial Statements of the Discovery Account..........................................................................A-1
Consolidated financial statements of The Prudential Insurance Company of America and subsidiaries .....................B-1
</TABLE>
ADDITIONAL INFORMATION
Prudential has filed a registration statement with the SEC under the Securities
Act of 1933, relating to the offering described in this Prospectus. This
Prospectus does not include all of the information set forth in the registration
statement. Certain portions have been omitted pursuant to the rules and
regulations of the SEC. You may obtain the omitted information, however, from
the SEC's principal office in Washington, D.C., upon payment of a prescribed
fee.
You may obtain further information, including the Statement of Additional
Information, from Prudential without charge. The addresses and telephone numbers
are set forth on the cover page of this Prospectus.
42
<PAGE>
<TABLE>
APPENDIX
ACCUMULATION UNIT VALUES
SMALL PLAN CONTRACT
THE PRUDENTIAL DISCOVERY SELECT GROUP VARIABLE CONTRACT ACCOUNT
(CONDENSED FINANCIAL INFORMATION)
<CAPTION>
SUBACCOUNTS
------------------------------------------------------------------
PRUDENTIAL PRUDENTIAL
SERIES FUND SERIES FUND
MONEY MARKET DIVERSIFIED BOND
------------------------------------------------------------------
01/01/99 01/01/99
TO TO
12/31/99 12/31/99
------------------------------------------------------------------
<S> <C> <C>
1. Beginning of period (rounded)...... $10.52 $10.68
2. End of period (rounded)............ $10.89 $10.45
3. Accumulation Units Outstanding
at end of period................ 359 4,044
------------------------------ ------------------------------
<CAPTION>
SUBACCOUNTS
-------------------------------------------------------------------
PRUDENTIAL PRUDENTIAL
SERIES FUND SERIES FUND
GOVERNMENT INCOME CONSERVATIVE BALANCED
-------------------------------------------------------------------
01/01/99 01/01/99
TO TO
12/31/99 12/31/99
-------------------------------------------------------------------
<S> <C> <C>
1. Beginning of period (rounded)...... $11.10 $11.10
2. End of period (rounded)............ $10.64 $11.67
3. Accumulation Units Outstanding
at end of period................ 1,387 865
--------------------------------- ------------------------------
<CAPTION>
SUBACCOUNTS
-------------------------------------------------------------------
PRUDENTIAL PRUDENTIAL
SERIES FUND SERIES FUND
FLEXIBLE MANAGED HIGH YIELD BOND
-------------------------------------------------------------------
01/01/99 01/01/99
TO TO
12/31/99 12/31/99
-------------------------------------------------------------------
<S> <C> <C>
1. Beginning of period (rounded)...... N/A $10.02
2. End of period (rounded)............ N/A $10.33
3. Accumulation Units Outstanding
at end of period................ N/A 594
------------------------------ ---------------------------------
<CAPTION>
SUBACCOUNTS
------------------------------------------------------------------
PRUDENTIAL PRUDENTIAL
SERIES FUND SERIES FUND
STOCK INDEX EQUITY INCOME
------------------------------------------------------------------
01/01/99 01/01/99
TO TO
12/31/99 12/31/99
------------------------------------------------------------------
<S> <C> <C>
1. Beginning of period (rounded)...... $13.09 $10.13
2. End of period (rounded)............ $15.54 $11.23
3. Accumulation Units Outstanding
at end of period................ 10,316 2,738
------------------------------ ------------------------------
<CAPTION>
SUBACCOUNTS
------------------------------------------------------------------
PRUDENTIAL PRUDENTIAL
SERIES FUND SERIES FUND
EQUITY JENNISON
------------------------------------------------------------------
01/01/99 01/01/99
TO TO
12/31/99 12/31/99
------------------------------------------------------------------
<S> <C> <C>
1. Beginning of period (rounded)...... $10.96 $13.43
2. End of period (rounded)............ $12.15 $18.82
3. Accumulation Units Outstanding
at end of period................ 872 1,110
------------------------------ --------------------------------
<CAPTION>
SUBACCOUNTS
--------------------------------------------------------------------
PRUDENTIAL
SERIES FUND AIM V.I.
GLOBAL GROWTH AND INCOME
--------------------------------------------------------------------
01/01/99 01/01/99
TO TO
12/31/99 12/31/99
--------------------------------------------------------------------
<S> <C> <C>
1. Beginning of period (rounded)...... $11.08 $12.37
2. End of period (rounded)............ $16.19 $16.37
3. Accumulation Units Outstanding
at end of period................ 75 351
-------------------------------- --------------------------------
<CAPTION>
SUBACCOUNTS
-------------------------------------------------------------------
JANUS
AIM V.I. ASPEN
VALUE GROWTH
-------------------------------------------------------------------
01/01/99 01/01/99
TO TO
12/31/99 12/31/99
-------------------------------------------------------------------
<S> <C> <C>
1. Beginning of period (rounded)...... $12.97 $13.33
2. End of period (rounded)............ $16.60 $18.91
3. Accumulation Units Outstanding
at end of period................ 577 1,197
------------------------------- -------------------------------
<CAPTION>
SUBACCOUNTS
-----------------------------------------------------------------
JANUS
ASPEN
INTERNATIONAL MFS
GROWTH EMERGING GROWTH
------------------------------------------------------------------
01/01/99 01/01/99
TO TO
12/31/99 12/31/99
------------------------------------------------------------------
<S> <C> <C>
1. Beginning of period (rounded)...... $10.96 $13.23
2. End of period (rounded)............ $19.69 $23.04
3. Accumulation Units Outstanding
at end of period................ 31 82
------------------------------ ------------------------------
<CAPTION>
SUBACCOUNTS
----------------------------------------------------------------------------------------------
OCC
OCC ACCUMULATION
MFS ACCUMULATION TRUST
RESEARCH TRUST MANAGED SMALL CAP
----------------------------------------------------------------------------------------------
01/01/99 01/01/99 01/01/99
TO TO TO
12/31/99 12/31/99 12/31/99
----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1. Beginning of period (rounded)...... $11.82 N/A $9.19
2. End of period (rounded)............ $14.45 N/A $8.89
3. Accumulation Units Outstanding
at end of period................ 1 N/A 1,162
----------------------------- ---------------------------- -----------------------------
<CAPTION>
SUBACCOUNTS
----------------------------------------------------------------------------------------------
WARBURG PINCUS
T. ROWE PRICE T. ROWE PRICE GLOBAL POST-VENTURE
EQUITY INCOME INTERNATIONAL STOCK CAPITAL
----------------------------------------------------------------------------------------------
01/01/99 01/01/99 01/01/99
TO TO TO
12/31/99 12/31/99 12/31/99
----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1. Beginning of period (rounded)...... $11.38 $10.24 $10.64
2. End of period (rounded)............ $11.63 $13.45 $17.15
3. Accumulation Units Outstanding
at end of period................ 480 409 1,372
------------------------------ ---------------------------- -----------------------------
</TABLE>
<PAGE>
<TABLE>
APPENDIX
ACCUMULATION UNIT VALUES
CONTRACTS OTHER THAN SMALL PLAN CONTRACT
THE PRUDENTIAL DISCOVERY SELECT GROUP VARIABLE CONTRACT ACCOUNT
(CONDENSED FINANCIAL INFORMATION)
<CAPTION>
SUBACCOUNTS
------------------------------------------------------------------
PRUDENTIAL PRUDENTIAL
SERIES FUND SERIES FUND
MONEY MARKET DIVERSIFIED BOND
------------------------------------------------------------------
01/01/99 01/01/98 7/31/97* 01/01/99 01/01/98 7/31/97*
TO TO TO TO TO TO
12/31/99 12/31/98 12/31/97 12/31/99 12/31/98 12/31/97
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1. Beginning of period (rounded)...... $ 10.52 $ 10.08 $ 10.00 $ 10.68 $ 10.07 $ 10.00
2. End of period (rounded)............ $ 10.94 $ 10.52 $ 10.08 $ 10.50 $ 10.68 $ 10.07
3. Accumulation Units Outstanding
at end of period................ 127,605 42,992 815 105,742 63,041 542
------------------------------ ------------------------------
<CAPTION>
SUBACCOUNTS
-------------------------------------------------------------------
PRUDENTIAL PRUDENTIAL
SERIES FUND SERIES FUND
GOVERNMENT INCOME CONSERVATIVE BALANCED
-------------------------------------------------------------------
01/01/99 01/01/98 7/31/97* 01/01/99 01/01/98 7/31/97*
TO TO TO TO TO TO
12/31/99 12/31/98 12/31/97 12/31/99 12/31/98 12/31/97
-------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1. Beginning of period (rounded)...... $ 11.10 $ 10.27 $ 10.00 $ 11.10 $ 10.03 $ 10.00
2. End of period (rounded)............ $ 10.69 $ 11.10 $ 10.27 $ 11.73 $ 11.10 $ 10.03
3. Accumulation Units Outstanding
at end of period................ 58,456 33,914 60 246,332 146,440 563
--------------------------------- ------------------------------
<CAPTION>
SUBACCOUNTS
-------------------------------------------------------------------
PRUDENTIAL PRUDENTIAL
SERIES FUND SERIES FUND
FLEXIBLE MANAGED HIGH YIELD BOND
-------------------------------------------------------------------
01/01/99 01/01/98 7/31/97* 01/01/99 01/01/98 7/31/97*
TO TO TO TO TO TO
12/31/99 12/31/98 12/31/97 12/31/99 12/31/98 12/31/97
-------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1. Beginning of period (rounded)...... $ 10.90 $ 9.99 $ 10.00 $ 10.02 $ 10.37 $ 10.00
2. End of period (rounded)............ $ 11.64 $ 10.90 $ 9.99 $ 10.38 $ 10.02 $ 10.37
3. Accumulation Units Outstanding
at end of period................ 256,779 149,274 4,286 36,945 19,787 1,952
------------------------------ ---------------------------------
<CAPTION>
SUBACCOUNTS
------------------------------------------------------------------
PRUDENTIAL PRUDENTIAL
SERIES FUND SERIES FUND
STOCK INDEX EQUITY INCOME
------------------------------------------------------------------
01/01/99 01/01/98 7/31/97* 01/01/99 01/01/98 7/31/97*
TO TO TO TO TO TO
12/31/99 12/31/98 12/31/97 12/31/99 12/31/98 12/31/97
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1. Beginning of period (rounded)...... $ 13.09 $ 10.29 $ 10.00 $ 10.13 $ 10.48 $ 10.00
2. End of period (rounded)............ $ 15.62 $ 13.09 $ 10.29 $ 11.29 $ 10.13 $ 10.48
3. Accumulation Units Outstanding
at end of period................ 888,608 382,563 1,890 120,568 53,578 1,171
------------------------------ ------------------------------
<CAPTION>
SUBACCOUNTS
------------------------------------------------------------------
PRUDENTIAL PRUDENTIAL
SERIES FUND SERIES FUND
EQUITY JENNISON
------------------------------------------------------------------
01/01/99 01/01/98 7/31/97* 01/01/99 01/01/98 7/31/97*
TO TO TO TO TO TO
12/31/99 12/31/98 12/31/97 12/31/99 12/31/98 12/31/97
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1. Beginning of period (rounded)...... $ 10.96 $ 10.12 $ 10.00 $ 13.43 $ 9.87 $ 10.00
2. End of period (rounded)............ $ 12.21 $ 10.96 $ 10.12 $ 18.91 $ 13.43 $ 9.87
3. Accumulation Units Outstanding
at end of period................ 1,188,971 769,653 2,907 416,885 77,040 3,111
------------------------------- --------------------------------
<CAPTION>
SUBACCOUNTS
--------------------------------------------------------------------
PRUDENTIAL
SERIES FUND AIM V.I.
GLOBAL GROWTH AND INCOME
--------------------------------------------------------------------
01/01/99 01/01/98 7/31/97* 01/01/99 01/01/98 7/31/97*
TO TO TO TO TO TO
12/31/99 12/31/98 12/31/97 12/31/99 12/31/98 12/31/97
--------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1. Beginning of period (rounded)...... $ 11.08 $ 8.95 $ 10.00 $ 12.37 $ 9.79 $ 10.00
2. End of period (rounded)............ $ 16.27 $ 11.08 $ 8.95 $ 16.45 $ 12.37 $ 9.79
3. Accumulation Units Outstanding
at end of period................ 206,013 124,465 1,576 202,653 16,899 1,122
-------------------------------- --------------------------------
<CAPTION>
SUBACCOUNTS
-------------------------------------------------------------------
JANUS
AIM V.I. ASPEN
VALUE GROWTH
-------------------------------------------------------------------
01/01/99 01/01/98 7/31/97* 01/01/99 01/01/98 7/31/97*
TO TO TO TO TO TO
12/31/99 12/31/98 12/31/97 12/31/99 12/31/98 12/31/97
-------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1. Beginning of period (rounded)...... $ 12.97 $ 9.89 $ 10.00 $ 13.33 $ 9.92 $ 10.00
2. End of period (rounded)............ $ 16.68 $ 12.97 $ 9.89 $ 19.01 $ 13.33 $ 9.92
3. Accumulation Units Outstanding
at end of period................ 275,517 37,442 1,738 455,919 43,275 462
------------------------------- -------------------------------
<CAPTION>
SUBACCOUNTS
-----------------------------------------------------------------
JANUS
ASPEN
INTERNATIONAL MFS
GROWTH EMERGING GROWTH
------------------------------------------------------------------
01/01/99 01/01/98 7/31/97* 01/01/99 01/01/98 7/31/97*
TO TO TO TO TO TO
12/31/99 12/31/98 12/31/97 12/31/99 12/31/98 12/31/97
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1. Beginning of period (rounded)...... $ 10.96 $ 9.44 $ 10.00 $ 13.23 $ 9.95 $ 10.00
2. End of period (rounded)............ $ 19.79 $ 10.96 $ 9.44 $ 23.15 $ 13.23 $ 9.95
3. Accumulation Units Outstanding
at end of period................ 189,554 34,735 942 234,665 61,164 470
------------------------------ ------------------------------
<CAPTION>
SUBACCOUNTS
----------------------------------------------------------------------------------------------
OCC
OCC ACCUMULATION
MFS ACCUMULATION TRUST
RESEARCH TRUST MANAGED SMALL CAP
----------------------------------------------------------------------------------------------
01/01/99 01/01/98 7/31/97* 01/01/99 01/01/98 7/31/97* 01/01/99 01/01/98 7/31/97*
TO TO TO TO TO TO TO TO TO
12/31/99 12/31/98 12/31/97 12/31/99 12/31/98 12/31/97 12/31/99 12/31/98 12/31/97
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1. Beginning of period (rounded)...... $ 11.82 $ 9.67 $ 10.00 $ 10.75 $ 10.13 $ 10.00 $ 9.19 $ 10.20 $ 10.00
2. End of period (rounded)............ $ 14.52 $ 11.82 $ 9.67 $ 11.18 $ 10.75 $ 10.13 $ 8.94 $ 9.19 $ 10.20
3. Accumulation Units Outstanding
at end of period................ 57,813 14,548 779 59,831 23,869 2,135 29,150 1 2,742 2,781
----------------------------- ---------------------------- -----------------------------
<CAPTION>
SUBACCOUNTS
----------------------------------------------------------------------------------------------
WARBURG PINCUS
T. ROWE PRICE T. ROWE PRICE GLOBAL POST-VENTURE
EQUITY INCOME INTERNATIONAL STOCK CAPITAL
----------------------------------------------------------------------------------------------
01/01/99 01/01/98 7/31/97* 01/01/99 01/01/98 7/31/97* 01/01/99 01/01/98 7/31/97*
TO TO TO TO TO TO TO TO TO
12/31/99 12/31/98 12/31/97 12/31/99 12/31/98 12/31/97 12/31/99 12/31/98 12/31/97
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1. Beginning of period (rounded)...... $ 11.38 $ 10.54 $ 10.00 $ 10.24 $ 8.92 $ 10.00 $ 10.64 $ 10.08 $ 10.00
2. End of period (rounded)............ $ 11.69 $ 11.38 $ 10.54 $ 13.51 $ 10.24 $ 8.92 $ 17.23 $ 10.64 $ 10.08
3. Accumulation Units Outstanding
at end of period................ 88,559 26,852 1,704 15,783 6,523 216 11.646 6,039 5
------------------------------ ---------------------------- -----------------------------
</TABLE>
* Commencement of Operations
<PAGE>
DISCOVERY SELECT GROUP RETIREMENT ANNUITY
Discovery Select Group Retirement Annuity is a variable annuity
issued by The Prudential Insurance Company of America, Newark,
NJ. It is offered through these affiliated Prudential
subsidiaries: Prudential Securities Incorporated; Pruco
Securities Corporation; Prudential Investment Management
Services LLC.
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
751 Broad Street
Newark, NJ 07102-3777
PRUDENTIAL INVESTMENTS
3 Gateway Center, 12th Floor
Newark, NJ 07102-4077
[Prudential Logo]
DISCOVERY SELECT(SM) is a service mark of Prudential.
DS.PU.002.0500
<PAGE>
PART B
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
MAY 1, 2000
DISCOVERY SELECT
GROUP RETIREMENT ANNUITY
DISCOVERY SELECT
GROUP VARIABLE ANNUITY CONTRACTS
ISSUED THROUGH
THE PRUDENTIAL DISCOVERY SELECT GROUP
VARIABLE CONTRACT ACCOUNT
The Prudential Insurance Company of America ("Prudential") offers the DISCOVERY
SELECT(SM) Group Variable Annuity Contracts for use in connection with
retirement arrangements that qualify for federal tax benefits under Sections
401, 403(b), 408 or 457 of the Internal Revenue Code of 1986 (the "Code") and
with non-qualified annuity arrangements on a continuous basis. Contributions to
the Contract made on behalf of a Participant may be invested in one or more of
the twenty-two Subaccounts of The Prudential Discovery Select Group Variable
Contract Account as well as the Guaranteed Interest Account. Each Subaccount is
invested in a corresponding Portfolio of The Prudential Series Fund, Inc., AIM
Variable Insurance Funds, Inc., Janus Aspen Series, MFS Variable Insurance
Trust, OCC Accumulation Trust, T. Rowe Price Equity Series, Inc., T. Rowe Price
International Series, Inc. and Warburg Pincus Trust.
This Statement of Additional Information is not a prospectus and should be read
in conjunction with the prospectus, dated May 1, 2000. Certain portions of that
May 1, 2000 prospectus are incorporated by reference into this Statement of
Additional Information.
<PAGE>
TABLE OF CONTENTS
PAGE
----
DEFINITIONS........................................................... 2
OTHER CONTRACT PROVISIONS............................................. 2
ASSIGNMENT........................................................... 2
PARTICIPATION IN DIVISIBLE SURPLUS................................... 2
ADMINISTRATION........................................................ 2
PERFORMANCE INFORMATION............................................... 3
AVERAGE ANNUAL TOTAL RETURN.......................................... 3
NON-STANDARD TOTAL RETURN............................................ 3
PERFORMANCE INFORMATION.............................................. 4
DIRECTORS OF PRUDENTIAL............................................... 9
OFFICERS OF PRUDENTIAL................................................ 11
SALE OF THE CONTRACTS................................................. 13
LEGAL MATTERS......................................................... 13
EXPERTS .............................................................. 13
FINANCIAL STATEMENTS OF THE DISCOVERY ACCOUNT......................... A-1
CONSOLIDATED FINANCIAL STATEMENTS OF THE PRUDENTIAL
INSURANCE COMPANY OF AMERICA AND SUBSIDIARIES........................ B-1
The Prudential Insurance Company of America
30 Scranton Office Park
Scranton, PA 18507-1789
Telephone 1-800-458-6333
<PAGE>
DEFINITIONS
CONTRACTS--The group variable annuity contracts described in the Prospectus and
offered for use in connection with retirement arrangements that qualify for
federal tax benefits under Sections 401, 403(b), 408 or 457 of the Internal
Revenue Code and with non-qualified annuity arrangements. One of such contracts
is the Small Plan Contract described in the Prospectus. Another such Contract is
the 457 Contract described in the Prospectus.
FUNDS--The Portfolios of the Prudential Series Fund, Inc., AIM Variable
Insurance Funds, Inc., Janus Aspen Series, MFS Variable Insurance Trust, OCC
Accumulation Trust, T. Rowe Price Equity Series, Inc., T. Rowe Price
International Series, Inc., and Warburg Pincus Trust.
PARTICIPANT--A person who makes contributions, or for whom contributions have
been made, and to whom they remain credited under the Contract.
PARTICIPANT ACCOUNT--An account established for each Participant to record the
amount credited to the Participant under the Contract.
PARTICIPANT ACCOUNT VALUE--The dollar amount held in a Participant Account.
PRUDENTIAL--The Prudential Insurance Company of America. "We," "us," or "our"
means Prudential.
PRUDENTIAL DISCOVERY SELECT GROUP VARIABLE CONTRACT ACCOUNT--A separate account
of Prudential registered under the Investment Company Act of 1940 as a unit
investment trust (the "Discovery Account"), invested through its Subaccounts in
shares of the corresponding Funds.
SMALL PLAN CONTRACT--A type of Contract used exclusively with retirement plans
qualified under Sections 401(k) or 401(a) of the Code that generally have 100 or
fewer Participants.
SUBACCOUNT--A division of the Discovery Account, the assets of which are
invested in shares of the corresponding Funds.
457 CONTRACT--A type of Contract used exclusively with retirement plans
qualified under Section 457 of the Code.
We set out other defined terms in the Prospectus.
OTHER CONTRACT PROVISIONS
ASSIGNMENT
Unless contrary to applicable law, the right to any payment under the Contract
is neither assignable nor subject to the claim of any creditor.
PARTICIPATION IN DIVISIBLE SURPLUS
A mutual life insurance company differs from a stock life insurance company in
that it has no stockholders who are the owners of the enterprise. Accordingly, a
Contractholder of Prudential participates in the divisible surplus of
Prudential, according to the annual determination of Prudential's Board of
Directors as to the portion, if any, of the divisible surplus which has accrued
on the Contracts. No assurance can be given as to the amount of divisible
surplus, if any, that will be available for distribution under these Contracts
in the future. As discussed in the Prospectus, Prudential is considering
reorganizing itself into a stock company.
ADMINISTRATION
The assets of each Subaccount of the Discovery Account are invested in a
corresponding Fund. The prospectus and the statement of additional information
of each Fund describe the investment management and administration of that Fund.
Subject to Prudential's supervision, the investment advisory services provided
to the Prudential Series Fund, Inc. by Prudential are furnished by its
wholly-owned subsidiary, The Prudential Investment Corporation ("PIC"), pursuant
to the service agreement between Prudential and PIC (the "Service Agreement")
which provides that Prudential will reimburse PIC for its costs and expenses
and, pursuant to a Subadvisory Agreement, by another wholly-owned subsidiary,
Jennison Associates Capital Corp. ("Jennison"), with respect to the management
of the Prudential Jennison
2
<PAGE>
Portfolio. Both PIC and Jennison are registered as investment advisers under the
Investment Advisers Act of 1940.
Prudential generally is responsible for the administrative and recordkeeping
functions of the Discovery Account and pays the expenses associated with them.
These functions include enrolling Participants, receiving and allocating
contributions, maintaining Participant Accounts, preparing and distributing
confirmations, statements, and reports. The administrative and recordkeeping
expenses borne by Prudential include salaries, rent, postage, telephone, travel,
legal, actuarial and accounting fees, office equipment, stationery and
maintenance of computer and other systems.
With respect to the Small Plan Contracts, Prudential has delegated certain of
these administrative and recordkeeping functions to the Small Plan Contract
Recordkeeper.
Prudential is reimbursed for these administrative and recordkeeping expenses by
the annual account charge and the daily charge against the assets of each
Subaccount for administrative expenses.
A daily charge is made which is equal to a maximum effective annual rate of
0.85% of the net assets in each Subaccount (this charge is equal to 1.05% for
Small Plan Contracts). All of this charge is for administrative expenses not
covered by the annual account charge. During 1999, 1998 and 1997, Prudential
received $487,156, $18,262, and $316 respectively for administrative expenses
and for providing management services. There is also an annual account charge
for administrative expenses of not greater than $32 assessed against a
Participant Account. During 1999, 1998 and 1997, Prudential collected $21,188,
$6,527, and $173 respectively in annual account charges.
A withdrawal charge is also imposed on certain withdrawals from the Subaccounts
and the Guaranteed Interest Account. During 1999, Prudential collected $0 in
withdrawal charges.
PERFORMANCE INFORMATION
AVERAGE ANNUAL TOTAL RETURN
The Discovery Account may advertise average annual total return information
calculated according to a formula prescribed by the U.S. Securities and Exchange
Commission ("SEC"). Average annual total return shows the average annual
percentage increase, or decrease, in the value of a hypothetical contribution
allocated to a Subaccount from the beginning to the end of each specified period
of time. The SEC standardized version of this performance information is based
on an assumed contribution of $1,000 allocated to a Subaccount at the beginning
of each period and full withdrawal of the value of that amount at the end of
each specified period, giving effect to any withdrawal charge and all other
charges and fees applicable under the Contract. This method of calculating
performance further assumes that (i) a $1,000 contribution was allocated to a
Subaccount and (ii) no transfers or additional payments were made. Premium taxes
are not included in the term "charges" for purposes of this calculation. Average
annual total return is calculated by finding the average annual compounded rates
of return of a hypothetical contribution that would compare the Unit Value on
the first day of the specified period to the ending redeemable value at the end
of the period according to the following formula:
P(1 + T)n= ERV
Where T equals average annual total return, where ERV (the ending redeemable
value) is the value at the end of the applicable period of a hypothetical
contribution of $1,000 made at the beginning of the applicable period, where P
equals a hypothetical contribution of $1,000, and where n equals the number of
years.
NON-STANDARD TOTAL RETURN
In addition to the standardized average annual total return information
described above, we may present total return information computed on bases
different from that standardized method. The Discovery Account may present total
return information computed on the same basis as the standardized method except
that charges deducted from the hypothetical contribution will not include any
withdrawal charge. Consistent with the long-term investment and retirement
objectives of the Contract, this total return
3
<PAGE>
presentation may assume that investment in the Contract continues beyond the
period when the withdrawal charge applies. The total return percentage under
this non-standardized method will be higher than that resulting from the
standardized method.
The Discovery Account may also present aggregate total return figures for
various periods, reflecting the cumulative change in value of an investment in
the Discovery Account for the specified period.
PERFORMANCE INFORMATION
The tables below provide performance information for each Subaccount for
specified periods ending December 31, 1999. This performance information is only
for Contracts other than the Small Plan Contract. Because its charges are
higher, the Small Plan Contract will have lower performance than the other
Contracts. For the periods prior to the date the Subaccounts commenced
operations, non-standard performance information for the Contracts will be
calculated based on the performance of the Funds and the assumption that the
Subaccounts were in existence for the same periods as those indicated for the
Funds, with the level of Contract charges that were in effect at the inception
of the Subaccounts (this is referred to as "hypothetical performance data").
This information does not indicate or represent future performance.
4
<PAGE>
Table 1 below assumes a hypothetical investment of $1,000 at the beginning of
the period via the Subaccount investing in the applicable Fund and withdrawal of
the investment on 12/31/99. The rates of return thus reflect the mortality and
expense risk fee, the maximum administrative fee, the withdrawal charge and a
pro rata portion of the annual account charge. The performance shown below is
only for Contracts other than the Small Plan Contract.
TABLE 1
SUBACCOUNT STANDARDIZED
AVERAGE ANNUAL TOTAL RETURN
<TABLE>
<CAPTION>
ONE
YEAR
Fund Date ENDED 7/31/97-
Portfolio Established 12/31/99 12/31/99
--------- ----------- -------- --------
<S> <C> <C> <C>
The Prudential Series Fund, Inc.
Money Market Subaccount........................................ 6/24/97 -1.12% 3.80
Diversified Bond Subaccount.................................... 6/24/97 -6.78% 3.26
Government Income Subaccount................................... 6/24/97 -8.72% 3.85
Conservative Balanced Subaccount............................... 6/24/97 0.59% 8.60
Flexible Managed Subaccount.................................... 6/24/97 1.64% 8.82
High Yield Bond Subaccount..................................... 6/24/97 -1.48% 2.75
Stock Index Subaccount......................................... 6/24/97 14.29% 23.15
Equity Income Subaccount....................................... 6/24/97 6.36% 8.28
Equity Subaccount.............................................. 6/24/97 6.30% 11.38
Prudential Jennison Subaccount................................. 6/24/97 35.73% 35.00
Global Subaccount.............................................. 6/24/97 41.74% 23.39
AIM Variable Insurance Funds, Inc.
AIM V.I. Growth and Income Subaccount.......................... 6/24/97 27.86% 26.21
AIM V.I. Value Subaccount...................................... 6/24/97 23.55% 26.15
Janus Aspen Series
Growth Subaccount.............................................. 6/24/97 37.51% 33.09
International Growth Subaccount................................ 6/24/97 75.42% 33.44
MFS Variable Insurance Trust
Emerging Growth Subaccount..................................... 6/24/97 69.93% 44.81
Research Subaccount............................................ 6/24/97 17.77% 19.40
OCC Accumulation Trust
Managed Subaccount............................................. 6/24/97 -1.07% 7.21
Small Cap Subaccount........................................... 6/24/97 -7.86% -3.02
T. Rowe Price
T. Rowe Price Equity Series, Inc., Equity Income
Subaccount..................................................... 6/24/97 -2.35% 8.76
T. Rowe Price International Series, Inc., International
Stock Subaccount............................................... 6/24/97 26.95% 13.87
Warburg Pincus Trust
Global Post-Venture Capital Subaccount......................... 6/24/97 56.83% 28.35
</TABLE>
5
<PAGE>
Tables 2 and 3 below show average annual total return and cumulative total
return, respectively, on the same assumptions as Table 1 except that the value
in the Subaccount is not withdrawn at the end of the period or is withdrawn to
effect an annuity. The rates of return shown below reflect the mortality and
expense risk fee and the maximum administrative fee, but do not reflect any
withdrawal charges or the impact of a pro rata portion of the annual account
charge. The performance shown in Tables 2 and 3 below is only for Contracts
other than the Small Plan Contract.
TABLE 2
SUBACCOUNT "HYPOTHETICAL"
AVERAGE ANNUAL TOTAL RETURN ASSUMING NO WITHDRAWAL
<TABLE>
<CAPTION>
ONE THREE FIVE TEN
YEAR YEARS YEARS YEARS
Fund DATE ENDED ENDED ENDED ENDED
Portfolio ESTABLISHED 12/31/99 12/31/99 12/31/99 12/31/99
--------- ----------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
The Prudential Series Fund, Inc.
Money Market Subaccount.............. 5/13/83 3.94% 3.88% 4.11% 4.04%
Diversified Bond Subaccount.......... 5/13/83 -1.72 3.94 6.76 6.63
Government Income Subaccount......... 5/1/89 -3.66 3.93 6.09 5.96
Conservative Balanced
Subaccount......................... 5/13/83 5.65 9.66 11.29 9.23
Flexible Managed Subaccount.......... 5/13/83 6.70 10.64 13.36 10.61
High Yield Bond Subaccount........... 2/23/87 3.58 4.09 7.68 8.70
Stock Index Subaccount............... 10/19/87 19.35 26.34 27.12 16.70
Equity Income Subaccount............. 2/19/88 11.42 12.57 15.67 12.69
Equity Subaccount.................... 5/13/83 11.36 13.87 17.62 13.85
Prudential Jennison Subaccount....... 5/1/95 40.79 35.14 N/A 30.40
Global Subaccount.................... 9/19/88 46.80 23.74 20.82 12.07
AIM Variable Insurance Funds, Inc.
AIM V.I. Growth and Income
Subaccount......................... 5/2/94 32.92 27.66 26.76 23.14
AIM V.I. Value Subaccount............ 5/5/93 28.61 27.33 25.95 21.84
Janus Aspen Series
Growth Subaccount.................... 9/13/93 42.57 32.11 28.35 22.86
International Growth Subaccount...... 5/2/94 80.48 34.34 31.55 26.60
MFS Variable Insurance Trust
Emerging Growth Subaccount........... 7/24/95 74.99 40.72 N/A 34.88
Research Subaccount.................. 7/24/95 22.83 20.80 N/A 21.25
OCC Accumulation Trust
Managed Subaccount................... 8/1/88 3.99 10.53 18.79 15.64
Small Cap Subaccount................. 8/1/88 -2.80 1.84 7.23 10.02
T. Rowe Price
T. Rowe Price Equity Series, Inc.,
Equity Income Subaccount............ 3/31/94 2.71 12.12 17.34 16.15
T. Rowe Price International Series,
Inc., International Stock
Subaccount......................... 3/31/94 32.01 15.43 13.96 12.23
Warburg Pincus Trust
Global Post-Venture Capital
Subaccount......................... 9/30/96 61.89 24.33 N/A 21.69
</TABLE>
- -----------------------
Note 1: This table assumes no deferred sales charges.
6
<PAGE>
TABLE 3
SUBACCOUNT "HYPOTHETICAL"
CUMULATIVE TOTAL RETURN ASSUMING NO WITHDRAWAL
<TABLE>
<CAPTION>
ONE THREE FIVE TEN
YEAR YEARS YEARS YEARS
Fund DATE ENDED ENDED ENDED ENDED
Portfolio ESTABLISHED 12/31/99 12/31/99 12/31/99 12/31/99
--------- ----------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
The Prudential Series Fund, Inc.
Money Market Subaccount.............. 5/13/83 3.94 12.09 22.34 48.56
Diversified Bond Subaccount.......... 5/13/83 -1.72 12.28 38.73 90.17
Government Income Subaccount......... 5/1/89 -3.66 12.26 34.40 78.38
Conservative Balanced
Subaccount......................... 5/13/83 5.65 31.87 70.75 141.99
Flexible Managed Subaccount.......... 5/13/83 6.70 35.44 87.28 174.33
High Yield Bond Subaccount........... 2/23/87 3.58 12.77 44.77 130.44
Stock Index Subaccount............... 10/19/87 19.35 101.67 232.11 368.75
Equity Income Subaccount............. 2/19/88 11.42 42.65 107.19 230.58
Equity Subaccount.................... 5/13/83 11.36 47.64 125.21 265.99
Prudential Jennison Subaccount....... 5/1/95 40.79 146.81 N/A N/A
Global Subaccount.................... 9/19/88 46.80 89.45 157.59 212.61
AIM Variable Insurance Funds, Inc.
AIM V.I. Growth and Income
Subaccount......................... 5/2/94 32.92 108.03 227.50 N/A
AIM V.I. Value Subaccount............ 5/5/93 28.61 106.46 217.18 N/A
Janus Aspen Series
Growth Subaccount.................... 9/13/93 42.57 130.58 248.54 N/A
International Growth Subaccount...... 5/2/94 80.48 142.47 294.26 N/A
MFS Variable Insurance Trust
Emerging Growth Subaccount........... 7/24/95 74.99 178.67 N/A N/A
Research Subaccount.................. 7/24/95 22.83 76.29 N/A N/A
OCC Accumulation Trust
Managed Subaccount................... 8/1/88 3.99 35.02 136.61 327.86
Small Cap Subaccount................. 8/1/88 -2.80 5.63 41.76 159.87
T. Rowe Price
T. Rowe Price Equity Series, Inc.,
Equity Income Subaccount............ 3/31/94 2.71 40.96 122.58 136.71
T. Rowe Price International Series,
Inc., International Stock
Subaccount......................... 3/31/94 32.01 53.79 92.24 94.24
Warburg Pincus Trust
Global Post-Venture Capital
Subaccount......................... 9/30/96 61.89 92.20 N/A N/A
</TABLE>
------------------------
Note 1: This table assumes no deferred sales charges.
7
<PAGE>
MONEY MARKET SUBACCOUNT YIELD
The "yield" and "effective yield" figures for the Money Market Subaccount shown
below were calculated using historical investment returns of the Money Market
Portfolio of the Prudential Series Fund. All fees, expenses and charges
associated with the DISCOVERY SELECT Group Annuity and the Series Fund have been
reflected.
The "yield" and "effective yield" of the Money Market Subaccount for the seven
days ended December 31, 1999 were 4.55% and 4.65%, respectively, with respect to
Contracts other than the Small Plan Contract. The "yield" and "effective yield"
of the Money Market Subaccount for the seven days ended December 31, 1999 were
4.55% and 3.55%, respectively, with respect to the Small Plan Contract.
The yield is computed by determining the net change, exclusive of capital
changes, in the value of a hypothetical pre-existing account having a balance of
one accumulation unit of the Money Market Subaccount at the beginning of the
period, subtracting a hypothetical charge reflecting deductions from contract
owner accounts, and dividing the difference by the value of the subaccount at
the beginning of the base period to obtain the base period return, and then
multiplying the base period return by (365/7), with the resulting figure carried
to the nearest ten-thousandth of 1%.
The deduction referred to above consists of the 0.15% charge for mortality and
expense risks and the 0.85% charge for administration. It does not reflect the
withdrawal charge.
The effective yield is obtained by taking the base period return, adding 1,
raising the sum to a power equal to 365 divided by 7, and subtracting 1 from the
result, according to the following formula: Effective Yield = (base period
return + 1) 365/7 -1.
The yield on amounts held in the Money Market Subaccount will fluctuate on a
daily basis. Therefore, the stated yields for any given period are not an
indication of future yields.
COMPARATIVE PERFORMANCE INFORMATION
Reports or advertising may include comparative performance information,
including, but not limited to: (1) comparisons to market indices such as the Dow
Jones Industrial Average, the Standard & Poor's 500 Index, the Value Line
Composite Index, the Russell 2000 Index, the Morgan Stanley World Index, the
Lehman Brothers bond indices; (2) comparisons to other investments, such as
certificates of deposit; (3) performance rankings assigned by services such as
Morningstar, Inc. and Variable Research and Data Services (VARDS), and Lipper
Analytical Services, Inc.; (4) data presented by analysts such as Dow Jones,
A.M. Best, The Bank Rate Monitor National Index; and (5) data in publications
such as The Wall Street Journal, Times, Forbes, Barrons, Fortune, Money
Magazine, and Financial World.
8
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
DIRECTORS
FRANKLIN E. AGNEW--Director since 1994 (current term expires April, 2005).
Member, Committee on Finance & Dividends; Member, Corporate Governance
Committee. Business consultant since 1987. Chief Financial Officer, H.J. Heinz
from 1971 to 1986. Mr. Agnew is also a director of Erie Plastics Corporation.
Age 65. Address: 600 Grant Street, Suite 660, Pittsburgh, PA 15219.
FREDERIC K. BECKER--Director since 1994 (current term expires April, 2005).
Member, Auditing Committee; Member, Corporate Governance Committee. President,
Wilentz Goldman and Spitzer, P.A. (law firm) since 1989, with firm since 1960.
Age 64. Address: 90 Woodbridge Center Drive, Woodbridge, NJ 07095.
GILBERT F. CASELLAS--Director since 1998 (current term expires April, 2003).
Member, Compensation Committee. President and Chief Operating Officer, The
Swarthmore Group, Inc. since 1999. Partner, McConnell Valdes, LLP in 1998.
Chairman, U.S. Equal Employment Opportunity Commission from 1994 to 1998. Age
47. Address: 1646 West Chester Pike, Suite 3, West Chester, PA 19382.
JAMES G. CULLEN--Director since 1994 (current term expires April, 2001). Member,
Compensation Committee; Member, Committee on Business Ethics. President & Chief
Operating Officer, Bell Atlantic Corporation, since 1998. President & Chief
Executive Officer, Telecom Group, Bell Atlantic Corporation, from 1997 to 1998.
Vice Chairman, Bell Atlantic Corporation from 1995 to 1997. President, Bell
Atlantic Corporation from 1993 to 1995. Mr. Cullen is also a director of Bell
Atlantic Corporation and Johnson & Johnson. Age 57. Address: 1310 North Court
House Road, 11th Floor, Alexandria, VA 22201.
CAROLYNE K. DAVIS--Director since 1989 (current term expires April, 2001).
Member, Committee on Business Ethics; Member, Compensation Committee.
Independent Health Care Advisor since 1997. Health Care Advisor, Ernst & Young,
LLP from 1985 to 1997. Dr. Davis is also a director of Beckman Coulter
Instruments, Inc., Merck & Co., Inc., Minimed Incorporated, Science Applications
International Corporation, and Beverley Enterprises. Age 68. Address: 751 Broad
Street, 21st Floor, Newark, NJ 07102-3777.
ROGER A. ENRICO--Director since 1994 (current term expires April, 2002). Member,
Committees on Nominations & Corporate Governance; Member, Compensation
Committee. Chairman and Chief Executive Officer, PepsiCo, Inc. since 1996. Mr.
Enrico originally joined PepsiCo, Inc. in 1971. Mr. Enrico is also a director of
A.H. Belo Corporation, Target Corporation, and Electronic Data Systems. Age 55.
Address: 700 Anderson Hill Road, Purchase, NY 10577.
ALLAN D. GILMOUR--Director since 1995 (current term expires April, 2003).
Member, Investment Committee; Member, Committee on Finance & Dividends. Retired
since 1995. Vice Chairman, Ford Motor Company, from 1993 to 1995. Mr. Gilmour
originally joined Ford in 1960. Mr. Gilmour is also a director of Whirlpool
Corporation, MediaOne Group, Inc., The Dow Chemical Company and DTE Energy
Company. Age 65. Address: 751 Broad Street, 21st Floor, Newark, NJ 07102-3777.
WILLIAM H. GRAY III--Director since 1991 (current term expires April, 2004).
Chairman, Committees on Nominations & Corporate Governance. Member, Executive
Committee; Member, Committee on Business Ethics. President and Chief Executive
Officer, The College Fund/UNCF since 1991. Mr. Gray served in Congress from 1979
to 1991. Mr. Gray is also a director of Chase Manhattan Corporation, Chase
Manhattan Bank, Municipal Bond Investors Assurance Corporation, Rockwell
International Corporation, Warner-Lambert Company, CBS Corporation, Electronic
Data Systems, and Ezgov.com, Inc. Age 58. Address: 8260 Willow Oaks Corp. Drive,
Fairfax,VA 22031-4511.
9
<PAGE>
JON F. HANSON--Director since 1991 (current term expires April, 2003). Member,
Investment Committee; Member, Committee on Business Ethics. Chairman, Hampshire
Management Company since 1976. Mr. Hanson is also a director of James E. Hanson
Management Company, Neumann Distributors, Inc., United Water Resources, and
Consolidated Delivery and Logistics. Age 63. Address: 235 Moore Street, Suite
200, Hackensack, NJ 07601.
GLEN H. HINER--Director since 1997 (current term expires April, 2001). Member,
Compensation Committee. Chairman and Chief Executive Officer, Owens Corning
since 1992. Senior Vice President and Group Executive, Plastics Group, General
Electric Company from 1983 to 1991. Mr. Hiner is also a director of Dana
Corporation, Owens Corning, and Kohler, Co. Age 65. Address: One Owens Corning
Parkway, Toledo, OH 43659.
CONSTANCE J. HORNER--Director since 1994 (current term expires April, 2002).
Member, Auditing Committee; Member, Committees on Nominations & Corporate
Governance. Guest Scholar, The Brookings Institution since 1993. Ms. Horner is
also a director of Foster Wheeler Corporation, Ingersoll-Rand Company, and
Pfizer, Inc. Age 58. Address: 1775 Massachusetts Ave., N.W. Washington, D.C.
20036-2188.
GAYNOR N. KELLEY--Director since 1997 (current term expires April, 2001).
Member, Auditing Committee. Retired since 1996. Chairman and Chief Executive
Officer, The Perkin Elmer Corporation from 1990 to 1996. Mr. Kelley is also a
director of Hercules Incorporated and Alliant Techsystems. Age 68. Address: 751
Broad Street, 21st Floor, Newark, NJ 07102-3777.
BURTON G. MALKIEL--Director since 1978 (current term expires April, 2002).
Chairman, Investment Committee; Member, Executive Committee; Member, Committee
on Finance & Dividends. Professor of Economics, Princeton University, since
1988. Dr. Malkiel is also a director of Banco Bilbao Vizcaya Gestinova, Baker
Fentress & Company, The Jeffrey Company, Select Sector SPDR Trusts, and Vanguard
Group, Inc. Age 67. Address: Princeton University, Department of Economics, 110
Fisher Hall, Prospect Avenue, Princeton, NJ 08544-1021.
ARTHUR F. RYAN--Chairman of the Board Chief Executive Officer and President of
Prudential since 1994. President and Chief Operating Officer, Chase Manhattan
Bank from 1990 to 1994, with Chase since 1972. Age 57. Address: 751 Broad
Street, Newark, NJ 07102-3777.
IDA F.S. SCHMERTZ--Director since 1997 (current term expires April, 2004).
Member, Audit Committee. Principal, Investment Strategies International since
1994. Age 65. Address: 751 Broad Street, 21st Floor, Newark, NJ 07102-3777.
CHARLES R. SITTER--Director since 1995 (current term expires April, 2003).
Member, Committee on Finance & Dividend; Member, Investment Committee. Retired
since 1996. President, Exxon Corporation from 1993 to 1996. Mr. Sitter began his
career with Exxon in 1957. Age 69. Address: 5959 Las Colinas Boulevard, Irving,
TX 75039-2298.
DONALD L. STAHELI--Director since 1995 (current term expires April, 2003).
Member, Compensation Committee; Member, Auditing Committee. Retired since 1996.
Chairman and Chief Executive Officer, Continental Grain Company from 1994 to
1997. President and Chief Executive Officer, Continental Grain Company from 1988
to 1994. Age 68 Address: 47 East South Temple, #501, Salt Lake City, UT 84150.
RICHARD M. THOMSON--Director since 1976 (current term expires April, 2004).
Chairman, Executive Committee; Chairman, Compensation Committee. Retired since
1998. Chairman of the Board, The Toronto-Dominion Bank from 1997 to 1998.
Chairman and Chief Executive Officer from 1978 to 1997. Mr. Thomson is also a
director of CGC, Inc., INCO, Limited, S.C. Johnson & Son, Inc., The Thomson
Corporation, Canadian Occidental Petroleum Ltd., The Toronto-Dominion Bank,
Ontario Power Generation, Inc., Canada Pension Plan Investment Board, and
TrizecHahn Corporation. Age 66. Address: P.O. Box 1, Toronto-Dominion Centre,
Toronto, Ontario, M5K 1A2, Canada.
JAMES A. UNRUH--Director since 1996 (current term expires April, 2004). Member,
Committees on Nominations & Corporate Governance; Member, Investment Committee.
Founding Member, Alerion Capital Group, LLC since
10
<PAGE>
1998. Chairman and Chief Executive Officer, Unisys Corporation, from 1990 to
1997. Mr. Unruh is also a director of Moss Software, Inc. Age 59. Address: 751
Broad Street, 21st Floor, Newark, NJ 07102-3777.
P. ROY VAGELOS, M.D.--Director since 1989 (current term expires April, 2001).
Chairman, Auditing Committee; Member, Executive Committee; Member, Committees on
Nominations & Corporate Governance. Chairman, Regeneron Pharmaceuticals since
1995. Chairman, Advanced Medicines, Inc. since 1997. Chairman, Chief Executive
Officer and President, Merck & Co., Inc. from 1986 to 1995. Dr. Vagelos
originally joined Merck in 1975. Dr. Vagelos is also a director of The Estee
Lauder Companies, Inc. and PepsiCo., Inc. Age 70. Address: One Crossroads Drive,
Building A, 3rd Floor, Bedminster, NJ 07921.
STANLEY C. VAN NESS--Director since 1990 (current term expires April, 2002).
Chairman, Committee on Business Ethics; Member, Executive Committee; Member,
Auditing Committee. Partner, Herbert, Van Ness, Cayci & Goodell (law firm) since
1998. Counselor at Law, Picco Herbert Kennedy (law firm) from 1990 to 1998. Mr.
Van Ness is also a director of Jersey Central Power & Light Company. Age 66.
Address: 22 Chambers Street, Princeton, NJ 08542.
PAUL A. VOLCKER--Director since 1988 (current term expires April, 2004).
Chairman, Committee on Finance & Dividends; Member, Executive Committee; Member,
Committee on Nominations & Corporate Governance. Consultant since 1997. Chairman
and Chief Executive Officer, Wolfensohn & Co., Inc. 1995 to 1996. Chairman,
James D. Wolfensohn, Inc. 1988 to 1995. Mr. Volcker is also a director of
Nestle, S.A,. and as well as a Member of the Board of Overseers of TIAA-CREF.
Age 72. Address: 610 Fifth Avenue, Suite 420, New York, NY 10020.
JOSEPH H. WILLIAMS--Director since 1994 (current term expires April, 2002).
Member, Committee on Finance & Dividends; Member, Investment Committee.
Director, The Williams Companies since 1979. Chairman & Chief Executive Officer,
The Williams Companies from 1979 to 1993. Mr. Williams is also a director of The
Orvis Company, and AEA Investors, Inc. Age 66. Address: One Williams Center,
Tulsa, OK 74172.
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
PRINCIPAL OFFICERS
ARTHUR F. RYAN--Chairman of the Board, Chief Executive Officer, and President
since 1994; prior to 1994, President and Chief Operating Officer, Chase
Manhattan Corporation. Age 57.
MICHELE S. DARLING--Executive Vice President, Corporate Governance and Human
Resources since 2000; Executive Vice President, Human Resources from 1997 to
2000; prior to 1997, Executive Vice President, Human Resources, Canadian
Imperial Bank of Commerce. Age 46.
ROBERT C. GOLDEN--Executive Vice President, Operations and Systems since 1997;
prior to 1997, Executive Vice President, Prudential Securities. Age 53.
MARK B. GRIER--Executive Vice President, Financial Management since 2000;
Executive Vice President, Corporate Governance from 1998 to 2000; Executive Vice
President, Financial Management from 1997 to 1998; Chief Financial Officer from
1995 to 1997; prior to 1995, Executive Vice President, Chase Manhattan
Corporation. Age 47.
JEAN D. HAMILTON--Executive Vice President, Prudential Institutional since 1998;
President, Diversified Group since 1995 to 1998; prior to 1995, President,
Prudential Capital Group. Age 53.
RODGER A. LAWSON--Executive Vice President, International Investments & Global
Marketing Communications since 1998; Executive Vice President, Marketing and
Planning from 1996 to 1998; President and CEO, Van Eck Global, from 1994 to
1996; prior to 1994, President and CEO, Global Private Banking, Bankers Trust
Company. Age 53.
11
<PAGE>
KIYOFUMI SAKAGUCHI--Executive Vice President, International Insurance since
1998; President, International Insurance Group from 1995 to 1998; prior to 1995,
Chairman and CEO, The Prudential Life Insurance Co., Ltd., Japan. Age 57.
JOHN R. STRANGFELD--Executive Vice President, Global Asset Management since
1998; Chief Executive Officer, Private Asset Management Group (PAMG) from 1996
to 1998; President, PAMG, from 1994 to 1996; prior to 1994, Senior Managing
Director. Age 46.
VIVIAN BANTA--Executive Vice President, Individual Financial Services since
2000; Consultant, Individual Financial Services from 1998 to 1999; Consultant,
Morgan Stanley from 1997 to 1998; Executive Vice President, Global Investor
Service, The Chase Manhattan Bank from 1991 to 1997. Age 49.
RICHARD J. CARBONE--Senior Vice President and Chief Financial Officer since
1997; Controller, Salomon Brothers, from 1995 to 1997; prior to 1995,
Controller, Bankers Trust. Age 52.
ANTHONY S. PISZEL--Senior Vice President and Controller since 2000; Vice
President and Controller from 1998 to 2000. Vice President, Enterprise Financial
Management from 1997 to 1998; prior to 1997, Chief Financial Officer, Individual
Insurance Group. Age 45.
SUSAN J. BLOUNT--Vice President and Secretary since 1995; prior to 1995,
Assistant General Counsel. Age 42.
C. EDWARD CHAPLIN--Vice President and Treasurer since 1995; prior to 1995,
Managing Director and Assistant Treasurer. Age 43.
12
<PAGE>
SALE OF THE CONTRACTS
Prudential Investment Management Services LLC ("PIMS"), a subsidiary of
Prudential, offers the Contracts on a continuous basis through Corporate Office,
regional home office and group sales office employees in those states in which
the Contracts may be lawfully sold. It may also offer the Contracts through
licensed insurance brokers and agents, or through appropriately registered
direct or indirect subsidiary(ies) of Prudential, provided clearances to do so
are obtained in any jurisdiction where such clearances may be necessary. During
1999, 1998 and 1997, the aggregate dollar amount of underwriting commissions
paid to PIMS were $573,984, $105,206, and $4,896, respectively. During 1999,
1998 and 1997 PIMS paid $573,984, $105,206, and $4,896 respectively to cover
individual representatives' commissions and other distribution expenses.
Prudential may pay trail commissions to registered representatives who maintain
an ongoing relationship with a Contractholder. Typically, a trail commission is
compensation that is paid periodically to a representative, the amount of which
is linked to the value of the Contract and the amount of time that the Contract
has been in effect.
LEGAL MATTERS
All matters relating to New Jersey law pertaining to the Contracts, including
the validity of the Contracts and Prudential's authority to issue the Contracts,
have been passed upon by C. Christopher Sprague, Assistant General Counsel of
Prudential. Shea and Gardner of Washington, D.C. has provided advice on certain
matters relating to the federal securities laws.
EXPERTS
The consolidated financial statements of Prudential and its subsidiaries as of
December 31, 1999 and 1998 and for each of the two years in the period ended
December 31, 1999 and the financial statements of the Account as of December 31,
1999 and for each of the three years in the period then ended included in this
statement of additional information have been so included in reliance on the
reports of PricewaterhouseCoopers LLP, independent accountants, given on the
authority of said firm as experts in auditing and accounting.
PricewaterhouseCoopers LLP's principal business address is 1177 Avenue of the
Americas, New York, New York 10036.
FINANCIAL STATEMENTS
The consolidated financial statements for Prudential and subsidiaries included
herein should be distinguished from the financial statements of the Discovery
Account, and should be considered only as bearing upon the ability of Prudential
to meet its obligations under the Contracts. Also included herein are certain
financial statements of the Discovery Account.
13
<PAGE>
FINANCIAL STATEMENTS OF THE DISCOVERY ACCOUNTS
STATEMENTS OF NET ASSETS
DECEMBER 31, 1999
<TABLE>
<CAPTION>
SUBACCOUNTS
---------------------------------------------------------------------------------------------
Prudential Series Prudential Series Prudential Series Prudential Series Prudential Series
Fund Fund Fund Fund Fund
Money Market Diversified Bond Government Income Conservative Balanced Flexible Managed
----------------- ---------------- ----------------- --------------------- -----------------
<S> <C> <C> <C> <C> <C>
Asset Value [Note 2] .............. $1,400,902 $1,153,780 $639,648 $2,903,766 $2,991,947
Net Receivable (Payable) from
the Prudential Insurance Co.
of America ........................ (1,176) (1,250) 113 (4,976) (4,313)
---------- ---------- -------- ---------- ----------
Net Assets ........................... $1,399,726 $1,152,530 $639,761 $2,898,790 $2,987,634
========== ========== ======== ========== ==========
Net Assets Representing:
Equity of Participants
of Other than Small
Plan Contracts .................... $1,395,815 $1,110,270 $625,002 $2,888,694 $2,987,634
Equity of Participants of
Small Plan Contracts .............. 3,911 42,260 14,759 10,096 --
---------- ---------- -------- ---------- ----------
Net Assets ........................... $1,399,726 $1,152,530 $639,761 $2,898,790 $2,987,634
========== ========== ======== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
SUBACCOUNTS
--------------------------------------------------------------------------------------------
Prudential Series Prudential Series Prudential Series Prudential Series Prudential Series
Fund Fund Fund Fund Fund
High Yield Bond Stock Index Equity Income Equity Jennison
----------------- ----------------------------------- ----------------- -------------------
<S> <C> <C> <C> <C> <C>
Asset Value [Note 2] .............. $389,634 $14,050,548 $1,398,485 $14,563,586 $7,906,065
Net Receivable (Payable) from
the Prudential Insurance Co.
of America ........................ 96 (9,612) (6,770) (40,437) (1,031)
-------- ----------- ---------- ----------- ----------
Net Assets ........................... $389,730 $14,040,936 $1,391,715 $14,523,149 $7,905,034
======== =========== ========== =========== ==========
Net Assets Representing:
Equity of Participants
of Other than Small
Plan Contracts .................... $383,596 $13,880,585
Equity of Participants of $1,360,964 $14,512,558 $7,884,150
Small Plan Contracts .............. 6,134 160,351 30,751 10,591 20,884
-------- ----------- ---------- ----------- ----------
Net Assets ........................... $389,730 $14,040,936 $1,391,715 $14,523,149 $7,905,034
======== =========== ========== =========== ==========
</TABLE>
<TABLE>
<CAPTION>
SUBACCOUNTS
---------------------------------------------------------------------
Prudential Series AIM V.I.
Fund Growth and AIM V.I. Janus Aspen
Global Income Value Growth
----------------- ---------- ----------- -------------
<S> <C> <C> <C> <C>
Investment in Shares at Net
Asset Value [Note 2] .............. $3,356,549 $3,347,345 $4,602,115 $8,686,546
Net Receivable (Payable) from
the Prudential Insurance Co.
of America ........................ (3,720) (8,571) 3,269 1,759
---------- ---------- ---------- ----------
Net Assets ........................... $3,352,829 $3,338,774 $4,605,384 $8,688,305
========== ========== ========== ==========
Net Assets Representing:
Equity of Participants of
Other than Small
Plan Contracts .................... $3,351,616 $3,333,025 $4,595,809 $8,665,662
Equity of Participants
of Small Plan Contracts. .......... 1,213 5,749 9,575 22,643
---------- ---------- ---------- ----------
Net Assets ........................... $3,352,829 $3,338,774 $4,605,384 $8,688,305
========== ========== ========== ==========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
A-1
<PAGE>
FINANCIAL STATEMENTS OF THE DISCOVERY ACCOUNTS
STATEMENTS OF NET ASSETS
DECEMBER 31, 1999
<TABLE>
<CAPTION>
SUBACCOUNTS
-------------------------------------------------------------------------------------------------
Janus Aspen MFS OCC Accumulation OCC Accumulation T. Rowe
International Emerging MFS Trust Trust Price
Growth Growth Research Managed Small Cap Equity Income
-------------- ---------- -------- ---------------- ---------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Investment in Shares at Net
Asset Value [Note 2] .......... $3,762,454 $5,439,238 $841,176 $673,693 $269,421 $1,044,140
Net Receivable (Payable) from
the Prudential Insurance Co.
of America .................... (11,157) (5,038) (1,565) (4,921) 1,374 (3,651)
---------- ---------- -------- -------- -------- ----------
Net Assets ....................... $3,751,297 $5,434,200 $839,611 $668,772 $270,795 $1,040,489
========== ========== ======== ======== ======== ==========
Net Assets Representing:
Equity of Participants of
Other than Small
Plan Contracts ............... $3,750,686 $5,432,301 $839,595 $668,772 $260,461 $1,034,911
Equity of Participants of
Small Plan Contracts ......... 611 1,899 16 -- 10,334 5,578
---------- ---------- -------- -------- -------- ----------
Net Assets ....................... $3,751,297 $5,434,200 $839,611 $668,772 $270,795 $1,040,489
========== ========== ======== ======== ======== ==========
</TABLE>
SUBACCOUNTS
---------------------------------------
T. Rowe Warburg Pincus
Price Post-Venture
International Stock Capital
------------------- --------------
Investment in Shares at Net
Asset Value [Note 2] .......... $223,053 $226,064
Net Receivable (Payable) from
the Prudential Insurance Co.
of America .................... (4,303) (1,872)
-------- --------
Net Assets ....................... $218,750 $224,192
======== ========
Net Assets Representing:
Equity of Participants of
Other than Small
Plan Contracts ............... $213,253 $200,662
Equity of Participants of
Small Plan Contracts ......... 5,497 23,530
-------- --------
Net Assets ....................... $218,750 $224,192
======== ========
STATEMENTS OF OPERATIONS
YEAR ENDED
DECEMBER 31, 1999
<TABLE>
<CAPTION>
SUBACCOUNTS
-----------------------------------------------------------------------------------------------
Prudential Series Prudential Series Prudential Series Prudential Series Prudential Series
Fund Fund Fund Fund Fund
Money Market Diversified Bond Government Income Conservative Balanced Flexible Managed
----------------- ----------------- ----------------- --------------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Investment Income
Ordinary Dividend Distributions .... $41,868 -- -- $ 97,548 $ 91
Expense [Note 3]
Fees Charged to Participants
for Administrative Purposes and
Mortality and Expense Risk. .... (8,477) $ (8,997) $(5,865) (21,982) (23,126)
------- -------- -------- -------- --------
Net Investment Income ................ 33,391 (8,997) (5,865) 75,566 (23,035)
------- -------- -------- -------- --------
Net Realized and Unrealized
Gains on Investments
Capital Gains Distributions Received . -- 2,015 -- 12,170 23,132
Net Realized Loss
on Investments. ................... -- (16,649) (12,248) (33,937) (66,885)
Net Increase (Decrease) in Unrealized
Appreciation on Investments. ...... -- 9,329 (3,688) 76,396 226,496
------- -------- -------- -------- --------
Net gain (loss) on Investments ....... -- (5,305) (15,936) 54,629 182,743
------- -------- -------- -------- --------
Net Increase (Decrease) in
Net Assets Resulting
From Operations ...................... $33,391 $(14,302) $(21,801) $130,195 $159,708
======= ======== ======== ======== ========
</TABLE>
SUBACCOUNTS
-------------------------------------
Prudential Series Prudential Series
Fund Fund
High Yield Bond Stock Index
------------------ -----------------
Investment Income
Ordinary Dividend Distributions .... $ 905 $ 108,916
Expense [Note 3]
Fees Charged to Participants
for Administrative Purposes and
Mortality and Expense Risk. .... (3,000) (94,041)
------- ----------
Net Investment Income ................ (2,095) 14,875
======= ==========
Net Realized and Unrealized
Gains on Investments
Capital Gains Distributions Received . -- 143,078
Net Realized Loss
on Investments. ................... (12,879) (29,506)
Net Increase (Decrease) in Unrealized
Appreciation on Investments. ...... 25,239 1,656,196
------- ----------
Net gain (loss) on Investments ....... 12,360 1,769,768
------- ----------
Net Increase (Decrease) in
Net Assets Resulting
From Operations ...................... $10,265 $1,784,643
======= ==========
See Notes to Financial Statements
A-2
<PAGE>
FINANCIAL STATEMENTS OF THE DISCOVERY ACCOUNTS
STATEMENTS OF OPERATIONS
YEAR ENDED
DECEMBER 31, 1999
<TABLE>
<CAPTION>
SUBACCOUNTS
----------------------------------------------------------------------------------
Prudential Series Prudential Series Prudential Series Prudential Series
Fund Fund Fund Fund
Equity Income Equity Jennison Global
----------------- ----------------- ------------------ ------------------
<S> <C> <C> <C> <C>
Investment Income
Ordinary Dividend Distributions ....... $23,344 $206,966 $ 16,472 $ 7,336
Expense [Note 3]
Fees Charged to Participants
for Administrative Purposes and
Mortality and Expense Risk ......... (9,202) (114,496) (38,917) (20,689)
------- ---------- ---------- --------
Net Investment Income (Loss) ............. 14,142 92,470 (22,445) (13,353)
------- ---------- ---------- --------
Net Realized and Unrealized
Gains on Investments
Capital Gains Distributions Received ..... 135,464 1,583,550 277,098 12,863
Net Realized Loss
on Investments ........................ (50,912) (665,565) (24,134) (9,934)
Net Increase (Decrease) in Unrealized
Appreciation on Investments ........... (15,019) 23,565 1,452,109 968,680
------- ---------- ---------- --------
Net gain on Investments .................. 69,533 941,550 1,705,073 971,609
------- ---------- ---------- --------
Net Increase
in Net Assets
Resulting From Operations ................ $83,675 $1,034,020 $1,682,628 $958,256
======= ========== ========== ========
</TABLE>
<TABLE>
<CAPTION>
SUBACCOUNTS
-----------------------------------------------------
AIM V.I. AIM V.I. Janus Aspen
Growth and Income Value Growth
-----------------------------------------------------
<S> <C> <C> <C>
Investment Income
Ordinary Dividend Distributions ....... $ 27,640 $ 74,316 $ 12,133
Expense [Note 3]
Fees Charged to Participants
for Administrative Purposes and
Mortality and Expense Risk ......... (15,452) (23,015) (40,123)
-------- -------- ----------
Net Investment Income (Loss) ............. 12,188 51,301 (27,990)
-------- -------- ----------
Net Realized and Unrealized
Gains on Investments
Capital Gains Distributions Received ..... -- -- 20,713
Net Realized Loss
on Investments ........................ (16,747) (21,715) (8,475)
Net Increase (Decrease) in Unrealized
Appreciation on Investments ........... 599,043 652,636 1,775,148
-------- -------- ----------
Net gain on Investments .................. 582,296 630,921 1,787,386
-------- -------- ----------
Net Increase
in Net Assets
Resulting From Operations ................ $594,484 $682,222 $1,759,396
======== ======== ==========
</TABLE>
<TABLE>
<CAPTION>
SUBACCOUNTS
-----------------------------------------------------------------------
Janus Aspen MFS OCC Accumulation
International Emerging MFS Trust
Growth Growth Research Managed
--------------- ------------- --------- -----------------
<S> <C> <C> <C> <C>
Investment Income
Ordinary Dividend Distributions .......... $ 3,170 -- $ 757 $ 4,898
Expense [Note 3]
Fees Charged to Participants
for Administrative Purposes and
Mortality Expense Risk ................ (14,339) $ (23,778) (4,864) (4,973)
---------- ---------- -------- -------
Net Investment Income (Loss) ................ (11,169) (23,778) (4,107) (75)
---------- ---------- -------- -------
Net Realized and Unrealized
Gains on Investments
Capital Gains Distributions Received ........ -- -- 3,997 10,992
Net Realized Gain (Loss)
on Investments ........................... (4,901) (15,295) (10,520) (12,592)
Net Increase in Unrealized
Appreciation on Investments .............. 1,353,126 2,019,639 150,326 19,818
---------- ---------- -------- -------
Net gain (loss) on Investments .............. 1,348,225 2,004,344 143,803 18,218
---------- ---------- -------- -------
Net Increase (Decrease) in Net
Assets Resulting From
Operations .................................. $1,337,056 $1,980,566 $139,696 $18,143
========== ========== ======== =======
</TABLE>
<TABLE>
<CAPTION>
SUBACCOUNTS
-------------------------------------------------------------------------------
OCC Accumulation T. Rowe T. Rowe Warburg Pincus
Trust Price Price Post-Venture
Small Cap Equity Income International Stock Capital
----------------- ------------- ------------------- --------------
<S> <C> <C> <C> <C>
Investment Income
Ordinary Dividend Distributions .......... $ 861 $57,696 $ 3,289 --
Expense [Note 3]
Fees Charged to Participants
for Administrative Purposes and
Mortality Expense Risk ................ (2,004) (7,676) (1,245) $ (895)
------- ------- ------- -------
Net Investment Income (Loss) ................ (1,143) 50,020 2,044 (895)
------- ------- ------- -------
Net Realized and Unrealized
Gains on Investments
Capital Gains Distributions Received ........ -- 1,862 -- --
Net Realized Gain (Loss)
on Investments ........................... (19,360) (27,479) 2,093 (37)
Net Increase in Unrealized
Appreciation on Investments .............. 16,241 30,169 46,344 66,438
------- ------- ------- -------
Net gain (loss) on Investments .............. (3,119) 4,552 48,437 66,401
------- ------- ------- -------
Net Increase (Decrease) in Net
Assets Resulting From
Operations .................................. ($4,262) $54,572 $50,481 $65,506
======= ======= ======= =======
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
A-3
<PAGE>
FINANCIAL STATEMENTS OF THE DISCOVERY ACCOUNTS
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
SUBACCOUNTS
----------------------------------------------------------------------------
Prudential Series Fund Prudential Series Fund
Money Market Diversified Bond
------------------------------------- ------------------------------------
Year Year Year Year
Ended Ended Ended Ended
December 31, 1999 December 31, 1998 December 31, 1999 December 31, 1998
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Net Increase (Decrease) in Net Assets
Resulting From Operations ......... $ 33,391 $ 6,945 $ (14,302) $ 15,786
---------- -------- ---------- --------
Accumulation Unit Transactions
Purchase Payments and
Transfers In [Note 7& 8] ........... 2,394,918 797,116 1,095,971 810,474
Withdrawals and
Transfers Out [Notes 7&8] .......... (1,479,485) (359,300) (599,165) (157,252)
Annual Account Charges Deducted
From Participants' Accumulation
Accounts [Note 4] .................. (1,539) (545) (3,481) (973)
---------- -------- ---------- --------
Net Increase In Net Assets
Resulting From Accumulation
Unit Transactions .................... 913,894 437,271 493,325 652,249
---------- -------- ---------- --------
Total Increase in Net Assets ............ 947,285 444,216 479,023 668,035
Net Assets
Beginning of Year .................... 452,441 8,225 673,507 5,472
---------- -------- ---------- --------
End of Year .......................... $1,399,726 $452,441 $1,152,530 $673,507
========== ======== ========== ========
</TABLE>
<TABLE>
<CAPTION>
SUBACCOUNTS
------------------------------------------------------------------------------
Prudential Series Fund Prudential Series Fund
Government Income Conservative Balance
------------------------------------- ------------------------------------
Year Year Year Year
Ended Ended Ended Ended
December 31, 1999 December 31, 1998 December 31, 1999 December 31, 1998
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Net Increase (Decrease) in Net Assets
Resulting From Operations ......... $(21,801) $ 9,692 $ 130,195 $ 53,367
-------- ---------- ---------- ----------
Accumulation Unit Transactions
Purchase Payments and
Transfers In [Note 7& 8] ........... 624,926 505,132 1,673,772 1,678.603
Withdrawals and
Transfers Out [Notes 7&8] .......... (339,516) (138,978) (528,225) (111,465)
Annual Account Charges Deducted
From Participants' Accumulation
Accounts [Note 4] .................. (238) (76) (2,390) (729)
-------- ---------- ---------- ----------
Net Increase In Net Assets
Resulting From Accumulation
Unit Transactions .................... 285,172 366,078 1,143,157 1,566,409
-------- ---------- ---------- ----------
Total Increase in Net Assets ............ 263,371 375,770 1,273,352 1,619,776
Net Assets
Beginning of Year .................... 376,390 620 1,625,438 5,662
-------- ---------- ---------- ----------
End of Year .......................... $639,761 $376,390 $2,898,790 $1,625,438
======== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
SUBACCOUNTS
---------------------------------------------------------------------------------------
Prudential Series Fund Prudential Series Fund
Flexible Managed High Yield Bond
------------------------------------------ ----------------------------------------
Year Year Year Year
Ended Ended Ended Ended
December 31, 1999 December 31, 1998 December 31, 1999 December 31, 1998
----------------- ----------------- ------------------ ------------------
<S> <C> <C> <C> <C>
Net Increase (Decrease) in Net Assets
Resulting From Operations ............ $ 159,708 $ 33,775 $ 10,265 ($6,058)
---------- ---------- -------- --------
Accumulation Unit Transactions
Purchase Payments and
Transfers In [Notes 7&8] ............. 1,879,520 1,770,868 443,187 198,666
Withdrawals and
Transfers Out [Notes 7&8] ............ (678,149) (219,644) (260,368) (13,733)
Annual Account Charges Deducted
From Participants' Accumulation
Accounts [Note 4] .................... (1,150) (351) (1,704) (789)
---------- ---------- -------- --------
Net Increase In Net Assets
Resulting From Accumulation
Unit Transactions ..................... 1,200,221 1,550,873 181,115 184,144
---------- ---------- -------- --------
Total Increase in Net Assets ............... 1,359,929 1,584,648 191,380 178,086
Net Assets
Beginning of Year ....................... 1,627,705 43,057 198,350 20,264
---------- ---------- -------- --------
End of Year ............................. $2,987,634 $1,627,705 $389,730 $198,350
========== ========== ======== ========
</TABLE>
<TABLE>
<CAPTION>
SUBACCOUNTS
-------------------------------------------------------------------------------
Prudential Series Fund Prudential Series Fund
Stock Index Equity Income
--------------------------------------- ------------------------------------
Year Year Year Year
Ended Ended Ended Ended
December 31, 1999 December 31, 1998 December 31, 1999 December 31, 1998
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Net Increase (Decrease) in Net Assets
Resulting From Operations ............ $ 1,784,643 $ 456,810 $ 83,675 ($13,604)
----------- ---------- ---------- --------
Accumulation Unit Transactions
Purchase Payments and
Transfers In [Notes 7&8] ............. 10,105,989 4,860,238 955,179 555,878
Withdrawals and
Transfers Out [Notes 7&8] ............ (2,853,456) (329,120) (187,432) (10,679)
Annual Account Charges Deducted
From Participants' Accumulation
Accounts [Note 4] .................... (3,225) (457) (2,510) (1,092)
----------- ---------- ---------- --------
Net Increase In Net Assets
Resulting From Accumulation
Unit Transactions ..................... 7,249,308 4,530,661 765,237 544,107
----------- ---------- ---------- --------
Total Increase in Net Assets ............... 9,033,951 4,987,471 848,912 530,503
Net Assets
Beginning of Year ....................... 5,006,985 19,514 542,803 12,300
----------- ---------- ---------- --------
End of Year ............................. $14,040,936 $5,006,985 $1,391,715 $542,803
=========== ========== ========== ========
</TABLE>
See Notes to Financial Statements
A-4
<PAGE>
FINANCIAL STATEMENTS OF THE DISCOVERY ACCOUNTS
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
SUBACCOUNTS
-----------------------------------------------------------------------------------------
Prudential Series Fund Prudential Series Fund
Equity Jennison
--------------------------------------- ---------------------------------------------
Year Year Year Year
Ended Ended Ended Ended
December 31, 1999 December 31, 1998 December 31, 1999 December 31, 1998
----------------- ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
Net Increase (Decrease) in Net
Assets Resulting From
Operations .................... $ 1,034,020 ($57,291) $1,682,628 $ 141,092
----------- ---------- ---------- ----------
Accumulation Unit Transactions
Purchase Payments and
Transfers In [Notes 7&8] ....... 13,835,428 9,455,297 5,983,040 887,743
Withdrawals and
Transfers Out [Notes 7&8] ...... (8,781,048) (990,979) (794,308) (24,581)
Annual Account Charges Deducted
From Participants' Accumulation
Accounts [Note 4] .............. (1,222) (483) (1,210) (175)
----------- ---------- ---------- ----------
Net Increase In Net Assets
Resulting From Accumulation
Unit Transactions ................ 5,053,158 8,463,835 5,187,522 862,987
----------- ---------- ---------- ----------
Total Increase in Net Assets ........ 6,087,178 8,406,544 6,870,150 1,004,079
Net Assets
Beginning of Year ................ 8,435,971 29,427 1,034,884 30,805
----------- ---------- ---------- ----------
End of Year ...................... $14,523,149 $8,435,971 $7,905,034 $1,034,884
=========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
SUBACCOUNTS
-------------------------------------------------------------------------------
Prudential Series Fund AIM V.I.
Global Growth and Income
--------------------------------------- -------------------------------------
Year Year Year Year
Ended Ended Ended Ended
December 31, 1999 December 31, 1998 December 31, 1999 December 31, 1998
----------------- ------------------ ----------------- ------------------
<S> <C> <C> <C> <C>
Net Increase (Decrease) in Net
Assets Resulting From
Operations ..................... $ 958,256 $ 67,098 $ 594,484 $ 29,122
---------- ---------- ---------- --------
Accumulation Unit Transactions
Purchase Payments and
Transfers In [Notes 7&8] ........ 1,819,230 1,462,943 2,719,119 172,557
Withdrawals and
Transfers Out [Notes 7&8] ....... (803,971) (164,746) (183,516) (3,487)
Annual Account Charges Deducted
From Participants' Accumulation
Accounts [Note 4] ............... (66) (26) (419) (113)
---------- ---------- ---------- --------
Net Increase In Net Assets
Resulting From Accumulation
Unit Transactions ................. 1,015,193 1,298,171 2,535,184 168,957
---------- ---------- ---------- --------
Total Increase in Net Assets ......... 1,973,449 1,365,269 3,129,668 198,079
Net Assets
Beginning of Year ................. 1,379,380 14,111 209,106 11,027
---------- ---------- ---------- --------
End of Year ....................... $3,352,829 $1,379,380 $3,338,774 $209,106
========== ========== ========== ========
</TABLE>
<TABLE>
<CAPTION>
SUBACCOUNTS
---------------------------------------------------------------------------------------
AIM V.I. Janus Aspen
Value Growth
-------------------------------------- --------------------------------------------
Year Year Year Year
Ended Ended Ended Ended
December 31, 1999 December 31, 1998 December 31, 1999 December 31, 1998
----------------- ----------------- ------------------ --------------------
<S> <C> <C> <C> <C>
Net Increase in Net Assets
Resulting From Operations ..... $ 682,222 $ 68,346 $1,759,396 $ 89,727
---------- -------- ---------- --------
Accumulation Unit Transactions
Purchase Payments and
Transfers In [Notes 7&8] ....... 3,664,102 410,625 6,858,833 519,122
Withdrawals and
Transfers Out [Notes 7&8] ...... (226,359) (10,598) (506,602) (36,451)
Annual Account Charges Deducted
From Participants' Accumulation
Accounts [Note 4] .............. (194) (37) (265) (73)
---------- -------- ---------- --------
Net Increase In Net Assets
Resulting From Accumulation
Unit Transactions ................ 3,437,549 399,990 6,351,966 482,598
---------- -------- ---------- --------
Total Increase in Net Assets ........ 4,119,771 468,336 8,111,362 572,325
Net Assets
Beginning of Year ................ 485,613 17,277 576,943 4,618
---------- -------- ---------- --------
End of Year ..................... $4,605,384 $485,613 $8,688,305 $576,943
========== ======== ========== ========
</TABLE>
<TABLE>
<CAPTION>
SUBACCOUNTS
----------------------------------------------------------------------------------
Janus Aspen MFS
International Growth Emerging Growth
---------------------------------------- --------------------------------------
Year Year Year Year
Ended Ended Ended Ended
December 31, 1999 December 31, 1998 December 31, 1999 December 31, 1998
------------------ ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Net Increase in Net Assets
Resulting From Operations ........ $1,337,056 $ 13,892 $1,980,566 $124,826
---------- -------- ---------- --------
Accumulation Unit Transactions
Purchase Payments and
Transfers In [Notes 7&8] .......... 2,174,414 369,321 3,013,205 704,021
Withdrawals and
Transfers Out [Notes 7&8] ......... (140,992) (11,285) (368,597) (24,367)
Annual Account Charges Deducted
From Participants' Accumulation
Accounts [Note 4] ................. (11) (3) (128) (24)
---------- -------- ---------- --------
Net Increase In Net Assets
Resulting From Accumulation
Unit Transactions ................... 2,033,411 358,033 2,644,480 679,630
---------- -------- ---------- --------
Total Increase in Net Assets ........... 3,370,467 371,925 4,625,046 804,456
Net Assets
Beginning of Year ................... 380,830 8,905 809,154 4,698
---------- -------- ---------- --------
End of Year ........................ $3,751,297 $380,830 $5,434,200 $809,154
========== ======== ========== ========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
A-5
<PAGE>
FINANCIAL STATEMENTS OF THE DISCOVERY ACCOUNTS
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
SUBACCOUNTS
-----------------------------------------------------------------------------------
MFS OCC Accumulation
Research Trust Managed
------------------------------------------ -------------------------------------
Year Year Year Year
Ended Ended Ended Ended
December 31, 1999 December 31, 1998 December 31, 1999 December 31, 1998
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Net Increase (Decrease) in Net
Assets Resulting From
Operations .............................. $139,696 $ 13,426 $ 18,143 $ 7,331
-------- -------- -------- --------
Accumulation Unit Transactions
Purchase Payments and
Transfers In [Notes 7&8] ................. 587,903 169,889 478,525 242,811
Withdrawals and
Transfers Out [Note 7&8] ................. (59,937) (18,797) (83,563) (14,910)
Annual Account Charges Deducted
From Participants' Accumulation
Accounts [Note 4] ........................ (64) (63) (894) (343)
-------- -------- -------- --------
Net Increase In Net Assets
Resulting From Accumulation
Unit Transactions .......................... 527,902 151,029 394,068 227,558
-------- -------- -------- --------
Total Increase in Net Assets .................. 667,598 164,455 412,211 234,889
Net Assets
Beginning of Year .......................... 172,013 7,558 256,561 21,672
-------- -------- -------- --------
End of Year ................................ $839,611 $172,013 $668,772 $256,561
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
SUBACCOUNTS
----------------------------------------------------------------------------------
OCC Accumulation T. Rowe Price
Trust Small Cap Equity Income
--------------------------------------- --------------------------------------
Year Year Year Year
Ended Ended Ended Ended
December 31, 1999 December 31, 1998 December 31, 1999 December 31, 1998
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Net Increase (Decrease) in Net
Assets Resulting From
Operations .............................. ($4,262) ($3,532) $ 54,572 $ 13,625
-------- -------- ---------- --------
Accumulation Unit Transactions
Purchase Payments and
Transfers In [Notes 7&8] ................. 208,108 95,630 848,876 276,367
Withdrawals and
Transfers Out [Note 7&8] ................. (50,160) (3,337) (168,027) (2,335)
Annual Account Charges Deducted
From Participants' Accumulation
Accounts [Note 4] ......................... (16) (8) (457) (167)
-------- -------- ---------- --------
Net Increase In Net Assets
Resulting From Accumulation
Unit Transactions .......................... 157,932 92,285 680,392 273,865
-------- -------- ---------- --------
Total Increase in Net Assets .................. 153,670 88,753 734,964 287,490
Net Assets
Beginning of Year .......................... 117,125 28,372 305,525 18,035
-------- -------- ---------- --------
End of Year ................................ $270,795 $117,125 $1,040,489 $305,525
======== ======== ========== ========
</TABLE>
<TABLE>
<CAPTION>
Subaccounts
-----------------------------------------------------------------------------------
T. Rowe Price Warburg Pincus
International Stock Post-Venture Capital
--------------------------------------- ---------------------------------------
Year Year Year Year
Ended Ended Ended Ended
December 31, 1999 December 31, 1998 December 31, 1999 December 31, 1998
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Net Increase in Net Assets
Resulting From Operations ............ $ 50,481 $ 5,181 $ 65,506 $ 3,450
-------- ------- -------- -------
Accumulation Unit Transactions
Purchase Payments and
Transfers In [Notes 7&8] ......... 124,756 60,070 125,537 62,801
Withdrawals and
Transfers Out [Notes 7&8] ........ (23,242) (422) (31,120) (2,031)
Annual Account Charges Deducted
From Participants' Accumulation
Accounts [Note 4] ................. (5) -- -- --
-------- ------- -------- -------
Net Increase In Net Assets
Resulting From Accumulation
Unit Transactions .................. 101,509 59,648 94,417 60,770
-------- ------- -------- -------
Total Increas in Net Assets ........... 151,990 64,829 159,923 64,220
Net Assets
Beginning of Year .................. 66,760 1,931 64,269 49
-------- ------- -------- -------
End of Year ........................ $218,750 $66,760 $224,192 $64,269
======== ======= ======== =======
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
A-6
<PAGE>
Notes to Financial Statements of the Discovery Account
- --------------------------------------------------------------------------------
NOTE 1: General
The Prudential Discovery Select Group Variable Contract Account (the
"Discovery Account") was established on February 11, 1997 by The
Prudential Insurance Company of America (Prudential or Company) and
commenced operations on July 31, 1997 under the laws of the State of
New Jersey and meets the definition of a "separate account" under
federal securities laws. The Discovery Account is registered with the
Securities and Exchange Commission ("SEC") under the Investment
Company Act of 1940 ("1940 Act") as a unit investment trust, which is
a type of investment company.
The Discovery Account is used in connection with retirement
arrangements that qualify for federal tax benefits under Sections 401,
403(b), 408 or 457 of the Internal Revenue Code of 1986 (the "Code")
and with nonqualified annuity arrangements. The Small Plan Contract is
used exclusively with retirement plans qualified under Sections 401(k)
or 401(a) of the Code that generally have 100 or fewer Participants.
The Contracts are group annuity contracts and generally are issued to
employers (Contractholders) who make contributions under them on
behalf of their employees. A person for whom contributions have been
made and to whom they remain credited under a Contract is a
"Participant."
The Discovery Account is comprised of 22 Subaccounts. The assets of
each Subaccount are invested in a corresponding Fund listed as
follows:
<TABLE>
<S> <C>
THE PRUDENTIAL SERIES FUND, INC. MFS VARIABLE INSURANCE TRUST
Money Market Portfolio Emerging Growth Series
Diversified Bond Portfolio Research Series
Government Income Portfolio OCC ACCUMULATION TRUST
Conservative Balanced Portfolio Managed Portfolio
Flexible Managed Portfolio Small Cap Portfolio
High Yield Bond Portfolio T. Rowe Price
Stock Index Portfolio T. Rowe Price Equity Series, Inc.,
Equity Income Portfolio Equity Income Portfolio
Equity Portfolio T. Rowe Price International Series,
Prudential Jennison Portfolio Inc.
Global Portfolio International Stock Portfolio
AIM VARIABLE INSURANCE WARBURG PINCUS TRUST
AIM V.I. Growth and Income Fund Post-Venture Capital Portfolio
AIM V.I. Value Fund
JANUS ASPEN SERIES
Growth Portfolio
International Growth Portfolio
</TABLE>
All contractual and other obligations arising under contracts
participating in the Discovery Account are general corporate
obligations of Prudential, although Participants' payments from the
Account will depend upon the investment experience of the Account.
Significant Accounting Policies
Investments--The investments in shares of the Funds are stated at the
net asset value of the respective portfolio.
Security Transactions--Realized gains and losses on security
transactions are reported on an average cost basis. Purchase and sale
transactions are recorded as of the trade date of the security being
purchased or sold.
Distributions Received--Dividend and capital gain distributions
received are invested in additional shares of the Funds and are
recorded on ex-dividend date.
A-7
<PAGE>
Notes to Financial Statements of the Discovery Account
- --------------------------------------------------------------------------------
NOTE 2: Investment Information
The number of shares of each portfolio of the Fund, the Net Asset
Value (NAV) per share for each portfolio held by the Subaccounts of
the Discovery Account, and the aggregate cost of investments in such
shares as of December 31, 1999 were as follows:
<TABLE>
<CAPTION>
Prudential Series Prudential Series Prudential Series Prudential Series Prudential Series
Fund Fund Fund Fund Fund
Money Market Diversified Bond Government Income Conservative Balanced Flexible Managed
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Number of Shares 140,090 105,368 55,381 189,047 169,612
NAV per Share $ 10.00 $ 10.95 $ 11.55 $ 15.36 $ 17.64
Cost at 12-31-99 $1,400,902 $1,148,967 $642,935 $2,885,511 $2,884,441
<CAPTION>
Prudential Series Prudential Series Prudential Series Prudential Series Prudential Series
Fund Fund Fund Fund Fund
High Yield Bond Stock Index Equity Income Equity Jennison
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Number of Shares 51,813 316,098 71,644 503,930 244,090
NAV per Share $ 7.52 $ 44.45 $ 19.52 $ 28.90 $ 32.39
Cost at 12-31-99 $377,622 $12,000,059 $1,453,866 $15,490,911 $6,311,528
<CAPTION>
Prudential Series AIM V.I. Janus Aspen MFS
Fund Growth and AIM V.I. Janus Aspen International Emerging
Global Income Value Growth Growth Growth
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Number of Shares 108,346 105,962 137,377 258,144 97,296 143,364
NAV per Share $ 30.98 $ 31.59 $ 33.50 $33.65 $ 38.67 $ 37.94
Cost at 12-31-99 $2,369,704 $2,720,384 $3,898,354 $6,814,040 $2,390,698 $3,283,927
<CAPTION>
OCC Accumulation OCC Accumulation T. Rowe T. Rowe Warburg Pincus
MFS Trust Trust Price Price Post-Venture
Research Managed Small Cap Equity Income International Stock Capital
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Number of Shares 36,040 15,434 11,964 55,747 11,715 11,737
NAV per Share $ 23.34 $ 43.65 $ 22.52 $ 18.73 $ 19.04 $ 19.26
Cost at 12-31-99 $671,161 $643,863 $254,144 $1,067,717 $170,871 $153,972
</TABLE>
NOTE 3: Expenses
A daily charge at an effective annual rate of 0.85% of the average
participant account value of each Subaccount of the Discovery Account
is paid to Prudential for administrative expenses not provided by the
annual account charge with respect to contracts other than the Small
Plan Contract. A daily charge at an effective annual rate of 0.15% of
the average participant account value of each Subaccount of the
Discovery Account is paid to Prudential for assuming mortality and
expense risks under the Contracts. For Small Plan Contracts, the
effective annual rate is 1.05% for the Administrative fee.
NOTE 4: Annual Account Charge
An additional administrative charge of up to $32, the annual account
charge, is paid to Prudential on or about the last day of each
calendar year and at the time of a full withdrawal. The annual account
charge will be prorated for new Participants on a monthly basis for
their first year of participation. Generally, the charge will first be
made against the Participant Account Value under the guaranteed
interest account (if available). If the Participant is not invested in
the guaranteed interest account, or if the Participant does not have
enough money in such an option to pay the charge, the charge will then
be made against any one or of more the Subaccounts in which the
Participant is invested. This is represented in the statement of net
assets as receiveable (payable) from the Prudential Insurance Co. of
America.
NOTE 5: Withdrawal Charge
A withdrawal charge is imposed upon the withdrawal of certain purchase
payments to compensate Prudential for sales and other marketing
expenses. With respect to contracts other than the Small Plan
Contract, the maximum withdrawal charge is 5% on contributions
withdrawn during the first year of participation. The withdrawal
charge declines by 1% in each subsequent year until it is 0% after the
fifth year. No withdrawal charge is imposed upon contributions
withdrawn for any reason after five years of participation in a
Program. In addition, no withdrawal charge is imposed upon
contributions withdrawn to purchase an annuity under a Contract, to
provide a death benefit, pursuant to a systematic withdrawal plan, to
provide a minimum distribution payment, or in cases of financial
hardship or disability retirement as determined pursuant to provisions
of the employer's retirement arrangement. Further, for all plans other
than IRAs, no withdrawal charge is imposed
A-8
<PAGE>
Notes to Financial Statements of the Discovery Account
- --------------------------------------------------------------------------------
upon contributions withdrawn due to resignation or retirement by the
Participant or termination of the Participant by the Contract-holder.
Under the Small Plan Contract, a Participant making a full or partial
withdrawal does not pay the withdrawal charge indicated above.
Instead, withdrawal charges under the Small Plan Contract are
triggered only when the Employer to which the Contract was issued
terminates the Contract in whole or in part. Under full termination of
the Contract, the withdrawal charge would be assessed against the
Employer based on the total value of contributions withdrawn under the
terminated Contract. Under a partial termination of the Contract, the
withdrawal charge is assessed only against those assets withdrawn by
reason of a specified group, classification, or type of employee
leaving the Plan as a result of a corporate merger, restructuring, or
other comparable employer-intiated event.
Each Participant's Account Value that is withdrawn in connection with
such a full or partial Contract termination may be subject to a
withdrawal charge. The amount of the withdrawal charge varies
depending on the number of years that have elapsed since the Small
Plan Contract became effective. Specifically, the withdrawal charge is
equal to 5% of contributions withdrawn during the first year of the
Contract and the charge declines by one percentage each year
thereafter. After five complete years have elapsed from the effective
date of the Small Plan Contract, no such withdrawal charge is
deducted.
NOTE 6: Taxes
The Discovery Account is not considered a separate taxpayer for
purposes of the Internal Revenue Code. As distinguished from most
other registered investment companies -- which are separate taxpayers
-- the earnings of the Subaccounts invested in the Funds are taxed as
part of the income of Prudential. As a result, the unit value of the
Subaccounts has not been reduced by federal income taxes.
NOTE 7: Unit Transactions
The number of units issued and redeemed during the year ended December
31, 1999 and the year ended December 31, 1998 was as follows:
1999
Other than Small Plan Contracts
<TABLE>
<CAPTION>
Prudential Series Prudential Series Prudential Series Prudential Series
Fund Fund Fund Fund
Money Market Diversified Bond Government Income Conservative Balanced
---------------------------------------------------------------------------------------------------
Units Amounts Units Amounts Units Amounts Units Amounts
------- ---------- ------- ---------- ------- -------- ------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Issued 222,369 $2,391,075 99,730 $1,053,594 55,740 $610,087 147,178 $1,663,879
Redeemed (137,756) (1,479,485) (57,029) (599,165) (31,198) (339,516) (47,286) (528,225)
<CAPTION>
Prudential Series Prudential Series Prudential Series Prudential Series
Fund Fund Fund Fund
Flexible Managed High Yield Bond Stock Index Equity Income
--------------------------------------------------------------------------------------------------------
Units Amounts Units Amounts Units Amounts Units Amounts
------- ---------- ------- -------- ------- ---------- ------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Issued 168,215 $1,879,520 42,330 $437,137 705,255 $9,954,211 84,454 $926,924
Redeemed (60,710) (678,149) (25,172) (260,368) (199,210) (2,853,456) (17,464) (187,432)
<CAPTION>
Prudential Series Prudential Series Prudential Series
Fund Fund Fund AIM V.I.
Equity Jennison Global Growth and Income
----------------------------------------------------------------------------------------------------------
Units Amounts Units Amounts Units Amounts Units Amounts
--------- ----------- ------- ---------- ------- ---------- ------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Issued 1,174,137 $13,825,298 390,796 $5,964,656 144,540 $1,818,253 198,196 $2,713,897
Redeemed (754,819) (8,781,048) (50,901) (794,308) (62,992) (803,971) (12,442) (183,516)
<CAPTION>
Janus Aspen MFS
AIM V.I. Janus Aspen International Emerging
Value Growth Growth Growth
----------------------------------------------------------------------------------------------------------
Units Amounts Units Amounts Units Amounts Units Amounts
--------- ----------- ------- ---------- ------- ---------- ------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Issued 252,855 $3,655,145 445,240 $6,838,340 165,608 $2,173,969 196,911 $3,011,882
Redeemed (14,780) (226,359) (32,596) (506,602) (10,789) (140,992) (23,410) (368,597)
</TABLE>
A-9
<PAGE>
Notes to Financial Statements of the Discovery Account
- -------------------------------------------------------------------------------
1999
Other than Small Plan Contracts (Cont'd)
<TABLE>
<CAPTION>
OCC Accumulation OCC Accumulation T. Rowe
MFS Trust Trust Price
Research Managed Small Cap Equity Income
----------------------------------------------------------------------------------------------------------
Units Amounts Units Amounts Units Amounts Units Amounts
--------- ----------- ------- ---------- ------- ---------- ------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Issued 48,070 $587,890 43,486 $478,525 22,056 $198,215 75,778 $843,251
Redeemed (4,805) (59,937) (7,524) (83,563) (5,648) (50,160) (14,071) (168,027)
<CAPTION>
T. Rowe Warburg Pincus
Price Post-Venture
International Stock Capital
----------------------------------------------
Units Amounts Units Amounts
------ -------- ------ -------
<S> <C> <C> <C> <C>
Issued 11,181 $119,798 8,406 $105,752
Redeemed (1,921) (23,242) (2,799) (31,120)
</TABLE>
Small Plan Contracts
<TABLE>
<CAPTION>
Prudential Series Prudential Series Prudential Series Prudential Series
Fund Fund Fund Fund
Money Market Diversified Bond Government Income Conservative Balanced
------------------------------------------------------------------------------------------------
Units Amounts Units Amounts Units Amounts Units Amounts
----- ------- ----- ------- ----- ------- ----- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Issued 359 $3,843 4,044 $42,377 1,387 $14,839 865 $9,893
<CAPTION>
Prudential Series Prudential Series Prudential Series Prudential Series
Fund Fund Fund Fund
Flexible Managed High Yield Bond Stock Index Equity Income
------------------------------------------------------------------------------------------------
Units Amounts Units Amounts Units Amounts Units Amounts
----- ------- ----- ------- ----- ------- ----- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Issued 0 $0 594 $6,050 10,316 $151,778 2,738 $28,255
<CAPTION>
Prudential Series Prudential Series Prudential Series
Fund Fund Fund AIM V.I.
Equity Jennison Global Growth and Income
------------------------------------------------------------------------------------------------
Units Amounts Units Amounts Units Amounts Units Amounts
----- ------- ----- ------- ----- ------- ----- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Issued 872 $10,130 1,110 $18,384 75 $977 351 $5,222
<CAPTION>
Janus Aspen MFS
AIM V.I Janus Aspen International Emerging
Value Growth Growth Growth
------------------------------------------------------------------------------------------------
Units Amounts Units Amounts Units Amounts Units Amounts
----- ------- ----- ------- ----- ------- ----- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Issued 577 $8,957 1,197 $20,493 31 $445 82 $1,323
<CAPTION>
OCC Accumulation OCC Accumulation T. Rowe
MFS Trust Trust Price
Research Managed Small Cap Equity Income
------------------------------------------------------------------------------------------------
Units Amounts Units Amounts Units Amounts Units Amounts
----- ------- ----- ------- ----- ------- ----- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Issued 1 $13 0 $0 1,162 $9,893 480 $5,625
<CAPTION>
T. Rowe Warburg Pincus
Price Post-Venture
International Stock Capital
------------------------------------------------
Units Amounts Units Amounts
----- ------- ------- --------
<S> <C> <C> <C> <C>
Issued 409 $4,958 1,372 $19,785
</TABLE>
A-10
<PAGE>
Notes to Financial Statements of the Discovery Account
- -------------------------------------------------------------------------------
NOTE 8: Participant Loans
The minimum loan amount is as specified in the Contract, or if not
specified, as determined by Prudential. The maximum loan amount is the
lesser of (a) $50,000, reduced by the highest outstanding balance of
loans during the one year period immediately preceding the date of the
loan or (b) 50% of the value of the Participant's vested interest
under a Contract. In the loan application, the Contractholder (or in
certain cases, the Participant) designates the Subaccount(s) from
which the loan amount is deducted. To repay the loan, the Participant
makes periodic payments of interest plus a portion of the principal.
Those payments are invested in the Subaccounts chosen by the
Participant. With respect to contracts other than the Small Plan
Contract, the Participant may specify the Subaccounts from which he
may borrow and into which repayments may be invested. If the
Participant does not specify the Subaccounts from which the loan
amount is deducted, the loan amount will be deducted pro rata from the
participant account value in subaccounts. With respect to the Small
Plan Contract, amounts borrowed are deducted from a Participant's
Subaccounts on a pro rata basis. With respect to such Contracts,
amounts repaid on a loan are applied to a Partcipant's Subaccounts
based on the Participant's current contribution allocations.
The maximum loan amount referred to above is imposed by federal tax
law. That limit, however, applies to all loans from any qualified plan
of the employer. Since Prudential cannot monitor a Participant's loan
activity relating to other plans offered to Participants, it is the
Participant's responsibility to do so. Provided that a Participant
adheres to these limitations, the loan will not be treated as a
taxable distribution. If, however, the Participant defaults on the
loan by, for example, failing to make required payments, the defaulted
loan amount (as described in loan disclosure information provided to a
borrowing Participant) will be treated as a taxable distribution and
Prudential will send the appropriate tax information to the
Participant and the Internal Revenue Service.
Prudential charges a loan application fee of up to $75, which is
deducted from the Participant Account at the time the loan is
initiated. Prudential also charges up to $60 per year as a loan
maintenance fee for record keepping and other administrative services
provided in connection with the loan. This charge is guaranteed not to
increase during the term of any loan and is not greater than the
average expected cost of the services required to maintain the loan.
The annualized loan maintenance charge will be prorated based on the
number of full months that the loan is outstanding and is generally
deducted quarterly. For the year ended December 31, 1999 and the
period ended December 31, 1998 the amount of participant loans that
was withdrawn from the Subaccounts is follows:
1999
<TABLE>
<CAPTION>
Prudential Series Prudential Series Prudential Series Prudential Series Prudential Series Prudential Series
Fund Fund Fund Fund Fund Fund
Money Market Diversified Bond Government Income Conservative Balanced Flexible Managed High Yield Bond
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Loans 3,341 2,620 227 14,456 21,934 147
Repayments 62 616 -- 716 2,710 32
<CAPTION>
Prudential Series Prudential Series Prudential Series Prudential Series Prudential Series AIM V.I.
Fund Fund Fund Fund Fund Growth and
Stock Index Equity Income Equity Jennison Global Income
------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Loans 25,616 5,410 45,193 20,495 9,338 771
Repayments 5,960 1,258 9,202 7,441 2,160 208
<CAPTION>
Janus Aspen MFS OCC Accumulation
AIM V.I. Janus Aspen International Emerging MFS Trust
Value Growth Growth Growth Research Managed
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Loans 10,288 17,848 5,652 5,311 -- 222
Repayments 1,949 7,725 1,111 2,005 707 400
<CAPTION>
OCC Accumulation T. Rowe T. Rowe Warburg Pincus
Trust Price Price Post-Venture
Small Cap Equity Income International Stock Capital
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Loans 575 5,014 1,414 --
Repayments 1,792 506 281 --
</TABLE>
A-11
<PAGE>
Notes to Financial Statements of the Discovery Account
- -------------------------------------------------------------------------------
1998
<TABLE>
<CAPTION>
Prudential Series Prudential Series Prudential Series Prudential Series Prudential Series Prudential Series
Fund Fund Fund Fund Fund Fund
Money Market Diversified Bond Government Income Conservative Balanced Flexible Managed High Yield Bond
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Loans -- 635 -- 2,484 5,575 --
Repayments -- -- -- -- 313 11
<CAPTION>
Prudential Series Prudential Series Prudential Series Prudential Series Prudential Series AIM V.I.
Fund Fund Fund Fund Fund Growth and
Stock Index Equity Income Equity Jennison Global Income
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Loans 5,309 4,247 10,176 5,250 298 --
Repayments 498 289 2,279 2,279 1,334 --
<CAPTION>
Janus Aspen MFS OCC Accumulation OCC Accumulation
AIM V.I. Janus Aspen International Emerging MFS Trust Trust
Value Growth Growth Growth Research Managed Small Cap
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Loans -- 6,562 -- 1,416 2,707 611 --
Repayments -- -- -- 1,026 175 -- 1,346
<CAPTION>
T. Rowe T. Rowe Warburg Pincus
Price Price Post-Venture
Equity Income International Stock Capital
<S> <C> <C> <C>
Loans -- -- --
Repayments -- 11 --
</TABLE>
Note 10: Condensed Financial Information
Accumulation Unit Values for Discovery Account
Prudential Series Fund
Money Market 01/01/99 01/01/98 07/31/97
to to to
12/31/99 12/31/98 12/31/97
-------- -------- --------
Other than Small Plan
Contracts:
Beginning of year (rounded) $10.52 $10.08 $10.00
End of year (rounded) $10.94 $10.52 $10.08
Accumulation Units
Outstanding at end of year 127,605 42,992 815
Small Plan Contracts:
Beginning of year (rounded) $10.52 N/A N/A
End of year (rounded) $10.89 N/A N/A
Accumulation Units Outstanding
at end of year 359 N/A N/A
Prudential Series Fund
Diversified Bond 01/01/99 01/01/98 07/31/97
to to to
12/31/99 12/31/98 12/31/97
-------- -------- --------
Other than Small Plan
Contracts:
Beginning of year (rounded) $10.68 $10.07 $10.00
End of year (rounded) $10.50 $10.68 $10.07
Accumulation Units
Outstanding at end of year 105,742 63,041 542
Small Plan Contracts:
Beginning of year (rounded) $10.68 N/A N/A
End of year (rounded) $10.45 N/A N/A
Accumulation Units Outstanding
at end of year 4,044 N/A N/A
Prudential Series Fund
Government Income 01/01/99 01/01/98 07/31/97
to to to
12/31/99 12/31/98 12/31/97
-------- -------- --------
Other than Small Plan
Contracts:
Beginning of year (rounded) $11.10 $10.27 $10.00
End of year (rounded) $10.69 $11.10 $10.27
Accumulation Units
Outstanding at end of year 58,456 33,914 60
Small Plan Contracts:
Beginning of year (rounded) $11.10 N/A N/A
End of year (rounded) $10.64 N/A N/A
Accumulation Units Outstanding
at end of year 1,387 N/A N/A
Prudential Series Fund
Conservative Balanced 01/01/99 01/01/98 07/31/97
to to to
12/31/99 12/31/98 12/31/97
-------- -------- --------
Other than Small Plan
Contracts:
Beginning of year (rounded) $11.10 $10.03 $10.00
End of year (rounded) $11.73 $11.10 $10.03
Accumulation Units
Outstanding at end of year 246,332 146,440 563
Small Plan Contracts:
Beginning of year (rounded) $11.10 N/A N/A
End of year (rounded) $11.67 N/A N/A
Accumulation Units Outstanding
at end of year 865 N/A N/A
Prudential Series Fund
Flexible Managed 01/01/99 01/01/98 07/31/97
to to to
12/31/99 12/31/98 12/31/97
-------- -------- --------
Other than Small Plan
Contracts:
Beginning of year (rounded) $10.90 $9.99 $10.00
End of year (rounded) $11.64 $10.90 $9.99
Accumulation Units
Outstanding at end of year 256,779 149,274 4,286
Small Plan Contracts:
Beginning of year (rounded) N/A N/A N/A
End of year (rounded) N/A N/A N/A
Accumulation Units Outstanding
at end of year N/A N/A N/A
Prudential Series Fund
High Yield Bond 01/01/99 01/01/98 07/31/97
to to to
12/31/99 12/31/98 12/31/97
-------- -------- --------
Other than Small Plan
Contracts:
Beginning of year (rounded) $10.02 $10.37 $10.00
End of year (rounded) $10.38 $10.02 $10.37
Accumulation Units
Outstanding at end of year 36,945 19,787 1,952
Small Plan Contracts:
Beginning of year (rounded) $10.02 N/A N/A
End of year (rounded) $10.33 N/A N/A
Accumulation Units Outstanding
at end of year 594 N/A N/A
A-12
<PAGE>
Notes to Financial Statements of Discovery Account (Unaudited)
- -------------------------------------------------------------------------------
Note 10 (cont'd): Condensed Financial Information
Accumulation Unit Values for the Discovery Account
Prudential Series Fund
Stock Index 01/01/99 01/01/98 07/31/97
to to to
12/31/99 12/31/98 12/31/97
-------- -------- --------
Other than Small Plan
Contracts:
Beginning of year (rounded) $13.09 $10.29 $10.00
End of year (rounded) $15.62 $13.09 $10.29
Accumulation Units
Outstanding at end of year 888,608 382,563 1,890
Small Plan Contracts:
Beginning of year (rounded) $13.09 N/A N/A
End of year (rounded) $15.54 N/A N/A
Accumulation Units Outstanding
at end of year 10,316 N/A N/A
Prudential Series Fund
Equity Income 01/01/99 01/01/98 07/31/97
to to to
12/31/99 12/31/98 12/31/97
-------- -------- --------
Other than Small Plan
Contracts:
Beginning of year (rounded) $10.13 $10.48 $10.00
End of year (rounded) $11.29 $10.13 $10.48
Accumulation Units
Outstanding at end of year 120,568 53,578 1,171
Small Plan Contracts:
Beginning of year (rounded) $10.13 N/A N/A
End of year (rounded) $11.23 N/A N/A
Accumulation Units Outstanding
at end of year 2,738 N/A N/A
Prudential Series Fund
Equity 01/01/99 01/01/98 07/31/97
to to to
12/31/99 12/31/98 12/31/97
-------- -------- --------
Other than Small Plan
Contracts:
Beginning of year (rounded) $10.96 $10.12 $10.00
End of year (rounded) $12.21 $10.96 $10.12
Accumulation Units
Outstanding at end of year 1,188,971 769,653 2,907
Small Plan Contracts:
Beginning of year (rounded) $10.96 N/A N/A
End of year (rounded) $12.15 N/A N/A
Accumulation Units Outstanding
at end of year 872 N/A N/A
Prudential Series Fund
Jennison 01/01/99 01/01/98 07/31/97
to to to
12/31/99 12/31/98 12/31/97
-------- -------- --------
Other than Small Plan
Contracts:
Beginning of year (rounded) $13.43 $9.87 $10.00
End of year (rounded) $18.91 $13.43 $9.87
Accumulation Units
Outstanding at end of year 416,885 77,040 3,111
Small Plan Contracts:
Beginning of year (rounded) $13.43 N/A N/A
End of year (rounded) $18.82 N/A N/A
Accumulation Units Outstanding
at end of year 1,110 N/A N/A
Prudential Series Fund
Global 01/01/99 01/01/98 07/31/97
to to to
12/31/99 12/31/98 12/31/97
-------- -------- --------
Other than Small Plan
Contracts:
Beginning of year (rounded) $11.08 $8.95 $10.00
End of year (rounded) $16.27 $11.08 $8.95
Accumulation Units
Outstanding at end of year 206,013 124,465 1,576
Small Plan Contracts:
Beginning of year (rounded) $11.08 N/A N/A
End of year (rounded) $16.19 N/A N/A
Accumulation Units Outstanding
at end of year 75 N/A N/A
AIM V.I.
Growth and Income 01/01/99 01/01/98 07/31/97
to to to
12/31/99 12/31/98 12/31/97
-------- -------- --------
Other than Small Plan
Contracts:
Beginning of year (rounded) $12.37 $9.79 $10.00
End of year (rounded) $16.45 $12.37 $9.79
Accumulation Units
Outstanding at end of year 202,653 16,899 1,122
Small Plan Contracts:
Beginning of year (rounded) $12.37 N/A N/A
End of year (rounded) $16.37 N/A N/A
Accumulation Units Outstanding
at end of year 351 N/A N/A
AIM V.I.
Value 01/01/99 01/01/98 07/31/97
to to to
12/31/99 12/31/98 12/31/97
-------- -------- --------
Other than Small Plan
Contracts:
Beginning of year (rounded) $12.97 $9.89 $10.00
End of year (rounded) $16.68 $12.97 $9.89
Accumulation Units
Outstanding at end of year 275,517 37,442 1,738
Small Plan Contracts:
Beginning of year (rounded) $12.37 N/A N/A
End of year (rounded) $16.60 N/A N/A
Accumulation Units Outstanding
at end of year 577 N/A N/A
Janus Aspen Growth 01/01/99 01/01/98 07/31/97
to to to
12/31/99 12/31/98 12/31/97
-------- -------- --------
Other than Small Plan
Contracts:
Beginning of year (rounded) $13.33 $9.92 $10.00
End of year (rounded) $19.01 $13.33 $9.92
Accumulation Units
Outstanding at end of year 455,919 43,275 462
Small Plan Contracts:
Beginning of year (rounded) $13.33 N/A N/A
End of year (rounded) $18.91 N/A N/A
Accumulation Units Outstanding
at end of year 1,197 N/A N/A
Janus Aspen
International Growth 01/01/99 01/01/98 07/31/97
to to to
12/31/99 12/31/98 12/31/97
-------- -------- --------
Other than Small Plan
Contracts:
Beginning of year (rounded) $10.96 $9.44 $10.00
End of year (rounded) $19.79 $10.96 $9.44
Accumulation Units
Outstanding at end of year 189,554 34,735 942
A-13
<PAGE>
Notes to Financial Statements of Discovery Account (Unaudited)
- -------------------------------------------------------------------------------
Note 10 (cont'd): Condensed Financial Information
Accumulation Unit Values for the Discovery Account
Janus Aspen
International Growth(Cont'd) 01/01/99 01/01/98 07/31/97
to to to
12/31/99 12/31/98 12/31/97
-------- -------- --------
Small Plan Contracts:
Beginning of year (rounded) $10.96 N/A N/A
End of year (rounded) $19.69 N/A N/A
Accumulation Units Outstanding
at end of year 31 N/A N/A
MFS
Emerging Growth 01/01/99 01/01/98 07/31/97
to to to
12/31/99 12/31/98 12/31/97
-------- -------- --------
Other than Small Plan
Contracts:
Beginning of year (rounded) $13.23 $9.95 $10.00
End of year (rounded) $23.15 $13.23 $9.95
Accumulation Units
Outstanding at end of year 234,665 61,164 470
Small Plan Contracts:
Beginning of year (rounded) $13.23 N/A N/A
End of year (rounded) $23.04 N/A N/A
Accumulation Units Outstanding
at end of year 82 N/A N/A
MFS
Research 01/01/99 01/01/98 07/31/97
to to to
12/31/99 12/31/98 12/31/97
-------- -------- --------
Other than Small Plan
Contracts:
Beginning of year (rounded) $11.82 $9.67 $10.00
End of year (rounded) $14.52 $11.82 $9.67
Accumulation Units
Outstanding at end of year 57,813 14,548 779
Small Plan Contracts:
Beginning of year (rounded) $11.82 N/A N/A
End of year (rounded) $14.45 N/A N/A
Accumulation Units Outstanding
at end of year 1 N/A N/A
OCC Accumulation Trust
Managed 01/01/99 01/01/98 07/31/97
to to to
12/31/99 12/31/98 12/31/97
-------- -------- --------
Other than Small Plan
Contracts:
Beginning of year (rounded) $10.75 $10.13 $10.00
End of year (rounded) $11.18 $10.75 $10.13
Accumulation Units
Outstanding at end of year 59,831 23,869 2,135
Small Plan Contracts:
Beginning of year (rounded) N/A N/A N/A
End of year (rounded) N/A N/A N/A
Accumulation Units Outstanding
at end of year N/A N/A N/A
OCC Accumulation Trust
Small Cap 01/01/99 01/01/98 07/31/97
to to to
12/31/99 12/31/98 12/31/97
-------- -------- --------
Other than Small Plan
Contracts:
Beginning of year (rounded) $9.19 $10.20 $10.00
End of year (rounded) $8.94 $9.19 $10.20
Accumulation Units
Outstanding at end of year 29,150 12,742 2,781
Small Plan Contracts:
Beginning of year (rounded) $9.19 N/A N/A
End of year (rounded) $8.89 N/A N/A
Accumulation Units Outstanding
at end of year 1,162 N/A N/A
T. Rowe Price
Equity Income 01/01/99 01/01/98 07/31/97
to to to
12/31/99 12/31/98 12/31/97
-------- -------- --------
Other than Small Plan
Contracts:
Beginning of year (rounded) $11.38 $10.54 $10.00
End of year (rounded) $11.69 $11.38 $10.54
Accumulation Units
Outstanding at end of year 88,559 26,852 1,704
Small Plan Contracts:
Beginning of year (rounded) $11.38 N/A N/A
End of year (rounded) $11.63 N/A N/A
Accumulation Units Outstanding
at end of year 480 N/A N/A
T. Rowe Price
International Stock 01/01/99 01/01/98 07/31/97
to to to
12/31/99 12/31/98 12/31/97
-------- -------- --------
Other than Small Plan
Contracts:
Beginning of year (rounded) $10.24 $8.92 $10.00
End of year (rounded) $13.51 $10.24 $8.92
Accumulation Units
Outstanding at end of year 15,783 6,523 216
Small Plan Contracts:
Beginning of year (rounded) $10.24 N/A N/A
End of year (rounded) $13.45 N/A N/A
Accumulation Units Outstanding
at end of year 409 N/A N/A
Warburg Pincus
Post-Venture Capital 01/01/99 01/01/98 07/31/97
to to to
12/31/99 12/31/98 12/31/97
-------- -------- --------
Other than Small Plan
Contracts:
Beginning of year (rounded) $10.64 $10.08 $10.00
End of year (rounded) $17.23 $10.64 $10.08
Accumulation Units
Outstanding at end of year 11,646 6,039 5
Small Plan Contracts:
Beginning of year (rounded) $10.64 N/A N/A
End of year (rounded) $17.15 N/A N/A
Accumulation Units Outstanding
at end of year 1,372 N/A N/A
A-14
<PAGE>
Report of Independent Accountants
To the Contract Holders of
The Prudential Discovery Select Group Variable Contract Account
and the Board of Directors of
The Prudential Insurance Company of America
In our opinion, the accompanying statements of net assets and the related
statements of operations and of changes in net assets present fairly, in all
material respects, the financial position of Prudential Series Fund Money Market
Subaccount, Prudential Series Fund Diversified Bond Subaccount, Prudential
Series Fund Government Income Subaccount, Prudential Series Fund Conservative
Balanced Subaccount, Prudential Series Fund Flexible Managed Subaccount,
Prudential Series Fund High Yield Bond Subaccount, Prudential Series Fund Stock
Index Subaccount, Prudential Series Fund Equity Income Subaccount, Prudential
Series Fund Equity Subaccount, Prudential Series Fund Jennison Subaccount,
Prudential Series Fund Global Subaccount, AIM V.I. Growth and Income Subaccount,
AIM V.I. Value Subaccount, Janus Aspen Growth Subaccount, Janus Aspen
International Growth Subaccount, MFS Emerging Growth Subaccount, MFS Research
Subaccount, OCC Accumulation Trust Managed Subaccount, OCC Accumulation Trust
Small Cap Subaccount, T. Rowe Price Equity Series Equity Income Subaccount, T.
Rowe Price International Series International Stock Subaccount and Warburg
Pincus Post-Venture Capital Subaccount (separately managed portfolios of The
Prudential Discovery Select Group Variable Contract Account; the "Account") at
December 31, 1999, the results of each of their operations for the year then
ended and the changes in each of their net assets for the two periods in the
period then ended in conformity with accounting principles generally accepted in
the United States. These financial statements are the responsibility of the
Account's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
financial statements in accordance with auditing standards generally accepted in
the United States which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of fund shares owned at December 31, 1999
with each Subaccounts' transfer agent, provide a reasonable basis for the
opinion expressed above.
PricewaterhouseCoopers LLP
New York, New York
February 23, 2000
A-15
<PAGE>
The Prudential Insurance Company of America Consolidated Financial Statements
<PAGE>
The Prudential Insurance Company of America
Consolidated Statements of Financial Position
December 31, 1999 and 1998 (In Millions)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998
--------------- ----------------
<S> <C> <C>
ASSETS
Fixed maturities:
Available for sale, at fair value (amortized cost, 1999: $76,815; 1998: $76,997) $ 74,697 $ 80,158
Held to maturity, at amortized cost (fair value, 1999: $14,112; 1998: $17,906) 14,237 16,848
Trading account assets, at fair value 9,741 8,888
Equity securities, available for sale, at fair value (cost, 1999: $2,531; 1998: $2,583) 3,264 2,759
Mortgage loans on real estate 16,268 16,016
Investment real estate 770 675
Policy loans 7,590 7,476
Securities purchased under agreements to resell 13,944 10,252
Cash collateral for borrowed securities 7,124 5,622
Other long-term investments 4,087 3,474
Short-term investments 12,303 9,781
--------------- ----------------
Total investments 164,025 161,949
Cash 1,330 1,943
Accrued investment income 1,836 1,795
Broker-dealer related receivables 11,346 10,142
Deferred policy acquisition costs 7,324 6,462
Other assets 17,102 16,200
Separate account assets 82,131 80,931
--------------- ----------------
TOTAL ASSETS $ 285,094 $ 279,422
=============== ================
LIABILITIES AND EQUITY
LIABILITIES
Future policy benefits $ 68,069 $ 67,059
Policyholders' account balances 31,578 33,098
Unpaid claims and claim adjustment expenses 2,829 3,806
Policyholders' dividends 1,484 1,444
Securities sold under agreements to repurchase 24,598 21,486
Cash collateral for loaned securities 10,775 7,132
Income taxes payable 804 785
Broker-dealer related payables 5,839 6,530
Securities sold but not yet purchased 6,968 5,771
Short-term debt 10,858 10,082
Long-term debt 5,513 4,734
Other liabilities 14,357 16,169
Separate account liabilities 82,131 80,931
--------------- ----------------
Total liabilities 265,803 259,027
--------------- ----------------
COMMITMENTS AND CONTINGENCIES (See Notes 14 and 15)
EQUITY
Accumulated other comprehensive income/(loss) (685) 1,232
Retained earnings 19,976 19,163
--------------- ----------------
Total equity 19,291 20,395
--------------- ----------------
TOTAL LIABILITIES AND EQUITY $ 285,094 $ 279,422
=============== ================
</TABLE>
See Notes to Consolidated Financial Statements
B1
<PAGE>
The Prudential Insurance Company of America
Consolidated Statements of Operations
Years Ended December 31, 1999, 1998 and 1997 (In Millions)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998 1997
--------------- -------------- --------------
<S> <C> <C> <C>
REVENUES
Premiums $9,475 $9,024 $9,015
Policy charges and fee income 1,516 1,465 1,423
Net investment income 9,424 9,535 9,482
Realized investment gains, net 924 2,641 2,168
Commissions and other income 5,279 4,471 4,480
--------------- -------------- --------------
Total revenues 26,618 27,136 26,568
--------------- -------------- --------------
BENEFITS AND EXPENSES
Policyholders' benefits 10,175 9,840 9,956
Interest credited to policyholders' account balances 1,811 1,953 2,170
Dividends to policyholders 2,571 2,477 2,422
General and administrative expenses 9,656 9,108 8,620
Sales practices remedies and costs 100 1,150 2,030
--------------- -------------- --------------
Total benefits and expenses 24,313 24,528 25,198
--------------- -------------- --------------
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES AND
EXTRAORDINARY ITEM 2,305 2,608 1,370
--------------- -------------- --------------
Income taxes
Current 690 1,085 101
Deferred 352 (115) 306
--------------- -------------- --------------
Total income taxes 1,042 970 407
--------------- -------------- --------------
INCOME FROM CONTINUING OPERATIONS BEFORE EXTRAORDINARY ITEM 1,263 1,638 963
--------------- -------------- --------------
DISCONTINUED OPERATIONS
Loss from healthcare operations, net of taxes - (298) (353)
Loss on disposal of healthcare operations, net of taxes (400) (223) -
--------------- -------------- --------------
Net loss from discontinued operations (400) (521) (353)
--------------- -------------- --------------
INCOME BEFORE EXTRAORDINARY ITEM 863 1,117 610
EXTRAORDINARY ITEM - DEMUTUALIZATION EXPENSES, NET OF TAXES (50) (11) -
--------------- -------------- --------------
NET INCOME $ 813 $1,106 $ 610
=============== ============== ==============
</TABLE>
See Notes to Consolidated Financial Statements
B2
<PAGE>
The Prudential Insurance Company of America
Consolidated Statements of Changes in Equity
Years Ended December 31, 1999, 1998 and 1997 (In Millions)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Accumulated Other Comprehensive Income/(Loss)
---------------------------------------------------------------------
Total
Foreign Net Accumulated
Currency Unrealized Pension Other
Translation Investment Liability Comprehensive
Adjustments Gains/(Losses) Adjustment Income/(Loss)
--------------- ----------------- ------------- -----------------
<S> <C> <C> <C> <C>
Balance, December 31, 1996 $ (56) $ 1,136 $ (4) $ 1,076
Comprehensive income:
Net income
Other comprehensive income, net of tax:
Change in foreign currency translation
adjustments (29) (29)
Change in net unrealized investment gains 616 616
Additional pension liability adjustment (2) (2)
Other comprehensive income
Total comprehensive income
---------------------------------------------------------------------
Balance, December 31, 1997 (85) 1,752 (6) 1,661
Comprehensive income:
Net income
Other comprehensive loss, net of tax:
Change in foreign currency translation
adjustments 54 54
Change in net unrealized investment gains (480) (480)
Additional pension liability adjustment (3) (3)
Other comprehensive loss
Total comprehensive income
---------------------------------------------------------------------
Balance, December 31, 1998 (31) 1,272 (9) 1,232
Comprehensive income:
Net income
Other comprehensive loss, net of tax:
Change in foreign currency translation
adjustments 13 13
Change in net unrealized investment gains (1,932) (1,932)
Additional pension liability adjustment 2 2
Other comprehensive loss
Total comprehensive loss
---------------------------------------------------------------------
Balance, December 31, 1999 $ (18) $ (660) $ (7) $ (685)
=====================================================================
<CAPTION>
Retained Total
Earnings Equity
-------------- ------------
<S> <C> <C>
Balance, December 31, 1996 $ 17,447 $18,523
Comprehensive income:
Net income 610 610
Other comprehensive income, net of tax:
Change in foreign currency translation
adjustments (29)
Change in net unrealized investment gains 616
Additional pension liability adjustment (2)
----------
Other comprehensive income 585
----------
Total comprehensive income 1,195
----------------------------
Balance, December 31, 1997 18,057 19,718
Comprehensive income:
Net income 1,106 1,106
Other comprehensive loss, net of tax:
Change in foreign currency translation
adjustments 54
Change in net unrealized investment gains (480)
Additional pension liability adjustment (3)
----------
Other comprehensive loss (429)
----------
Total comprehensive income 677
----------------------------
Balance, December 31, 1998 19,163 20,395
Comprehensive income:
Net income 813 813
Other comprehensive loss, net of tax:
Change in foreign currency translation
adjustments 13
Change in net unrealized investment gains (1,932)
Additional pension liability adjustment 2
----------
Other comprehensive loss (1,917)
----------
Total comprehensive loss (1,104)
----------------------------
Balance, December 31, 1999 $ 19,976 $19,291
============================
</TABLE>
See Notes to Consolidated Financial Statements
B3
<PAGE>
The Prudential Insurance Company of America
Consolidated Statements of Cash Flows
Years Ended December 31, 1999, 1998 and 1997 (In Millions)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998 1997
-------------- -------------- --------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 813 $ 1,106 $ 610
Adjustments to reconcile net income to
net cash provided by operating activities:
Realized investment gains, net (915) (2,671) (2,209)
Policy charges and fee income (237) (232) (258)
Interest credited to policyholders' account balances 1,811 1,953 2,170
Depreciation and amortization 489 337 271
Loss on disposal of businesses 400 223 -
Change in:
Deferred policy acquisition costs (178) (174) (233)
Future policy benefits and other insurance liabilities 724 597 2,537
Trading account assets (853) (2,540) (1,825)
Income taxes payable 1,074 594 (1,391)
Broker-dealer related receivables/payables (1,898) 1,495 (672)
Securities purchased under agreements to resell (3,692) (1,591) (3,314)
Cash collateral for borrowed securities (1,502) (575) (2,631)
Cash collateral for loaned securities 3,643 (6,985) 5,668
Securities sold but not yet purchased 1,197 2,122 1,633
Securities sold under agreements to repurchase 3,112 9,139 4,844
Other, net (3,356) (5,234) 3,910
-------------- -------------- --------------
Cash flows from (used in) operating activities 632 (2,436) 9,110
-------------- -------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from the sale/maturity of:
Fixed maturities, available for sale 120,875 123,151 123,550
Fixed maturities, held to maturity 4,957 4,466 4,042
Equity securities, available for sale 3,190 2,792 2,572
Mortgage loans on real estate 2,640 4,090 4,299
Investment real estate 507 1,489 1,842
Other long-term investments 1,219 1,848 5,232
Payments for the purchase of:
Fixed maturities, available for sale (120,933) (126,742) (129,854)
Fixed maturities, held to maturity (2,414) (2,244) (2,317)
Equity securities, available for sale (2,779) (2,547) (2,461)
Mortgage loans on real estate (2,595) (3,719) (3,305)
Investment real estate (483) (31) (241)
Other long-term investments (1,354) (1,842) (4,173)
Short-term investments (2,510) 2,145 (2,848)
-------------- -------------- --------------
Cash flows from (used in) investing activities 320 2,856 (3,662)
-------------- -------------- --------------
</TABLE>
See Notes to Consolidated Financial Statements
B4
<PAGE>
The Prudential Insurance Company of America
Consolidated Statements of Cash Flows (continued)
Years Ended December 31, 1999, 1998 and 1997 (In Millions)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998 1997
-------------- -------------- --------------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Policyholders' account deposits 6,901 7,052 5,245
Policyholders' account withdrawals (9,835) (11,332) (9,873)
Net increase in short-term debt 444 2,422 305
Proceeds from the issuance of long-term debt 1,844 1,940 324
Repayments of long-term debt (919) (418) (464)
-------------- -------------- --------------
Cash flows used in financing activities (1,565) (336) (4,463)
-------------- -------------- --------------
NET (DECREASE)/INCREASE IN CASH (613) 84 985
CASH, BEGINNING OF YEAR 1,943 1,859 874
-------------- -------------- --------------
CASH, END OF YEAR $ 1,330 $ 1,943 $ 1,859
============== ============== ==============
SUPPLEMENTAL CASH FLOW INFORMATION:
Income taxes (received)/paid $ (344) $ 163 $ 968
-------------- -------------- --------------
Interest paid $ 824 $ 864 $ 708
-------------- -------------- --------------
</TABLE>
See Notes to Consolidated Financial Statements
B5
<PAGE>
The Prudential Insurance Company of America
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
1. BUSINESS
The Prudential Insurance Company of America and its subsidiaries
(collectively, "Prudential" or "the Company") provide financial services
throughout the United States and in many foreign countries. The Company's
businesses provide a full range of insurance, investment, securities and
other financial products and services to both retail and institutional
customers. Principal products and services provided include life insurance,
property and casualty insurance, annuities, mutual funds, pension and
retirement related investments and administration, asset management, and
securities brokerage.
Demutualization
On February 10, 1998, the Company's Board of Directors authorized management
to take the preliminary steps necessary to allow the Company to demutualize
and become a publicly traded stock company. On July 1, 1998, legislation was
enacted in New Jersey that would permit demutualization to occur and that
specified the process for conversion. Demutualization is a complex process
involving the development of a plan of reorganization, approval of the plan
by the Company's Board of Directors, a public hearing, approval by
two-thirds of the qualified policyholders who vote on the plan, and review
and approval by the New Jersey Department of Banking and Insurance. The
Company's management is in the process of developing a proposed plan of
demutualization, although there can be no assurance as to the terms thereof
or that the Company's Board of Directors will approve such a plan.
The Company's management currently anticipates that the Company's proposed
plan of demutualization will include the establishment of a new holding
company, Prudential, Inc., whose stock will be publicly traded and of which
the Company's stock successor will become a direct or indirect wholly-owned
subsidiary. The consolidated financial statements of the Company prior to
the demutualization will become Prudential, Inc.'s consolidated financial
statements upon demutualization. The Company's management also currently
intends to propose that a corporate reorganization occur concurrently with
the demutualization whereby the stock of various of the Company's
subsidiaries (including Prudential Securities Group, the personal lines
property-casualty insurance companies and the international insurance
companies), the stock of a newly formed subsidiary containing the Company's
asset management operations, and certain prepaid pension expense,
post-employment benefits and certain other assets will be distributed to
Prudential, Inc. If effected, the corporate reorganization can be expected
to materially reduce invested assets, net income and total equity of The
Prudential Insurance Company of America, which would be an insurance
subsidiary of Prudential, Inc. after the corporate reorganization, although
it would have no effect on the consolidated assets, net income or total
equity of Prudential, Inc. As the terms of the foregoing transactions have
not been finalized by the Company or approved by the regulatory authority,
it is not currently possible to quantify their financial effect on the
Company.
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, its
majority-owned subsidiaries, and those partnerships and joint ventures in
which the Company has a controlling financial interest, except in those
instances where the Company cannot exercise control because the minority
owners have substantive participating rights in the operating and capital
B6
<PAGE>
The Prudential Insurance Company of America
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
decisions of the entity. The consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States ("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, in particular deferred policy acquisition
costs ("DAC") and future policy benefits, 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 is written
down to estimated fair value when a decline in value is considered to be
other than temporary. Unrealized gains and losses on fixed maturities
"available for sale," net of income tax and the effect on deferred policy
acquisition costs and future policy benefits that would result from the
realization of unrealized gains and losses, are included in a separate
component of equity, "Accumulated other comprehensive income."
Trading account assets and securities sold but not yet purchased are carried
at estimated fair value. Realized and unrealized gains and losses on trading
account assets and securities sold but not yet purchased are included in
"Commissions and other income."
Equity securities, available for sale, are comprised of common and
non-redeemable preferred stock and are carried at estimated fair value. The
associated unrealized gains and losses, net of income tax and the effect on
deferred policy acquisition costs and future policy benefits that would
result from the realization of unrealized gains and losses, are included in
a separate component of equity, "Accumulated other comprehensive
income/(loss)."
Mortgage loans on real estate are stated primarily at unpaid principal
balances, net of unamortized discounts and an allowance for losses. The
allowance for losses includes a loan specific reserve for impaired loans and
a portfolio reserve for incurred but not specifically identified losses.
Impaired loans include those loans for 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 at the present value of
expected future cash flows discounted at the loan's effective interest rate,
or at the fair value of the collateral if the loan is collateral dependent.
Interest received on impaired loans, including loans that were previously
modified in a troubled debt restructuring, is either applied against the
principal or reported as revenue, according to management's judgment as to
the collectibility of principal. Management discontinues accruing interest
on impaired loans after the loans are 90 days delinquent as to principal or
interest, or earlier when management has serious doubts about
collectibility. When a loan is recognized as impaired, any accrued but
uncollectible interest 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 the payment of interest has been interrupted for a substantial
period, a regular payment performance has been established. The portfolio
reserve for incurred but not specifically identified losses considers the
Company's past loan loss experience, the current credit composition of the
portfolio, historical credit migration, property type diversification,
default and loss severity statistics and other relevant factors.
B7
<PAGE>
The Prudential Insurance Company of America
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Investment real estate held for disposal is carried at the lower of
depreciated cost or fair value less estimated selling costs and is not
further depreciated once classified as such.
Real estate which the Company has the intent to hold for the production of
income is carried at depreciated cost less any write-downs to fair value for
impairment losses and is reviewed for impairment whenever events or
circumstances indicate that the carrying value may not be recoverable. An
impairment loss is recognized when the review indicates that the carrying
value of the investment real estate exceeds the estimated undiscounted
future cash flows (excluding interest charges) from the investment. At that
time, the carrying value of the investment real estate is written down to
fair value.
Charges relating to real estate held for disposal and impairments of real
estate held for investment are included in "Realized investment gains, net."
Depreciation on real estate held for the production of income is computed
using the straight-line method over the estimated lives of the properties,
and is included in "Net investment income."
Policy loans are carried at unpaid principal balances.
Securities purchased under agreements to resell and securities sold under
agreements to repurchase are treated as financing arrangements and are
carried at the amounts at which the securities will be subsequently resold
or reacquired, including accrued interest, as specified in the respective
agreements. The Company's policy is to take possession or control of
securities purchased under agreements to resell. Assets to be repurchased
are the same, or substantially the same, as the assets transferred and the
transferor, through right of substitution, maintains the right and ability
to redeem the collateral on short notice. The market value of securities to
be repurchased or resold is monitored, and additional collateral is
obtained, where appropriate, to protect against credit exposure.
Securities borrowed and securities loaned are treated as financing
arrangements and are recorded at the amount of cash advanced or received.
With respect to securities loaned, the Company obtains collateral in an
amount equal to 102% and 105% of the fair value of the domestic and foreign
securities, respectively. The Company monitors the market value of
securities borrowed and loaned on a daily basis with additional collateral
obtained as necessary. Non-cash collateral received is not reflected in the
consolidated statements of financial position because the debtor typically
has the right to redeem the collateral on short notice. Substantially all of
the Company's securities borrowed contracts are with other brokers and
dealers, commercial banks and institutional clients. Substantially all of
the Company's securities loaned are with large brokerage firms.
Securities repurchase and resale agreements and securities borrowed and
loaned transactions are used to generate net investment income and
facilitate trading activity. These instruments are short-term in nature
(usually 30 days or less) and are collateralized principally by U.S.
Government and mortgage-backed securities. The carrying amounts of these
instruments approximate fair value because of the relatively short period of
time between the origination of the instruments and their expected
realization.
Other long-term investments primarily represent the Company's investments in
joint ventures and partnerships in which the Company does not exercise
control and derivatives held for purposes other than trading. Such joint
venture and partnership interests are generally accounted for using the
equity method of accounting, reduced for other than temporary declines in
value, except in instances in which the Company's interest is so minor that
it exercises virtually no influence over operating and financial policies.
In such instances, the Company applies the cost method of accounting. The
Company's net income from investments in joint ventures and partnerships is
generally included in "Net investment income." However, for certain real
estate joint ventures, Prudential's
B8
<PAGE>
The Prudential Insurance Company of America
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
interest is liquidated by means of one or more transactions that result in
the sale of the underlying invested assets to third parties and the ultimate
distribution of the proceeds to Prudential and other joint venture partners
in exchange for and settlement of the respective joint venture interests.
These transactions are accounted for as disposals of Prudential's joint
venture interests and the resulting gains and losses are included in
"Realized investment gains, net."
Short-term investments, including highly liquid debt instruments purchased
with an original maturity of twelve months or less, are carried at amortized
cost, which approximates fair value.
Realized investment gains, net are computed using the specific
identification method. Costs of fixed maturities and equity securities are
adjusted for impairments considered to be other than temporary. Allowances
for losses on mortgage loans on real estate are netted against asset
categories to which they apply and provisions for losses on investments are
included in "Realized investment gains, net." Decreases in the carrying
value of investment real estate held for disposal are recorded in "Realized
investment gains, net."
Cash
Cash includes cash on hand, amounts due from banks, and money market
instruments.
Deferred Policy Acquisition Costs
The costs that vary with and that are related primarily to the production of
new insurance and annuity business are deferred to the extent such costs are
deemed recoverable from future profits. Such costs include commissions,
costs of policy issuance and underwriting, and variable field office
expenses. Deferred policy acquisition costs are subject to recoverability
testing at the time of policy issue and loss recognition testing at the end
of each accounting period. Deferred policy acquisition costs, for certain
products, are adjusted for the impact of unrealized gains or losses on
investments as if these gains or losses had been realized, with
corresponding credits or charges included in "Accumulated other
comprehensive income."
For participating life insurance, deferred policy acquisition costs are
amortized over the expected life of the contracts (up to 45 years) in
proportion to estimated gross margins based on historical and anticipated
future experience, which is updated periodically. The average rate of
assumed investment yield used in estimating expected gross margins was 7.83%
at December 31, 1999. The effect of changes in estimated gross margins on
unamortized deferred acquisition costs is reflected in "General and
administrative expenses" in the period such estimated gross margins 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, which is updated periodically.
The effect of changes to estimated gross profits on unamortized deferred
acquisition costs is reflected in "General and administrative expenses" in
the period such estimated gross profits are revised. Deferred policy
acquisition costs related to non-participating term insurance are amortized
over the expected life of the contracts in proportion to the premium income.
The Company has offered programs under which policyholders, for a selected
product or group of products, can exchange an existing policy or contract
issued by the Company for another form of policy or contract. These
transactions are known as internal replacements. If policyholders surrender
traditional life insurance policies in exchange for life insurance policies
that do not have fixed and guaranteed terms, the Company immediately charges
to expense the remaining unamortized DAC on the surrendered policies. For
other internal replacement transactions, the unamortized DAC on the
surrendered policies is immediately charged to expense if the terms of the
new policies are not substantially similar to those of the former policies.
If the new policies have terms that
B9
<PAGE>
The Prudential Insurance Company of America
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
are substantially similar to those of the earlier policies, the DAC is
retained with respect to the new policies.
For property and casualty insurance 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, group life insurance, group annuities and
guaranteed investment contracts, acquisition costs are expensed as incurred.
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 funds 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 generally not subject to claims that arise out of any
other business of the Company. Investment risks associated with market value
changes are borne by the customers, except to the extent of minimum
guarantees made by the Company with respect to certain accounts. The
investment income and gains or losses for separate accounts generally accrue
to the policyholders and are not included in the Consolidated Statements of
Operations. Mortality, policy administration and surrender charges on the
accounts are included in "Policy charges and fee income." Asset management
fees charged to the accounts are included in "Commissions and other income."
Other Assets and Other Liabilities
Other assets consist primarily of prepaid benefit costs, reinsurance
recoverables, certain restricted assets, trade receivables, mortgage
securitization inventory, and property and equipment. Property and equipment
are stated at cost less accumulated depreciation. Depreciation is determined
using the straight-line method over the estimated useful lives of the
related assets which generally range from 3 to 40 years. Other liabilities
consist primarily of trade payables, employee benefit liabilities, and
reserves for sales practices remedies and costs.
Contingencies
Amounts related to contingencies are accrued if it is probable that a
liability has been incurred and an amount is reasonably estimable.
Management evaluates whether there are incremental legal or other costs
directly associated with the ultimate resolution of the matter that are
reasonably estimable and, if so, they are included in the accrual.
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 based on the Company's statutory results and
past experience, including investment income, realized investment gains, net
over a number of years, mortality experience and other factors.
Insurance Revenue and Expense Recognition
Premiums from participating insurance policies are recognized when due.
Benefits are recorded as an expense when they are incurred. A liability for
future policy benefits is recorded using the net level premium method.
Premiums from non-participating group annuities with life contingencies are
recognized when due. For single premium immediate annuities and structured
settlements with life contingencies, premiums are recognized when due with
any excess profit deferred and recognized in a constant relationship to the
amount of expected future benefit payments.
B10
<PAGE>
The Prudential Insurance Company of America
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Amounts received as payment for interest-sensitive life 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 and surrender charges.
Benefits and expenses for these products include claims in excess of related
account balances, expenses of contract administration, interest credited and
amortization of deferred policy acquisition costs.
For disability insurance, group life insurance, and property and casualty
insurance, premiums are recognized over the period to which the premiums
relate in proportion to the amount of insurance protection provided. Claim
and claim adjustment expenses are recognized when incurred.
Premiums, benefits and expenses are stated net of reinsurance ceded to other
companies. Estimated reinsurance receivables and the cost of reinsurance are
recognized over the life of the reinsured policies using assumptions
consistent with those used to account for the underlying policies.
Foreign Currency Translation Adjustments
Assets and liabilities of foreign operations and subsidiaries reported in
other than U.S. dollars are translated at the exchange rate in effect at the
end of the period. Revenues, benefits and other expenses are translated at
the average rate prevailing during the period. The effects of translating
the Statements of Financial Position of non-U.S. entities with functional
currencies other than the U.S. dollar are included, net of related hedge
gains and losses and income taxes, in "Accumulated other comprehensive
income (loss)," a separate component of equity.
Commissions and Other Income
Commissions and other income principally includes securities and commodities
commission revenues, asset management fees, investment banking revenue and
realized and unrealized gains from trading activities of the Company's
securities business.
Derivative Financial Instruments
Derivatives are financial instruments whose values are derived from interest
rates, foreign exchange rates, financial indices, or the value of securities
or commodities. Derivative financial instruments used by the Company include
swaps, futures, forwards and option contracts and may be exchange-traded or
contracted in the over-the-counter market. The Company uses derivative
financial instruments to seek to reduce market risk from changes in interest
rates or foreign currency exchange rates and to alter interest rate or
currency exposures arising from mismatches between assets and liabilities.
Additionally, derivatives are used in the broker-dealer business and in a
limited-purpose subsidiary for trading purposes.
To qualify as a hedge, derivatives must be designated as hedges for existing
assets, liabilities, firm commitments or anticipated transactions which are
identified and probable to occur, and effective in reducing the market risk
to which the Company is exposed. The effectiveness of the derivatives are
evaluated at the inception of the hedge and throughout the hedge period.
Derivatives held for trading purposes are used by the Company's securities
business to meet the needs of customers by structuring transactions that
allow customers to manage their exposure to interest rates, foreign exchange
rates, indices or prices of securities and commodities. Trading derivative
positions are valued daily, generally by obtaining quoted market prices or
through the use of pricing models. Values are affected by changes in
interest rates, currency exchange rates, credit spreads, market volatility
and liquidity. The Company monitors
B11
<PAGE>
The Prudential Insurance Company of America
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
these exposures through the use of various analytical techniques.
Derivatives held for trading purposes are included at fair value in "Trading
account assets," "Other liabilities" or "Broker-dealer related
receivables/payables" in the Consolidated Statements of Financial Position,
and realized and unrealized changes in fair value are included in
"Commissions and other income" of the Consolidated Statements of Operations
in the periods in which the changes occur. Cash flows from trading
derivatives are reported in the operating activities section of the
Consolidated Statements of Cash Flows.
Derivatives held for purposes other than trading are primarily used to seek
to 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 as part of the Company's risk management activities.
See Note 14 for a discussion of the accounting treatment of derivatives that
qualify as hedges. If the Company's use of other than trading derivatives
does not meet the criteria to apply hedge accounting, the derivatives are
recorded at fair value in "Other long-term investments" or "Other
liabilities" in the Consolidated Statements of Financial Position, and
changes in their fair value are included in "Realized investment gains, net"
without considering changes in the hedged assets or liabilities. Cash flows
from other than trading derivatives are reported in the investing activities
section in the Consolidated Statements of Cash Flows.
Income Taxes
The Company and its domestic subsidiaries file a consolidated federal income
tax return. The Internal Revenue Code (the "Code") limits the amount of
non-life insurance losses that may offset life insurance company taxable
income. The Code also imposes an "equity tax" on mutual life insurance
companies which, in effect, imputes an additional tax to the Company based
on a formula that calculates the difference between stock and mutual life
insurance companies' earnings. Income taxes include an estimate for changes
in the total equity tax to be paid for current and prior years. Subsidiaries
operating outside the United States are taxed under applicable foreign
statutes.
Deferred income taxes are recognized, based on enacted rates, when assets
and liabilities have different values for financial statement and tax
reporting purposes. A valuation allowance is recorded to reduce a deferred
tax asset to that portion that is expected to be realized.
Extraordinary Item - Demutualization Expenses, Net of Taxes
The Consolidated Statements of Operations reflect extraordinary charges for
demutualization expenses of $50 million and $11 million, net of taxes of
zero, for the years ended December 31, 1999 and 1998, respectively.
Demutualization expenses consist primarily of the cost of engaging
independent accounting, actuarial, investment banking, legal and other
consultants to advise the Company and the New Jersey Department of Banking
and Insurance and the New York Department of Insurance in the
demutualization process and related matters. Future demutualization expenses
will also include the cost of printing and postage for communications with
policyholders.
New Accounting Pronouncements
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" which requires that companies recognize
all derivatives as either assets or liabilities in the balance sheet and
measure those instruments at fair value. SFAS No. 133 does not apply to most
traditional insurance contracts. However, certain hybrid contracts that
contain features which may affect settlement amounts similarly to
derivatives may require separate accounting for the "host contract" and the
underlying "embedded derivative"
B12
<PAGE>
The Prudential Insurance Company of America
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
provisions. The latter provisions would be accounted for as derivatives as
specified by the statement.
SFAS No. 133 provides, if certain conditions are met, that a derivative may
be specifically designated as (1) a hedge of the exposure to changes in the
fair value of a recognized asset or liability or an unrecognized firm
commitment (fair value hedge), (2) a hedge of the exposure to variable cash
flows of a forecasted transaction (cash flow hedge), or (3) a hedge of the
foreign currency exposure of a net investment in a foreign operation, an
unrecognized firm commitment, an available-for-sale security or a
foreign-currency-denominated forecasted transaction (foreign currency
hedge).
Under SFAS No. 133, the accounting for changes in fair value of a derivative
depends on its intended use and designation. For a fair value hedge, the
gain or loss is recognized in earnings in the period of change together with
the offsetting loss or gain on the hedged item. For a cash flow hedge, the
effective portion of the derivative's gain or loss is initially reported as
a component of other comprehensive income and subsequently reclassified into
earnings when the forecasted transaction affects earnings. For a foreign
currency hedge, the gain or loss is reported in other comprehensive income
as part of the foreign currency translation adjustment. For all other
derivatives not designated as hedging instruments, the gain or loss is
recognized in earnings in the period of change. The Company is required to
adopt this Statement, as amended, as of January 1, 2001 and is currently
assessing the effect of the new standard.
In October 1998, the AICPA issued Statement of Position 98-7, "Deposit
Accounting: Accounting for Insurance and Reinsurance Contracts That Do Not
Transfer Insurance Risk" ("SOP 98-7"). This statement provides guidance on
how to account for insurance and reinsurance contracts that do not transfer
insurance risk. SOP 98-7 is effective for fiscal years beginning after June
15, 1999. The adoption of this statement is not expected to have a material
effect on the Company's financial position or results of operations.
Reclassifications
Certain amounts in prior years have been reclassified to conform to the
current year presentation.
3. DISCONTINUED OPERATIONS
In December 1998, the Company entered into a definitive agreement to sell
its healthcare business to Aetna, Inc. ("Aetna"). The sale was completed on
August 6, 1999. Included in this transaction were the Company's managed
medical care, point of service, preferred provider organization and
indemnity health lines, dental business, as well as the Company's
Administrative Services Only ("ASO") business. The healthcare business is
recorded as a discontinued operation in the accompanying consolidated
financial statements, with a measurement date of December 31, 1998
Proceeds from the sale were $500 million of cash, $500 million of Aetna
three-year senior notes and stock appreciation rights covering one million
shares of Aetna common stock, valued at approximately $30 million at the
date of closing, with a term of five years and a reference price of $81.81
per Aetna common share. The sale resulted in a loss of $623 million, net of
tax. Loss from healthcare operations for 1998 includes results through
December 31, 1998 (the measurement date). Amounts within the footnotes have
been adjusted, where noted, to eliminate the impact of discontinued
operations and to be consistent with the presentation in the Consolidated
Statements of Operations.
The 1998 loss on disposal of $223 million, net of taxes, included
anticipated operating losses to be incurred by the healthcare business
subsequent to December 31, 1998 (the measurement date) through the expected
date of
B13
<PAGE>
The Prudential Insurance Company of America
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
3. DISCONTINUED OPERATIONS (continued)
the sale, as well as estimates of other costs the Company would incur in
connection with the disposition of the healthcare business. These include
costs attributable to facilities closure and systems terminations, severance
and termination benefits, payments to Aetna related to the ASO business and
estimated payments in connection with a medical loss ratio agreement
covering the fully insured medical and dental business (the "MLR
Agreement"). The MLR Agreement provides for payments either to or from Aetna
in the event that medical loss ratios (i.e., incurred medical expense
divided by earned premiums) for covered businesses are either less favorable
or more favorable than levels specified in the MLR Agreement for the years
1999 and 2000. The loss on disposal also included the estimated positive
impact of net curtailment gains from expected modifications of certain
pension and other postretirement benefit plans in which employees of the
healthcare business participate. (See Note 9).
In 1999 the Company recognized an additional loss on disposal of its
healthcare business of $400 million, after related tax benefits. The
additional loss resulted primarily from higher than anticipated healthcare
operating losses during the 1999 period through the August 6 closing date.
The higher losses resulted principally from adverse claims experience and
the impact of this experience on the evaluation of the Company's obligation
under the MLR Agreement. The pretax operating loss from the healthcare
business from January 1, 1999 through August 6, 1999 was $370 million, which
exceeded the original estimate of $160 million, recorded within the "Loss on
disposal of healthcare operations" in 1998. In addition to the obligations
noted above, the Company has retained certain liabilities pertaining to the
healthcare business, including all liabilities associated with litigation
which existed at August 6, 1999 or commences within two years of that date
with respect to claims that were incurred prior to August 6, 1999.
Management's best estimate of these costs is included in the loss on
disposal. It is possible that additional adjustments to estimates may be
necessary which might be material to future results of operations of a
particular quarterly or annual period.
Upon the closing of the sale of the healthcare business, the Company entered
into a coinsurance agreement with Aetna. The agreement is 100% indemnity
reinsurance on a coinsurance basis for all of the Company's insured medical
and dental business in-force upon the completion of the sale of the business
on August 6, 1999. The agreement requires the Company to issue additional
policies for new customers in response to proposals made to brokers or
customers within six months after the closing date and to renew insurance
policies until two years after the closing date. All such additional new and
renewal policies are 100% coinsured by Aetna, when issued. The purpose of
the agreement is to provide for the uninterrupted operation and growth,
including renewals of existing policies and issuance of new policies, of the
healthcare business that Aetna acquired from Prudential. The operation of
the business and the attendant risks, except for the existence of the MLR
Agreement as discussed above, were assumed entirely by Aetna. Consequently,
the following amounts pertaining to the agreement had no effect on the
Company's results of operations. The Company ceded premiums and benefits of
$896 million and $757 million, respectively, for the period from August 6,
1999 through December 31, 1999. Reinsurance recoverable under this
agreement, included in other assets, was $500 million at December 31, 1999.
The following table presents the results and the loss on the disposal of the
Company's healthcare business, determined as of the measurement date and
subsequently adjusted, which are included in "Discontinued Operations" in
the Consolidated Statements of Operations. Amounts for 1997 include revenues
and expenses relating to a contract with the American Association of Retired
Persons for healthcare and similar coverages which was terminated effective
December 31, 1997.
B14
<PAGE>
The Prudential Insurance Company of America
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
3. DISCONTINUED OPERATIONS (continued)
<TABLE>
<CAPTION>
1999 1998 1997
--------------- --------------- --------------
(In Millions)
<S> <C> <C> <C>
Revenues $ - $ 7,461 $10,305
Policyholder benefits - (6,064) (8,484)
General and administrative expenses - (1,822) (2,364)
--------------- --------------- --------------
Loss before income taxes - (425) (543)
Income tax benefit - 127 190
--------------- --------------- --------------
Loss from operations - (298) (353)
Loss on disposal, net of tax benefits of $240 in 1999 and $131 in 1998 (400) (223) -
--------------- --------------- --------------
Loss from discontinued operations, net of taxes $ (400) $ (521) $ (353)
=============== =============== ==============
</TABLE>
B15
<PAGE>
The Prudential Insurance Company of America
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
4. INVESTMENTS
Fixed Maturities and Equity Securities
The following tables provide additional information relating to fixed
maturities and equity securities (excluding trading account assets) as of
December 31:
<TABLE>
<CAPTION>
1999
--------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------ ------------ ------------- ------------
(In Millions)
<S> <C> <C> <C> <C>
Fixed maturities available for sale
U.S. Treasury securities and obligations of
U.S. government corporations and agencies $ 5,594 $ 36 $ 236 $ 5,394
Obligations of U.S. states and
their political subdivisions 2,437 41 118 2,360
Foreign government bonds 4,590 140 90 4,640
Corporate securities 57,503 580 2,431 55,652
Mortgage-backed securities 6,566 96 135 6,527
Other 125 - 1 124
--------------------------------------------------------------
Total fixed maturities available for sale $ 76,815 $ 893 $ 3,011 $ 74,697
==============================================================
Equity securities available for sale $ 2,531 $ 829 $ 96 $ 3,264
==============================================================
</TABLE>
<TABLE>
<CAPTION>
1999
--------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------ ------------ ------------- ------------
(In Millions)
<S> <C> <C> <C> <C>
Fixed maturities held to maturity
U.S. Treasury securities and obligations of
U.S. government corporations and agencies $ 5 $ - $ - $ 5
Obligations of U.S. states and
their political subdivisions 81 1 3 79
Foreign government bonds 214 11 1 224
Corporate securities 13,883 280 408 13,755
Mortgage-backed securities 1 - - 1
Other 53 - 5 48
--------------------------------------------------------------
Total fixed maturities held to maturity $ 14,237 $ 292 $ 417 $ 14,112
==============================================================
</TABLE>
B16
<PAGE>
The Prudential Insurance Company of America
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
4. INVESTMENTS (continued)
<TABLE>
<CAPTION>
1998
--------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------ ------------ ------------- ------------
(In Millions)
<S> <C> <C> <C> <C>
Fixed maturities available for sale
U.S. Treasury securities and obligations of
U.S. government corporations and agencies $ 5,761 $ 580 $ 9 $ 6,332
Obligations of U.S. states and
their political subdivisions 2,672 204 1 2,875
Foreign government bonds 3,486 258 59 3,685
Corporate securities 57,043 2,540 546 59,037
Mortgage-backed securities 7,935 208 14 8,129
Other 100 - - 100
--------------------------------------------------------------
Total fixed maturities available for sale $ 76,997 $ 3,790 $ 629 $ 80,158
==============================================================
Equity securities available for sale $ 2,583 $ 472 $ 296 $ 2,759
==============================================================
</TABLE>
<TABLE>
<CAPTION>
1998
--------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------ ------------ ------------- ------------
(In Millions)
<S> <C> <C> <C> <C>
Fixed maturities held to maturity
U.S. Treasury securities and obligations of
U.S. government corporations and agencies $ 5 $ - $ - $ 5
Obligations of U.S. states and
their political subdivisions 62 2 1 63
Foreign government bonds 216 8 1 223
Corporate securities 16,514 1,092 48 17,558
Mortgage-backed securities 1 - - 1
Other 50 6 - 56
--------------------------------------------------------------
Total fixed maturities held to maturity $ 16,848 $ 1,108 $ 50 $ 17,906
==============================================================
</TABLE>
B17
<PAGE>
The Prudential Insurance Company of America
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
4. INVESTMENTS (continued)
The amortized cost and estimated fair value of fixed maturities by
contractual maturities at December 31, 1999, 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 $ 3,171 $ 3,166 $ 671 $ 671
Due after one year through five years 18,132 17,911 4,063 4,078
Due after five years through ten years 19,249 18,725 5,449 5,345
Due after ten years 29,697 28,368 4,053 4,017
Mortgage-backed securities 6,566 6,527 1 1
--------------- -------------- --------------- --------------
Total $ 76,815 $ 74,697 $ 14,237 $ 14,112
=============== ============== =============== ==============
</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 1999,
1998 and 1997 were $4,957 million, $4,466 million, and $4,042 million,
respectively. Gross gains of $73 million, $135 million, and $62 million, and
gross losses of $0 million, $2 million, and $1 million were realized on
prepayment of held to maturity fixed maturities during 1999, 1998 and 1997,
respectively.
Proceeds from the sale of available for sale fixed maturities during 1999,
1998 and 1997 were $117,547 million, $119,096 million and $120,604 million,
respectively. Proceeds from the maturity of available for sale fixed
maturities during 1999, 1998 and 1997 were $3,328 million, $4,055 million and
$2,946 million, respectively. Gross gains of $884 million, $1,765 million and
$1,310 million, and gross losses of $1,231 million, $443 million and $639
million were realized on sales and prepayments of available for sale fixed
maturities during 1999, 1998 and 1997, respectively.
Writedowns for impairments which were deemed to be other than temporary for
fixed maturities were $266 million, $96 million and $13 million and for
equity securities were $205 million, $95 million and $31 million for the
years 1999, 1998 and 1997, respectively.
During the years ended December 31, 1999 and 1998, certain securities
classified as held to maturity were either sold or transferred to the
available for sale portfolio. These actions were taken as a result of a
significant deterioration in creditworthiness. The aggregate amortized cost
of the securities sold or transferred was $230 million in 1999 and $73
million in 1998. Gross unrealized investment losses of $5 million in 1999 and
$.4 million in 1998 were recorded in "Accumulated other comprehensive income"
at the time of the transfer. Prior to transfer, impairments related to these
securities, if any, were included in "Realized investment gains, net."
Realized gains on securities sold were $3 million in 1999.
B18
<PAGE>
The Prudential Insurance Company of America
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
4. INVESTMENTS (continued)
Mortgage Loans on Real Estate
The Company's mortgage loans were collateralized by the following property
types at December 31:
<TABLE>
<CAPTION>
Amount Percentage Amount Percentage
(In Millions) of Total (In Millions) of Total
1999 1998
---------------------------------- ---------------------------------
<S> <C> <C> <C> <C>
Office Buildings $ 3,960 24.1% $ 4,156 25.3%
Retail stores 2,627 15.9% 2,866 17.4%
Residential properties 662 4.0% 716 4.3%
Apartment complexes 4,508 27.3% 4,179 25.4%
Industrial buildings 2,161 13.1% 1,971 12.0%
Agricultural properties 1,959 11.9% 1,936 11.8%
Other 612 3.7% 619 3.8%
---------------- ---------------- --------------- ---------------
Subtotal 16,489 100% 16,443 100%
================ ===============
Allowance for losses (221) (427)
---------------- ---------------
Net carrying value $ 16,268 $ 16,016
================ ===============
</TABLE>
The mortgage loans are geographically dispersed throughout the United States
and Canada with the largest concentrations in California (23.4%) and New York
(10.1%) at December 31, 1999. Mortgage loans receivable at December 31, 1998
include $87 million from non-consolidated joint ventures.
Activity in the allowance for losses for all mortgage loans, for the years
ended December 31, is summarized as follows:
<TABLE>
<CAPTION>
1999 1998 1997
----------------- ----------------- -----------------
(In Millions)
<S> <C> <C> <C>
Allowance for losses, beginning of year $ 427 $ 450 $ 515
Release of allowance for losses (201) - (41)
Charge-offs, net of recoveries (5) (23) (24)
----------------- ----------------- -----------------
Allowance for losses, end of year $ 221 $ 427 $ 450
================= ================= =================
</TABLE>
The $201 million reduction of the mortgage loan allowance for losses in 1999
is primarily attributable to the improved economic climate, changes in the
nature and mix of borrowers and underlying collateral and a decrease in
impaired loans.
Impaired mortgage loans identified in management's specific review of
probable loan losses and the related allowance for losses at December 31, are
as follows:
<TABLE>
<CAPTION>
1999 1998
----------------- -----------------
(In Millions)
<S> <C> <C>
Impaired mortgage loans with allowance for losses $ 411 $ 501
Impaired mortgage loans with no allowance for losses 283 572
Allowance for losses, end of year (24) (45)
----------------- -----------------
Net carrying value of impaired mortgage loans $ 670 $ 1,028
================= =================
</TABLE>
B19
<PAGE>
The Prudential Insurance Company of America
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
4. INVESTMENTS (continued)
Impaired mortgage loans with no allowance for losses are loans in which the
fair value of the collateral or the net present value of the loans' expected
future cash flows equals or exceeds the recorded investment. The average
recorded investment in impaired loans before allowance for losses was $884
million, $1,329 million and $2,102 million during 1999, 1998 and 1997,
respectively. Net investment income recognized on these loans totaled $55
million, $94 million and $140 million for the years ended December 31, 1999,
1998 and 1997, respectively.
Investment Real Estate
"Investment real estate" of $770 million and $675 million at December 31,
1999 and 1998, respectively, is directly owned. Of the Company's real estate,
$293 million and $675 million consists of commercial and agricultural assets
held for disposal at December 31, 1999 and 1998, respectively. Impairment
losses amounted to $3 million, $8 million and $40 million for the years ended
December 31, 1999, 1998 and 1997, respectively, and are included in "Realized
investment gains, net."
Restricted Assets and Special Deposits
Assets of $4,463 million and $2,803 million at December 31, 1999 and 1998,
respectively, were on deposit with governmental authorities or trustees as
required by certain insurance laws. Additionally, assets valued at $2,325
million and $3,898 million at December 31, 1999 and 1998, respectively, were
held in voluntary trusts. Of these amounts, $1,553 million and $3,131 million
at December 31, 1999 and 1998, respectively, related to the multi-state
policyholder settlement described in Note 15. The remainder relates to trusts
established to fund guaranteed dividends to certain policyholders and to fund
certain employee benefits. Assets valued at $128 million and $173 million at
December 31, 1999 and 1998, respectively, were pledged as collateral for bank
loans and other financing agreements. Restricted cash and securities of
$4,082 million and $2,366 million at December 31, 1999 and 1998,
respectively, were included in the Consolidated Statements of Financial
Position in "Other assets." The restricted cash represents funds deposited by
clients and funds accruing to clients as a result of trades or contracts.
Other Long-Term Investments
The Company's "Other long-term investments" of $4,087 million and $3,474
million as of December 31, 1999 and 1998, respectively, are comprised of
$1,212 million and $1,133 million in real estate related interests and $2,875
million and $2,341 million of non-real estate related interests. Net
investment income from other long-term investments was $365 million, $311
million and $443 million for 1999, 1998 and 1997, respectively.
B20
<PAGE>
The Prudential Insurance Company of America
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
4. INVESTMENTS (continued)
Investment Income and Investment Gains and Losses
Net investment income arose from the following sources for the years ended
December 31:
<TABLE>
<CAPTION>
1999 1998 1997
------------- ------------ -------------
(In Millions)
<S> <C> <C> <C>
Fixed maturities - available for sale $ 5,450 $ 5,366 $ 5,074
Fixed maturities - held to maturity 1,217 1,406 1,622
Trading account assets 622 677 504
Equity securities - available for sale 63 54 52
Mortgage loans on real estate 1,401 1,525 1,555
Investment real estate 101 230 565
Policy loans 448 410 396
Securities purchased under agreements to resell 25 18 15
Broker-dealer related receivables 976 836 706
Short-term investments 642 725 697
Other investment income 354 430 535
------------- ------------ -------------
Gross investment income 11,299 11,677 11,721
Less investment expenses (1,824) (2,035) (2,027)
------------- ------------ -------------
Subtotal 9,475 9,642 9,694
Less amount relating to discontinued operations (51) (107) (212)
------------- ------------ -------------
Net investment income $ 9,424 $ 9,535 $ 9,482
============= ============ =============
</TABLE>
B21
<PAGE>
The Prudential Insurance Company of America
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
4. INVESTMENTS (continued)
Realized investment gains, net, for the years ended December 31, were from
the following sources:
<TABLE>
<CAPTION>
1999 1998 1997
--------------- --------------- ---------------
(In Millions)
<S> <C> <C> <C>
Fixed maturities $ (557) $ 1,381 $ 684
Equity securities - available for sale 223 427 363
Mortgage loans on real estate 209 22 68
Investment real estate 106 642 700
Joint ventures and limited partnerships 656 454 289
Derivatives 305 (263) 108
Other (27) 8 (3)
--------------- --------------- ---------------
Subtotal 915 2,671 2,209
Less amount related to discontinued operations 9 (30) (41)
--------------- --------------- ---------------
Realized investment gains, net $ 924 $ 2,641 $ 2,168
=============== =============== ===============
</TABLE>
The "joint ventures and limited partnerships" category includes net realized
investment gains relating to real estate joint ventures' and partnerships'
sales of their underlying invested assets, as described more fully in Note
2, "Other long-term investments," amounting to $114 million, $177 million
and $56 million in 1999, 1998 and 1997, respectively.
Based on the carrying value, assets categorized as "non-income producing"
for the year ended December 31, 1999 included in fixed maturities available
for sale, mortgage loans on real estate and other long-term investments
totaled $15 million, $25 million and $1 million, respectively.
Net Unrealized Investment Gains/Losses
Net unrealized investment gains on securities available for sale and certain
other long-term investments are included in the Consolidated Statements of
Financial Position as a component of "Accumulated other comprehensive
income." Changes in these amounts include reclassification adjustments to
avoid including in "Other comprehensive income/(loss)" those items that are
included as part of "Net income" for a period that also had been part of
"Other comprehensive income/(loss)" in earlier periods. The amounts for the
years ended December 31, are as follows:
B22
<PAGE>
The Prudential Insurance Company of America
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
4. INVESTMENTS (continued)
<TABLE>
<CAPTION>
Impact of unrealized investment gains (losses) on:
---------------------------------------------------------
Deferred
Unrealized policy Future Deferred
gains(losses) on acquisition policy income tax
investments costs benefits (liability)benefit
------------------ --------------- ---------------- ----------------------
(In Millions)
<S> <C> <C> <C> <C>
Balance, December 31, 1996 $ 2,527 $ (193) $ (573) $ (625)
Net investment gains (losses) on
investments arising during the
period 2,667 - - (961)
Reclassification adjustment for
gains included in net income (986) - - 355
Impact of net unrealized investment - (154) - 55
gains on deferred policy acquisition
costs
Impact of net unrealized investment - - (563) 203
gains on future policy benefits
------------------ --------------- ---------------- ----------------------
Balance, December 31, 1997 4,208 (347) (1,136) (973)
Net investment gains (losses) on
investments arising during the
period 804 - - (282)
Reclassification adjustment for
gains included in net income (1,675) - - 588
Impact of net unrealized investment
gains on deferred policy acquisition
costs - 98 - (36)
Impact of net unrealized investment
gains on future policy benefits - - 38 (15)
------------------ --------------- ---------------- ----------------------
Balance, December 31, 1998 3,337 (249) (1,098) (718)
Net investment gains (losses) on
investments arising during the
period (5,089) - - 1,845
Reclassification adjustment for
gains included in net income 404 - - (146)
Impact of net unrealized investment
losses on deferred policy acquisition - 566 - (213)
costs
Impact of net unrealized investment
losses on future policy benefits - - 1,095 (394)
------------------ --------------- ---------------- ----------------------
Balance, December 31, 1999 $ (1,348) $ 317 $ (3) $ 374
================== =============== ================ ======================
<CAPTION>
Accumulated
other
comprehensive
income/(loss)
related to net
unrealized
investment
gains (losses)
------------------
<S> <C>
Balance, December 31, 1996 $ 1,136
Net investment gains (losses) on
investments arising during the
period 1,706
Reclassification adjustment for
gains included in net income (631)
Impact of net unrealized investment (99)
gains on deferred policy acquisition
costs
Impact of net unrealized investment (360)
gains on future policy benefits
------------------
Balance, December 31, 1997 1,752
Net investment gains (losses) on
investments arising during the
period 522
Reclassification adjustment for
gains included in net income (1,087)
Impact of net unrealized investment
gains on deferred policy acquisition
costs 62
Impact of net unrealized investment
gains on future policy benefits 23
------------------
Balance, December 31, 1998 1,272
Net investment gains (losses) on
investments arising during the
period (3,244)
Reclassification adjustment for
gains included in net income 258
Impact of net unrealized investment
losses on deferred policy acquisition 353
costs
Impact of net unrealized investment
losses on future policy benefits 701
------------------
Balance, December 31, 1999 $ (660)
==================
</TABLE>
B23
<PAGE>
The Prudential Insurance Company of America
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
4. INVESTMENTS (continued)
The table below presents unrealized gains (losses) on investments by asset
class:
<TABLE>
<CAPTION>
As of December 31,
1999 1998 1997
------------- --------------- -------------
(In Millions)
<S> <C> <C> <C>
Fixed maturities $ (2,118) $ 3,161 $ 3,774
Equity securities 733 176 434
Other long-term investments 37 - -
------------- --------------- -------------
Unrealized gains (losses) on investments $ (1,348) $ 3,337 $ 4,208
============= =============== =============
</TABLE>
5. DEFERRED POLICY ACQUISITION COSTS
The balances of and changes in deferred policy acquisition costs as of and
for the years ended December 31, are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
--------- ---------- ----------
(In Millions)
<S> <C> <C> <C>
Balance, beginning of year $ 6,462 $ 6,083 $ 6,095
Capitalization of commissions, sales and issue
expenses 1,333 1,313 1,409
Amortization (1,155) (1,139) (1,176)
Change in unrealized investment gains 566 98 (154)
Foreign currency translation 118 107 (91)
--------- ---------- ----------
Balance, end of year $ 7,324 $ 6,462 $ 6,083
========= ========== ==========
</TABLE>
6. POLICYHOLDERS' LIABILITIES
Future policy benefits at December 31, are as follows:
1999 1998
-------- --------
(In Millions)
Life insurance $ 51,667 $ 48,981
Annuities 14,138 15,360
Other contract liabilities 2,264 2,718
-------- --------
Total future policy benefits $ 68,069 $ 67,059
======== ========
The majority of the Company's participating insurance is in its domestic
individual life insurance business. Participating insurance represented
approximately 90% of domestic individual life insurance inforce and
approximately 90% of domestic individual life insurance premiums for 1999,
1998 and 1997. Revenues and expenses of this business come directly from
the underlying policies and supporting assets.
B24
<PAGE>
The Prudential Insurance Company of America
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
6. POLICYHOLDERS' LIABILITIES (continued)
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 life contingent 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 11.5% Net level premium
guaranteed in calculating based on non-forfeiture
cash surrender values interest rate
Individual annuities 1971 and 1983 Individual 3.5% to 13.4% Present value of
Annuity Mortality expected future payments
Tables with certain based on historical
modifications experience
Group annuities 1950 and 1971 Group 3.8% to 17.3% Present value of
Annuity Mortality expected future payments
Tables with certain based on historical
modifications experience
Other contract liabilities 2.5% to 11.5% Present value of
expected future payments
based on historical
experience
</TABLE>
Premium deficiency reserves are established, if necessary, when the
liability for future policy benefits plus the present value of expected
future gross premiums are determined to be insufficient to provide for
expected future policy benefits and expenses and to recover any unamortized
acquisition costs. Premium deficiency reserves have been recorded for the
group single premium annuity business, which consists of limited-payment,
long duration, traditional and non-participating annuities, and for certain
individual health policies. Liabilities of $1,930 million and $1,844
million is included in "Future policy benefits" with respect to these
deficiencies at December 31, 1999 and 1998, respectively.
Policyholders' account balances at December 31, are as follows:
<TABLE>
<CAPTION>
1999 1998
------------ ------------
(In Millions)
<S> <C> <C>
Individual annuities $ 4,612 $ 4,997
Group annuities 2,176 2,362
Guaranteed investment contracts and guaranteed interest accounts 13,429 14,408
Interest-sensitive life contracts 3,607 3,566
Dividend accumulations and other 7,754 7,765
------------ ------------
Policyholders' account balances $ 31,578 $ 33,098
============ ============
</TABLE>
B25
<PAGE>
The Prudential Insurance Company of America
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
6. POLICYHOLDERS' LIABILITIES (continued)
Policyholders' account balances for interest-sensitive life and
investment-type contracts represent an accumulation of account deposits
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 3.0% to 11.3% 0% to 8% for up to 8 years
Group annuities 2.0% to 13.9% Contractually limited or subject
to market value adjustment
Guaranteed investment contracts and 3.9% to 15.4% Generally, subject to market value
Guaranteed interest accounts withdrawal provisions for any funds
withdrawn other than for benefit
responsive and contractual payments
Interest-sensitive life contracts 2.0% to 6.0% Various up to 10 years
Dividend accumulations and other 3.0% to 7.0% Withdrawal or surrender
contractually limited or subject
to market value adjustment
</TABLE>
B26
<PAGE>
The Prudential Insurance Company of America
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
6. POLICYHOLDERS' LIABILITIES (continued)
Unpaid claims and claim adjustment expenses. The following table provides a
reconciliation of the activity in the liability for unpaid claims and claim
adjustment expenses for property and casualty insurance, which includes the
Company's personal lines automobile and homeowner's business, as well as the
Company's wind-down commercial lines business, primarily environmental and
asbestos-related claims, and accident and health insurance at December 31:
<TABLE>
<CAPTION>
1999 1998
-------------------------------- -------------------------------
Accident Property Accident Property
and Health and Casualty and Health and Casualty
-------------- --------------- -------------- --------------
(In Millions)
<S> <C> <C> <C> <C>
Balance at January 1 $ 1,090 $ 2,716 $ 1,857 $ 2,956
Less reinsurance recoverables, net 52 533 810 535
-------------- --------------- -------------- --------------
Net balance at January 1 1,038 2,183 1,047 2,421
-------------- --------------- -------------- --------------
Incurred related to:
Current year 4,110 1,249 6,132 1,314
Prior years (72) (54) (15) (154)
-------------- --------------- -------------- --------------
Total incurred 4,038 1,195 6,117 1,160
-------------- --------------- -------------- --------------
Paid related to:
Current year 3,397 700 5,287 717
Prior years 672 720 839 681
-------------- --------------- -------------- --------------
Total paid 4,069 1,420 6,126 1,398
-------------- --------------- -------------- --------------
Disposal of healthcare business (See Note 3) (965) - - -
-------------- --------------- -------------- --------------
Net balance at December 31 42 1,958 1,038 2,183
Plus reinsurance recoverables, net 378 451 52 533
-------------- --------------- -------------- --------------
Balance at December 31 $ 420 $ 2,409 $ 1,090 $ 2,716
============== =============== ============== ==============
<CAPTION>
1997
--------------------------------
Accident Property
and Health and Casualty
-------------- ---------------
(In Millions)
<S> <C> <C>
Balance at January 1 $ 1,932 $ 3,076
Less reinsurance recoverables, net 10 553
-------------- ---------------
Net balance at January 1 1,922 2,523
-------------- ---------------
Incurred related to:
Current year 8,379 1,484
Prior years 63 (50)
-------------- ---------------
Total incurred 8,442 1,434
-------------- ---------------
Paid related to:
Current year 6,673 739
Prior years 1,842 797
-------------- ---------------
Total paid 8,515 1,536
-------------- ---------------
Disposal of healthcare business (See Note 3) - -
-------------- ---------------
Net balance at December 31 1,849 2,421
Plus reinsurance recoverables, net 8 535
-------------- ---------------
Balance at December 31 $ 1,857 $ 2,956
============== ===============
</TABLE>
The Accident and Health reinsurance recoverable balance at December 31,
1999 includes $371 million attributable to the Company's discontinued
healthcare business. The Accident and Health balance at December 31, 1998
and 1997 includes amounts attributable to the Company's discontinued
healthcare business of $1,026 million and $1,693 million, respectively.
The unpaid claims and claim adjustment expenses presented above include
estimates for liabilities associated with reported claims and for incurred
but not reported claims based, in part, on the Company's experience.
Changes in the estimated cost to settle unpaid claims are charged or
credited to the Consolidated Statement of Operations periodically as the
estimates are revised. Accident and Health unpaid claims liabilities are
discounted using interest rates ranging from 3.5% to 7.5%.
In 1999, 1998 and 1997, the amounts incurred for claims and claim
adjustment expenses for property and casualty related to prior years were
primarily driven by lower than anticipated losses for the auto line of
business.
The amounts incurred for claims and claim adjustment expense for Accident
and Health related to prior years are primarily due to factors including
changes in claim cost trends and an accelerated decline in the indemnity
health business.
B27
<PAGE>
The Prudential Insurance Company of America
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
7. REINSURANCE
The Company participates in reinsurance in order to provide additional
capacity for future growth and limit the maximum net loss potential arising
from large risks. Life reinsurance is accomplished through various plans of
reinsurance, primarily yearly renewable term and coinsurance.
Property-casualty reinsurance is placed on a pro-rata basis and excess of
loss, including stop loss, basis. Reinsurance ceded arrangements do not
discharge the Company as the primary insurer. Ceded balances would
represent a liability of the Company in the event the reinsurers were
unable to meet their obligations to the Company under the terms of the
reinsurance agreements. Reinsurance premiums, commissions, expense
reimbursements, benefits and reserves related to reinsured long-duration
contracts are accounted for over the life of the underlying reinsured
contracts using assumptions consistent with those used to account for the
underlying contracts. The cost of reinsurance related to short-duration
contracts is accounted for over the reinsurance contract period. Amounts
recoverable from reinsurers, for both short and long-duration reinsurance
arrangements, are estimated in a manner consistent with the claim
liabilities and policy benefits associated with the reinsured policies.
The tables presented below exclude amounts pertaining to the Company's
discontinued healthcare operations. See Note 3 for a discussion of the
Company's coinsurance agreement with Aetna.
Reinsurance amounts included in the Consolidated Statements of Operations
for the years ended December 31, were as follows:
1999 1998 1997
--------- --------- ---------
(In Millions)
Direct premiums $ 10,068 $ 9,637 $ 9,667
Reinsurance assumed 66 65 64
Reinsurance ceded (659) (678) (716)
--------- --------- ---------
Premiums $ 9,475 $ 9,024 $ 9,015
========= ========= =========
Policyholders' benefits ceded $ 483 $ 510 $ 530
========= ========= =========
Reinsurance recoverables, included in "Other assets" in the Company's
Consolidated Statements of Financial Position at December 31, were as
follows:
1999 1998
---------- ----------
(In Millions)
Life insurance $ 576 $ 620
Property-casualty 473 564
Other reinsurance 90 92
---------- ----------
$ 1,139 $ 1,276
========== ==========
Two major reinsurance companies account for approximately 58% of the
reinsurance recoverable at December 31, 1999. The Company periodically
reviews the financial condition of its reinsurers and amounts recoverable
therefrom in order to minimize its exposure to loss from reinsurer
insolvencies, recording an allowance when necessary for uncollectible
reinsurance.
B28
<PAGE>
The Prudential Insurance Company of America
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
8. SHORT-TERM AND LONG-TERM DEBT
Debt consists of the following at December 31:
Short-term debt
1999 1998
----------- ----------
(In Millions)
Commercial paper (b) $ 7,506 $ 7,057
Notes payable 2,598 2,164
Current portion of long-term debt 754 861
----------- ----------
Total short-term debt $ 10,858 $ 10,082
=========== ==========
The weighted average interest rate on outstanding short-term debt was
approximately 5.2% and 5.4% at December 31, 1999 and 1998, respectively.
Long-term debt
<TABLE>
<CAPTION>
Description Maturity Dates Rate 1999 1998
- ----------- ----------------------- ------------------- ------------ ------------
(In Millions)
<S> <C> <C> <C> <C>
Fixed rate notes 2000 - 2023 .50% - 12.28% $ 1,161 $ 1,480
Floating rate notes ("FRN") 2000 - 2003 (a) 865 767
Surplus notes 2003 - 2025 6.875% - 8.30% 987 987
Commercial paper backed by long-term
credit agreement (b) 2,500 1,500
------------ ------------
Total long-term debt $ 5,513 $ 4,734
============ ============
</TABLE>
(a) Floating interest rates are generally based on such rates as LIBOR, Constant
Maturity Treasury, or the Federal Funds Rate. Interest on the FRN's ranged
from 6.17% to 14.00% for 1999 and 1998, respectively. Included in the
floating rate notes are equity indexed instruments. The Company issued an
S&P 500 index linked note of $29 million in September of 1997. The interest
rate on the note is based on the appreciation of the S&P 500 index, with a
contractual cap of 14%. At December 31, 1999 and 1998, the rate was 14%.
Excluding this note, floating interest rates ranged from 6.17% to 9.54% for
1999 and 4.04% to 7.9% for 1998.
(b) At December 31, 1999 and 1998, the Company classified $2.5 billion and $1.5
billion, respectively, of its commercial paper as long-term debt. This
classification is supported by long-term syndicated credit line agreements.
The Company has the ability and intent to use these agreements, if
necessary, to refinance commercial paper on a long-term basis.
B29
<PAGE>
The Prudential Insurance Company of America
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
8. SHORT-TERM AND LONG-TERM DEBT (continued)
The following table summarizes the Company's use of the proceeds from
issuing long-term debt:
1999 1998
--------------- ----------------
(In Millions)
Corporate $ 1,782 $ 1,917
Investment related 1,121 751
Securities business related 2,610 2,066
--------------- ----------------
Total long-term debt $ 5,513 $ 4,734
=============== ================
The net proceeds from the issuance of the Company's long-term debt may be
used for general corporate purposes. This includes investing in equity and
debt securities of subsidiaries, advancing funds to its subsidiaries for
liquidity and operational purposes, and supporting liquidity of the
Company's other businesses.
Investment related long-term debt consists of debt issued to finance
specific investment assets or portfolios of investment assets including real
estate, institutional spread lending investment portfolios and real estate
related investments held in consolidated joint ventures.
Securities business related long-term debt consists of debt issued to
finance primarily the liquidity of the Company's securities business. Loans
made by the Company to its securities subsidiaries using the proceeds from
the Company's issuance of long-term debt may be made on a long-term,
short-term, or subordinated basis, depending on the particular requirements
of its securities business.
Payment of interest and principal on the surplus notes issued after 1993, of
which $688 million were outstanding at December 31, 1999 and 1998, may be
made only with the prior approval of the Commissioner of Insurance of the
State of New Jersey.
In order to modify exposure to interest rate and currency exchange rate
movements, the Company utilizes derivative instruments, primarily interest
rate swaps, in conjunction with some of its debt issues. The effect of these
derivative instruments is included in the calculation of the interest
expense on the associated debt, and as a result, the effective interest
rates on the debt may differ from the rates reflected in the tables above.
Floating rates are determined by formulas and may be subject to certain
minimum or maximum rates.
Scheduled principal repayment of long-term debt (In Millions)
2001 $ 738
2002 1,942
2003 459
2004 1,334
2005 58
2006 and thereafter 982
------------------
Total $ 5,513
==================
At December 31, 1999, the Company had $9,934 million in lines of credit
from numerous financial institutions of which $7,947 million were unused.
These lines of credit generally have terms ranging from one to five years.
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. A portion of commercial
B30
<PAGE>
The Prudential Insurance Company of America
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
8. SHORT-TERM AND LONG-TERM DEBT (continued)
paper borrowings are supported by various lines of credit referred to
above. At December 31, 1999 and 1998, the weighted average maturity of
commercial paper outstanding was 23 and 21 days, respectively.
Interest expense for short-term and long-term debt is $863 million, $920
million, and $743 million for the years ended December 31, 1999, 1998 and
1997, respectively. Securities business related interest expense of $254
million, $288 million, and $248 million in 1999, 1998 and 1997,
respectively, is included in "Net investment income."
9. EMPLOYEE BENEFIT PLANS
Pension and Other Postretirement Plans
The Company has funded non-contributory defined benefit pension plans which
cover substantially all of its employees. The Company also has several
non-funded non-contributory defined benefit plans covering certain
executives. Benefits are generally based on career average earnings and
credited length of service. The Company's funding policy is to contribute
annually an amount necessary to satisfy the Internal Revenue Service
contribution guidelines.
The Company provides certain life insurance and healthcare benefits ("Other
postretirement benefits") for its retired employees, their beneficiaries
and covered dependents. The healthcare plan is contributory; the life
insurance plan is non-contributory.
Substantially all of the Company's employees may become eligible to receive
benefits if they retire after age 55 with at least 10 years of service or
under certain circumstances after age 50 with at least 20 years of
continuous service. These benefits are funded as considered necessary by
Company management.
The Company has elected to amortize its transition obligation for other
postretirement benefits over 20 years.
Prepaid and accrued benefits costs are included in "Other assets" and
"Other liabilities," respectively, in the Company's Consolidated Statements
of Financial Position. The status of these plans as of September 30,
adjusted for fourth-quarter activity, is summarized below:
B31
<PAGE>
The Prudential Insurance Company of America
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
9. EMPLOYEE BENEFIT PLANS (continued)
<TABLE>
<CAPTION>
Other
Pension Benefits Postretirement Benefits
---------------------------------- ---------------------------------
1999 1998 1999 1998
--------------- --------------- --------------- --------------
(In Millions)
<S> <C> <C> <C> <C>
Change in benefit obligation:
Benefit obligation at the beginning of period $ (6,309) $ (5,557) $ (2,213) $ (2,128)
Service cost (193) (159) (39) (35)
Interest cost (410) (397) (141) (142)
Plan participants' contributions - - (6) (6)
Amendments (2) (58) (2) -
Actuarial gains (losses) 974 (600) 312 (31)
Contractual termination benefits (53) (30) - -
Special termination benefits (51) - (2) -
Curtailment 206 - 43 -
Benefits paid 408 485 108 128
Foreign currency changes - 7 (1) 1
--------------- --------------- --------------- --------------
Benefit obligation at end of period $ (5,430) $ (6,309) $ (1,941) $ (2,213)
=============== =============== =============== ==============
Change in plan assets:
Fair value of plan assets at beginning of period $ 8,427 $ 8,489 $ 1,422 $ 1,354
Actual return on plan assets 1,442 445 213 146
Transfer to third party (14) (4) - -
Contribution from pension plan - - - 31
Employer contributions 21 25 15 13
Plan participants' contributions - - 6 6
Withdrawal under IRS Section 420 - (36) - -
Benefits paid (408) (485) (108) (128)
Foreign currency changes - (7) - -
--------------- --------------- --------------- --------------
Fair value of plan assets at end of period $ 9,468 $ 8,427 $ 1,548 $ 1,422
=============== =============== =============== ==============
Funded status:
Funded status at end of period $ 4,038 $ 2,118 $ (393) $ (791)
Unrecognized transition (asset) liability (448) (554) 462 660
Unrecognized prior service cost 225 335 2 -
Unrecognized actuarial net (gain) (2,514) (813) (746) (353)
Effects of fourth quarter activity (3) (9) - 2
--------------- --------------- --------------- --------------
Net amount recognized $ 1,298 $ 1,077 $ (675) $ (482)
=============== =============== =============== ==============
Amounts recognized in the Statements of
Financial Position consist of:
Prepaid benefit cost $ 1,601 $ 1,348 $ - $ -
Accrued benefit liability (316) (287) (675) (482)
Intangible asset 6 7 - -
Accumulated other comprehensive income 7 9 - -
--------------- --------------- --------------- --------------
Net amount recognized $ 1,298 $ 1,077 $ (675) $ (482)
=============== =============== =============== ==============
</TABLE>
B32
<PAGE>
The Prudential Insurance Company of America
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
9. EMPLOYEE BENEFIT PLANS (continued)
The projected benefit obligations, accumulated benefit obligations and fair
value of plan assets for the pension plans with accumulated benefit
obligations in excess of plan assets were $401 million, $309 million and
$0, respectively, as of September 30, 1999 and $384 million, $284 million
and $0, respectively, as of September 30, 1998.
The effects of fourth quarter activity are summarized as follows:
<TABLE>
<CAPTION>
Other
Pension Benefits Postretirement Benefits
--------------------------------- ---------------------------------
1999 1998 1999 1998
-------------- -------------- -------------- --------------
(In Millions)
<S> <C> <C> <C> <C>
Contractual termination benefits $ (9) $ (14) $ - $ -
Employer contributions 6 5 - 2
-------------- -------------- -------------- --------------
Effects of 4th quarter activity $ (3) $ (9) $ - $ 2
============== ============== ============== ==============
</TABLE>
Pension plan assets consist primarily of equity securities, bonds, real
estate and short-term investments, of which $6,534 million and $5,926
million are included in Separate Account assets and liabilities at
September 30, 1999 and 1998, respectively.
Other postretirement plan assets consist of group and individual life
insurance policies, group life and health contracts, common stocks,
corporate debt securities, U.S. government securities and short-term
investments. During 1999 the assets of group life and health contracts were
transferred into common stocks, debt securities and short-term investments.
Plan assets include $434 million and $1,018 million of Company insurance
policies and contracts at September 30, 1999 and 1998, respectively.
The Prudential Plan was amended during the time period presented to provide
contractual termination benefits to certain plan participants whose
employment had been terminated. Costs related to these amendments are
reflected in contractual termination benefits that follow.
B33
<PAGE>
The Prudential Insurance Company of America
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
9. EMPLOYEE BENEFIT PLANS (continued)
Net periodic benefit cost included in "General and administrative expenses"
in the Company's Consolidated Statements of Operations for the years ended
December 31, includes the following components:
<TABLE>
<CAPTION>
Pension Benefits Other Postretirement Benefits
----------------------------------------------------------------------------------
1999 1998 1997 1999 1998 1997
----------- ----------- ----------- ------------ ------------ ------------
(In Millions)
<S> <C> <C> <C> <C> <C> <C>
Components of net periodic benefits
costs:
Service cost $ 193 $ 159 $ 127 $ 39 $ 35 $ 38
Interest cost 410 397 376 141 142 149
Expected return on plan assets (724) (674) (617) (121) (119) (87)
Amortization of transition amount (106) (106) (106) 47 47 50
Amortization of prior service cost 45 45 42 - - -
Amortization of actuarial net (gain) loss 4 1 - (10) (13) (13)
Special termination benefits 51 - - 2 - -
Curtailment (gain) loss (122) 5 - 108 - -
Contractual termination benefits 48 14 30 - - -
----------- ----------- ----------- ------------ ------------ ------------
Subtotal (201) (159) (148) 206 92 137
Less amounts related to discontinued operations 84 25 - (130) (34) (38)
----------- ----------- ----------- ------------ ------------ ------------
Net periodic (benefit) cost $ (117) $ (134) $ (148) $ 76 $ 58 $ 99
=========== =========== =========== ============ ============ ============
</TABLE>
Discontinued operations amounts for 1998 and 1997 were included in loss
from healthcare operations. The 1999 amounts were included in loss on
disposal of healthcare operations. See Note 3 for discussion of the
disposal of the Company's healthcare business. Discontinued operations for
pension benefits in 1999 includes $122 million of curtailment gains and $51
million of special termination benefit costs. Discontinued operations for
postretirement benefits in 1999 includes $108 million of curtailment losses
and $2 million of special termination benefit costs.
The assumptions at September 30, used by the Company to calculate the
benefit obligations as of that date and to determine the benefit cost in
the subsequent year are as follows:
<TABLE>
<CAPTION>
Pension Benefits Other Postretirement Benefits
------------------------------------- --------------------------------------------------
1999 1998 1997 1999 1998 1997
---------- ----------- ----------- --------------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Weighted-average assumptions:
Discount rate (beginning of period) 6.50% 7.25% 7.75% 6.50% 7.25% 7.75%
Discount rate (end of period) 7.75% 6.50% 7.25% 7.75% 6.50% 7.25%
Rate of increase in compensation 4.50% 4.50% 4.50% 4.50% 4.50% 4.50%
levels (beginning of period)
Rate of increase in compensation 4.50% 4.50% 4.50% 4.50% 4.50% 4.50%
levels (end of period)
Expected return on plan assets 9.50% 9.50% 9.50% 9.00% 9.00% 9.00%
Health care cost trend rates - - - 7.50 - 9.80% 7.80 - 11.00% 8.20 - 11.80%
Ultimate health care cost trend rate - - - 5.00% 5.00% 5.00%
after gradual decrease until 2006
</TABLE>
B34
<PAGE>
The Prudential Insurance Company of America
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
9. EMPLOYEE BENEFIT PLANS (continued)
Assumed health care cost trend rates have a significant effect on the
amounts reported for the health care plan. A one-percentage point increase
and decrease in assumed health care cost trend rates would have the
following effects:
Other
Postretirement Benefits
----------------------------
1999
------------
(In Millions)
One percentage point increase
Increase in total service and interest costs $ 25
Increase in postretirement benefit obligation 200
One percentage point decrease
Decrease in total service and interest costs $ 20
Decrease in postretirement benefit obligation 167
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, 1999 and 1998
was $157 million and $135 million, respectively, and is included in "Other
liabilities."
Other Employee Benefits
The Company sponsors voluntary savings plans for employees (401(k) plans).
The plans provide for salary reduction contributions by employees and
matching contributions by the Company of up to 3% of annual salary. The
matching contributions by the Company included in "General and
administrative expenses" are as follows:
<TABLE>
<CAPTION>
401(k) Company Match
---------------------------------------------------
1999 1998 1997
-------------- --------------- --------------
(In Millions)
<S> <C> <C> <C>
Company match $ 60 $ 54 $ 63
Less amounts related to discontinued operations (8) (14) (16)
-------------- --------------- --------------
401(k) Company match included in
general and administrative expenses $ 52 $ 40 $ 47
============== =============== ==============
</TABLE>
Discontinued operations amounts for 1998 and 1997 were included in loss
from healthcare operations. The 1999 amount was included in loss on
disposal of healthcare operations.
B35
<PAGE>
The Prudential Insurance Company of America
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
10. INCOME TAXES
The components of income tax expense for the years ended December 31, were
as follows:
<TABLE>
<CAPTION>
1999 1998 1997
-------------- -------------- --------------
(In Millions)
<S> <C> <C> <C>
Current tax expense (benefit):
U.S. $ 614 $ 883 $ (14)
State and local 84 54 51
Foreign (8) 148 64
-------------- -------------- --------------
Total 690 1,085 101
Deferred tax expense (benefit):
U.S. 206 (93) 269
State and local 44 (6) 4
Foreign 102 (16) 33
-------------- -------------- --------------
Total 352 (115) 306
Total income tax expense $ 1,042 $ 970 $ 407
============== ============== ==============
</TABLE>
Income from continuing operations before income taxes and extraordinary
item, for the years ended December 31, was as follows:
<TABLE>
<CAPTION>
1999 1998 1997
-------------- -------------- ---------------
(In Millions)
<S> <C> <C> <C>
Domestic $ 1,989 $ 2,384 $ 1,039
International 316 224 331
-------------- -------------- ---------------
Total income from continuing operations
before income taxes and extraordinary item $ 2,305 $ 2,608 $ 1,370
============== ============== ===============
</TABLE>
The Company's income tax expense for the years ended December 31, differs
from the amount computed by applying the expected federal income tax rate
of 35% to income from continuing operations before income taxes for the
following reasons:
<TABLE>
<CAPTION>
1999 1998 1997
-------------- -------------- --------------
(In Millions)
<S> <C> <C> <C>
Expected federal income tax expense $ 807 $ 913 $ 480
Equity tax (benefit) 190 75 (65)
State and local income taxes 83 31 37
Tax-exempt interest and dividend received (63) (46) (67)
deduction
Other 25 (3) 22
-------------- -------------- --------------
Total income tax expense $ 1,042 $ 970 $ 407
============== ============== ==============
</TABLE>
B36
<PAGE>
The Prudential Insurance Company of America
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
10. INCOME TAXES (continued)
Deferred tax assets and liabilities at December 31, resulted from the items
listed in the following table:
<TABLE>
<CAPTION>
1999 1998
------------- ------------
(In Millions)
<S> <C> <C>
Deferred tax assets
Insurance reserves $ 1,582 $ 1,807
Net unrealized investment (gains)/losses 474 (1,225)
Policyholder dividends 277 265
Net operating loss carryforwards 280 276
Litigation related reserves 61 87
Employee benefits 32 63
Other - 135
------------- ------------
Deferred tax assets before valuation allowance 2,706 1,408
Valuation allowance (24) (13)
------------- ------------
Deferred tax assets after valuation allowance 2,682 1,395
------------- ------------
Deferred tax liabilities
Deferred policy acquisition cost 1,942 1,697
Investments 284 151
Depreciation 59 64
------------- ------------
Deferred tax liabilities 2,285 1,912
------------- ------------
Net defered tax asset/(liability) $ 397 $ (517)
============= ============
</TABLE>
Management believes that based on its historical pattern of taxable income,
the Company will produce sufficient income in the future to realize its
deferred tax asset after valuation allowance. Adjustments to the valuation
allowance will be made if there is a change in management's assessment of
the amount of the deferred tax asset that is realizable. At December 31,
1999 and 1998, respectively, the Company had federal life net operating loss
carryforwards of $660 million and $540 million, which expire in 2012. At
December 31, 1999 and 1998, respectively, the Company had state operating
loss carryforwards for tax purposes approximating $570 million and $1,278
million, which expire between 2000 and 2019.
Deferred taxes are not provided on the undistributed earnings of foreign
subsidiaries (considered to be permanent investments), which at December 31,
1999 were $521 million. Determining the tax liability that would arise if
these earnings were remitted is not practical.
The Internal Revenue Service (the "Service") has completed all examinations
of the consolidated federal income tax returns through 1992. The Service has
begun their examination of the years 1993 through 1995.
B37
<PAGE>
The Prudential Insurance Company of America
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
11. STATUTORY NET INCOME AND SURPLUS
Reconciliation of Statutory Net Income and Surplus
Accounting practices used to prepare statutory financial statements for
regulatory purposes differ in certain instances from GAAP. The following
tables reconcile the Company's statutory net income and surplus as of and
for the years ended December 31, 1999, 1998, and 1997, determined in
accordance with accounting practices prescribed or permitted by the New
Jersey Department of Banking and Insurance, to net income and equity
determined using GAAP:
<TABLE>
<CAPTION>
1999 1998 1997
---------------- --------------- ----------------
(In Millions)
<S> <C> <C> <C>
Statutory net income $ 333 $ 1,247 $ 1,471
Adjustments to reconcile to net income on a GAAP basis:
Insurance revenues and expenses 136 (117) 12
Income taxes 436 128 601
Valuation of investments (27) (143) (62)
Realized investment gains 73 1,162 702
Litigation and other reserves (102) (1,150) (1,975)
Discontinued operations and other, net (36) (21) (139)
---------------- --------------- ----------------
GAAP net income $ 813 $ 1,106 $ 610
================ =============== ================
</TABLE>
<TABLE>
<CAPTION>
1999 1998
---------------- ---------------
(In Millions)
<S> <C> <C>
Statutory surplus $ 9,249 $ 8,536
Adjustments to reconcile to equity on a GAAP basis:
Deferred policy acquisition costs 7,295 6,462
Valuation of investments 2,909 8,358
Future policy benefits and policyholder account balances (1,544) (2,621)
Non-admitted assets 2,069 2,119
Income taxes 522 (576)
Surplus notes (987) (987)
Discontinued operations and other, net (222) (896)
---------------- ---------------
GAAP equity $ 19,291 $ 20,395
================ ===============
</TABLE>
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.
B38
<PAGE>
The Prudential Insurance Company of America
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
12. OPERATING LEASES (continued)
The Company occupies leased office space in many locations under various
long-term leases and has entered into numerous leases covering the long-term
use of computers and other equipment. At December 31, 1999, future minimum
lease payments under non-cancelable operating leases are, as follows:
(In Millions)
2000 $ 294
2001 265
2002 217
2003 178
2004 147
Remaining years after 2004 776
----------------
Total $ 1,877
================
Rental expense incurred for the years ended December 31, 1999, 1998 and 1997
was $278 million, $320 million and $352 million, respectively, excluding
expenses relating to the Company's healthcare business.
13. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values presented below have been determined by using
available market information and by applying valuation methodologies.
Considerable judgment is applied in interpreting data to develop the
estimates of fair value. Estimated fair values may not be realized in a
current market exchange. The use of different market assumptions and/or
estimation methodologies could have a material effect on the estimated fair
values. The following methods and assumptions were used in calculating the
estimated fair values (for all other financial instruments presented in the
table, the carrying values approximate estimated fair values).
Fixed maturities and Equity securities
Estimated fair values for fixed maturities and equity securities, other than
private placement securities, are based on quoted market prices or estimates
from independent pricing services. Generally fair values for private
placement fixed maturities are estimated using a discounted cash flow model
which considers the current market spreads between the U.S. Treasury yield
curve and corporate bond yield curve, adjusted for the type of issue, its
current credit quality and its remaining average life. The fair value of
certain non-performing private placement fixed maturities is based on
amounts estimated by management.
Mortgage loans on real estate
The estimated fair value of mortgage loans on real estate is primarily based
upon the present value of the expected future cash flows discounted at the
appropriate U.S. Treasury rate, adjusted for the current market spread for
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.
B39
<PAGE>
The Prudential Insurance Company of America
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
13. FAIR VALUE OF FINANCIAL INSTRUMENTS (continued)
Derivative financial instruments
Refer to Note 14 for the disclosure of fair values on these instruments.
Investment contracts
For guaranteed investment contracts, income annuities, and other similar
contracts without life contingencies, estimated fair values are derived
using discounted projected cash flows, based on interest rates being offered
for similar contracts with maturities consistent with those of the contracts
being valued. For individual deferred annuities and other deposit
liabilities, fair value approximates carrying value.
Debt
The estimated fair value of short-term and long-term debt is derived by
using discount rates based on the borrowing rates currently available to the
Company for debt with similar terms and remaining maturities.
B40
<PAGE>
The Prudential Insurance Company of America
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
13. FAIR VALUE OF FINANCIAL INSTRUMENTS (continued)
The following table discloses the carrying amounts and estimated fair
values of the Company's financial instruments at December 31:
<TABLE>
<CAPTION>
1999 1998
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
--------------- --------------- --------------- --------------
(In Millions)
<S> <C> <C> <C> <C>
FINANCIAL ASSETS:
Other than trading:
Fixed maturities:
Available for sale $ 74,697 $ 74,697 $ 80,158 $ 80,158
Held to maturity 14,237 14,112 16,848 17,906
Equity securities 3,264 3,264 2,759 2,759
Mortgage loans on real estate 16,268 15,826 16,016 16,785
Policy loans 7,590 7,462 7,476 8,123
Securities purchased under agreements to resell - - 1,737 1,737
Short-term investments 12,303 12,303 9,781 9,781
Mortgage securitization inventory 803 803 480 480
Cash 1,330 1,330 1,943 1,943
Restricted cash and securities 4,082 4,082 2,366 2,366
Separate Account assets 82,131 82,131 80,931 80,931
Trading:
Trading account assets $ 9,741 $ 9,741 $ 8,888 $ 8,888
Broker-dealer related receivables 11,346 11,346 10,142 10,142
Securities purchased under agreements to resell 13,944 13,944 8,515 8,515
Cash collateral for borrowed securities 7,124 7,124 5,622 5,622
FINANCIAL LIABILITIES:
Other than trading:
Investment contracts $ 25,164 $ 25,352 $ 26,246 $ 27,051
Securities sold under agreements to repurchase 4,260 4,260 7,085 7,085
Cash collateral for loaned securities 2,582 2,582 2,450 2,450
Short-term and long-term debt 16,371 16,563 14,816 15,084
Securities sold but not yet purchased - - 2,215 2,215
Separate Account liabilities 82,131 82,131 80,931 80,931
Trading:
Broker-dealer related payables $ 5,839 $ 5,839 $ 6,530 $ 6,530
Securities sold under agreements to repurchase 20,338 20,338 14,401 14,401
Cash collateral for loaned securities 8,193 8,189 4,682 4,682
Securities sold but not yet purchased 6,968 6,968 3,556 3,556
</TABLE>
B41
<PAGE>
The Prudential Insurance Company of America
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
14. DERIVATIVE AND OFF-BALANCE SHEET CREDIT-RELATED INSTRUMENTS
Interest Rate Swaps
The Company uses interest rate swaps to reduce market risks from changes in
interest rates and to manage interest rate exposures arising from mismatches
between assets and liabilities. Under interest rate swaps, the Company
agrees with other parties to exchange, at specified intervals, the
difference between fixed-rate and floating-rate interest amounts calculated
by reference to an agreed notional principal amount. Generally, no cash is
exchanged at the outset of the contract and no principal payments are made
by either party. Cash is paid or received based on the terms of the swap.
These transactions are entered into pursuant to master agreements that
provide for a single net payment to be made by one counterparty at each due
date. The fair value of swap agreements is estimated based on the present
value of future cash flows under the agreements, discounted at the
applicable zero coupon U.S. Treasury rate and swap spread.
If swap agreements meet the criteria for hedge accounting, net interest
receipts or payments are accrued and recognized over the life of the swap
agreements as an adjustment to interest income or expense of the hedged
item. Any unrealized gains or losses are not recognized until the hedged
item is sold or matures. Gains or losses on early termination of interest
rate swaps are deferred and amortized over the remaining period originally
covered by the swaps. If the criteria for hedge accounting are not met, the
swap agreements are accounted for at fair value with changes in fair value
reported in current period earnings.
Futures and Options
The Company uses exchange-traded Treasury futures and options to reduce
market risks from changes in interest rates, to alter mismatches between the
duration of assets in a portfolio and the duration of liabilities supported
by those assets, and to hedge against changes in the value of securities it
owns or anticipates acquiring. The Company enters into exchange-traded
futures and options with regulated futures commissions merchants who are
members of a trading exchange. The fair value of those futures and options
is based on market quotes.
In exchange-traded futures transactions, the Company purchases or sells
contracts, the value of which are determined by the value of designated
classes of Treasury securities, and posts variation margins on a daily basis
in an amount equal to the difference in the daily market values of those
contracts. Futures are typically used to hedge duration mismatches between
assets and liabilities by replicating Treasury performance. Treasury futures
move substantially in value as interest rates change and can be used to
either modify or hedge existing interest rate risk. This strategy protects
against the risk that cash flow requirements may necessitate liquidation of
investments at unfavorable prices resulting from increases in interest
rates. This strategy can be a more cost effective way of temporarily
reducing the Company's exposure to a market decline than selling fixed
income securities and purchasing a similar portfolio when such a decline is
believed to be over.
If futures meet hedge accounting criteria, changes in their fair value are
deferred and recognized as an adjustment to the carrying value of the hedged
item. Deferred gains or losses from the hedges for interest-bearing
financial instruments are amortized as a yield adjustment over the remaining
lives of the hedged item. Futures that do not qualify as hedges are carried
at fair value with changes in value reported in current period earnings. The
gains and losses associated with anticipatory transactions are not material.
B42
<PAGE>
The Prudential Insurance Company of America
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
14. DERIVATIVE AND OFF-BALANCE SHEET CREDIT-RELATED INSTRUMENTS (continued)
When the Company anticipates a significant decline in the stock market which
will correspondingly affect its diversified portfolio, it may purchase put
index options where the basket of securities in the index is appropriate to
provide a hedge against a decrease in the value of the Company's equity
portfolio or a portion thereof. This strategy effects an orderly sale of
hedged securities. When the Company has large cash flows which it has
allocated for investment in equity securities, it may purchase call index
options as a temporary hedge against an increase in the price of the
securities it intends to purchase. This hedge is intended to permit such
investment transactions to be executed with less adverse market impact.
Currency Derivatives
The Company uses currency derivatives, including exchange-traded currency
futures and options, currency forwards and currency swaps, to reduce market
risks from changes in currency exchange rates with respect to investments
denominated in foreign currencies that the Company either holds or intends
to acquire and to alter the currency exposures arising from mismatches
between such foreign currencies and the U.S. dollar.
Under currency forwards, the Company agrees with other parties upon delivery
of a specified amount of a specified currency at a specified future date.
Typically, the price is agreed upon at the time of the contract and payment
for such a contract is made at the specified future date. Under currency
swaps, the Company agrees with other parties to exchange, at specified
intervals, the difference between one currency and another at a forward
exchange rate and calculated by reference to an agreed principal amount.
Generally, the principal amount of each currency is exchanged at the
beginning and termination of the currency swap by each party. These
transactions are entered into pursuant to master agreements that provide for
a single net payment to be made by one counterparty for payments made in the
same currency at each due date.
If currency derivatives are effective as hedges of foreign currency
translation and transaction exposures, gains or losses are recorded in
"Accumulated other comprehensive income." If currency derivatives do not
meet hedge accounting criteria, gains or losses from those derivatives are
recognized in "Realized investment gains, net."
Forwards
The Company uses forwards to manage market risks relating to interest rates
and commodities. Additionally, in connection with the Company's investment
banking activities, the Company trades in mortgage backed securities forward
contracts. Typically, the price is agreed upon at the time of the contract
and payment for such a contract is made at the specified future date.
If the forwards are effective as hedges, gains or losses are recorded in
"Accumulated other comprehensive income." If forwards do not meet hedge
accounting criteria, gains or losses from those forwards are recognized in
current period earnings.
The tables below summarize the Company's outstanding positions by derivative
instrument types as of December 31, 1999 and 1998. 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.
B43
<PAGE>
The Prudential Insurance Company of America
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
14. DERIVATIVE AND OFF-BALANCE SHEET CREDIT-RELATED INSTRUMENTS (continued)
DERIVATIVE FINANCIAL INSTRUMENTS
December 31, 1999
(In Millions)
<TABLE>
<CAPTION>
Trading Other than Trading
------------------------------------------ ------------------------------------------
Hedge Accounting
------------------------------------------
Estimated Estimated
Notional Fair Value Notional Fair Value
------------------ ------------------- ------------------ ------------------
<S> <C> <C> <C> <C>
Swap Instruments
Interest rate
Asset $ 7,116 $ 151 $ - $ -
Liability 6,490 137 - -
Currency
Asset 24 45 343 30
Liability 77 51 369 33
Equity and commodity
Asset 8 9 - -
Liability 8 5 - -
Forward contracts
Interest rate
Asset 14,837 105 - -
Liability 12,459 84 - -
Currency
Asset 11,181 275 54 2
Liability 10,377 247 841 16
Equity and commodity
Asset 1,664 68 - -
Liability 1,592 60 - -
Futures contracts
Interest rate
Asset 2,374 2 - -
Liability 3,017 3 - -
Equity and commodity
Asset 2,283 44 - -
Liability 837 57 - -
Option contracts
Interest rate
Asset 3,725 22 - -
Liability 2,185 11 - -
Currency
Asset 613 5 - -
Liability 4,439 5 - -
Equity and commodity
Asset 340 6 - -
Liability 366 3 - -
------------------ ------------------- ------------------ ------------------
Total Derivatives:
Assets $ 44,165 $ 732 $ 397 $ 32
================== =================== ================== ==================
Liabilities $ 41,847 $ 663 $ 1,210 $ 49
================== =================== ================== ==================
<CAPTION>
Other than Trading Total
------------------------------------------ ------------------------------------------
Non-Hedge Accounting
------------------------------------------
Estimated Estimated
Notional Fair Value Notional Fair Value
------------------- ------------------ ------------------ -------------------
<S> <C> <C> <C> <C>
Swap Instruments
Interest rate
Asset $ 2,185 $ 146 $ 9,301 $ 297
Liability 1,261 32 7,751 169
Currency
Asset - - 367 75
Liability - - 446 84
Equity and commodity
Asset 47 13 55 22
Liability - - 8 5
Forward contracts
Interest rate
Asset - - 14,837 105
Liability - - 12,459 84
Currency
Asset 1,182 16 12,417 293
Liability 1,347 21 12,565 284
Equity and commodity
Asset - - 1,664 68
Liability - - 1,592 60
Futures contracts
Interest rate
Asset 800 14 3,174 16
Liability 3,696 44 6,713 47
Equity and commodity
Asset 71 4 2,354 48
Liability 12 11 849 68
Option contracts
Interest rate
Asset - - 3,725 22
Liability 13 - 2,198 11
Currency
Asset 10 - 623 5
Liability 10 - 4,449 5
Equity and commodity
Asset - - 340 6
Liability - - 366 3
------------------- ------------------ ------------------ -------------------
Total Derivatives:
Assets $ 4,295 $ 193 $ 48,857 $ 957
=================== ================== ================== ===================
Liabilities $ 6,339 $ 108 $ 49,396 $ 820
=================== ================== ================== ===================
</TABLE>
B44
<PAGE>
The Prudential Insurance Company of America
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
14. DERIVATIVE AND OFF-BALANCE SHEET CREDIT-RELATED INSTRUMENTS (continued)
DERIVATIVE FINANCIAL INSTRUMENTS
December 31, 1998
(In Millions)
<TABLE>
<CAPTION>
Trading Other than Trading
------------------------------------------ ------------------------------------------
Hedge Accounting
------------------------------------------
Estimated Estimated
Notional Fair Value Notional Fair Value
------------------ ------------------- ------------------ ------------------
<S> <C> <C> <C> <C>
Swap Instruments
Interest rate
Asset $ 4,145 $ 204 $ - $ -
Liability 4,571 192 - -
Currency
Asset 372 91 229 16
Liability 263 84 464 46
Equity and commodity
Asset 47 14 - -
Liability - - - -
Forward contracts
Interest rate
Asset 31,568 72 - -
Liability 24,204 56 - -
Currency
Asset 12,879 198 60 1
Liability 13,594 221 573 11
Equity and commodity
Asset 1,204 12 - -
Liability 1,355 3 - -
Futures contracts
Interest rate
Asset 2,429 10 - -
Liability 3,147 3 - -
Equity and commodity
Asset 843 51 - -
Liability 1,224 44 - -
Option contracts
Interest rate
Asset 2,500 10 - -
Liability 1,451 8 - -
Currency
Asset 4,882 101 - -
Liability 4,151 112 - -
Equity and commodity
Asset 928 2 - -
Liability 901 4 - -
------------------ ------------------- ------------------ ------------------
Total Derivatives:
Assets $ 61,797 $ 765 $ 289 $ 17
================== =================== ================== ==================
Liabilities $ 54,861 $ 727 $ 1,037 $ 57
================== =================== ================== ==================
<CAPTION>
Other than Trading Total
------------------------------------------ ------------------------------------------
Non-Hedge Accounting
------------------------------------------
Estimated Estimated
Notional Fair Value Notional Fair Value
------------------- ------------------ ------------------ -------------------
<S> <C> <C> <C> <C>
Swap Instruments
Interest rate
Asset $ 1,949 $ 73 $ 6,094 $ 277
Liability 2,501 301 7,072 493
Currency
Asset - - 601 107
Liability - - 727 130
Equity and commodity
Asset 22 7 69 21
Liability - - - -
Forward contracts
Interest rate
Asset - - 31,568 72
Liability - - 24,204 56
Currency
Asset 942 13 13,881 212
Liability 1,466 26 15,633 258
Equity and commodity
Asset 2 - 1,206 12
Liability - - 1,355 3
Futures contracts
Interest rate
Asset 1,762 22 4,191 32
Liability 478 4 3,625 7
Equity and commodity
Asset 24 1 867 52
Liability 53 1 1,277 45
Option contracts
Interest rate
Asset 130 2 2,630 12
Liability 98 - 1,549 8
Currency
Asset - - 4,882 101
Liability - - 4,151 112
Equity and commodity
Asset - - 928 2
Liability - - 901 4
------------------- ------------------ ------------------ -------------------
Total Derivatives:
Assets $ 4,831 $ 118 $ 66,917 $ 900
=================== ================== ================== ===================
Liabilities $ 4,596 $ 332 $ 60,494 $ 1,116
=================== ================== ================== ===================
</TABLE>
B45
<PAGE>
The Prudential Insurance Company of America
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
14. DERIVATIVE AND OFF-BALANCE SHEET CREDIT-RELATED INSTRUMENTS (continued)
The following table discloses net trading revenues by derivative instrument
types as of December 31:
1999 1998 1997
-------- -------- --------
(In Millions)
Forwards $ 53 $ 67 $ 59
Futures 80 (5) 37
Swaps 16 (13) (13)
Options (14) - -
-------- -------- --------
Net trading revenues $ 135 $ 49 $ 83
======== ======== ========
Average fair values for trading derivatives in an asset position during the
years ended December 31, 1999 and 1998 were $789 million and $922 million,
respectively, and for derivatives in a liability position were $766 million
and $905 million, respectively. The average fair values do not reflect the
netting of amounts pursuant to the right of offset or qualifying master
netting agreements. Of those derivatives held for trading purposes at
December 31, 1999, 61% of the notional amount consisted of interest rate
derivatives, 33% consisted of foreign currency derivatives and 6% consisted
of equity and commodity derivatives. Of those derivatives held for purposes
other than trading at December 31, 1999, 65% of notional consisted of
interest rate derivatives, 34% consisted of foreign currency derivatives,
and 1% consisted of equity and commodity derivatives.
Credit Risk
The credit exposure of the Company's derivative contracts is limited to the
fair value at the reporting date. Credit risk is managed by entering into
transactions with creditworthy counterparties and obtaining collateral where
appropriate and customary. The Company also attempts to minimize its
exposure to credit risk through the use of various credit monitoring
techniques. At December 31, 1999 and 1998, approximately 81% and 95%,
respectively, of the net credit exposure for the Company from derivative
contracts is with investment-grade counterparties.
Off-Balance Sheet Credit-Related Instruments
During the normal course of its business, the Company utilizes financial
instruments with off-balance sheet credit risk such as commitments,
financial guarantees, loans sold with recourse and letters of credit.
Commitments include commitments to purchase and sell mortgage loans, the
underfunded portion of commitments to fund investments in private placement
securities and unused credit card and home equity lines.
In connection with the Company's consumer banking business, loan commitment
for credit cards and home equity lines of credit and other lines of credit
include agreements to lend up to specified limits to customers. It is
anticipated that commitment amounts will only be partially drawn down based
on overall customer usage patterns, and, therefore, do not necessarily
represent future cash requirements. The Company evaluates each credit
decision on such commitments at least annually and has the ability to cancel
or suspend such lines at its option. The total available lines of credit
card, home equity and other commitments were $2.7 billion, of which $2.0
billion remains available at December 31, 1999.
Also, in connection with the Company's investment banking activities, the
Company enters into agreements with mortgage originators and others to
provide financing on both a secured and an unsecured basis. Aggregate
financing commitments on a secured basis, for periods of less than one year,
approximate $4.9 billion, of which $2.73 billion remains available at
December 31, 1999. Unsecured commitments approximate $528 million, of which
$334 million remains available at December 3l, 1999.
B46
<PAGE>
The Prudential Insurance Company of America
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
14. DERIVATIVE AND OFF-BALANCE SHEET CREDIT-RELATED INSTRUMENTS (continued)
Other commitments primarily include commitments to purchase and sell
mortgage loans and the unfunded portion of commitments to fund investments
in private placement securities. These mortgage loans and private
commitments were $2.9 billion, of which $1.9 billion remain available at
December 31, 1999. Additionally, mortgage loans sold with recourse were $0.1
billion at December 31, 1999.
The Company also provides financial guarantees incidental to other
transactions and letters of credit that guarantee the performance of
customers to third parties. These credit-related financial instruments have
off-balance sheet credit risk because only their origination fees, if any,
and accruals for probable losses, if any, are recognized until the
obligation under the instrument is fulfilled or expires. These instruments
can extend for several years and expirations are not concentrated in any
period. The Company seeks to control credit risk associated with these
instruments by limiting credit, maintaining collateral where customary and
appropriate and performing other monitoring procedures. At December 31, 1999
these were immaterial.
15. CONTINGENCIES AND LITIGATION
Stop-Loss Reinsurance and Stop-Loss Indemnification Agreements
On February 24, 2000, the Company entered into an agreement to sell 100% of
the capital stock of its subsidiary, Gibraltar Casualty Company
("Gibraltar") to Everest Reinsurance Holdings, Inc. (now known as Everest Re
Group, Ltd.) ("Everest"). The transaction is expected to be completed in the
second quarter of 2000, subject to approval by state regulators and other
customary closing conditions. Proceeds from the sale will consist of
approximately $52 million in cash, which approximated the book value of
Gibraltar at December 31, 1999. In connection with the sale, the Company
will provide a stop-loss indemnification agreement covering 80% of the first
$200 million of any adverse loss development in excess of Gibraltar's
carried reserves as of the closing date of the transaction, resulting in a
maximum potential exposure to the Company of $160 million. In connection
with the Company's 1995 sale of what is now Everest, Gibraltar had entered
into a stop-loss reinsurance agreement with Everest whereby Gibraltar
reinsured up to $375 million of the first $400 million of aggregate adverse
loss development, on an incurred basis, with respect to reserves recorded by
Everest as of June 30, 1995. Upon the expected completion of the
aforementioned sale of Gibraltar, the Company will no longer be subject to
exposure under the 1995 stop-loss agreement. Management believes that based
on currently available information and established reserves, the ultimate
settlement of claims under either the 1995 stop-loss agreement or the
stop-loss indemnification agreement should not have a material adverse
effect on the Company's financial position.
Environmental and Asbestos-Related Claims
Certain of the Company's subsidiaries are subject to claims under expired
contracts that assert alleged injuries and/or damages relating to or
resulting from toxic torts, toxic waste and other hazardous substances. The
liabilities for these claims cannot be reasonably estimated using
traditional reserving techniques. The predominant source of such exposure
for the Company is Gibraltar, which, as discussed above, is expected to be
sold in the second quarter of 2000. The liabilities recorded for
environmental and asbestos-related claims, net of reinsurance recoverables,
of $342 million ($321 million for Gibraltar) and $239 million ($217 million
for Gibraltar) at December 31, 1999 and 1998, respectively, reflect the
Company's best estimate of ultimate claims and claim adjustment expenses
based upon known facts and current law. However, as a result of judicial
decisions and legislative actions, the coverage afforded under these
contracts may be expanded beyond their original terms. Given the expansion
of coverage and liability by the courts and legislatures in the past, and
the potential for other unfavorable trends in the future, the ultimate cost
of these claims could increase from the levels currently established.
Because of these uncertainties, these additional amounts, or a range of
these additional amounts, cannot be reasonably estimated, and could result
in a liability exceeding recorded liabilities by an amount that could be
material to the Company's results of operations in a future quarterly or
annual period. The Company's residual exposure pertaining to Gibraltar upon
completion of the expected sale, pursuant to a
B47
<PAGE>
The Prudential Insurance Company of America
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
15. CONTINGENCIES AND LITIGATION (continued)
stop-loss indemnification agreement, is discussed above. Management believes
that these claims should not have a material adverse effect on the Company's
financial position.
Managed Care Reimbursement
The Company has reviewed its obligations retained in the sale of the
healthcare operations under certain managed care arrangements for possible
failure to comply with contractual and regulatory requirements. It is the
opinion of management that adequate reserves have been established to
provide for appropriate reimbursements to customers.
Litigation
The Company is subject to legal and regulatory actions in the ordinary
course of its businesses, including class actions. Pending legal and
regulatory actions include proceedings specific to the Company's practices
and proceedings generally applicable to business practices in the industries
in which the Company operates. In certain of these matters, large and/or
indeterminate amounts are sought, including punitive or exemplary damages.
In particular, the Company has been subject to substantial regulatory
actions and civil litigation involving individual life insurance sales
practices. In 1996, the Company entered into settlement agreements with
relevant insurance regulatory authorities and plaintiffs in the principal
life insurance sales practices class action lawsuit covering policyholders
of individual permanent life insurance policies issued in the United States
from 1982 to 1995. Pursuant to the settlements, the Company agreed to
various changes to its sales and business practices controls and a series of
fines, and is in the process of distributing final remediation relief to
eligible class members. In many instances, claimants have the right to
"appeal" the Company's decision to an independent reviewer. The bulk of such
appeals were resolved in 1999, and the balance is expected to be addressed
in 2000. As of January 31, 2000, the Company remained a party to two
putative class actions and approximately 158 individual actions relating to
permanent life insurance policies the Company issued in the United States
between 1982 and 1995. Additional suits may be filed by individuals who
opted out of the settlements. While the approval of the class action
settlement is now final, the Company remains subject to oversight and review
by insurance regulators and other regulatory authorities with respect to its
sales practices and the conduct of the remediation program. The U.S.
District Court has also retained jurisdiction as to all matters relating to
the administration, consummation, enforcement and interpretation of the
settlements. In November 1999, upon the joint application of the Company and
class counsel, the Court ordered an investigation into certain allegations
of improprieties in the administration and implementation of the remediation
program at the Company's Plymouth, Minnesota facility. Class counsel is
expected to submit a summary of its findings pursuant to the investigation
to the Court in mid-April 2000.
In 1999, 1998, 1997 and 1996, the Company recorded provisions in its
Consolidated Statements of Operations of $100 million, $1,150 million,
$2,030 million and $1,125 million, respectively, to provide for estimated
remediation costs, and additional sales practices costs including related
administrative costs, regulatory fines, penalties and related payments,
litigation costs and settlements, including settlements associated with the
resolution of claims of deceptive sales practices asserted by policyholders
who elected to "opt-out" of the class action settlement and litigate their
claims against the Company separately, and other fees and expenses
associated with the resolution of sales practices issues.
B48
<PAGE>
The Prudential Insurance Company of America
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
15. CONTINGENCIES AND LITIGATION (continued)
The following table summarizes the Company's charges for the estimated total
costs of sales practices remedies and additional sales practices costs and
the related liability balances as of the dates indicated:
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------
1999 1998 1997 1996
---------------------------------------------
(In Millions)
<S> <C> <C> <C> <C>
Liability balance at beginning of period $ 3,058 $ 2,553 $ 963 $ -
Charges to expense:
Remedy costs (99) 510 1,640 410
Additional sales practices costs 199 640 390 715
--------- --------- --------- ---------
Total charges to expense 100 1,150 2,030 1,125
Amounts paid or credited:
Remedy costs 1,708 147 - -
Additional sales practices costs 559 498 440 162
--------- --------- --------- ---------
Total amounts paid or credited 2,267 645 440 162
Liability balance at end of period $ 891 $ 3,058 $ 2,553 $ 963
========= ========= ========= =========
</TABLE>
In 1996, the Company recorded in its Consolidated Statements of Operations
the cost of $410 million before taxes as a guaranteed minimum remediation
expense pursuant to the settlement agreement. Management had no better
information available at that time upon which to make a reasonable estimate
of the losses associated with the settlement. Charges were also recorded in
1996 for estimated additional sales practices costs totaling $715 million
before taxes.
In 1997, management increased the estimated liability for the costs of
remedying policyholder claims by $1,640 million before taxes. This increase
was based on additional information derived from claim sampling techniques,
the terms of the settlement and the number of claim forms received. The
Company also recorded additional charges of $390 million to recognize the
increase in estimated total additional sales practices costs.
In 1998, the Company recorded an additional charge of $510 million before
taxes to recognize the increase of the estimated total cost of remedying
policyholder claims to a total of $2,560 million before taxes. This increase
was based on (i) estimates derived from an analysis of claims actually
remedied (including interest); (ii) a sample of claims still to be remedied;
(iii) an estimate of additional liabilities associated with a claimant's
right to "appeal" the Company's decision; and (iv) an estimate of an
additional liability associated with the results of an investigation by a
court-appointed independent expert regarding the impact of the Company's
failure to properly implement procedures to preserve all documents relevant
to the class action and remediation program. The Company also recorded
additional charges of $640 million before taxes to recognize the increase in
estimated total additional sales practices costs.
In 1999, as a result of a decrease in the estimated cost of remedying
policyholder claims, the Company recorded a credit of $99 million before
taxes to reduce its liability relative to remedy costs. The revised estimate
was based on additional information derived from claims actually remedied
and an evaluation of remaining obligations taking into consideration
experience in 1999. The Company also recorded a charge of $199 million
before taxes to recognize an increase in estimated total additional sales
practices costs based on additional information obtained in 1999.
B49
<PAGE>
The Prudential Insurance Company of America
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
15. CONTINGENCIES AND LITIGATION (continued)
The Company's litigation is subject to many uncertainties, and given their
complexity and scope, the outcomes cannot be predicted. It is possible that
the results of operations or the cash flow of the Company, in a particular
quarterly or annual period, could be materially affected by an ultimate
unfavorable outcome of pending litigation and regulatory matters depending,
in part, upon the results of operation or cash flow for such period.
Management believes, however, that the ultimate resolution of all pending
litigation and regulatory matters, after consideration of applicable
reserves, should not have a material adverse effect on the Company's
financial position.
******
B50
<PAGE>
Report of Independent Accountants
---------------------------------
To the Board of Directors and Policyholders of
The Prudential Insurance Company of America
In our opinion, the accompanying consolidated statements of financial position
and the related consolidated statements of operations, of changes in equity and
of cash flows present fairly, in all material respects, the financial position
of The Prudential Insurance Company of America and its subsidiaries at December
31, 1999 and 1998, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 1999, in conformity
with accounting principles generally accepted in the United States. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States, 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.
PricewaterhouseCoopers LLP
New York, New York
March 21, 2000
B51
B-1
<PAGE>
PART C
OTHER INFORMATION
Item 24. Financial statements and Exhibits
(a) The following financial statements are included in Part B:
Financial Statements of Registrant for the fiscal year ended
December 31, 1999
Financial Statement of Depositor - The Prudential Insurance
Company of America
(b) Exhibits
1. Resolution adopted by the Board of Directors of The
Prudential Insurance Company of America on February
11, 1997 establishing the Prudential Discovery
Select Group Variable Contract Account (the
"Discovery Account"). (Note 2)
2. Not applicable.
3(a). Distribution Agreement. (Note 4)
3(b). Broker-dealer sales agreement. (Note 2)
4(a). Form of Group Annuity Contract offered by The
Prudential Insurance Company of America (FL). (Note
2)
4(b). Form of Group Annuity Contract offered to small 401
plans by The Prudential Insurance Company of
America. (PA) (Note 4)
4(c) Form of Group Annuity Contract offered by the
Prudential Insurance Company of America (NJ). (Note
8)
5(a). Not applicable.
5(b). Form of Participant enrollment form (including
acknowledgment of restrictions on redemption imposed
by I.R.C. Section 403(b)). (Note 2)
6(a). Charter of The Prudential Insurance Company of
America, as amended November 14, 1995. (Note 5)
6(b). By-Laws of The Prudential Insurance Company of
America, as amended May 12, 1998. (Note 7)
7. Not applicable.
8(a). Participation Agreement between The Prudential
Insurance Company of America and AIM Variable
Insurance Funds, Inc. (Note 2)
8(b). Participation Agreement between The Prudential
Insurance Company of America and T. Rowe Price
Equity Series, Inc. (Note 2)
8(c). Participation Agreement between The Prudential
Insurance Company of America and Janus Aspen Series.
(Note 2)
8(c)(i). Form of Amendment to Participation Agreement between
The Prudential Insurance Company of America and
Janus Aspen Series. (Note 8)
8(d). Participation Agreement between The Prudential
Insurance Company of America and MFS Variable
Insurance Trust. (Note 2)
8(e). Participation Agreement between The Prudential
Insurance Company of America and OCC Accumulation
Trust. (Note 2)
8(f). Participation Agreement between The Prudential
Insurance Company of America and Warburg Pincus
Trust. (Note 2)
8(g). Retirement Plan Services Outsourcing Agreement
between The Prudential Insurance Company of America
and BISYS Plan Services, L.P. (Note 4)
C-1
<PAGE>
9. Consent and opinion of C. Christopher Sprague,
Assistant General Counsel, The Prudential Insurance
Company of America, as to the legality of the
securities being registered.
10(a). Consent of PricewaterhouseCoopers LLP, Independent
Accountants.
10(b). Consent of Shea & Gardner.
10(c). Powers of Attorney for Franklin Agnew, Frederick
Becker, James Cullen, Carolyne Davis, Roger Enrico,
Allan Gilmour, William Gray, Jon Hanson, Glen Hiner,
Constance Horner, Gaynor Kelley, Burton Malkiel,
Arthur Ryan, Ida Schmertz, Charles Sitter, Donald
Staheli, Richard Thomson, James Unruh, P. Roy
Vagelos, Stanley Van Ness, Paul Volcker, Joseph
Williams. (Note 5)
Richard Carbone. (Note 3)
Gilbert F. Casellas, (Note 7)
Anthony S. Piszel (Note 8)
11. Not applicable.
12. Not applicable.
13. Schedule for Computation of Performance
Calculations.
- ----------
(Note 1) Filed herewith.
(Note 2) Incorporated by reference to Pre-Effective Amendment No. 1 to this
Registration Statement, filed June 17, 1997.
(Note 3) Incorporated by reference to Post-Effective Amendment No. 1 to this
Registration Statement, filed April 27, 1998.
(Note 4) Incorporated by reference to Post-Effective Amendment No. 2 to this
Registration Statement, filed August 19, 1998.
(Note 5) Incorporated by reference to Post-Effective Amendment No. 9 to Form
S-1, Registration No. 33-20083, filed April 9, 1998 on behalf of The
Prudential Variable Contract Real Property Account.
(Note 6) Incorporated by reference to Post-Effective Amendment No. 10 to Form
S-1, Registration No. 33-20083, filed April 9, 1997 on behalf of The
Prudential Variable Contract Real Property Account.
(Note 7) Incorporated by reference to Form S-6, Registration No. 333-64957,
filed September 30, 1998 on behalf of The Prudential Variable
Appreciable Account.
(Note 8) Incorporated by reference to Post-Effective Amendment No. 4 to this
Registration Statement, filed February 23, 1999.
Item 25. Directors and Officers of the Depositor
Information about the Directors and Executive Officers of Prudential,
Registrant's depositor, appears under the heading of "Directors and Officers of
Prudential" in the Statement of Additional information (Part B of this
Registration Statement).
Item 26. Persons Controlled by or Under Common Control with the Depositor or
Registrant
Registrant is a separate account of The Prudential Insurance Company of America,
a mutual life insurance company organized under the laws of the State of New
Jersey. The subsidiaries of Prudential and short descriptions of each are listed
under Item 25 to Post-Effective Amendment No. 37 to the Form N-1A Registration
Statement for The Prudential Series Fund, Inc., Registration No. 2-80896, filed
April __, 2000, the text of which is hereby incorporated.
In addition to the subsidiaries shown on the Organization Chart, Prudential
holds all of the voting securities of Prudential's Gibraltar Fund, Inc., a
Maryland corporation, in three of its separate accounts. Prudential also holds
directly and in three of its separate accounts, shares of The Prudential Series
Fund, Inc., a Maryland corporation. The balance of the shares of The Prudential
Series Fund, Inc. are held in separate accounts of Pruco Life Insurance Company
and Pruco Life Insurance Company of New Jersey, wholly-owned subsidiaries of
Prudential. All of the separate accounts referred to above are unit investment
trusts registered under the Investment Company Act of 1940. Prudential's
Gibraltar Fund, Inc. and The Prudential Series Fund, Inc. are registered as
open-end, diversified management investment companies under the Investment
Company Act of 1940. The shares of these investment companies are voted in
C-2
<PAGE>
accordance with the instructions of persons having interests in the unit
investment trusts, and Prudential, Pruco Life Insurance Company and Pruco Life
Insurance Company of New Jersey vote the shares they hold directly in the same
manner that they vote the shares that they hold in their separate accounts.
Registrant may also be deemed to be under common control with The Prudential
Variable Contract Account-2, The Prudential Variable Contract Account-10, and
The Prudential Variable Contract Account-11, separate accounts of Prudential
registered as open-end, diversified management investment companies under the
Investment Company Act of 1940.
Prudential is a mutual insurance company. Its financial statements have been
prepared in conformity with generally accepted accounting principles, which
include statutory accounting practices prescribed or permitted by state
regulatory authorities for insurance companies.
Item 27. Number of Contractholders
As of February 28, 2000 there were 361 Contractholders of qualified Contracts
offered by the Registrant, and 2 Contractholders of non-qualified Contracts
offered by the Registrant.
Item 28. Indemnification
The Registrant, in conjunction with certain affiliates, maintains insurance on
behalf of any person who is or was a trustee, director, officer, employee, or
agent of the Registrant, or who is or was serving at the request of the
Registrant as a trustee, director, officer, employee or agent of such other
affiliated trust or corporation, against any liability asserted against and
incurred by him or her arising out of his or her position with such trust or
corporation.
New Jersey, being the state of organization of The Prudential Insurance Company
of America ("Prudential"), permits entities organized under its jurisdiction to
indemnify directors and officers with certain limitations. The relevant
provisions of New Jersey law permitting indemnification can be found in Section
14A:3-5 of the New Jersey Statutes Annotated. The text of Prudential's By-law
27, which relates to indemnification of officers and directors, is incorporated
by reference to Exhibit (8)(ii) of Post-Effective Amendment No. 12 to Form N-4,
Registration No. 33-25434, filed April 30, 1997, on behalf of the Prudential
Variable Contract Account.
Insofar as indemnification for liability arising under the Securities Act of
1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
of 1933 and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer, or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act of 1933 and will be governed by the final adjudication of such issue.
Item 29. Principal Underwriter
(a) Prudential Investment Management Services LLC (PIMS) is the
distributor for the following open-end management companies: Cash
Accumulation Trust, COMMAND Money Fund, COMMAND Government Fund,
COMMAND Tax-Free Fund, Global Utility Fund, Inc.,
Nicholas-Applegate Fund, Inc. (Nicholas-Applegate Growth Equity
Fund), Prudential Balanced Fund, Prudential California Municipal
Fund, Prudential Diversified Bond Fund, Inc., Prudential
Diversified Funds, Prudential Emerging Growth Fund, Inc.,
Prudential Equity Fund, Inc., Prudential Equity Income Fund,
Prudential Europe Growth Fund, Inc., Prudential Global Genesis
Fund, Inc., Prudential Global Total Return Fund, Inc., Prudential
Government Income Fund, Inc., Prudential Government Securities
Trust, Prudential High Yield Fund, Inc., Prudential High Yield
Total Return Fund, Inc., Prudential Index Series Fund, Prudential
Institutional Liquidity Portfolio, Inc., Prudential International
Bond Fund, Inc., Prudential Mid-Cap Value Fund, Prudential
MoneyMart Assets, Inc., Prudential Municipal Bond Fund,
Prudential Municipal Series Fund, Prudential National Municipals
Fund, Inc., Prudential Natural Resources Fund, Inc., Prudential
Pacific Growth Fund, Inc., Prudential Real Estate Securities
Fund, Prudential Sector Funds, Inc., Prudential Small-Cap Quantum
Fund, Inc., Prudential Small Company Value Fund, Inc., Prudential
Special Money Market Fund, Inc., Prudential Structured Maturity
Fund, Inc., Prudential Tax-Free Money Fund, Inc., Prudential
Tax-Managed Funds, Prudential 20/20 Focus Fund, Prudential World
Fund, Inc., The Prudential Investment Portfolios, Inc., Strategic
Partners Series, Target Funds and The Target Portfolio Trust.
PIMS is also distributor of the following unit investment trusts:
Separate Accounts: Prudential's Gilbraltar Fund, Inc., The
Prudential Variable Contract Account-2, The Prudential Variable
Contract Account-10, The Prudential Variable Contract Account-11,
The Prudential Variable Contract Account-24, The Prudential
Variable Contract GI-2, The Prudential Discovery Select Group
Variable Contract Account, The Pruco Life Flexible Premium
Variable Annuity Account, The Pruco Life of New Jersey Flexible
Premium Variable Annuity Account, The Prudential Individual
Variable Contract Account and The Prudential Qualified Individual
Variable Contract Account.
(b)(1) The following table sets forth certain information regarding
the officers and directors of PIMS:
NAME AND PRINCIPAL POSITIONS AND OFFICES
BUSINESS ADDRESS WITH UNDERWRITER
------------------------ ---------------------------------
Robert F. Gunia President
C. Edward Chaplin Treasurer
Kevin B. Frawley Senior Vice President and Chief
Compliance Officer
Francis O. Odubekun Senior Vice President and
Chief Operations Officer
Jean D. Hamilton Executive Vice President
C-3
<PAGE>
Carl L. McGuire Vice President
John R. Strangfeld Executive Vice President
William V. Healey Senior Vice President, Secretary
and Chief Legal Officer
Margaret M. Deverell Senior Vice President, Comptroller
and Chief Financial Officer
------------------
The principal business address for the directors and
officers, with the exception of Carl L. McGuire, is 751 Broad
Street, Newark, NJ 07102. The principal business address for
Carl L. McGuire is: c/o Prudential Investments, 30 Scranton
Office Park, Scranton, PA 18307
<TABLE>
<CAPTION>
(c)
NAME OF NET UNDERWRITING
PRINCIPAL DISCOUNTS AND COMPENSATION BROKERAGE
UNDERWRITER COMMISSIONS ON REDEMPTION COMMISSIONS
------------------------- ---------------- ------------- -----------
<S> <C> <C> <C>
Prudential Investment $ $ $
Management Services, LLC -0- -0- 573,984
</TABLE>
Item 30. Location of Accounts and Records
The names and addresses of the persons who maintain physical possession of the
accounts, books and documents required to be maintained by Section 31(a) of the
Investment Company Act of 1940 and the rules thereunder are:
The Prudential Insurance Company of America
and The Prudential Investment Corporation
751 Broad Street
Newark, New Jersey 07102-3777
The Prudential Insurance Company of America
and The Prudential Investment Corporation
Gateway Buildings Two, Three and Four
100 Mulberry Street
Newark, New Jersey 07102
The Prudential Insurance Company of America and
The Prudential Investment Corporation
56 North Livingston Avenue
Roseland, New Jersey 07088
The Prudential Insurance Company of America
c/o Prudential Investments
30 Scranton Office Park
Scranton, Pennsylvania 18507-1789
C-4
<PAGE>
The Prudential Insurance Company of America
c/o The Prudential Asset Management Company, Inc.
71 Hanover Road
Florham Park, New Jersey 07932
Investors Fiduciary Trust Company
127 West 10th Street
Kansas City, Missouri 64105
BISYS Plan Services, L. P.
323 Norristown Road
Ambler, PA 19002
Item 31. Management Services
Summary of Retirement Plan Services Outsourcing Agreement
Included as an exhibit to this registration statement is an agreement (the
"Agreement") dated August 6, 1998 between The Prudential Insurance Company of
America ("Prudential") and BISYS Plan Services, L. P. ("BISYS"). Pursuant to the
Agreement, Prudential has delegated to BISYS certain recordkeeping and
administrative services to be performed on behalf of certain defined
contribution pension plans (the "Plans") that qualify or intend to qualify under
Section 401(k) and/or Section 401(a) of the Internal Revenue Code of 1986, as
amended. In addition to the recordkeeping and administrative services, BISYS is
obligated under the Agreement to arrange for the provision to the Plans of
certain trust and accounting services and certain order placement, processing
and related services. Schedule F of the Agreement describes the specific
services that BISYS will provide with respect to the Discovery Select Group
Retirement Annuity. These services include, among others: (a) providing
participant-level recordkeeping, (b) administering certain features of the
annuity, and (c) transmitting participant purchase orders.
The Plans to which BISYS will provide these services are small defined
contribution plans with which Prudential has entered into an administrative
services agreement. Typically, these Plans will share the following
characteristics, among others: (a) less than $1 million in anticipated Plan
assets, (b) fewer than 100 eligible employees, and (c) $3,000 minimum average
annual cash flow per participant (for a start-up Plan).
Under the Agreement, BISYS collects from the Plans a variety of fees and charges
(the "Fees") on Prudential's behalf, and is entitled to keep such Fees as
payment in full for BISYS's satisfactory performance of its services and
obligations under the Agreement. These Fees include, among others: (a) an annual
fee of $2,000 per Plan, (b) an annual fee per Plan participant of either $14 or
$28, and (c) an installation charge for each startup Plan of $1,500.
The initial term of the Agreement is two years from the Agreement's "effective
date." The Agreement is automatically extended for successive two year terms
unless, at least 180 days prior to the end of such initial or subsequent term,
BISYS gives Prudential notice that such term will not be extended.
Item 32. Undertakings
The Registrant hereby undertakes:
(a) to file a post-effective amendment to this registration
statement as frequently as is necessary to ensure that the
audited financial statements in this registration statement
are never more than 16 months old for so long as payments
under the variable annuity contracts may be accepted, unless
otherwise permitted.
(b) to include either (1) as part of any enrollment form to
purchase a contract offered by the prospectus, a space that an
applicant can check to request a Statement of Additional
Information, or (2) a post card or similar written
communication affixed to or included in the prospectus that
the applicant can remove to send for a Statement of Additional
Information.
(c) To deliver any Statement of Additional Information and any
financial statements required to be made available under this
Form promptly upon written or oral request.
(d) Prudential Insurance Company of America hereby represents that
the fees and charges deducted under the Contract, in the
aggregate, are reasonable in relation to the services
rendered, the expenses expected to be incurred, and the risks
assumed by Prudential Insurance Company of America.
C-5
<PAGE>
403(b) ANNUITIES
The Registrant intends to rely on the no-action response dated November 28,
1988, from Ms. Angela C. Goelzer of the Commission staff to the American Council
of Life Insurance concerning the redeemability of Section 403(b) annuity
contracts and the Registrant has complied with the provisions of paragraphs
(1)-(4) thereof.
TEXAS ORP
The Registrant intends to offer Contracts to Participants in the Texas Optional
Retirement Program. In connection with that offering, Rule 6c-7 of the
Investment Company Act of 1940 is being relied upon and paragraphs (a)-(d) of
that Rule will be complied with.
C-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant,
The Prudential Discovery Select Group Variable Contract Account, certifies that
this Amendment is filed solely for one or more of the purposes specified in Rule
485 (b)(1), and that no material event requiring disclosure in the prospectus,
other than one listed in Rule 485 (b)(1), has occured since the effective date
of the Registrant's most recent post-effective amendment, and the Registrant and
the Depositor have duly caused this Registration Statement to be signed on their
behalf, in the City of Newark, and the State of New Jersey on this 2nd day of
May, 2000.
THE PRUDENTIAL DISCOVERY SELECT GROUP VARIABLE
CONTRACT ACCOUNT
-----------------------------------------------
(REGISTRANT)
BY: THE PRUDENTIAL INSURANCE COMPANY OF
AMERICA
-----------------------------------------------
(DEPOSITOR)
By: /s/ C. CHRISTOPHER SPRAGUE
-------------------------------
C. Christopher Sprague
Assistant General Counsel
-------------------------------
(Signature and Title)
C-7
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant,
The Prudential Discovery Select Group Variable Contract Account, certifies that
this Amendment is filed solely for one or more of the purposes specified in Rule
485 (b)(1), and that no material event requiring disclosure in this prospectus,
other than one listed in Rule 485 (b)(1), has occured since the effective date
of the Registrant's most recent post-effective amendment, and the Registrant has
duly caused this Registration Statement to be signed on its behalf in the City
of Newark and the State of New Jersey on this day of this 2nd day of May, 2000.
SIGNATURE AND TITLE
--------------------
/s/ * /s/ *
- --------------------------------------- ----------------------------------
ARTHUR F. RYAN CAROLYNE K. DAVIS
CHAIRMAN OF THE BOARD, PRESIDENT DIRECTOR
AND CHIEF EXECUTIVE OFFICER
/s/ * /s/ *
- --------------------------------------- ----------------------------------
ANTHONY S. PISZEL ROGER A. ENRICO
VICE PRESIDENT AND CONTROLLER DIRECTOR
(CHIEF ACCOUNTING OFFICER)
/s/ * /s/ *
- --------------------------------------- ----------------------------------
RICHARD J. CARBONE ALLAN D. GILMOUR
SENIOR VICE PRESIDENT AND DIRECTOR
CHIEF FINANCIAL OFFICER
/s/ * /s/ *
- --------------------------------------- ----------------------------------
FRANKLIN E. AGNEW WILLIAM H. GRAY, III
DIRECTOR DIRECTOR
/s/ * /s/ *
- --------------------------------------- ----------------------------------
FREDERIC K. BECKER JON F. HANSON
DIRECTOR DIRECTOR
/s/ * /s/ *
- --------------------------------------- ----------------------------------
GILBERT F. CASELLAS GLEN H. HINER
DIRECTOR DIRECTOR
/s/ * *By: C. CHRISTOPHER SPRAGUE
- --------------------------------------- ----------------------------
JAMES G. CULLEN C. CHRISTOPHER SPRAGUE
DIRECTOR (ATTORNEY-IN-FACT)
May 2, 2000
C-8
<PAGE>
SIGNATURE AND TITLE
--------------------
/s/ * /s/ *
- ---------------------------- -------------------------------------
CONSTANCE J. HORNER RICHARD M. THOMSON
DIRECTOR DIRECTOR
/s/ * /s/ *
- ---------------------------- -------------------------------------
GAYNOR N. KELLEY JAMES A. UNRUH
DIRECTOR DIRECTOR
/s/ * /s/ *
- ---------------------------- -------------------------------------
BURTON G. MALKIEL P. ROY VAGELOS, M.D.
DIRECTOR DIRECTOR
/s/ * /s/ *
- ---------------------------- -------------------------------------
IDA F.S. SCHMERTZ STANLEY C. VAN NESS
DIRECTOR DIRECTOR
/s/ * /s/ *
- ---------------------------- -------------------------------------
CHARLES R. SITTER PAUL A. VOLCKER
DIRECTOR DIRECTOR
/s/ * /s/ *
- ---------------------------- -------------------------------------
DONALD L. STAHELI JOSEPH H. WILLIAMS
DIRECTOR DIRECTOR
*By: C. CHRISTOPHER SPRAGUE
-------------------------------
C. CHRISTOPHER SPRAGUE
(ATTORNEY-IN-FACT)
May 2, 2000
C-9
<PAGE>
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
9 Consent and Opinion of C. Christopher Sprague, Assistant General
Counsel, The Prudential Insurance Company of America, as to the
legality of the securities being registered.
10(a) Consent of PricewaterhouseCoopers LLP, independent accountants.
10(b) Consent of Shea & Gardner.
13 Schedule of Computation of Performance Calculations.
C-10
Exhibit 9
May 1, 2000
The Prudential Insurance Company
of America
751 Broad Street
Newark, New Jersey 07102-3777
Gentlemen:
In my capacity as Assistant General Counsel of The Prudential Insurance Company
of America, I have reviewed the establishment of the Prudential Discovery Select
Group Variable Contract Account (the "Account") on February 11, 1997 by the
Finance Committee of the Board of Directors of Prudential as a separate account
for assets applicable to certain variable annuity contracts, pursuant to the
provisions of Section 17B: 28-7 of the Revised Statutes of New Jersey and
relevant documents contained in the registration statement.
I was responsible for oversight of the preparation and review of Post-Effective
Amendment No. 6 to the Registration Statement (Registration Number 333-23271)
under the Securities Act of 1933 for the registration of certain variable
annuity contracts issued with respect to the Account.
I am of the following opinion:
(1) Prudential was duly organized under the laws of New Jersey and is a
validly existing insurance company.
(2) The Account has been duly created and is validly existing as a
separate account pursuant to the aforementioned provisions of New
Jersey Law.
(3) The portion of the assets held in the Account equal to the reserve and
other liabilities for variable benefits under the variable annuity
contracts is not chargeable with liabilities arising out of any other
business Prudential may conduct.
(4) Assuming that the variable annuity contracts are issued in accordance
with their terms, and that any necessary payment for the contracts is
received by Prudential, the variable annuity contracts are legally
issued and are valid and binding obligations of Prudential.
In arriving at the foregoing opinion, I have made such examination of law and
examined such records and other documents as I judged to be necessary or
appropriate.
I hereby consent to the filing of this opinion as an exhibit to the Registration
Statement.
Sincerely,
C. Christopher Sprague
Assistant General Counsel
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Registration Statement on Form N-3 of our
report dated February 23, 2000, relating to the financial statements of The
Prudential Discovery Select Group Variable Contract Account, which appear in
such Registration Statement. We also consent to the references to us under the
headings "Experts" and "Financial Highlights" in such Registration Statement.
PricewaterhouseCoopers LLP
New York, New York
April 28, 2000
Exhibit 10(b)
SHEA & GARDNER
1800 Massachusetts Avenue, N.W.
Washington, D.C. 20036
(202) 828-2000
Fax: (202) 828-2195
April 21, 2000
Board of Directors
The Prudential Insurance Company of America
751 Broad Street
Newark, NJ 07102
Ladies and Gentlemen:
We hereby consent to the reference to our name under the caption "Legal
Matters" in the State of Additional Information filed as part of Post-Effective
Amendment No. 6 to the registration statement on Form N-4 for The Prudential
Discovery Select Group Variable Contract Account (File No. 333-23271). In giving
this consent, we do not admit that we are in the category of persons whose
consent is required under Section 7 of the Securities Act of 1933.
Very truly yours,
SHEA & GARDNER
By: /s/ CHRISTOPHER E. PALMER
----------------------
Christopher E. Palmer
EXHIBIT 13
TABLE 1
SUBACCOUNT STANDARDIZED
AVERAGE ANNUAL TOTAL RETURN
<TABLE>
<CAPTION>
ONE
YEAR
Fund Date ENDED 7/31/97-
Portfolio Established 12/31/99 12/31/99
--------- ----------- -------- --------
<S> <C> <C> <C>
The Prudential Series Fund, Inc.
Money Market Subaccount........................................ 6/24/97 -1.12% 3.80
Diversified Bond Subaccount.................................... 6/24/97 -6.78% 3.26
Government Income Subaccount................................... 6/24/97 -8.72% 3.85
Conservative Balanced Subaccount............................... 6/24/97 0.59% 8.60
Flexible Managed Subaccount.................................... 6/24/97 1.64% 8.82
High Yield Bond Subaccount..................................... 6/24/97 -1.48% 2.75
Stock Index Subaccount......................................... 6/24/97 14.29% 23.15
Equity Income Subaccount....................................... 6/24/97 6.36% 8.28
Equity Subaccount.............................................. 6/24/97 6.30% 11.38
Prudential Jennison Subaccount................................. 6/24/97 35.73% 35.00
Global Subaccount.............................................. 6/24/97 41.74% 23.39
AIM Variable Insurance Funds, Inc.
AIM V.I. Growth and Income Subaccount.......................... 6/24/97 27.86% 26.21
AIM V.I. Value Subaccount...................................... 6/24/97 23.55% 26.15
Janus Aspen Series
Growth Subaccount.............................................. 6/24/97 37.51% 33.09
International Growth Subaccount................................ 6/24/97 75.42% 33.44
MFS Variable Insurance Trust
Emerging Growth Subaccount..................................... 6/24/97 69.93% 44.81
Research Subaccount............................................ 6/24/97 17.77% 19.40
OCC Accumulation Trust
Managed Subaccount............................................. 6/24/97 -1.07% 7.21
Small Cap Subaccount........................................... 6/24/97 -7.86% -3.02
T. Rowe Price
T. Rowe Price Equity Series, Inc., Equity Income
Subaccount..................................................... 6/24/97 -2.35% 8.76
T. Rowe Price International Series, Inc., International
Stock Subaccount............................................... 6/24/97 26.95% 13.87
Warburg Pincus Trust
Global Post-Venture Capital Subaccount......................... 6/24/97 56.83% 28.35
</TABLE>
<PAGE>
TABLE 2
SUBACCOUNT "HYPOTHETICAL"
AVERAGE ANNUAL TOTAL RETURN ASSUMING NO WITHDRAWAL
<TABLE>
<CAPTION>
ONE THREE FIVE TEN
YEAR YEARS YEARS YEARS
Fund DATE ENDED ENDED ENDED ENDED
Portfolio ESTABLISHED 12/31/99 12/31/99 12/31/99 12/31/99
--------- ----------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
The Prudential Series Fund, Inc.
Money Market Subaccount.............. 5/13/83 3.94% 3.88% 4.11% 4.04%
Diversified Bond Subaccount.......... 5/13/83 -1.72 3.94 6.76 6.63
Government Income Subaccount......... 5/1/89 -3.66 3.93 6.09 5.96
Conservative Balanced
Subaccount......................... 5/13/83 5.65 9.66 11.29 9.23
Flexible Managed Subaccount.......... 5/13/83 6.70 10.64 13.36 10.61
High Yield Bond Subaccount........... 2/23/87 3.58 4.09 7.68 8.70
Stock Index Subaccount............... 10/19/87 19.35 26.34 27.12 16.70
Equity Income Subaccount............. 2/19/88 11.42 12.57 15.67 12.69
Equity Subaccount.................... 5/13/83 11.36 13.87 17.62 13.85
Prudential Jennison Subaccount....... 5/1/95 40.79 35.14 N/A 30.40
Global Subaccount.................... 9/19/88 46.80 23.74 20.82 12.07
AIM Variable Insurance Funds, Inc.
AIM V.I. Growth and Income
Subaccount......................... 5/2/94 32.92 27.66 26.76 23.14
AIM V.I. Value Subaccount............ 5/5/93 28.61 27.33 25.95 21.84
Janus Aspen Series
Growth Subaccount.................... 9/13/93 42.57 32.11 28.35 22.86
International Growth Subaccount...... 5/2/94 80.48 34.34 31.55 26.60
MFS Variable Insurance Trust
Emerging Growth Subaccount........... 7/24/95 74.99 40.72 N/A 34.88
Research Subaccount.................. 7/24/95 22.83 20.80 N/A 21.25
OCC Accumulation Trust
Managed Subaccount................... 8/1/88 3.99 10.53 18.79 15.64
Small Cap Subaccount................. 8/1/88 -2.80 1.84 7.23 10.02
T. Rowe Price
T. Rowe Price Equity Series, Inc.,
Equity Income Subaccount............ 3/31/94 2.71 12.12 17.34 16.15
T. Rowe Price International Series,
Inc., International Stock
Subaccount......................... 3/31/94 32.01 15.43 13.96 12.23
Warburg Pincus Trust
Global Post-Venture Capital
Subaccount......................... 9/30/96 61.89 24.33 N/A 21.69
</TABLE>
- -----------------------
Note 1: This table assumes no deferred sales charges.
<PAGE>
TABLE 3
SUBACCOUNT "HYPOTHETICAL"
CUMULATIVE TOTAL RETURN ASSUMING NO WITHDRAWAL
<TABLE>
<CAPTION>
ONE THREE FIVE TEN
YEAR YEARS YEARS YEARS
Fund DATE ENDED ENDED ENDED ENDED
Portfolio ESTABLISHED 12/31/99 12/31/99 12/31/99 12/31/99
--------- ----------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
The Prudential Series Fund, Inc.
Money Market Subaccount.............. 5/13/83 3.94 12.09 22.34 48.56
Diversified Bond Subaccount.......... 5/13/83 -1.72 12.28 38.73 90.17
Government Income Subaccount......... 5/1/89 -3.66 12.26 34.40 78.38
Conservative Balanced
Subaccount......................... 5/13/83 5.65 31.87 70.75 141.99
Flexible Managed Subaccount.......... 5/13/83 6.70 35.44 87.28 174.33
High Yield Bond Subaccount........... 2/23/87 3.58 12.77 44.77 130.44
Stock Index Subaccount............... 10/19/87 19.35 101.67 232.11 368.75
Equity Income Subaccount............. 2/19/88 11.42 42.65 107.19 230.58
Equity Subaccount.................... 5/13/83 11.36 47.64 125.21 265.99
Prudential Jennison Subaccount....... 5/1/95 40.79 146.81 N/A N/A
Global Subaccount.................... 9/19/88 46.80 89.45 157.59 212.61
AIM Variable Insurance Funds, Inc.
AIM V.I. Growth and Income
Subaccount......................... 5/2/94 32.92 108.03 227.50 N/A
AIM V.I. Value Subaccount............ 5/5/93 28.61 106.46 217.18 N/A
Janus Aspen Series
Growth Subaccount.................... 9/13/93 42.57 130.58 248.54 N/A
International Growth Subaccount...... 5/2/94 80.48 142.47 294.26 N/A
MFS Variable Insurance Trust
Emerging Growth Subaccount........... 7/24/95 74.99 178.67 N/A N/A
Research Subaccount.................. 7/24/95 22.83 76.29 N/A N/A
OCC Accumulation Trust
Managed Subaccount................... 8/1/88 3.99 35.02 136.61 327.86
Small Cap Subaccount................. 8/1/88 -2.80 5.63 41.76 159.87
T. Rowe Price
T. Rowe Price Equity Series, Inc.,
Equity Income Subaccount............ 3/31/94 2.71 40.96 122.58 136.71
T. Rowe Price International Series,
Inc., International Stock
Subaccount......................... 3/31/94 32.01 53.79 92.24 94.24
Warburg Pincus Trust
Global Post-Venture Capital
Subaccount......................... 9/30/96 61.89 92.20 N/A N/A
</TABLE>
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Note 1: This table assumes no deferred sales charges.
