<PAGE> 1
As Filed with the SEC on April 30, 1999
Registration No. 2-76581
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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Form N-3
REGISTRATION STATEMENT
under
THE SECURITIES ACT OF 1933
POST-EFFECTIVE AMENDMENT NO. 33
and
REGISTRATION STATEMENT UNDER
THE INVESTMENT COMPANY ACT OF 1940
AMENDMENT NO. 35
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THE PRUDENTIAL VARIABLE CONTRACT ACCOUNT-11
(Exact Name of Registrant)
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
(Name of Insurance Company)
751 Broad Street
Newark, New Jersey 07102-3777
(973) 802-8781
(Address and telephone number of Insurance Company's
principal executive offices)
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CAREN CUNNINGHAM
Assistant General Counsel
Prudential Investments Fund Management LLC
Gateway Center Three
100 Mulberry Street, 9th Floor
Newark, NJ 07102
(Name and address of agent for service)
Copy to:
Christopher E. Palmer, Esq.
Shea & Gardner
1800 Massachusetts Avenue, 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
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X on April 30, 1999 pursuant to paragraph (b) of Rule 485
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(date)
60 days after filing pursuant to paragraph (a)(i) of Rule 485
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on pursuant to paragraph (a)(i) of Rule 485
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75 days after filing pursuant (a)(ii) of Rule 485
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on pursuant to paragraph (a)(ii) of Rule 485
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(date)
If appropriate, check the following box:
this post-effective amendment designates a new effective date for a
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previously filed post-effective amendment.
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PROSPECTUS
May 1, 1999
THE MEDLEY(SM) PROGRAM
This prospectus describes contracts (the Contracts) offered by The Prudential
Insurance Company of America (Prudential) 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, as amended. The Contracts may
also be used with non-qualified arrangements. Contributions under the Contracts
may be invested in The Prudential Variable Contract Account-10, The Prudential
Variable Contract Account-11 and The Prudential Variable Account-24.
The Prudential Variable Contract Account-10 (VCA 10) invests primarily in equity
securities of major, established corporations. Its investment goal is long term
growth of capital. This means we look for investments whose price we expect will
increase over several years.
The Prudential Variable Contract Account-11 (VCA 11) invests in money market
instruments. Its investment goal is as high a level of current income as is
consistent with the preservation of capital and liquidity. An investment in VCA
11 is neither insured nor guaranteed by the U.S. Government.
The Prudential Variable Contract Account-24 (VCA 24) allows you to invest in one
or more of the portfolios of The Prudential Series Fund, Inc. (the Series Fund).
A prospectus for the Series Fund is included with this prospectus and describes
the investment goals of the seven Series Fund portfolios offered through VCA 24.
Please read this prospectus before investing and keep it for future reference.
To learn more about the Contracts, you can get a copy of the MEDLEY Statement of
Additional Information (SAI) dated May 1, 1999. The SAI has been filed with the
Securities and Exchange Commission (SEC) and is legally a part of this
prospectus. 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. For a free copy of the SAI,
call us at: 1-800-458-6333 or write us at:
The Prudential Insurance Company of America
c/o Prudential Investments
30 Scranton Office Park
Scranton, PA 18506-1789
FILING THIS PROSPECTUS 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.
INVESTMENT IN THE CONTRACTS IS SUBJECT TO RISK, INCLUDING THE POSSIBLE LOSS OF
PRINCIPAL. AN INVESTMENT IN THE CONTRACTS IS NOT A BANK DEPOSIT AND IS NOT
INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT
AGENCY.
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[PRUDENTIAL INVESTMENTS LOGO]
<PAGE> 4
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
GLOSSARY OF SPECIAL TERMS..................................................... 3
FEE TABLES.................................................................... 4
SUMMARY....................................................................... 6
PRUDENTIAL.................................................................... 8
THE INVESTMENT OPTIONS........................................................ 8
INVESTMENT PRACTICES.......................................................... 8
VCA 10...................................................................... 9
VCA 11...................................................................... 11
The Series Fund Portfolios.................................................. 12
DETERMINATION OF ASSET VALUE.................................................. 13
MANAGEMENT.................................................................... 14
CONTRACT CHARGES.............................................................. 14
Deferred Sales Charge....................................................... 14
Waiver of Deferred Sales Charge............................................. 14
Annual Account Fee.......................................................... 15
Charge for Administrative Expenses and Investment Management Services....... 15
Modification of Charges..................................................... 15
THE CONTRACTS................................................................. 16
The Accumulation Period..................................................... 16
1. Contributions.......................................................... 16
2. The Unit Value......................................................... 16
3. Withdrawal of Contributions............................................ 16
4. Systematic Withdrawal Plan............................................. 17
5. Texas Optional Retirement Program...................................... 18
6. Death Benefits......................................................... 18
7. Discontinuance of Contributions........................................ 18
8. Transfer Payments...................................................... 18
9. Requests by Telephone and Other Electronic Means....................... 19
10. Prudential Mutual Funds................................................ 19
11. Discovery Select(SM) Group Retirement Annuity.......................... 20
12. Loans.................................................................. 20
13. Modified Procedures.................................................... 21
The Annuity Period........................................................... 21
1. Electing the Annuity Date and the Form of Annuity...................... 21
2. Available Forms of Annuity............................................. 21
3. Purchasing the Annuity................................................. 22
Assignment.................................................................. 22
Changes in the Contracts.................................................... 22
Reports..................................................................... 22
Performance Information..................................................... 23
Participation in divisible surplus.......................................... 23
FEDERAL TAX STATUS............................................................ 23
VOTING RIGHTS................................................................. 26
LEGAL PROCEEDINGS............................................................. 26
YEAR 2000..................................................................... 27
TABLE OF CONTENTS - STATEMENT OF ADDITIONAL INFORMATION....................... 29
APPENDIX...................................................................... 30
FINANCIAL HIGHLIGHTS - VCA 10................................................. 32
FINANCIAL HIGHLIGHTS - VCA 11................................................ 33
FINANCIAL INFORMATION - VCA 24................................................ 34
</TABLE>
2
<PAGE> 5
Glossary of Special Terms
We have tried to make this prospectus as readable and understandable for you as
possible. By the very nature of the Contracts, however, certain technical words
or terms are unavoidable. We have identified the following as some of these
words or terms.
ACCUMULATION PERIOD: The period that begins with the Contract date (see
definition below) and ends when you start receiving income payments or earlier
if the Contract is terminated through a full withdrawal or payment of a death
benefit.
ACCUMULATION ACCOUNT: An account used to calculate the value of your assets
allocated to an investment option during the accumulation period. You have a
separate ACCUMULATION ACCOUNT for each investment option.
COMPANION CONTRACT: A fixed dollar group annuity contract issued by Prudential
under which contributions may be made for Participants in the MEDLEY program.
CONTRACTS: The group variable annuity contracts described in this prospectus.
CONTRACT DATE: The date Prudential receives the initial contribution on behalf
of a Participant and all necessary paperwork is in good order. Contract
anniversaries are measured from the Contract date.
CONTRACTHOLDER: The employer, association or trust to which Prudential has
issued a Contract.
CONTRIBUTIONS: Payments made by the Contractholder under the Contract for the
benefit of a Participant.
INCOME PERIOD: The period that begins when you start receiving income payments
under a Contract.
INVESTMENT OPTIONS: VCA 10, VCA 11 and VCA 24.
NASDAQ: A computerized system that provides price quotations for securities
traded over-the-counter as well as many New York Stock Exchange listed
securities.
NON-QUALIFIED COMBINATION CONTRACT: A group variable annuity contract issued in
connection with non-qualified arrangements that permits Participants with a
single Contract to direct contributions to VCA 10, VCA 11, VCA 24 or a general
account fixed rate option of Prudential.
PARTICIPANT OR YOU: The person for whose benefit contributions are made under a
Contract.
PRUDENTIAL OR WE: The Prudential Insurance Company of America.
QUALIFIED COMBINATION CONTRACT: A group variable annuity contract issued in
connection with qualified arrangements that permits Participants with a single
Contract to direct contributions to VCA 10, VCA 11, VCA 24 or a general account
fixed rate option of Prudential.
SEPARATE ACCOUNT: Purchase payments allocated to the various investment options
available under a Contract are held by Prudential in a separate account. VCA 10,
VCA 11 and VCA 24 are each a separate account.
TAX DEFERRAL: A way to increase your assets without being taxed every year.
Taxes are not paid on investment gain until you take money out of your Contract.
UNIT AND UNIT VALUE: You are credited with Units of the MEDLEY investment
options you select. Initially, the number of Units credited to you is determined
by dividing the amount of the contribution made on your behalf by the applicable
Unit Value for that day for that investment option. After that, the value of the
Units is adjusted each day to reflect the investment returns and expenses of the
investment option plus any Contract charges that may apply to you.
3
<PAGE> 6
Fee Tables
VCA 10 AND VCA 11 - PARTICIPANT TRANSACTION EXPENSES
<TABLE>
<S> <C>
Sales Load Imposed on Purchases.......................................... None
Maximum Deferred Sales Load (as a percentage of contributions withdrawn)* 7%
Exchange Fee............................................................. None
Maximum Annual Contract Fee.............................................. $30
ANNUAL EXPENSES (as a percentage of average net assets)
Management Fees.......................................................... 0.25%
Administrative Fees...................................................... 0.75%
Total Annual Expenses.................................................... 1.00%
</TABLE>
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* The deferred sales load decreases by 1% each year of Program participation as
follows:
7% for the first year of Program participation, 6% for the second year and so
on until after the seventh year the charge is 0%.
EXAMPLES
These examples will help you compare the fees and expenses of the various
Contracts and compare the cost of the Contracts with other variable annuity
contracts. The examples are calculated based on the expenses listed in the table
above.*
<TABLE>
<CAPTION>
If you surrender your Contract at the end
of the applicable time period: 1 year 3 years 5 years 10 years
---- ----- ----- -----
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000 investment,
assuming 5% annual return on assets:............................ $80 $82 $86 $125
If you annuitize at the end of the applicable time period:
You would pay the following expenses on a $1,000 investment,
assuming 5% annual return on assets:............................ $10 $32 $56 $125
If you do not surrender your Contract:
You would pay the following expenses on a $1,000 investment,
assuming 5% annual return on assets:............................ $10 $32 $56 $125
</TABLE>
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* The Annual Contract Fee is reflected in the above example upon the assumption
that it is deducted from each of the available investment options, including
the Companion Contract and fixed rate option, in the same proportions as the
aggregate Annual Contract Fees are deducted from each option. The actual
expenses paid by each Participant will vary depending upon the total amount
credited to that Participant and how that amount is allocated.
VCA 24 - PARTICIPANT TRANSACTION EXPENSES
<TABLE>
<S> <C>
Sales Load Imposed on Purchases................................................ None
Maximum Deferred Sales Load (as a percentage of contributions withdrawn)* 7%
Exchange Fee................................................................... None
Maximum Annual Contract Fee.................................................... $30
SEPARATE ACCOUNT ANNUAL EXPENSES (as a percentage of average net assets)
Mortality and Expense Risk Fees................................................ None
Administrative Fees............................................................ 0.75%
Total Annual Expenses.......................................................... 0.75%
</TABLE>
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* The deferred sales load decreases by 1% each year of Program participation as
follows:
7% for the first year of Program participation, 6% for the second year and so
on until after the seventh year the charge is 0%.
4
<PAGE> 7
SERIES FUND PORTFOLIO ANNUAL EXPENSES
<TABLE>
<CAPTION>
Conservative Diversified Flexible
Balanced Bond Equity Managed
Portfolio Portfolio Portfolio Portfolio
------------ --------- ----------- ---------
<S> <C> <C> <C> <C>
Investment Management Fee........... .55% .40% .45% .60%
Other Expenses...................... .02% .02% .02% .01%
Total Annual Portfolio Expenses..... .57% .42% .47% .61%
</TABLE>
<TABLE>
<CAPTION>
Government
Global Income Stock Index
Portfolio Portfolio Portfolio
--------- ----------- ------------
<S> <C> <C> <C>
Investment Management Fee........... .75% .40% .35%
Other Expenses...................... .11% .03% .02%
Total Annual Portfolio Expenses..... .86% .43% .37%
</TABLE>
EXAMPLES
These examples will help you compare the fees and expenses of the VCA 24
Contract and compare the cost of the VCA 24 Contract with other variable
annuity contracts. The examples are calculated based on the expenses listed in
the table above.*
<TABLE>
<CAPTION>
You would pay the following expenses on each
$1,000 invested, assuming a 5% annual return
and redemption at the end of the time period: 1 Year 3 Years 5 Years 10 Years
------ ------- ------- -------
<S> <C> <C> <C> <C>
Conservative Balanced............................... $83 $92 $102 $159
Diversified Bond.................................... 82 87 94 142
Equity.............................................. 82 89 97 148
Flexible Managed.................................... 84 93 104 164
Global.............................................. 86 101 118 191
Government Income................................... 82 87 95 143
Stock Index......................................... 81 86 92 136
</TABLE>
<TABLE>
<CAPTION>
You would pay the following expenses on each
$1,000 invested, assuming a 5% annual return
and no redemption at the end of the time period: 1 Year 3 Years 5 Years 10 Years
----- ------ ------- --------
<S> <C> <C> <C> <C>
Conservative Balanced............................... $13 $42 $72 $159
Diversified Bond.................................... 12 37 64 142
Equity.............................................. 12 39 67 148
Flexible Managed.................................... 14 43 74 164
Global.............................................. 16 51 88 191
Government Income................................... 12 37 65 143
Stock Index......................................... 11 36 62 136
</TABLE>
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* The annual contract fee is reflected in the above examples upon the
assumption that it is deducted from each of the available investment options,
including the Companion Contract and fixed rate option, in the same
proportions as the aggregate annual contract fees are deducted from each
investment option. The actual expenses paid by each Participant will vary
depending upon the total amount credited to that Participant and how that
amount is allocated.
5
<PAGE> 8
Summary
THE CONTRACTS
Five of the six GROUP VARIABLE ANNUITY CONTRACTS that make up the MEDLEY Program
are described in this prospectus. A group variable annuity contract is a
contract between a Contractholder and Prudential, an insurance company. The
Contracts offer a way to invest on a tax-deferred basis and are intended for
retirement savings or other long-term investment purposes. The Contracts, like
all deferred annuity contracts, have two phases - an accumulation period and an
income period. During the accumulation period, earnings accumulate on a
tax-deferred basis. That means you are only taxed on the earnings when you
withdraw them. The second phase - the income period - occurs when you begin
receiving regular payments from your Contract. The amount of money earned during
the accumulation period determines the amount of payments you will receive
during the income period.
The Contracts generally are issued to employers who make contributions on behalf
of their employees under Sections 401, 403(b) or 457 of the Internal Revenue
Code or a non-qualified retirement arrangement. In this case, the employer is
called the "Contractholder" and the person for whom contributions are being made
is a "Participant."
THE MEDLEY PROGRAM
The following group annuity contracts make up the MEDLEY Program:
- VCA 10 CONTRACT - which provides for contributions to be invested in
VCA 10.
- VCA 11 CONTRACT - which provides for contributions to be invested in
VCA 11.
- VCA 24 CONTRACT - which provides for contributions to be invested in one
or more of the Series Fund portfolios.
- QUALIFIED COMBINATION CONTRACT - is a qualified contract which provides
for contributions to be invested in VCA 10, VCA 11, VCA 24 and a fixed
rate option provided by Prudential.
- NON-QUALIFIED COMBINATION CONTRACT - is a non-qualified contract which
provides for contributions to be invested in VCA 10, VCA 11, VCA 24 and a
fixed rate option provided by Prudential.
- COMPANION CONTRACT - is a fixed dollar group annuity contract issued by
Prudential. (This Contract is not described in this prospectus.)
Your employer, which generally is the Contractholder, will decide which of these
Contracts will be made available to you. Depending on the Contractholder's
selection, you may be able to choose to have contributions made on your behalf
to VCA 10, VCA 11 and/or VCA 24. You may also change how the contributions are
allocated, usually by notifying Prudential at the address shown on the cover of
this prospectus.
Depending on market conditions, you can make or lose money by investing in VCA
10, VCA 11 or VCA 24. The value of your Contract will fluctuate with its
investment performance. Performance information is provided in the SAI.
Remember, past performance is not a guarantee of future results.
CONTRIBUTIONS
Contributions may be made through a payroll deduction program or a similar
arrangement with the Contractholder. If Contributions are being made to an
Individual Retirement Annuity they must be at least $500. Contributions to an
Individual Retirement Annuity for a non-working spouse under Section 408 of the
Internal Revenue Code (or a working spouse who elects to be treated as a
non-working spouse) are limited to $250 a year. All contributions may be
allocated among the investment options available to you under your Contract.
Checks should be made payable to The Prudential Insurance Company of America.
6
<PAGE> 9
CHARGES
No sales charge is deducted when a contribution is made. However, there may be
a sales charge when a contribution is withdrawn from VCA 10, VCA 11 or VCA 24.
This is known as a "deferred sales charge" and covers Prudential's sales
expenses. A deferred sales charge is charged only when contributions are
withdrawn by a Participant during the first 7 years of his or her participation
in the MEDLEY Program.
The maximum deferred sales charge is 7% and applies to contributions withdrawn
during the first year of participation. Each year after, the deferred sales
charge decreases. No deferred sales charge is imposed on contributions that are
withdrawn:
- to purchase an annuity under a Contract
- to provide a death benefit
- under the systematic withdrawal plan
- under a minimum distribution plan
- in the case of financial hardship or disability retirement as determined
under an employer's retirement arrangement
- (except for IRAs) due to a Participant's resignation or retirement or
termination of the Participant's employment by the Contractholder
If you decide to transfer contributions among the investment options available
under your Contract, you will not be subject to a deferred sales charge.
However, these transfers are treated as contributions into the new investment
option for purposes of determining any deferred sales charges on future
withdrawals.
An annual account charge may also be made. This charge will not exceed $30 in
any calendar year and will be divided up among your investment options.
VCA 10 and VCA 11 are subject to fees for investment management and
administration services. VCA 24 is subject to an administration fee only, but
the Series Fund portfolios are subject to investment management fees and other
expenses. These fees will have the effect of decreasing investment performance,
which in turn, determines how much you earn during the accumulation period of
your Contract.
WITHDRAWALS & TRANSFERS
All written requests and notices required under the Contracts - other than
withdrawal requests and death benefit claims - should be sent to Prudential at
the address on the cover of this prospectus. You can also use that address for
any written inquiries you may have.
As explained later, some transactions may be made by telephone and other
electronic means. Permitted telephone transactions can be made by calling
Prudential at 800-458-6333 and electronic transactions may be made through
www.Prudential.com.
All written withdrawal requests and death benefit claims relating to a
Participant's interest in VCA 10, VCA 11 or VCA 24 must be made in one of the
following ways:
- by U.S. mail to Prudential Investments, P.O. Box 5410, Scranton,
Pennsylvania 18505-5410.
- by other delivery service - or example, Federal Express - to Prudential
Investments, 30 Scranton Office Park, Scranton, Pennsylvania 18507-1789.
- by fax to Prudential Investments, Attn: Client Payments at (570) 340-4328.
In order to process a withdrawal request or death benefit claim, it must be
submitted to Prudential in "good order." This is described under "Contract
Charges - Deferred Sales Charges," below.
In some cases, the Contractholder or a third-party may provide recordkeeping
services for a Contract instead of Prudential. In that case, withdrawal and
transfer procedures may vary.
7
<PAGE> 10
Prudential
Prudential is a mutual life insurance company incorporated in 1873 under the
laws of New Jersey. Its corporate offices are located at 751 Broad Street,
Newark, New Jersey 07102-3777. It has been investing for pension funds since
1928.
Prudential is the investment adviser for VCA 10, VCA 11 and the Series Fund. It
is registered as an investment adviser under the Investment Advisers Act of
1940. Prudential is also responsible for the administration and recordkeeping
activities for VCA 10, VCA 11 and VCA 24. Prudential's financial statements are
included in the SAI.
Prudential is currently considering reorganizing itself into a publicly traded
stock company through a process known as "demutualization." On February 10,
1998, the company's Board of Directors authorized management to take the
preliminary steps necessary to allow the company to demutualize. On July 1,
1998, legislation was enacted in New Jersey that would permit this conversion
to occur and that specified the process for conversion. Demutualization is a
complex process involving development of a plan of reorganization, adoption of
a plan by the company's Board of Directors, a public hearing, voting by
qualified policyholders and regulatory approval, all of which could take two or
more years to complete. Prudential's management and Board of Directors have not
yet determined to demutualize and it is possible that, after careful review,
Prudential could decide not to go public.
The plan of reorganization, which hasn't been developed and approved, would
provide the criteria for determining eligibility and the methodology for
allocating shares or other consideration to those who would be eligible.
Generally, the amount of shares or other consideration eligible customers would
receive would be based on a number of factors, including the types, amounts and
issue years of their policies. As a general rule, owners of Prudential-issued
insurance policies and annuity contracts would be eligible, while mutual fund
customers and customers of the company's subsidiaries would not be. It has not
yet been determined whether any exceptions to that general rule will be made
with respect to policyholders and contract owners of Prudential's subsidiaries.
Eligible policyholders would generally include employers, associations, other
groups, and trusts established by or for such entities, that own group policies
issued by Prudential, and generally would include Contractholders. The
individuals covered under a group plan, such as the Participants under a
Contract, generally would not be eligible to receive stock or other
consideration from Prudential.
Prudential Investment Management Services LLC (PIMS), an indirect wholly-owned
subsidiary of Prudential, is the principal underwriter of the Contracts. That
means it is responsible for certain sales and distribution functions for the
Contracts. PIMS is registered as a broker-dealer under the Securities Exchange
Act of 1934. PIMS is a direct wholly-owned subsidiary of Prudential. Its main
offices are located at 751 Broad St., Newark, New Jersey 07102-3777.
The Investment Options
VCA 10 and VCA 11 were created on March 1, 1982 and VCA 24 was created on April
29, 1987. Each is a separate account of Prudential. This means the assets of
each are the property of Prudential but are kept separate from Prudential's
general assets and cannot be used to meet liabilities from Prudential's other
businesses.
VCA 10 and VCA 11 are registered with the SEC as open-end, diversified
management investment companies. VCA 24 is registered with the SEC as a unit
investment trust, which is another type of investment company.
THE SERIES FUND
If VCA 24 is available under your Program, you may invest in one or more of the
portfolios of the Series Fund. Like VCA 10 and VCA 11, the Series Fund is
registered with the SEC as an open-end, diversified management investment
company. Shares of the Series Fund are sold at their net asset value to
separate accounts (like VCA 24) established by Prudential and certain other
insurers that offer variable life and variable annuity contracts.
Because shares of the Series Fund are sold to both variable life and variable
annuity separate accounts, it is possible that in the future the interest of
one type of account may conflict with the other. This could occur, for example,
if there are changes in state insurance law or federal income tax law. Although
such developments are not currently anticipated, the Series Fund Board of
Directors carefully monitors events in order to identify any material
conflicts.
Investment Practices
Before making your allocation decision, you should carefully review the
investment objectives and policies of each of your investment options. For the
most part, VCA 10, VCA 11 and the available Series Fund portfolios have
different goals and strategies which will affect the level of risk and return
of your investment. There is no guarantee that the investment objectives of VCA
10, VCA 11 or any of the Series Fund portfolios will be met.
8
<PAGE> 11
VCA 10
VCA 10's investment objective is LONG-TERM GROWTH OF CAPITAL. To achieve this
objective, we invest primarily in EQUITY SECURITIES of major, established
corporations. VCA 10 may also invest in PREFERRED STOCKS, WARRANTS and BONDS
that can be converted into a company's common stock or other equity security.
Equity securities - such as common stocks - are subject to COMPANY RISK. The
price of the stock of a particular company can vary based on a variety of
factors, such as the company's financial performance, changes in management and
product trends, and the potential for takeover and acquisition. Common stocks
are also subject to MARKET RISK stemming from factors independent of any
particular security. Investment markets fluctuate. All markets go through
cycles and market risk involves being on the wrong side of a cycle. Factors
affecting market risk include political events, broad economic and social
changes and the mood of the investing public. If investor sentiments turn
gloomy, the price of all stocks may decline. It may not matter that a
particular company has great profits and its stock is selling at a relatively
low price. If the overall market is dropping, the value of all stocks are
likely to drop.
Under normal market conditions, VCA 10 may also invest up to 20% of its total
assets in short, intermediate or long term DEBT INSTRUMENTS that have been
rated "investment grade." (This means major rating services, like Standard &
Poor's Ratings Group or Moody's Investors Service Inc., have rated the
securities within one of their four highest rating groups.) In response to
adverse market conditions, we may invest a higher percentage in debt
instruments. Since VCA 10 invests in debt obligations, there is the risk that
the value of a particular obligation could decrease. Debt obligations may
involve CREDIT RISK - the risk that the borrower will not repay an obligation,
and MARKET RISK the risk that interest rates may change and affect the value of
the obligation.
VCA 10 may also invest in foreign securities in the form of AMERICAN DEPOSITARY
RECEIPTS (ADRs). ADRs are certificates representing the right to receive
foreign securities that have been deposited with a U.S. bank or a foreign
branch of a U.S. bank. We may purchase ADRs that are traded on a U.S. exchange
or in an over-the-counter market. ADRs are generally thought to be less risky
than direct investment in foreign securities because they can be transferred
easily, have readily available market quotations, and the foreign companies
that issue them are usually subject to the same types of financial and
accounting standards as U.S. companies. Nevertheless, as foreign securities,
ADRs involve special risks that should be considered carefully by investors.
These risks include political and/or economic instability in the country of the
issuer, the difficulty of predicting international trade patterns, and the fact
that there may be less publicly available information about a foreign company
than about a U.S. company.
VCA 10 may enter into INTEREST RATE SWAP TRANSACTIONS. Interest rate swaps, in
their most basic form, involve the exchange by one party with another party of
their respective commitments to pay or receive interest. For example, VCA 10
might exchange its right to receive certain floating rate payments in exchange
for another party's right to receive fixed rate payments. Interest rate swaps
can take a variety of other forms, such as agreements to pay the net
differences between two different indices or rates, even if the parties do not
own the underlying instruments. Despite their differences in form the function
of interest rate swaps is generally the same - to increase or decrease exposure
to long- or short-term interest rates. For example, VCA 10 may enter into a
swap transaction to preserve a return or spread on a particular investment to a
portion of its portfolio or to protect against any increase in the price of
securities the VCA 10 anticipates purchasing at a later date. VCA 10 will
maintain appropriate liquid assets in a segregated custodial account to cover
its obligations under swap agreements.
The use of swap agreements is subject to certain risks. As with options and
futures, if our prediction of interest rate movements is incorrect, VCA 10's
total return will be less than if we had not used swaps. In addition, if the
counterparty's creditworthiness declines, the value of the swap would likely
decline. Moreover, there is no guarantee that VCA 10 could eliminate its
exposure under an outstanding swap agreement by entering into an offsetting
swap agreement with the same or another party.
VCA 10 may also purchase and sell FINANCIAL FUTURES CONTRACTS, including
futures contracts on stock indexes, interest-bearing securities (for example,
U.S. Treasury bonds and notes) or interest rate indexes. The use of futures
contracts for hedging purposes involves several risks. While our hedging
transactions may protect VCA 10 against adverse movements in interest rates or
other economic conditions, they may limit our ability to benefit from favorable
movements in interest rates or other economic conditions. There are also the
risks that we may not correctly predict changes in the market and that there
may be an imperfect correlation between the futures contract price movements
and the securities being hedged. Nor can there be any assurance that a liquid
market will exist at the time we wish to close out a futures position. Most
futures exchanges and boards of trade limit the amount of fluctuation in
futures prices
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<PAGE> 12
during a single day - once the daily limit has been reached, no trades may be
made that day at a price beyond the limit. It is possible for futures prices to
reach the daily limit for several days in a row with little or no trading. This
could prevent us from liquidating an unfavorable position while we are still
required to meet margin requirements and continue to incur losses until the
position is closed.
We may also purchase and sell FUTURES CONTRACTS ON FOREIGN CURRENCIES or groups
of foreign currencies.
In addition to futures contracts, VCA 10 is permitted to purchase and sell
OPTIONS on equity securities, debt securities, securities indexes, foreign
currencies and financial futures contracts. An option gives the owner the right
to buy (a call option) or sell (a put option) securities at a specified price
during a given period of time. VCA 10 will only invest in covered options. An
option can be covered in a variety of ways, such as setting aside certain
securities or cash in a segregated account equal in value to the obligation
under the option.
Options involve certain risks. We may not correctly anticipate movements in the
relevant markets. If this happens, VCA 10 would realize losses on its options
position. In addition, options have risks related to liquidity. A position in
an exchange-traded option may be closed out only on an exchange, board of trade
or other trading facility which provides a secondary market for an option of
the same series. Although generally VCA 10 will only purchase or write
exchange-traded options for which there appears to be an active secondary
market, there is no assurance that a liquid secondary market on an exchange
will exist for any particular option, or at any particular time. For some
options, no secondary market on an exchange or otherwise may exist and we might
not be able to effect closing transactions in particular options. In this
event, VCA 10 would have to exercise its options in order to realize any profit
and would incur brokerage commissions both upon the exercise of such options
and upon the subsequent disposition of underlying securities acquired through
the exercise of such options (or upon the purchase of underlying securities for
the exercise of put options). If VCA 10 - as a covered call option writer - is
unable to effect a closing purchase transaction in a secondary market, it will
not be able to sell the underlying security until the option expires or it
delivers the underlying security upon exercise.
Options on futures contracts are subject to risks similar to those described
above with respect to options on securities, options on stock indices, and
futures contracts. These risks include the risk that we may not correctly
predict changes in the market, the risk of imperfect correlation between the
option and the securities being hedged, and the risk that there might not be a
liquid secondary market for the option. There is also the risk of imperfect
correlation between the option and the underlying futures contract. If there
were no liquid secondary market for a particular option on a futures contract,
VCA 10 might have to exercise an option it held in order to realize any profit
and might continue to be obligated under an option it had written until the
option expired or was exercised. If VCA 10 were unable to close out an option
it had written on a futures contract, it would continue to be required to
maintain initial margin and make variation margin payments with respect to the
option position until the option expired or was exercised against VCA 10.
VCA 10 may invest in SECURITIES BACKED BY REAL ESTATE or shares of real estate
investment trusts - called REITS - that are traded on a stock exchange or
NASDAQ. These types of securities are sensitive to factors that many other
securities are not - such as real estate values, property taxes, overbuilding,
cash flow and the management skill of the issuer. They may also be affected by
tax and regulatory requirements, such as those relating to the environment.
From time to time, VCA 10 may invest in REPURCHASE AGREEMENTS. In a repurchase
agreement, one party agrees to sell a security and also to repurchase it at a
set price and time in the future. The period covered by a repurchase period is
usually very short - possibly overnight or a few days - though it can extend
over a number of months. Because these transactions may be considered loans of
money to the seller of the underlying security, VCA 10 will only enter into
repurchase agreements that are fully collaterized. VCA 10 will not enter into
repurchase agreements with Prudential or its affiliates as seller. However, VCA
10 is seeking regulatory approval to permit it to enter into joint repurchase
transactions with other Prudential investment companies.
VCA 10 may also enter into REVERSE REPURCHASE AGREEMENTS and DOLLAR ROLL
TRANSACTIONS. In a reverse repurchase arrangement, VCA 10 agrees to sell one of
its portfolio securities and at the same time agrees to repurchase the same
security at a set price and time in the future. During the reverse repurchase
period, VCA 10 often continues to receive principal and interest payments on
the security that it "sold." Each reverse repurchase agreement reflects a rate
of interest for use of the money received by VCA 10 and, for this reason, has
some characteristics of borrowing.
Dollar rolls occur when VCA 10 sells a security for delivery in the current
month and at the same time agrees to repurchase a substantially similar security
from the same party at a specified price and time in the future. During
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<PAGE> 13
the roll period, VCA 10 does not receive the principal or interest earned on
the underlying security. Rather, it is compensated by the difference in the
current sales price and the specified future price as well as by interest
earned on the cash proceeds of the original "sale."
Reverse repurchase agreements and dollar rolls involve the risk that the market
value of the securities held by VCA 10 may decline below the price of the
securities VCA 10 has sold but is obligated to repurchase. In the event the
buyer of securities under a reverse repurchase agreement or dollar roll files
for bankruptcy or becomes insolvent, VCA 10's use of the proceeds of the
agreement may be restricted pending a determination by the other party, or its
trustee or receiver, whether to enforce VCA 10's obligation to repurchase the
securities.
From time to time, VCA 10 may purchase or sell securities on a WHEN-ISSUED or
DELAYED DELIVERY basis - that is, delivery and payment can take place a month
or more after the date of the transaction. VCA 10 will enter into when-issued
or delayed delivery transactions only when it intends to actually acquire the
securities involved.
VCA 10 may also enter into SHORT SALES AGAINST THE BOX. In a short sale we sell
a security we do not own to take advantage of an anticipated decline in the
stock's price. VCA 10 borrows the stock for delivery and if it can buy the
stock later at a lower price, a profit results. A short sale is "against the
box" when VCA 10 owns securities identical to those sold short.
VCA 10 may also use FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS. VCA 10's
successful use of forward foreign currency exchange contracts depends on our
ability to predict the direction of currency exchange markets and political
conditions, which requires different skills and techniques than predicting
changes in the securities markets generally.
VCA 10 may LEND its portfolio securities and invest up to 15% of its net assets
in ILLIQUID SECURITIES. Illiquid securities include those with legal or
contractual restrictions on resale, those without a readily available market
and repurchase agreements with maturities of longer than 7 days.
There is risk involved in the investment strategies we may use. Some of our
strategies require us to try to predict whether the price or value of an
underlying investment will go up or down over a certain period of time. There
is always the risk that investments will not perform as we thought they would.
Like any mutual fund, an investment in VCA 10 could lose value, and you could
lose money.
Additional information about the investment techniques described above is
provided in the SAI.
VCA 11
VCA 11's investment objective is to seek as HIGH A LEVEL OF CURRENT INCOME AS
IS CONSISTENT WITH THE PRESERVATION OF CAPITAL AND LIQUIDITY. To achieve this
objective, we invest in a diversified portfolio of short-term debt obligations
issued by the U.S. government, its agencies and instrumentalities, as well as
commercial paper, variable rate demand notes, bills, notes and other
obligations issued by banks, corporations and other companies and obligations
issued by U.S and foreign banks, companies or foreign governments.
We make investments that meet specific rules designed for money market mutual
funds, including Rule 2a-7 of the Investment Company Act of 1940 (the 1940
Act). As such, we will not acquire any security with a remaining period to
repayment of principal exceeding 397 days, and we will maintain a
dollar-weighted average portfolio of 90 days or less. In addition, we will
comply with the diversification, quality and other requirements of Rule 2a-7.
This means, generally, that the instruments that we purchase present "minimal
credit risk" and are of "eligible quality." "Eligible quality" for this purpose
means a security: (i) rated in one of the two highest short-term rating
categories by at least two major rating services (or if only one major rating
service has rated the security, as rated by that service); or (ii) if unrated,
of comparable quality in our judgment. All securities that we purchase will be
denominated in U.S. dollars. (See the Appendix to this prospectus.)
COMMERCIAL PAPER is short-term debt obligations of banks, corporations and
other borrowers. The obligations are usually issued by financially strong
businesses and often include a line of credit to protect purchasers of the
obligations. An ASSET-BACKED SECURITY is a loan or note that pays interest
based upon the cash flow of a pool of assets, such as mortgages, loans and
credit card receivables. FUNDING AGREEMENTS are contracts issued by insurance
companies that guarantee a return of principal, plus some amount of interest.
When purchased by money market funds, funding agreements will typically be
short-term and will provide an adjustable rate of interest. CERTIFICATES OF
DEPOSIT, TIME DEPOSITS, BANKERS' ACCEPTANCES and BANK NOTES are obligations
issued by or through a bank. These instruments depend upon the strength of the
bank involved in the borrowing to give investors comfort that the borrowing
will be repaid when promised.
We may purchase DEBT SECURITIES that include DEMAND FEATURES, which allow us to
demand repayment of a debt obligation before the obligation is due or
"matures." This means that longer term securities can be purchased because of
our expectation that we can demand repayment of the obligation at an agreed
price within a rela-
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<PAGE> 14
tively short period of time, in compliance with the rules applicable to money
market mutual funds. (See the Appendix to this prospectus.)
VCA 11 may also purchase FLOATING RATE and VARIABLE RATE securities. These
securities pay interest at rates that change periodically to reflect changes in
market interest rates. Because these securities adjust the interest they pay,
they may be beneficial when interest rates are rising because of the additional
return VCA 11 will receive, and they may be detrimental when interest rates are
falling because of the reduction in interest payments to VCA 11.
We may also invest in loans arranged through private negotiations between a
corporation which is the borrower and one or more financial institutions that
are the lenders. Generally, these types of investments are in the form of LOAN
PARTICIPATIONS. In loan participations, VCA 11 will have a contractual
relationship with the lender but not with the borrower. This means VCA 11 will
only have rights to principal and interest received by the lender. It will not
be able to enforce compliance by the borrower with the terms of the loan and
may not have a right to any collateral securing the loan. If the lender becomes
insolvent, VCA 11 may be treated as a general creditor and not benefit from any
set-off between the lender and the borrower.
From time to time, VCA 11 may invest in REPURCHASE AGREEMENTS. In a repurchase
agreement one party agrees to sell a security and also to repurchase it at a
set price and time in the future. The period covered by a repurchase period is
usually very short - possibly overnight or a few days - though it can extend
over a number of months. Because these transactions may be considered loans of
money to the seller of the underlying security, VCA 11 will only enter into
repurchase agreements that are fully collaterized. VCA 11 will not enter into
repurchase agreements with Prudential or its affiliates as seller. However, VCA
11 is seeking regulatory approval to permit it to enter into joint repurchase
transactions with other Prudential investment companies.
From time to time, VCA 11 may purchase or sell securities on a WHEN-ISSUED or
DELAYED DELIVERY basis - that is, delivery and payment can take place a month
or more after the date of the transaction. VCA 11 will enter into when-issued
or delayed delivery transactions only when it intends to actually acquire the
securities involved.
Up to 10% of VCA 11's net assets may be invested in ILLIQUID securities.
Illiquid securities include those with legal or contractual restrictions, those
without a readily available market and repurchase agreements with maturities of
longer than 7 days.
The securities that we may purchase may change over time as new types of money
market instruments are developed. We will purchase these new instruments,
however, only if their characteristics and features follow the rules governing
money market mutual funds.
Since VCA 11 invests only in money market instruments, there is not likely to
be an opportunity for capital appreciation. Debt obligations, including money
market instruments, also involve CREDIT RISK - the risk that the borrower will
not repay an obligation, and MARKET RISK - the risk that interest rates may
change and affect the value of the obligation. There is also risk involved in
the investment strategies we may use. Some of our strategies require us to try
to predict whether the price or value of an underlying investment will go up or
down over a certain period of time. There is always the risk that investments
will not perform as we thought they would. Like any mutual fund, an investment
in VCA 11 could lose value, and you could lose money.
VCA 11's investment in U.S. dollar denominated foreign securities involves
additional risks. For example, foreign banks and companies generally are not
subject to the same types of regulatory requirements that U.S. banks and
companies are. Foreign political developments may adversely affect the value of
foreign securities. VCA 11's foreign securities may also be affected by changes
in foreign currency rates. These effects would be linked to the ability of the
issuer to repay the debt in U.S. dollars.
Information about all of the investment techniques described above, including
the risks associated with their use, is provided in the SAI.
AN INVESTMENT IN VCA 11 IS NEITHER INSURED
NOR GUARANTEED BY THE U.S. GOVERNMENT.
THE SERIES FUND PORTFOLIOS
We list below the investment objectives of the seven Series Fund portfolios
currently available for investment through VCA 24 under the Contracts.
CONSERVATIVE BALANCED PORTFOLIO. Achievement of a favorable total investment
return consistent with a portfolio having a conservatively managed mix of money
market instruments, fixed income securities, and common stocks, in proportions
believed by the investment manager to be appropriate for an investor desiring
diversification of investment who prefers a relatively lower risk of loss than
that associated with the Flexible Managed Portfolio while
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<PAGE> 15
recognizing that this reduces the chances of greater appreciation.
DIVERSIFIED BOND PORTFOLIO. A high level of income over the longer term while
providing reasonable safety of capital through investment primarily in readily
marketable intermediate and long-term fixed income securities that provide
attractive yields but do not involve substantial risk of loss of capital
through default.
EQUITY PORTFOLIO. Capital appreciation through investment primarily in common
stocks of companies, including major established corporations as well as
smaller capitalization companies, that appear to offer attractive prospects of
price appreciation that is superior to broadly-based stock indices. Current
income, if any, is incidental.
FLEXIBLE MANAGED PORTFOLIO. Achievement of a high total return consistent with
a portfolio having an aggressively managed mix of money market instruments,
fixed income securities, and common stocks, in proportions believed by the
investment manager to be appropriate for an investor desiring diversification
of investment who is willing to accept a relatively high risk of loss in an
effort to achieve greater appreciation.
GLOBAL PORTFOLIO. Long-term growth of capital through investment primarily in
common stock and common stock equivalents of foreign and domestic issuers.
Current income, if any, is incidental.
GOVERNMENT INCOME PORTFOLIO. A high level of income over the longer term
consistent with the preservation of capital through investment primarily in
U.S. Government securities, including intermediate and long-term U.S. Treasury
securities and debt obligations issued by agencies of or instrumentalities
established, sponsored or guaranteed by the U.S. Government. At least 65% of
the total assets of the portfolio will be invested in U.S. Government
securities.
STOCK INDEX PORTFOLIO. Achievement of investment results that correspond to the
price and yield performance of publicly traded common stocks in the aggregate
by following a policy of attempting to duplicate the price and yield
performance of the Standard & Poor's 500 Composite Stock Price Index.
The Conservative Balanced, Flexible Managed and Equity Portfolios may invest in
below investment grade fixed income securities. Medium to lower rated and
comparable non-rated securities tend to offer higher yields than higher rated
securities with the same maturities because the historical financial condition
of the issuers of such securities may not have been as strong as that of other
issuers. Since medium to lower rated securities generally involve greater risks
of loss of income and principal than higher rated securities, investors should
consider carefully the relative risks associated with investments in high
yield/high risk securities which carry medium to lower ratings and in
comparable non-rated securities. Investors should understand that such
securities are not generally meant for short-term investing.
The investment policies, restrictions and risks associated with each of these
seven portfolios are described in the accompanying prospectus for the Series
Fund. Certain restrictions are set forth in the Series Fund's SAI.
Determination of Net Asset Value
To keep track of investment results, each Participant is credited with Units in
the investment options he or she has selected. Initially, the number of Units
credited to a Participant is determined by dividing the amount of the
contribution made on his or her behalf by the applicable Unit Value for that
day for that investment option. After that, the value of the Units is adjusted
each day to reflect the investment returns and expenses of the investment
option plus any Contract charges that may apply to the Participant. The
procedures for computing the net asset value for shares of the Series Fund are
described in the accompanying Series Fund prospectus.
The net asset value of each Unit for VCA 10 and VCA 11 is determined once a day
at 4:15 p.m. New York Time - on each day the New York Stock Exchange is open
for business. If the New York Stock Exchange closes early on a day, the NAVs
will be calculated some time between the closing time and 4:15 p.m. on that
day.
EQUITY SECURITIES are generally valued at the last sale price on an exchange or
NASDAQ, or if there is no sale, at the mean between the most recent bid and
asked prices on that day. If there is no asked price, the security will be
valued at the bid price. Equity securities that are not sold on an exchange or
NASDAQ are generally valued by an independent pricing agent or principal market
maker.
All SHORT-TERM DEBT SECURITIES held by VCA 11 are valued at amortized cost.
Short-term debt securities having remaining maturities of 60 days or less held
by VCA 10 are valued at amortized cost. The amortized cost valuation method is
widely used by mutual funds. It means that the security is valued initially at
its purchase price and then decreases (or increases when a security is purchased
at a discount) in value by equal amounts each day until the security matures. It
almost always results in a value that is extremely close to the actual market
value.
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OTHER DEBT SECURITIES - those that are not valued on an amortized cost basis -
are valued using an independent pricing service.
OPTIONS ON STOCK AND STOCK INDEXES that are traded on an national securities
exchange are valued at the average of the bid and asked prices as of the close
of that exchange.
FUTURES CONTRACTS and OPTIONS ON FUTURES CONTRACTS are valued at the last sale
price at the close of the commodities exchange or board of trade on which they
are traded. If there has been no sale that day, the securities will be valued
at the mean between the most recently quoted bid and asked prices on that
exchange or board of trade.
SECURITIES FOR WHICH NO MARKET QUOTATIONS ARE AVAILABLE will be valued at fair
value by Prudential under the supervision of the VCA 10 or VCA 11 Committee.
Management
VCA 10 and VCA 11 each has a Committee - similar to a board of directors - that
provides general supervision. The members of the VCA 10 and VCA 11 Committees
are elected for indefinite terms by the Participants of VCA 10 and VCA 11,
respectively. A majority of the members of each Committee are not "interested
persons" of Prudential or its affiliates, as defined by the 1940 Act.
Information about the Series Fund's Board of Directors is provided in the
accompanying prospectus for the Series Fund and in the Series Fund SAI.
Under separate investment management agreements, Prudential serves as the
investment manager of VCA 10, VCA 11 and the Series Fund. In turn, Prudential
has contracted with its wholly owned subsidiary, Prudential Investment
Corporation (PIC), to provide these investment services. Nevertheless,
Prudential continues to have responsibility for all investment management
services. Prudential reimburses PIC for its costs and expenses incurred in
providing these services. PIC is registered as an investment adviser under the
Investment Advisers Act of 1940.
Contract Charges
DEFERRED SALES CHARGE
No sales charge is imposed when a contribution is made on your behalf to VCA
10, VCA 11 or VCA 24. This means 100% of the contribution is invested. However,
a deferred sales charge may be imposed if contributions are withdrawn within
seven years after you began your participation in the MEDLEY Program. The
amount of the deferred sales charge depends on the number of years you have
been in the MEDLEY Program, the year in which the withdrawal is made and the
kind of retirement arrangement that covers the Participant.
The maximum deferred sales charge that may be imposed are shown below. Certain
Contracts may impose lower deferred sales charges.
<TABLE>
<CAPTION>
Years of Deferred Sales
Participation in Charge, as a % of
the Program* Contributions Withdrawn
- ---------------- -----------------------
<S> <C>
Up to 1 year............. 7%
1 year up to 2 years..... 6%
2 years up to 3 years.... 5%
3 years up to 4 years.... 4%
4 years up to 5 years.... 3%
5 years up to 6 years.... 2%
6 years up to 7 years.... 1%
7 years and after........ 0%
</TABLE>
- -----------------------
* If you make a withdrawal on the anniversary date of your participation in the
MEDLEY Program, any applicable deferred sales charge will be based on the
longer period of Program participation.
The deferred sales charge is used to compensate PIMS for its expenses in
selling the Contracts. If PIMS' expenses exceed the amount of deferred sales
charges received, Prudential will make up the difference from its general
account.
The applicable deferred sales charge is deducted from the amount withdrawn. For
purposes of calculating charges, your participation in the MEDLEY Program
begins on the date we accept the first contribution made on your behalf under
one of the Contracts, a Companion Contract, the fixed rate option, mutual fund
or other investment vehicles made available by Prudential. Before a
contribution will be accepted, however, it must be received in "good order."
This means that all requested information must be submitted in a manner
satisfactory to Prudential.
WAIVER OF DEFERRED SALES CHARGE
A deferred sales charge will not be imposed on any contributions you withdraw:
- - to purchase an annuity under a Contract
- - to provide a death benefit
- - under the systematic withdrawal plan
- - under a minimum distribution plan
- - in the case of financial hardship or disability retirement as determined
under an employer's retirement arrangement
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<PAGE> 17
- - (except for IRAs) due to a Participant's resignation or retirement or
termination of the Participant's employment by the Contractholder
- - after 7 years of participation in the MEDLEY Program
If you decide to transfer contributions among the investment options available
under your Contract, you will not be subject to a deferred sales charge.
However, these transfers are treated as contributions into the new investment
option for purposes of determining any deferred sales charges on future
withdrawals.
Under certain circumstances, you may borrow contributions made on your behalf.
A loan will reduce the number of your Units but will not be subject to a
deferred sales charge. As you pay back the loan, any principal repayment will
be treated as a new contribution for purposes of calculating any deferred sales
charge on future withdrawals. If a Participant defaults on a loan, the
outstanding balance of the loan will be treated as a withdrawal and the
deferred sales charge will apply.
Withdrawals, transfers and loans from VCA 10, VCA 11 and VCA 24 are considered
to be withdrawals of contributions until all of the Participant's contributions
have been withdrawn, transferred or borrowed. No deferred sales charge is
imposed on withdrawals of any amount in excess of contributions.
ANNUAL ACCOUNT FEE
Every year, you will be charged an account fee for recordkeeping and other
administrative services. This fee is paid to Prudential and will not exceed $30
in any year. The account fee is deducted automatically from your account on the
last business day of each calendar year. New Participants will only be charged
a portion of the annual account fee, depending on the number of months
remaining in the calendar year after the first contribution is made.
If you withdraw all your contributions (other than to purchase an annuity under
a Contract) before the end of a year, the fee will be charged on the date of
the last withdrawal. In this case, the fee will be prorated unless you withdraw
all of your contributions in the same year the initial contribution is made -
in which case, the full account fee will be charged.
The total annual account charge with respect to all of a Participant's accounts
will not be greater than $30. The charge will first be made against a
Participant's account under a fixed-dollar Companion Contract or fixed rate
option of a Combination Contract. If the Participant has no account under a
Companion Contract or the fixed rate option, or if that account is too small to
pay the charge, the charge will be made against the Participant's account in
VCA 11. If the Participant has no VCA 11 account, or if that account is too
small to pay the charge, the charge will then be made against the Participant's
VCA 10 account. If the Participant has no VCA 10 account, or if it is too small
to pay the charge, the charge will then be made against any one or more of the
Participant's accounts in VCA 24.
CHARGE FOR ADMINISTRATIVE EXPENSE AND
INVESTMENT MANAGEMENT SERVICES
Like many other variable annuity contracts, VCA 10 and VCA 11 are subject to
fees for investment management and administration services. These fees are
deducted directly from the assets of VCA 10 and VCA 11 but will have the effect
of decreasing their investment performance, which in turn, determines how much
you earn during the accumulation period of your Contract.
VCA 10 and VCA 11 are each charged an annual investment management fee of .25
of 1% of their net assets. In addition, each is also charged an annual
administration fee of .75 of 1% of its net assets.
VCA 24 is subject to an annual administrative fee of .75 of 1% of its net
assets. Although VCA 24 itself does not pay an investment management fee, the
Series Fund portfolios do as follows:
<TABLE>
<CAPTION>
Investment Management Fee
Portfolio (as a % of net assets)
- --------- -------------------------
<S> <C>
Conservative Balanced.. 0.55%
Diversified Bond....... 0.40%
Equity................. 0.45%
Flexible Managed....... 0.60%
Global................. 0.75%
Government Income...... 0.40%
Stock Index............ 0.35%
</TABLE>
Other expenses incurred by the Series Fund portfolios include costs of
portfolio transactions, legal and accounting expenses, and the fees of the
Series Fund's custodian and transfer agent. More information about these
expenses is included in the accompanying Series Fund prospectus.
MODIFICATION OF CHARGES
Under certain of the Contracts, Prudential may impose lower deferred sales
charges and account fees. We would do this if we think that our sales or
administrative costs with respect to a Contract will be less than for the
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<PAGE> 18
other Contracts. This might occur if Prudential is able to save money by using
mass enrollment procedures or if recordkeeping or sales efforts are performed
by the Contractholder or a third party. We may also lower the deferred sales
charge to comply with state laws.
THE CONTRACTS
The Contracts described in this prospectus are generally issued to employers
who make contributions on behalf of their employees. The Contracts can also be
issued to associations or trusts that represent employers or represent
individuals who themselves become Participants. Even though the employer,
association or trust is the Contractholder, the Participants usually - although
not always - have the rights under the Contract described in this prospectus.
You should check the provisions of your employer's plan or any agreements with
your employer to see if there are any limitations on your Contract rights.
For individuals who are not associated with a single employer or other
organization, Prudential offers a Non-Qualified Combination Contract.
THE ACCUMULATION PERIOD
1. Contributions
In most cases, contributions are made through a payroll deduction or similar
arrangement with the Contractholder. If contributions are being made to an
Individual Retirement Annuity they must be at least $500. (Contributions to an
Individual Retirement Annuity for a non-working spouse or a working spouse who
elects to be treated as a non-working spouse are limited to $250 per year.)
You decide how contributions made on your behalf will be allocated among the
investment options available under your Contract. You can change this
allocation by simply notifying us at the address shown on the cover of this
prospectus - or if some other organization provides the recordkeeping services
under your Contract, by contacting them.
When a contribution is made, 100% of it is invested in the investment option
you have chosen. You are credited with Units which are determined by dividing
the amount of the contribution by the Unit Value for that investment option for
that day. Then the value of your Units is adjusted each business day to reflect
the performance and expenses of your investment option. Units will be redeemed
as necessary to pay your annual account charge.
The first contribution made on your behalf will be invested within two business
days after it has been received by us if we receive all the necessary
enrollment information. If the Contractholder submits an initial contribution
for you and the enrollment form is not in order, we will place the contribution
into one of two money market options until the paperwork is complete. The two
money market options are:
- - If the Contractholder has purchased only MEDLEY Contracts or a MEDLEY
Contract together with either a group variable annuity contract issued
through The Prudential Variable Contract Account-2 or unaffiliated mutual
funds, then the initial contribution will be invested in VCA 11.
- - If the Contractholder has purchased MEDLEY contracts as well as shares of a
money market fund, the initial contribution will be invested in that money
market fund.
In this event, the Contractholder will be promptly notified. However, if the
enrollment process is not completed within 105 days, we will redeem the money
market shares. Any proceeds paid to the Contractholder under this procedure may
be considered a prohibited transaction and taxable reversion to the
Contractholder under current provisions of the Code. Similarly, returning
proceeds may cause the Contractholder to violate a requirement under the
Employee Retirement Income Security Act of 1974, as amended (ERISA), to hold
all plan assets in trust. Both problems may be avoided if the Contractholder
arranges to have the proceeds paid into a qualified trust or annuity contract.
2. The Unit Value
Unit Values are determined each business day by multiplying the previous day's
Unit Value by the "gross change factor" for the current business day and
reducing this amount by the daily equivalent of the investment management and
administrative fees. The gross change factor for VCA 10 and VCA 11 is
determined by dividing the current day's net assets, ignoring changes resulting
from new purchase payments and withdrawals, by the previous day's net assets.
The gross change factor for VCA 24 is calculated by dividing the current day's
net asset value per share of the applicable portfolio of the Series Fund by the
previous day's net value per share.
3. Withdrawal of Contributions
Because the Contracts are intended as a part of your retirement arrangements
there are certain restrictions on when you can withdraw contributions. For
example, if your retirement plan is subject to Sections 401(a) or 403(b) of the
Internal Revenue Code, contributions made from a Participant's own salary
(before taxes) cannot be withdrawn unless the Participant is at least 59 1/2
years old, no longer works for his or her employer, becomes disabled or dies.
(Contributions made from your own salary may sometimes be withdrawn in the case
of hardship, but you
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<PAGE> 19
need to check your particular retirement arrangements.) Some retirement
arrangements will allow you to withdraw contributions made by the employer on
your behalf or contributions you have made with after-tax dollars.
Retirement arrangements that are not covered by Sections 401(a) or 403(b) of
the Internal Revenue Code are subject to different limitations. For example,
Section 457 Plans usually allow withdrawals only when the Participant reaches
70 1/2 years of age, no longer works for his or her employer or for
unforeseeable emergencies.
Under certain retirement arrangements, federal law requires that married
Participants must obtain their spouses' written consent to make a withdrawal
request. The spouse's consent must be notarized or witnessed by an authorized
plan representative.
BECAUSE WITHDRAWALS WILL GENERALLY HAVE FEDERAL TAX IMPLICATIONS, WE URGE YOU TO
CONSULT WITH YOUR TAX ADVISER BEFORE MAKING ANY WITHDRAWALS UNDER YOUR CONTRACT.
Minimum Withdrawals. Certain Contracts require that any withdrawal must be at
least $250. If your Units are worth less than $250, these Contracts may permit
you to make a single withdrawal of all your Units. The amount withdrawn will be
subject to any applicable deferred sales charges and, if you are withdrawing
all of your Units, the full annual account charge will be automatically
deducted regardless of when in the calendar year you make the withdrawal.
Payment of Redemption Proceeds. In most cases, once we receive a withdrawal
request in good order, we will pay you the redemption amount (less any
applicable deferred sales charges and account fees) within seven days. The SEC
permits us to delay payment of redemption amounts beyond seven days under
certain circumstances - for example, when the New York Stock Exchange is closed
or trading is restricted.
Plan Expenses. Under certain Contracts, withdrawals may be made to pay expenses
of the plan.
4. Systematic Withdrawal Plan
If you are at least 59 1/2 years old and have Units equal to least $5,000, you
may be able to participate in the Systematic Withdrawal Plan. However,
participation in this program may have significant tax consequences and
Participants should consult with their tax adviser before signing up.
Plan enrollment. To participate in the Systematic Withdrawal Plan, you must
make an election on a form approved by Prudential. (Under some retirement
arrangements, if you are married you may also have to obtain your spouse's
written consent in order to participate in the Systematic Withdrawal Plan.) You
can choose to have withdrawals made on a monthly, quarterly, semi-annual or
annual basis. On the election form, you will also be asked to indicate whether
you want payments in equal dollar amounts or made over a specified period of
time. If you choose the second option, the amount of the withdrawal payment
will be determined by dividing the total value of your Units by the number of
withdrawals left to be made during the specified time period. These payments
will vary in amount reflecting the investment performance of your investment
option during the withdrawal period. You may change the frequency of
withdrawals, as well as the amount, once during each calendar year on a form
which we will provide to you on request.
Applicability of Deferred Sales Charge. No deferred sales charge is imposed on
withdrawals made under the Systematic Withdrawal Plan. However, we reserve the
right to impose a charge if you participate in the Systematic Withdrawal Plan
for less than three years. A Participant in the Systematic Withdrawal Plan who
is over 59 1/2 may make one additional withdrawal during each calendar year in
an amount that does not exceed 10% of the aggregate value of his or her Units.
This withdrawal will not be subject to any deferred sales charge. (Different
procedures may apply if Prudential is not the recordkeeper for your Contract.)
Termination of Plan Participation. You may terminate your participation in the
Systematic Withdrawal Plan at any time upon notice to us. If you do so, you
cannot participate in the Systematic Withdrawal Plan again until the next
calendar year.
Order of Withdrawals. When you participate in the Systematic Withdrawal Plan,
withdrawals will be made first from your Companion Contract Units or fixed rate
option Units, if any. Once all of these Units have been redeemed, systematic
withdrawals will be made by redeeming your Units in the following order:
First, VCA 11 Units
- - Next, VCA 10 Units
- - Next, Units in the Equity Portfolio of the Series Fund
- - Next, Units in the Diversified Bond Portfolio of the Series Fund
- - Next, Units in the Conservative Balanced Portfolio of the Series Fund
- - Next, Units in the Flexible Managed Portfolio of the Series Fund
- - Next, Units in the Stock Index Portfolio of the Series Fund
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<PAGE> 20
- - Next, Units in the Government Income Portfolio of the Series Fund
- - Next, Units in the Global Portfolio of the Series Fund
5. Texas Optional Retirement Program
Special rules apply with respect to Contracts covering persons participating in
the Texas Optional Retirement Program in order to comply with the provisions of
Texas law relating to this program. Please refer to your Contract documents if
this applies to you.
6. Death Benefits
In the event a Participant dies before the income period under a Contract is
completed, a death benefit will be paid to the Participant's designated
beneficiary. The death benefit will equal the value of the Participant's Units
on the day we receive the claim in good order, less the annual account fee.
Payment Methods. You, the Participant, can elect to have the death benefit paid
to your beneficiary in one cash sum, as systematic withdrawals, as an annuity,
or a combination of the three, subject to the minimum distribution rules of
Section 401(a)(9) of the Internal Revenue Code described below. If you do not
make an election, your beneficiary may chose from the four options within the
time limit set by your retirement arrangement. If the beneficiary does not make
the election within the time limit, he or she will receive a one-sum cash
payment equal to the aggregate value of the Participant's Units less the annual
account fee.
Minimum Death Benefit. Under certain retirement arrangements, if you (or your
beneficiary, if you did not) elected to have the death benefit paid in one-sum
cash payment by redeeming all of your Units in one or more of the investment
options, Prudential will add to the payment, if necessary, so that the death
benefit is not less than the contributions made on your behalf (less any
withdrawals, transfers and the annual account fee). Certain Contracts may
provide for an even higher minimum amount.
ERISA. Under certain types of retirement plans, ERISA requires that in the case
of a married Participant who dies prior to the date payments could have begun,
a death benefit be paid to the Participant's spouse in the form of a "qualified
pre-retirement survivor annuity." This 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 value of the Participant's Units as of the date of the Participant's
death. In these cases, the spouse may consent to waive the benefit. The consent
must be in a writing, acknowledge the effect of waiving the coverage, contain
the signatures of both the Participant and the spouse and be notarized or
witnessed by an authorized plan representative. If the spouse does not consent,
or the consent is not in good order, 50% of the value of the Participant's
Units will be paid to the spouse, even if the Participant named someone else as
the beneficiary. The remaining 50% will be paid to the designated beneficiary.
Annuity Option. Under many retirement arrangements, a beneficiary who elects a
fixed-dollar annuity death benefit may choose from among the forms of annuity
available. (See "The Annuity Period - Available Forms of Annuity," below.) He
or she will be entitled to the same annuity purchase rate basis that would have
applied if you were purchasing the annuity for yourself. The beneficiary may
make this election immediately or at some time in the future.
Systematic Withdrawal Option. If a beneficiary has chosen to receive the death
benefit in the form of systematic withdrawals, he or she may terminate the
withdrawals and receive the remaining value of the Participant's Units in cash
or to purchase an annuity. The beneficiary may also change the frequency or
amount of withdrawals, subject to the minimum distribution rules described
below.
Until Pay-out. Until all of your Units are redeemed and paid out in the form of
a death benefit, they will be maintained for the benefit of your beneficiary.
However, a beneficiary will not be allowed to make contributions or take a loan
against the Units. No deferred sales charges will apply on withdrawals by a
beneficiary.
7. Discontinuance of Contributions
A Contractholder can stop contributions on behalf of all Participants under a
Contract by giving notice to Prudential. If this happens, you may still make
withdrawals in order to transfer amounts, purchase an annuity or for any other
purpose - just as if contributions were still being made on your behalf. But if
contributions are discontinued for a certain length of time (24 months in
certain states, 36 in others) and your Units equal less than a certain amount
($1,000 in certain states, $2,000 in others), we have the right under some
retirement arrangements to redeem your Units. In that case, you would receive
the value of your Units - less the annual account charge - as of the date of
cancellation.
We also have the right to refuse new Participants or new contributions on
behalf of existing Participants upon 60 days' notice to the Contractholder.
(Some Contracts require 90 days' advance notice.)
8. Transfer Payments
Under most of the Contracts, you can transfer all or some of your Units from
one investment option to another. In
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<PAGE> 21
order to make a transfer, you need to provide us with a completed written
transfer request form or a properly authorized telephone or Internet transfer
request (see below). There is no minimum transfer amount but we have the right
to limit the number of transfers you make in any given period of time. Although
there is no charge for transfers currently, we may impose one at any time upon
notice to you.
Processing Transfer Requests. On the day we receive your transfer request in
good order, we will redeem the number of Units you have indicated (or the
number of Units necessary to make up the dollar amount you have indicated) and
invest in Units of the investment option you have selected. The value of the
Units redeemed and of the Units in the new investment option will be determined
by dividing the amount transferred by the Unit Value for that day for the
respective investment option.
Different procedures may apply if recordkeeping services for your Contract are
performed by an organization other than Prudential.
Alternate Funding Agency. Some Contracts provide that if a Contractholder stops
making contributions, it can request Prudential to transfer Units from any of
the investment options to a designated alternate funding agency. If the
Contract is used in connection with certain non-qualified annuity arrangements,
tax-deferred annuities subject to Section 403(b) of the Internal Revenue Code
or with an Individual Retirement Annuity, we will notify each Participant with
Units as of the date of the Contractholder's request. A Participant may then
choose to keep his or her Units in the MEDLEY investment options or have them
transferred to the alternate funding agency. If we do not hear from a
Participant within 30 days, his or her Units will remain in the MEDLEY
investment options.
If a Contractholder stops contributions under a Contract used in connection
with a deferred compensation plan subject to Section 457 of the Internal
Revenue Code, Prudential has the right to transfer Participants' Units from VCA
10, VCA 11 and VCA 24 to an alternate funding agency.
9. Requests by Telephone and other Electronic Means
Depending on your Contract, you may be able to make transfers and other
transactions by telephone, telecopy or other electronic means - like the
Internet. If your Contract provides for these privileges, you will
automatically be able to use them unless you decline them in writing on a form
provided by us or the Contractholder.
For your protection and to prevent unauthorized exchanges, telephone calls and
other communications will be recorded and you will be asked to provide your
personal identification number or other identifying information. Neither
Prudential nor our agents will be liable for any loss, liability or cost which
results from acting upon instructions reasonably believed to be genuine.
During times of extraordinary economic or market changes, electronic
instructions may be difficult to implement.
Some states may not allow these privileges.
10. Prudential Mutual Funds
We may offer certain Prudential mutual funds as an alternative investment
vehicle for existing MEDLEY Contractholders. These funds are managed by
Prudential Investments Fund Management LLC, a wholly-owned subsidiary of
Prudential. If the Contractholder elects to make one or more of these funds
available, Participants may direct new contributions to the funds.
Exchanges. Prudential may also permit Participants to exchange some or all of
their MEDLEY Units for shares of the Prudential mutual funds without imposing
any sales charges. In addition, Prudential may allow Participants to exchange
some or all of their shares in the Prudential mutual funds for MEDLEY Units. No
sales charge is imposed on these exchanges or subsequent withdrawals. Before
deciding to make any exchanges, you should carefully read the prospectus for
the Prudential mutual fund you are considering. The Prudential mutual funds are
not funding vehicles for variable annuity contracts and therefore do have the
same features - such as a minimum death benefit - as the MEDLEY Contracts.
Offer Period. Prudential will determine the time periods during which these
exchange rights will be offered. In no event will these exchange rights be
offered for a period of less than 60 days. Any exchange offer may be
terminated, and the terms of any offer may change. After an offering, a
Participant may only make transfers to the Prudential mutual funds to the
extent his or her Units are not subject to a deferred sales charge.
Annual Account Fee. If a Participant exchanges all of his or her MEDLEY Units
for shares in the Prudential mutual funds, the annual account fee under the
Contract may be deducted from the Participant's mutual fund account.
Taxes. Generally, there should be no adverse tax consequences if a Participant
in a qualified retirement arrangement, in a deferred compensation plan under
Section 457 or in an individual retirement annuity under Section 408 of the
Internal Revenue Code elects to exchange amounts in the Participant's current
MEDLEY account(s) for shares of Prudential mutual funds or vice versa. For
403(b) plans, exchanges from a MEDLEY account to a Prudential mutual fund will
be effected from a 403(b) annuity con-
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<PAGE> 22
tract to a 403(b)(7) custodial account so that such transactions will not
constitute taxable distributions. Conversely, exchanges from a Prudential
mutual fund to a MEDLEY account will be effected from a 403(b)(7) custodial
account to a 403(b) annuity contract so that such transactions will not
constitute taxable distributions. However, 403(b) Participants should be aware
that the Internal Revenue Code may impose more restrictive rules on early
withdrawals from Section 403(b)(7) custodial accounts under the Prudential
mutual funds than under the MEDLEY Program.
Non-Qualified Contracts. For tax reasons, Prudential does not intend to permit
exchanges from a MEDLEY Contract to a Prudential mutual fund for Participants
under a Non-Qualified Combination Contract issued to a plan covering employees
that share a common employer or that are otherwise associated.
Demutualization. If the Contractholder makes Prudential mutual funds available
and Participants exchange their MEDLEY Units for shares of the Prudential
mutual funds, and if Prudential demutualizes in the future, the Contractholder
might not receive consideration it might otherwise have received or the amount
of the consideration the Contractholder receives could be smaller than had
Participants not exchanged MEDLEY Units. As a general rule, owners of
Prudential-issued insurance policies and annuity contracts would be eligible,
while mutual fund customers and customers of the company's subsidiaries would
not be. Under New Jersey's demutualization law, an annuity contract would have
to be in effect on the date Prudential's Board of Directors adopts a plan of
reorganization in order to be considered for eligibility. A MEDLEY Contract
will cease to be in effect when all the Participants have exchanged their Units
under a MEDLEY Contract. Decisions regarding the exchange of MEDLEY should be
based on the desire for the features of the mutual funds as well as
Participants' insurance needs, and not on Prudential's potential for
demutualization. For more information about demutualization, see
"Prudential,"above.
11. Discovery Select(SM) Group Retirement Annuity
Certain Participants may be offered an opportunity to exchange their MEDLEY
Units for interests in Discovery Select(SM) Group Retirement Annuity (Discovery
Select), which offers 22 different investment options. The mutual funds
available through Discovery Select are described in the Discovery Select
prospectus and include both Prudential and non-Prudential funds.
For those who are eligible, no charge will be imposed upon transfer into
Discovery Select, however, Participants will become subject to the charges
applicable under that annuity. For purposes of calculating the accumulation
period and any applicable deferred sales charges, years of participation in the
MEDLEY Program will be counted as years of participation in Discovery Select.
Generally, there should be no adverse tax consequences if a Participant in a
qualified retirement arrangement, Section 403(b) plan, Section 457 plan, or
Section 408 individual retirement annuity elects to exchange MEDLEY Units for
interests in Discovery Select.
A copy of the Discovery Select prospectus can be obtained at no cost by calling
1-800-458-6333.
If the Contractholder makes Discovery Select available and Participants
exchange their MEDLEY Units for interests in Discovery Select, and if
Prudential demutualizes in the future, the Contractholder might not receive
consideration it might otherwise have received or the amount of the
consideration the Contractholder receives could be smaller than had
Participants not exchanged MEDLEY. Decisions regarding the exchange of MEDLEY
should be based on the desire for the features of Discovery Select as well as
Participants' insurance needs, and not on Prudential's potential
demutualization. For more information about demutualization, see "Prudential,"
above.
12. Loans
Many of the Contracts permit Participants to borrow against their Units. Like
any other loan, the Participant is required to make periodic payments of
interest plus a portion of the principal. These payments are then invested in
the investment options chosen by the Participant or specified in the Contracts.
The ability to borrow, as well as the interest rate and other terms and
conditions of these loans, may vary from Contract to Contract. Participants
interested in borrowing should consult their Contractholder or Prudential.
Loan Amount. In general (though not under all Contracts), the minimum loan
amount is set out in the Contract documents, or if not specified, will be
determined by Prudential. The most a Participant may borrow is the lesser of:
- - $50,000 reduced by the highest outstanding balance of loans during the
one-year period preceding the date of the loan, or
- - 50% of the value of the Participant's Units.
This maximum is set by federal tax law and applies to all of your loans from
any qualified retirement plan of your employer. Since we cannot monitor your
loan activity relating to other plans, it is your responsibility to do so.
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FAILING TO COMPLY WITH THESE REQUIREMENTS OR DEFAULTING UNDER A LOAN COULD HAVE
NEGATIVE TAX CONSEQUENCES.
Fees. A loan application fee of up to $75 will be charged at the time the loan
is made. This fee will be automatically deducted from your account. Prudential
also charges a loan maintenance fee of up to $25 a year for its recordkeeping
and other administrative services provided in connection with the loan. The
loan maintenance fee, which is deducted quarterly, will be pro rated in the
year in which the loan is repaid.
13. Modified Procedures
Under some Contracts, the Contractholder or a third party provides the
recordkeeping services that would otherwise be provided by Prudential. These
Contracts may have different deferred sales charges and annual account charges
than those described in this prospectus. They also may have different
procedures for allocation, transfer and withdrawal requests. For more
information, contact your Contractholder or third party recordkeeper.
THE ANNUITY PERIOD
1. Electing the Annuity Date and the Form of Annuity
If permitted under federal tax law and your Contract, you may have all or any
part of your Units in VCA 10, VCA 11 or VCA 24 used to purchase a fixed-dollar
annuity under the MEDLEY Program. If you decide to purchase an annuity, you can
choose from any of the options described below unless your retirement
arrangement otherwise restricts you.
The Retirement Equity Act of 1984 requires that a married Participant under
certain types of retirement arrangements must obtain the consent of his or her
spouse if the Participant wishes to select a payout that is not a qualified
joint and survivor annuity. The spouse's consent must be signed, and notarized
or witnessed by an authorized plan representative.
Withdrawals from VCA 10, VCA 11 and VCA 24 that are used to purchase
fixed-dollar annuity under the MEDLEY Program become part of Prudential's
general account, which supports insurance and annuity obligations. Similarly,
amounts allocated to the Companion Contract or the fixed rate option under a
Combination Contract become part of Prudential's general account. Because of
exemptive and exclusionary provisions, interest in the general account have not
been registered under the Securities Act of 1933 (the 1933 Act) nor is the
general account registered as an investment company under the 1940 Act.
Accordingly, neither the general account nor any interests therein are
generally subject to the provisions of the 1933 or 1940 Acts. We have been
advised that the staff of the SEC has not reviewed the disclosures in this
prospectus which relate to the fixed-dollar annuity that may be purchased under
the Contracts. Disclosures regarding this annuity and the general account,
however, may be subject to certain generally applicable provisions of the
federal securities laws relating to accuracy and completeness of statements
made in prospectuses.
2. Available Forms of Annuity
OPTION 1 - LIFE ANNUITY WITH PAYMENTS CERTAIN.
If you purchase this type of an annuity, you will begin receiving monthly
annuity payments immediately. These payments will continue throughout your
lifetime no matter how long you live. You also get to specify a number of
minimum payments that will be made - 60, 120, 180 or 240 months - so that if
you pass away before the last payment is received, your beneficiary will
continue to receive payments for that period.
OPTION 2 - ANNUITY CERTAIN.
If you purchase this type of annuity, you will begin receiving monthly annuity
payments immediately. However, unlike Option 1, these payments will only be
paid during the period you have specified (60, 120, 180 or 240 months). If you
pass away before the last payment is received, your beneficiary will continue
to receive payments for that period. If you outlive the specified time period,
you will no longer receive any annuity payments.
OPTION 3 - JOINT AND SURVIVOR ANNUITY WITH PAYMENTS CERTAIN.
If you purchase this type of annuity, you will begin receiving monthly annuity
payments immediately. These payments will be continued throughout your lifetime
and afterwards, to the person you name as the "contingent annuitant," if
living, for the remainder of her or his lifetime.
When you purchase this type of annuity you will be asked to:
- - specify the length of time you want the contingent annuitant to receive
monthly payments in the same amount as the monthly payments you have received
(this is called the period certain) AND
- - set the percentage of the monthly payment - for example, 33% or 66% or even
100% - you want paid to the contingent annuitant after the period certain for
the remainder of his or her lifetime.
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<PAGE> 24
If both you and the contingent annuitant pass away during the period certain,
payments will be made to the properly designated beneficiary.
Not all of the above forms of annuity may be available under your retirement
arrangements. In some cases, other forms of annuity are available under the
Contracts.
3. Purchasing the Annuity
Once you have selected the type of annuity, you must submit to Prudential a
written election on a form that we will provide to you on request. Unless you
request otherwise, the annuity will begin on the first day of the month after
we have received your election form in good order and you will receive your
first annuity payment within one month after that.
If you withdraw contributions to purchase an annuity, no deferred sales charge
will apply. If it is necessary to withdraw all of your contributions in order
to purchase the annuity, the full annual account charge will be charged unless
the annuity becomes effective on January 1 of any year. The remainder - less
any applicable taxes on annuity considerations - will be applied to the
appropriate annuity purchase rate set forth in your Contract. (Prudential has
the right to determine the amount of monthly payments from annuity purchase
rates if they would provide a larger monthly payment than the rate shown in
your Contract.)
The schedule of annuity purchase rates in a Contract is guaranteed by
Prudential for ten years from the date the Contract is issued. If we modify the
rates after ten years, the new rates will be guaranteed for the next ten years.
A change in annuity purchase rates used for annuities described in Option 2
above will only apply to contributions made after the date of the change. A
change in the rates under the other options will apply to all of your
contributions.
ASSIGNMENT
The right to any payment under a Contract is neither assignable nor subject to
the claim of a creditor unless state or federal law provides otherwise.
CHANGES IN THE CONTRACTS
We have the right under some Contracts to change the annual account fee and
schedule of deferred sales charges after two years. In the event we decide to
change the deferred sales charge schedule, the new charges will only apply to
the contributions you withdraw after the change takes place. For this purpose,
contributions will be treated as withdrawn on a first-in, first-out basis.
Some Contracts also provide that after they have been in effect for five years,
Prudential may change:
- - the deduction from VCA 10, VCA 11 or VCA 24 assets for administrative
expenses,
- - the terms and conditions under which a deferred sales charge is imposed,
- - the minimum contribution amount, AND
- - the terms and amount of any transfer or withdrawal (provided these changes
are permitted under law).
These changes would apply to all of your contributions, regardless of when they
were made.
Some of the Contracts allow us to revise the annual annuity purchase rates from
time to time and all of the Contracts permit us to make changes if we consider
it necessary to comply with any laws or regulations. A Contract may also be
changed at any time by agreement of the Contractholder and Prudential -
however, no change will be made in this way that would adversely affect the
rights of anyone who purchased an annuity prior to that time unless we first
receive their approval.
If Prudential does modify any of the Contracts as discussed above, it will give
the Contractholder at least 90 days' prior notice.
We reserve the right to operate VCA 24 as a different form of registered
investment company or as an unregistered entity, to transfer the Contracts to a
different separate account, or to no longer offer certain of the Series Fund
portfolios, to the extent permitted by law. We also reserve the right to
substitute the shares of any other registered investment company for shares in
the Series Fund that you hold under a Contract. Before we could do this,
however, under current law we would have to obtain the SEC's permission and
notify the Contractholders.
REPORTS
At least once a year, you will receive a report from us showing the number of
your Units in each of VCA 10, VCA 11 and VCA 24. You will also receive
semi-annual reports showing the financial condition of these investment
options.
If a single individual or company invests in the Series Fund through more than
one variable insurance contract, then the individual or company will receive
only one copy of the Series Fund annual and semi-annual reports unless we are
directed otherwise.
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PERFORMANCE INFORMATION
Performance information for VCA 10, VCA 11 and the Series Fund portfolios may
appear in advertisements and reports to current and prospective Contractholders
and Participants. This performance information is based on actual historical
performance and does not indicate or represent future performance.
Total return data is based on the overall dollar or percentage change in the
value of a hypothetical investment. Total return quotations reflect changes in
Unit Values and the deduction of applicable charges.
A cumulative total return figure 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.
VCA 11 may also advertise its current and effective yield. Current yield
reflects the income generated by an investment in VCA 11 over a specified seven
day period. Effective yield is calculated in a similar manner except that
income earned is assumed to be reinvested.
Comparative performance information may from time to time be included in
reports or advertising, including but not limited to, data from Morningstar,
Inc., Lipper Inc., Standard & Poor's 500 Composite Price Index, Lehman Brothers
indexes and other commonly used indexes or industry publications.
PARTICIPATION IN DIVISIBLE SURPLUS
A mutual life insurance company, like Prudential, differs from a stock life
insurance company in that it has no stockholders who are the owners of the
enterprise. Rather, the holders of Prudential contracts participate in the
divisible surplus of Prudential, if any, according to the annual determination
of the Prudential Board of Directors. For Contracts described in this
prospectus, any surplus determined by the Prudential Board of Directors as a
dividend is credited to Participants. NO ASSURANCE CAN BE GIVEN AS TO THE
AMOUNT, IF ANY, THAT WILL BE AVAILABLE FOR DISTRIBUTION UNDER THESE CONTRACTS
IN THE FUTURE.
The following payments of divisible surplus were made under the Contracts in the
years indicated:
<TABLE>
<CAPTION>
1998 1997 1996
--------- ------ -------
<S> <C> <C> <C>
VCA 10 ($1,425,180) ($32,895) ($980,047)
VCA 11 (1,588,734) 0 (89,828)
VCA 24 2,782,398 614,058 789,747
</TABLE>
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.
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), and
retirement programs governed by Internal Revenue Code Section 403(b) (Section
403(b) plans). The provisions of the tax law that apply to these retirement
arrangements that may be funded by the Contracts are complex and you 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).
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" below, which
may be applicable in certain circumstances.
Contributions
In general, assuming that you and your Contractholder follow the requirements
and limitations of tax law applicable to the particular type of plan,
contributions made under a retirement arrangement funded by a Contract are
deductible (or not includible in income) up to certain amounts each year.
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 investment option until you receive a distribution or
withdrawal.
Distribution or Withdrawal
When you receive a distribution or withdrawal (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
23
<PAGE> 26
sum distributions may be limited by a special 5-year or 10-year income
averaging rule. The 5-year averaging rule will not be available for tax years
beginning after 1999.
Furthermore, premature distributions or withdrawals may be restricted or
subject to a penalty tax. The restrictions are discussed in the "Taxes on
Withdrawals and Surrender" section below. Participants contemplating a
withdrawal should consult a qualified tax adviser.
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 you attain age 70 1/2
or (2) you retire. The following exceptions apply:
- - For a Section 403(b) plan, only benefits accruing after December 31, 1986 must
begin distribution by the Required Beginning Date.
- - For IRAs or if you are a 5% owner of the Contractholder as defined under the
Internal Revenue Code, distributions must begin by April 1 of the calendar
year following the year you attain age 70 1/2.
Distributions that are made after the Required Beginning Date must generally be
made in the form of an annuity for your life or the lives of you and your
designated beneficiary, or over a period that is not longer than your life
expectancy or the life expectancies of you and your designated beneficiary.
Distributions to beneficiaries are also subject to minimum distribution rules.
If you die before your entire interest in your Accumulation Accounts has been
distributed, your remaining interest must be distributed at least as rapidly as
under the method of distribution being used as of your date of death. If you
die before distributions have begun (or are treated as having begun) the entire
interest in your Accumulation Accounts must be distributed by December 31 of
the calendar year containing the fifth anniversary of your death.
Alternatively, if there is a designated beneficiary, the designated beneficiary
may elect to receive payments beginning no later than December 31 of the
calendar year immediately following the year in which you die 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 your spouse is your 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.
If you or your beneficiary does not meet the minimum distribution requirements,
an excise tax applies.
NON-QUALIFIED ARRANGEMENTS USING THE CONTRACTS
Taxes Payable by Participants
Prudential believes the Contracts are annuity contracts for tax purposes.
Accordingly, as a general rule, you do not pay any tax as a result of any
increase in the value of your investment options. 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
Amounts you withdraw before the annuity starting date are treated for tax
purposes first as being withdrawals of investment income, rather than
withdrawals of premium payments, until all investment income has been
withdrawn. Therefore, you will be taxed on the amount you withdraw before you
start receiving annuity payments to the extent that the cash value of your
Contract (without a reduction for any withdrawal charge) exceeds your premium
payments.
If you take a loan against your Contract or if you pledge the Contract, that is
generally treated as a withdrawal and you may be taxed.
If you transfer 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 pur-
24
<PAGE> 27
chase payments have been recovered, a tax deduction is allowed for the
unrecovered amount.
Penalty Taxes on Withdrawals and Annuity Payments
1. 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:
- - the amount is paid on or after you attain age 59 1/2 or die;
- - the amount received is attributable to your becoming disabled;
- - the amount paid or received is in the form of level annuity payments not
less frequently than annually under a lifetime annuity; or
- - the amount received is paid under an immediate annuity contract (in which
annuity payments begin within one year of purchase).
2. If the lifetime annuity payment stream is modified (other than as a result
of death or disability) before age 59 1/2 (or before the end of the five year
period beginning with the first payment and ending after age 59 1/2), the tax
for the year of modification will be increased by the penalty tax that would
have been imposed without the exception, plus interest for the deferral.
Taxes Payable by Beneficiaries
Generally, the same tax rules apply to amounts received by a beneficiary as
those set forth above with respect to a Participant. The election of an annuity
payment option instead of a lump sum death benefit may defer taxes. Certain
minimum distribution requirements apply upon 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.
ENTITY OWNERS
Where 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 Section 403(b) plan 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, individual retirement accounts, or individual retirement
annuities are subject to tax withholding. You 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. You 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 (b) distributions for a specified
period of 10 years or more; or (c) 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.
25
<PAGE> 28
DEATH BENEFITS
In general, a death benefit consisting of amounts paid to your beneficiary is
includable in your estate for federal estate tax purposes.
TAXES ON PRUDENTIAL
VCA 10, VCA 11, and VCA 24 are not considered separate taxpayers for purposes
of the Internal Revenue Code. The earnings of these accounts are taxed as part
of the operations of Prudential. We do not currently charge you for federal
income taxes paid by Prudential. We will review the question of a charge for
our federal income taxes attributable to the Contracts periodically. Such a
charge may be made in future years for any federal income taxes that would be
attributable to the Contracts.
Voting Rights
VCA 10 and VCA 11 may call meetings of their Participants, just like other
mutual funds have shareholder meetings. Each Participant in VCA 10 has the
right to vote at meetings of VCA 10 Participants and each Participant in VCA 11
has the right to vote at meetings of VCA 11 Participants. With respect to VCA
24, Prudential votes shares of the Series Fund on behalf of the VCA 24
Participants, as those Participants direct. (Participants and beneficiaries
under certain Contracts used in connection with certain non-qualified annuity
arrangements and deferred compensation plans established under Section 457 of
the Internal Revenue Code Section 457 Contracts - may have different voting
rights than those described above. If this applies to you, please refer to your
Contract documents.)
Participant meetings are not necessarily held every year. VCA 10 and VCA 11
Participant meetings may be called to elect Committee Members, vote on
amendments to investment management agreements, and approve changes in
fundamental investment policies. Under the Rules and Regulations of VCA 10 and
VCA 11, a Participant meeting to elect Committee Members must be held if less
than a majority of the Members of a Committee have been elected by
Participants.
Prudential votes on behalf of the VCA 24 Participants on matters relating to
the Series Fund. Participants can direct how Prudential will vote for them.
As a VCA 10 or VCA 11 Participant, you are entitled to the number of votes that
equals the total dollar amount of your units. (Again, this may not be the case
for Section 457 Contracts.) To the extent Prudential has invested its own money
in VCA 10 or VCA 11, it will be entitled to vote on the same basis as other
Participants. Prudential's votes will be cast in the same proportion that the
other Participants vote - for example, if 25% of the Participants who vote are
in favor of a proposal, Prudential will cast 25% of its votes in favor of the
proposal.
Legal Proceedings
On October 28, 1996, Prudential entered into a Stipulation of Settlement in a
multidistrict proceeding involving allegations of various claims relating to
Prudential's life insurance sales practices. (In re Prudential Insurance
Company of America Sales Practices Litigation, D.N.J., MDL No. 1061, Master
Docket No. 95-4704 (AMW)). On March 7, 1997, the United States District Court
for the District of New Jersey approved the Stipulation of Settlement as fair,
reasonable and adequate, and later issued a Final Order and Judgment in the
consolidated class actions before the court, 962 F. Supp. 450 (March 17, 1997,
as amended April 14, 1997). The Court's Final Order and Judgment approving the
class Settlement was appealed to the United States Court of Appeals for the
Third Circuit, which upheld the district court's approval of the Stipulation of
Settlement on July 23, 1998. The Supreme Court denied certiorari in January
1999, thereby making final the approval of the class action settlement.
Pursuant to the Settlement, Prudential agreed to provide and has been
implementing an Alternative Dispute Resolution ("ADR") process for class
members who believe they were misled concerning the sale or performance of
their life insurance Contracts. As of December 31, 1998, based on an analysis
of claims actually remedied, a sample of claims still to be remedied, and
estimates of additional liabilities associated with the ADR program, management
estimated the cost, before taxes, of remedying policyholder claims in the ADR
process to be approximately $2.56 billion. While management believes these to
be reasonable estimates based on available information, the ultimate amount of
the total cost of remedied policyholder claims and other related costs is
dependent on complex and varying factors, including the relief options still to
be chosen by claimants, the dollar value of those options, and the number and
type of claims that may successfully be appealed.
In addition, a number of actions have been filed against Prudential by
policyholders who have excluded themselves from the Settlement; Prudential
anticipates that additional suits may be filed by other policyholders.
Also, on July 9, 1996, a Multi-State Life Insurance Task Force comprised of
insurance regulators from 29 states and the District of Columbia, released a
report on Prudential's activities. As of February 24, 1997, Prudential
26
<PAGE> 29
had entered into consent orders or agreements with all 50 states and
the District of Columbia to implement a remediation plan, whose terms closely
parallel the Settlement approved in the MDL proceeding, and agreed to a series
of payments allocated to all 50 states and the District of Columbia amounting
to a total of approximately $65 million. These agreements are now being
implemented through Prudential's implementation of the class Settlement.
Prudential's litigation is subject to many uncertainties, and given the
complexity and scope, the outcomes cannot be predicted with precision. It is
possible that the results of operations or the cash flow of the company, in
particular quarterly or annual periods, could be materially affected by an
ultimate unfavorable outcome of the matters specifically discussed above.
Management believes, however, that the ultimate resolution of all such matters,
after consideration of applicable reserves, should not have a material adverse
effect on Prudential's financial position.
Year 2000
The services provided under the Contracts by Prudential depend on the smooth
functioning of its computer systems. Many computer systems in use today are
programmed to recognize only the last two digits of a date as the year. As a
result, any systems using this kind of programming cannot distinguish a date
using "00" and may treat it as "1900" instead of "2000." This problem may
impact computer systems that store business information, but it could also
affect other equipment used in our business like telephone, fax machines and
elevators. If this problem is not corrected, the "Year 2000" issue could affect
the accuracy and integrity of business records. Prudential's regular business
operations could be interrupted as well as those of other companies that deal
with us.
In addition, the operations of the Fund associated with VCA 24 could experience
problems resulting from the Year 2000 issue. Please refer to the Fund's
prospectus for information regarding its approach to Year 2000 concerns. The
following describes Prudential's effort to address Year 2000 concerns.
To address this potential problem Prudential organized its Year 2000 efforts
around the following three areas:
- - Business Systems - Computer programs directly used to support our business;
- - Infrastructure - Computers and other business equipment like telephones and
fax machines; and
- - Business Partners - Year 2000 readiness of essential business partners.
Business Systems. The business systems component includes a wide range of
computer programs that directly support Prudential's business operations
including systems for: insurance product processing, securities trading,
personnel record keeping and general accounting systems. All business systems
were analyzed to determine whether each computer program with a Year 2000
problem should be retired, replaced or renovated. The majority of this work has
been completed. A few remaining programs are currently being tested and
completion of this process is expected by June 1999.
Infrastructure. As with business applications, we established a specific
methodology and process for addressing infrastructure issues. The
infrastructure effort includes mainframe computer system hardware and operating
system software, mid-range systems and servers, telecommunications equipment
and systems, buildings and facilities systems, personal computers, and vendor
hardware and software. Other than desktop systems, substantially all other
infrastructure systems have been tested. Presently a small number of midrange
computers, and building and facility systems are still in the testing phase. We
expect to have the infrastructure implementation process completed by June
1999.
Business Partners. Prudential recognizes the importance of determining the Year
2000 readiness of external business relationships especially those that involve
electronic data transfer products and services, and products that impact our
essential business processes. Prudential first classified each business partner
as "highly critical" or "less critical" to our business and then began to
develop risk assessment and contingency plans to address the potential that a
business partner could experience a Year 2000 failure. All highly critical
business partner relationships have been assessed and contingency planning is
completed. Risk assessment and contingency planning continues for less critical
business partners, and the target completion date for these relationships is
June 1999.
Prudential believes that the Business Application, Infrastructure and Business
Partners components of the Year 2000 project are substantially on schedule. A
small number of the projects may not meet their targeted completion date.
However, Prudential expects that these projects will be completed by September
1999. If there are any delays, they should not have a significant impact on the
timing of the project as a whole.
27
<PAGE> 30
THE COST OF YEAR 2000 READINESS
Prudential is funding the Year 2000 program from internal operating budgets,
and estimates that its total costs to address the Year 2000 issue will total
approximately $220 million. Because these expenses were part of the operating
budget, they did not impact the management of VCA 10, VCA 11 or VCA 24. During
the course of the Year 2000 program, some optional computer projects have been
delayed, but these delays have not had any material effect on VCA 10, VCA 11 or
VCA 24.
YEAR 2000 RISKS AND CONTINGENCY PLANNING
Prudential believes that it is well positioned to lessen the impact of the Year
2000 problem. However, given the nature of this issue, we can not be 100%
certain that we are completely prepared, particularly because we cannot be
certain of Year 2000 readiness of third parties. As a result, we are unable to
determine at this time whether the consequences of Year 2000 failures may have
a material adverse effect on the results of Prudential's operations, liquidity
or financial condition. In the worst case, it is possible that a Year 2000
technology failure, whether internal or external, could have a material impact
on Prudential's results of operations, liquidity, or financial position. If
Prudential is unable to address the Year 2000 problem, we may have difficulty
in responding to your incoming phone calls, calculating your unit values or
processing withdrawals and purchase payments. With respect to VCA 24, it is
also possible that the Fund will be unable to value its securities, in turn
creating difficulties in purchasing or selling its shares and calculating
corresponding unit asset values. The objective of Prudential's Year 2000
program has been to reduce these risks as much as possible.
Most of the operations of VCA 10, VCA 11 or VCA 24 involve such a large number
of individual transactions that they can only be handled with the help of
computers. As a result, our current contingency plans include responses to the
failure of specific business programs or infrastructure components. However,
our contingency responses are now being reviewed and we expect to finalize them
by June, 1999 to ensure that they are workable under the special conditions of
a Year 2000 failure. Prudential believes that with the completion of its Year
2000 program as scheduled, the possibility of significant interruptions of
normal operations will be reduced.
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<PAGE> 31
Additional Information
Registration statements under the Securities Act of 1933 have been filed with
the SEC with respect to the Contracts. This prospectus does not contain all the
information set forth in the registration statements, certain portions of which
have been omitted pursuant to the rules and regulations of the SEC. The omitted
information may be obtained from the SEC's principal office in Washington, D.C.
upon payment of the fees prescribed by the SEC.
For further information, you may also contact Prudential's office at the
address or telephone number on the cover of this prospectus.
A copy of the SAI, which provides more detailed information about the
Contracts, may be obtained without charge by calling Prudential at
1-800-458-6333. The Statement includes:
Table of Contents - Statement of Additional Information
<TABLE>
<CAPTION>
PAGE
<S> <C>
INVESTMENT MANAGEMENT AND ADMINISTRATION OF VCA 10, VCA 11 AND VCA 24...... 1
Fundamental investment restrictions adopted by VCA 10.................... 2
Non-fundamental investment restrictions adopted by VCA 10................ 3
Fundamental investment restrictions adopted by VCA 11.................... 4
Non-fundamental investment restrictions adopted by VCA 11................ 5
Investment restrictions imposed by state law............................. 5
Additional information about financial future contracts.................. 6
Additional information about options..................................... 7
Forward foreign currency exchange contracts.............................. 12
Interest rate swaps...................................................... 12
Loans of portfolio securities............................................ 13
Portfolio turnover rate.................................................. 13
Portfolio brokerage and related practices................................ 14
Custody of securities.................................................... 15
PERFORMANCE INFORMATION.................................................... 15
THE VCA 10 AND VCA 11 COMMITTEES........................................... 18
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA-DIRECTORS...................... 19
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA-PRINCIPAL OFFICERS............. 22
SALE OF THE CONTRACTS...................................................... 23
EXPERTS.................................................................... 24
FINANCIAL STATEMENTS OF VCA 10............................................. A-1
FINANCIAL STATEMENTS OF VCA 11............................................. A-11
FINANCIAL STATEMENTS OF VCA 24............................................. A-19
CONSOLIDATED FINANCIAL STATEMENTS OF THE PRUDENTIAL INSURANCE
COMPANY OF AMERICA AND SUBSIDIARIES...................................... B-1
</TABLE>
29
<PAGE> 32
Appendix
Some of the terms used in this Prospectus to describe the investment objective
and policies of VCA 11 are further explained below.
The term "money market" refers to the marketplace composed of the financial
institutions which handle the purchase and sale of liquid, short-term,
high-grade debt instruments. The money market is not a single entity, but
consists of numerous separate markets, each of which deals in a different type
of short-term debt instrument. These include U.S. government obligations,
commercial paper, certificates of deposit and bankers' acceptances, which are
generally referred to as money market instruments.
"U.S. Government obligations" are debt securities (including bills,
certificates of indebtedness, notes, and bonds) issued by the U.S. Treasury or
issued by an agency or instrumentality of the U.S. government which is
established under the authority of an act of Congress. Such agencies or
instrumentalities include, but are not limited to, the Federal National
Mortgage Association, the Federal Farm Credit Bank, and the Federal Home Loan
Bank. Although all obligations of agencies and instrumentalities are not direct
obligations of the U.S. Treasury, payment of the interest and principal on
these obligations is generally backed directly or indirectly by the U.S.
government. This support can range from the backing of the full faith and
credit of the United States, to U.S. Treasury guarantees, or to the backing
solely of the issuing instrumentality itself.
"Bank obligations" include (1) "Certificates of deposit" which are certificates
evidencing the indebtedness of a commercial bank to repay funds deposited with
it for a definite period of time (usually from 14 days to one year); (2)
"Bankers' acceptances" which are credit instruments evidencing the obligation
of a bank to pay a draft which has been drawn on it by a customer. These
instruments reflect the obligations both of the bank and of the drawer to pay
the face amount of the instrument upon maturity; and (3) "Time deposits" which
are non-negotiable deposits in a bank for a fixed period of time.
"Commercial paper" consists of short-term (usually from 1 to 270 days)
unsecured promissory notes issued to finance current operations. Commercial
paper ratings are as follows:
A Prime rating is the highest commercial paper rating assigned by Moody's
Investors Service, Inc. (Moody's). Issuers rated Prime are further referred to
by use of numbers 1, 2 and 3 to denote relative strength within this highest
classification. Among the factors considered by Moody's in assigning ratings
are the following: (1) evaluation of the management of the issuer: (2) economic
evaluation of the issuer's industry or industries and appraisal of speculative
type risks which may be inherent in certain areas; (3) evaluation of the
issuer's products in relating to competition and customer acceptance; (4)
liquidity; (5) amount and quality of long-term debt; (6) trend of earnings over
a period of ten years; (7) financial strength of a parent company and the
relationships which exist with the issuer; and (8) recognition by management of
obligations which may be present or may arise as a result of public interest
questions and preparations to meet such obligations.
Commercial paper rated A by Standard & Poor's Ratings Group (S&P) has the
following characteristics as determined by S&P; liquidity ratios are better
than the industry average; long-term senior debt rating is A or better (in some
cases, BBB credits may be acceptable); the issuer has access to at least two
additional channels of borrowing and basic earnings and cash flow have an
upward trend with allowances made for unusual circumstances. Typically, the
issuer's industry is well established, the issuer has a strong position within
its industry and the reliability and quality of management is unquestioned.
Issuers rated A are further referred to by use of numbers 1, 2 and 3 to denote
relative strength within this highest classification.
"Other corporate obligations" are bonds and notes, loan participations and
other debt obligations created by corporations, banks and other business
organizations, including business trusts. Corporate bond ratings are as
follows:
Bonds rated Aa by Moody's are judged by Moody's to be of high quality by all
standards. Together with bonds rated Aaa (Moody's highest rating), they
comprise what are generally known as high-grade bonds. They are rated lower
than the best bond because margins of protection may not be as large as Aaa
securities or fluctuation of protective elements may be of greater amplitude or
there may be other elements present which make the long-term risks appear
somewhat larger than in Aaa securities.
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<PAGE> 33
Bonds rated AA by S&P are judged by S&P to be high-grade obligations and, in
the majority of instances, to differ only in small degree from issues rated
AAA. Bonds rated AAA are considered by S&P to be highest grade obligations and
possess the ultimate degree of protection as to principal and interest. As with
AAA bonds, prices of AA bonds move with the long-term money market.
A "first tier" security is either (i) an "eligible security" that is rated, or
has been issued by an issuer that is rated with respect to comparable
securities, in the highest rating category for such securities or issuers by
two nationally recognized statistical rating organizations ("NRSROs")* (or by
only one NRSRO if it is the only NRSRO that has rated such security or issuer),
or (ii) is an unrated short-term security of comparable quality as determined
by the investment manager under the supervision of the VCA 11 Committee.
A "second tier" security is any "eligible security" other than a "first-tier"
security.
- -------------------------
* There are other NRSROs, in addition to S&P and Moody's, that use similar
methodologies to rate debt securities.
31
<PAGE> 34
FINANCIAL HIGHLIGHTS FOR VCA 10
INCOME AND CAPITAL CHANGES PER ACCUMULATION UNIT*
(For an Accumulation Unit outstanding throughout the year)
The following financial highlights for the three-year period ended December 31,
1998 has been audited by PricewaterhouseCoopers LLP, independent accountants,
whose unqualified report thereon appears in VCA 10's Annual Report dated
December 31, 1998. The condensed financial information for each of the years
prior to and including the period ended December 31, 1995 has been audited by
other independent auditors, whose report thereon was also unqualified. The
information set out below should be read together with the financial statements
and related notes that also appear in VCA 10's Annual Report which is included
in the SAI.
<TABLE>
<CAPTION>
Year Ended
--------------------------------------------------------------------------------------------------
12/31/98 12/31/97 12/31/96 12/31/95 12/31/94 12/31/93 12/31/92 12/31/91 12/31/90 12/31/89
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Investment Income... $ .0956 $ .0757 $ .0657 $ .0609 $ .0563 $ .0855 $ .0551 $ .0538 $ .0718 $ .0650
Expenses
For investment
management fee.. .0177 .0154 .0118 .0094 .0083 .0077 .0064 .0056 .0048 .0047
For administrative
expenses not
covered by the
annual account
charge............ .0530 .0461 .0354 .0282 .0251 .0230 .0192 .0169 .0144 .0141
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Net investment
income............ .0249 .0142 .0185 .0233 .0229 .0548 .0295 .0313 .0526 .0462
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Capital Changes
Net realized
gain (loss) on
investments..... .8002 1.2761 .5085 .3850 .1947 .2763 .2884 .1096 .0791 .1451
Net unrealized
appreciation
(depreciation)
of investments.. (1.0426) .3841 .5682 .4744 (.2148) .2599 (.0823) .4478 (.2054) .2167
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Net increase
(decrease) in
Unit Value........ (.2175) 1.6744 1.0952 .8827 .0028 .5910 .2356 .5887 (.0737) .4080
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Unit Value
Beginning of year 7.0127 5.3383 4.2431 3.3604 3.3576 2.7666 2.5310 1.9423 2.0160 1.6080
End of year....... $6.7952 $7.0127 $5.3383 $4.2431 $3.3604 $3.3576 $2.7666 $2.5310 $1.9423 $2.0160
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Ratio of Expenses to
average net
assets**.......... 1.00% 1.00% 1.00% .99% 1.00% 1.00% .99% .99% 1.00% 1.01%
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Ratio of net
investment income
to average net
assets............ .36% .24% .39% .61% .68% 1.78% 1.14% 1.38% 2.74% 2.47%
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Portfolio turnover
rate.............. 47% 47% 52% 45% 32% 45% 65% 72% 106% 64%
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Number of Units
outstanding for
Participants at
end of year
(000 omitted)..... 80,431 83,261 91,532 81,817 79,189 73,569 62,592 58,699 55,621 53,748
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
</TABLE>
** Calculation by accumulating the actual per Unit amounts daily.
** These calculations exclude Prudential's equity in VCA 10.
The above table does not reflect the annual account charge, which does not
affect the Unit Value of VCA 10. This charge is made by reducing Participants'
accounts by a number of Units equal in value to the charge.
32
<PAGE> 35
FINANCIAL HIGHLIGHTS FOR VCA 11
INCOME AND CAPITAL CHANGES PER ACCUMULATION UNIT*
(For an Accumulation Unit outstanding throughout the year)
The following financial highlights for the three-year period ended December 31,
1998 has been audited by PricewaterhouseCoopers LLP, independent accountants,
whose unqualified report thereon appears in VCA 11's Annual Report dated
December 31, 1998. The condensed financial information for each of the years
prior to and including the period ended December 31 1995 has been audited by
other independent auditors, whose report thereon was also unqualified. The
information set out below should be read together with the financial statements
and related notes that also appear in VCA 11's Annual Report which is included
in the SAI.
<TABLE>
<CAPTION>
Year Ended
--------------------------------------------------------------------------------------------------
12/31/98 12/31/97 12/31/96 12/31/95 12/31/94 12/31/93 12/31/92 12/31/91 12/31/90 12/31/89
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Investment Income... $ .1411 $ .1353 $ .1281 $ .1313 $ .0912 $ .0682 $ .0812 $ .1215 $ .1464 $ .1536
Expenses
For investment
management fee.. .0062 .0059 .0056 .0054 .0052 .0050 .0049 .0047 .0044 .0040
For administrative
expenses not
covered by the
annual account
charge............ .0186 .0178 .0170 .0160 .0154 .0150 .0147 .0142 .0131 .0122
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Net investment
income............ .1163 .1116 .1055 .1099 .0706 .0482 .0616 .1026 .1289 .1374
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Capital Changes
Net realized
gain (loss) on
investments..... -- -- -- -- -- -- -- -- -- --
Net unrealized
appreciation
(depreciation)
of investments.. -- -- -- -- -- -- -- -- -- --
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Net increase
(decrease) in
Unit Value........ .1163 .1116 .1055 .1099 .0706 .0482 .0616 .1026 .1289 .1374
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Unit Value
Beginning of year 2.4326 2.3210 2.2155 2.1056 2.0350 1.9868 1.9252 1.8226 1.6937 1.5563
End of year....... $2.5489 $2.4326 $2.3210 $2.2155 $2.1056 $2.0350 $1.9868 $1.9252 $1.8226 $1.6937
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Ratio of Expenses to
average net
assets**.......... .99% .98% .98% .99% 1.00% .99% 1.00% 1.00% 1.00% 1.00%
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Ratio of net
investment income
to average net
assets............ 4.78% 4.73% 4.57% 5.08% 3.42% 2.40% 3.14% 5.47% 7.33% 8.46%
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Number of Units
outstanding for
Participants at
end of year
(000 omitted)..... 34,882 35,757 38,315 34,136 35,448 29,421 27,518 26,400 25,174 23,777
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
</TABLE>
** Calculation by accumulating the actual per Unit amounts daily.
** These calculations exclude Prudential's equity in VCA 11.
The above table does not reflect the annual account charge, which does not
affect the Unit Value of VCA 11. This charge is made by reducing Participants'
accounts by a number of Units equal in value to the charge.
33
<PAGE> 36
FINANCIAL INFORMATION
PARTICIPANT ACCUMULATION UNIT VALUES FOR VCA 24
<TABLE>
<CAPTION>
SUBACCOUNTS
- -----------------------------------------------------------------------------------------------------------------------------------
EQUITY
--------------------------------------------------------------------------------------------------
01/01/98 01/01/97 01/01/96 01/01/95 01/01/94 01/01/93 01/01/92 01/01/91 01/01/90 01/01/89
TO TO TO TO TO TO TO TO TO TO
12/31/98 12/31/97 12/31/96 12/31/95 12/31/94 12/31/93 12/31/92 12/31/91 12/31/90 12/31/89
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Beginning of period (rounded) $3.8962 $3.1487 $2.6769 $2.0541 $2.0136 $1.6646 $1.4690 $1.1745 $1.2484 $0.9697
End of period (rounded) $4.2286 $3.8962 $3.1487 $2.6769 $2.0541 $2.0136 $1.6646 $1.4690 $1.1745 $1.2484
Accumulation Units Outstanding
at end of period (000 omitted) 111,855 141,162 132,455 118,394 99,323 79,985 51,639 35,657 21,964 17,703
</TABLE>
<TABLE>
<CAPTION>
SUBACCOUNTS
- -----------------------------------------------------------------------------------------------------------------------------------
DIVERSIFIED BOND
--------------------------------------------------------------------------------------------------
01/01/98 01/01/97 01/01/96 01/01/95 01/01/94 01/01/93 01/01/92 01/01/91 01/01/90 01/01/89
TO TO TO TO TO TO TO TO TO TO
12/31/98 12/31/97 12/31/96 12/31/95 12/31/94 12/31/93 12/31/92 12/31/91 12/31/90 12/31/89
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Beginning of period (rounded) $2.2404 $2.0789 $2.0065 $1.6746 $1.7435 $1.5950 $1.4992 $1.2973 $1.2075 $1.0720
End of period (rounded) $2.3829 $2.2404 $2.0789 $2.0065 $1.6746 $1.7435 $1.5950 $1.4992 $1.2973 $1.2075
Accumulation Units Outstanding
at end of period (000 omitted) 23,260 19,114 20,280 16,898 14,575 14,481 10,103 7,928 5,824 4,122
</TABLE>
<TABLE>
<CAPTION>
SUBACCOUNTS
- -----------------------------------------------------------------------------------------------------------------------------------
FLEXIBLE MANAGED
--------------------------------------------------------------------------------------------------
01/01/98 01/01/97 01/01/96 01/01/95 01/01/94 01/01/93 01/01/92 01/01/91 01/01/90 01/01/89
TO TO TO TO TO TO TO TO TO TO
12/31/98 12/31/97 12/31/96 12/31/95 12/31/94 12/31/93 12/31/92 12/31/91 12/31/90 12/31/89
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Beginning of period (rounded) $2.9103 $2.4854 $2.2038 $1.7886 $1.8609 $1.6223 $1.5189 $1.2201 $1.2056 $0.9976
End of period (rounded) $3.1844 $2.9103 $2.4854 $2.2038 $1.7886 $1.8609 $1.6223 $1.5189 $1.2201 $1.2056
Accumulation Units Outstanding
at end of period (000 omitted) 53,275 64,184 59,681 51,419 44,729 36,035 23,410 16,859 12,229 10,015
</TABLE>
<TABLE>
<CAPTION>
SUBACCOUNTS
- -----------------------------------------------------------------------------------------------------------------------------------
CONSERVATIVE BALANCED
--------------------------------------------------------------------------------------------------
01/01/98 01/01/97 01/01/96 01/01/95 01/01/94 01/01/93 01/01/92 01/01/91 01/01/90 01/01/89
TO TO TO TO TO TO TO TO TO TO
12/31/98 12/31/97 12/31/96 12/31/95 12/31/94 12/31/93 12/31/92 12/31/91 12/31/90 12/31/89
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Beginning of period (rounded) $2.5165 $2.2364 $1.9993 $1.7175 $1.7473 $1.5691 $1.4781 $1.2508 $1.1971 $1.0310
End of period (rounded) $2.7909 $2.5165 $2.2364 $1.9993 $1.7175 $1.7473 $1.5691 $1.4781 $1.2508 $1.1971
Accumulation Units Outstanding
at end of period (000 omitted) 51,101 51,297 50,029 46,873 43,594 36,932 24,223 16,385 11,857 10,273
</TABLE>
<TABLE>
<CAPTION>
SUBACCOUNTS
- -----------------------------------------------------------------------------------------------------------------------------------
STOCK INDEX
--------------------------------------------------------------------------------------------------
01/01/98 01/01/97 01/01/96 01/01/95 01/01/94 01/01/93 01/01/92 01/01/91 01/01/90 01/01/89
TO TO TO TO TO TO TO TO TO TO
12/31/98 12/31/97 12/31/96 12/31/95 12/31/94 12/31/93 12/31/92 12/31/91 12/31/90 12/31/89
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Beginning of period (rounded) $4.3910 $3.3302 $2.7378 $2.0123 $2.0072 $1.8440 $1.7342 $1.3469 $1.4086 $1.0843
End of period (rounded) $5.5972 $4.3910 $3.3302 $2.7378 $2.0123 $2.0072 $1.8440 $1.7342 $1.3469 $1.4086
Accumulation Units Outstanding
at end of period (000 omitted) 78,885 85,941 80,572 51,701 40,522 32,178 20,554 10,724 4,232 1,285
</TABLE>
<TABLE>
<CAPTION>
SUBACCOUNTS
- -----------------------------------------------------------------------------------------------------
GLOBAL
--------------------------------------------------------------------
01/01/98 01/01/97 01/01/96 01/01/95 01/01/94 01/01/93 01/01/92
TO TO TO TO TO TO TO
12/31/98 12/31/97 12/31/96 12/31/95 12/31/94 12/31/93 12/31/92
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Beginning of period (rounded) $1.8815 $1.7836 $1.4975 $1.3020 $1.3791 $0.9707 $1.0127
End of period (rounded) $2.3269 $1.8815 $1.7836 $1.4975 $1.3020 $1.3791 $0.9707
Accumulation Units Outstanding
at end of period (000 omitted) 37,297 37,576 33,505 24,439 21,739 12,368 3,180
</TABLE>
<TABLE>
<CAPTION>
SUBACCOUNTS
- ---------------------------------------------------------------------------------------------------------------
GOVERNMENT INCOME
------------------------------------------------------------------------------
01/01/98 01/01/97 01/01/96 01/01/95 01/01/94 01/01/93 01/01/92 01/01/91
TO TO TO TO TO TO TO TO
12/31/98 12/31/97 12/31/96 12/31/95 12/31/94 12/31/93 12/31/92 12/31/91
-------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Beginning of period (rounded) $1.6267 $1.4943 $1.4730 $1.2421 $1.3196 $1.1811 $1.1242 $1.0000
End of period (rounded) $1.7614 $1.6267 $1.4943 $1.4730 $1.2421 $1.3196 $1.1811 $1.1242
Accumulation Units Outstanding
at end of period (000 omitted) 20,924 17,033 17,697 17,289 16,140 15,556 9,269 6,641
</TABLE>
34
<PAGE> 37
FOR MORE INFORMATION
Additional information about the Contracts can be obtained upon request without
charge and can be found in the following documents:
Statement of Additional Information (SAI)
(incorporated by reference into this prospectus)
Annual Report
(including a discussion of market conditions and
strategies that significantly affected the Contracts'
performance during the previous year)
Semi-Annual Report
To obtain these documents or to ask any questions about the Contracts:
Call toll-free 1-800-458-6333
OR
Write to
The Prudential Contract Account 10, 11 or 24
c/o Prudential Investments
30 Scranton Office Park
Scranton, PA 18506-1789
You can also obtain copies of Contract documents from the Securities and
Exchange Commission as follows:
By Mail:
Securities and Exchange Commission
Public Reference Section
Washington, DC 20549-6009
(The SEC charges a fee to copy documents.)
In Person:
Public Reference Room
in Washington, DC
(For hours of operation, call 1(800) SEC-0330.)
Via the Internet:
http://www.sec.gov
SEC File No.:
The Prudential Variable Contract Account 10 2-76580
The Prudential Variable Contract Account 11 2-76581
The Prudential Variable Contract Account 24 33-12362
35
<PAGE> 38
The Prudential Insurance Company of America BULK RATE
c/o Prudential Investments U.S. POSTAGE
30 Scranton Office Park PAID
Scranton, Pennsylvania 18507-1789 PERMIT No. 941
CHICAGO, IL
ADDRESS SERVICE REQUESTED
MD.PU.003.0499 ED. 5/99
<PAGE> 39
THE PRUDENTIAL
SERIES FUND, INC.
- --------------------------------------------------------------------------------
CONSERVATIVE BALANCED PORTFOLIO
DIVERSIFIED BOND PORTFOLIO
EQUITY PORTFOLIO
FLEXIBLE MANAGED PORTFOLIO
GLOBAL PORTFOLIO
GOVERNMENT INCOME PORTFOLIO
STOCK INDEX PORTFOLIO
PROSPECTUS: MAY 1, 1999
As with all mutual funds, filing this prospectus with the SEC does not mean
that the SEC has judged this Fund a good investment, nor has the SEC determined
that this prospectus is complete or accurate. It is a criminal offense to state
otherwise.
[GRAPHIC]
[PRUDENTIAL INVESTMENTS LOGO]
THE PRUDENTIAL SERIES FUND, INC. 1
<PAGE> 40
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
RISK/RETURN SUMMARY
CONSERVATIVE BALANCED PORTFOLIO................. 3
Investment Objective and Principal Strategies... 3
Principal Risks................................. 3
Evaluating Performance.......................... 4
DIVERSIFIED BOND PORTFOLIO...................... 5
Investment Objective and Principal Strategies... 5
Principal Risks................................. 5
Evaluating Performance.......................... 5
EQUITY PORTFOLIO................................ 6
Investment Objective and Principal Strategies... 6
Principal Risks................................. 6
Evaluating Performance.......................... 7
FLEXIBLE MANAGED PORTFOLIO...................... 8
Investment Objective and Principal Strategies... 8
Principal Risks................................. 8
Evaluating Performance.......................... 8
GLOBAL PORTFOLIO................................ 9
Investment Objective and Principal Strategies... 9
Principal Risks................................. 9
Evaluating Performance.......................... 10
GOVERNMENT INCOME PORTFOLIO..................... 11
Investment Objective and Principal Strategies... 11
Principal Risks................................. 11
Evaluating Performance.......................... 11
STOCK INDEX PORTFOLIO........................... 12
Investment Objective and Principal Strategies... 12
Principal Risks................................. 12
Evaluating Performance.......................... 12
HOW THE PORTFOLIOS INVEST
Conservative Balanced Portfolio................. 14
Diversified Bond Portfolio...................... 17
Equity Portfolio................................ 19
Flexible Managed Portfolio...................... 21
Global Portfolio................................ 23
Government Income Portfolio..................... 25
Stock Index Portfolio........................... 27
HOW THE PORTFOLIOS ARE MANAGED
Investment Adviser.............................. 33
Investment Sub-Advisers......................... 33
Portfolio Managers.............................. 33
HOW TO BUY AND SELL SHARES OF THE FUND
How to Buy and Sell Shares...................... 35
Net Asset Value................................. 35
Distributor..................................... 36
OTHER INFORMATION
Federal Income Taxes............................ 37
Year 2000....................................... 37
Monitoring for Possible Conflicts............... 37
FINANCIAL HIGHLIGHTS............................ 38
FOR MORE INFORMATION...................(Back Cover)
</TABLE>
- --------------------------------------------------------------------------------
THE PRUDENTIAL SERIES FUND, INC. 2
<PAGE> 41
RISK/RETURN SUMMARY
- --------------------------------------------------------------------------------
This prospectus is for use with the Prudential Variable Contract Account-24
Contract (the VCA-24 Contract) and only describes those portfolios of The
Prudential Series Fund, Inc. (the Fund) that are available for investment
through the Contract. This prospectus should be read together with the current
prospectus for the VCA-24 Contract.
The Fund is a diversified, open-end investment management company - commonly
known as a mutual fund. Seven of the Fund's seventeen portfolios (the
Portfolios) are available under the VCA-24 Contract:
CONSERVATIVE BALANCED PORTFOLIO GLOBAL PORTFOLIO
DIVERSIFIED BOND PORTFOLIO GOVERNMENT INCOME PORTFOLIO
EQUITY PORTFOLIO STOCK INDEX PORTFOLIO
FLEXIBLE MANAGED PORTFOLIO
The following section highlights key information about each Portfolio.
Additional information follows this summary and is provided in the Fund's
Statement of Additional Information (SAI).
CONSERVATIVE BALANCED PORTFOLIO
INVESTMENT OBJECTIVE AND PRINCIPAL STRATEGIES
Our investment objective is A TOTAL INVESTMENT RETURN CONSISTENT WITH A
CONSERVATIVELY MANAGED DIVERSIFIED PORTFOLIO. This Portfolio may be appropriate
for an investor who wants diversification with a relatively lower risk of loss
than that associated with the Flexible Managed Portfolio (see below). To
achieve our objective, we invest in a mix of equity securities, debt
obligations and money market instruments. Up to 30% of the Portfolio's total
assets may be invested in foreign securities. In addition, we may invest a
portion of the Portfolio's assets in high yield/high risk debt securities.
While we make every effort to achieve our objective, we can't guarantee
success.
PRINCIPAL RISKS
Although we try to invest wisely, all investments involve risk. Equity
securities - such as common stocks - are subject to COMPANY RISK. The price of
the stock of a particular company can vary based on a variety of factors, such
as the company's financial performance, changes in management and product
trends, and the potential for takeover and acquisition. Common stocks are also
subject to MARKET RISK stemming from factors independent of any particular
security. Investment markets fluctuate. All markets go through cycles and
market risk involves being on the wrong side of a cycle. Factors affecting
market risk include political events, broad economic and social changes, and
the mood of the investing public. You can see market risk in action during
large drops in the stock market. If investor sentiment turns gloomy, the price
of all stocks may decline. It may not matter that a particular company has
great profits and its stock is selling at a relatively low price. If the
overall market is dropping, the values of all stocks are likely to drop.
Since the Portfolio also invests in debt obligations, there is the risk that
the value of a particular obligation could decrease. Debt obligations may
involve CREDIT RISK - the risk that the borrower will not repay an obligation,
and MARKET RISK - the risk that interest rates may change and affect the value
of the obligation. High-yield debt securities - also known as "junk bonds" -
have a higher risk of default and tend to be less liquid.
- --------------------------------------------------------------------------------
THE PRUDENTIAL SERIES FUND, INC. 3
<PAGE> 42
RISK/RETURN SUMMARY CONTINUED
- --------------------------------------------------------------------------------
The Portfolio's investment in foreign securities involves additional risks. For
example, foreign banks and companies generally are not subject to the same
types of regulatory requirements that U.S. banks and companies are. Foreign
political developments and changes in currency rates may adversely affect the
value of foreign securities.
There is also risk involved in the investment strategies we may use. Some of
our strategies require us to try to predict whether the price or value of an
underlying investment will go up or down over a certain period of time. There
is always the risk that investments will not perform as we thought they would.
Like any mutual fund, an investment in the Portfolio could lose value, and you
could lose money. For more information about risk, see "Investment Risks."
EVALUATING PERFORMANCE
A number of factors - including risk - affect how the Portfolio performs. The
following bar chart and table show the Portfolio's performance for each full
calendar year of operation for the last 10 years. They demonstrate the risk of
investing in the Portfolio and how returns can change from year to year. Past
performance does not mean that the Portfolio will achieve similar results in
the future.
<TABLE>
<CAPTION>
ANNUAL RETURNS* (CLASS I SHARES)
- ----------------------------------
<S> <C>
1989 16.99%
1990 5.27%
1991 19.07%
1992 6.95%
1993 12.20%
1994 -0.97%
1995 17.27%
1996 12.63%
1997 13.45%
1998 11.74%
BEST QUARTER: 7.62% (2nd quarter of 1997)
WORST QUARTER: (3.17)% (3rd quarter of 1998)
</TABLE>
* These annual returns do not include Contract charges. If Contract charges
were included, the annual returns would be lower than those shown. See the
accompanying Contract prospectus.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------
AVERAGE ANNUAL RETURNS* (AS OF 12/31/98)
- ------------------------------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS SINCE INCEPTION (5/13/83)
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class I shares 11.74% 10.65% 11.31% 10.86%
- ------------------------------------------------------------------------------------
S&P 500** 28.60% 24.05% 19.19% 17.29%
- ------------------------------------------------------------------------------------
Lipper Average*** 14.79% 13.73% 12.21% 8.94%
- ------------------------------------------------------------------------------------
</TABLE>
* The Portfolio's returns are after deduction of expenses and do not include
Contract charges.
** The Standard & Poor's 500 Stock Index (S&P 500 ) - an unmanaged index of
500 stocks of large U.S. companies - gives a broad look at how stock
prices have performed. These returns do not include the effect of any
investment management expenses. These returns would be lower if they
included the effect of these expenses. The "Since Inception" return
reflects the closest calendar month-end return (4/30/83). Source: Lipper,
Inc.
*** The Lipper/Variable Insurance Products (VIP) Balanced Average is
calculated by Lipper Analytical Services, Inc. and reflects the investment
return of certain portfolios underlying variable life and annuity
products. The returns are net of investment fees and fund expenses but not
product charges. The "Since Inception" return reflects the closest
calendar month-end return (4/30/83). Source: Lipper, Inc.
- --------------------------------------------------------------------------------
THE PRUDENTIAL SERIES FUND, INC. 4
<PAGE> 43
- --------------------------------------------------------------------------------
DIVERSIFIED BOND PORTFOLIO
INVESTMENT OBJECTIVE AND PRINCIPAL STRATEGIES
Our investment objective is A HIGH LEVEL OF INCOME OVER A LONGER TERM WHILE
PROVIDING REASONABLE SAFETY OF CAPITAL. This means we look for investments that
we think will provide a high level of current income, but which are not
expected to involve a substantial risk of loss of capital through default. To
achieve our objective, we invest primarily in higher-grade debt obligations and
high-quality money market investments. We may also purchase U.S. dollar
denominated securities that are issued outside the U.S. by foreign or U.S.
issuers. In addition, we may invest a portion of the Portfolio's assets in high
yield/high risk debt securities. While we make every effort to achieve our
objective, we can't guarantee success.
PRINCIPAL RISKS
Although we try to invest wisely, all investments involve risk. Since the
Portfolio invests primarily in debt obligations, there is the risk that the
value of a particular obligation could go down. Debt obligations may involve
CREDIT RISK - the risk that the borrower will not repay an obligation, and
MARKET RISK - the risk that interest rates may change and affect the value of
the obligation. High-yield debt securities - also known as "junk bonds" - have a
higher risk of default and tend to be less liquid.
The Portfolio's investment in U.S. dollar denominated foreign securities
involves additional risks. For example, foreign banks and companies generally
are not subject to the same types of regulatory requirements that U.S. banks
and companies are. Foreign political developments may adversely affect the
value of foreign securities. The Portfolio's foreign securities may also be
affected by changes in currency rates, though to a lesser extent than if the
Portfolio invested in securities denominated in a foreign currency.
There is also risk involved in the investment strategies we may use. Some of
our strategies require us to try to predict whether the price or value of an
underlying investment will go up or down over a certain period of time. There
is always the risk that investments will not perform as we thought they would.
Like any mutual fund, an investment in the Portfolio could lose value, and you
could lose money. For more information about risk, see "Investment Risks."
EVALUATING PERFORMANCE
A number of factors - including risk - affect how the Portfolio performs. The
following bar chart and table show the Portfolio's performance for each full
calendar year of operation for the last 10 years. They demonstrate the risk of
investing in the Portfolio and how returns can change from year to year. Past
performance does not mean that the Portfolio will achieve similar results in
the future.
- --------------------------------------------------------------------------------
THE PRUDENTIAL SERIES FUND, INC. 5
<PAGE> 44
RISK/RETURN SUMMARY CONTINUED
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ANNUAL RETURNS* (CLASS I SHARES)
- ----------------------------------
<S> <C>
1989 13.49%
1990 8.32%
1991 16.44%
1992 7.19%
1993 10.13%
1994 -3.23%
1995 20.73%
1996 4.40%
1997 8.57%
1998 7.15%
BEST QUARTER: 7.94% (2nd quarter of 1989)
WORST QUARTER: (2.83)% (1st quarter of 1994)
</TABLE>
* These annual returns do not include Contract charges. If Contract charges
were included, the annual returns would be lower than those shown. See the
accompanying Contract prospectus.
<TABLE>
<CAPTION>
AVERAGE ANNUAL RETURNS* (AS OF 12/31/98)
- ------------------------------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS SINCE INCEPTION (5/13/83)
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class I shares 7.15% 7.25% 9.14% 9.25%
- ------------------------------------------------------------------------------------
Lehman Aggregate Index** 8.69% 7.27% 9.26% 9.99%
- ------------------------------------------------------------------------------------
Lipper Average*** 7.44% 7.13% 8.97% 8.94%
- ------------------------------------------------------------------------------------
</TABLE>
* The Portfolio's returns are after deduction of expenses and do not include
Contract charges.
** The Lehman Aggregate Index (LAI) is comprised of more than 5,000 government
and corporate bonds. These returns do not include the effect of any sales
charges. These returns would be lower if they included the effect of sales
charges. The "Since Inception" return reflects the closest calendar
month-end return (4/30/83). Source: Lipper, Inc.
*** The Lipper Variable Insurance Products (VIP) Corporate Debt Average is
calculated by Lipper Analytical Services, Inc. and reflects the investment
return of certain portfolios underlying variable life and annuity products.
The returns are net of investment fees and fund expenses but not product
charges. The "Since Inception" return reflects the closest calendar
month-end return (4/30/83). Source: Lipper, Inc.
EQUITY PORTFOLIO
INVESTMENT OBJECTIVE AND PRINCIPAL STRATEGIES
Our investment objective is CAPITAL APPRECIATION. To achieve our objective, we
invest primarily in common stocks of major established corporations as well as
smaller companies that we believe offer attractive prospects of appreciation.
In addition, the Portfolio may invest up to 30% of its total assets in foreign
securities. While we make every effort to achieve our objective, we can't
guarantee success.
PRINCIPAL RISKS
Although we try to invest wisely, all investments involve risk. Equity
securities - such as common stocks - are subject to COMPANY RISK. The price of
the stock of a particular company can vary based on a variety of factors, such
as the company's financial performance, changes in management and product
trends, and the potential for takeover and acquisition. Common stocks are also
subject to MARKET RISK stemming from factors independent of any particular
security. Investment markets fluctuate. All markets go through cycles and
market risk involves being on the wrong side of a cycle. Factors affecting
market risk include political events, broad economic and social changes, and
the mood of the investing public. You can see market risk in action during
large drops in the stock market. If investor sentiments turn gloomy, the price
of all stocks may decline. It may not matter that a particular company has
great profits and its stock is selling at a relatively low price. If the
- --------------------------------------------------------------------------------
THE PRUDENTIAL SERIES FUND, INC. 6
<PAGE> 45
overall market is dropping, the values of all stocks are likely to drop.
Generally, the stock prices of small-sized companies vary more than the prices
of large company stocks and may present above average risks.
The Portfolio's investment in foreign securities involves additional risks. For
example, foreign banks and companies generally are not subject to the same
types of regulatory requirements that U.S. banks and companies are. Foreign
political developments and changes in currency rates may adversely affect the
value of foreign securities.
There is also risk involved in the investment strategies we may use. Some of
our strategies require us to try to predict whether the price or value of an
underlying investment will go up or down over a certain period of time. There
is always the risk that investments will not perform as we thought they would.
Like any mutual fund, an investment in the Portfolio could lose value, and you
could lose money. For more information about risk, see "Investment Risks."
EVALUATING PERFORMANCE
A number of factors - including risk - affect how the Portfolio performs. The
following bar chart and table show the Portfolio's performance for each full
calendar year of operation for the last 10 years. They demonstrate the risk of
investing in the Portfolio and how returns can change from year to year. Past
performance does not mean that the Portfolio will achieve similar results in
the future.
<TABLE>
<CAPTION>
ANNUAL RETURNS* (CLASS I SHARES)
- ----------------------------------
<S> <C>
1989 29.73%
1990 -5.21%
1991 26.01%
1992 14.17%
1993 21.87%
1994 2.78%
1995 31.29%
1996 18.52%
1997 24.66%
1998 9.34%
BEST QUARTER: 19.13% (1st quarter of 1991)
WORST QUARTER: (15.59)% (3rd quarter of 1990)
</TABLE>
* These annual returns do not include Contract charges. If Contract charges
were included, the annual returns would be lower than those shown. See the
accompanying Contract prospectus.
<TABLE>
<CAPTION>
AVERAGE ANNUAL RETURNS* (AS OF 12/31/98)
- ------------------------------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS SINCE INCEPTION (5/13/83)
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class I shares 9.34% 16.88% 16.74% 15.14%
- ------------------------------------------------------------------------------------
S&P 500** 28.60% 24.05% 19.19% 17.29%
- ------------------------------------------------------------------------------------
Lipper Average*** 24.94% 20.25% 17.83% 16.01%
- ------------------------------------------------------------------------------------
</TABLE>
* The Portfolio's returns are after deduction of expenses and do not include
Contract charges.
** The Standard & Poor's 500 Stock Index (S&P 500) - an unmanaged index of
500 stocks of large U.S. companies - gives a broad look at how stock
prices have performed. These returns do not include the effect of any
investment management expenses. These returns would be lower if they
included the effect of these expenses. The "Since Inception" return
reflects the closest calendar month-end return (4/30/83). Source: Lipper,
Inc.
*** The Lipper Variable Insurance Products (VIP) Growth Fund Average is
calculated by Lipper Analytical Services, Inc. and reflects the investment
return of certain portfolios underlying variable life and annuity
products. The returns are net of investment fees and fund expenses but not
product charges. These returns would be lower if they included the effect
of these expenses. The "Since Inception" return reflects the closest
calendar month-end return (4/30/83). Source: Lipper, Inc.
- --------------------------------------------------------------------------------
THE PRUDENTIAL SERIES FUND, INC. 7
<PAGE> 46
RISK/RETURN SUMMARY CONTINUED
FLEXIBLE MANAGED PORTFOLIO
INVESTMENT OBJECTIVE AND PRINCIPAL STRATEGIES
Our investment objective is A HIGH TOTAL RETURN CONSISTENT WITH AN AGGRESSIVELY
MANAGED DIVERSIFIED PORTFOLIO. This Portfolio may be appropriate for an
investor who wants diversification and is willing to accept a relatively high
level of loss in an effort to achieve greater appreciation. To achieve our
objective, we invest in a mix of equity securities, debt obligations and money
market instruments. The Portfolio may also invest in foreign securities. A
portion of the debt portion of the Portfolio may be invested in
high-yield/high-risk debt securities which have speculative characteristics and
generally are riskier than higher-rated securities. While we make every effort
to achieve our objective, we can't guarantee success.
PRINCIPAL RISKS
Although we try to invest wisely, all investments involve risk. Since the
Portfolio invests in debt obligations, there is the risk that the value of a
particular obligation could decrease. Debt obligations may involve CREDIT RISK
the risk that the borrower will not repay an obligation, and MARKET RISK - the
risk that interest rates may change and affect the value of the obligation.
A substantial portion of the Portfolio's assets may also be invested in equity
securities. Equity securities - such as common stocks - are subject to COMPANY
RISK. The price of the stock of a particular company can vary based on a
variety of factors, such as the company's financial performance, changes in
management and product trends, and the potential for takeover and acquisition.
Common stocks are also subject to MARKET RISK stemming from factors independent
of any particular security. Investment markets fluctuate. All markets go
through cycles and market risk involves being on the wrong side of a cycle.
Factors affecting market risk include political events, broad economic and
social changes and the mood of the investing public. If investor sentiments
turn gloomy, the price of all stocks may decline. It may not matter that a
particular company has great profits and its stock is selling at a relatively
low price. If the overall market is dropping, the value of all stocks are
likely to drop.
The Portfolio's investment in foreign securities involves additional risks. For
example, foreign banks and companies generally are not subject to the same
types of regulatory requirements that U.S. banks and companies are. Foreign
political developments and changes in currency rates may adversely affect the
value of foreign securities.
There is also risk involved in the investment strategies we may use. Some of
our strategies require us to try to predict whether the price or value of an
underlying investment will go up or down over a certain period of time. There
is always the risk that investments will not perform as we thought they would.
Like any mutual fund, an investment in the Portfolio could lose value, and you
could lose money. For more information about risk, see "Investment Risks."
EVALUATING PERFORMANCE
A number of factors - including risk - affect how the Portfolio performs. The
following bar chart and table show the Portfolio's performance for each full
calendar year of operation for the last 10 years. They demonstrate the risk of
investing in the Portfolio and how returns can change from year to year. Past
performance does not mean that the Portfolio will achieve similar results in
the future.
- --------------------------------------------------------------------------------
THE PRUDENTIAL SERIES FUND, INC. 8
<PAGE> 47
<TABLE>
<CAPTION>
ANNUAL RETURNS* (CLASS I SHARES)
- ----------------------------------
<S> <C>
1989 21.77%
1990 1.91%
1991 25.43%
1992 7.61%
1993 15.58%
1994 -3.16%
1995 24.13%
1996 13.64%
1997 17.96%
1998 10.24%
BEST QUARTER: 10.89% (2nd quarter of 1997)
WORST QUARTER: (8.50)% (3rd quarter of 1998)
</TABLE>
* These annual returns do not include Contract charges. If Contract charges
were included, the annual returns would be lower than those shown. See the
accompanying Contract prospectus.
<TABLE>
<CAPTION>
AVERAGE ANNUAL RETURNS* (AS OF 12/31/98)
- ------------------------------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS SINCE INCEPTION (5/13/83)
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class I shares 10.24% 12.19% 13.15% 12.06%
- ------------------------------------------------------------------------------------
S&P 500** 28.60% 24.05% 19.19% 17.29%
- ------------------------------------------------------------------------------------
Lipper Average*** 13.50% 13.64% 14.00% 12.84%
- ------------------------------------------------------------------------------------
</TABLE>
* The Portfolio's returns are after deduction of expenses and do not include
Contract charges.
** The Standard & Poor's 500 Stock Index (S&P 500) - an unmanaged index of 500
stocks of large U.S. companies - gives a broad look at how stock prices
have performed. These returns do not include the effect of any investment
management expenses. These returns would be lower if they included the
effect of these expenses. The "Since Inception" return reflects the closest
calendar month-end return (4/30/83). Source: Lipper, Inc.
*** The Lipper Variable Insurance Products (VIP) Flexible Average is calculated
by Lipper Analytical Services, Inc. and reflects the investment return of
certain portfolios underlying variable life and annuity products. The
returns are net of investment fees and fund expenses but not product
charges. The "Since Inception" return reflects the closest calendar
month-end return (4/30/83). Source: Lipper, Inc.
GLOBAL PORTFOLIO
INVESTMENT OBJECTIVE AND PRINCIPAL STRATEGIES
Our investment objective is LONG-TERM GROWTH OF CAPITAL. To achieve this
objective, we invest primarily in common stocks (and their equivalents) of
foreign and U.S. companies. Generally, we invest in at least three countries,
including the U.S., but we may invest up to 35% of the Portfolio's assets in
companies located in any one country other than the U.S. While we make every
effort to achieve our objective, we can't guarantee success.
PRINCIPAL RISKS
Although we try to invest wisely, all investments involve risk. Equity
securities - such as common stocks - are subject to COMPANY RISK. The price of
the stock of a particular company can vary based on a variety of factors, such
as the company's financial performance, changes in management and product
trends, and the potential for takeover and acquisition. Common stocks are also
subject to MARKET RISK stemming from factors independent of any particular
security. Investment markets fluctuate. All markets go through cycles and
market risk involves being on the wrong side of a cycle. Factors affecting
market risk include political events, broad economic and social changes, and
the mood of the investing public. You can see market risk in action during
large drops in the stock market. If investor sentiments turn gloomy, the price
of all stocks may decline. It may
- --------------------------------------------------------------------------------
THE PRUDENTIAL SERIES FUND, INC. 9
<PAGE> 48
RISK/RETURN SUMMARY CONTINUED
- --------------------------------------------------------------------------------
not matter that a particular company has great profits and its stock is selling
at a relatively low price. If the overall market is dropping, the values of all
stocks are likely to drop.
Depending on market conditions, the Portfolio may be invested primarily in
foreign securities, which involve additional risks. For example, foreign banks
and companies generally are not subject to the same types of regulatory
requirements that U.S. banks and companies are. Foreign political developments
and changes in currency rates may adversely affect the value of foreign
securities.
There is also risk involved in the investment strategies we may use. Some of
our strategies require us to try to predict whether the price or value of an
underlying investment will go up or down over a certain period of time. There
is always the risk that investments will not perform as we thought they would.
Like any mutual fund, an investment in the Portfolio could lose value, and you
could lose money. For more information about risk, see "Investment Risks."
EVALUATING PERFORMANCE
A number of factors - including risk - affect how the Portfolio performs. The
following bar chart and table show the Portfolio's performance for each full
calendar year of operation for the last 10 years. They demonstrate the risk of
investing in the Portfolio and how returns can change from year to year. Past
performance does not mean that the Portfolio will achieve similar results in
the future.
<TABLE>
<CAPTION>
ANNUAL RETURNS* (CLASS I SHARES)
- ----------------------------------
<S> <C>
1989 18.82%
1990 -12.91%
1991 11.39%
1992 -3.42%
1993 43.14%
1994 -4.89%
1995 15.88%
1996 19.97%
1997 6.98%
1998 25.08%
BEST QUARTER: 22.17% (4th quarter of 1998)
WORST QUARTER: (14.21)% (3rd quarter of 1998)
</TABLE>
* These annual returns do not include Contract charges. If Contract charges
were included, the annual returns would be lower than those shown. See the
accompanying Contract prospectus.
<TABLE>
<CAPTION>
AVERAGE ANNUAL RETURNS* (AS OF 12/31/98)
- ------------------------------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS SINCE INCEPTION (9/19/88)
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class I shares 25.08% 12.04% 10.90% 11.47%
- ------------------------------------------------------------------------------------
Morgan Stanley World Index** 24.80% 16.19% 11.21% 12.10%
- ------------------------------------------------------------------------------------
Lipper Average*** 16.19% 12.31% 11.04% 11.10%
- ------------------------------------------------------------------------------------
</TABLE>
* The Portfolio's returns are after deduction of expenses and do not include
Contract charges.
** The Morgan Stanley World Index (MSWI) is a weighted index comprised of
approximately 1,500 companies listed on the stock exchanges of the U.S.A.,
Europe, Canada, Australia, New Zealand and the Far East. The "Since
Inception" return reflects the closest calendar month-end return
(9/30/88). Source: Lipper, Inc.
*** The Lipper Variable Insurance Products (VIP) Global Average is calculated
by Lipper Analytical Services, Inc. and reflects the investment return of
certain portfolios underlying variable life and annuity products. The
returns are net of investment fees and fund expenses but not product
charges. The "Since Inception" return reflects the closest calendar
month-end return (9/30/88). Source: Lipper, Inc.
- --------------------------------------------------------------------------------
THE PRUDENTIAL SERIES FUND, INC. 10
<PAGE> 49
GOVERNMENT INCOME PORTFOLIO
INVESTMENT OBJECTIVE AND PRINCIPAL STRATEGIES
Our investment objective is A HIGH LEVEL OF INCOME OVER THE LONG TERM
CONSISTENT WITH THE PRESERVATION OF CAPITAL. To achieve our objective, we
invest 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. The Portfolio may also
invest in mortgage-related securities, collateralized mortgage obligations and
corporate debt securities. While we make every effort to achieve our objective,
we can't guarantee success.
An investment in the Portfolio is not a bank deposit and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other government
agency.
PRINCIPAL RISKS
The Portfolio invests primarily in U.S. government securities which are
considered among the most creditworthy of debt securities. Nevertheless, all
investments involve risk. All debt securities have the risk that the value of a
particular obligation could decrease. Debt obligations may involve CREDIT RISK
- - the risk that the borrower will not repay an obligation, and MARKET RISK - the
risk that interest rates may change and affect the value of the obligation.
There is also risk involved in the investment strategies we may use. Some of
our strategies require us to try to predict whether the price or value of an
underlying investment will go up or down over a certain period of time. There
is always the risk that investments will not perform as we thought they would.
Like any mutual fund, an investment in the Portfolio could lose value, and you
could lose money. For more information about risk, see "Investment Risks."
EVALUATING PERFORMANCE
A number of factors - including risk - affect how the Portfolio performs. The
following bar chart and table show the Portfolio's performance for each full
calendar year of operation for the last 9 years. They demonstrate the risk of
investing in the Portfolio and how returns can change from year to year. Past
performance does not mean that the Portfolio will achieve similar results in
the future.
<TABLE>
<CAPTION>
ANNUAL RETURNS* (CLASS I SHARES)
- ----------------------------------
<S> <C>
1990 6.34%
1991 16.11%
1992 5.85%
1993 12.56%
1994 -5.16%
1995 19.48%
1996 2.22%
1997 9.67%
1998 9.09%
BEST QUARTER: 6.95% (3rd quarter of 1991)
WORST QUARTER: (3.93)% (1st quarter of 1994)
</TABLE>
* These annual returns do not include Contract charges. If Contract charges
were included, the annual returns would be lower than those shown. See the
accompanying Contract prospectus.
- --------------------------------------------------------------------------------
THE PRUDENTIAL SERIES FUND, INC. 11
<PAGE> 50
RISK/RETURN SUMMARY CONTINUED
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AVERAGE ANNUAL RETURNS* (AS OF 12/31/98)
- ------------------------------------------------------------------------------------
1 YEAR 5 YEARS SINCE INCEPTION (5/1/89)
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
Class I shares 9.09% 6.74% 8.87%
- ------------------------------------------------------------------------------------
Lehman Govt. Index** 9.85% 7.18% 9.14%
- ------------------------------------------------------------------------------------
Lipper Average*** 8.14% 6.36% 8.66%
- ------------------------------------------------------------------------------------
</TABLE>
* The Portfolio's returns are after deduction of expenses and do not include
Contract charges.
** The Lehman Government Index is a weighted index comprised of securities
issued or backed by the U.S. government, its agencies and instrumentalities
with a remaining maturity of one to 30 years. The "Since Inception" return
reflects the closest calendar month-end return (4/30/89). Source: Lipper,
Inc.
*** The Lipper Variable Insurance Products (VIP) General U.S. Government
Average is calculated by Lipper Analytical Services, Inc. and reflects the
investment return of certain portfolios underlying variable life and
annuity products. The returns are net of investment fees and fund expenses
but not product charges. The "Since Inception" return reflects the closest
calendar month-end return (4/30/89). Source: Lipper, Inc.
STOCK INDEX PORTFOLIO
INVESTMENT OBJECTIVE AND PRINCIPAL STRATEGIES
Our investment objective is INVESTMENT RESULTS THAT GENERALLY CORRESPOND TO THE
PERFORMANCE OF PUBLICLY-TRADED COMMON STOCKS. To achieve our objective, we
attempt to duplicate the price and yield of the Standard & Poor's 500 Stock
Index (S&P 500 Index). The S&P 500 Index represents more than 70% of the total
market value of all publicly-traded common stocks and is widely viewed as
representative of publicly-traded common stocks as a whole.
The Portfolio is not "managed" in the traditional sense of using market and
economic analyses to select stocks. Rather, the portfolio manager purchases
stocks in proportion to their weighting in the S&P 500 Index. While we make
every effort to achieve our objective, we can't guarantee success.
PRINCIPAL RISKS
Although we try to invest wisely, all investments involve risk. Equity
securities - such as common stocks - are subject to COMPANY RISK. The price of
the stock of a particular company can vary based on a variety of factors, such
as the company's financial performance, changes in management and product
trends, and the potential for takeover and acquisition. Common stocks are also
subject to MARKET RISK stemming from factors independent of any particular
security. Investment markets fluctuate. All markets go through cycles and
market risk involves being on the wrong side of a cycle. Factors affecting
market risk include political events, broad economic and social changes, and
the mood of the investing public. You can see market risk in action during
large drops in the stock market. If investor sentiments turn gloomy, the price
of all stocks may decline. It may not matter that a particular company has
great profits and its stock is selling at a relatively low price. If the
overall market is dropping, the values of all stocks are likely to drop.
Like any mutual fund, an investment in the Portfolio could lose value, and you
could lose money. For more information about risk, see "Investment Risks."
EVALUATING PERFORMANCE
A number of factors - including risk - affect how the Portfolio performs. The
following bar chart and table show the Portfolio's performance for each full
calendar year of operation for the last 10 years. They demonstrate the risk of
investing in the Portfolio and how returns can change. Past performance does
not mean that the Portfolio will achieve similar results in the future.
- --------------------------------------------------------------------------------
THE PRUDENTIAL SERIES FUND, INC. 12
<PAGE> 51
<TABLE>
<CAPTION>
ANNUAL RETURNS* (CLASS I SHARES)
- ----------------------------------
<S> <C>
1989 30.93%
1990 -3.63%
1991 29.72%
1992 7.13%
1993 9.66%
1994 1.01%
1995 37.06%
1996 22.57%
1997 32.83%
1998 28.42%
BEST QUARTER: 21.44% (4th quarter of 1998)
WORST QUARTER: (13.72%) (3rd quarter of 1990)
</TABLE>
* These annual returns do not include Contract charges. If Contract charges
were included, the annual returns would be lower than those shown. See the
accompanying Contract prospectus.
<TABLE>
<CAPTION>
AVERAGE ANNUAL RETURNS* (AS OF 12/31/98)
- -------------------------------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS SINCE INCEPTION (10/19/87)
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class I shares 28.42% 23.70% 18.74% 18.82%
- ------------------------------------------------------------------------------------
S&P 500** 28.60% 24.05% 19.19% 18.50%
- ------------------------------------------------------------------------------------
Lipper Average*** 28.25% 23.58% 18.62% 18.04%
- ------------------------------------------------------------------------------------
</TABLE>
* The Portfolio's returns are after deduction of expenses and do not include
Contract charges.
** The Standard & Poor's 500 Stock Index (S&P 500) - an unmanaged index of 500
stocks of large U.S. companies - gives a broad look at how stock prices
have performed. These returns do not include the effect of any investment
management expenses. These returns would be lower if they included the
effect of these expenses. The "Since Inception" return reflects the closest
calendar month-end return (10/31/87). Source: Lipper, Inc.
*** The Lipper Variable Insurance Products (VIP) S&P 500 Index Average is
calculated by Lipper Analytical Services, Inc. and reflects the investment
return of certain portfolios underlying variable life and annuity products.
The returns are net of investment fees and fund expenses but not product
charges. The "Since Inception" return reflects the closest calendar
month-end return (10/31/87). Source: Lipper, Inc.
- --------------------------------------------------------------------------------
THE PRUDENTIAL SERIES FUND, INC. 13
<PAGE> 52
HOW THE PORTFOLIOS INVEST
- --------------------------------------------------------------------------------
While the Portfolios have some common attributes, each one has its own
portfolio managers, investment objective and policies, performance information,
and risks.
Therefore, some sections of this prospectus deal with each Portfolio
separately, while other sections address two or more Portfolios at the same
time. In sections that concern one particular Portfolio as identified in the
section heading, "the Portfolio" refers to that particular Portfolio.
CONSERVATIVE BALANCED PORTFOLIO
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of this Portfolio is to seek A TOTAL INVESTMENT RETURN
CONSISTENT WITH A CONSERVATIVELY MANAGED DIVERSIFIED PORTFOLIO.
- --------------------------------------------------------------------------------
BALANCED PORTFOLIO
We invest in all three types of securities - equity, debt and money market - in
order to achieve diversification in a single portfolio. We seek to maintain a
conservative blend of investments that will have strong performance in a down
market and solid, but not necessarily outstanding, performance in up markets.
This Portfolio may be appropriate for an investor looking for diversification
with less risk than that of the Flexible Managed Portfolio, while recognizing
that this reduces the chances of greater appreciation.
To achieve our objective, we invest in a mix of equity and equity-related
securities, debt obligations and money market instruments. We adjust the
percentage of Portfolio assets in each category depending on our expectations
regarding the different markets. While we make every effort to achieve our
objective, we can't guarantee success.
We will vary how much of the Portfolio's assets are invested in a particular
type of security depending how we think the different markets will perform.
Under normal conditions, we intend to keep at least 25% of the Portfolio's
total assets invested in debt securities.
- ------------------------------------------------------------------------------
In general, we will invest within the ranges shown below:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
ASSET TYPE MINIMUM NORMAL MAXIMUM
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Stocks 15% 35% 75%
- ------------------------------------------------------------------------------
Debt obligations and money
market securities 25% 65% 85%
- ------------------------------------------------------------------------------
</TABLE>
DEBT SECURITIES in general are basically written promises to repay a debt.
There are numerous types of debt securities which vary as to the terms of
repayment and the commitment of other parties to honor the obligations of the
issuer. Most of the securities in the debt portion of this Portfolio will be
rated "investment grade." This means major rating services, like Standard &
Poor's Ratings Group (S&P) or Moody's Investors Service, Inc. (Moody's), have
rated the securities within one of their four highest rating categories.
The Portfolio may also invest in lower-rated securities, which are riskier and
are considered speculative. These securities are sometimes referred to as "junk
bonds." We may also invest in instruments that are not rated, but which we
believe are of comparable quality to the instruments described above.
The Portfolio may also invest up to 30% of its total assets in FOREIGN EQUITY
and DEBT SECURITIES that are not denominated in the U.S. dollar. In addition,
up to 20% of the Portfolio's total assets may be invested in debt securities
that are issued outside the U.S. by foreign or U.S. issuers, but are
denominated in U.S. dollars. For these purposes, we do not consider American
Depositary Receipts (ADRs) as foreign securities. (ADRs are
- --------------------------------------------------------------------------------
THE PRUDENTIAL SERIES FUND, INC. 14
<PAGE> 53
- --------------------------------------------------------------------------------
certificates representing the right to receive foreign securities that have
been deposited with a U.S. bank or a foreign branch of a U.S. bank.)
The stock portion of the Portfolio will be invested mainly in EQUITY and
EQUITY-RELATED securities of major, established corporations which we believe
are in sound financial condition and offer better total returns than broad
based market indexes.
The money market portion of the Portfolio will be invested in high-quality
money market instruments. We manage this portion of the Portfolio to comply
with specific rules designed for money market mutual funds. We will not acquire
any security with a remaining maturity exceeding thirteen months, and we will
maintain a dollar-weighted average portfolio of 90 days or less. (Weighted
average maturity is calculated by adding the maturities of all the bonds in a
portfolio and dividing by the number of bonds on a weighted basis.)
In response to adverse market conditions or when restructuring the Portfolio,
we may temporarily invest up to 100% of the Portfolio's total assets in money
market instruments. Investing heavily in these securities limits our ability to
achieve our investment objective, but can help to preserve the value of the
Portfolio's assets when the markets are unstable.
We may also invest in loans arranged through private negotiations between a
corporation which is the borrower and one or more financial institutions that
are the lenders. Generally, these types of investments are in the form of LOAN
PARTICIPATIONS. In loan participations, the Portfolio will have a contractual
relationship with the lender but not with the borrower. This means the
Portfolio will only have rights to principal and interest received by the
lender. It will not be able to enforce compliance by the borrower with the
terms of the loan and may not have a right to any collateral securing the loan.
If the lender becomes insolvent, the Portfolio may be treated as a general
creditor and not benefit from any set-off between the lender and the borrower.
DERIVATIVES AND OTHER STRATEGIES
We may also use alternative investment strategies - including DERIVATIVES - to
try to improve the Portfolio's returns, protect its assets or for short-term
cash management. There is no guarantee that these strategies will work, that
the instruments necessary to implement these strategies will be available or
that the Portfolio will not lose money. With derivatives, we try to predict
whether the underlying investment - a security, market index, currency,
interest rate or some other benchmark - will go up or down at some future date.
We may use derivatives to try to reduce risk or to increase return consistent
with the Portfolio's overall investment objective.
We may: purchase and sell OPTIONS on equity securities, debt securities, stock
indexes and foreign currencies; purchase and sell stock index, interest rate
and foreign currency FUTURES CONTRACTS and options on those contracts; enter
into FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS; and purchase securities on a
WHEN-ISSUED or DELAYED DELIVERY basis.
The Portfolio may also enter into SHORT SALES. In a short sale we sell a
security we do not own to take advantage of an anticipated decline in the
stock's price. The Portfolio borrows the stock for delivery and if it can buy
the stock later at a lower price, a profit results. No more than 25% of the
Portfolio's net assets may be used as collateral or segregated for purposes of
securing a short sale obligation. The Portfolio may also enter into SHORT SALES
AGAINST-THE-BOX which means it owns securities identical to those sold short.
- --------------------------------------------------------------------------------
THE PRUDENTIAL SERIES FUND, INC. 15
<PAGE> 54
HOW THE PORTFOLIOS INVEST CONTINUED
- --------------------------------------------------------------------------------
We may also use INTEREST RATE SWAPS in the management of the fixed-income
portion of the Portfolio. In an interest rate swap the Portfolio and another
party agree to exchange interest payments. For example, the Portfolio may wish
to exchange a floating rate of interest for a fixed rate. We would enter into
this type of a swap if we think interest rates are going down.
The Portfolio may also enter into REPURCHASE AGREEMENTS. In a repurchase
transaction, the Portfolio agrees to purchase certain securities and the seller
agrees to repurchase the same securities at an agreed upon price on a specified
date. This creates a fixed return for the Portfolio. The Portfolio may
participate with certain other Portfolios of the Fund in a JOINT REPURCHASE
ACCOUNT under an order obtained from the SEC. In a joint repurchase
transaction, uninvested cash balances of various Portfolios are added together
and invested in one or more repurchase agreements. Each of the participating
Portfolios receives a portion of the income earned in the joint account based
on the percentage of its investment.
We may also invest in REVERSE REPURCHASE AGREEMENTS and DOLLAR ROLLS in the
management of the fixed-income portion of the portfolio. In a reverse
repurchase transaction, the Portfolio sells a security it owns and agrees to
buy it back at a set price and date. During the period the security is held by
the other party, the Portfolio may continue to receive principal and interest
payments on the security. Dollar rolls involve the sale by the Portfolio of a
security for delivery in the current month with a promise to repurchase from
the buyer a substantially similar but not necessarily the same - security at a
set price and date in the future. During the "roll period," the Portfolio does
not receive any principal or interest on the security. Instead it is
compensated by the difference between the current sales price and the price of
the future purchase, as well as any interest earned on the cash proceeds from
the original sale. The Portfolio will not use more than 30% of its net assets
in connection with reverse repurchase transactions and dollar rolls.
We will consider other factors (such as cost) in deciding whether to employ any
particular strategy or use any particular instrument. Any derivatives we use
may not match the Portfolio's underlying holdings. For more information about
these strategies, see the SAI, "Investment Objectives and Policies of the
Portfolios."
ADDITIONAL STRATEGIES
The Portfolio also follows certain policies when it BORROWS MONEY (the
Portfolio may borrow up to 5% of the value of its total assets); LENDS ITS
SECURITIES; and holds ILLIQUID SECURITIES (the Portfolio may hold up to 15% of
its net assets in illiquid securities, including securities with legal or
contractual restrictions on resale, those without a readily available market
and repurchase agreements with maturities longer than seven days). The
Portfolio is subject to certain investment restrictions that are fundamental
policies, which means they cannot be changed without shareholder approval. For
more information about these restrictions, see the SAI.
- --------------------------------------------------------------------------------
THE PRUDENTIAL SERIES FUND, INC. 16
<PAGE> 55
- --------------------------------------------------------------------------------
DIVERSIFIED BOND PORTFOLIO INVESTMENT OBJECTIVE AND POLICIES
Our investment objective is a HIGH LEVEL OF INCOME OVER A LONGER TERM WHILE
PROVIDING REASONABLE SAFETY OF CAPITAL. This means we look for investments that
we think will provide a high level of current income, but which are not
expected to involve a substantial risk of loss of capital through default. To
achieve our objective, we invest primarily in intermediate and long term debt
obligations that are rated investment grade and high quality money market
investments. While we make every effort to achieve our objective, we can't
guarantee success.
- --------------------------------------------------------------------------------
OUR STRATEGY
In general, the value of debt obligations moves in the opposite direction as
interest rates - if a bond is purchased and then interest rates go up, newer
bonds will be worth more because they will have a higher rate of interest. We
will adjust the mix of the Portfolio's short-term, intermediate and long term
debt obligations in an attempt to benefit from price appreciation when interest
rates go down and to incur smaller declines when rates go up.
- ------------------------------------------------------------------------------
Debt obligations, in general, are basically written promises to repay a debt.
The terms of repayment vary among the different types of debt obligations, as
do the commitments of other parties to honor the obligations of the issuer of
the security. The types of debt obligations in which we can invest include U.S.
government securities, mortgage-related securities and corporate bonds.
Usually at least 80% of the Portfolio's total assets will be invested in debt
securities that are investment grade. The Portfolio may continue to hold a debt
obligation if it is downgraded below investment grade after it is purchased or
if it is no longer rated by a major rating service. We may also invest in lower
rated securities which are riskier and considered speculative. These securities
are sometimes referred to as "junk bonds." We may also invest in instruments
that are not rated, but which we believe are of comparable quality to the
instruments described above.
The Portfolio may invest without limit in DEBT OBLIGATIONS ISSUED OR GUARANTEED
BY THE U.S. GOVERNMENT AND GOVERNMENT-RELATED ENTITIES. An example of a debt
security that is backed by the full faith and credit of the U.S. government is
an obligation of the Government National Mortgage Association (Ginnie Mae). In
addition, we may invest in U.S. government securities issued by other
government entities, like the Federal National Mortgage Association (Fannie
Mae) and the Student Loan Marketing Association (Sallie Mae) which are not
backed by the full faith and credit of the U.S. government. Instead, these
issuers have the right to borrow from the U.S. Treasury to meet their
obligations. The Portfolio may also invest in the debt securities of other
government-related entities, like the Farm Credit System, which depend entirely
upon their own resources to repay their debt.
We may also invest up to 20% of Portfolio's total assets in debt securities
issued outside the U.S. by U.S. or foreign issuers provided the securities are
denominated in U.S. dollars.
The Portfolio may also invest in CONVERTIBLE DEBT SECURITIES and CONVERTIBLE
AND NON-CONVERTIBLE PREFERRED STOCKS of any rating. The Portfolio will not
acquire any common stock except by converting a convertible debt security or
exercising a warrant. No more than 10% of the Portfolio's total assets will be
held in common stocks, and those will usually be sold as soon as a favorable
opportunity arises.
- --------------------------------------------------------------------------------
THE PRUDENTIAL SERIES FUND, INC. 17
<PAGE> 56
HOW THE PORTFOLIOS INVEST CONTINUED
- --------------------------------------------------------------------------------
We may also invest in loans arranged through private negotiations between a
corporation which is the borrower and one or more financial institutions that
are the lenders. Generally, these types of investments are in the form of LOAN
PARTICIPATIONS. In loan participations, the Portfolio will have a contractual
relationship with the lender but not with the borrower. This means the
Portfolio will only have rights to principal and interest received by the
lender. It will not be able to enforce compliance by the borrower with the
terms of the loan and may not have a right to any collateral securing the loan.
If the lender becomes insolvent, the Portfolio may be treated as a general
creditor and will not benefit from any set-off between the lender and the
borrower.
Under normal conditions, the Portfolio may invest a portion of its assets in
high-quality MONEY MARKET INSTRUMENTS. In response to adverse market conditions
or when restructuring the Portfolio, we may temporarily invest up to 100% of
the Portfolio's assets in money market instruments. Investing heavily in these
securities limits our ability to achieve our investment objective, but can help
to preserve the value of the Portfolio's assets when the markets are unstable.
DERIVATIVES AND OTHER STRATEGIES
We may also use alternative investment strategies - including DERIVATIVES - to
try to improve the Portfolio's returns, protect its assets or for short-term
cash management. There is no guarantee that these strategies will work, that
the instruments necessary to implement these strategies will be available or
that the Portfolio will not lose money. With derivatives, we try to predict
whether the underlying investment - a security, market index, currency,
interest rate or some other benchmark - will go up or down at some future date.
We may use derivatives to try to reduce risk or to increase return consistent
with the Portfolio's overall investment objective.
We may: purchase and sell OPTIONS on debt securities; purchase and sell
interest rate FUTURES CONTRACTS and options on those contracts; and purchase
securities on a WHEN-ISSUED or DELAYED DELIVERY basis.
The Portfolio may also enter into SHORT SALES. In a short sale we sell a
security we do not own to take advantage of an anticipated decline in the
stock's price. The Portfolio borrows the stock for delivery and if it can buy
the stock later at a lower price, a profit results. No more than 25% of the
Portfolio's net assets may be used as collateral or segregated for purposes of
securing a short sale obligation. The Portfolio may also enter into SHORT SALES
AGAINST-THE-BOX which means it owns securities identical to those sold short.
We may also use INTEREST RATE SWAPS in the management of the Portfolio. In an
interest rate swap the Portfolio and another party agree to exchange interest
payments. For example, the Portfolio may wish to exchange a floating rate of
interest for a fixed rate. We would enter into this type of a swap if we think
interest rates are going down.
The Portfolio may also enter into REPURCHASE AGREEMENTS. In a repurchase
transaction, the Portfolio agrees to purchase certain securities and the seller
agrees to repurchase the same securities at an agreed upon price on a specified
date. This creates a fixed return for the Portfolio. The Portfolio may
participate with certain other Portfolios of the Fund in a JOINT REPURCHASE
ACCOUNT under an order obtained from the SEC. In a joint repurchase
transaction, uninvested cash balances of various Portfolios are added together
and invested in one or more repurchase agreements. Each of the participating
Portfolios receives a portion of the income earned in the joint account based
on the percentage of its investment.
- --------------------------------------------------------------------------------
THE PRUDENTIAL SERIES FUND, INC. 18
<PAGE> 57
- --------------------------------------------------------------------------------
The Portfolio may also invest up to 30% of its net assets in REVERSE REPURCHASE
AGREEMENTS and DOLLAR ROLLS. In a reverse repurchase transaction, the Portfolio
sells a security it owns and agrees to buy it back at a set price and date.
During the period the security is held by the other party, the Portfolio may
continue to receive principal and interest payments on the security. Dollar
rolls involve the sale by the Portfolio of a security for delivery in the
current month with a promise to repurchase from the buyer a substantially
similar - but not necessarily the same - security at a set price and date in
the future. During the "roll period," the Portfolio does not receive any
principal or interest on the security. Instead it is compensated by the
difference between the current sales price and the price of the future
purchase, as well as any interest earned on the cash proceeds from the original
sale. The Portfolio will not use more than 30% of its net assets in connection
with reverse repurchase transactions and dollar rolls.
We will consider other factors (such as cost) in deciding whether to employ any
particular strategy or use any particular instrument. Any derivatives we use
may not match the Portfolio's underlying holdings. For more information about
these strategies, see the SAI, "Investment Objectives and Policies of the
Portfolios."
ADDITIONAL STRATEGIES
The Portfolio also follows certain policies when it BORROWS MONEY (the
Portfolio may borrow up to 5% of the value of its total assets); LENDS ITS
SECURITIES; and holds ILLIQUID SECURITIES (the Portfolio may hold up to 15% of
its net assets in illiquid securities, including securities with legal or
contractual restrictions on resale, those without a readily available market
and repurchase agreements with maturities longer than seven days). The
Portfolio is subject to certain investment restrictions that are fundamental
policies, which means they cannot be changed without shareholder approval. For
more information about these restrictions, see the SAI.
EQUITY PORTFOLIO
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of this Portfolio is CAPITAL APPRECIATION. This means
we seek investments that we believe will provide investment returns above
broadly based market indexes. While we make every effort to achieve this
objective, we can't guarantee success.
- --------------------------------------------------------------------------------
VALUE APPROACH
We use a value approach to investing which means we look for companies whose
stock is selling below the price that we believe reflects its true worth based
on earnings, book value and other financial measures.
To achieve our value investment strategy, we usually buy securities that are
out of favor and that many other investors are selling. We attempt to invest in
companies and industries before other investors recognize their true value.
To achieve our investment objective, we invest primarily in common stocks of
major established corporations as well as smaller companies.
A portion of the Portfolio's assets may be invested in short, intermediate or
long term DEBT OBLIGATIONS, including convertible and nonconvertible PREFERRED
STOCK and OTHER EQUITY-RELATED SECURITIES. Up to 5% of these holdings may be
rated below investment grade. These securities are considered speculative and
are sometimes referred to as "junk bonds."
Up to 30% of the Portfolio's total assets may be invested in FOREIGN
SECURITIES, including money market instruments, equity securities and debt
obligations. For these purposes, we do not consider American Depositary
Receipts (ADRs) as foreign securities. (ADRs are certificates representing the
right to receive foreign securities that have been deposited with a U.S. bank
or a foreign branch of a U.S. bank.)
- --------------------------------------------------------------------------------
THE PRUDENTIAL SERIES FUND, INC. 19
<PAGE> 58
HOW THE PORTFOLIOS INVEST CONTINUED
- --------------------------------------------------------------------------------
Under normal circumstances, the Portfolio may invest a portion of its assets in
MONEY MARKET INSTRUMENTS. In addition, we may temporarily invest up to 100% of
the Portfolio's assets in money market instruments in response to adverse
market conditions or when we are restructuring the Portfolio. Investing heavily
in these securities limits our ability to achieve our investment objective, but
can help to preserve the Portfolio's assets when the markets are unstable.
DERIVATIVES AND OTHER STRATEGIES
We may also use alternative investment strategies - including DERIVATIVES - to
try to improve the Portfolio's returns, protect its assets or for short-term
cash management. There is no guarantee that these strategies will work, that
the instruments necessary to implement these strategies will be available or
that the Portfolio will not lose money. With derivatives, we try to predict
whether the underlying investment - a security, market index, currency or some
other benchmark - will go up or down at some future date. We may use
derivatives to try to reduce risk or to increase return consistent with the
Portfolio's overall investment objective.
We may: purchase and sell OPTIONS on equity securities, stock indexes and
foreign currencies; purchase and sell stock index and foreign currency futures
contracts and options on these FUTURES CONTRACTS; enter into FORWARD FOREIGN
CURRENCY EXCHANGE CONTRACTS; and purchase securities on a WHEN-ISSUED or
DELAYED DELIVERY basis.
The Portfolio may also enter into SHORT SALES AGAINST-THE-BOX. In a short sale
we sell a security we do not own to take advantage of an anticipated decline in
the stock's price. The Portfolio borrows the stock for delivery and if it can
buy the stock later at a lower price, a profit results. A short sale is
"against-the-box" when the Portfolio owns an equal amount of the securities
sold short or owns securities that can be converted into the securities sold.
The Portfolio may also enter into REPURCHASE AGREEMENTS. In a repurchase
transaction, the Portfolio agrees to purchase certain securities and the seller
agrees to repurchase the same securities at a set price on a specified date.
This creates a fixed return for the Portfolio. The Portfolio may participate
with certain other Portfolios of the Fund in a JOINT REPURCHASE ACCOUNT under
an order obtained from the SEC. In a joint repurchase transaction, uninvested
cash balances of various Portfolios are added together and invested in one or
more repurchase agreements. Each of the participating Portfolios receives a
portion of the income earned in the joint account based on the percentage of
its investment.
We will consider factors such as cost and volatility in deciding whether to
employ any particular strategy or use any particular instrument. Any
derivatives we use may not match the Portfolio's underlying holdings. For more
information about these strategies, see the SAI, "Investment Objectives and
Policies of the Portfolios."
ADDITIONAL STRATEGIES
The Portfolio also follows certain policies when it BORROWS MONEY (the
Portfolio may borrow up to 5% of the value of its total assets); LENDS ITS
SECURITIES; and holds ILLIQUID SECURITIES (the Portfolio may hold up to 15% of
its net assets in illiquid securities, including securities with legal or
contractual restrictions on resale, those without a readily available market
and repurchase agreements with maturities longer than seven days). The
Portfolio is subject to certain investment restrictions that are fundamental
policies, which means they cannot be changed without shareholder approval. For
more information about these restrictions, see the SAI.
- --------------------------------------------------------------------------------
THE PRUDENTIAL SERIES FUND, INC. 20
<PAGE> 59
- --------------------------------------------------------------------------------
FLEXIBLE MANAGED PORTFOLIO
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of this Portfolio is to seek a HIGH TOTAL RETURN
CONSISTENT WITH AN AGGRESSIVELY MANAGED DIVERSIFIED PORTFOLIO.
- ------------------------------------------------------------------------------
BALANCED PORTFOLIO
We invest in all three types of securities - equity, debt and money market - in
order to achieve diversification in a single portfolio. We seek to maintain a
more aggressive mix of investments than the Conservative Balanced Portfolio.
This Portfolio may be appropriate for an investor looking for diversification
who is willing to accept a relatively high level of loss in an effort to
achieve greater appreciation.
- ------------------------------------------------------------------------------
To achieve our objective, we invest in a mix of equity and equity-related
securities, debt obligations and money market instruments. We adjust the
percentage of Portfolio assets in each category depending on our expectations
regarding the different markets. While we make every effort to achieve our
objective, we can't guarantee success.
Generally, we will invest within the ranges shown below:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------
ASSET TYPE MINIMUM NORMAL MAXIMUM
------------------------------------------------------------------------------
<S> <C> <C> <C>
Stocks 25% 60% 100%
------------------------------------------------------------------------------
Fixed income securities 0% 40% 75%
------------------------------------------------------------------------------
Money market securities 0% 0% 75%
------------------------------------------------------------------------------
</TABLE>
The stock portion of the Portfolio will be invested in a broadly diversified
portfolio of stocks generally consisting of large and mid-size companies,
although it may also hold stocks of smaller companies. We will invest in
companies and industries that, in our judgment, will provide either attractive
long-term returns, or are desirable to hold in the Portfolio to manage risk.
Most of the securities in the fixed income portion of this Portfolio will be
investment grade, however, we may also invest up to 25% of this portion of the
Portfolio in debt securities rated as low as BB, Ba or lower by a major rating
service at the time they are purchased. These high-yield or "junk bonds" are
riskier than higher rated bonds and are considered speculative. We may also
invest in instruments that are not rated, but which we believe are of
comparable quality to the instruments described above.
The fixed income portion of the Portfolio may also include LOAN PARTICIPATIONS.
In loan participations, the Portfolio will have a contractual relationship with
the lender but not with the borrower. This means the Portfolio will only have
rights to principal and interest received by the lender. It will not be able to
enforce compliance by the borrower with the terms of the loan and may not have
a right to any collateral securing the loan. If the lender becomes insolvent,
the Portfolio may be treated as a general creditor and will not benefit from
any set-off between the lender and the borrower.
The Portfolio may also invest up to 30% of its total assets in FOREIGN EQUITY
and DEBT SECURITIES that are not denominated in the U.S. dollar. In addition,
up to 20% of the Portfolio's total assets may be invested in debt securities
that are issued outside of the U.S. by foreign or U.S. issuers provided the
securities are denominated in U.S. dollars. For these purposes, we do not
consider American Depositary Receipts (ADRs) as foreign securities. (ADRs are
certificates representing the right to receive foreign securities that have
been deposited with a U.S. bank or a foreign branch of a U.S. bank.)
- --------------------------------------------------------------------------------
THE PRUDENTIAL SERIES FUND, INC. 21
<PAGE> 60
HOW THE PORTFOLIOS INVEST CONTINUED
- --------------------------------------------------------------------------------
The money market portion of the Portfolio will be invested in high-quality money
market instruments. In response to adverse market conditions or when we are
restructuring the Portfolio, we may temporarily invest up to 100% of the
Portfolio's assets in money market instruments. Investing heavily in these
securities limits our ability to achieve our investment objective, but can help
to preserve the Portfolio's assets when the markets are unstable.
The Portfolio may also invest in REAL ESTATE INVESTMENT TRUSTS (REITs). A REIT
is a company that manages a portfolio of real estate to earn profits for its
shareholders. Some REITs acquire equity interests in real estate and then
receive income from rents and capital gains when the buildings are sold. Other
REITs lend money to real estate developers and receive interest income from the
mortgages. Some REITs invest in both types of interests.
DERIVATIVES AND OTHER STRATEGIES
We may also use alternative investment strategies - including DERIVATIVES - to
try to improve the Portfolio's returns, protect its assets or for short-term
cash management. There is no guarantee that these strategies will work, that
the instruments necessary to implement these strategies will be available or
that the Portfolio will not lose money. With derivatives, we try to predict
whether the underlying investment - a security, market index, currency,
interest rate or some other benchmark - will go up or down at some future
date. We may use derivatives to try to reduce risk or to increase return
consistent with the Portfolio's overall investment objective.
We may: purchase and sell OPTIONS on equity securities, debt securities, stock
indexes and foreign currencies; purchase and sell stock index, interest rate and
foreign currency FUTURES CONTRACTS and options on those contracts; enter into
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS; and purchase securities on a
WHEN-ISSUED or DELAYED DELIVERY basis.
The Portfolio may also enter into SHORT SALES. In a short sale we sell a
security we do not own to take advantage of an anticipated decline in the
stock's price. The Portfolio borrows the stock for delivery and if it can buy
the stock later at a lower price, a profit results. No more than 25% of the
Portfolio's net assets may be used as collateral or segregated for purposes of
securing a short sale obligation. The Portfolio may also enter into SHORT SALES
AGAINST-THE-BOX which means it owns securities identical to those sold short.
We may also use INTEREST RATE SWAPS in the management of the fixed income
portion of the Portfolio. In an interest rate swap the Portfolio and another
party agree to exchange interest payments. For example, the Portfolio may wish
to exchange a floating rate of interest for a fixed rate. We would enter into
this type of a swap if we think interest rates are going down.
The Portfolio may also enter into REPURCHASE AGREEMENTS. In a repurchase
transaction, the Portfolio agrees to purchase certain securities and the seller
agrees to repurchase the same securities at a set price on a specified date.
This creates a fixed return for the Portfolio. The Portfolio may participate
with certain other Portfolios of the Fund in a JOINT REPURCHASE ACCOUNT under an
order obtained from the SEC. In a joint repurchase transaction, uninvested cash
balances of various Portfolios are added together and invested in one or more
repurchase agreements. Each of the participating Portfolios receives a portion
of the income earned in the joint account based on the percentage of its
investment.
- --------------------------------------------------------------------------------
THE PRUDENTIAL SERIES FUND, INC. 22
<PAGE> 61
- --------------------------------------------------------------------------------
We may also invest in REVERSE REPURCHASE AGREEMENTS and DOLLAR ROLLS in the
management of the fixed-income portion of the Portfolio. In a reverse repurchase
transaction, the Portfolio sells a security it owns and agrees to buy it back at
set price and date. During the period the security is held by the other party,
the Portfolio may continue to receive principal and interest payments on the
security. Dollar rolls involve the sale by the Portfolio of a security for
delivery in the current month with a promise to repurchase from the buyer a
substantially similar but not necessarily the same - security at a set price and
date in the future. During the "roll period," the Portfolio does not receive any
principal or interest on the security. Instead it is compensated by the
difference between the current sales price and the price of the future purchase,
as well as any interest earned on the cash proceeds from the original sale. The
Portfolio will not use more than 30% of its net assets in connection with
reverse repurchase transactions and dollar rolls.
We will consider other factors (such as cost) in deciding whether to employ any
particular strategy or use any particular instrument. Any derivatives we use may
not match the Portfolio's underlying holdings. For more information about these
strategies, see the SAI, "Investment Objectives and Policies of the Portfolios."
ADDITIONAL STRATEGIES
The Portfolio also follows certain policies when it BORROWS MONEY (the
Portfolio may borrow up to 5% of the value of its total assets); LENDS ITS
SECURITIES; and holds ILLIQUID SECURITIES (the Portfolio may hold up to 15% of
its net assets in illiquid securities, including securities with legal or
contractual restrictions on resale, those without a readily available market
and repurchase agreements with maturities longer than seven days). The
Portfolio is subject to certain investment restrictions that are fundamental
policies, which means they cannot be changed without shareholder approval. For
more information about these restrictions, see the SAI.
GLOBAL PORTFOLIO
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of this Portfolio is LONG TERM GROWTH OF CAPITAL. To
achieve this objective, we invest primarily in equity and equity-related
securities of foreign and U.S. companies. While we make every effort to
achieve this objective, we can't guarantee success.
- --------------------------------------------------------------------------------
GLOBAL INVESTING
This Portfolio is intended to provide investors with the opportunity to invest
in companies located throughout the world. Although we are not required to
invest in a minimum number of countries, we intend generally to invest in at
least three countries, including the U.S. However, in response to market
conditions, we can invest up to 35% of the Portfolio's total assets in any one
country other than the U.S.
- --------------------------------------------------------------------------------
When selecting stocks, we use a growth approach which means we look for
companies that have above-average growth prospects. In making our stock picks,
we look for companies that have had growth in earnings and sales, high returns
on equity and assets or other strong financial characteristics. Often, the
companies we chose have superior management, a unique market niche or a strong
new product.
The Portfolio may invest up to 100% of its assets in MONEY MARKET INSTRUMENTS in
response to adverse market conditions or when we are restructuring the
Portfolio. Investing heavily in these securities limits our ability to achieve
our investment objective, but can help to preserve the Portfolio's assets when
the markets are unstable.
- --------------------------------------------------------------------------------
THE PRUDENTIAL SERIES FUND, INC. 23
<PAGE> 62
HOW THE PORTFOLIOS INVEST CONTINUED
- --------------------------------------------------------------------------------
DERIVATIVES AND OTHER STRATEGIES
We may also use alternative investment strategies - including DERIVATIVES - to
try to improve the Portfolio's returns, protect its assets or for short-term
cash management. There is no guarantee that these strategies will work, that
the instruments necessary to implement these strategies will be available or
that the Portfolio will not lose money. With derivatives, we try to predict
whether the underlying investment - a security, market index, currency,
interest rate or some other benchmark - will go up or down at some future
date. We may use derivatives to try to reduce risk or to increase return
consistent with the Portfolio's overall investment objective.
We may: purchase and sell OPTIONS on equity securities, stock indexes and
foreign currencies; purchase and sell FUTURES CONTRACTS on stock indexes, debt
securities, interest rate indexes and foreign currencies and options on these
futures contracts; enter into FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS; and
purchase securities on a WHEN-ISSUED or DELAYED DELIVERY basis.
The Portfolio may also enter into SHORT SALES AGAINST-THE-BOX. In a short sale
we sell a security we do not own to take advantage of an anticipated decline in
the stock's price. The Portfolio borrows the stock for delivery and if it can
buy the stock later at a lower price, a profit results. A short sale is
"against-the-box" when the Portfolio owns an equal amount of the securities sold
short or owns securities that can be converted into the securities sold.
The Portfolio may also enter into REPURCHASE AGREEMENTS. In a repurchase
transaction, the Portfolio agrees to purchase certain securities and the seller
agrees to repurchase the same securities at a set price on a specified date.
This creates a fixed return for the Portfolio. The Portfolio may participate
with certain other Portfolios of the Fund in a JOINT REPURCHASE ACCOUNT under an
order obtained from the SEC. In a joint repurchase transaction, uninvested cash
balances of various Portfolios are added together and invested in one or more
repurchase agreements. Each of the participating Portfolios receives a portion
of the income earned in the joint account based on the percentage of its
investment.
We will consider factors such as cost and volatility in deciding whether to
employ any particular strategy or use any particular instrument. Any derivatives
we use may not match the Portfolio's underlying holdings. For more information
about these strategies, see the SAI, "Investment Objectives and Policies of the
Portfolios."
ADDITIONAL STRATEGIES
The Portfolio also follows certain policies when it BORROWS MONEY (the
Portfolio may borrow up to 5% of the value of its total assets); LENDS ITS
SECURITIES; and holds ILLIQUID SECURITIES (the Portfolio may hold up to 15% of
its net assets in illiquid securities, including securities with legal or
contractual restrictions on resale, those without a readily available market
and repurchase agreements with maturities longer than seven days). The
Portfolio is subject to certain investment restrictions that are fundamental
policies, which means they cannot be changed without shareholder approval. For
more information about these restrictions, see the SAI.
- --------------------------------------------------------------------------------
THE PRUDENTIAL SERIES FUND, INC. 24
<PAGE> 63
- --------------------------------------------------------------------------------
GOVERNMENT INCOME PORTFOLIO
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of this Portfolio is a HIGH LEVEL OF INCOME OVER THE
LONGER TERM CONSISTENT WITH THE PRESERVATION OF CAPITAL. In pursuing our
objective, we invest primarily in intermediate and long-term U.S. Treasury
securities and debt obligations issued by agencies or instrumentalities
established, sponsored or guaranteed by the U.S. government. While we make
every effort to achieve this objective, we can't guarantee success.
- --------------------------------------------------------------------------------
U.S. GOVERNMENT SECURITIES
U.S. government securities are considered among the most creditworthy of debt
securities. Because they are generally considered less risky, their yields tend
to be lower than the yields from corporate debt. Like all debt securities, the
values of U.S. government securities will change as interest rates change.
- --------------------------------------------------------------------------------
Normally, we will invest at least 65% of the Portfolio's total assets in U.S.
GOVERNMENT SECURITIES, which include TREASURY SECURITIES, OBLIGATIONS ISSUED OR
GUARANTEED BY U.S. GOVERNMENT AGENCIES AND INSTRUMENTALITIES and
MORTGAGE-RELATED SECURITIES issued by U.S. government instrumentalities or
non-governmental corporations.
MORTGAGE-RELATED SECURITIES are usually pass-through instruments that pay
investors a share of all interest and principal payments from an underlying pool
of fixed or adjustable rate mortgages. We may invest in mortgage-related
securities issued and guaranteed by the U.S. government or its agencies like the
Federal National Mortgage Association (Fannie Maes) and the Government National
Mortgage Association (Ginnie Maes) and debt securities issued (but not
guaranteed) by the Federal Home Loan Mortgage Company (Freddie Macs). Private
mortgage-related securities that are not guaranteed by U.S. governmental
entities generally have one or more types of credit enhancement to ensure timely
receipt of payments and to protect against default.
Mortgage-related securities include COLLATERALIZED MORTGAGE OBLIGATIONS,
MULTI-CLASS PASS THROUGH SECURITIES AND STRIPPED MORTGAGE-BACKED SECURITIES. A
collateralized mortgage backed obligation (CMO) is a security backed by an
underlying portfolio of mortgages or mortgage-backed securities that may be
issued or guaranteed by entities such as banks, U.S. governmental entities or
broker-dealers. A multi-class pass-through security is an equity interest in a
trust composed of underlying mortgage assets. Payments of principal and interest
on the mortgage assets and any reinvestment income provide the money to pay debt
service on the CMO or to make scheduled distributions on the multi-class
pass-through security. A stripped mortgage-backed security (MBS strip) may be
issued by U.S. governmental entities or by private institutions. MBS strips take
the pieces of a debt security (principal and interest) and break them apart. The
resulting securities may be sold separately and may perform differently. MBS
strips are highly sensitive to changes in prepayment and interest rates.
The Portfolio may invest up to 35% of its total assets in MONEY MARKET
INSTRUMENTS, FOREIGN GOVERNMENT SECURITIES (including those issued by
supranational organizations) denominated in U.S. dollars, ASSET-BACKED
SECURITIES rated in one of the top two ratings categories by Moody's or S&P (or
if unrated, of comparable quality in our judgment) and SECURITIES OF ISSUERS
(INCLUDING FOREIGN GOVERNMENTS) OTHER THAN THE U.S. GOVERNMENT AND RELATED
ENTITIES, where the principal and interest are substantially guaranteed by U.S.
government agencies whose guarantee is backed by the full faith and credit of
the U.S. and where an assurance of payment on the unguaranteed portion is
provided for in a comparable way.
The Portfolio may invest up to 100% of its assets in MONEY MARKET INSTRUMENTS in
response to adverse market conditions or when restructuring the Portfolio.
Investing heavily in these securities limits our ability to achieve capital
appreciation, but can help to preserve the Portfolio's assets when the markets
are unstable.
- --------------------------------------------------------------------------------
THE PRUDENTIAL SERIES FUND, INC. 25
<PAGE> 64
HOW THE PORTFOLIOS INVEST CONTINUED
- --------------------------------------------------------------------------------
DERIVATIVES AND OTHER STRATEGIES
We may also use alternative investment strategies - including DERIVATIVES - to
try to improve the Portfolio's returns, protect its assets or for short-term
cash management. There is no guarantee that these strategies will work, that
the instruments necessary to implement these strategies will be available or
that the Portfolio will not lose money. With derivatives, we try to predict
whether the underlying investment - a security, interest rate or some other
benchmark - will go up or down at some future date. We may use derivatives to
try to reduce risk or to increase return consistent with the Portfolio's
overall investment objective.
We may: purchase and sell OPTIONS on debt securities; purchase and sell interest
rate FUTURES CONTRACTS and options on these futures contracts; and purchase
securities on a WHEN-ISSUED or DELAYED DELIVERY basis.
The Portfolio may also enter into SHORT SALES. In a short sale we sell a
security we do not own to take advantage of an anticipated decline in the
stock's price. The Portfolio borrows the stock for delivery and if it can buy
the stock later at a lower price, a profit results. No more than 25% of the
Portfolio's net assets may be used as collateral or segregated for purposes of
securing a short sale obligation. The Portfolio may also enter into SHORT SALES
AGAINST-THE-BOX which means it owns securities identical to those sold short.
We may also use INTEREST RATE SWAPS in the management of the Portfolio. In an
interest rate swap the Portfolio and another party agree to exchange interest
payments. For example, the Portfolio may wish to exchange a floating rate of
interest for a fixed rate. We would enter into this type of a swap if we think
interest rates are going down.
The Portfolio may also enter into REPURCHASE AGREEMENTS. In a repurchase
transaction, the Portfolio agrees to purchase certain securities and the seller
agrees to repurchase the same securities at a set price on a specified date.
This creates a fixed return for the Portfolio. The Portfolio may participate
with certain other Portfolios of the Fund in a JOINT REPURCHASE ACCOUNT under an
order obtained from the SEC. In a joint repurchase transaction, uninvested cash
balances of various Portfolios are added together and invested in one or more
repurchase agreements. Each of the participating Portfolios receives a portion
of the income earned in the joint account based on the percentage of its
investment.
The Portfolio may use up to 30% of its net assets in connection with REVERSE
REPURCHASE AGREEMENTS and DOLLAR ROLLS. In a reverse repurchase transaction, the
Portfolio sells a security it owns and agrees to buy it back at an agreed price
and date. During the period the security is held by the other party, the
Portfolio may continue to receive principal and interest payments on the
security. Dollar rolls involve the sale by the Portfolio of a security for
delivery in the current month with a promise to repurchase from the buyer a
substantially similar - but not necessarily the same - security at a set price
and date in the future. During the "roll period," the Portfolio does not receive
any principal or interest on the security. Instead it is compensated by the
difference between the current sales price and the price of the future purchase,
as well as any interest earned on the cash proceeds from the original sale.
We will consider factors such as cost and volatility in deciding whether to
employ any particular strategy or use any particular instrument. Any derivatives
we use may not match the Portfolio's underlying holdings. For more information
about these strategies, see the SAI, "Investment Objectives and Policies of the
Portfolios."
- --------------------------------------------------------------------------------
THE PRUDENTIAL SERIES FUND, INC. 26
<PAGE> 65
- --------------------------------------------------------------------------------
ADDITIONAL STRATEGIES
The Portfolio also follows certain policies when it BORROWS MONEY (the Portfolio
may borrow up to 5% of the value of its total assets); LENDS ITS SECURITIES; and
holds ILLIQUID SECURITIES (the Portfolio may hold up to 15% of its net assets in
illiquid securities, including securities with legal or contractual restrictions
on resale, those without a readily available market and repurchase agreements
with maturities longer than seven days). The Portfolio is subject to certain
investment restrictions that are fundamental policies, which means they cannot
be changed without shareholder approval. For more information about these
restrictions, see the SAI.
STOCK INDEX PORTFOLIO
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of this Portfolio is to achieve INVESTMENT RESULTS THAT
GENERALLY CORRESPOND TO THE PERFORMANCE OF PUBLICLY-TRADED COMMON STOCKS. To
achieve this goal, we attempt to duplicate the performance of the S&P 500 Index.
While we make every effort to achieve this objective, we can't guarantee
success.
- --------------------------------------------------------------------------------
S&P 500 INDEX
We attempt to duplicate the performance of the Standard & Poor's 500 Stock
Index, a market-weighted index which represents more than 70% of the market
value of all publicly-traded common stocks.
- --------------------------------------------------------------------------------
Under normal conditions, we attempt to invest in all 500 stocks represented in
the S&P 500 Index in proportion to their weighting in the Index. We will attempt
to remain as fully invested in the S&P 500 stocks as possible in light of cash
flow into and out of the Portfolio.
To manage investments and redemptions in the Portfolio, we may temporarily hold
cash or invest in high-quality MONEY MARKET INSTRUMENTS. To the extent we do so,
the Portfolio's performance will differ from that of the Index. We attempt to
minimize differences in the performance of the Portfolio and the Index by using
stock index FUTURES CONTRACTS, OPTIONS on stock indexes and options on stock
index futures contracts. The Portfolio will not use these derivative securities
for speculative purposes or to hedge against a decline in the value of the
Portfolio's holdings.
ALTERNATIVE STRATEGIES
We may also use alternative investment strategies to try to improve the
Portfolio's returns or for short-term cash management. There is no guarantee
that these strategies will work, that the instruments necessary to implement
these strategies will be available or that the Portfolio will not lose money.
We may purchase and sell OPTIONS on stock indexes and purchase and sell stock
index futures contracts and options on those FUTURES CONTRACTS.
The Portfolio may also enter into SHORT SALES AGAINST-THE-BOX. In a short sale
we sell a security we do not own to take advantage of an anticipated decline in
the stock's price. The Portfolio borrows the stock for delivery and if it can
buy the stock later at a lower price, a profit results. A short sale is
"against-the-box" when the Portfolio owns an equal amount of the securities sold
short or owns securities that can be converted into the securities sold.
- --------------------------------------------------------------------------------
THE PRUDENTIAL SERIES FUND, INC. 27
<PAGE> 66
HOW THE PORTFOLIOS INVEST CONTINUED
- --------------------------------------------------------------------------------
The Portfolio may also enter into REPURCHASE AGREEMENTS. In a repurchase
transaction, the Portfolio agrees to purchase certain securities and the seller
agrees to repurchase the same securities at a set price on a specified date.
This creates a fixed return for the Portfolio. The Portfolio may participate
with certain other Portfolios of the Fund in a joint REPURCHASE ACCOUNT under an
order obtained from the SEC. In a joint repurchase transaction, uninvested cash
balances of various Portfolios are added together and invested in one or more
repurchase agreements. Each of the participating Portfolios receives a portion
of the income earned in the joint account based on the percentage of its
investment.
We will consider factors such as cost and volatility in deciding whether to
employ any particular strategy or use any particular instrument. For more
information about these strategies, see the SAI, "Investment Objectives and
Policies of the Portfolios."
ADDITIONAL STRATEGIES
The Portfolio also follows certain policies when it BORROWS MONEY (the Portfolio
may borrow up to 5% of the value of its total assets); LENDS ITS SECURITIES; and
holds ILLIQUID SECURITIES (the Portfolio may hold up to 15% of its net assets in
illiquid securities, including securities with legal or contractual restrictions
on resale, those without a readily available market and repurchase agreements
with maturities longer than seven days). The Portfolio is subject to certain
investment restrictions that are fundamental policies, which means they cannot
be changed without shareholder approval. For more information about these
restrictions, see the SAI.
A STOCK'S INCLUSION IN THE S&P 500 INDEX IN NO WAY IMPLIES S&P'S OPINION AS TO
THE STOCK'S ATTRACTIVENESS AS AN INVESTMENT. THE PORTFOLIO IS NOT SPONSORED,
ENDORSED, SOLD OR PROMOTED BY S&P. S&P MAKES NO REPRESENTATIONS REGARDING THE
ADVISABILITY OF INVESTING IN THE PORTFOLIO. "STANDARD & POOR'S," "STANDARD &
POOR'S 500" AND "500" ARE TRADEMARKS OF MCGRAW HILL.
- -------------------------------------------------------------------------------
THE PRUDENTIAL SERIES FUND, INC. 28
<PAGE> 67
- -------------------------------------------------------------------------------
INVESTMENT RISKS
As noted, all investments involve risk, and investing in the Portfolios is no
exception. This chart outlines the key risks and potential rewards of the
principal investments and certain other investments each Portfolio may make. See
also, "Investment Objectives and Policies of the Portfolios" in the SAI.
<TABLE>
<CAPTION>
INVESTMENT TYPE PROTFOLIO & % OF ASSETS RISKS POTENTIAL REWARDS
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
HIGH-QUALITY MONEY MARKET ALL PORTFOLIOS - Credit risk - the risk that the - Regular interest income
OBLIGATIONS OF ALL TYPES (% varies) borrower can't pay back the money
borrowed - Generally more secure than stocks
since companies must pay their
- Market risk - the risk that the debts before they pay dividends
obligations may lose value because
interest rates change or there is
a lack of confidence in the borrower
- ------------------------------------------------------------------------------------------------------------------------------------
EQUITY AND EQUITY-RELATED EQUITY SECURITIES: - Individual stocks could lose - Historically, stocks have out
SECURITIES All Portfolios except value performed other investments
Government Income over the long term
(% varies) - The equity markets could go
down, resulting in a decline - Generally, economic growth
EQUITY-RELATED in value of a Portfolio's means higher corporate profits,
SECURITIES: investments which leads to an increase in
Conservative Balanced, stock prices, known as capital
Diversified Bond, Equity, - Companies that pay dividends appreciation
Flexible Managed, Global may not do so if they don't
(% varies) have profits or adequate - May be a source of dividend
cash flow income
- Changes in economic or political - Highly successful small-cap
conditions, both U.S. and companies can outperform larger
international, may result in a ones
decline in the value of a
Portfolio's investments
- Small-cap companies are more
likely to reinvest earnings
and not pay dividends
- Changes in interest rates may
affect the securities of
small- and medium-sized companies
more than the securities of larger
companies
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
THIS CHART CONTINUES ON THE NEXT PAGE
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THE PRUDENTIAL SERIES FUND, INC. 29
<PAGE> 68
HOW THE PORTFOLIOS INVEST CONTINUED
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INVESTMENT TYPE PORTFOLIO AND % OF ASSETS RISKS POTENTIAL REWARDS
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INVESTMENT GRADE ALL PORTFOLIOS EXCEPT - A Portfolio's holdings, share - Bonds have generally outperformed
DEBT SECURITIES STOCK INDEX price, yield, and total return money market instruments over the long
(% varies) may fluctuate in response to term with less risk than stocks
bond market movements
- Most bonds will rise in value
- Credit risk - the default of an when interest rates fall
issuer would leave a Portfolio
with unpaid interest or principal. - Regular interest income
The lower a bond's quality, the
higher its potential volatility - Investment grade bonds have a lower
risk of default
- Market risk - the risk that the
market value of an investment may - Generally more secure than stocks
move up or down, sometimes rapidly since companies must pay their debts
or unpredictably. Market risk may before they pay dividends
affect an industry, sector, or the
market as a whole
- Interest rate risk - the value of
most bonds will fall when interest
rates rise; the longer a bond's
maturity and the lower its credit
quality, the more its value typically
falls. It can lead to price volatility
- ---------------------------------------------------------------------------------------------------------------------------------
HIGH-YIELD DEBT Conservative Balanced, - Higher market risk - May offer higher interest income
SECURITIES Diversified Bond, than higher quality debt securities
(JUNK BONDS) Flexible Managed - Higher credit risk
(% varies)
- May be more illiquid (harder
to value and sell), in which
case valuation would depend
more on the investment adviser's
judgment than is generally the
case with higher rated securities
- ---------------------------------------------------------------------------------------------------------------------------------
FOREIGN SECURITIES Conservative Balanced, - Foreign markets, economies - Investors can participate in
Diversified Bond, Equity, and political systems may the growth of foreign markets
Flexible Managed, Global, not be as stable as and companies operating in
Government Income in the U.S. those markets
(% varies)
- Currency risk - changing values - Changing value of foreign
OPTIONS ON FOREIGN of foreign currencies currencies
CURRENCIES:
Conservative Balanced, - May be less liquid than U.S. - Opportunities for
Equity, Flexible Managed, stocks and bonds diversification
Global
(% varies) - Differences in foreign laws,
accounting standards, public
FUTURES ON FOREIGN information, custody and
CURRENCIES: settlement practices
Conservative Balanced,
Equity, Flexible Managed, - Year 2000 conversion may be
Global more of a problem for some
(% varies) foreign issuers
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
THIS CHART CONTINUES ON THE NEXT PAGE
- -------------------------------------------------------------------------------
THE PRUDENTIAL FUND SERIES, INC. 30
<PAGE> 69
<TABLE>
<CAPTION>
INVESTMENT TYPE PORTFOLIO AND % OF ASSETS RISKS POTENTIAL REWARDS
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
DERIVATIVES OPTIONS ON EQUITY - Derivatives, such as futures, - A Portfolio could make money
SECURITIES: options and foreign currency and protect against losses
forward contracts, may not if the investment
Conservative Balanced, fully offset the underlying analysis proves correct
Equity, Flexible Managed, positions and this could result
Global, Stock Index in losses to a Portfolio that - Derivatives that involve
(% varies) would not have otherwise occurred leverage could generate
substantial gains at low
OPTIONS ON DEBT - Derivatives used for risk management cost
SECURITIES: may not have the intended effects and
may result in losses or missed - One way to manage a Portfolio's
Conservative Balanced, opportunities risk/return balance is to lock
Diversified Bond, in the value of an investment
Flexible Managed, - The other party to a derivatives ahead of time
Government Income contract could default
(% varies)
- Derivatives that involve leverage
OPTIONS ON STOCK INDEXES: could magnify losses
Conservative Balanced,
Equity, Flexible Managed, - Certain types of derivatives
Global, Stock Index involve costs to a Portfolio
(% varies) that can reduce returns
FUTURES CONTRACTS ON
STOCK INDEXES:
Conservative Balanced,
Equity, Flexible Managed,
Global, Stock Index
(% varies)
FUTURES ON DEBT
SECURITIES AND INTEREST
RATE INDEXES:
Conservative Balanced,
Diversified Bond, Flexible
Managed, Global, Government
Income (% varies)
INTEREST RATE SWAPS:
Conservative Balanced,
Diversified Bond, Flexible
Managed, Government Income
(% varies)
- ----------------------------------------------------------------------------------------------------------------------------------
MORTGAGE BACKED & Government Income - Prepayment risk - the risk that - Regular interest income
ASSET BACKED the underlying mortgage or other
SECURITIES debt may be prepaid partially or - Pass-through instruments provide
completely, generally during greater diversification than
periods of falling interest direct ownership of loans
rates, which could adversely
affect yield to maturity and could - Certain mortgage-backed
require a Portfolio to reinvest in securities may benefit from
lower-yielding securities security interest in
real estate collateral
- Credit risk - the risk that the
underlying mortgages or receivables
will not be paid by debtors or by
credit insurers or guarantors of
such instruments and thus may involve
greater risk
- Market risk
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
THIS CHART CONTINUES ON THE NEXT PAGE
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THE PRUDENTIAL FUND SERIES, INC. 31
<PAGE> 70
HOW THE PORTFOLIOS INVEST CONTINUED
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INVESTMENT TYPE PORTFOLIO AND % OF ASSETS RISKS POTENTIAL REWARDS
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REAL ESTATE INVESTMENT Conservative Balanced, - Performance depends on the - Real estate holdings can
TRUSTS (REITS) Flexible Managed strength of real estate generate good returns from
(% varies) markets, REIT management rents, rising market
and property management values, etc.
which can be affected by
many factors, including - Greater diversification
national and regional than direct ownership
economic conditions
- ----------------------------------------------------------------------------------------------------------------------------------
ILLIQUID SECURITIES All Portfolios - May be difficult to value - May offer a more attractive
(15% of net assets) precisely yield than more widely traded
securities
- May be difficult to sell
at the time or price desired
- ----------------------------------------------------------------------------------------------------------------------------------
LOAN PARTICIPATIONS Conservative Balanced, - Credit risk - May offer right to receive
Diversified Bond, principal, interest and
Flexible Managed - Market risk fees without as much risk
(% varies) as lender
- A Portfolio has no rights
against the borrower in
the event the borrower
does not repay the loan
- ----------------------------------------------------------------------------------------------------------------------------------
WHEN-ISSUED AND DELAYED WHEN-ISSUES AND DELAYED- - Use of such instruments - Use instruments may magnify
DELIVERY SECURITIES, DELIVERY SECURITIES: and strategies may magnify underlying investment
REVERSE REPURCHASE Conservative Balanced, underlying investment gains
AGREEMENTS, DOLLAR Diversified Bond, Equity, losses
ROLLS AND SHORT SALES Flexible Managed, Global,
Government Income - Investment costs may exceed
(% varies) potential underlying investment
gains
REVERSE REPURCHASE AGREEMENTS:
Conservative Balanced,
Diversified Bond, Flexible
Managed, Government Income
and the money market portion
of any Portfolio (% varies)
DOLLAR ROLLS:
Conservative Balanced,
Diversified Bond,
Flexible Managed,
Government Income
(% varies)
SHORT SALES:
Conservative Balanced,
Diversified Bond,
Flexible Managed,
Government Income
(% varies)
SHORT SALES AGAINST THE
BOX:
All Portfolios
(% varies)
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
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THE PRUDENTIAL FUND SERIES, INC. 32
<PAGE> 71
HOW THE PORTFOLIOS ARE MANAGED
- -------------------------------------------------------------------------------
INVESTMENT ADVISER
The Prudential Insurance Company of America (Prudential) serves as the overall
investment adviser for the Fund. Founded in 1875, it is responsible for the
management of the Fund and provides investment advice and related services to
each Portfolio. As of December 31, 1998, Prudential had total assets under
management of approximately $334 billion. Prudential is located at 751 Broad
Street, Newark, New Jersey 07102-3777.
Prudential is currently considering reorganizing itself into a publicly traded
stock company through a process known as "demutualization." On February 10,
1998, the Company's Board of Directors authorized management to take the
preliminary steps necessary to allow the Company to demutualize. On July 1,
1998, legislation was enacted in New Jersey that would permit this conversion to
occur and that specified the process for conversion. Demutualization is a
complex process involving development of a plan of reorganization, adoption of a
plan by the Company's Board of Directors, a public hearing, voting by qualified
policyholders and regulatory approval, all of which could take two or more years
to complete. Prudential's management and Board of Directors have not yet
determined to demutualize and it is possible that, after careful review,
Prudential could decide not to go public.
The following chart lists the total investment advisory fees paid in 1998 as a
percentage of the Portfolio's average net assets.
<TABLE>
<CAPTION>
FEE ARRANGEMENT (1988)
- -------------------------------------------------------------------------------
PORTFOLIO TOTAL ADVISORY FEES AS % OF AVERAGE NET ASSETS
- -------------------------------------------------------------------------------
<S> <C>
Conservative Balanced 0.55
- -------------------------------------------------------------------------------
Diversified Bond 0.40
- -------------------------------------------------------------------------------
Equity 0.45
- -------------------------------------------------------------------------------
Flexible Managed 0.60
- -------------------------------------------------------------------------------
Global 0.75
- -------------------------------------------------------------------------------
Government Income 0.40
- -------------------------------------------------------------------------------
Stock Index 0.35
- -------------------------------------------------------------------------------
</TABLE>
INVESTMENT SUB-ADVISERS
Prudential has appointed Prudential Investment Corporation (PIC), a wholly owned
subsidiary of Prudential, as the sub-adviser for each of the Portfolios.
Prudential pays PIC for these services out of the fee Prudential receives from
the Fund. PIC's address is 751 Broad Street, Newark, New Jersey 07102-3777.
PORTFOLIO MANAGERS
Prudential's fixed-income group is organized by teams that specialize in sector.
The Fixed Income Investment Policy Committee, which is comprised of senior
investment staff from each sector team, provides guidance to the teams regarding
duration risk, asset allocations and general risk parameters. Each of the
portfolio managers of the fixed-income Portfolios (or the fixed income portion
of a Portfolio) contributes bottom-up securities selection within those
guidelines and is responsible for the day-to-day management of the Portfolio.
- -------------------------------------------------------------------------------
THE PRUDENTIAL FUND SERIES, INC. 33
<PAGE> 72
HOW THE PORTFOLIOS ARE MANAGED CONTINUED
- -------------------------------------------------------------------------------
CONSERVATIVE BALANCED PORTFOLIO & FLEXIBLE MANAGED PORTFOLIO
These Portfolios are managed by a team of portfolio managers. Mark Stumpp,
Ph.D., Senior Managing Director of Prudential Investments, a division of
Prudential, has been the lead portfolio manager of the Portfolios since 1994 and
is responsible for the overall asset allocation decisions.
WARREN SPITZ, Managing Director of Prudential Investments, has been a portfolio
manager of the Portfolios since 1995 and manages a portion of each Portfolio's
equity holdings.
JOSE RODRIGUEZ, Managing Director of Prudential Investments, has been a
portfolio manager of the Portfolios since 1993 and is responsible for the debt
portion of the Portfolios. Mr. Rodriguez has been a portfolio manager for
Prudential Investments since 1988.
JOHN MOSCHBERGER, CFA, Vice President of Prudential Investments, manages the
portions of each Portfolio designed to duplicate the performance of the S&P 500
Index. Mr. Moschberger joined Prudential in 1980 and has been a portfolio
manager since 1986.
DIVERSIFIED BOND PORTFOLIO & GOVERNMENT INCOME PORTFOLIO
These Portfolios are managed by MS. BARBARA KENWORTHY who has been the manager
of each since 1995. Ms. Kenworthy is a Managing Director of Prudential
Investments. Before joining Prudential in 1994, she served as president and
portfolio manager for several Dreyfus fixed-income funds. Ms. Kenworthy has over
30 years of investment experience and is a member of the Treasury Borrowing
Advisory Committee of the Public Securities Association.
EQUITY PORTFOLIO
THOMAS JACKSON, Managing Director of Prudential Investments, has managed this
Portfolio since 1990. Mr. Jackson, a Managing Director of PIC, joined PIC in
1990 and has over 30 years of professional equity investment management
experience. He was formerly co-chief investment officer of Red Oak Advisers and
Century Capital Associates, each a private money management firm, where he
managed pension and other accounts for institutions and individuals. Mr. Jackson
was also with The Dreyfus Corporation where he managed and served as president
of the Dreyfus Fund. Mr. Jackson began managing at Chase Manhattan Bank. He is a
member of the New York Society of Security Analysts.
GLOBAL PORTFOLIO
DANIEL DUANE, CFA, Managing Director of Prudential Investments, INGRID HOLM,
CFA, Vice President of Prudential Investments and MICHELLE PICKER, CFA, Vice
President of Prudential Investments, have been co-managers of this Portfolio
since 1997. Mr. Duane has managed the Portfolio since 1990. Ms. Holm has
assisted in the management of Prudential mutual funds since 1994 and has managed
a portion of Prudential's general account. Prior to 1994, Ms. Holm headed the
high yield research group for Prudential's general account. Ms. Picker has been
an analyst in Prudential's global equity investments groups since 1992 and has
managed a portion of Prudential's general account.
STOCK INDEX PORTFOLIO
JOHN MOSCHBERGER, CFA, Vice President of Prudential Investments, has managed
this Portfolio since 1990. (See description under "Conservative Balanced
Portfolio & Flexible Managed Portfolio," above.)
- -------------------------------------------------------------------------------
THE PRUDENTIAL FUND SERIES, INC. 34
<PAGE> 73
HOW TO BUY AND SELL SHARES OF THE FUND
- -------------------------------------------------------------------------------
The Fund offers two classes of shares in each Portfolio: Class I and Class II.
Class I shares are sold only to separate accounts of The Prudential Insurance
Company of America (Prudential) as investment options under variable life
insurance and variable annuity contracts including the VCA-24 Contract. (A
separate account is simply an accounting device used to keep the assets invested
in certain insurance contracts separate from the general assets and liabilities
of the insurance company.) Class II shares are offered only to separate accounts
of non-Prudential insurance companies for the same types of contracts.
HOW TO BUY AND SELL SHARES
The only way to invest in the Portfolios is through certain variable life
insurance and variable annuity contracts. Together with this prospectus, you
should have received a prospectus for the VCA-24 Contract. You should refer to
that prospectus for further information on investing in the Portfolios.
Class I shares of a Portfolio are sold without any sales charge at the net asset
value of the Portfolio. Class I shares do not have a distribution or
administration fee.
Shares are redeemed for cash within seven days of receipt of a proper notice of
redemption or sooner if required by law. There is no redemption charge. We may
suspend the right to redeem shares or receive payment when the New York Stock
Exchange is closed (other than weekends or holidays), when trading on the New
York Stock Exchange is restricted, or as permitted by the SEC.
NET ASSET VALUE
When you purchase or sell shares of a Portfolio the price you will pay or
receive, as the case may be, is based on the share's value. This is known as the
net asset value or NAV. The price at which a purchase or redemption is made is
based on the next calculation of the NAV after the order is placed. The NAV of
each share class of each of the Portfolios is determined once a day - at 4:15
p.m. New York Time - on each day the New York Stock Exchange is open for
business. If the New York Stock Exchange closes early on a day, the Portfolios'
NAVs will be calculated some time between the closing time and 4:15 p.m. on that
day.
The NAV for each of the Portfolios is determined by a simple calculation. It's
the total value of a Portfolio (assets minus liabilities) divided by the total
number of shares outstanding.
To determine a Portfolio's NAV, its holdings are valued as follows:
EQUITY SECURITIES are generally valued at the last sale price on an exchange or
NASDAQ, or if there is not sale, at the mean between the most recent bid and
asked prices on that day. If there is no asked price, the security will be
valued at the bid price. Equity securities that are not sold on an exchange or
NASDAQ are generally valued by an independent pricing agent or principal market
maker.
A Portfolio may own securities that are primarily listed on foreign exchanges
that trade on weekends or other days when the Portfolios do not price their
shares. Therefore, the value of a Portfolio's assets may change on days when
shareholders cannot purchase or redeem Portfolio shares.
- -------------------------------------------------------------------------------
THE PRUDENTIAL FUND SERIES, INC. 35
<PAGE> 74
HOW TO BUY AND SELL SHARES OF THE FUND CONTINUED
- -------------------------------------------------------------------------------
SHORT-TERM DEBT SECURITIES with remaining maturities of 12 month or less held by
the Conservative Balanced and Flexible Managed Portfolios are valued on an
amortized cost basis. For the other Portfolios, debt securities with remaining
maturities of 60 days or less are valued on an amortized cost basis. This
valuation method is widely used by mutual funds. It means that the security is
valued initially at its purchase price and then decreases in value by equal
amounts each day until the security matures. It almost always results in a value
that is extremely close to the actual market value. The Fund's Board of
Directors has established procedures to monitor whether any material deviation
between valuation and market value occurs and if so, will promptly consider what
action, if any, should be taken to prevent unfair results to Contractowners.
OTHER DEBT SECURITIES -- those that are not valued on an amortized cost basis --
are valued using an independent pricing service.
OPTIONS ON STOCK AND STOCK INDEXES that are traded on a national securities
exchange are valued at the average of the bid and asked prices as of the close
of that exchange.
FUTURES CONTRACTS and OPTIONS ON FUTURES CONTRACTS are valued at the last sale
price at the close of the commodities exchange or board of trade on which they
are traded. If there has been no sale that day, the securities will be valued at
the mean between the most recently quoted bid and asked prices on that exchange
or board of trade.
SECURITIES FOR WHICH NO MARKET QUOTATIONS ARE AVAILABLE will be valued at fair
value by Prudential under the direction of the Fund's Board of Directors.
DISTRIBUTOR
Prudential Investment Management Services LLC (PIMS) distributes the Fund's
shares under a Distribution Agreement with the Fund. PIMS' principle business
address is 751 Broad Street, Newark, New Jersey 07102-3777.
- -------------------------------------------------------------------------------
THE PRUDENTIAL FUND SERIES, INC. 36
<PAGE> 75
OTHER INFORMATION
- -------------------------------------------------------------------------------
FEDERAL INCOME TAXES
If you own or are considering purchasing a variable contract, you should consult
the prospectus for the variable contract for tax information about that variable
contract. You should also consult with a qualified tax adviser for information
and advice.
The SAI provides information about certain tax laws applicable to the Fund.
YEAR 2000
The services provided to the Fund and the shareholders by the Fund's investment
adviser, sub-advisers, distributor, transfer agent and custodians depend on the
smooth functioning of their computer systems and those of outside service
providers. Many computer software systems in use today cannot distinguish the
year 2000 from the year 1900 because of the way dates are encoded and
calculated. Such event could have a negative impact on handling securities
trades, payments of interest and dividends, pricing and account services.
Although, at this time, there can be no assurance that there will be no adverse
impact on the Fund, the Fund's investment adviser, sub-advisers, distributor,
transfer agent and custodians have advised the Fund that they have been actively
working on necessary changes to their computer systems to prepare for the year
2000. The Fund and its Directors receive and have received since mid-1998
satisfactory quarterly reports from the principal service providers as to their
preparations for year 2000 readiness, although there can be no assurance that
the service providers (or other securities market participants) will
successfully complete the necessary changes in a timely manner or that there
will be no adverse impact on the Fund. Moreover, the Fund at this time has not
considered retaining alternative service providers or directly undertaken
efforts to achieve year 2000 readiness, the latter of which would involve
substantial expenses without an assurance of success.
Additionally, issuers of securities generally as well as those purchased by the
Fund may confront year 2000 compliance issues which, if material and not
resolved, could have an adverse impact on securities markets and/or a specific
issuer's performance and result in a decline in the value of the securities held
by the Fund.
MONITORING FOR POSSIBLE CONFLICTS
The Fund sells its shares to fund variable life insurance contracts and variable
annuity contracts and may offer its shares to qualified retirement plans.
Because of differences in tax treatment and other considerations, it is possible
that the interest of variable life insurance contract owners, variable annuity
contract owners and participants in qualified retirement plans could conflict.
The Fund will monitor the situation and in the event that a material conflict
did develop, the Fund would determine what action, if any, to take in response.
- -------------------------------------------------------------------------------
THE PRUDENTIAL FUND SERIES, INC. 37
<PAGE> 76
FINANCIAL HIGHLIGHTS
- -------------------------------------------------------------------------------
The financial highlights will help you evaluate the financial performance of
each Portfolio.
The TOTAL RETURN in each chart represents the rate that a shareholder earned on
an investment in the Portfolio, assuming reinvestment of all dividends and other
distributions. The charts do not reflect charges under any variable contract.
The information is for Class I for the periods indicated.
The information for the three years ended December 31, 1998, has been audited by
PricewaterhouseCoopers LLP, whose unqualified report, along with the financial
statements, appear in the SAI, which is available upon request. The information
for the two years ended December 31, 1995, was audited by other independent
auditors whose report was also unqualified.
<TABLE>
<CAPTION>
CONSERVATIVE BALANCED
------------------------------------------------------------------------
YEAR ENDED
DECEMBER 31,
------------------------------------------------------------------------
1998 1997 1996 1995(a) 1994(a)
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net Asset Value, beginning of year.................... $ 14.97 $ 15.52 $ 15.31 $ 14.10 $ 14.91
-------- -------- -------- -------- --------
INCOME FROM INVESTMENT OPERATIONS
Net investment income................................. 0.66 0.76 0.66 0.63 0.53
Net realized and unrealized gains
(losses) on investments....................... 1.05 1.26 1.24 1.78 (0.68)
-------- -------- -------- -------- --------
Total from investment operations...... 1.71 2.02 1.90 2.41 (0.15)
-------- -------- -------- -------- --------
LESS DISTRIBUTIONS:
Dividends from net investment income.................. (0.66) (0.76) (0.66) (0.64) (0.51)
Distributions from net realized gains................. (0.94) (1.81) (1.03) (0.56) (0.15)
-------- -------- -------- -------- --------
Total distributions................... (1.60) (2.57) (1.69) (1.20) (0.66)
-------- -------- -------- -------- --------
Net Asset Value, end of year.......................... $ 15.08 $ 14.97 $ 15.52 $ 15.31 $ 14.10
======== ======== ======== ======== ========
TOTAL INVESTMENT RETURN:(b)........................... 11.74% 13.45% 12.63% 17.27% (0.97)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (in millions)................. $4,796.0 $4,744.2 $4,478.8 $3,940.8 $3,501.1
Ratios to average net assets:
Expenses...................................... 0.57% 0.56% 0.59% 0.58% 0.61%
Net investment income......................... 4.19% 4.48% 4.13% 4.19% 3.61%
Portfolio turnover rate............................... 167% 295% 295% 201% 125%
</TABLE>
(a) Calculations are based on average month-end shares outstanding.
(b) Total investment return is calculated assuming a purchase of shares on the
first day and a sale on the last day of each year reported and includes
reinvestment of dividends and distributions.
- -------------------------------------------------------------------------------
THE PRUDENTIAL FUND SERIES, INC. 38
<PAGE> 77
FINANCIAL HIGHLIGHTS
- -------------------------------------------------------------------------------
The financial highlights will help you evaluate the financial performance of
each Portfolio.
The TOTAL RETURN in each chart represents the rate that a shareholder earned on
an investment in the Portfolio, assuming reinvestment of all dividends and other
distributions. The charts do not reflect charges under any variable contract.
The information is for Class I for the periods indicated.
The information for the three years ended December 31, 1998, has been audited by
PricewaterhouseCoopers LLP, whose unqualified report, along with the financial
statements, appear in the SAI, which is available upon request. The information
for the two years ended December 31, 1995, was audited by other independent
auditors whose report was also unqualified.
<TABLE>
<CAPTION>
DIVERSIFIED BOND
-------------------------------------------------------------
YEAR ENDED
DECEMBER 31,
-------------------------------------------------------------
1998 1997 1996 1995(a) 1994(a)
-------- ------ ------ ------- -------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net Asset Value, beginning of year................. $ 11.02 $11.07 $11.31 $10.04 $11.10
-------- ------ ------ ------- -------
INCOME FROM INVESTMENT OPERATIONS
Net investment income.............................. 0.69 0.80 0.76 0.76 0.68
Net realized and unrealized gains
(losses) on investments.................... 0.08 0.11 (0.27) 1.29 (1.04)
-------- ------ ------ ------- -------
Total from investment operations... 0.77 0.91 0.49 2.05 (0.36)
-------- ------ ------ ------- -------
LESS DISTRIBUTIONS:
Dividends from net investment income............... (0.69) (0.83) (0.73) (0.75) (0.68)
Distributions from net realized gains.............. (0.04) (0.13) -- (0.03 (0.02)
-------- ------ ------ ------- -------
Total distributions................ (0.73) (0.96) (0.73) (0.78) (0.70)
-------- ------ ------ ------- -------
Net Asset Value, end of year....................... $ 11.06 $11.02 $11.07 $11.31 $10.04
======== ====== ====== ======= =======
TOTAL INVESTMENT RETURN:(b)........................ 7.15% 8.57% 4.40% 20.73% (3.23)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (in millions).............. $1,122.6 $816.7 $720.2 $655.8 $541.6
Ratios to average net assets:
Expenses................................... 0.42% 0.43% 0.45% 0.44% 0.45%
Net investment income...................... 6.40% 7.18% 6.89% 7.00% 6.41%
Portfolio turnover rate 199% 224% 210% 199% 32%
FINANCIAL HIGHLIGHTS
</TABLE>
(a) Calculations are based on average month-end shares outstanding.
(b) Total investment return is calculated assuming a purchase of shares on the
first day and a sale on the last day of each year reported and includes
reinvestment of dividends and distributions.
(c) Less than $.005 per share.
- -------------------------------------------------------------------------------
THE PRUDENTIAL FUND SERIES, INC. 39
<PAGE> 78
FINANCIAL HIGHLIGHTS
- -------------------------------------------------------------------------------
The financial highlights will help you evaluate the financial performance of
each Portfolio.
The TOTAL RETURN in each chart represents the rate that a shareholder earned on
an investment in the Portfolio, assuming reinvestment of all dividends and other
distributions. The charts do not reflect charges under any variable contract.
The information is for Class I for the periods indicated.
The information for the three years ended December 31, 1998, has been audited by
PricewaterhouseCoopers LLP, whose unqualified report, along with the financial
statements, appear in the SAI, which is available upon request. The information
for the two years ended December 31, 1995, was audited by other independent
auditors whose report was also unqualified.
<TABLE>
<CAPTION>
EQUITY
------------------------------------------------------------------
YEAR ENDED
DECEMBER 31,
------------------------------------------------------------------
1998 1997 1996 1995(a) 1994(a)
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net Asset Value, beginning of year................. $ 31.07 $ 26.96 $ 25.64 $ 20.66 $ 21.49
-------- -------- -------- -------- --------
INCOME FROM INVESTMENT OPERATIONS
Net investment income.............................. 0.60 0.69 0.71 0.55 0.51
Net realized and unrealized gains on
investments................................ 2.21 5.88 3.88 5.89 0.05
-------- -------- -------- -------- --------
Total from investment operations... 2.81 6.57 4.59 6.44 0.56
-------- -------- -------- -------- --------
LESS DISTRIBUTIONS:
Dividends from net investment income............... (0.60) (0.70) (0.67) (0.52) (0.49)
Distributions from net realized gains.............. (3.64) (1.76) (2.60) (0.94) (0.90)
-------- -------- -------- -------- --------
Total distributions................ (4.24) (2.46) (3.27) (1.46) (1.39)
-------- -------- -------- -------- --------
Net Asset Value, end of year....................... $ 29.64 $ 31.07 $ 26.96 $ 25.64 $ 20.66
======== ======== ======== ======== ========
TOTAL INVESTMENT RETURN:(b)........................ 9.34% 24.66% 18.52% 31.29% 2.78%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (in millions).............. $6,247.0 $6,024.0 $4,814.0 $3,813.8 $2,617.8
Ratios to average net assets:
Expenses................................... 0.47% 0.46% 0.50% 0.48% 0.55%
Net investment income...................... 1.81% 2.27% 2.54% 2.28% 2.39%
Portfolio turnover rate............................ 25% 13% 20% 18% 7%
</TABLE>
(a) Calculations are based on average month-end shares outstanding.
(b) Total investment return is calculated assuming a purchase of shares on the
first day and a sale on the last day of each year reported and includes
reinvestment of dividends and distributions.
- -------------------------------------------------------------------------------
THE PRUDENTIAL FUND SERIES, INC. 40
<PAGE> 79
FINANCIAL HIGHLIGHTS
- -------------------------------------------------------------------------------
The financial highlights will help you evaluate the financial performance of
each Portfolio.
The TOTAL RETURN in each chart represents the rate that a shareholder earned on
an investment in the Portfolio, assuming reinvestment of all dividends and other
distributions. The charts do not reflect charges under any variable contract.
The information is for Class I for the periods indicated.
The information for the three years ended December 31, 1998, has been audited by
PricewaterhouseCoopers LLP, whose unqualified report, along with the financial
statements, appear in the SAI, which is available upon request. The information
for the two years ended December 31, 1995, was audited by other independent
auditors whose report was also unqualified.
<TABLE>
<CAPTION>
FLEXIBLE MANAGED
--------------------------------------------------------------------
YEAR ENDED
DECEMBER 31,
--------------------------------------------------------------------
1998 1997 1996 1995(a) 1994(a)
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net Asset Value, beginning of year................. $ 17.28 $ 17.79 $ 17.86 $ 15.50 $ 16.96
-------- -------- -------- -------- --------
INCOME FROM INVESTMENT OPERATIONS
Net investment income.............................. 0.58 0.59 0.57 0.56 0.47
Net realized and unrealized gains
(losses) on investments.................... 1.14 2.52 1.79 3.15 (1.02)
-------- -------- -------- -------- --------
Total from investment operations... 1.72 3.11 2.36 3.71 (0.55)
-------- -------- -------- -------- --------
LESS DISTRIBUTIONS:
Dividends from net investment income............... (0.59) (0.58) (0.58) (0.56) (0.45)
Distributions from net realized gains.............. (1.85) (3.04) (1.85) (0.79) (0.46)
-------- -------- -------- -------- --------
Total distributions................ (2.44) (3.62) (2.43) (1.35) (0.91)
-------- -------- -------- -------- --------
Net Asset Value, end of year....................... $ 16.56 $ 17.28 $ 17.79 $ 17.86 $ 15.50
======== ======== ======== ======== ========
TOTAL INVESTMENT RETURN:(b)........................ 10.24% 17.96% 13.64% 24.13% (3.16)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (in millions).............. $5,410.0 $5,490.1 $4,896.9 $4,261.2 $3,481.5
Ratios to average net assets:
Expenses................................... 0.61% 0.62% 0.64% 0.63% 0.66%
Net investment income...................... 3.21% 3.02% 3.07% 3.30% 2.90%
Portfolio turnover rate 138% 227% 233% 173% 124%
</TABLE>
(a) Calculations are based on average month-end shares outstanding.
(b) Total investment return is calculated assuming a purchase of shares on the
first day and a sale on the last day of each year reported and includes
reinvestment of dividends and distributions.
- -------------------------------------------------------------------------------
THE PRUDENTIAL FUND SERIES, INC. 41
<PAGE> 80
FINANCIAL HIGHLIGHTS
- -------------------------------------------------------------------------------
The financial highlights will help you evaluate the financial performance of
each Portfolio.
The TOTAL RETURN in each chart represents the rate that a shareholder earned on
an investment in the Portfolio, assuming reinvestment of all dividends and other
distributions. The charts do not reflect charges under any variable contract.
The information is for Class I for the periods indicated.
The information for the three years ended December 31, 1998, has been audited by
PricewaterhouseCoopers LLP, whose unqualified report, along with the financial
statements, appear in the SAI, which is available upon request. The information
for the two years ended December 31, 1995, was audited by other independent
auditors whose report was also unqualified.
<TABLE>
<CAPTION>
GLOBAL
----------------------------------------------------------
YEAR ENDED
DECEMBER 31,
----------------------------------------------------------
1998 1997 1996 1995(a) 1994(a)
------ ------ ------ ------- -------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net Asset Value, beginning of year.................. $17.92 $17.85 $15.53 $13.88 $14.64
INCOME FROM INVESTMENT OPERATIONS
Net investment income............................... 0.07 0.09 0.11 0.06 0.02
Net realized and unrealized gains
(losses) on investments..................... 4.38 1.11 2.94 2.14 (0.74)
------ ------ ------ ------- -------
Total from investment operations... 4.45 1.20 3.05 2.20 (0.72)
------ ------ ------ ------- -------
LESS DISTRIBUTIONS:
Dividends from net investment income................ (0.16) (0.13) (0.11) (0.24) (0.02)
Dividends in excess of net investment
income...................................... (0.12) (0.10) -- -- --
Distributions from net realized gains............... (0.93) (0.90) (0.62) (0.31) (0.02)
------ ------ ------ ------- -------
Total distributions................ (1.21) (1.13) (0.73) (0.55) (0.04)
------ ------ ------ ------- -------
Net Asset Value, end of year........................ $21.16 $17.92 $17.85 $15.53 $13.88
====== ====== ====== ======= =======
TOTAL INVESTMENT RETURN:(b)......................... 25.08% 6.98% 19.97% 15.88% (4.89)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (in millions)............... $844.5 $638.4 $580.6 $400.1 $345.7
Ratios to average net assets:
Expenses.................................... 0.86% 0.85% 0.92% 1.06% 1.23%
Net investment income....................... 0.29% 0.47% 0.64% 0.44% 0.20%
Portfolio turnover rate............................. 73% 70% 41% 59% 37%
</TABLE>
(a) Calculations are based on average month-end shares outstanding.
(b) Total investment return is calculated assuming a purchase of shares on the
first day and a sale on the last day of each year reported and includes
reinvestment of dividends and distributions.
- -------------------------------------------------------------------------------
THE PRUDENTIAL FUND SERIES, INC. 42
<PAGE> 81
FINANCIAL HIGHLIGHTS
- -------------------------------------------------------------------------------
The financial highlights will help you evaluate the financial performance of
each Portfolio.
The TOTAL RETURN in each chart represents the rate that a shareholder earned on
an investment in the Portfolio, assuming reinvestment of all dividends and other
distributions. The charts do not reflect charges under any variable contract.
The information is for Class I for the periods indicated.
The information for the three years ended December 31, 1998, has been audited by
PricewaterhouseCoopers LLP, whose unqualified report, along with the financial
statements, appear in the SAI, which is available upon request. The information
for the two years ended December 31, 1995, was audited by other independent
auditors whose report was also unqualified.
<TABLE>
<CAPTION>
GOVERNMENT INCOME
-----------------------------------------------------------
YEAR ENDED
DECEMBER 31,
-----------------------------------------------------------
1998 1997 1996 1995(a) 1994(a)
------ ------ ------ ------- -------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net Asset Value, beginning of year................. $11.52 $11.22 $11.72 $10.46 $11.78
------ ------ ------ ------- -------
INCOME FROM INVESTMENT OPERATIONS
Net investment income.............................. 0.67 0.75 0.75 0.74 0.70
Net realized and unrealized gains
(losses) on investments.................... 0.36 0.30 (0.51) 1.28 (1.31)
------ ------ ------ ------- -------
Total from investment operations... 1.03 1.05 0.24 2.02 (0.61)
------ ------ ------ ------- -------
LESS DISTRIBUTIONS:
Dividends from net investment income............... (0.68) (0.75) (0.74) (0.76) (0.71)
Dividends in excess of net investment
income..................................... --(c) -- -- -- --
------ ------ ------ ------- -------
Total distributions................ (0.68) (0.75) (0.74) (0.76) (0.71)
------ ------ ------ ------- -------
Net Asset Value, end of year....................... $11.87 $11.52 $11.22 $11.72 $10.46
====== ====== ====== ======= =======
TOTAL INVESTMENT RETURN:(b)........................ 9.09% 9.67% 2.22% 19.48% (5.16)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (in millions).............. $443.2 $429.6 $482.0 $501.8 $487.6
Ratios to average net assets:
Expenses................................... 0.43% 0.44% 0.46% 0.45% 0.45%
Net investment income...................... 5.71% 6.40% 6.38% 6.55% 6.30%
Portfolio turnover rate............................ 109% 88% 95% 195% 34%
</TABLE>
(a) Calculations are based on average month-end shares outstanding.
(b) Total investment return is calculated assuming a purchase of shares on the
first day and a sale on the last day of each year reported and includes
reinvestment of dividends and distributions.
(c) Less than $.005 per share.
- -------------------------------------------------------------------------------
THE PRUDENTIAL FUND SERIES, INC. 43
<PAGE> 82
FINANCIAL HIGHLIGHTS
- -------------------------------------------------------------------------------
The financial highlights will help you evaluate the financial performance of
each Portfolio.
The TOTAL RETURN in each chart represents the rate that a shareholder earned on
an investment in the Portfolio, assuming reinvestment of all dividends and other
distributions. The charts do not reflect charges under any variable contract.
The information is for Class I for the periods indicated.
The information for the three years ended December 31, 1998, has been audited by
PricewaterhouseCoopers LLP, whose unqualified report, along with the financial
statements, appear in the SAI, which is available upon request. The information
for the two years ended December 31, 1995, was audited by other independent
auditors whose report was also unqualified.
<TABLE>
<CAPTION>
STOCK INDEX
---------------------------------------------------------------------
YEAR ENDED
DECEMBER 31,
---------------------------------------------------------------------
1998 1997 1996 1995(a) 1994(a)
-------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net Asset Value, beginning of year................. $ 30.22 $ 23.74 $ 19.96 $ 14.96 $15.20
-------- -------- -------- -------- -------
INCOME FROM INVESTMENT OPERATIONS
Net investment income.............................. 0.42 0.43 0.40 0.40 0.38
Net realized and unrealized gains
(losses) on investments.................... 8.11 7.34 4.06 5.13 (0.23)
-------- -------- -------- -------- -------
Total from investment operations... 8.53 7.77 4.46 5.53 0.15
-------- -------- -------- -------- -------
LESS DISTRIBUTIONS:
Dividends from net investment income............... (0.42) (0.42) (0.40) (0.38) (0.37)
Distributions from net realized gains.............. (0.59) (0.87) (0.28) (0.15) (0.02)
-------- -------- -------- -------- -------
Total distributions................ (1.01) (1.29) (0.68) (0.53) (0.39)
-------- -------- -------- -------- -------
Net Asset Value, end of year....................... $ 37.74 $ 30.22 $ 23.74 $ 19.96 $14.96
======== ======== ======== ======== =======
TOTAL INVESTMENT RETURN:(b)........................ 28.42% 32.83% 22.57% 37.06% 1.01%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (in millions).............. $3,548.1 $2,448.2 $1,581.4 $1,031.3 $664.5
Ratios to average net assets:
Expenses................................... 0.37% 0.37% 0.40% 0.38% 0.42%
Net investment income...................... 1.25% 1.55% 1.95% 2.27% 2.50%
Portfolio turnover rate............................ 3% 5% 1% 1% 2%
</TABLE>
(a) Calculations are based on average month-end shares outstanding.
(b) Total investment return is calculated assuming a purchase of shares on the
first day and a sale on the last day of each year reported and includes
reinvestment of dividends and distributions.
- -------------------------------------------------------------------------------
THE PRUDENTIAL FUND SERIES, INC. 44
<PAGE> 83
(This page intentionally left blank)
<PAGE> 84
FOR MORE INFORMATION
- -------------------------------------------------------------------------------
Additional information about the Fund and each Portfolio can be obtained upon
request without charge and can be found in the following documents:
STATEMENT OF ADDITIONAL INFORMATION (SAI)
(incorporated by reference into this prospectus)
ANNUAL REPORT
(including a discussion of market conditions and strategies that significantly
affected the Portfolios' performance during the previous year)
SEMI-ANNUAL REPORT
- --------------------------------------------------------------------------------
To obtain these documents or to ask any questions about the Fund:
CALL TOLL-FREE
(800) 778-2255
WRITE TO:
Prudential Series Fund,
751 Broad Street,
Newark, NJ 07102-3777
- --------------------------------------------------------------------------------
You can also obtain copies of Fund documents from the Securities and Exchange
Commission as follows:
BY MAIL:
Securities and Exchange Commission
Public Reference Section
Washington, DC 20549-6009
(The SEC charges a fee to copy documents.)
IN PERSON:
Public Reference Room in Washington, DC
(For hours of operation, call 1(800) SEC-0330.)
VIA THE INTERNET:
http://www.sec.gov
- --------------------------------------------------------------------------------
SEC File No. 811-03623
- --------------------------------------------------------------------------------
THE PRUDENTIAL FUND SERIES, INC. 46
<PAGE> 85
A "Statement of Additional Information" about the Contracts has been filed with
the Securities and Exchange Commission. A copy of this Statement is available
without charge.
To receive additional information about the MEDLEY Program fill in your name and
address on this card, tear it off, affix the proper postage, and mail it
to us.
YOU MUST DETACH BEFORE MAILING
- -------------------------------------------------------------------------------
Please send me the "Statement of Additional Information" describing The
Prudential's Group Variable Contracts.
Name ______________________________________________
Address ____________________________________________
City ________________________________________________
State______________________ Zip Code _________________
PLEASE PRINT--will be used as mailing label!
<PAGE> 86
Please
place
correct
postage
here
Prudential Investments
c/o Prudential Investments
30 Scranton Office Park
Scranton, Pennsylvania 18507-1789
Attention: Retirement Services Marketing
<PAGE> 87
STATEMENT OF ADDITIONAL INFORMATION
MAY 1, 1999
THE MEDLEY(SM) PROGRAM
GROUP VARIABLE CONTRACTS
issued through
<TABLE>
<CAPTION>
<S> <C>
THE PRUDENTIAL THE PRUDENTIAL
VARIABLE CONTRACT ACCOUNT VARIABLE CONTRACT ACCOUNT
-10 -11
</TABLE>
THE PRUDENTIAL
VARIABLE CONTRACT ACCOUNT-24
These Contracts are designed 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, as amended, and with non-qualified annuity
arrangements. Contributions made on behalf of Participants may be invested in
The Prudential Variable Contract Account-10, a separate account primarily
invested in common stocks, in The Prudential Variable Contract Account-11, a
separate account invested in money market instruments, or in one or more of the
seven Subaccounts of The Prudential Variable Contract Account-24. Each
Subaccount is invested in a corresponding Portfolio of The Prudential Series
Fund, Inc.
---------------
This Statement of Additional Information is not a prospectus and should be read
in conjunction with the Prospectus, dated May 1, 1999, which is available
without charge upon written request to The Prudential Insurance Company of
America, c/o Prudential Investments, 30 Scranton Office Park, Scranton, PA
18507-1789, or by telephoning 1-800-458-6333.
[GRAPHIC OMITTED]
<PAGE> 88
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
INVESTMENT MANAGEMENT AND ADMINISTRATION OF VCA 10, VCA 11 AND VCA 24........... 1
Fundamental investment restrictions adopted by VCA 10 ..................... 2
Non-fundamental investment restrictions adopted by VCA 10.................. 3
Fundamental investment restrictions adopted by VCA 11...................... 4
Non-fundamental investment restrictions adopted by VCA 11.................. 5
Investment restrictions imposed by state law............................... 5
Additional information about financial futures contracts................... 6
Additional information about options....................................... 7
Forward foreign currency exchanges contracts............................... 12
Interest rate swaps........................................................ 12
Loans of portfolio securities.............................................. 13
Portfolio turnover rate.................................................... 13
Portfolio brokerage and related practices.................................. 14
Custody of securities...................................................... 15
PERFORMANCE INFORMATION......................................................... 15
THE VCA 10 AND VCA 11 COMMITTEES................................................ 18
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA--DIRECTORS.......................... 19
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA--PRINCIPAL OFFICERS................. 22
SALE OF THE CONTRACTS........................................................... 23
EXPERTS......................................................................... 24
FINANCIAL STATEMENTS OF VCA 10.................................................. A-1
FINANCIAL STATEMENTS OF VCA 11.................................................. A-11
FINANCIAL STATEMENTS OF VCA 24.................................................. A-19
CONSOLIDATED FINANCIAL STATEMENTS OF THE PRUDENTIAL INSURANCE
COMPANY OF AMERICA AND SUBSIDIARIES............................................. B-1
</TABLE>
<PAGE> 89
INVESTMENT MANAGEMENT
AND ADMINISTRATION OF
VCA 10, VCA 11 AND VCA 24
The Prudential Insurance Company of America ("Prudential") acts as investment
manager for The Prudential Variable Contract Account-10 ("VCA 10") and The
Prudential Variable Contract Account-11 ("VCA 11") under separate investment
management agreements with each of them. Each Account's assets are invested and
reinvested in accordance with its investment objective and policies, subject to
the general supervision and authorization of the Account's Committee.
The assets of each Subaccount of VCA 24 are invested in a corresponding
portfolio of The Prudential Series Fund, Inc. (the "Fund"). The Prospectus and
the Statement of Additional Information of the Fund describe the investment
management and administration of the Fund and its various portfolios.
Subject to Prudential's supervision, all of the investment management services
provided 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. PIC is registered as
an investment adviser under the Investment Advisers Act of 1940.
Prudential continues to have responsibility for all investment advisory services
under its management or subadvisory agreements with respect to its clients.
Prudential's investment management agreement with each of VCA 10 and VCA 11 was
most recently renewed by unanimous vote of the Committees on May 28, 1998 and by
the Participants in each Account on September 8, 1983. The Service Agreement was
submitted to and approved by Participants in VCA 10 and VCA 11 on November 4,
1985 and its annual continuation was most recently approved by unanimous vote of
the VCA 10 and VCA 11 Committees on May 28, 1998. Each Account's investment
management agreement and the Service Agreement will continue in effect as long
as approved at least once a year by a majority of the non-interested members of
the Account's Committee and either by a majority of each entire Committee or by
a majority vote of persons entitled to vote in respect of the Account. An
Account's investment management agreement will terminate automatically in the
event of assignment, and may be terminated without penalty on 60 days' notice by
the Account's Committee or by the majority vote of persons having voting rights
in respect of the Account, or on 90 days' notice by Prudential.
The Service Agreement will continue in effect as to each Account for a period of
more than two years from its execution only so long as such continuance is
specifically approved at least annually in the same manner as the agreements for
investment management services between Prudential and the Accounts. The Service
Agreement may be terminated by either party upon not less than thirty days'
prior written notice to the other party, will terminate automatically in the
event of its assignment and will terminate automatically as to an Account in the
event of the assignment or termination of the agreement for investment
management services between Prudential and the Account. Prudential is not
relieved of its responsibility for all investment advisory services under the
agreement for investment management services between Prudential and the
Accounts. The Service Agreement provides for Prudential to reimburse PIC for its
costs and expenses incurred in furnishing investment advisory services. For the
meaning of a majority vote of persons having voting rights with respect to an
Account, see the section entitled "Voting Rights" in the Prospectus.
Prudential is responsible for the administrative and recordkeeping functions of
VCA 10, VCA 11 and VCA 24 and pays the expenses associated with them. These
functions include enrolling Participants, receiving and allocating
contributions, maintaining Participants' Accumulation 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.
A daily charge is made which is equal to an effective annual rate of 1.00% of
the net value of the assets in VCA 10 and VCA 11. Three-quarters of this charge
(0.75%) is for administrative expenses not covered by the annual account charge,
and one-quarter
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<PAGE> 90
(0.25%) is for investment management. During 1998, 1997 and, 1996, Prudential
received $5,890,071, $5,388,303, and $4,121,607, respectively, from VCA 10 and
$963,852, $892,983 and $804,528, respectively, from VCA 11 for administrative
expenses and for providing management services.
A daily charge is made which is equal to an effective annual rate of 0.75% of
the net value of the assets in each Subaccount of VCA 24. All of this charge is
for administrative expenses not covered by the annual account charge. During
1998, 1997 and, 1996, Prudential received $10,057,907, $9,369,395 and
$6,866,521, respectively, in daily charges for VCA 24.
Prior to May 1, 1997, an annual account charge for administrative expenses of
not greater than $20 was assessed against a Participant's Accumulation Account.
As of May 1, 1997, this charge was increased to not greater than $30. During
1998, 1997 and, 1996, Prudential collected $106,534, $125,689, and $81,929,
respectively, from VCA 10 and $47,451, $58,601, and $40,724, respectively, from
VCA 11 in annual account charges. During 1998, 1997, and 1996, Prudential
collected $152,129, $294,865 and $143,977, respectively, in annual account
charges from VCA 24.
A deferred sales charge is also imposed on certain withdrawals from the Accounts
and Subaccounts. The deferred sales charges imposed on withdrawals from VCA 10
during 1998, 1997, and 1996, were $9,116, $18,599,and $13,057, respectively. The
deferred sales charges imposed on VCA 11 withdrawals during 1998, 1997, and
1996, were $2,389, $8,370, and $8,659, respectively. During 1998, 1997, and
1996, the deferred sales charges imposed on withdrawals from VCA 24 were
$38,089, $93,520 and $98,456, respectively.
FUNDAMENTAL INVESTMENT RESTRICTIONS ADOPTED BY VCA 10
In addition to the investment objective described in the prospectus, the
following investment restrictions are fundamental investment policies of VCA 10
and may not be changed without the approval of a majority vote of persons having
voting rights in respect of the Account.
Concentration in Particular Industries. VCA 10 will not purchase any security
(other than obligations of the U.S. Government, its agencies or
instrumentalities) if as a result: (i) with respect to 75% of VCA 10's total
assets, more than 5% of VCA 10's total assets (determined at the time of
investment) would then be invested in securities of a single issuer, or (ii) 25%
or more of VCA 10's total assets (determined at the time of the investment)
would be invested in a single industry.
Investments in Real Estate-Related Securities. No purchase of or investment in
real estate will be made for the account of VCA 10 except that VCA 10 may buy
and sell securities that are secured by real estate or shares of real estate
investment trusts listed on stock exchanges or reported on the National
Association of Securities Dealers, Inc. automated quotation system ("NASDAQ").
Investments in Financial Futures. No commodities or commodity contracts will be
purchased or sold for the account of VCA 10 except that VCA 10 may purchase and
sell financial futures contracts and related options.
Loans. VCA 10 will not lend money, except that loans of up to 10% of the value
of VCA 10's total assets may be made through the purchase of privately placed
bonds, debentures, notes, and other evidences of indebtedness of a character
customarily acquired by institutional investors that may or may not be
convertible into stock or accompanied by warrants or rights to acquire stock.
Repurchase agreements and the purchase of publicly traded debt obligations are
not considered to be "loans" for this purpose and may be entered into or
purchased by VCA 10 in accordance with its investment objectives and policies.
Borrowing. VCA 10 will not issue senior securities, borrow money or pledge its
assets, except that VCA 10 may borrow from banks up to 33 1/3 percent of the
value of its total assets (calculated when the loan is made) for temporary,
extraordinary or emergency purposes, for the clearance of transactions or for
investment purposes. VCA 10 may pledge up to 33 1/3 percent of the value of its
total assets to secure such borrowing. For purposes of this restriction, the
purchase or sale of securities on a when-issued or delayed delivery basis,
forward foreign currency exchange contracts and collateral arrangements relating
thereto, and collateral arrangements
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<PAGE> 91
with respect to interest rate swap transactions, reverse repurchase agreements,
dollar roll transactions, options, futures contracts, and options thereon are
not deemed to be a pledge of assets or the issuance of a senior security.
Margin. VCA 10 will not purchase securities on margin (but VCA 10 may obtain
such short-term credits as may be necessary for the clearance of transactions);
provided that the deposit or payment by VCA 10 of initial or maintenance margin
in connection with futures or options is not considered the purchase of a
security on margin.
Underwriting of Securities. VCA 10 will not underwrite the securities of other
issuers, except where VCA 10 may be deemed to be an underwriter for purposes of
certain federal securities laws in connection with the disposition of portfolio
securities and with loans that VCA 10 is permitted to make.
Control or Management of Other Companies. No securities of any company will be
acquired for VCA 10 for the purpose of exercising control or management thereof.
NON-FUNDAMENTAL INVESTMENT RESTRICTIONS ADOPTED BY VCA 10
The VCA 10 Committee has also adopted the following additional investment
restrictions as non-fundamental operating policies. The Committee can change
these restrictions without the approval of the persons having voting rights in
respect of VCA 10.
Investments in Other Investment Companies. Except as part of a merger,
consolidation, acquisition or reorganization, VCA 10 will not invest in the
securities of other investment companies in excess of the limits stipulated by
the Investment Company Act of 1940, as amended, and the rules and regulations
thereunder.
Short Sales. VCA 10 will not make short sales of securities or maintain a short
position, except that VCA 10 may make short sales against the box. Collateral
arrangements entered into with respect to options, futures contracts, forward
contracts and interest rate swap agreements are not deemed to be short sales.
Illiquid Securities. No more than 15% of the value of the net assets held in VCA
10 will be invested in securities (including repurchase agreements and
non-negotiable time deposits maturing in more than seven days) that are subject
to legal or contractual restrictions on resale or for which no readily available
market exists.
FUNDAMENTAL INVESTMENT RESTRICTIONS ADOPTED BY VCA 11
In addition to the investment objective described in the Prospectus, the
following investment restrictions are fundamental investment policies of VCA 11
and may not be changed without the approval of a majority vote of persons having
voting rights in respect of the Account.
Concentration in Particular Industries. VCA 11 will not purchase any security
(other than obligations of the U.S. Government, its agencies or
instrumentalities) if as a result: (i) with respect to 75% of VCA 11's total
assets, more than 5% of VCA 11's total assets (determined at the time of
investment) would then be invested in securities of a single issuer, or (ii) 25%
or more of VCA 11's total assets (determined at the time of the investment)
would be invested in a single industry. Notwithstanding this restriction, there
is no limitation with respect to money market instruments of domestic banks,
U.S. branches of foreign banks that are subject to the same regulations as U.S.
banks, and foreign branches of domestic banks (provided that the domestic bank
is unconditionally liable in the event of the failure of the foreign branch to
make payment on its instruments for any reason).
Investments in Real Estate-Related Securities. No purchase of or investment in
real estate will be made for the account of VCA 11.
Investments in Financial Futures. No commodities or commodity contracts will be
purchased or sold for the account of VCA 11.
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<PAGE> 92
Loans. VCA 11 will not lend money, except that it may purchase debt obligations
in accordance with its investment objective and policies and may engage in
repurchase agreements.
Borrowing. VCA 11 will not issue senior securities, borrow money or pledge its
assets, except that VCA 11 may borrow from banks up to 33 1/3 percent of the
value of its total assets (calculated when the loan is made) for temporary,
extraordinary or emergency purposes, for the clearance of transactions or for
investment purposes. VCA 11 may pledge up to 33 1/3 percent of the value of its
total assets to secure such borrowing. For purposes of this restriction, the
purchase or sale of securities on a when-issued or delayed delivery basis is not
deemed to be a pledge of assets or the issuance of a senior security.
Margin. VCA 11 will not purchase securities on margin (but VCA 11 may obtain
such short-term credits as may be necessary for the clearance of transactions).
Underwriting of Securities. VCA 11 will not underwrite the securities of other
issuers, except where VCA 11 may be deemed to be an underwriter for purposes of
certain federal securities laws in connection with the disposition of portfolio
securities and with loans that VCA 11 is permitted to make.
Control or Management of Other Companies. No securities of any company will be
acquired for VCA 11 for the purpose of exercising control or management thereof.
NON-FUNDAMENTAL INVESTMENT RESTRICTIONS ADOPTED BY VCA 11
The VCA 11 Committee has also adopted the following additional investment
restrictions as non-fundamental operating policies. The Committee can change
these restrictions without the approval of the persons having voting rights in
respect of VCA 11.
Investments in Other Investment Companies. Except as part of a merger,
consolidation, acquisition or reorganization, VCA 11 will not invest in the
securities of other investment companies in excess of the limits stipulated by
the Investment Company Act of 1940 as amended, and the rules and regulations
thereunder.
Short Sales. VCA 11 will not make short sales of securities or maintain a short
position.
Illiquid Securities. No more than 10% of the value of the net assets held in VCA
11 will be invested in illiquid securities (including repurchase agreements and
non-negotiable time deposits maturing in more than seven days). Securities that
have legal or contractual restrictions on resale but have a readily available
market are not deemed illiquid for purposes of this limitation.
INVESTMENT RESTRICTIONS IMPOSED BY STATE LAW
In addition to the investment objectives, policies and restrictions that they
have adopted, VCA 10 and VCA 11 must limit their investments to those authorized
for variable contract accounts of life insurance companies by the laws of the
State of New Jersey. In the event of future amendments of the applicable New
Jersey statutes, each Account will comply, without the approval of Participants
or others having voting rights in respect of the Account, with the statutory
requirements as so modified. The pertinent provisions of New Jersey law as they
currently read are, in summary form, as follows:
1. An account may not purchase any evidence of indebtedness issued, assumed or
guaranteed by any institution created or existing under the laws of the
U.S., any U.S. state or territory, District of Columbia, Puerto Rico, Canada
or any Canadian province, if such evidence of indebtedness is in default as
to interest. "Institution" includes any corporation, joint stock
association, business trust, business joint venture, business partnership,
savings and loan association, credit union or other mutual savings
institution.
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2. The stock of a corporation may not be purchased unless (i) the corporation
has paid a cash dividend on the class of stock during each of the past five
years preceding the time of purchase, or (ii) during the five-year period
the corporation had aggregate earnings available for dividends on such class
of stock sufficient to pay average dividends of 4% per annum computed upon
the par value of such stock, or upon stated value if the stock has no par
value. This limitation does not apply to any class of stock which is
preferred as to dividends over a class of stock whose purchase is not
prohibited.
3. Any common stock purchased must be (i) listed or admitted to trading on a
securities exchange in the United States or Canada; or (ii) included in the
National Association of Securities Dealers' national price listings of
"over-the-counter" securities; or (iii) determined by the Commissioner of
Insurance of New Jersey to be publicly held and traded and as to which
market quotations are available.
4. Any security of a corporation may not be purchased if after the purchase
more than 10% of the market value of the assets of an Account would be
invested in the securities of such corporation.
The currently applicable requirements of New Jersey law impose substantial
limitations on the ability of VCA 10 to invest in the stock of companies whose
securities are not publicly traded or who have not recorded a five-year history
of dividend payments or earnings sufficient to support such payments. This means
that the Account will not generally invest in the stock of newly organized
corporations. Nonetheless, an investment not otherwise eligible under paragraph
1 or 2 above may be made if, after giving effect to the investment, the total
cost of all such non-eligible investments does not exceed 5% of the aggregate
market value of the assets of the Account.
Investment limitations may also arise under the insurance laws and regulations
of other states where the Contracts are sold. Although compliance with the
requirements of New Jersey law set forth above will ordinarily result in
compliance with any applicable laws of other states, under some circumstances
the laws of other states could impose additional restrictions on the portfolios
of the Accounts.
ADDITIONAL INFORMATION ABOUT FINANCIAL FUTURES CONTRACTS
As described in the prospectus, VCA 10 may engage in certain transactions
involving financial futures contracts. This additional information on those
instruments should be read in conjunction with the prospectus.
VCA 10 will only enter into futures contracts that are standardized and traded
on a U.S. exchange or board of trade. When a financial futures contract is
entered into, each party deposits with a broker or in a segregated custodial
account approximately 5% of the contract amount, called the "initial margin."
Subsequent payments to and from the broker, called the "variation margin," are
made on a daily basis as the underlying security, index, or rate fluctuates,
making the long and short positions in the futures contracts more or less
valuable, a process known as "marking to the market."
There are several risks associated with the use of futures contracts for hedging
purposes. While VCA 10's hedging transactions may protect it against adverse
movements in the general level of interest rates or other economic conditions,
such transactions could also preclude VCA 10 from the opportunity to benefit
from favorable movements in the level of interest rates or other economic
conditions. There can be no guarantee that there will be correlation between
price movements in the hedging vehicle and in the securities or other assets
being hedged. An incorrect correlation could result in a loss on both the hedged
assets and the hedging vehicle so that VCA 10's return might have been better if
hedging had not been attempted. The degree of imperfection of correlation
depends on circumstances such as variations in speculative market demand for
futures and futures options, including technical influences in futures trading
and futures options, and differences between the financial instruments being
hedged and the instruments underlying the standard contracts available for
trading in such respects as interest rate levels, maturities, and
creditworthiness of issuers. A decision as to whether, when, and how to hedge
involves the exercise of skill and judgment and even a well-conceived hedge may
be unsuccessful to some degree because of market behavior or unexpected market
trends.
There can be no assurance that a liquid market will exist at a time when VCA 10
seeks to close out a futures contract or a futures option position. Most futures
exchanges and boards of trade limit the amount of fluctuation permitted in
futures contract prices during a
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single day; once the daily limit has been reached on a particular contract, no
trades may be made that day at a price beyond that limit. In addition, certain
of these instruments are relatively new and without a significant trading
history. As a result, there is no assurance that an active secondary market will
develop or continue to exist. The daily limit governs only price movements
during a particular trading day and therefore does not limit potential losses
because the limit may work to prevent the liquidation of unfavorable positions.
For example, futures prices have occasionally moved to the daily limit for
several consecutive trading days with little or no trading, thereby preventing
prompt liquidation of positions and subjecting some holders of futures contracts
to substantial losses. Lack of a liquid market for any reason may prevent VCA 10
from liquidating an unfavorable position and VCA 10 would remain obligated to
meet margin requirements and continue to incur losses until the position is
closed.
ADDITIONAL INFORMATION ABOUT OPTIONS
As described in the prospectus, VCA 10 may engage in certain transactions
involving options. This additional information on those instruments should be
read in conjunction with the prospectus.
In addition to those described in the prospectus, options have other risks,
primarily related to liquidity. A position in an exchange-traded option may be
closed out only on an exchange, board of trade or other trading facility which
provides a secondary market for an option of the same series. Although VCA 10
will generally purchase or write only those exchange-traded options for which
there appears to be an active secondary market, there is no assurance that a
liquid secondary market on an exchange will exist for any particular option, or
at any particular time, and for some options no secondary market on an exchange
or otherwise may exist. In such event it might not be possible to effect closing
transactions in particular options, with the result that VCA 10 would have to
exercise its options in order to realize any profit and would incur brokerage
commissions upon the exercise of such options and upon the subsequent
disposition of underlying securities acquired through the exercise of call
options or upon the purchase of underlying securities for the exercise of put
options. If VCA 10 as a covered call option writer is unable to effect a closing
purchase transaction in a secondary market, it will not be able to sell the
underlying security until the option expires or it delivers the underlying
security upon exercise.
Reasons for the absence of a liquid secondary market on an exchange include the
following: (i) there may be insufficient trading interest in certain options;
(ii) restrictions imposed by an exchange on opening transactions or closing
transactions or both; (iii) trading halts, suspensions or other restrictions may
be imposed with respect to particular classes or series of options or underlying
securities; (iv) unusual or unforeseen circumstances may interrupt normal
operations on an exchange; (v) the facilities of an exchange or a clearing
corporation may not at all times be adequate to handle current trading volume;
or (vi) one or more exchanges could, for economic or other reasons, decide or be
compelled at some future date to discontinue the trading of options (or a
particular class or series of options), in which event the secondary market on
that exchange (or in the class or series of options) would cease to exist,
although outstanding options on that exchange that had been issued by a clearing
corporation as a result of trades on that exchange would continue to be
exercisable in accordance with their terms. There is no assurance that higher
than anticipated trading activity or other unforeseen events might not, at
times, render certain of the facilities of any of the clearing corporations
inadequate, and thereby result in the institution by an exchange of special
procedures which may interfere with the timely execution of customers' orders.
The purchase and sale of over-the-counter ("OTC") options will also be subject
to certain risks. Unlike exchange-traded options, OTC options generally do not
have a continuous liquid market. Consequently, VCA 10 will generally be able to
realize the value of an OTC option it has purchased only by exercising it or
reselling it to the dealer who issued it. Similarly, when VCA 10 writes an OTC
option, it generally will be able to close out the OTC option prior to its
expiration only by entering into a closing purchase transaction with the dealer
to which VCA 10 originally wrote the OTC option. There can be no assurance that
VCA 10 will be able to liquidate an OTC option at a favorable price at any time
prior to expiration. In the event of insolvency of the other party, VCA 10 may
be unable to liquidate an OTC option.
Options on Equity Securities. VCA 10 may purchase and write (i.e., sell) put and
call options on equity securities that are traded on U.S. securities exchanges,
are listed on the National Association of Securities Dealers Automated Quotation
System ("NASDAQ"), or that result from privately negotiated transactions with
broker-dealers ("OTC options"). A call option is a short-term contract pursuant
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to which the purchaser or holder, in return for a premium paid, has the right to
buy the security underlying the option at a specified exercise price at any time
during the term of the option. The writer of the call option, who receives the
premium, has the obligation, upon exercise of the option, to deliver the
underlying security against payment of the exercise price. A put option is a
similar contract which gives the purchaser or holder, in return for a premium,
the right to sell the underlying security at a specified price during the term
of the option. The writer of the put, who receives the premium, has the
obligation to buy the underlying security at the exercise price upon exercise by
the holder of the put.
VCA 10 will write only "covered" options on stocks. A call option is covered if:
(1) VCA 10 owns the security underlying the option; or (2) VCA 10 has an
absolute and immediate right to acquire that security without additional cash
consideration (or for additional cash consideration held in a segregated account
by its custodian) upon conversion or exchange of other securities it holds; or
(3) VCA 10 holds on a share-for-share basis a call on the same security as the
call written where the exercise price of the call held is equal to or less than
the exercise price of the call written or greater than the exercise price of the
call written if the difference is maintained by VCA 10 in cash, U.S. government
securities or other liquid unencumbered assets in a segregated account with its
custodian. A put option is covered if: (1) VCA 10 deposits and maintains with
its custodian in a segregated account cash, U.S. Government securities or other
liquid unencumbered assets having a value equal to or greater than the exercise
price of the option; or (2) VCA 10 holds on a share-for-share basis a put on the
same security as the put written where the exercise price of the put held is
equal to or greater than the exercise price of the put written or less than the
exercise price if the difference is maintained by VCA 10 in cash, U.S.
government securities or other liquid unencumbered assets in a segregated
account with its custodian.
VCA 10 may also purchase "protective puts" (i.e., put options acquired for the
purpose of protecting VCA 10 security from a decline in market value). The loss
to VCA 10 is limited to the premium paid for, and transaction costs in
connection with, the put plus the initial excess, if any, of the market price of
the underlying security over the exercise price. However, if the market price of
the security underlying the put rises, the profit VCA 10 realizes on the sale of
the security will be reduced by the premium paid for the put option less any
amount (net of transaction costs) for which the put may be sold.
VCA 10 may also purchase putable and callable equity securities, which are
securities coupled with a put or call option provided by the issuer.
VCA 10 may purchase call options for hedging or investment purposes. VCA 10 does
not intend to invest more than 5% of its net assets at any one time in the
purchase of call options on stocks.
If the writer of an exchange-traded option wishes to terminate the obligation,
he or she may effect a "closing purchase transaction" by buying an option of the
same series as the option previously written. Similarly, the holder of an option
may liquidate his or her position by exercise of the option or by effecting a
"closing sale transaction" by selling an option of the same series as the option
previously purchased. There is no guarantee that closing purchase or closing
sale transactions can be effected.
Options on Debt Securities. VCA 10 may purchase and write exchange-traded and
OTC put and call options on debt securities. Options on debt securities are
similar to options on stock, except that the option holder has the right to take
or make delivery of a debt security, rather than stock.
VCA 10 will write only "covered" options. Options on debt securities are covered
in the same manner as options on stocks, discussed above, except that, in the
case of call options on U.S. Treasury Bills, VCA 10 might own U.S. Treasury
Bills of a different series from those underlying the call option, but with a
principal amount and value corresponding to the option contract amount and a
maturity date no later than that of the securities deliverable under the call
option.
VCA 10 may also write straddles (i.e., a combination of a call and a put written
on the same security at the same strike price where the same issue of the
security is considered as the cover for both the put and the call). In such
cases, VCA 10 will also segregate or deposit for the benefit of VCA 10's broker
cash or liquid unencumbered assets equivalent to the amount, if any, by which
the put is "in
7
<PAGE> 96
the money." It is contemplated that VCA 10's use of straddles will be limited to
5% of VCA 10's net assets (meaning that the securities used for cover or
segregated as described above will not exceed 5% of VCA 10's net assets at the
time the straddle is written).
VCA 10 may purchase "protective puts" in an effort to protect the value of a
security that it owns against a substantial decline in market value. Protective
puts on debt securities operate in the same manner as protective puts on equity
securities, described above. VCA 10 may wish to protect certain securities
against a decline in market value at a time when put options on those particular
securities are not available for purchase. VCA 10 may therefore purchase a put
option on securities it does not hold. While changes in the value of the put
should generally offset changes in the value of the securities being hedged, the
correlation between the two values may not be as close in these transactions as
in transactions in which VCA 10 purchases a put option on an underlying security
it owns.
VCA 10 may also purchase call options on debt securities for hedging or
investment purposes. VCA 10 does not intend to invest more than 5% of its net
assets at any one time in the purchase of call options on debt securities.
VCA 10 may also purchase putable and callable debt securities, which are
securities coupled with a put or call option provided by the issuer.
VCA 10 may enter into closing purchase or sale transactions in a manner similar
to that discussed above in connection with options on equity securities.
Options on Stock Indices. VCA 10 may purchase and sell put and call options on
stock indices traded on national securities exchanges, listed on NASDAQ or that
result from privately negotiated transactions with broker-dealers. Options on
stock indices are similar to options on stock except that, rather than the right
to take or make delivery of stock at a specified price, an option on a stock
index gives the holder the right to receive, upon exercise of the option, an
amount of cash if the closing level of the stock index upon which the option is
based is greater than in the case of a call, or less than, in the case of a put,
the strike price of the option. This amount of cash is equal to such difference
between the closing price of the index and the strike price of the option times
a specified multiple (the "multiplier"). If the option is exercised, the writer
is obligated, in return for the premium received, to make delivery of this
amount. Unlike stock options, all settlements are in cash, and gain or loss
depends on price movements in the stock market generally (or in a particular
industry or segment of the market) rather than price movements in individual
stocks.
VCA 10 will write only "covered" options on stock indices. A call option is
covered if VCA 10 follows the segregation requirements set forth in this
paragraph. When VCA 10 writes a call option on a broadly based stock market
index, it will segregate or put into escrow with its custodian or pledge to a
broker as collateral for the option, cash, U.S. government securities or other
liquid unencumbered assets, or "qualified securities" (defined below) with a
market value at the time the option is written of not less than 100% of the
current index value times the multiplier times the number of contracts. A
"qualified security" is an equity security which is listed on a national
securities exchange or listed on NASDAQ against which VCA 10 has not written a
stock call option and which has not been hedged by VCA 10 by the sale of stock
index futures. When VCA 10 writes a call option on an industry or market segment
index, it will segregate or put into escrow with its custodian or pledge to a
broker as collateral for the option, cash, U.S. government securities or other
liquid unencumbered assets, or at least five qualified securities, all of which
are stocks of issuers in such industry or market segment, with a market value at
the time the option is written of not less than 100% of the current index value
times the multiplier times the number of contracts. Such stocks will include
stocks which represent at least 50% of the weighting of the industry or market
segment index and will represent at least 50% of VCA 10's holdings in that
industry or market segment. No individual security will represent more than 15%
of the amount so segregated, pledged or escrowed in the case of broadly based
stock market stock options or 25% of such amount in the case of industry or
market segment index options. If at the close of business on any day the market
value of such qualified securities so segregated, escrowed, or pledged falls
below 100% of the current index value times the multiplier times the number of
contracts, VCA 10 will so segregate, escrow, or pledge an amount in cash, U.S.
government securities, or other liquid unencumbered assets equal in value to the
difference. In addition, when VCA 10 writes a call on an index which is
in-the-money at the time the call is written, it will segregate with its
custodian or pledge to the broker as collateral, cash or U.S. government
securities or other liquid unencumbered assets equal in value to the amount by
which the call is in-the-money times the multiplier times the number of
contracts. Any amount segregated pursuant to the foregoing sentence may be
applied to VCA 10's obligation to segregate
8
<PAGE> 97
additional amounts in the event that the market value of the qualified
securities falls below 100% of the current index value times the multiplier
times the number of contracts.
A call option is also covered if VCA 10 holds a call on the same index as the
call written where the strike price of the call held is equal to or less than
the strike price of the call written or greater than the strike price of the
call written if the difference is maintained by VCA 10 in cash, U.S. government
securities or other liquid unencumbered assets in a segregated account with its
custodian.
A put option is covered if: (1) VCA 10 holds in a segregated account cash, U.S.
government securities or other liquid unencumbered assets of a value equal to
the strike price times the multiplier times the number of contracts; or (2) VCA
10 holds a put on the same index as the put written where the strike price of
the put held is equal to or greater than the strike price of the put written or
less than the strike price of the put written if the difference is maintained by
VCA 10 in cash, U.S. government securities or other liquid unencumbered assets
in a segregated account with its custodian.
VCA 10 may purchase put and call options on stock indices for hedging or
investment purposes. VCA 10 does not intend to invest more than 5% of its net
assets at any one time in the purchase of puts and calls on stock indices. VCA
10 may effect closing sale and purchase transactions involving options on stock
indices, as described above in connection with stock options.
The distinctive characteristics of options on stock indices create certain risks
that are not present with stock options. Index prices may be distorted if
trading of certain stocks included in the index is interrupted. Trading in the
index options also may be interrupted in certain circumstances, such as if
trading were halted in a substantial number of stocks included in the index. If
this occurred, VCA 10 would not be able to close out options which it had
purchased or written and, if restrictions on exercise were imposed, might be
unable to exercise an option it holds, which could result in substantial losses
to VCA 10. Price movements in VCA 10's equity security holdings probably will
not correlate precisely with movements in the level of the index and, therefore,
in writing a call on a stock index VCA 10 bears the risk that the price of the
securities held by VCA 10 may not increase as much as the index. In such event,
VCA 10 would bear a loss on the call which is not completely offset by movement
in the price of VCA 10's equity securities. It is also possible that the index
may rise when VCA 10's securities do not rise in value. If this occurred, VCA 10
would experience a loss on the call which is not offset by an increase in the
value of its securities holdings and might also experience a loss in its
securities holdings. In addition, when VCA 10 has written a call, there is also
a risk that the market may decline between the time VCA 10 has a call exercised
against it, at a price which is fixed as of the closing level of the index on
the date of exercise, and the time VCA 10 is able to sell stocks in its
portfolio. As with stock options, VCA 10 will not learn that an index option has
been exercised until the day following the exercise date but, unlike a call on
stock where VCA 10 would be able to deliver the underlying securities in
settlement, VCA 10 may have to sell part of its stock portfolio in order to make
settlement in cash, and the price of such stocks might decline before they can
be sold. This timing risk makes certain strategies involving more than one
option substantially more risky with options in stock indices than with stock
options.
There are also certain special risks involved in purchasing put and call options
on stock indices. If VCA 10 holds an index option and exercises it before final
determination of the closing index value for that day, it runs the risk that the
level of the underlying index may change before closing. If such a change causes
the exercise option to fall out of-the-money, VCA 10 will be required to pay the
difference between the closing index value and the strike price of the option
(times the applicable multiplier) to the assigned writer. Although VCA 10 may be
able to minimize the risk by withholding exercise instructions until just before
the daily cutoff time or by selling rather than exercising an option when the
index level is close to the exercise price, it may not be possible to eliminate
this risk entirely because the cutoff times for index options may be earlier
than those fixed for other types of options and may occur before definitive
closing index values are announced.
Options on Foreign Currencies. VCA 10 may purchase and write put and call
options on foreign currencies traded on U.S. or foreign securities exchanges or
boards of trade. Options on foreign currencies are similar to options on stock,
except that the option holder has the right to take or make delivery of a
specified amount of foreign currency, rather than stock. VCA 10's successful use
of options on foreign currencies depends upon the investment manager's ability
to predict the direction of the currency exchange markets
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<PAGE> 98
and political conditions, which requires different skills and techniques than
predicting changes in the securities markets generally. In addition, the
correlation between movements in the price of options and the price of
currencies being hedged is imperfect.
Options on Futures Contracts. VCA 10 may enter into certain transactions
involving options on futures contracts. VCA 10 will utilize these types of
options for the same purpose that it uses the underlying futures contract. An
option on a futures contract gives the purchaser or holder the right, but not
the obligation, to assume a position in a futures contract (a long position if
the option is a call and a short position if the option is a put) at a specified
price at any time during the option exercise period. The writer of the option is
required upon exercise to assume an offsetting futures position (a short
position if the option is a call and long position if the option is a put). Upon
exercise of the option, the assumption of offsetting futures positions by the
writer and holder of the option will be accomplished by delivery of the
accumulated balance in the writer's futures margin account which represents the
amount by which the market price of the futures contract, at exercise, exceeds,
in the case of a call, or is less than, in the case of a put, the exercise price
of the option on the futures contract. As an alternative to exercise, the holder
or writer of an option may terminate a position by selling or purchasing an
option of the same series. There is no guarantee that such closing transactions
can be effected. VCA 10 intends to utilize options on futures contracts for the
same purposes that it uses the underlying futures contracts.
Options on futures contracts are subject to risks similar to those described
above with respect to options on securities, options on stock indices, and
futures contracts. These risks include the risk that the investment manager may
not correctly predict changes in the market, the risk of imperfect correlation
between the option and the securities being hedged, and the risk that there
might not be a liquid secondary market for the option. There is also the risk of
imperfect correlation between the option and the underlying futures contract. If
there were no liquid secondary market for a particular option on a futures
contract, VCA 10 might have to exercise an option it held in order to realize
any profit and might continue to be obligated under an option it had written
until the option expired or was exercised. If VCA 10 were unable to close out an
option it had written on a futures contract, it would continue to be required to
maintain initial margin and make variation margin payments with respect to the
option position until the option expired or was exercised against VCA 10.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
A forward foreign currency exchange contract is a contract obligating one party
to purchase and the other party to sell one currency for another currency at a
future date and price. When investing in foreign securities, VCA 10 may enter
into such contracts in anticipation of or to protect itself against fluctuations
in currency exchange rates.
VCA 10 generally will not enter into a forward contract with a term of greater
than 1 year. At the maturity of a forward contract, VCA 10 may either sell the
security and make delivery of the foreign currency or it may retain the security
and terminate its contractual obligation to deliver the foreign currency by
purchasing an "offsetting" contract with the same currency trader obligating it
to purchase, on the same maturity date, the same amount of the foreign currency.
VCA 10's successful use of forward contracts depends upon the investment
manager's ability to predict the direction of currency exchange markets and
political conditions, which requires different skills and techniques than
predicting changes in the securities markets generally.
INTEREST RATE SWAP TRANSACTIONS
VCA 10 may enter into interest rate swap transactions. Interest rate swaps, in
their most basic form, involve the exchange by one party with another party of
their respective commitments to pay or receive interest. For example, VCA 10
might exchange its right to receive certain floating rate payments in exchange
for another party's right to receive fixed rate payments. Interest rate swaps
can take a variety of other forms, such as agreements to pay the net differences
between two different indices or rates, even if the parties do not own the
underlying instruments. Despite their differences in form, the function of
interest rate swaps is generally the same--to increase or decrease exposure to
long- or short-term interest rates. For example, VCA 10 may enter into a swap
transaction to preserve a return or spread on a particular investment or a
portion of its portfolio or to protect against any increase in the price of
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<PAGE> 99
securities the Account anticipates purchasing at a later date. VCA 10 will
maintain appropriate liquid assets in a segregated custodial account to cover
its obligations under swap agreements.
The use of swap agreements is subject to certain risks. As with options and
futures, if the investment manager's prediction of interest rate movements is
incorrect, VCA 10's total return will be less than if the Account had not used
swaps. In addition, if the counterparty's creditworthiness declines, the value
of the swap would likely decline. Moreover, there is no guarantee that VCA 10
could eliminate its exposure under an outstanding swap agreement by entering
into an offsetting swap agreement with the same or another party.
LOANS OF PORTFOLIO SECURITIES
VCA 10 and VCA 11 may from time to time lend their portfolio securities to
broker-dealers, qualified banks and certain institutional investors, provided
that such loans are made pursuant to written agreements and are continuously
secured by collateral in the form of cash, U.S. Government securities or
irrevocable standby letters of credit in an amount equal to at least the market
value at all times of the loaned securities. During the time portfolio
securities are on loan, VCA 10 and VCA 11 will continue to receive the interest
and dividends, or amounts equivalent thereto, on the loaned securities while
receiving a fee from the borrower or earning interest on the investment of the
cash collateral. The right to terminate the loan will be given to either party
subject to appropriate notice. Upon termination of the loan, the borrower will
return to the lender securities identical to the loaned securities. VCA 10 and
VCA-II will not have the right to vote securities on loan, but would terminate
the loan and regain the right to vote if that were considered important with
respect to the investment. The primary risk in lending securities is that the
borrower may become insolvent on a day on which the loaned security is rapidly
advancing in price. In such event, if the borrower fails to return the loaned
securities, the existing collateral might be insufficient to purchase back the
full amount of stock loaned, and the borrower would be unable to furnish
additional collateral. The borrower would be liable for any shortage, but VCA 10
and VCA 11 would be unsecured creditors with respect to such shortage and might
not be able to recover all or any of it. However, this risk may be minimized by
a careful selection of borrowers and securities to be lent.
VCA 10 and VCA 11 will not lend their portfolio securities to borrowers
affiliated with Prudential, including Prudential Securities Incorporated. This
will not affect the Accounts' ability to maximize their securities lending
opportunities.
PORTFOLIO TURNOVER RATE
VCA 10 has no fixed policy with respect to portfolio turnover, which is an index
determined by dividing the lesser of the purchases and sales of portfolio
securities during the year by the monthly average of the aggregate value of the
portfolio securities owned during the year. VCA 10 seeks long term capital
growth rather than short term trading profits. However, during any period when
changing economic or market conditions are anticipated, successful management
requires an aggressive response to such changes which may result in portfolio
shifts that may significantly increase the rate of portfolio turnover. Higher
portfolio turnover involves correspondingly greater brokerage commissions and
other transaction costs, which are borne directly by VCA 10. It is not
anticipated that under normal circumstances the annual portfolio turnover rate
would exceed 100%. During 1998 and 1997 the total portfolio turnover rate for
VCA 10 was 49% and 47%, respectively.
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<PAGE> 100
PORTFOLIO BROKERAGE AND RELATED PRACTICES
Prudential is responsible for decisions to buy and sell securities for VCA 10
and VCA 11, the selection of brokers and dealers to effect the transactions and
the negotiation of brokerage commissions, if any. Transactions on a stock
exchange in equity securities for VCA 10 will be executed primarily through
brokers who will receive a commission paid by the Account. Fixed income
securities, as well as securities traded in the over-the-counter market, on the
other hand, will not normally incur any brokerage commissions. These securities
are generally traded on a "net" basis with dealers acting as principals for
their own accounts without a stated commission, although the price of the
security usually includes a profit to the dealer. In underwritten offerings,
securities are purchased at a fixed price that includes an amount of
compensation to the underwriter, generally referred to as the underwriter's
concession or discount. On occasion, certain of these securities may be
purchased directly from an issuer, in which case neither commissions nor
discounts are paid.
In placing orders for portfolio transactions of the Accounts, primary
consideration is given to obtaining the most favorable price and best execution.
An attempt is made to effect each transaction at a price and commission, if any,
that provide the most favorable total cost or proceeds reasonably attainable in
the circumstances. However, a higher spread or commission than is otherwise
necessary for a particular transaction may be paid if to do so appears to
further the goal of obtaining the best execution available.
In connection with any securities transaction that involves a commission
payment, the commission is negotiated with the broker on the basis of the
quality and quantity of execution services that the broker provides, in light of
generally prevailing commission rates. Periodically, Prudential and PIC review
the allocation among brokers of orders for equity securities and the commissions
that were paid.
When selecting a broker or dealer in connection with a transaction for either
Account, consideration is given to whether the broker or dealer has furnished
Prudential or PIC with certain services that brokerage houses customarily supply
to institutional investors, provided this does not jeopardize the objective of
obtaining the best price and execution.
These services include statistical and economic data and research reports on
particular companies and industries. Prudential and PIC use these services in
connection with all of their investment activities, and some of the data or
services obtained in connection with the execution of transactions for an
Account may be used in managing other investment accounts. Conversely, brokers
and dealers furnishing such services may be selected for the execution of
transactions of such other accounts, while the data and services may be used in
providing investment management for one or both of the Accounts. Although
Prudential's present policy is not to permit higher spreads or commissions to be
paid on transactions for the Accounts in order to secure research and
statistical services from brokers or dealers, Prudential might in the future
authorize the payment of higher commissions (but not of higher spreads), with
the prior concurrence of an Account's Committee, if it is determined that the
higher commissions are necessary in order to secure desired research and are
reasonable in relation to all the services that the broker provides.
When investment opportunities arise that may be appropriate for more than one
entity for which Prudential serves as investment manager or adviser, one entity
will not be favored over another and allocations of investments among them will
be made in an impartial manner believed to be equitable to each entity involved.
The allocations will be based on each entity's investment objectives and its
current cash and investment positions. Because the various entities for which
Prudential acts as investment manager or adviser have different investment
objectives and positions, from time to time a particular security may be
purchased for one or more such entities while at the same time such securities
may be sold for another.
An affiliated broker may be employed to execute brokerage transactions on behalf
of the Accounts as long as the commissions are reasonable and fair compared to
the commissions received by other brokers in connection with comparable
transactions involving similar securities being purchased or sold on a
securities exchange during a comparable period of time. During 1998, 1997 and
1996, the total dollar amount of commissions paid by VCA 10 to an affiliated
broker, Prudential Securities Incorporated, was $8,801, $27,462 and $12,687,
respectively, which represented 1.0%, 3.3% and 2.3%, respectively, of the
aggregate brokerage commissions paid by
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<PAGE> 101
VCA 10. For 1998, 1997 and 1996 Prudential Securities effected 1.2%, 3.1% and
2.1%, respectively, of the transactions involving the payment of commissions on
an aggregate dollar basis. The Accounts may not engage in any transactions in
which Prudential or its affiliates, including Prudential Securities
Incorporated, acts as principal, including over-the-counter purchases and
negotiated trades in which such a party acts as a principal.
Prudential or PIC may enter into business transactions with brokers or dealers
for purposes other than the execution of portfolio securities transactions for
accounts Prudential manages. These other transactions will not affect the
selection of brokers or dealers in connection with portfolio transactions for
the Accounts.
During 1998, 1997, and 1996, $901,787, $828,324, and $548,304, respectively, was
paid to various brokers in connection with securities transactions for VCA 10.
Of this amount, approximately 64.7%, 62.1% and 78.6%, respectively, was
allocated to brokers who provided research and statistical services to
Prudential.
CUSTODY OF SECURITIES
Investors Fiduciary Trust Company, 127 West 10th Street, Kansas City, Missouri
64105, is custodian of the assets of VCA 10 and VCA 11 and maintains certain
books and records in connection therewith.
PERFORMANCE INFORMATION
The tables below provide performance information for each variable investment
option through December 31, 1998. The performance information is based on
historical experience and does not indicate or represent future performance.
ANNUAL AVERAGE TOTAL RETURN
Table 1 below shows the average annual rates of total return on hypothetical
investments of $1,000 for periods ended December 31, 1998 in VCA 10, VCA 11 and
the following subaccounts of VCA 24: Diversified Bond, Government Income,
Conservative Balanced, Flexible Managed, Stock Index, Equity and Global. These
figures assume withdrawal of the investments at the end of the period other than
to effect an annuity under the Contract. VCA 24 has been in existence since May
1, 1987. However, the applicable underlying Portfolios of the Fund existed as
funding vehicles for other Prudential products prior to that date. For
performance information purposes, the returns calculated below for periods prior
to inclusion in the MEDLEY Program reflect a hypothetical return as if those
portfolios were part of the MEDLEY Program at that time, using charges
applicable to the MEDLEY Program.
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<PAGE> 102
TABLE 1
AVERAGE ANNUAL TOTAL RETURN ASSUMING WITHDRAWAL
<TABLE>
<CAPTION>
FROM DATE PORTFOLIO
ESTABLISHED
THROUGH
12/31/98 IF
ONE YEAR FIVE YEARS TEN YEARS PORTFOLIO
DATE ENDED ENDED ENDED NOT IN EXISTENCE
ESTABLISHED 12/31/98 12/31/98 12/31/98 FOR TEN YEARS
----------- -------- -------- -------- ----------------
<S> <C> <C> <C> <C> <C>
VCA 10 .................... 8/25/82 (9.35)% 14.76% 15.43% --
VCA 11 .................... 8/25/82 (1.33) 4.17 4.98 --
VCA 24:
Diversified Bond ..... 5/13/83 0.35 6.12 8.30 --
Government Income .... 5/1/89 2.27 5.62 -- 8.04%
Conservative Balanced 5/13/83 4.86 9.51 10.45 --
Flexible Managed ..... 5/13/83 3.36 11.04 12.28 --
Stock Index .......... 10/19/87 21.41 22.55 17.81
Equity ............... 5/13/83 2.37 15.68 15.81
Global ............... 9/19/88 17.66 10.75 9.87 --
</TABLE>
The average annual rates of total return shown above are computed by finding the
average annual compounded rates of return over the periods shown that would
equate the initial amount invested to the withdrawal value, in accordance with
the following formula: P(1+T)n = ERV. In the formula, P is a hypothetical
investment or contribution of $1,000; T is the average annual total return; n is
the number of years; and ERV is the withdrawal value at the end of the periods
shown. The annual account charge is prorated among the investment options
available under MEDLEY, including the Companion Contract, in the same
proportions as the aggregate annual contract fees are deducted from each option.
These figures assume deduction of the maximum deferred sales charge that may be
applicable to a particular period.
NON-STANDARD TOTAL RETURN
Table 2 below shows the average annual rates of return as in Table 1, but
assumes that the contributions or investments are not withdrawn at the end of
the period or that the Participant annuitizes at the end of the period.
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<PAGE> 103
TABLE 2
AVERAGE ANNUAL TOTAL RETURN ASSUMING NO WITHDRAWAL
<TABLE>
<CAPTION>
FROM DATE
PORTFOLIO
ESTABLISHED
THROUGH
FIVE 12/31/98 IF
ONE YEAR YEARS TEN YEARS PORTFOLIO
DATE ENDED ENDED ENDED NOT IN EXISTENCE
ESTABLISHED 12/31/98 12/31/98 12/31/98 FOR TEN YEARS
----------- -------- -------- -------- ----------------
<S> <C> <C> <C> <C> <C>
VCA 10 .................... 8/25/82 (3.10)% 15.13% 15.49% --
VCA 11 .................... 8/25/82 4.78 4.60 5.05 --
VCA 24: --
Diversified Bond ..... 5/13/83 6.36 6.44 8.31 --
Government Income .... 5/1/89 8.28 5.94 -- 8.05%
Conservative Balanced 5/13/83 10.91 9.81 10.47 --
Flexible Managed ..... 5/13/83 9.42 11.34 12.30 --
Stock Index .......... 10/19/87 27.47 22.75 17.83 --
Equity ............... 5/13/83 8.53 15.99 15.86 --
Global ............... 9/19/88 23.67 11.02 9.87 --
</TABLE>
Table 3 shows the cumulative total return for the above investment options,
assuming no withdrawal.
TABLE 3
CUMULATIVE TOTAL RETURN ASSUMING NO WITHDRAWAL
<TABLE>
<CAPTION>
FROM DATE
PORTFOLIO
ESTABLISHED
THROUGH
12/31/98 IF
ONE YEAR FIVE YEARS TEN YEARS PORTFOLIO
DATE ENDED ENDED ENDED NOT IN EXISTENCE
ESTABLISHED 12/31/98 12/31/98 12/31/98 FOR TEN YEARS
----------- -------- -------- -------- ----------------
<S> <C> <C> <C> <C> <C>
VCA 10 ................. 8/25/82 (3.10)% 102.38% 322.59% --
VCA 11 ................. 8/25/82 4.78 25.25 63.78 --
VCA 24:
Diversified Bond .... 5/13/83 6.36 36.67 122.28 --
Government Income ... 5/1/89 8.28 33.48 -- 111.43%
Conservative Balanced 5/13/83 10.91 59.73 170.71 --
Flexible Managed .... 5/13/83 9.42 71.12 219.19 --
Stock Index ......... 10/19/87 27.47 178.86 416.22 --
Equity .............. 5/13/83 8.53 110.01 336.06 --
Global .............. 9/19/88 23.67 68.72 156.45 --
</TABLE>
15
<PAGE> 104
VCA 11 YIELD
The yield is computed by determining the net change, exclusive of capital
changes, in the value of a hypothetical preexisting account having a balance of
one accumulation unit of VCA 11 at the beginning of the period, subtracting a
prorated portion of the annual account charge as explained above, and dividing
the difference by the value of the account at the beginning of the base period,
and then multiplying the base period by (365/7), with the resulting figure
carried to the nearest hundred of 1%.
The yield reflects the deduction of the 1% charge for administrative expenses
and investment management, but does not reflect the deferred sales 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 following formula:
Effective Yield = [(base period return + 1)365/7]--1.
The yields on amount held in VCA 11 will fluctuate on a daily basis. Therefore,
the stated yields for any given period are not an indication of future yields.
THE VCA 10 AND VCA 11 COMMITTEES
VCA 10 is managed by The Prudential Variable Contract Account 10 Committee ("VCA
10 Committee"). VCA 11 is managed by The Prudential Variable Contract Account 11
Committee ("VCA 11 Committee"). The members of each Committee are elected by the
persons having voting rights in respect of each Account. The affairs of each
Account are conducted in accordance with the Rules and Regulations of the
Account. The members of each Account's Committee, the Account's Secretary and
the principal occupation of each during the past five years are shown below.
VCA 10 AND VCA 11 COMMITTEES*
SAUL K. FENSTER, 66, Director--President of New Jersey Institute of Technology.
Address: 323 Martin Luther King, Jr. Boulevard, Newark, New Jersey 07102.
W. SCOTT McDONALD, JR., 62, Director--Vice President, Kaludis Consulting Group
since 1997; 1995 to 1996: Principal, Scott McDonald & Associates; Prior to 1995:
Executive Vice President of Fairleigh Dickinson University. Address: 9 Zamrok
Way, Morristown, New Jersey 07960.
JOSEPH WEBER, 75, Director--Vice President, Interclass (international corporate
learning). Address: 37 Beachmont Terrace, North Caldwell, New Jersey 07006.
- ---------------------------------
* Certain actions of the Committees, including the annual continuance of the
Agreement for Investment Management Services between the Account and Prudential,
must be approved by a majority of the Members of the Committees who are not
interested persons of Prudential, its affiliates or the Accounts as defined in
the Investment Company Act of 1940 (the 1940 Act). Messrs. Fenster, McDonald,
and Weber are not interested persons of Prudential, its affiliates, or the
Accounts. However, Mr. Fenster is President of the New Jersey Institute of
Technology. Prudential has issued a group annuity contract to the Institute and
provides group life and group health insurance to its employees.
16
<PAGE> 105
OFFICERS WHO ARE NOT DIRECTORS
E. MICHAEL CAULFIELD, President -- Executive Vice President, Prudential
Financial Management since 1998; 1995 to 1998: Chief Executive Officer of
Prudential Investments; 1995: Chief Executive Officer, Prudential Preferred
Financial Services; prior to 1995: President, Prudential Preferred Financial
Services.
CAREN A. CUNNINGHAM, Secretary--Assistant General Counsel of Prudential
Investments Fund Management, LLC ("PIFM") since 1997; Prior to 1997: Vice
President and Associate General Counsel of Smith Barney Mutual Fund Management
Inc. Address: 100 Mulberry Street, Gateway Center Three, Newark, New Jersey
07102.
GRACE C. TORRES, Treasurer and Principal Financial and Accounting Officer--First
Vice President of PIFM since 1996; Prior to 1996: First Vice President of
Prudential Securities Inc. Address: 100 Mulberry Street, Gateway Center Three,
Newark, New Jersey 07102.
STEPHEN M. UNGERMAN, Assistant Treasurer--Vice President and Tax Director of
Prudential Investments since 1996; Prior to 1996: First Vice President of
Prudential Mutual Fund Management, Inc. Address: 100 Mulberry Street, Gateway
Center Three, Newark, New Jersey 07102.
REMUNERATION OF MEMBERS OF THE COMMITTEES AND CERTAIN AFFILIATED PERSONS
No member of the Committee of either VCA 10 or VCA 11 nor any other person
(other than Prudential) receives remuneration from an Account. Prudential pays
certain of the expenses relating to the operation of VCA 10 and VCA 11,
including all compensation paid to members of each Committee, its Chairman, its
Secretary and Treasurer. No member of either Account's Committee, its Chairman,
its Secretary or Treasurer who is also an officer, Director or employee of
Prudential or an affiliate of Prudential is entitled to any fee for his services
as a member or officer of the Committee.
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
DIRECTORS
FRANKLIN E. AGNEW--Director since 1994 (current term expires April, 2000).
Member, Committee on Finance & Dividends; Member, Corporate Governance
Committee. Business consultant since 1986. Senior Vice President, H.J. Heinz
from 1971 to 1986. Mr. Agnew is also a director of Bausch & Lomb, Inc. and Erie
Plastics Corporation. Age 64. Address: 600 Grant Street, Suite 660, Pittsburgh,
PA 15219.
FREDERICK K. BECKER--Director since 1994 (current term expires April, 2005).
Member, Auditing Committee; Member, Corporate Governance Committee. President,
Wilentz Goldman and Spitzer, P.A. (law firm) since 1989, with firm since 1960.
Age 63. Address: 90 Woodbridge Center Drive, Woodbridge, NJ 07095.
GILBERT F. CASELLAS--Director since 1998 (current term expires April, 2003).
Member, Compensation Committee. President, The Swarthmore Group, Inc. since
1999. Partner, McConnell Valdes, LLP in 1998. Chairman, U.S. Equal Employment
Opportunity Commission from 1994 to 1998. Age 46. Address: 1646 West Chester
Pike, Suite 3, West Chester, PA 19382.
JAMES G. CULLEN--Director since 1994 (current term expires April, 2001). Member,
Compensation Committee; Member, Committee on Business Ethics. President & Chief
Operating Officer, Bell Atlantic Corporation, since 1998. President & Chief
Executive Officer, Telecom Group, Bell Atlantic Corporation, from 1997 to 1998.
Vice Chairman, Bell Atlantic Corporation from 1995 to 1997. President, Bell
Atlantic Corporation from 1993 to 1995. Mr. Cullen is also a director
17
<PAGE> 106
of Bell Atlantic Corporation and Johnson & Johnson. Age 56. Address: 1310 North
Court House Road, 11th Floor, Alexandria, VA 22201.
CAROLYNE K. DAVIS--Director since 1989 (current term expires April, 2001).
Member, Committee on Business Ethics; Member, Compensation Committee.
Independent Health Care Advisor since 1997. National and International Health
Care Advisor, Ernst & Young, LLP from 1985 to 1997. Dr. Davis is also a director
of Beckman Coulter Instruments, Inc., Merck & Co., Inc., Minimed Incorporated,
and Beverley Enterprises. Age 67. Address: 751 Broad Street, 23rd Floor, Newark,
NJ 07102.
ROGER A. ENRICO--Director since 1994 (current term expires April, 2002). Member,
Committees on Nominations & Corporate Governance; Member, Compensation
Committee. Chairman and Chief Executive Officer, PepsiCo, Inc. since 1996. Mr.
Enrico originally joined PepsiCo, Inc. in 1971. Mr. Enrico is also a director of
A.H. Belo Corporation and Dayton Hudson Corporation. Age 54. Address: 700
Anderson Hill Road, Purchase, NY 10577.
ALLAN D. GILMOUR--Director since 1995 (current term expires April, 2003).
Member, Investment Committee; Member, Committee on Finance & Dividends. Retired
since 1995. Vice Chairman, Ford Motor Company, from 1993 to 1995. Mr. Gilmour
originally joined Ford in 1960. Mr. Gilmour is also a director of Whirlpool
Corporation, MeidiaOne Group, Inc., AP Automotive Systems, Inc., The Dow
Chemical Company and DTE Energy Company. Age 64. Address: 751 Broad Street, 23rd
Floor, Newark, NJ 07102.
WILLIAM H. GRAY, III--Director since 1991 (current term expires April, 2000).
Chairman, Committees on Nominations & Corporate Governance. Member, Executive
Committee; Member, Committee on Business Ethics. President and Chief Executive
Officer, The College Fund/UNCF since 1991. Mr. Gray served in Congress from 1979
to 1991. Mr. Gray is also a director of Chase Manhattan Corporation, Municipal
Bond Investors Assurance Corporation, Rockwell International Corporation,
Union-Pacific Corporation, Warner-Lambert Company, CBS Corporation, and
Electronic Data Systems. Age 57. Address: 8260 Willow Oaks Corp. Drive, Fairfax,
VA 22031-4511.
JON F. HANSON--Director since 1991 (current term expires April, 2003). Member,
Investment Committee; Member, Committee on Business Ethics. Chairman, Hampshire
Management Company since 1976. Mr. Hanson is also a director of James E. Hanson
Management Company, Neumann Distributors, Inc., Fleet Trust and Investment
Services Company, N.A., United Water Resources, Orange & Rockland Utilities,
Inc., and Consolidated Delivery and Logistics. Age 62. Address: 235 Moore
Street, Suite 200, Hackensack, NJ 07601.
GLEN H. HINER, JR.--Director since 1997 (current term expires April, 2001).
Member, Compensation Committee. Chairman and Chief Executive Officer, Owens
Corning since 1991. Senior Vice President and Group Executive, Plastics Group,
General Electric Company from 1983 to 1991. Mr. Hiner is also a director of Dana
Corporation and Owens Corning. Age 64. Address: One Owens Corning Parkway,
Toledo, OH 43659.
CONSTANCE J. HORNER--Director since 1994 (current term expires April, 2002).
Member, Auditing Committee; Member, Committees on Nominations & Corporate
Governance. Guest Scholar, The Brookings Institution since 1993. Ms. Horner is
also a director of Foster Wheeler Corporation, Ingersoll-Rand Company, and
Pfizer, Inc. Age 56. Address: 1775 Massachusetts Ave., N.W. Washington, D.C.
20036-2188.
GAYNOR N. KELLEY--Director since 1997 (current term expires April, 2001).
Member, Auditing Committee. Retired since 1996. Chairman and Chief Executive
Officer, The Perkin Elmer Corporation from 1990 to 1996. Mr. Kelley is also a
director of Hercules Incorporated, and Alliant Techsystems. Age 67. Address: 751
Broad Street, 23rd Floor, Newark, NJ 07102-3777.
BURTON G. MALKIEL--Director since 1978 (current term expires April, 2002).
Chairman, Investment Committee; Member, Executive Committee; Member, Committee
on Finance & Dividends. Professor of Economics, Princeton University, since
1988. Dr. Malkiel is also a director of Banco Bilbao Vizcaya, Baker Fentress &
Company, The Jeffrey Company, The Southern New England Telecommunications
Company, and Vanguard Group, Inc. Age 66. Address: Princeton University, 110
Fisher Hall, Prospect Avenue, Princeton, NJ 08544-1021.
ARTHUR F. RYAN--Chairman of the Board, President and Chief Executive Officer of
Prudential since 1994. President and Chief Operating Officer, Chase Manhattan
Bank from 1990 to 1994, with Chase since 1972. Age 56. Address: 751 Broad
Street, Newark, NJ 07102.
18
<PAGE> 107
IDA F.S. SCHMERTZ--Director since 1997 (current term expires April, 2004).
Member, Audit Committee. Principal, Investment Strategies International since
1994. Age 64. Address: 751 Broad Street, 23rd Floor, Newark, NJ 07102.
CHARLES R. SITTER--Director since 1995 (current term expires April, 2003).
Member, Committee on Finance & Dividend; Member, Investment Committee. Retired
since 1996. President, Exxon Corporation from 1993 to 1996. Mr. Sitter began his
career with Exxon in 1957. Age 68. Address: 5959 Las Colinas Boulevard, Irving,
TX 75039-2298.
DONALD L. STAHELI--Director since 1995 (current term expires April, 2003).
Member, Compensation Committee; Member, Auditing Committee. Retired since 1996.
Chairman and Chief Executive Officer, Continental Grain Company from 1994 to
1997. President and Chief Executive Officer, Continental Grain Company from 1988
to 1994. Mr. Staheli is also director of Bankers Trust Company, Conti-Financial
Corporation and Continental Grain Company. Age 67 Address: 39 Locust Street,
Suite 204, New Canaan, CT 06840.
RICHARD M. THOMSON--Director since 1976 (current term expires April, 2000).
Chairman, Executive Committee; Chairman, Compensation Committee. Retired since
1998. Chairman of the Board, The Toronto-Dominion Bank from 1997 to 1998.
Chairman and Chief Executive Officer from 1978 to 1997. Mr. Thomson is also a
director of CGC, Inc., INCO, Limited, S.C. Johnson & Son, Inc., The Thomson
Corporation, Canadian Occidental Petroleum, Ltd., The Toronto-Dominion Bank and
Ontario Hydro. Age 64. Address: P.O. Box 1, Toronto-Dominion Centre, Toronto,
Ontario, M5K 1A2, Canada.
JAMES A. UNRUH--Director since 1996 (current term expires April, 2000). Member,
Committees on Nominations & Corporate Governance; Member, Investment Committee.
Retired since 1997. Chairman and Chief Executive Officer, Unisys Corporation,
from 1990 to 1997. Mr. Unruh is also a director of Ameritech Corporation and
Moss Micro. Age 57. Address: 751 Broad Street, Newark, NJ 07102-3777
P. ROY VAGELOS, M.D.--Director since 1989 (current term expires April, 2001).
Chairman, Auditing Committee; Member, Executive Committee; Member, Committees on
Nominations & Corporate Governance. Chairman, Regeneron Pharmaceuticals since
1995. Chairman, Advanced Medicines, Inc. since 1997. Chairman, Chief Executive
Officer and President, Merck & Co., Inc. from 1986 to 1995, Dr. Vagelos
originally joined Merck in 1975 Dr. Vagelos is also a director of The Estee
Lauder Companies, Inc. and PepsiCo., Inc. Age 69. Address: One Crossroads Drive,
Building A, 3rd Floor, Bedminster, NJ 07921.
STANLEY C. VAN NESS--Director since 1990 (current term expires April, 2002).
Chairman, Committee on Business Ethics; Member, Executive Committee; Member,
Auditing Committee. Partner, Herbert, Van Ness, Cayci & Goodell (law firm) since
1998. Counselor at Law, Picco Herbert Kennedy (law firm) from 1990 to 1998. Mr.
Van Ness is also a director of Jersey Central Power & Light Company. Age 64.
Address: 22 Chambers Street, Princeton, NJ 08542.
PAUL A. VOLCKER--Director since 1988 (current term expires April, 2000).
Chairman, Committee on Finance & Dividends; Member, Executive Committee; Member,
Committee on Nominations & Corporate Governance. Consultant since 1997.
Chairman, Wolfensohn & Co., Inc. 1988 to 1996 Chairman, James D. Wolfensohn,
Inc. 1988 to 1996. Chief Executive Officer, James D. Wolfensohn, Inc. from 1995
to 1996. Mr. Volcker is also a director of Nestle, S.A., and Bankers Trust New
York Corporation as well as a Director of the Board of Overseers of TIAA-CREF.
Age 71, Address: 610 Fifth Avenue, Suite 420, New York, NY 10020.
JOSEPH H. WILLIAMS--Director since 1994 (current term expires April, 2002).
Member, Committee on Finance & Dividends; Member, Investment Committee.
Director, The Williams Companies since 1979. Chairman & Chief Executive Officer,
The Williams Companies from 1979 to 1993. Mr. Williams is also a director of The
Orvis Company, MTC Investors, LLC., and AEA Investors, Inc. Age 65. Address: One
Williams Center, Tulsa, OK 74102.
19
<PAGE> 108
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
PRINCIPAL OFFICERS
ARTHUR F. RYAN--Chairman of the Board, President and Chief Executive Officer
since 1994; prior to 1994, President and Chief Operating Officer, Chase
Manhattan Corporation. Age 56.
E. MICHAEL CAULFIELD--Executive Vice President, Financial Management since 1998;
Chief Executive Officer, Prudential Investments from 1995 to 1998; Chief
Executive Officer, Money Management Group in 1995; prior to 1995, President,
Prudential Preferred Financial Services. Age 52.
MICHELE S. DARLING--Executive Vice President, Human Resources since 1997; prior
to 1997, Executive Vice President, Canadian Imperial Bank of Commerce. Age 45.
ROBERT C. GOLDEN--Executive Vice President, Operations and Systems since 1997;
prior to 1997, Executive Vice President, Prudential Securities,. Age 53.
MARK B. GRIER--Executive Vice President, Corporate Governance, since 1998;
Executive Vice President, Financial Management from 1997 to 1998; Chief
Financial Officer from 1995 to 1997; prior to 1995, Executive Vice President,
Chase Manhattan Corporation. Age 46.
JEAN D. HAMILTON--Executive Vice President, Institutional, since 1998;
President, Diversified Group since 1995 to 1998; prior to 1995, President,
Prudential Capital Group. Age 52.
RODGER A. LAWSON--Executive Vice President, International Investments & Global
Marketing, since 1998; Executive Vice President, Marketing and Planning from
1996 to 1998; President and CEO, Van Eck Global, from 1994 to 1996; prior to
1994, President and CEO, Global Private Banking, Bankers Trust Company. Age 52.
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. Age 56.
JOHN V. SCICUTELLA--Executive Vice President, Individual Financial Services,
since 1998; Chief Executive Officer, Individual Insurance Group from 1997 to
1998; Executive Vice President Operations and Systems from 1995 to 1997; prior
to 1995, Executive Vice President, Chase Manhattan Corporation. Age 49.
JOHN R. STRANGFELD--Executive Vice President, Global Asset Management, since
1998; Chief Executive Officer, Private Asset Management Group (PAMG) from 1996
to 1998; President, PAMG, from 1994 to 1996; prior to 1994, Senior Managing
Director. Age 45.
JAMES J. AVERY, JR.--Senior Vice President & Chief Actuary, Individual Insurance
Group since 1997; President Prudential Select from 1996 to 1997; prior to 1995,
Executive Vice President and Chief Operating Officer, Prudential Select. Age 47.
MARTIN A. BERKOWITZ--Senior Vice President, Financial Management, since 1998;
Senior Vice President and Comptroller from 1995 to 1998; prior to 1995, Senior
Vice President and CFO, Prudential Investment Corporation. Age 50.
WILLIAM M. BETHKE--Senior Vice President and Chief Investment Officer since
1997; prior to 1997, President, Capital Management Group. Age 51.
ANNE E. BOSSI--Senior Vice President, Institutional, since 1998; President,
Group Life & Disability 1997 to 1998; President, Group Life Insurance 1995 to
1997; prior to 1995, President, Northeastern Group Operations. Age 47
RICHARD J. CARBONE--Senior Vice President and Chief Financial Officer since
1997. Controller, Salomon Brothers from 1995 to 1997; prior to 1995, Controller,
Bankers Trust. Age 51.
THOMAS J. CARROLL-- Senior Vice President and Chief Auditor since 1999. Managing
Director, Bankers Trust Company from 1996 to 1998; prior to 1996, Global Chief
Auditor and Managing Director, Credit Suisse First Boston. Age 57.
20
<PAGE> 109
THOMAS W. CRAWFORD--Senior Vice President, Individual Financial Services, since
1998; President and Chief Executive Officer, Prudential Property & Casualty
Company from 1996 to 1998; Vice President, Prudential Property & Casualty
Company in 1996; prior to 1996, President & CEO, Southern Heritage Insurance
Company. Age 55.
WILLIAM D. FRIEL--Senior Vice President and Chief Information Officer since
1996; prior to 1996, Chief Executive Officer, Prudential Service Company. Age
60.
MICHAEL J. HINES--Senior Vice President, Marketing and Communications, since
1999; 1996 to 1998 Vice President, Marketing and Communications. Age 47.
RONALD P. JOELSON--Senior Vice President, Financial Management, since 1999.
Senior Vice President, Guaranteed Products from 1996 to 1999; Vice President,
Guaranteed Investments during 1996; prior to 1996, Managing Director, Retirement
Services. Age 40.
IRA J. KLEINMAN--Senior Vice President, International Insurance, since 1997;
prior to 1997, Chief Marketing & Product Development Officer. Age 51.
KATHLEEN KRALL--Senior Vice President, Individual Financial Services, since
1999; Vice President, Individual Financial Services from 1996 to 1999; Vice
President, Operations and Systems from 1995 to 1996; prior to 1995 Vice
President, Chase Manhattan Bank. Age 41.
JOYCE R. LEIBOWITZ--Senior Vice President, Management Internal Controls, since
1999; Vice President, Management Internal Controls from 1995 to 1999; prior to
1995 Integrated Control Officer. Age 51.
JOHN M. LIFTIN--Senior Vice President and General Counsel since 1998;
Self-employed from 1997 to 1998; prior to 1997 Senior Vice President and General
Counsel, Kidder & Peabody Group, Inc. Age 55.
NEIL A. McGUINNESS--Senior Vice President, Individual Financial Services, since
1996; Director, Putnam Investments, in 1996; prior to 1996, President, Fidelity
Investment Employer Services Company. Age 52.
PRISCILLA A. MYERS--Senior Vice President, Demutualization, since 1998; Senior
Vice President and Auditor from 1995 to 1998; prior to 1995, Vice President and
Auditor. Age 48.
I. EDWARD PRICE--Senior Vice President, Individual Financial Services, since
1996; Senior Vice President and Actuary from 1995 to 1996; prior to 1995, Chief
Executive Officer, Prudential International Insurance. Age 56.
ROBERT J. SULLIVAN--Senior Vice President, Individual Financial Services, since
1997; prior to 1997, Managing Director, Fidelity Investments. Age 60.
SUSAN J. BLOUNT--Vice President and Secretary since 1995; prior to 1995,
Assistant General Counsel. Age 41.
C. EDWARD CHAPLIN--Vice President and Treasurer since 1995; prior to 1995,
Managing Director and Assistant Treasurer. Age 41.
ANTHONY S. PISZEL--Vice President and Controller since 1998; Vice President,
Enterprise Financial Management from 1997 to 1998; prior to 1997, Chief
Financial Officer, Individual Insurance Group. Age 44.
SALE OF THE CONTRACTS
Prudential offers the Contracts on a continuous basis through Corporate Office,
regional home office and group sales office employees in those states in which
the Contracts may be lawfully sold. It may also offer the Contracts through
licensed insurance brokers and agents, or through appropriately registered
direct or indirect subsidiary(ies) of Prudential, provided clearances to do so
are obtained in any jurisdiction where such clearances may be necessary. During
1998, 1997 and 1996, Prudential received $9,116, $18,599 and $13,057,
respectively, as deferred sales charges from VCA 10. $791,023, $860,025 and
$479,212, respectively, were credited to other broker-dealers for the same
periods in connection with sales of the Contracts. During 1998, 1997 and 1996,
Prudential received $2,389, $8,370 and $8,659, respectively, from VCA 11 as
deferred sales charges and credited $271,019, $154,536 and $112,654,
respectively, to other broker-dealers in connection with sales of the Contracts.
During 1998, 1997 and 1996, Prudential received
21
<PAGE> 110
$38,089, $93,520 and $98,458, respectively, from VCA 24 as deferred sales
charges and credited $2,349,448, $2,473,844 and $1,965,736, respectively, to
other broker-dealers in connection with sales of the Contracts.
EXPERTS
The financial statements for VCA 10, VCA 11, VCA 24 and Prudential included in
this Statement of Additional Information and the condensed financial information
for VCA 10, VCA 11 and VCA 24 in the prospectus for the fiscal years 1996, 1997
and 1998 have been audited by PricewaterhouseCoopers LLP, independent
accountants, as stated in their reports appearing herein. The financial
statements have been included in reliance upon the report of such firms given
upon their authority as experts in accounting and auditing.
PricewaterhouseCoopers LLP's principal business address is 1177 Avenue of the
Americas, New York, New York 10036.
Financial Statements for VCA 10, VCA 11, VCA 24 and Prudential, all as of
December 31, 1998, are included in this Statement of Additional Information,
beginning on the next page.
22
<PAGE> 111
FINANCIAL HIGHLIGHTS FOR VCA-10
INCOME AND CAPITAL CHANGES PER ACCUMULATION UNIT*
(FOR AN ACCUMULATION UNIT OUTSTANDING THROUGHOUT THE YEAR)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
- ---------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME $ .0956 $ .0757 $ .0657 $ .0609 $ .0563
EXPENSES
For investment management fee (.0177) (.0154) (.0118) (.0094) (.0083)
For administrative expenses (.0530) (.0461) (.0354) (.0282) (.0251)
- ---------------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME .0249 .0142 .0185 .0233 .0229
CAPITAL CHANGES
Net realized gain on investments .8002 1.2761 .5085 .3850 .1947
Net unrealized appreciation (depreciation)
on investments (1.0426) .3841 .5682 .4744 (.2148)
- ---------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN UNIT
ACCUMULATION VALUE (0.2175) 1.6744 1.0952 .8827 .0028
- ---------------------------------------------------------------------------------------------------------------
ACCUMULATION UNIT VALUE
Beginning of year 7.0127 5.3383 4.2431 3.3604 3.3576
- ---------------------------------------------------------------------------------------------------------------
End of year $ 6.7952 $ 7.0127 $5.3383 $4.2431 $3.3604
- ---------------------------------------------------------------------------------------------------------------
RATIO OF EXPENSES TO
AVERAGE NET ASSETS** 1.00% 1.00% 1.00% 1.00% 1.00%
- ---------------------------------------------------------------------------------------------------------------
RATIO OF NET INVESTMENT INCOME TO
AVERAGE NET ASSETS** .36% .24% .39% .61% .68%
- ---------------------------------------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE 49% 47% 52% 45% 32%
- ---------------------------------------------------------------------------------------------------------------
NUMBER OF UNITS OUTSTANDING
for Participants at end of year
(000's omitted) 80,431 83,261 91,532 81,817 79,189
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
*Calculated by accumulating the actual per unit amounts daily.
**These calculations exclude Prudential's equity in VCA-10.
The above table does not reflect the annual administration charge, which does
not affect the Accumulation Unit Value. This charge is made by reducing
Participants' Accumulation Accounts by a number of Accumulation Units equal in
value to the charge.
SEE NOTES TO FINANCIAL STATEMENTS
A-1
<PAGE> 112
FINANCIAL STATEMENTS OF VCA-10
STATEMENT OF NET ASSETS AS OF DECEMBER 31, 1998
<TABLE>
<CAPTION>
COMMON STOCK VALUE
INVESTMENTS SHARES [NOTE 2A]
- -----------------------------------------------------------------------
<S> <C> <C>
AEROSPACE/DEFENSE -- 3.0%
Doncasters PLC-ADR+
(United Kingdom) 146,400 $2,369,850
Gen Corp. 333,700 8,321,644
Litton Industries, Inc.+ 88,800 5,794,200
----------
16,485,694
- -----------------------------------------------------------------------
AUTOS & TRUCKS -- 3.3%
Borg-Warner Automotive, Inc. 195,300 10,900,181
Lear Corp.+ 90,200 3,472,700
Tower Automotive, Inc.+ 156,300 3,897,731
----------
18,270,612
- -----------------------------------------------------------------------
CHEMICALS -- 3.8%
Agrium, Inc. 481,100 4,179,556
Cytec Industries, Inc.+ 341,300 7,252,625
Dow Chemical Co. 51,000 4,637,812
Mississippi Chemical Corp. 324,086 4,537,204
----------
20,607,197
- -----------------------------------------------------------------------
COMPUTER RELATED -- 0.6%
Electronic Data Systems Corp. 64,800 3,256,200
- -----------------------------------------------------------------------
CONSUMER SERVICES -- 7.4%
Darden Restaurants, Inc. 438,100 7,885,800
Hilton Hotels Corp.+ 280,400 5,362,650
Innkeepers USA Trust 337,900 3,991,444
Lodgian, Inc. 389,600 1,899,300
Ogden Corp. 115,800 2,902,238
Reynolds & Reynolds
(Class "A" Stock) 435,200 9,982,400
RFS Hotel Investors, Inc.+ 255,800 3,133,550
Station Casinos, Inc.+ 641,000 5,248,187
----------
40,405,569
- -----------------------------------------------------------------------
CONTAINERS AND PACKAGING -- 1.7%
Alltrista Corp.+ 192,300 4,615,200
Crown Cork & Seal Co., Inc. 63,700 1,962,756
U.S. Can Corp.+ 151,900 2,715,213
---------
9,293,169
- -----------------------------------------------------------------------
ELECTRICAL EQUIPMENT -- 1.4%
Emcor Group, Inc.+ 252,600 4,073,175
Hussmann International, Inc. 182,900 3,543,687
---------
7,616,862
- -----------------------------------------------------------------------
ELECTRONICS -- 2.4%
Marshall Industries+ 161,800 3,964,100
National Semiconductor Corp.+ 162,000 2,187,000
Pioneer Standard Electronics 388,600 3,643,125
VLSI Technology, Inc.+ 311,100 3,402,656
----------
13,196,881
- -----------------------------------------------------------------------
ENGINEERING & CONSTRUCTION -- 3.7%
Apogee Enterprises, Inc. 228,400 2,569,500
Cameron Ashley
Building Products+ 126,700 1,655,019
Giant Cement Holding, Inc.+ 362,400 8,969,400
Gradall Industries, Inc.+ 300,800 4,324,000
Texas Industries, Inc. 102,900 2,771,869
----------
20,289,788
- -----------------------------------------------------------------------
EXPLORATION & PRODUCTION -- 3.9%
Atlantic Richfield Co. 83,700 5,461,425
Cabot Oil & Gas Corp. 234,300 3,514,500
Chesapeake Energy Corp. 355,500 311,062
Comstock Resources, Inc.+ 349,700 1,070,956
Occidental Petroleum Corp. 166,000 2,801,250
Oryx Energy Co.+ 239,800 3,222,313
Pioneer Natural Resources Co. 325,200 2,845,500
Vintage Petroleum, Inc. 270,600 2,333,925
----------
21,560,931
- -----------------------------------------------------------------------
FINANCIAL SERVICES -- 6.7%
The CIT Group, Inc.
(Class "A" Stock) 199,200 6,337,050
Citigroup, Inc. 126,999 6,286,450
Financial Security Assurance
Holdings Corp. 134,100 7,274,925
Heller Financial, Inc.+ 198,200 5,822,125
Morgan (J.P.) & Co., Inc. 32,900 3,456,556
The PMI Group, Inc. 115,000 5,678,125
Waddell & Reed Financial, Inc.
(Class "A" Stock) 16,459 389,873
Waddell & Reed Financial, Inc.
(Class "B" Stock) 65,855 1,531,129
----------
36,776,233
- -----------------------------------------------------------------------
HEALTHCARE -- 3.9%
Columbia/HCA Healthcare Corp. 140,500 3,477,375
Mallinckrodt, Inc. 125,200 3,857,725
Tenet Healthcare Corp.+ 207,800 5,454,750
United HealthCare Corp. 102,600 4,418,212
Wellpoint Health Networks, Inc.+ 46,900 4,080,300
----------
21,288,362
- -----------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
A-2
<PAGE> 113
FINANCIAL STATEMENTS OF VCA-10
STATEMENT OF NET ASSETS AS OF DECEMBER 31, 1998
<TABLE>
<CAPTION>
COMMON STOCK VALUE
INVESTMENTS SHARES [NOTE 2A]
- -------------------------------------------------------------------------
<S> <C> <C>
HOUSING RELATED -- 0.8%
Furniture Brands
International, Inc.+ 159,800 $4,354,550
- -------------------------------------------------------------------------
INSURANCE -- 10.0%
Allied Group, Inc. 246,100 1,553,506
Berkley (W.R.) Corp. 278,200 9,476,188
MMI Companies, Inc. 316,019 5,293,318
NAC Re Corp. 218,400 10,251,150
Old Republic International Corp. 227,150 5,110,875
Reinsurance Group of America, Inc. 70,650 4,945,500
Torchmark Corp. 180,300 6,366,844
Travelers Property Casualty
(Class "A" Stock) 121,100 3,754,100
Trenwick Group, Inc. 252,350 8,232,919
----------
54,984,400
- -------------------------------------------------------------------------
MACHINERY -- 3.2%
Applied Power Co.
(Class "A" Stock) 128,900 4,865,975
Columbus McKinnon Corp. 179,000 3,222,000
Denison International
PLC-ADR+
(United Kingdom) 144,800 1,810,000
Hardinge, Inc. 229,475 4,230,945
New Holland N.V. 230,400 3,153,600
----------
17,282,520
- -------------------------------------------------------------------------
MEDIA -- 13.4%
Belo (A.H.) Corp.
(Class "A" Stock) 173,900 3,467,131
CBS Corp.+ 138,800 4,545,700
Century Communications Corp.
(Class "A" Stock) 228,000 7,231,886
Comcast Corp.
(Class "A" Stock) 127,300 7,311,794
Comcast Corp.
(Class "A" Stock) Special 205,195 12,042,382
Cox Communication, Inc.
(Class "A" Stock)+ 40,613 2,807,374
MediaOne Group, Inc.+ 302,900 14,236,300
Tele-Communications, Inc.
Liberty Media Group
(Series A)+ 250,750 11,550,172
Time Warner, Inc. 77,400 4,803,637
Viacom, Inc.
(Class "B" Stock)+ 74,600 5,520,400
----------
73,516,776
- -------------------------------------------------------------------------
METALS -- 2.9%
Alcoa, Inc. 52,300 3,899,619
The Carbide/Graphite Group+ 372,100 5,488,475
Cleveland-Cliffs, Inc. 104,400 4,208,625
UCAR International, Inc.+ 114,900 2,046,656
-----------
15,643,375
- -------------------------------------------------------------------------
MISCELLANEOUS--INDUSTRIAL -- 9.3%
Crane Co. 247,650 7,475,934
Dexter Corp. 172,600 5,426,112
Global Industrial
Technologies, Inc.+ 348,000 3,719,250
Harsco Corp. 143,500 4,367,781
Pentair, Inc. 80,300 3,196,944
PPG Industries, Inc. 83,300 4,852,225
Regal Beloit Corp. 128,000 2,944,000
United Dominion Industries 291,700 5,943,388
Varian Associates, Inc. 197,700 7,487,888
Wolverine Tube, Inc.+ 278,600 5,850,600
-----------
51,264,122
- -------------------------------------------------------------------------
PAPER PRODUCTS -- 2.6%
Boise Cascade Corp. 101,100 3,134,100
Ennis Business Forms 282,900 2,811,319
Georgia Pacific Corp.
(GP Group)+ 62,500 3,660,156
Georgia Pacific Corp.
(Timber Group)+ 102,800 2,447,925
Mead Corp. 74,400 2,180,850
-----------
14,234,350
- -------------------------------------------------------------------------
RAILROADS -- 2.0%
Burlington Northern Santa
Fe Corp. 189,300 6,388,875
Varlen Corp. 188,472 4,346,636
----------
10,735,511
- -------------------------------------------------------------------------
REGIONAL BANKS -- 3.0%
Banc One Corp. 237,954 12,150,526
PNC Bank Corp. 80,100 4,335,413
-----------
16,485,939
- -------------------------------------------------------------------------
RETAIL -- 2.9%
Food Lion, Inc.
(Class "A" Stock) 396,600 4,213,875
Food Lion, Inc.
(Class "B" Stock) 96,200 968,013
Haverty Furniture, Inc. 303,200 6,367,200
Limited, Inc. 154,000 4,485,250
-----------
16,034,338
- -------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
A-3
<PAGE> 114
FINANCIAL STATEMENTS OF VCA-10
STATEMENT OF NET ASSETS AS OF DECEMBER 31, 1998
<TABLE>
<CAPTION>
COMMON STOCK VALUE
INVESTMENTS SHARES [NOTE 2A]
- -----------------------------------------------------------------------
<S> <C> <C>
SPECIALTY CHEMICALS -- 3.7%
Cambrex Corp. 142,400 $3,417,600
Crompton & Knowles Corp. 253,900 5,252,556
Ferro Corp. 191,350 4,975,100
French Fragrances, Inc.+ 282,400 2,047,400
IMC Global, Inc. 215,600 4,608,450
-----------
20,301,106
- -----------------------------------------------------------------------
TELECOMMUNICATIONS -- 1.7%
ALLTEL Corp. 154,678 9,251,678
- -----------------------------------------------------------------------
TOTAL COMMON STOCKS INVESTMENTS -- 97.3%
(Cost: $473,405,124) 533,136,163
- -----------------------------------------------------------------------
PREFERRED STOCKS INVESTMENT -- 0.1%
Chesapeake Energy Corp.
(Cum. Conv.), 7.00%, Series 144A
(Cost: $3,332,119) 67,200 705,600
- -----------------------------------------------------------------------
TOTAL LONG--TERM INVESTMENT -- 97.4%
(Cost: $476,737,243) 533,841,763
- -----------------------------------------------------------------------
SHORT--TERM INVESTMENT -- 2.6% PRINCIPAL
AMOUNT
(000)
---------
COMMERCIAL PAPER
Federal Home Loan Bank
4.50%, 01/04/99
(cost $14,217,888) $14,225 14,217,888
- -----------------------------------------------------------------------
TOTAL INVESTMENTS -- 100%
(Cost $490,955,131) 548,059,651
- -----------------------------------------------------------------------
OTHER ASSETS, LESS LIABILITIES
Cash 866
Dividends and Interest Receivable 704,213
Receivable for Investments Sold 250,433
Payable for Pending Capital Transactions (800,810)
- -----------------------------------------------------------------------
TOTAL OTHER ASSETS
LESS LIABILITIES-- 0.0% 154,702
- -----------------------------------------------------------------------
NET ASSETS --100% $548,214,353
- -----------------------------------------------------------------------
Net Assets, representing:
Equity of Participants
80,431,256 Accumulation Units at an
Accumulation Unit Value of
$6.7952 546,543,895
Equity of Prudential Insurance
Company of America 1,670,458
------------
$548,214,353
- -----------------------------------------------------------------------
</TABLE>
The following abbreviations are used in portfolio descriptions:
ADR - American Depository Receipts
N.V. - Naamloze VennootSchap (Dutch Corporation)
PLC - Public Limited Company
+ Non-income producing security.
SEE NOTES TO FINANCIAL STATEMENTS
A-4
<PAGE> 115
FINANCIAL STATEMENTS OF VCA-10
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1998
- ------------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME [NOTE 2B]
Dividends $ 6,940,317
Interest 1,093,432
- ------------------------------------------------------------------------------------
TOTAL INCOME 8,033,749
EXPENSES [NOTE 3]
Fees Charged to Participants for Investment Management Fee 1,472,518
Fees Charged to Participants for Administrative Expenses 4,417,553
- ------------------------------------------------------------------------------------
Total Expenses 5,890,071
- ------------------------------------------------------------------------------------
INVESTMENT INCOME -- NET 2,143,678
- ------------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS -- NET [NOTE 2B]
Realized Gain on Investments -- Net 67,764,851
Decrease in Unrealized Appreciation on Investments -- Net (91,652,147)
- ------------------------------------------------------------------------------------
NET LOSS ON INVESTMENTS (23,887,296)
- ------------------------------------------------------------------------------------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $ (21,743,618)
====================================================================================
</TABLE>
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1998 DECEMBER 31, 1997
- ----------------------------------------------------------------------------------------
<S> <C> <C>
OPERATIONS
Investment Income -- Net $ 2,143,678 $ 1,287,837
Realized Gain on Investments -- Net 67,764,851 112,053,314
Increase (Decrease) In Unrealized
Appreciation on Investments -- Net (91,652,147) 33,896,685
- ----------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS (21,743,618) 147,237,836
- ----------------------------------------------------------------------------------------
CAPITAL TRANSACTIONS
Purchase Payments and Transfers In 118,653,634 130,555,810
Withdrawals and Transfers Out (134,406,195) (181,895,417)
Annual Account Charges Deducted from
Participants' Accounts [Note 3b] (106,534) (125,689)
- ----------------------------------------------------------------------------------------
NET DECREASE IN NET ASSETS
RESULTING FROM CAPITAL TRANSACTIONS (15,859,095) (51,465,296)
- ----------------------------------------------------------------------------------------
NET DECREASE IN NET ASSETS
RESULTING FROM SURPLUS TRANSFERS [NOTE 6] (1,425,180) (32,895)
- ----------------------------------------------------------------------------------------
TOTAL INCREASE (DECREASE) IN NET ASSETS (39,027,893) 95,739,645
NET ASSETS
Beginning of Year 587,242,246 491,502,601
- ----------------------------------------------------------------------------------------
End of Year Year $548,214,353 $587,242,246
========================================================================================
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
A-5
<PAGE> 116
NOTES TO FINANCIAL STATEMENTS OF VCA-10
- -------------------------------------------------------------------------------
NOTE 1: GENERAL
The Prudential Variable Contract Account-10 (VCA-10 or the Account) was
established on March 1, 1982 by The Prudential Insurance Company of America
(Prudential) under the laws of the State of New Jersey and is registered as an
open-end, diversified management investment company under the Investment Company
Act of 1940, as amended. VCA-10 has been designed for use by employers
(Contract-holders) in connection with retirement arrangements made available to
their employees (Participants). The Account's investments are composed primarily
of common stocks. All contractual and other obligations arising under contracts
participating in VCA-10 are general corporate obligations of Prudential,
although Participants' payments from the Account will depend upon the investment
performance of the Account.
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. SECURITIES VALUATION
EQUITY SECURITIES
Securities for which the primary market is on an exchange are generally valued
at the last sale price on such exchanges as of the close of the NYSE (which is
currently 4:00 p.m. Eastern time) or, in the absence of recorded sales, at the
mean between the most recently quoted bid and asked prices. Nasdaq National
Market System equity securities are valued at the last sale price or, if there
was no sale on such day, at the mean between the most recently quoted bid and
asked prices. Other over-the-counter equity securities are valued at the mean
between the most recently quoted bid and asked prices. Portfolio securities for
which market quotations are not readily available will be valued at fair value
as determined in good faith under the direction of the Account's Committee.
FIXED INCOME SECURITIES
Fixed income securities will be valued utilizing an independent pricing service
to determine valuations for normal institutional size trading units of
securities. The pricing service considers such factors as security prices,
yields, maturities, call features, ratings and developments relating to specific
securities in arriving at securities valuations. Convertible debt securities
that are actively traded in the over-the-counter market, including listed
securities for which the primary market is believed to be over-the-counter, are
valued at the mean between the most recently quoted bid and asked prices
provided by an independent pricing service.
SHORT-TERM INVESTMENTS
Short-term investments having maturities of sixty days or less are
valued at amortized cost, which approximates market value. Amortized cost is
computed using the cost on the date of purchase, adjusted for constant accrual
of discount or amortization of premium to maturity.
A-6
<PAGE> 117
NOTES TO FINANCIAL STATEMENTS OF VCA-10
- -------------------------------------------------------------------------------
B. SECURITIES TRANSACTIONS AND INVESTMENT INCOME
Securities transactions are recorded on the trade date. Realized gains and
losses on sales of securities are calculated on the identified cost basis.
Dividend income is recorded on the ex-dividend date and interest income is
recorded on the accrual basis. Income and realized and unrealized gains and
losses are allocated to the Participants and Prudential on a daily basis in
proportion to their respective ownership in VCA-10. Expenses are recorded on the
accrual basis which may require the use of certain estimates by management.
C. REPURCHASE AGREEMENTS
Repurchase agreements may be considered loans of money to the seller of the
underlying security. VCA-10 will not enter into repurchase agreements unless the
agreement is fully collateralized, i.e., the value of the underlying collateral
securities is, and during the entire term of the agreement remains, at least
equal to the amount of the 'loan' including accrued interest. VCA-10's custodian
will take possession of the collateral and will value it daily to assure that
this condition is met. In the event that a seller defaults on a repurchase
agreement, VCA-10 may incur a loss in the market value of the collateral as well
as disposition costs; and, if a party with whom VCA-10 had entered into a
repurchase agreement becomes insolvent, VCA-10's ability to realize on the
collateral may be limited or delayed and a loss may be incurred if the
collateral securing the repurchase agreement declines in value during the
insolvency proceedings.
D. TAXES
The operations of VCA-10 are part of, and are taxed with, the
operations of Prudential. Under the current provisions of the Internal Revenue
Code, Prudential does not expect to incur federal income taxes on earnings of
VCA-10 to the extent the earnings are credited under the Contracts. As a result,
the Unit Value of VCA-10 has not been reduced by federal income taxes.
A-7
<PAGE> 118
NOTES TO FINANCIAL STATEMENTS OF VCA-10
- -------------------------------------------------------------------------------
NOTE 3: CHARGES
A. Prudential acts as investment manager for VCA-10 under an agreement for
Investment Management Services. A daily charge, at an effective annual rate of
1.00% of the current value of the Participant's equity in VCA-10, is paid to
Prudential. Three quarters of this charge (0.75%) is for administrative expenses
not provided by the annual account charge, and one quarter (0.25%) is for
investment management services.
B. An annual account charge of not more than $30 is deducted from the account of
each Participant, if applicable, at the time of withdrawal of the value of all
of the Participant's accounts or at the end of the accounting year by canceling
Units. The charge will first be made against a Participant's account under a
fixed dollar annuity companion contract or fixed rate option of the nonqualified
combination contract. If the Participant has no account under a companion
contract or the fixed rate option, or if the amount under the companion contract
or the fixed rate option is too small to pay the charge, the charge will be made
against the Participant's account in VCA-11. If the Participant has no VCA-11
account, or if the amount under that account is too small to pay the charge, the
charge will then be made against the Participant's VCA-10 account. If the
Participant has no VCA-10 account, or if it is too small to pay the charge, the
charge will then be made against any one or more of the Participant's accounts
in VCA-24.
C. A deferred sales charge is imposed upon that portion of certain withdrawals
which represents a return of contributions. The charge is designed to compensate
Prudential for sales and other marketing expenses. The maximum deferred sales
charge is 7% on contributions withdrawn from an account during the first year of
participation. After the first year of participation, the maximum deferred sales
charge declines by 1% in each subsequent year until it reaches 0% after seven
years. No deferred sales charge is imposed upon contributions withdrawn for any
reason after seven years of participation in the Program. In addition, no
deferred sales 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 deferred sales charge is imposed upon contributions withdrawn due to
resignation or retirement by the Participant or termination of the Participant
by the Contract-holder. Contributions transferred among VCA-10, VCA-11, the
Subaccounts of VCA-24, a companion contract, and the fixed rate option of the
nonqualified combination contract are considered to be withdrawals from the
Account or Subaccount from which the transfer is made, but no deferred sales
charge is imposed upon them. They will however, be considered as contributions
to the receiving Account or Subaccount for purposes of calculating any deferred
sales charge imposed upon their subsequent withdrawal from it. For the years
ended December 31, 1998 and December 31, 1997, Prudential has advised the
Account that they received deferred sales charges of $9,116 and $18,599
respectively.
A-8
<PAGE> 119
NOTES TO FINANCIAL STATEMENTS OF VCA-10
- -------------------------------------------------------------------------------
NOTE 4: PURCHASES AND SALES OF PORTFOLIO SECURITIES
For the year ended December 31, 1998, the aggregate cost of purchases and the
proceeds from sales of securities, excluding short-term investments, were
$282,511,151 and $285,168,751, respectively.
NOTE 5: UNIT TRANSACTIONS
The number of Accumulation Units issued and redeemed for the year ended December
31, 1998 and 1997 is as follows:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
- ---------------------------------------------------
Units issued 17,443,446 22,249,667
- ---------------------------------------------------
Units redeemed 20,273,521 30,520,771
- ---------------------------------------------------
</TABLE>
NOTE 6: NET DECREASE IN NET ASSETS RESULTING FROM SURPLUS TRANSFERS
The decrease in net assets resulting from surplus transfers represents the net
withdrawals from the equity of Prudential from VCA-10.
NOTE 7: RELATED PARTY TRANSACTIONS
For the year ended December 31, 1998, Prudential Securities Incorporated, an
indirect, wholly owned subsidiary of Prudential, earned $8,801 in brokerage
commissions from portfolio transactions executed on behalf of VCA-10. During the
year ended December 31, 1998, Prudential has advised the Account that it
received $16,668 in loan origination fees.
NOTE 8: PARTICIPANT LOANS
Loans are considered to be withdrawals from the Account from which the loan
amount was deducted; however no deferred sales charge is imposed upon them. The
principal portion of any loan repayment, however, will be treated as a
contribution to the receiving Account for purposes of calculating any deferred
sales charge imposed upon any subsequent withdrawal. If the Participant defaults
on the loan, for example by failing to make required payments, the outstanding
balance of the loan will be treated as a withdrawal for purposes of the deferred
sales charge. The deferred sales charge will be withdrawn from the same
Accumulation Accounts, and in the same proportions, as the loan amount was
withdrawn. If sufficient funds do not remain in those Accumulation Accounts, the
deferred sales charge will be withdrawn from the Participant's other
Accumulation Accounts as well.
Withdrawals, transfers and loans from VCA-10 are considered to be withdrawals of
contributions until all of the Participant's contributions to the Account have
been withdrawn, transferred or borrowed. No deferred sales charge is imposed
upon withdrawals of any amount in excess of contributions.
For the year ended December 31, 1998, $2,651,758 in participant loans were
withdrawn from VCA-10 and $1,908,945 of principal and interest was repaid to
VCA-10. For the year ended December 31, 1997, $2,202,462 in participant loans
was withdrawn from VCA-10 and $1,507,302 of principal and interest was repaid to
VCA-10. Loan repayments are invested in Participant's account(s) as chosen by
the Participant, which may not necessarily be VCA-10. The initial loan proceeds
which are being repaid may not necessarily have originated solely from VCA-10.
A-9
<PAGE> 120
REPORT OF INDEPENDENT ACCOUNTANTS
To the Committee and Participants
of The Prudential Variable Contract Account - 10
of The Prudential Insurance Company of America
In our opinion, the accompanying statement of net assets, and the related
statements of operations and of changes in net assets and the financial
highlights present fairly, in all material respects, the financial position of
The Prudential Variable Contract Account - 10 of The Prudential Insurance
Company of America (the "Account") at December 31, 1998, the results of its
operations for the year then ended, the changes in its net assets for each of
the two years in the period then ended and the financial highlights for each of
the three years in the period then ended, in conformity with generally accepted
accounting principles. These financial statements and financial highlights
(hereafter referred to as "financial statements") are the responsibility of the
Account's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
financial statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of securities at December 31, 1998 by correspondence with the
custodian, provide a reasonable basis for the opinion expressed above. The
accompanying financial highlights for each of the two years in the period ended
December 31, 1995 were audited by other independent accountants, whose opinion
dated February 15, 1996 was unqualified.
PricewaterhouseCoopers LLP
New York, New York
February 25, 1999
A-10
<PAGE> 121
FINANCIAL HIGHLIGHTS FOR VCA-11
INCOME AND CAPITAL CHANGES ACCUMULATION PER UNIT*
(FOR AN ACCUMULATION UNIT OUTSTANDING THROUGHOUT THE PERIOD)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
- ------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Investment Income ................................ $ .1411 $ .1353 $ .1281 $ .1313 $ .0912
EXPENSES
For investment management fee (.0062) (.0059) (.0056) (.0054) (.0052)
For administrative expenses not covered
by the annual account charge (.0186) (.0178) (.0170) (.0160) (.0154)
- ------------------------------------------------------------------------------------------------------------------------
NET INCREASE IN UNIT VALUE ....................... .1163 .1116 .1055 .1099 .0706
UNIT VALUE
Beginning of year ............................. 2.4326 2.3210 2.2155 2.1056 2.0350
- ------------------------------------------------------------------------------------------------------------------------
End of year ................................... $ 2.5489 $ 2.4326 $ 2.3210 $ 2.2155 $ 2.1056
- ------------------------------------------------------------------------------------------------------------------------
RATIO OF EXPENSES TO AVERAGE NET ASSETS** ........ .99% .98% .98% .99% 1.00%
- ------------------------------------------------------------------------------------------------------------------------
RATIO OF NET INVESTMENT INCOME TO
AVERAGE NET ASSETS** .......................... 4.78% 4.73% 4.57% 5.08% 3.42%
- ------------------------------------------------------------------------------------------------------------------------
NUMBER OF UNITS OUTSTANDING
For Participants at end of year (000s omitted). 34,882 35,757 38,315 34,136 35,448
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
*Calculated by accumulating the actual per unit amounts daily.
**These calculations exclude Prudential's equity in VCA-11.
The above table does not reflect the annual account charge, which does not
affect the Unit Value of VCA-11. This charge is made by reducing Participants'
accounts by a number of Units equal in value to the charge.
SEE NOTES TO FINANCIAL STATEMENTS
A-11
<PAGE> 122
FINANCIAL STATEMENTS OF VCA-11
STATEMENT OF NET ASSETS AS OF DECEMBER 31, 1998
<TABLE>
<CAPTION>
SHORT-TERM PRINCIPAL
INVESTMENTS [NOTE 2] AMOUNT VALUE
- -------------------------------------------------------------------------------------
<S> <C> <C>
COMMERCIAL PAPER - 59.0%
Aristar Inc., 5.25%
Due 2/5/99 $2,200,000 $2,188,450
Associates Corp. of
North America., 5.05%
Due 2/8/99 3,600,000 3,547,985
Baker Hughes, 5.70%
Due 1/29/99 1,000,000 1,000,000
Centric Capital Corp., 5.20%
Due 3/3/99 2,000,000 1,974,289
Centric Capital Corp., 5.25%
Due 2/26/99 1,200,000 1,189,850
Chrysler Financial Corp., 5.09%
Due 1/29/99 639,000 629,514
Chase Manhattan Corp., 5.22%
Due 2/22/99 1,200,000 1,182,426
Coca-Cola
Enterprises, Inc., 5.20%
Due 2/16/99 2,000,000 1,980,356
Countrywide
Home Loan, Inc., 5.40%
Due 1/4/99 2,215,000 2,213,671
Countrywide
Home Loan, Inc., 5.22%
Due 3/12/99 1,000,000 986,225
Enterprise Funding Corp., 5.30%
Due 2/19/99 2,526,000 2,494,762
Falcon Asset
Securitization Corp., 5.45%
Due 2/1/99 1,380,000 1,367,047
Falcon Asset
Securitization Corp., 5.43%
Due 2/11/99 1,000,000 987,330
First Chicago
Financial Corp., 5.13%
Due 3/12/99 300,000 295,682
Ford Motor Credit Co., 5.10%
Due 1/8/99 2,000,000 1,997,733
Ford Motor Credit Co., 5.40%
Due 1/14/99 1,000,000 1,000,000
General Electric
Capital Corp., 5.25%
Due 2/16/99 1,000,000 988,625
General Electric
Capital Corp., 5.11%
Due 3/10/99 1,700,000 1,676,352
General Motors
Acceptance Corp., 5.23%
Due 2/17/99 4,450,000 4,391,817
Goldman Sachs
Group LP., 5.24%
Due 6/4/01 3,800,000 3,800,000
Ing America Insurance
Holdings Inc., 5.25%
Due 2/3/99 1,400,000 1,384,075
Liquid Asset Backed
Securites Trust Series, 5.62%#
Due 2/26/99 619,237 619,237
Monte Rosa Cap Corp., 5.75%
Due 2/10/99 650,000 645,743
Monte Rosa Cap Corp., 5.43%
Due 2/17/99 1,000,000 986,274
PNC Funding Corp., 5.50%
Due 1/25/99 600,000 595,050
Restructuring Asset
Security, 5.63%
Due 3/31/99 1,000,000 1,000,000
Restructuring Asset
Security, 5.61%
Due 9/2/99 2,000,000 2,000,000
Restructuring Asset
Security, 5.67%
Due 1/21/00 2,000,000 2,000,000
Salomon Smith Barney, 5.31%
Due 2/10/99 1,200,000 1,184,247
Sears Roebuck
Acceptance Corp., 5.25%
Due 2/25/99 1,500,000 1,478,563
Strategic Money Market
Trust, 5.32%#
Due 12/15/99 2,000,000 2,000,000
Strategic Money Market
Trust, 5.59%#
Due 3/5/99 1,000,000 1,000,000
Short Term Repackaged
Asset Trust, 5.65%#
Due 8/18/99 1,000,000 1,000,000
Thunder Bay Funding, 5.35%
Due 2/12/99 1,000,000 991,083
----------
52,776,386
- ------------------------------------------------------------------------------------
OTHER CORPORATE DEBT - U.S. - 7.7%
(MEDIUM TERM NOTES, CORPORATE BONDS)
CIT Group Holdings,
6.20% Medium Term Note,
Due 6/17/99 328,000 328,568
Ford Motor Credit,
5.63% Corporate Bond,
Due 1/15/99 1,000,000 999,992
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
A-12
<PAGE> 123
FINANCIAL STATEMENTS OF VCA-11
STATEMENT OF NET ASSETS AS OF DECEMBER 31, 1998
<TABLE>
<CAPTION>
SHORT-TERM PRINCIPAL
INVESTMENTS [NOTE 2] AMOUNT VALUE
- -------------------------------------------------------------------------------------
<S> <C> <C>
Ford Motor Credit,
8.15% Medium Term Note,
Due 3/16/99 $,150,000 $,150,649
General Electric Capital Corp.
8.13% Medium Term Note,
Due 2/1/99 1,400,000 1,402,892
International Lease Finance Corp.
7.50% Corporate Bond,
Due 3/1/99 500,000 501,367
International Lease Finance Corp.
5.99% Medium Term Note,
Due 1/15/99 1,500,000 1,500,213
Toyota Motor Credit,
5.73% Medium Term Note,
Due 3/10/99 2,000,000 2,002,494
---------
6,886,175
- -------------------------------------------------------------------------------------
OTHER BANK RELATED INSTRUMENTS - U.S. - 10.7%
(BANK NOTES, CERTIFICATES OF DEPOSIT)
Bank of New York,
5.75% Bank Note,
Due 5/14/99 2,000,000 2,000,201
FCC National Bank.,
5.19% Bank Note,
Due 1/15/99 1,000,000 1,000,000
First National Bank.,
5.19% Bank Note,
Due 1/14/99 1,000,000 1,000,000
First Union National Bank,
5.42% Bank Note,
Due 11/17/99 2,200,000 2,200,000
KeyBank National Association.,
5.33% Bank Note,
Due 1/13/99 1,000,000 1,000,018
US Bank, N.A.
5.50% Bank Note,
Due 10/8/99 2,000,000 1,999,699
US Bank, N.A.
5.52% Bank Note,
Due 8/18/99 400,000 399,839
---------
9,599,757
- -------------------------------------------------------------------------------------
CERTIFICATES OF DEPOSIT - FOREIGN - 4.5%
Canadian Imperial
Bank of Commerce., 5.55%
Due 2/10/99 1,000,000 999,947
National Bank of Canada., 5.23%
Due 3/2/99 1,000,000 1,000,000
Royal Bank of Canada., 5.47
Due 8/6/99 2,000,000 1,999,188
---------
3,999,135
- -------------------------------------------------------------------------------------
COMMERCIAL PAPER - YANKEE - 5.2%
American Honda
Finance Corp., 5.32%
Due 2/11/99 750,000 745,345
Canadian Wheat Board, 5.05%
Due 4/1/99 1,000,000 981,203
Dailmler-Chrysler
North America, 5.25%
Due 2/22/99 3,000,000 2,957,125
---------
4,683,673
- -------------------------------------------------------------------------------------
CERTIFICATE OF DEPOSIT - YANKEE - 15.6%
Abbey National
Treasury Services, 5.25%
Due 1/20/99 4,000,000 4,000,000
Barclays Bank PLC, 5.49%
Due 6/2/99 2,000,000 1,999,342
Bayerische Landesbank
Girozentrale, 5.49%
Due 6/30/99 2,000,000 1,999,211
Bishop's Gate
Residential, 5.75%
Due 11/22/99 1,000,000 1,000,000
Deutsche Bank, 5.66%
Due 3/3/99 1,000,000 999,920
Deutsche Bank, 5.63%
Due 2/26/99 2,000,000 1,999,735
Swiss Bank Corp, 5.74%
Due 6/11/99 2,000,000 1,999,493
----------
13,997,701
- -------------------------------------------------------------------------------------
TOTAL SHORT-TERM INVESTMENTS - 102.7%
(Cost: $91,942,827) 91,942,827
- -------------------------------------------------------------------------------------
OTHER ASSETS, LESS LIABILITIES
Cash 4,604
Payable for Pending Capital Transaction (1,235,521)
Interest Receivable 842,639
Payable for Investments Purchased (2,038,784)
- -------------------------------------------------------------------------------------
TOTAL OTHER ASSETS
LESS LIABILITIES - (2.7)% $(2,427,062)
- -------------------------------------------------------------------------------------
NET ASSETS - 100% 87,515,765
- -------------------------------------------------------------------------------------
NET ASSETS, REPRESENTING:
Equity of Participants
34,881,978 Accumulation Units at an
Accumulation Unit Value of $2.5489 88,911,719
Equity of Prudential Insurance
Company of America 604,046
----------
$89,515,765
- -------------------------------------------------------------------------------------
</TABLE>
#Indicates a variable rate security. Rate shown is rate in effect at December
31, 1998.
SEE NOTES TO FINANCIAL STATEMENT
A-13
<PAGE> 124
FINANCIAL STATEMENTS OF VCA-11
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1998
- --------------------------------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME [NOTE 2]
Interest $ 5,595,451
- --------------------------------------------------------------------------------------------------------
EXPENSES [NOTE 3]
Fees Charged to Participants for Investment Management Services 240,963
Fees Charged to Participants for Administrative Expenses 722,889
- --------------------------------------------------------------------------------------------------------
TOTAL EXPENSES 963,852
- --------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME AND NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 4,631,599
========================================================================================================
</TABLE>
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
- --------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1998 DECEMBER 31, 1997
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 4,631,599 $ 4,315,890
- --------------------------------------------------------------------------------------------------------------
CAPITAL TRANSACTIONS
Purchase Payments and Transfers In [Note 6 and 7] 168,192,543 151,277,326
Withdrawals and Transfers Out [Note 6 and 7] (170,842,905) (157,203,424)
Annual Account Charges Deducted from
Participants' Accounts [Note 4] (47,451) (58,601)
- --------------------------------------------------------------------------------------------------------------
NET DECREASE IN NET ASSETS
RESULTING FROM CAPITAL TRANSACTIONS (2,697,813) (5,984,699)
- --------------------------------------------------------------------------------------------------------------
NET DECREASE IN NET ASSETS
RESULTING FROM SURPLUS TRANSFER (1,588,734) --
- --------------------------------------------------------------------------------------------------------------
TOTAL INCREASE/(DECREASE) IN NET ASSETS 345,052 (1,668,809)
NET ASSETS
Beginning of Year 89,170,713 90,839,522
- --------------------------------------------------------------------------------------------------------------
End of Year $89,515,765 $ 89,170,713
==============================================================================================================
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
A-14
<PAGE> 125
NOTES TO FINANCIAL STATEMENTS OF VCA-11
- -------------------------------------------------------------------------------
NOTE 1: GENERAL
The Prudential Variable Contract Account-11 (VCA-11 or the Account) was
established on March 1, 1982 by The Prudential Insurance Company of America
(Prudential) under the laws of the State of New Jersey and is registered as an
open-end, diversified management investment company under the Investment Company
Act of 1940, as amended. VCA-11 has been designed for use by employers
(Contract-holders) in making retirement arrangements on behalf of their
employees (Participants). Its investments are primarily composed of short-term
securities. All contractual and other obligations arising under contracts
participating in VCA-11 (the "Contracts") are general corporate obligations of
Prudential, although Participants' payments from the Account will depend upon
the investment performance of the Account.
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. VALUATION OF SHORT-TERM INVESTMENTS
Pursuant to an exemptive order from the Securities and Exchange Commission,
securities having a remaining maturity of one year or less are valued at
amortized cost which approximates market value. Amortized cost is computed using
the cost on the date of purchase adjusted for constant accretion of discount or
amortization of premium to maturity. The rate displayed is the effective yield
from the date of purchase to the date of maturity.
B. INCOME RECOGNITION
Security transactions are recorded on trade date. Interest income is accrued
daily. Income on investments is allocated to the Participants and Prudential on
a daily basis in proportion to their respective equities in VCA-11. Expenses are
recorded on the accrual basis which may require the use of certain estimates by
management.
C. TAXES
The operations of VCA-11 are part of, and are taxed with, the operations of
Prudential. Under the current provisions of the Internal Revenue Code,
Prudential does not expect to incur federal income taxes on earnings of VCA-11
to the extent the earnings are credited under the contracts. As a result, the
Unit Value of VCA-11 has not been reduced by federal income taxes.
NOTE 3: EXPENSES
Prudential acts as investment manager for VCA-11 under an agreement for
Investment Management Services. A daily charge, at an effective annual rate of
1.00% of the current value of the Participants' equity in VCA-11, is paid to
Prudential. Three quarters of this charge (0.75%) is for administrative expenses
not provided by the annual account charge, and one quarter (0.25%) is for
investment management services.
A-15
<PAGE> 126
NOTES TO FINANCIAL STATEMENTS OF VCA-11
- -------------------------------------------------------------------------------
NOTE 4: ANNUAL ACCOUNT CHARGE
An annual account charge of not more than $30 annually is deducted from the
account of each Participant, if applicable, at the time of withdrawal of the
value of all of the Participant's accounts or at the end of the accounting year
by canceling Units. The charge will first be made against a Participant's
account under a fixed dollar annuity companion contract or fixed rate option of
the nonqualified combination contract. If the Participant has no account under a
companion contract or the fixed rate option, or if the amount under the
companion contract or the fixed rate option is too small to pay the charge, the
charge will be made against the Participant's account in VCA-11. If the
Participant has no VCA-11 account, or if the amount under that account is too
small to pay the charge, the charge will then be made against the Participant's
VCA-10 account. If the Participant has no VCA-10 account, or if it is too small
to pay the charge, the charge will then be made against any one or more of the
Participant's accounts in VCA-24.
NOTE 5: DEFERRED SALES CHARGE
A deferred sales charge is imposed upon that portion of certain withdrawals
which represents a return of contributions. The charge is designed to compensate
Prudential for sales and other marketing expenses. The maximum deferred sales
charge is 7% on contributions withdrawn from an account during the first year of
participation. After the first year of participation, the maximum deferred sales
charge declines by 1% in each subsequent year until it reaches 0% after seven
years. No deferred sales charge is imposed upon contributions withdrawn for any
reason after seven years of participation in the Program. In addition, no
deferred sales 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 deferred sales charge is imposed upon contributions withdrawn due to
resignation or retirement by the Participant or termination of the Participant
by the Contract-holder. Contributions transferred among VCA-10, VCA-11, the
Subaccounts of VCA-24, a companion contract, and the fixed rate option of the
nonqualified combination contract are considered to be withdrawals from the
Account or Subaccount from which the transfer is made, but no deferred sales
charge is imposed upon them. They will, however, be considered as contributions
to the receiving Account or Subaccount for purposes of calculating any deferred
sales charge imposed upon their subsequent withdrawal from it. For the years
ended December 31, 1998 and December 31, 1997, Prudential has advised the
Account that they received deferred sales charges of $2,389 and $8,370
respectively.
NOTE 6: UNIT TRANSACTIONS
The number of Units issued and redeemed for the years ended December 31, 1998
and 1997 is as follows:
<TABLE>
<CAPTION>
1998 1997
- --------------------------------------------------
<S> <C> <C>
Units issued 67,777,991 63,669,685
- --------------------------------------------------
Units redeemed 68,652,928 66,228,235
- --------------------------------------------------
</TABLE>
A-16
<PAGE> 127
NOTES TO FINANCIAL STATEMENTS OF VCA-11
- -------------------------------------------------------------------------------
NOTE 7: PARTICIPANT LOANS
Loans are considered to be withdrawals from the Account from which the loan
amount was deducted, though they are not considered a withdrawal from the
Program. Therefore, no deferred sales charge is imposed upon them. The principal
portion of any loan repayment, however, will be treated as a contribution to the
receiving Account for purposes of calculating any deferred sales charge imposed
upon any subsequent withdrawal. If the Participant defaults on the loan, for
example, by failing to make required payments, the outstanding balance of the
loan will be treated as a withdrawal for purposes of the deferred sales charge.
The deferred sales charge will be withdrawn from the same Accumulation Accounts,
and in the same proportions, as the loan amount was withdrawn. If sufficient
funds do not remain in those Accumulation Accounts, the deferred sales charge
will be withdrawn from the Participant's other Accumulation Accounts as well.
Withdrawals, transfers and loans from VCA-11 are considered to be withdrawals of
contributions until all of the Participant's contributions to the Account have
been withdrawn, transferred or borrowed. No deferred sales charge is imposed
upon withdrawals of any amount in excess of contributions.
For the year ended December 31, 1998, $850,931 in participant loans was
withdrawn from VCA-11 and $299,809 of principal and interest was repaid to
VCA-11. For the year ended December 31, 1998, $553,894 in participant loans were
withdrawn from VCA-11 and $330,318 of principal and interest was repaid. Loan
repayments are invested in Participant's account(s) as chosen by the
Participant, which may not necessarily be VCA-11. The initial loan proceeds
which are being repaid may not necessarily have originated solely from VCA-11.
During the six months ended December 31, 1997, Prudential has advised the
Account that it received $5,456 in loan origination fees. For the year ended
December 31,1998, Prudential has advised the account that it received $7,662 in
loan origination fees.
A-17
<PAGE> 128
REPORT OF INDEPENDENT ACCOUNTANTS
To the Committee and Participants
of The Prudential Variable Contract Account - 11
of The Prudential Insurance Company of America
In our opinion, the accompanying statement of net assets, and the related
statements of operations and of changes in net assets and the financial
highlights present fairly, in all material respects, the financial position of
The Prudential Variable Contract Account - 11 of The Prudential Insurance
Company of America (the "Account") at December 31, 1998, the results of its
operations for the year then ended, the changes in its net assets for each of
the two years in the period then ended and the financial highlights for each of
the three years in the period then ended in conformity with generally accepted
accounting principles. These financial statements and financial highlights
(hereafter referred to as "financial statements") are the responsibility of the
Account's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
financial statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain reasonable assuarance
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 statments, assessing the accounting principles used
and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of securities at December 31, 1998 by correspondence with the
custodian and brokers, provide a reasonable basis for the opinion expressed
above. The accompanying financial highlights for each of the two years in the
period ended in December 31, 1995 were audited by other independent accountants,
whose opinion dated February 15, 1996 was unqualified.
PricewaterhouseCoopers LLP
New York, New York
February 25, 1999
A-18
<PAGE> 129
FINANCIAL STATEMENTS OF VCA-24
STATEMENTS OF NET ASSETS
DECEMBER 31, 1998
<TABLE>
<CAPTION>
SUBACCOUNTS
-------------------------------------------------------------------------------------
DIVERSIFIED FLEXIBLE CONSERVATIVE
EQUITY BOND MANAGED BALANCED STOCK INDEX GLOBAL
------------ ------------ ---------- -------------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Investment in Shares of
The Prudential Series Fund,
Inc. Portfolios at Net
Asset Value [Note 2]........... $474,280,896 $55,893,927 $170,862,480 $143,766,247 $441,752,153 $88,335,140
Receivable/(Payable) for Pending
Capital Transactions........... (1,913) 67,705 (4,691) 24,382 1,294,343 39,222
------------- ----------- ------------- ------------- ------------ -----------
NET ASSETS $474,278,983 $55,961,632 $170,857,789 $143,790,629 $443,046,496 $88,374,362
============= =========== ============= ============= ============ ===========
NET ASSETS REPRESENTING:
Equity of Participants......... $472,994,223 $ 55,426,094 $169,646,349 $142,619,689 $441,536,108 $86,785,387
Equity of The Prudential
Insurance Company of America 1,284,760 535,538 1,211,440 1,170,940 1,510,388 1,588,975
------------- ----------- ------------- ------------- ------------ -----------
x $474,278,983 $55,961,632 $170,857,789 $143,790,629 $443,046,496 $88,374,362
============= =========== ============= ============= ============ ===========
<CAPTION>
-------------
GOVERNMENT
INCOME
------------
<S> <C>
Investment in Shares of
The Prudential Series Fund,
Inc. Portfolios at Net
Asset Value [Note 2] $37,468,415
Receivable/(Payable) for Pending
Capital Transactions (88,532)
------------
NET ASSETS $37,379,883
============
NET ASSETS REPRESENTING:
Equity of Participants $36,854,738
Equity of The Prudential
Insurance Company of America 525,145
------------
x $37,379,883
============
</TABLE>
STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
SUBACCOUNTS
---------------------------------------------------------------------------------
DIVERSIFIED FLEXIBLE CONSERVATIVE
EQUITY BOND MANAGED BALANCED STOCK INDEX
-------------- ------------ ---------- --------------- ----------------
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME
Ordinary Dividend Distributions..... $9,797,896 $3,187,114 $ 6,006,240 $ 5,858,431 $ 5,108,542
Expense [Note 3]
Fees Charged to Participants
for Administrative Purposes... (3,837,597) (333,292) (1,322,186) (930,421) (2,880,796)
------------- ----------- ------------- ------------- ------------
NET INVESTMENT INCOME.................. 5,960,299 2,853,822 4,684,054 4,928,010 2,227,746
------------- ----------- ------------- ------------- ------------
NET REALIZED AND UNREALIZED
GAINS ON INVESTMENTS
CAPITAL GAINS DISTRIBUTIONS RECEIVED... 52,442,494 171,929 17,747,934 8,381,922 6,861,082
Net Realized Gain (Loss)
on Investments...................... 29,585,585 89,478 (867,173) 413,281 33,272,325
Net Increase / decrease in Unrealized
Appreciation on Investments......... (56,968,251) (121,565) (7,881,229) 494,765 48,543,036
------------- ----------- ------------- ------------- ------------
NET GAIN (LOSS) ON INVESTMENTS......... 25,059,828 139,842 8,999,532 9,289,968 88,676,443
------------- ----------- ------------- ------------- ------------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS........... $31,020,127 $2,993,664 $13,683,586 $14,217,978 $90,904,189
============= =========== ============= ============= ============
<CAPTION>
--------------------------------
GOVERNMENT
GLOBAL INCOME
-------------- --------------
<S> <C>
INVESTMENT INCOME
Ordinary Dividend Distributions..... $ 1,108,925 $1,886,240
Expense [Note 3]
Fees Charged to Participants
for Administrative Purposes... (542,910) (210,705)
----------- ------------
NET INVESTMENT INCOME.................. 566,015 1,675,535
----------- ------------
NET REALIZED AND UNREALIZED
GAINS ON INVESTMENTS
CAPITAL GAINS DISTRIBUTIONS RECEIVED... 3,694,097 --
Net Realized Gain (Loss)
on Investments...................... 5,572,907 224,663
Net Increase / decrease in Unrealized
Appreciation on Investments......... 7,439,259 583,493
----------- ------------
NET GAIN (LOSS) ON INVESTMENTS......... 16,706,263 808,156
----------- ------------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS........... $17,272,278 $2,483,691
=========== ============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
A-19
<PAGE> 130
FINANCIAL STATEMENTS OF VCA-24
STATEMENTS OF CHANGES IN
NET ASSETS
<TABLE>
<CAPTION>
SUBACCOUNTS
--------------------------------------------------------------------------------
DIVERSIFIED
EQUITY BOND
------------------------------------ ------------------------------------
FOR THE YEAR ENDED DEC. 31, 1998 DEC. 31, 1997 DEC. 31, 1998 DEC. 31, 1997
-------------- --------------- -------------- --------------
<S> <C> <C> <C> <C>
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS............... $ 31,020,127 $102,166,275 $ 2,993,664 $ 3,126,135
-------------- --------------- -------------- --------------
ACCUMULATION UNIT TRANSACTIONS
Purchase Payments and
Transfers In [Notes 7 & 8]................ 119,421,285 121,805,148 26,477,778 18,584,881
Withdrawals and
Transfers Out [Notes 7 & 8]............... (227,004,940) (91,113,887) (16,800,497) (21,019,961)
Annual Account Charges Deducted
From Participants' Accumulation
Accounts [Note 4].......................... (58,411) (117,988) (10,355) (10,410)
-------------- --------------- -------------- --------------
NET INCREASE IN NET ASSETS
RESULTING FROM ACCUMULATION................ (107,642,066) 30,573,273 9,666,926 (2,445,490)
NET INCREASE/(DECREASE) IN NET ASSETS
FROM SURPLUS TRANSFERS [NOTE 9]............ (9,423) 466,278 150,438 (428)
-------------- --------------- -------------- --------------
TOTAL INCREASE/(DECREASE) IN
NET ASSETS................................. (76,631,362) 133,205,826 12,811,028 680,217
NET ASSETS
Beginning of year.......................... 550,910,345 417,704,519 43,150,604 42,470,387
-------------- --------------- -------------- --------------
End of year................................ $ 474,278,983 $550,910,345 $ 55,961,632 $ 43,150,604
============== =============== ============== ==============
<CAPTION>
SUBACCOUNTS
--------------------------------------------------------------------------------
FLEXIBLE CONSERVATIVE
MANAGED BALANCED
------------------------------------ --------------------------------------
FOR THE YEAR ENDED DEC. 31, 1998 DEC. 31, 1997 DEC. 31, 1998 DEC. 31, 1997
-------------- -------------- --------------- --------------
<S> <C> <C> <C> <C>
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS............... $ 13,683,586 $ 26,074,193 $ 14,217,978 $ 14,412,978
-------------- --------------- -------------- --------------
ACCUMULATION UNIT TRANSACTIONS
Purchase Payments and
Transfers In [Notes 7 & 8]................ 42,624,953 41,634,688 27,343,287 25,368,814
Withdrawals and
Transfers Out [Notes 7 & 8]............... (73,203,087) (29,158,674) (27,813,972) (22,520,864)
Annual Account Charges Deducted
From Participants' Accumulation
Accounts [Note 4].......................... (21,523) (43,728) (24,743) (40,348)
-------------- --------------- -------------- --------------
NET INCREASE IN NET ASSETS
RESULTING FROM ACCUMULATION................ (30,559,657) 12,432,286 (495,428) 2,807,602
NET INCREASE/(DECREASE) IN NET ASSETS
FROM SURPLUS TRANSFERS [NOTE 9]............ 314,721 197,552 535,730 (18,742)
-------------- --------------- -------------- --------------
TOTAL INCREASE/(DECREASE) IN
NET ASSETS................................. (16,601,350) 38,704,031 14,258,280 17,201,838
NET ASSETS
Beginning of year.......................... 187,459,139 148,755,108 129,532,349 112,330,511
-------------- --------------- -------------- --------------
End of year................................ $170,857,789 $187,459,139 $143,790,629 $129,532,349
============== =============== ============== ==============
</TABLE>
<TABLE>
<CAPTION>
SUBACCOUNTS
------------------------------------------------------------------------------
STOCK
INDEX GLOBAL
-------------------------------------- ------------------------------------
FOR THE YEAR ENDED DEC. 31, 1998 DEC. 31, 1997 DEC. 31, 1998 DEC. 31, 1997
--------------- -------------- --------------- ---------------
<S> <C> <C> <C> <C>
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS.............. $ 90,904,189 $ 90,584,091 $ 17,272,278 $ 3,596,262
-------------- --------------- ------------- --------------
ACCUMULATION UNIT TRANSACTIONS
Purchase Payments and
Transfers In [Notes 7 & 8]................ 170,811,372 181,212,650 56,489,382 49,069,899
Withdrawals and
Transfers Out [Notes 7 & 8].............. (196,975,004) (162,967,623) (57,085,576) (41,642,292)
Annual Account Charges Deducted
From Participants' Accumulation
Accounts [Note 4]......................... (30,821) (68,031) (3,261) (8,545)
-------------- --------------- ------------- --------------
NET INCREASE / (DECREASE) IN NET ASSETS
RESULTING FROM ACCUMULATION
UNIT TRANSACTIONS......................... (26,194,453) 18,176,996 (599,455) 7,419,062
-------------- --------------- ------------- --------------
NET INCREASE / (DECREASE) IN NET ASSETS
FROM SURPLUS TRANSFERS [NOTE 9]........... 894,183 (45,282) 792,964 20,298
-------------- --------------- ------------- --------------
TOTAL INCREASE IN
NET ASSETS................................ 65,603,919 108,715,805 17,465,787 11,035,622
NET ASSETS
Beginning of year......................... 377,442,577 268,726,772 70,908,575 59,872,953
-------------- --------------- -------------- --------------
End of year. $ 443,046,496 $ 377,442,577 $ 88,374,362 $ 70,908,575
============== =============== ============== ==============
<CAPTION>
SUBACCOUNTS
--------------------------------------
GOVERNMENT
INCOME
--------------------------------------
FOR THE YEAR ENDED DEC. 31, 1998 DEC. 31, 1997
-------------- ---------------
<S> <C> <C>
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS.............. $2,483,691 $2,194,332
-------------- ------------
ACCUMULATION UNIT TRANSACTIONS
Purchase Payments and
Transfers In [Notes 7 & 8]................ 17,139,903 6,782,174
Withdrawals and
Transfers Out [Notes 7 & 8].............. (10,414,039) (7,672,320)
Annual Account Charges Deducted
From Participants' Accumulation
Accounts [Note 4]......................... (3,015) (5,815)
-------------- ------------
NET INCREASE / (DECREASE) IN NET ASSETS
RESULTING FROM ACCUMULATION
UNIT TRANSACTIONS......................... 6,722,849 (895,961)
-------------- ------------
NET INCREASE / (DECREASE) IN NET ASSETS
FROM SURPLUS TRANSFERS [NOTE 9]........... 103,785 (5,618)
-------------- ------------
TOTAL INCREASE IN
NET ASSETS................................ 9,310,325 1,292,753
NET ASSETS
Beginning of year......................... 28,069,558 26,776,805
-------------- ------------
End of year............................... $37,379,883 $28,069,558
============== ============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
A-20
<PAGE> 131
NOTES TO FINANCIAL STATEMENTS OF VCA-24
- -------------------------------------------------------------------------------
NOTE 1: GENERAL
The Prudential Variable Contract Account-24 (VCA-24 or the Account) was
established on April 29, 1987 by The Prudential Insurance Company of America
(Prudential) under the laws of the State of New Jersey and is registered as a
unit investment trust under the Investment Company Act of 1940, as amended.
VCA-24 has been designed for use by employers (Contract-holders) in making
retirement arrangements on behalf of their employees (Participants).
The Account is comprised of seven Subaccounts. Each of the Subaccounts invests
in a corresponding portfolio of The Prudential Series Fund, Inc. ("the Fund").
The Equity Subaccount invests in the Equity Portfolio, the Diversified Bond
Subaccount in the Diversified Bond Portfolio, the Flexible Managed Subaccount in
the Flexible Managed Portfolio, the Conservative Balanced Subaccount in the
Conservative Balanced Portfolio, the Stock Index Subaccount in the Stock Index
Portfolio, the Global Subaccount in the Global Portfolio, and the Government
Income Subaccount in the Government Income Portfolio. All contractual and other
obligations arising under contracts participating in VCA-24 (the "Contracts")
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 Series Fund are stated at the net
asset value of the respective portfolio.
Security Transactions--Realized gains and losses on security transactions are
reported on an average cost basis. Purchase and sale transactions are recorded
as of the trade date of the security being purchased or sold.
Distributions Received--Dividend and capital gain distributions received are
reinvested in additional shares of the Series Fund and are recorded on
ex-dividend date.
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 VCA-24, and the
aggregate cost of investments in such shares as of December 31, 1998 are as
follows:
<TABLE>
<CAPTION>
DIVERSIFIED FLEXIBLE CONSERVATIVE STOCK GOVERNMENT
EQUITY BOND MANAGED BALANCED INDEX GLOBAL INCOME
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Number of Shares 16,003,107 5,053,166 10,317,309 9,533,217 11,705,121 4,175,242 3,156,402
- ---------------------------------------------------------------------------------------------------------------------------
NAV per Share $ 29.64 $ 11.06 $ 16.56 $ 15.08 $ 37.74 $ 21.16 $ 11.87
- ---------------------------------------------------------------------------------------------------------------------------
Cost at 12-31-98 $393,648,090 $55,433,182 $175,236,922 $141,403,820 $274,232,607 $74,070,120 $35,976,709
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
NOTE 3: EXPENSES
A daily charge at an effective annual rate of 0.75% of the Net Asset Value of
each Subaccount of VCA-24 is paid to Prudential for administrative expenses not
provided by the annual account charge.
NOTE 4: ANNUAL ACCOUNT CHARGE
An annual account charge is deducted from the account of each Participant, if
applicable, at the time of withdrawal of the value of all of the Participant's
accounts or at the end of the accounting year by canceling Units. The charge
will first be made against a Participant's account under a fixed dollar annuity
companion contract or fixed rate option of the non-qualified combination
contract. If the Participant has no account under a fixed contract, or if the
amount under a fixed contract is too small to pay the charge, the charge will be
made against the Participant's account in VCA-11. If the Participant has no
VCA-11 account or if the amount under that account is too small to pay the
charge, the charge will then be made against the Participant's VCA-10 account.
If the Participant has no VCA-10 account, or if it is too small to pay the
charge, the charge will then be made against any one or more of the
Participant's accounts in VCA-24. The annual account charge will not exceed $30
and is paid to Prudential.
A-21
<PAGE> 132
NOTES TO FINANCIAL STATEMENTS OF VCA-24
- --------------------------------------------------------------------------------
NOTE 5: DEFERRED SALES CHARGE
A deferred sales charge is imposed upon the withdrawal of certain purchase
payments to compensate Prudential for sales and other marketing expenses. The
maximum deferred sales charge is 7% on contributions withdrawn during the first
year of participation. After the first year of participation, the maximum
deferred sales charge declines by 1% in each subsequent year until it reaches 0%
after seven years. No deferred sales charge is imposed upon contributions
withdrawn for any reason after seven years of participation in a Program. In
addition, no deferred sales 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 deferred sales charge is imposed upon contributions
withdrawn due to resignation or retirement by the Participant or termination of
the Participant by the Contract-holder. Contributions transferred among VCA-10,
VCA-11, the Subaccounts of VCA-24, the companion contract, and the fixed rate
option of the non-qualified combination contract are considered to be
withdrawals from the Account or Subaccount from which the transfer is made, but
no deferred sales charge is imposed upon them. They will, however, be considered
as contributions to the receiving Account or Subaccount for purposes of
calculating any deferred sales charge imposed upon their subsequent withdrawal.
For the years ended December 31, 1998 and December 31, 1997, Prudential has
advised the accountant that they received deferred sales charges as follows:
<TABLE>
<CAPTION>
DECEMBER DECEMBER
31, 1998 31, 1997
-----------------------------
<S> <C> <C>
Equity $ 12,573 $ 23,487
Diversified Bond 2,295 4,947
Flexible Managed 6,428 16,791
Cosnservative Balanced 5,770 16,349
Stock Index 8,656 21,400
Global 1,393 7,118
Government Income 974 3,428
----------- ---------
$ 38,089 $ 93,520
=========== =========
</TABLE>
NOTE 6: TAXES
The operations of VCA-24 are part of, and are taxed with, the operations of
Prudential. Under the current provisions of the Internal Revenue Code,
Prudential does not expect to incur federal income taxes on earnings of VCA-24
to the extent the earnings are credited under the Contracts. As a result, the
Unit Value of VCA-24 has not been reduced by federal income taxes.
NOTE 7: UNIT TRANSACTIONS
The number of units issued and redeemed during the year ended December 31, 1998
is as follows:
<TABLE>
<CAPTION>
1998
DIVERSIFIED FLEXIBLE CONSERVATIVE STOCK GOVERNMENT
EQUITY BOND MANAGED BALANCED INDEX GLOBAL INCOME
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Units issued 29,763,261 11,587,263 14,367,039 10,520,655 35,324,682 27,406,256 10,169,570
- ---------------------------------------------------------------------------------------------------------------------
Units redeemed 59,071,090 7,441,727 25,276,607 10,716,387 42,380,910 27,684,604 6,278,998
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
The number of units issued and redeemed during the year ended December 31, 1997
is as follows:
<TABLE>
<CAPTION>
1997
DIVERSIFIED FLEXIBLE CONSERVATIVE STOCK GOVERNMENT
EQUITY BOND MANAGED BALANCED INDEX GLOBAL INCOME
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Units issued 34,271,390 8,670,060 15,321,216 10,666,326 47,348,967 25,888,774 4,382,451
- ---------------------------------------------------------------------------------------------------------------------
Units redeemed 25,563,791 9,835,849 10,818,000 9,398,610 41,979,915 21,818,089 5,046,046
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
A-22
<PAGE> 133
NOTES TO FINANCIAL STATEMENTS OF VCA-24
- -------------------------------------------------------------------------------
NOTE 8: PARTICIPANT LOANS
Loans are considered to be withdrawals from the Subaccount from which the loan
amount was deducted, however, no deferred sales charge is imposed upon them. The
principal portion of any loan repayment, however, will be treated as a
contribution to the receiving Subaccount for purposes of calculating any
deferred sales charge imposed upon any subsequent withdrawal. If the Participant
defaults on the loan by, for example, failing to make required payments, the
outstanding balance of the loan will be treated as a withdrawal for purposes of
the deferred sales charge. The deferred sales charge will be withdrawn from the
same Accumulation Accounts, and in the same proportions, as the loan amount was
withdrawn. If sufficient funds do not remain in those Accumulation Accounts, the
deferred sales charge will be withdrawn from the Participant's other
Accumulation Accounts as well.
Withdrawals, transfers and loans from each Subaccount of VCA-24 are considered
to be withdrawals of contributions until all of the Participant's contributions
to the Subaccount have been withdrawn, transferred or borrowed. No deferred
sales charge is imposed upon withdrawals of any amount in excess of
contributions.
For the year ended December 31, 1998, the amount of participant loans that was
withdrawn from the Subaccounts and the amount of principal and interest that was
repaid to the Subaccounts is as follows:
<TABLE>
<CAPTION>
1998
DIVERSIFIED FLEXIBLE CONSERVATIVE STOCK GOVERNMENT
EQUITY BOND MANAGED BALANCED INDEX GLOBAL INCOME
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Loans $2,752,209 $418,846 $1,853,425 $829,592 $2,688,331 $553,774 $223,292
- ---------------------------------------------------------------------------------------------------------------------
Repayments $1,681,829 $216,684 $ 781,480 $478,418 $1,692,528 $476,226 $ 93,403
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
For the year ended December 31, 1997, the amount of participant loans what was
withdrawn from the Subaccounts and the amount of principal that was as follows:
<TABLE>
<CAPTION>
1997
DIVERSIFIED FLEXIBLE CONSERVATIVE STOCK GOVERNMENT
EQUITY BOND MANAGED BALANCED INDEX GLOBAL INCOME
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Loans $2,257,704 $341,223 $1,119,224 $621,979 $1,840,620 $517,512 $224,852
- ---------------------------------------------------------------------------------------------------------------------
Repayments $1,331,530 $206,579 $ 677,861 $397,144 $1,105,869 $315,438 $ 76,945
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
Loan repayments are invested in Participant's account(s) as chosen by the
Participant, which may not necessarily be the Subaccount from which the loan
amount was deducted. The initial loan proceeds which are being repaid may not
necessarily have originated solely from the Subaccounts of VCA-24.
NOTE 9: NET INCREASE/(DECREASE) IN NET ASSETS RESULTING FROM SURPLUS
TRANSFERS
The increase (decrease) in net assets resulting from surplus transfers
represents the net contributions to the Equity of Prudential to VCA-24. The
decrease in net assets resulting from surplus transfers represents the net
withdrawals from the Equity of Prudential from VCA-24.
A-23
<PAGE> 134
NOTES TO FINANCIAL STATEMENTS OF VCA-24
- -------------------------------------------------------------------------------
NOTE 10: CONDENSED FINANCIAL INFORMATION
PARTICIPANT ACCUMULATION UNIT VALUES FOR VCA-24 UNIT
<TABLE>
<S> <C> <C> <C> <C> <C>
EQUITY 01/01/98 01/01/97 01/01/96 01/01/95 01/01/94
TO TO TO TO TO
12/31/98 12/31/97 12/31/96 12/31/95 12/31/94
-------- -------- -------- -------- --------
Beginning of year (rounded) $3.8962 $3.1487 $ 2.6769 $ 2.0541 $ 2.0136
End of year (rounded) $4.2286 $3.8962 $ 3.1487 $ 2.6769 $ 2.0541
Accumulation Units
Outstanding at end of year
(000 omitted) 111,855 141,162 132,455 118,394 99,323
DIVERSIFIED BOND 01/01/98 01/01/97 01/01/96 01/01/95 01/01/94
TO TO TO TO TO
12/31/98 12/31/97 12/31/96 12/31/95 12/31/94
-------- -------- -------- -------- --------
Beginning of year (rounded) $2.2404 $2.0789 $ 2.0065 $ 1.6746 $ 1.7435
End of year (rounded) $2.3829 $2.2404 $ 2.0789 $ 2.0065 $ 1.6746
Accumulation Units
Outstanding at end of year
(000 omitted) 23,260 19,114 20,280 16,898 14,575
FLEXIBLE MANAGED 01/01/98 01/01/97 01/01/96 01/01/95 01/01/94
TO TO TO TO TO
12/31/98 12/31/97 12/31/96 12/31/95 12/31/94
-------- -------- -------- -------- --------
Beginning of year (rounded) $2.9103 $2.4854 $ 2.2038 $ 1.7886 $ 1.8609
End of year (rounded) $3.1844 $2.9103 $ 2.4854 $ 2.2038 $ 1.7886
Accumulation Units
Outstanding at end of year
(000 omitted) 53,275 64,184 59,681 51,419 44,729
CONSERVATIVE BALANCED 01/01/98 01/01/97 01/01/96 01/01/95 01/01/94
TO TO TO TO TO
12/31/98 12/31/97 12/31/96 12/31/95 12/31/94
-------- -------- -------- -------- --------
Beginning of year (rounded) $2.5165 $2.2364 $ 1.9993 $ 1.7175 $ 1.7473
End of year (rounded) $2.7909 $2.5165 $ 2.2364 $ 1.9993 $ 1.7175
Accumulation Units
Outstanding at end of year
(000 omitted) 51,101 51,297 50,029 46,873 43,594
STOCK INDEX 01/01/98 01/01/97 01/01/96 01/01/95 01/01/94
TO TO TO TO TO
12/31/98 12/31/97 12/31/96 12/31/95 12/31/94
-------- -------- -------- -------- --------
Beginning of year (rounded) $4.3910 $3.3302 $ 2.7378 $ 2.0123 $ 2.0072
End of year (rounded) $5.5972 $4.3910 $ 3.3302 $ 2.7378 $ 2.0123
Accumulation Units
Outstanding at end of year
(000 omitted) 78,885 85,941 80,572 51,701 40,522
GLOBAL 01/01/98 01/01/97 01/01/96 01/01/95 01/01/94
TO TO TO TO TO
12/31/98 12/31/97 12/31/96 12/31/95 12/31/94
-------- -------- -------- -------- --------
Beginning of year (rounded) $1.8815 $1.7836 $ 1.4975 $ 1.3020 $ 1.3791
End of year (rounded) $2.3269 $1.8815 $ 1.7836 $ 1.4975 $ 1.3020
Accumulation Units
Outstanding at end of year
(000 omitted) 37,297 37,576 33,505 24,439 21,739
GOVERNMENT INCOME 01/01/98 01/01/97 01/01/96 01/01/95 01/01/94
TO TO TO TO TO
12/31/98 12/31/97 12/31/96 12/31/95 12/31/94
-------- -------- -------- -------- --------
Beginning of year (rounded) $1.6267 $1.4943 $ 1.4730 $ 1.2421 $ 1.3196
End of year (rounded) $1.7614 $1.6267 $ 1.4943 $ 1.4730 $ 1.2421
Accumulation Units
Outstanding at end of year
(000 omitted) 20,924 17,033 17,697 17,289 16,140
</TABLE>
A-24
<PAGE> 135
Report of Independent Accountants
To the Contract Holders of
The Prudential Variable Contract Account-24
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 Equity
Subaccount, Prudential Series Fund Diversified Bond Subaccount, Prudential
Series Fund Flexible Managed Subaccount, Prudential Series Fund Conservative
Balanced Subaccount, Prudential Series Fund Stock Index Subaccount, Prudential
Series Fund Global Subaccount, and Prudential Series Fund Government Income
Subaccount (separate portfolios of The Prudential Variable Contract Account-24;
the "Account") at December 31, 1998, the results of each of their operations for
the year then ended and the changes in each of their net assets for each of the
two years in the period then ended, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Account's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
financial statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of fund shares owned at December 31, 1998 with the Prudential
Series Fund's transfer agent, provide a reasonable basis for the opinion
expressed above.
PricewaterhouseCoopers LLP
New York, New York
February 25, 1999
A-25
<PAGE> 136
THE PRUDENTIAL INSURANCE
COMPANY OF AMERICA
CONSOLIDATED FINANCIAL STATEMENTS AND
REPORT OF INDEPENDENT ACCOUNTANTS
DECEMBER 31, 1998 AND 1997
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Policyholders of
The Prudential Insurance Company of America
In our opinion, the accompanying consolidated statements of financial position
and the related consolidated statements of operations, of changes in equity and
of cash flows present fairly, in all material respects, the financial position
of The Prudential Insurance Company of America and its subsidiaries at December
31, 1998 and 1997, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 1998 in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
New York, New York
February 26, 1999
2
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
DECEMBER 31, 1998 AND 1997 (IN MILLIONS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
ASSETS
Fixed maturities:
Available for sale, at fair value (amortized cost, 1998: $76,997; 1997: $71,496) $ 80,158 $ 75,270
Held to maturity, at amortized cost (fair value, 1998: $17,906; 1997: $19,894) 16,848 18,700
Trading account assets, at fair value 8,888 6,347
Equity securities, available for sale, at fair value (cost, 1998: $2,583; 1997: $2,376) 2,759 2,810
Mortgage loans on real estate 16,495 16,004
Investment real estate 801 1,519
Policy loans 7,476 7,034
Securities purchased under agreements to resell 10,252 8,661
Cash collateral for borrowed securities 5,622 5,047
Other long-term investments 2,658 2,489
Short-term investments 9,781 12,106
--------- ---------
Total investments 161,738 155,987
Cash 1,943 1,859
Accrued investment income 1,795 1,909
Broker-dealer related receivables 10,142 8,442
Deferred policy acquisition costs 6,462 6,083
Other assets 15,721 11,452
Separate Account assets 81,621 73,839
--------- ---------
TOTAL ASSETS $ 279,422 $ 259,571
========= =========
LIABILITIES AND EQUITY
LIABILITIES
Future policy benefits $ 69,129 $ 67,367
Policyholders' account balances 30,974 33,246
Unpaid claims and claim adjustment expenses 3,860 4,864
Policyholders' dividends 1,444 1,269
Securities sold under agreements to repurchase 21,486 12,347
Cash collateral for loaned securities 7,132 14,117
Income taxes payable 785 500
Broker-dealer related payables 6,530 3,338
Securities sold but not yet purchased 5,771 3,648
Other liabilities 16,169 14,659
Short-term debt 10,082 6,774
Long-term debt 4,734 4,273
Separate Account liabilities 80,931 73,451
--------- ---------
Total liabilities 259,027 239,853
--------- ---------
COMMITMENTS AND CONTINGENCIES (SEE NOTE 16)
EQUITY
Accumulated other comprehensive income 1,232 1,661
Retained earnings 19,163 18,057
--------- ---------
Total equity 20,395 19,718
--------- ---------
TOTAL LIABILITIES AND EQUITY $ 279,422 $ 259,571
========= =========
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (IN MILLIONS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
REVENUES
Premiums $ 9,024 $ 9,005 $ 9,999
Policy charges and fee income 1,462 1,434 1,490
Net investment income 9,520 9,456 9,461
Realized investment gains, net 2,630 2,168 1,128
Commissions and other income 4,451 4,481 4,512
-------- -------- --------
Total revenues 27,087 26,544 26,590
-------- -------- --------
BENEFITS AND EXPENSES
Policyholders' benefits 9,976 10,076 11,094
Interest credited to policyholders' account balances 1,806 2,044 2,251
Dividends to policyholders 2,478 2,422 2,339
General and administrative expenses 9,720 8,992 8,956
Sales practices remedies 510 1,640 410
-------- -------- --------
Total benefits and expenses 24,490 25,174 25,050
-------- -------- --------
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES 2,597 1,370 1,540
-------- -------- --------
Income taxes
Current 1,185 101 556
Deferred (215) 306 (376)
-------- -------- --------
970 407 180
-------- -------- --------
INCOME FROM CONTINUING OPERATIONS 1,627 963 1,360
-------- -------- --------
DISCONTINUED OPERATIONS
Loss from Healthcare operations, net of taxes (298) (353) (282)
Loss on disposal of Healthcare operations, net of taxes (223) -- --
-------- -------- --------
Net loss from discontinued operations (521) (353) (282)
-------- -------- --------
NET INCOME $ 1,106 $ 610 $ 1,078
======== ======== ========
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (IN MILLIONS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ACCUMULATED OTHER COMPREHENSIVE INCOME
------------------------------------------------------
FOREIGN NET TOTAL
CURRENCY UNREALIZED PENSION ACCUMULATED OTHER
TRANSLATION INVESTMENT LIABILITY COMPREHENSIVE RETAINED TOTAL
ADJUSTMENTS GAINS ADJUSTMENT INCOME EARNINGS EQUITY
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1996 $ (24) $ 2,397 $ -- $ 2,373 $ 16,369 $ 18,742
Comprehensive income (loss):
Net income 1,078 1,078
Other comprehensive income (loss), net of tax:
Change in foreign currency translation
adjustments (32) (32) (32)
Change in net unrealized investment gains (1,261) (1,261) (1,261)
Additional pension liability adjustment (4) (4) (4)
--------
Other comprehensive income (loss) (1,297)
--------
Total comprehensive income (loss) (219)
-----------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1996 (56) 1,136 (4) 1,076 17,447 18,523
Comprehensive income:
Net income 610 610
Other comprehensive income (loss), net of tax:
Change in foreign currency translation
adjustments (29) (29) (29)
Change in net unrealized investment gains 616 616 616
Additional pension liability adjustment (2) (2) (2)
--------
Other comprehensive income 585
--------
Total comprehensive income 1,195
-----------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1997 (85) 1,752 (6) 1,661 18,057 19,718
Comprehensive income:
Net income 1,106 1,106
Other comprehensive income, net of tax:
Change in foreign currency translation
adjustments 54 54 54
Change in net unrealized investment gains (480) (480) (480)
Additional pension liability adjustment (3) (3) (3)
--------
Other comprehensive income (429)
--------
Total comprehensive income 677
-----------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1998 $ (31) $ 1,272 $ (9) $ 1,232 $ 19,163 $ 20,395
=============================================================================
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (IN MILLIONS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,106 $ 610 $ 1,078
Adjustments to reconcile net income to
net cash provided by operating activities:
Realized investment gains, net (2,660) (2,209) (1,138)
Policy charges and fee income (135) (258) (208)
Interest credited to policyholders' account balances 1,806 2,044 2,251
Depreciation and amortization 305 258 266
Loss (gain) on disposal of businesses 223 -- (116)
Change in:
Deferred policy acquisition costs (165) (142) (122)
Future policy benefits and other insurance liabilities 584 2,762 2,471
Securities purchased under agreements to resell (1,591) (3,314) (217)
Trading account assets (2,540) (1,825) (433)
Income taxes receivable/payable 594 (1,391) (937)
Cash collateral for borrowed securities (575) (2,631) (332)
Cash collateral for securities loaned (net) (6,985) 5,668 2,891
Broker-dealer related receivables/payables 1,495 (672) (607)
Securities sold but not yet purchased 2,122 1,633 251
Securities sold under agreements to repurchase 9,139 4,844 (490)
Other, net (5,168) 4,142 (1,334)
--------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES (2,445) 9,519 3,274
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from the sale/maturity of:
Fixed maturities, available for sale 123,151 123,550 123,368
Fixed maturities, held to maturity 4,466 4,042 4,268
Equity securities, available for sale 2,792 2,572 2,162
Mortgage loans on real estate 4,839 4,299 5,731
Investment real estate 1,364 1,842 615
Other long-term investments 1,848 5,081 3,203
Disposal of businesses -- -- 52
Payments for the purchase of:
Fixed maturities, available for sale (126,742) (129,854) (125,093)
Fixed maturities, held to maturity (2,244) (2,317) (2,844)
Equity securities, available for sale (2,547) (2,461) (2,384)
Mortgage loans on real estate (4,885) (3,363) (1,906)
Investment real estate (31) (241) (142)
Other long-term investments (1,415) (4,148) (2,060)
Short-term investments (net) 2,145 (2,848) (1,915)
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES 2,741 (3,846) 3,055
--------- --------- ---------
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (IN MILLIONS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Policyholders' account deposits 6,955 5,020 2,676
Policyholders' account withdrawals (11,111) (9,873) (8,099)
Net increase in short-term debt 2,422 305 583
Proceeds from the issuance of long-term debt 1,940 324 93
Repayments of long-term debt (418) (464) (1,306)
-------- -------- --------
CASH FLOWS USED IN FINANCING ACTIVITIES (212) (4,688) (6,053)
-------- -------- --------
NET INCREASE IN CASH 84 985 276
CASH, BEGINNING OF YEAR 1,859 874 598
-------- -------- --------
CASH, END OF YEAR $ 1,943 $ 1,859 $ 874
======== ======== ========
SUPPLEMENTAL CASH FLOW INFORMATION:
Income taxes paid $ 163 $ 968 $ 793
-------- -------- --------
Interest paid $ 864 $ 708 $ 595
-------- -------- --------
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. BUSINESS
The Prudential Insurance Company of America and its subsidiaries
(collectively, "the Company") provide financial services throughout the
United States and several locations worldwide. The Company's businesses
provide a full range of insurance, investment, securities brokerage and
other financial products and services to both retail consumers and
institutions. Principal products and services provided include life
insurance, property and casualty insurance, annuities, mutual funds,
pension and retirement related investments and administration, asset
management, and securities brokerage.
DEMUTUALIZATION
On February 10, 1998, the Company's Board of Directors authorized
management to take the preliminary steps necessary to allow the Company to
demutualize and become a publicly traded stock company. On July 1, 1998,
legislation was enacted in New Jersey that would permit this conversion to
occur and that specified the process for conversion. Demutualization is a
complex process involving development of a plan of reorganization, adoption
of a plan by the Company's Board of Directors, a public hearing, voting by
qualified voters and regulatory approval. There can be no assurance that
the Company will demutualize or, if it does so, when demutualization will
occur.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of The
Prudential Insurance Company of America, a mutual life insurance company,
and its consolidated subsidiaries, and those partnerships and joint
ventures in which the Company has a controlling interest. The consolidated
financial statements have been prepared in accordance with generally
accepted accounting principles ("GAAP"). All significant intercompany
balances and transactions have been eliminated.
USE OF ESTIMATES
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the period. Actual results could
differ from those estimates.
INVESTMENTS
FIXED MATURITIES classified as "available for sale" are carried at
estimated fair value. Fixed maturities that the Company has both the
positive intent and ability to hold to maturity are stated at amortized
cost and classified as "held to maturity." The amortized cost of fixed
maturities are written down to estimated fair value when a decline in value
is considered to be other than temporary. Unrealized gains and losses on
fixed maturities "available for sale," net of income tax, the effect on
deferred policy acquisition costs and participating annuity contracts that
would result from the realization of unrealized gains and losses, are
included in a separate component of equity, "Accumulated other
comprehensive income."
TRADING ACCOUNT ASSETS AND SECURITIES SOLD BUT NOT YET PURCHASED are
carried at estimated fair value. Realized and unrealized gains and losses
on trading account assets and securities sold but not yet purchased are
included in "Commissions and other income."
EQUITY SECURITIES, available for sale, are comprised of common and
non-redeemable preferred stock and are carried at estimated fair value. The
associated unrealized gains and losses, net of income tax, and the effects
on deferred policy acquisition costs and participating annuity contracts
that would result from the realization of unrealized gains and losses are
included in a separate component of equity, "Accumulated other
comprehensive income."
8
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
MORTGAGE LOANS ON REAL ESTATE are stated primarily at unpaid principal
balances, net of unamortized discounts and allowance for losses. The
allowance for losses is based upon a loan specific review and, for
performing loans collectively evaluated, a portfolio review. The loan
specific review includes consideration of expected future cash flows
relative to outstanding balances. The portfolio review includes
consideration of the composition of the loan portfolio, current economic
conditions, past results, current trends, the estimated aggregate value of
the underlying collateral, and other relevant environmental factors.
Impaired loans are identified by management as loans in which a probability
exists that all amounts due according to the contractual terms of the loan
agreement will not be collected. Impaired loans, identified in management's
specific review of probable loan losses, are measured based on the present
value of expected future cash flows discounted at the loan's effective
interest rate, or the fair value of the collateral if the loan is
collateral dependent.
Interest received on impaired loans, including loans that were previously
modified in a troubled debt restructuring, is either applied against the
principal or reported as revenue, according to management's judgment as to
the collectibility of principal. Management discontinues the accrual of
interest on impaired loans after the loans are 90 days delinquent as to
principal or interest, or earlier when management has serious doubts about
collectibility. When a loan is recognized as impaired, any accrued but
unpaid interest previously recorded on such loan is reversed against
interest income of the current period. Generally, a loan is restored to
accrual status only after all delinquent interest and principal are brought
current and, in the case of loans where interest has been interrupted for a
substantial period, a regular payment performance has been established.
INVESTMENT REAL ESTATE to be disposed of is carried at the lower of
depreciated cost or fair value less selling costs and is not depreciated
once classified as such. Real estate which the Company has the intent to
hold for the production of income, is carried at depreciated cost less any
write-downs to fair value for impairment losses and is reviewed for
impairment whenever events or circumstances indicate the carrying value may
not be recoverable. In reviewing recoverability, an impairment loss is
recognized for an other than temporary decline in value to the extent the
reduction in carrying values of investment real estate exceeds estimated
undiscounted future cash flows. Charges relating to real estate to be
disposed of and impairments of real estate held for investment are included
in "Realized investment gains, net." Depreciation on real estate is
computed using the straight-line method over the estimated lives of the
properties.
POLICY LOANS are carried at unpaid principal balances.
SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL AND SECURITIES SOLD UNDER
AGREEMENTS TO REPURCHASE are treated as financing arrangements and are
carried at the amounts at which the securities will be subsequently resold
or reacquired, including accrued interest, as specified in the respective
agreements. The Company's policy is to take possession of securities
purchased under agreements to resell. The market value of securities to be
repurchased or resold is monitored, and additional collateral is requested,
where appropriate, to protect against credit exposure.
SECURITIES BORROWED AND SECURITIES LOANED are treated as financing
arrangements and are recorded at the amount of cash advanced or received.
With respect to securities loaned, the Company obtains collateral in an
amount equal to 102% and 105% of the fair value of the domestic and foreign
securities, respectively. The Company monitors the market value of
securities borrowed and loaned on a daily basis with additional collateral
obtained as necessary. Non-cash collateral received is not reflected in the
consolidated statements of financial position because the debtor typically
has the right to redeem the collateral on short notice. Substantially all
of the Company's securities borrowed contracts are with other brokers and
dealers, commercial banks and institutional clients. Substantially all of
the Company's securities loaned are with large brokerage firms.
9
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Securities repurchase and resale agreements and securities borrowed and
loaned transactions are used to generate net investment income and
facilitate trading activity. These instruments are short-term in nature
(usually 30 days or less) and are collateralized principally by U.S.
Government and mortgage-backed securities. The carrying amounts of these
instruments approximate fair value because of the relatively short period
of time between the origination of the instruments and their expected
realization.
OTHER LONG-TERM INVESTMENTS primarily represent the Company's investments
in joint ventures and partnerships in which the Company does not have
control and derivatives held for purposes other than trading. Joint venture
and partnership investments are recorded using the equity method of
accounting, reduced for other than temporary declines in value.
SHORT-TERM INVESTMENTS, including highly liquid debt instruments purchased
with an original maturity of twelve months or less, are carried at
amortized cost, which approximates fair value.
REALIZED INVESTMENT GAINS, NET are computed using the specific
identification method. Costs of fixed maturities and equity securities are
adjusted for impairments considered to be other than temporary. Allowances
for losses on mortgage loans on real estate are netted against asset
categories to which they apply and provisions for losses on investments are
included in "Realized investment gains, net." Decreases in the lower of
depreciated cost or fair value less selling costs of investment real estate
held for sale are recorded in "Realized investment gains, net."
CASH
Cash includes cash on hand, amounts due from banks, and money market
instruments.
DEFERRED POLICY ACQUISITION COSTS
The costs which vary with and that are related primarily to the production
of new insurance business are deferred to the extent such costs are deemed
recoverable from future profits. Such costs include certain commissions,
costs of policy issuance and underwriting, and certain variable field
office expenses. Deferred policy acquisition costs are subject to
recoverability testing at the time of policy issue and loss recognition
testing at the end of each accounting period. Deferred policy acquisition
costs, for certain products, are adjusted for the impact of unrealized
gains or losses on investments as if these gains or losses had been
realized, with corresponding credits or charges included in "Accumulated
other comprehensive income."
For participating life insurance, deferred policy acquisition costs are
amortized over the expected life of the contracts (up to 45 years) in
proportion to estimated gross margins based on historical and anticipated
future experience, which is updated periodically. The effect of changes in
estimated gross margins is reflected in earnings in the period they are
revised. Policy acquisition costs related to interest-sensitive products
and certain investment-type products are deferred and amortized over the
expected life of the contracts (periods ranging from 15 to 30 years) in
proportion to estimated gross profits arising principally from investment
results, mortality and expense margins and surrender charges based on
historical and anticipated future experience, updated periodically. The
effect of revisions to estimated gross profits on unamortized deferred
acquisition costs is reflected in earnings in the period such estimated
gross profits are revised. The average rate of assumed investment yield in
estimating expected gross margins was 9.97%, 9.39%, and 8.39% for 1998,
1997 and 1996, respectively. Deferred policy acquisition costs related to
non-participatory term insurance are amortized over the expected life of
the contracts in proportion to the premium income.
For property and casualty contracts, deferred policy acquisition costs are
amortized over the period in which related premiums are earned. Future
investment income is considered in determining the recoverability of
deferred policy acquisition costs.
10
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
For disability insurance, group life insurance and most group annuities,
acquisition costs are expensed as incurred.
POLICYHOLDERS' DIVIDENDS
The amount of the dividends to be paid to policyholders is determined
annually by the Company's Board of Directors. The aggregate amount of
policyholders' dividends is related to actual interest, mortality,
morbidity, persistency and expense experience for the year and judgment as
to the appropriate level of statutory surplus to be retained by the
Company.
SEPARATE ACCOUNT ASSETS AND LIABILITIES
Separate Account assets and liabilities are reported at estimated fair
value and represent segregated funds which are invested for certain
policyholders, pension fund and other customers. The assets consist of
common stocks, fixed maturities, real estate related securities, real
estate mortgage loans and short term investments. The assets of each
account are legally segregated and are not subject to claims that arise out
of any other business of the Company. Investment risks associated with
market value changes are generally borne by the customers, except to the
extent of minimum guarantees made by the Company with respect to certain
accounts. The investment income and gains or losses for separate accounts
generally accrue to the policyholders and are not included in the
Consolidated Statements of Operations. Mortality, policy administration and
surrender charges on the accounts are included in "Policy charges and fee
income."
OTHER ASSETS AND OTHER LIABILITIES
Other assets consist primarily of prepaid benefit costs, reinsurance
recoverables, certain restricted assets, trade receivables and property and
equipment. Property and equipment are stated at cost less accumulated
depreciation. Depreciation is determined using the straight-line method
over the estimated useful lives of the related assets which generally range
from 3 to 40 years. Other liabilities consist primarily of trade payables
and reserves for sales practice remediation costs.
INSURANCE REVENUE AND EXPENSE RECOGNITION
Premiums from participating insurance policies are recognized when due.
Benefits are recorded as an expense when they are incurred. A liability for
future policy benefits is recorded using the net level premium method.
Premiums from non-participating group annuities with life contingencies are
recognized when due. For single premium immediate annuities and structured
settlements, premiums are recognized when due with any excess profit
deferred and recognized in a constant relationship to insurance in-force
or, for annuities, the amount of expected future benefit payments.
Amounts received as payment for interest sensitive investment contracts,
deferred annuities and participating group annuities are reported as
deposits to "Policyholders' account balances." Revenues from these
contracts are reflected in "Policy charges and fee income" and consist
primarily of fees assessed during the period against the policyholders'
account balances for mortality charges, policy administration charges,
surrender charges and interest earned from the investment of these account
balances. Benefits and expenses for these products include claims in excess
of related account balances, expenses of contract administration, interest
credited and amortization of deferred policy acquisition costs.
For disability insurance, group life insurance, and property and casualty
insurance, premiums are recognized over the period to which the premiums
relate in proportion to the amount of insurance protection provided. Claim
and claim adjustment expenses are recognized when incurred.
11
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Premiums, benefits and expenses are stated net of reinsurance ceded to
other companies. Estimated reinsurance receivables and the cost of
reinsurance are recognized over the life of the reinsured policies using
assumptions consistent with those used to account for the underlying
policies.
FOREIGN CURRENCY TRANSLATION ADJUSTMENTS
Assets and liabilities of foreign operations and subsidiaries reported in
other than U.S. dollars are translated at the exchange rate in effect at
the end of the period. Revenues, benefits and other expenses are translated
at the average rate prevailing during the period. The effects of
translating the Statements of Financial Position of non-U.S. entities with
functional currencies other than the U.S. dollar are recorded, net of
related hedge gains and losses and income taxes, as "Other comprehensive
income," a separate component of equity.
COMMISSIONS AND OTHER INCOME
Commissions and other income principally includes securities and
commodities commission revenues, asset management fees, investment banking
revenue and realized and unrealized gains from trading activities of the
Company's broker-dealer subsidiary.
DERIVATIVE FINANCIAL INSTRUMENTS
Derivatives are financial instruments whose values are derived from
interest rates, foreign exchange rates, various financial indices, or the
value of securities or commodities. Derivative financial instruments can be
exchange-traded or contracted in the over-the-counter market and those used
by the Company include swaps, futures, forwards and options contracts. The
Company uses derivative financial instruments to hedge market risk from
changes in interest rates or foreign currency exchange rates, and to alter
interest rate or currency exposures arising from mismatches between assets
and liabilities. Additionally, derivatives are used in the broker-dealer
business and in a limited-purpose subsidiary for trading purposes.
To qualify as a hedge, derivatives must be designated as hedges for
existing assets, liabilities, firm commitments, or anticipated transactions
which are identified and probable to occur, and effective in reducing the
market risk to which the Company is exposed. The effectiveness of the
derivatives are evaluated at the inception of the hedge and throughout the
hedge period.
DERIVATIVES HELD FOR TRADING PURPOSES are used in the Company's securities
broker-dealer business and in a limited-purpose subsidiary to meet the
needs of its customers by structuring transactions that allow customers to
manage their exposure to interest rates, foreign exchange rates, indices or
prices of securities and commodities. Trading derivative positions are
valued daily, generally by obtaining quoted market prices or through the
use of pricing models. Values are affected by changes in interest rates,
currency exchange rates, credit spreads, market volatility and liquidity.
The Company monitors these exposures through the use of various analytical
techniques.
Derivatives held for trading are recorded at fair value in "Trading account
assets," "Other liabilities" or "Receivables from/Payables to broker-dealer
clients" in the Consolidated Statements of Financial Position, and realized
and unrealized changes in fair value are included in "Commissions and other
income" of the Consolidated Statements of Operations in the periods in
which the changes occur. Cash flows from trading derivatives are reported
in the operating activities section of the Consolidated Statements of Cash
Flows.
DERIVATIVES HELD FOR PURPOSES OTHER THAN TRADING are primarily used to
hedge or reduce exposure to interest rate and foreign currency risks
associated with assets held or expected to be purchased or sold, and
liabilities incurred or expected to be incurred. Additionally, other than
trading derivatives are used to change the characteristics of the Company's
asset/liability mix consistent with the Company's risk management
activities.
12
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
See Note 14 for a discussion of the accounting treatment of derivatives
that qualify as hedges. If the Company's use of other than trading
derivatives does not meet the criteria to apply hedge accounting, the
derivatives are recorded at fair value in "Other long-term investments" or
"Other liabilities" in the Consolidated Statements of Financial Position,
and changes in their fair value are recognized in earnings in "Realized
investment gains, net" without considering changes in the hedged assets or
liabilities. Cash flows from other than trading derivative assets and
liabilities are reported in the investing activities section in the
Consolidated Statements of Cash Flows.
INCOME TAXES
The Company and its domestic subsidiaries file a consolidated federal
income tax return. The Internal Revenue Code (the "Code") limits the amount
of non-life insurance losses that may offset life insurance company taxable
income. The Code also imposes an "equity tax" on mutual life insurance
companies which, in effect, imputes an additional tax to the Company based
on a formula that calculates the difference between stock and mutual life
insurance companies' earnings. Income taxes include an estimate for changes
in the total equity tax to be paid for current and prior years.
Subsidiaries operating outside the United States are taxed under applicable
foreign statutes.
Deferred income taxes are generally recognized, based on enacted rates,
when assets and liabilities have different values for financial statement
and tax reporting purposes. A valuation allowance is recorded to reduce a
deferred tax asset to that portion that is expected to be realized.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1996, the Financial Accounting Standards Board ("FASB") issued the
Statement of Financial Accounting Standards ("SFAS") No. 125, "Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities" ("SFAS 125"). The statement provides accounting and reporting
standards for transfers and servicing of financial assets and
extinguishments of liabilities and provides consistent standards for
distinguishing transfers of financial assets that are sales from transfers
that are secured borrowings. SFAS 125 became effective January 1, 1997 and
was applied prospectively. Subsequent to June 1996, FASB issued SFAS No.
127, "Deferral of the Effective Date of Certain Provisions of SFAS 125"
("SFAS 127"). SFAS 127 delayed the implementation of SFAS 125 for one year
for certain provisions, including repurchase agreements, dollar rolls,
securities lending and similar transactions. The Company adopted the
delayed provisions of SFAS 125 in 1998. The adoption of SFAS 125 did not
have a material impact on the Company's results of operations or financial
position.
During 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive
Income," which was issued by the FASB in June 1997. This statement defines
comprehensive income and establishes standards for reporting and displaying
comprehensive income and its components in financial statements. The
statement requires that the Company classify items of other comprehensive
income by their nature and display the accumulated balance of other
comprehensive income separately from retained earnings in the equity
section of the Statements of Financial Position. Application of this
statement did not change recognition or measurement of net income and,
therefore, did not affect the Company's financial position or results of
operations.
During 1998, the Company adopted SFAS No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits," which was issued by the
FASB in February 1998. This statement standardizes the disclosure
requirements for pensions and other postretirement benefits, requires
additional information on changes in the benefit obligations and fair
values of plan assets and eliminates certain disclosures. This statement is
limited to changes in reporting and presentation and does not change
recognition or measurement of pension or other postretirement benefit
plans. Therefore, its adoption did not affect the Company's financial
position or results of operations.
13
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
On January 1, 1998, the Company adopted the American Institute of Certified
Public Accountants ("AICPA") Statement of Position 97-3, "Accounting by
Insurance and Other Enterprises for Insurance-Related Assessments" ("SOP
97-3"). This statement provides guidance for determining when an insurance
company or other enterprise should recognize a liability for guaranty-fund
assessments as well as guidance for measuring the liability. The adoption
of SOP 97-3 did not have a material effect on the Company's financial
condition or results of operations. In June 1998, the FASB issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities" which
requires that companies recognize all derivatives as either assets or
liabilities in the balance sheet and measure those instruments at fair
value. SFAS No. 133 provides, if certain conditions are met, that a
derivative may be specifically designated as (1) a hedge of the exposure to
changes in the fair value of a recognized asset or liability or an
unrecognized firm commitment (fair value hedge), (2) a hedge of the
exposure to variable cash flows of a forecasted transaction (cash flow
hedge), or (3) a hedge of the foreign currency exposure of a net investment
in a foreign operation, an unrecognized firm commitment, an
available-for-sale security or a foreign-currency-denominated forecasted
transaction (foreign currency hedge).
SFAS No. 133 does not apply to most traditional insurance contracts.
However, certain hybrid contracts that contain features which can affect
settlement amounts similarly to derivatives may require separate accounting
for the "host contract" and the underlying "embedded derivative"
provisions. The latter provisions would be accounted for as derivatives as
specified by the statement.
Under SFAS No. 133, the accounting for changes in fair value of a
derivative depends on its intended use and designation. For a fair value
hedge, the gain or loss is recognized in earnings in the period of change
together with the offsetting loss or gain on the hedged item. For a cash
flow hedge, the effective portion of the derivative's gain or loss is
initially reported as a component of other comprehensive income and
subsequently reclassified into earnings when the forecasted transaction
affects earnings. For a foreign currency hedge, the gain or loss is
reported in other comprehensive income as part of the foreign currency
translation adjustment. For all other derivatives not designated as hedging
instruments, the gain or loss is recognized in earnings in the period of
change. The Company is required to adopt this Statement no later than
January 1, 2000 and is currently assessing the effect of the new standard.
In October 1998, the AICPA issued Statement of Position 98-7, "Deposit
Accounting: Accounting for Insurance and Reinsurance Contracts That Do Not
Transfer Insurance Risk," ("SOP 98-7"). This statement provides guidance on
how to account for insurance and reinsurance contracts that do not transfer
insurance risk. SOP 98-7 is effective for fiscal years beginning after June
15, 1999. The adoption of this statement is not expected to have a material
effect on the Company's financial position or results of operations.
RECLASSIFICATIONS
Certain amounts in prior years have been reclassified to conform to current
year presentation.
14
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
3. DISCONTINUED OPERATIONS
In December 1998, the Company entered into a definitive agreement to sell
its HealthCare business to Aetna Inc. ("Aetna"). Included in this
transaction are the Company's managed medical care, point of service,
preferred provider organization and indemnity health lines, dental
business, as well as the Company's Administrative Services Only ("ASO")
businesses. The transaction was approved by the boards of directors of both
companies and is expected to be completed in the second quarter of 1999,
subject to review by federal antitrust authorities and approval by state
regulators, and other customary closing conditions. Proceeds from the sale
will consist of $500 million of cash and $500 million of Aetna three year
senior notes.
Loss from operations of discontinued businesses for 1998 includes results
through December 31, 1998 (the measurement date). The Statements of
Operations for 1997 and 1996 have been restated to conform with the 1998
presentation. Amounts within the footnotes have been adjusted, where noted,
to eliminate the impact of discontinued operations and to be consistent
with the presentation in the Consolidated Statements of Operations. The
following table presents the results of operations and the loss on the
disposal of the Company's HealthCare business, determined as of the
measurement date, which are included in "Discontinued Operations" in the
Consolidated Statements of Operations. Amounts for 1997 and 1996 include
revenues and expenses relating to a contract with the American Association
of Retired Persons for healthcare and similar coverages which was
terminated effective December 31, 1997.
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
(In Millions)
<S> <C> <C> <C>
Revenues $ 7,461 $ 10,305 $ 9,187
Policyholder benefits (6,064) (8,484) (7,711)
General and administrative expenses (1,822) (2,364) (1,921)
--------- --------- ---------
Loss before income taxes (425) (543) (445)
Income tax benefit 127 190 163
--------- --------- ---------
Loss from operations (298) (353) (282)
Loss on disposal, net of tax benefit of $131 (223) - -
--------- --------- ---------
Loss from discontinued operations, net of taxes $ (521) $ (353) $ (282)
========= ========= =========
</TABLE>
The loss on disposal includes anticipated operating losses to be incurred
by the HealthCare business subsequent to the measurement date through the
expected date of the sale, as well as estimates of other costs the Company
will incur in connection with the disposition of the HealthCare business.
Actual amounts may differ from these estimates. These include costs
attributable to facilities closure and systems terminations, severance,
payments to Aetna related to the ASO business, and estimated payments in
connection with an agreement covering the fully insured medical and dental
business. The latter agreement provides for payments either to or from
Aetna in the event that medical loss ratios (i.e., incurred medical expense
divided by earned premiums) for covered businesses are either less
favorable or more favorable than levels specified in the agreement for the
years 1999 and 2000. The loss on disposition was reduced by the estimated
impact of expected modifications of certain pension and other
postretirement benefit plans in which employees of the HealthCare business
participate. This amount includes curtailment gains and the cost of
termination benefits. (See Note 9.)
15
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
3. DISCONTINUED OPERATIONS (CONTINUED)
The following table presents the assets and liabilities pertaining to the
Company's HealthCare business at December 31, 1998 which are included in
the Company's Consolidated Statements of Financial Position.
(In Millions)
Cash and investments $ 1,652
Other assets 1,030
-------
Total assets 2,682
Future policy benefits 1,241
Other liabilities 1,105
-------
Total liabilities 2,346
-------
Net assets $ 336
=======
4. INVESTMENTS
FIXED MATURITIES AND EQUITY SECURITIES
The following tables provide additional information relating to fixed
maturities and equity securities (excluding trading account assets) as of
December 31:
<TABLE>
<CAPTION>
1998
-------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
---------- ---------- ---------- ----------
(In Millions)
<S> <C> <C> <C> <C>
FIXED MATURITIES AVAILABLE FOR SALE
U.S. Treasury securities and obligations of
U.S. government corporations and agencies $ 5,761 $ 580 $ 9 $ 6,332
Obligations of U.S. states and
their political subdivisions 2,672 204 1 2,875
Foreign government bonds 3,156 253 52 3,357
Corporate securities 57,373 2,545 553 59,365
Mortgage-backed securities 7,935 208 14 8,129
Other fixed maturities 100 - - 100
-----------------------------------------------------------
Total fixed maturities available for sale $ 76,997 $ 3,790 $ 629 $ 80,158
===========================================================
EQUITY SECURITIES AVAILABLE FOR SALE $ 2,583 $ 472 $ 296 $ 2,759
===========================================================
</TABLE>
16
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
4. INVESTMENTS (CONTINUED)
<TABLE>
<CAPTION>
1998
------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
FIXED MATURITIES HELD TO MATURITY (In Millions)
U.S. Treasury securities and obligations of
U.S. government corporations and agencies $ 5 $ - $ - $ 5
Obligations of U.S. states and
their political subdivisions 62 2 1 63
Foreign government bonds 31 4 - 35
Corporate securities 16,699 1,096 49 17,746
Mortgage-backed securities 1 - - 1
Other fixed maturities 50 6 - 56
------------------------------------------------------------
Total fixed maturities held to maturity $ 16,848 $ 1,108 $ 50 $ 17,906
============================================================
<CAPTION>
1997
-------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
--------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
FIXED MATURITIES AVAILABLE FOR SALE (In Millions)
U.S. Treasury securities and obligations of
U.S. government corporations and agencies $ 9,071 $ 671 $ - $ 9,742
Obligations of U.S. states and
their political subdivisions 1,529 152 - 1,681
Foreign government bonds 3,177 218 17 3,378
Corporate securities 50,043 2,611 144 52,510
Mortgage-backed securities 7,576 288 5 7,859
Other fixed maturities 100 - - 100
-----------------------------------------------------------
Total fixed maturities available for sale $ 71,496 $ 3,940 $ 166 $ 75,270
===========================================================
EQUITY SECURITIES AVAILABLE FOR SALE $ 2,376 $ 680 $ 246 $ 2,810
===========================================================
</TABLE>
17
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
4. INVESTMENTS (CONTINUED)
<TABLE>
<CAPTION>
1997
---------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
----------- ---------- ----------- ----------
(In Millions)
<S> <C> <C> <C> <C>
FIXED MATURITIES HELD TO MATURITY
U.S. Treasury securities and obligations of
U.S. government corporations and agencies $ 88 $ - $ - $ 88
Obligations of U.S. states and
their political subdivisions 152 4 1 155
Foreign government bonds 33 5 - 38
Corporate securities 18,282 1,212 34 19,460
Mortgage-backed securities 1 - - 1
Other fixed maturities 144 8 - 152
------------------------------------------------------------
Total fixed maturities held to maturity $ 18,700 $ 1,229 $ 35 $ 19,894
============================================================
</TABLE>
18
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
4. INVESTMENTS (CONTINUED)
The amortized cost and estimated fair value of fixed maturities by
contractual maturities at December 31, 1998, is shown below:
<TABLE>
<CAPTION>
AVAILABLE FOR SALE HELD TO MATURITY
---------------------------- -----------------------
ESTIMATED ESTIMATED
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
------------ -------------- ----------- ----------
(In Millions) (In Millions)
<S> <C> <C> <C> <C>
Due in one year or less $ 2,638 $ 2,644 $ 730 $ 736
Due after one year through five years 17,551 17,874 4,326 4,465
Due after five years through ten years 19,523 19,976 6,783 7,162
Due after ten years 29,350 31,535 5,008 5,542
Mortgage-backed securities 7,935 8,129 1 1
--------- ---------- -------- --------
Total $ 76,997 $ 80,158 $ 16,848 $ 17,906
========= ========== ======== ========
</TABLE>
Actual maturities may differ from contractual maturities because issuers
may have the right to call or prepay obligations.
Proceeds from the repayment of held to maturity fixed maturities during
1998, 1997 and 1996 were $4,466 million, $4,042 million and $4,268 million,
respectively. Gross gains of $135 million, $62 million and $78 million, and
gross losses of $2 million, $1 million and $7 million, were realized on
prepayment of held to maturity fixed maturities during 1998, 1997 and 1996,
respectively.
Proceeds from the sale of available for sale fixed maturities during 1998,
1997 and 1996 were $119,096 million, $120,604 million and $121,910 million,
respectively. Proceeds from the maturity of available for sale fixed
maturities during 1998, 1997 and 1996 were $ 4,055 million, $2,946 million
and $1,458 million, respectively. Gross gains of $1,765 million, $1,310
million and $1,562 million and gross losses of $443 million, $639 million
and $1,026 million were realized on sales and prepayments of available for
sale fixed maturities during 1998, 1997 and 1996, respectively.
Writedowns for impairments of fixed maturities which were deemed to be
other than temporary were $96 million, $13 million and $54 million for the
years 1998, 1997 and 1996, respectively.
During the years ended December 31, 1998 and December 31, 1997, certain
securities classified as held to maturity were transferred to the available
for sale portfolio. These actions were taken as a result of a significant
deterioration in credit worthiness. The aggregate amortized cost of the
securities transferred was $73 million and $27 million, respectively with
gross unrealized investment losses of $.4 million and gross unrealized
investment gains of $.6 million included during the years ended December
31, 1998 and 1997, respectively, in "Accumulated other comprehensive
income" at the time of the transfer.
19
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
4. INVESTMENTS (CONTINUED)
MORTGAGE LOANS ON REAL ESTATE
The Company's mortgage loans were collateralized by the following property
types at December 31:
AMOUNT PERCENTAGE AMOUNT PERCENTAGE
(IN MILLIONS) OF TOTAL (IN MILLIONS) OF TOTAL
------------- ---------- ------------- ----------
1998 1997
------------------------ -------------------------
Office buildings $ 4,267 25.2% $ 4,692 28.5%
Retail stores 3,021 17.9% 3,078 18.7%
Residential properties 716 4.2% 891 5.4%
Apartment complexes 4,362 25.8% 3,551 21.6%
Industrial buildings 1,989 11.8% 1,958 11.9%
Agricultural properties 1,936 11.4% 1,666 10.1%
Other 631 3.7% 618 3.8%
-------- ----- -------- -----
Subtotal 16,922 100.0% 16,454 100.0%
===== =====
Allowance for losses (427) (450)
-------- --------
Net carrying value $ 16,495 $ 16,004
======== ========
The mortgage loans are geographically dispersed throughout the United
States and Canada with the largest concentrations in California (23.8%)
and New York (9.5%) at December 31, 1998. Included in the above balances
are mortgage loans receivable from affiliated joint ventures of $87 million
and $225 million at December 31, 1998 and 1997, respectively.
Activity in the allowance for losses for all mortgage loans, for the years
ended December 31, is summarized as follows:
1998 1997 1996
----- ----- -----
(In Millions)
Allowance for losses, beginning of year $ 450 $ 515 $ 862
Additions charged to operations - - -
Release of allowance for losses - (41) (247)
Charge-offs, net of recoveries (23) (24) (100)
----- ----- -----
Allowance for losses, end of year $ 427 $ 450 $ 515
===== ===== =====
The $41 million and $247 million reductions of the mortgage loan allowance
for losses in 1997 and 1996, respectively, are primarily attributable to
the improved economic climate, changes in the nature and mix of borrowers
and underlying collateral and a significant decrease in impaired loans.
20
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
4. INVESTMENTS (CONTINUED)
Impaired mortgage loans identified in management's specific review of
probable loan losses and related allowance for losses at December 31, are
as follows:
1998 1997
------- -------
(In Millions)
Impaired mortgage loans with allowance for losses $ 149 $ 330
Impaired mortgage loans with no allowance for losses 924 1,303
Allowance for losses (45) (97)
------- -------
Net carrying value of impaired mortgage loans $ 1,028 $ 1,536
======= =======
Impaired mortgage loans with no provision for losses are loans where the
fair value of the collateral or the net present value of the expected
future cash flows related to the loan equals or exceeds the recorded
investment. The average recorded investment in impaired loans before
allowance for losses was $1,329 million, $2,102 million and $2,842 million
during 1998, 1997 and 1996, respectively. Net investment income recognized
on these loans totaled $94 million, $140 million and $265 million for the
years ended December 31, 1998, 1997 and 1996, respectively.
INVESTMENT REAL ESTATE
The Company's "Investment real estate" of $801 million and $1,519 million
at December 31, 1998 and 1997, respectively, is held through direct
ownership. Of the Company's real estate, $675 million and $1,490 million
consists of commercial and agricultural assets held for disposal at
December 31, 1998 and 1997, respectively. Impairment losses aggregated $8
million, $40 million and $38 million for the years ended December 31, 1998,
1997 and 1996, respectively, and are included in "Realized investment
gains, net."
RESTRICTED ASSETS AND SPECIAL DEPOSITS
Assets of $3,135 million and $2,783 million at December 31, 1998 and 1997,
respectively, were on deposit with governmental authorities or trustees as
required by certain insurance laws. Additionally, assets valued at $3,727
million and $2,352 million at December 31, 1998 and 1997, respectively,
were held in voluntary trusts. Of this amount, $3,131 million and $1,801
million at December 31, 1998 and 1997, respectively, related to the
multi-state policyholder settlement as described in Note 16. The remainder
relates to trusts established to fund guaranteed dividends to certain
policyholders. The terms of these trusts provide that the assets are to be
used for payment of the designated settlement and dividend benefits, as the
case may be. Assets valued at $403 million and $632 million at December 31,
1998 and 1997, respectively, were maintained as compensating balances,
which do not legally restrict the use of the funds, or pledged as
collateral for bank loans and other financing agreements. Restricted cash
and securities of $2,366 million and $1,835 million at December 31, 1998
and 1997, respectively, were included in the consolidated financial
statements in "Other assets." The restricted cash represents funds
deposited by clients and funds accruing to clients as a result of trades or
contracts.
OTHER LONG-TERM INVESTMENTS
The Company's "Other long-term investments" of $2,658 million and $2,489
million as of December 31, 1998 and 1997, respectively, are comprised of
$1,007 million and $1,498 million in real estate related interests and
$1,651 million and $991 million of non-real estate related interests. The
Company's share of net income from such entities was $285 million, $411
million and $245 million for 1998, 1997 and 1996, respectively, and is
reported in "Net investment income."
21
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
4. INVESTMENTS (CONTINUED)
INVESTMENT INCOME AND INVESTMENT GAINS AND LOSSES
NET INVESTMENT INCOME arose from the following sources for the years ended
December 31:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
(In Millions)
<S> <C> <C> <C>
Fixed maturities - available for sale $ 5,366 $ 5,074 $ 4,871
Fixed maturities - held to maturity 1,406 1,622 1,793
Trading account assets 677 504 444
Equity securities - available for sale 54 52 81
Mortgage loans on real estate 1,525 1,555 1,690
Investment real estate 230 565 685
Policy loans 410 396 384
Securities purchased under agreements to resell 18 15 11
Receivables from broker-dealer clients 836 706 579
Short-term investments 725 697 702
Other investment income 415 520 559
-------- -------- --------
Gross investment income 11,662 11,706 11,799
Less investment expenses (2,035) (2,038) (2,130)
-------- -------- --------
Subtotal 9,627 9,668 9,669
Less amount relating to discontinued operations (107) (212) (208)
-------- -------- --------
Net investment income $ 9,520 $ 9,456 $ 9,461
======== ======== ========
</TABLE>
REALIZED INVESTMENT GAINS, NET, for the years ended December 31, were from
the following sources:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
(In Millions)
<S> <C> <C> <C>
Fixed maturities $ 1,381 $ 684 $ 513
Mortgage loans on real estate 22 68 248
Investment real estate 642 700 76
Equity securities - available for sale 427 363 267
Other 188 394 34
-------- -------- --------
Subtotal 2,660 2,209 1,138
Less amounts related to discontinued operations (30) (41) (10)
-------- -------- --------
Realized investment gains, net $ 2,630 $ 2,168 $ 1,128
======== ======== ========
</TABLE>
Based on the carrying value, assets categorized as "non-income producing"
for the year ended December 31, 1998 included in fixed maturities available
for sale, mortgage loans on real estate and other long term investments
totaled $1 million, $23 million and $13 million, respectively.
22
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
4. INVESTMENTS (CONTINUED)
NET UNREALIZED INVESTMENT GAINS
Net unrealized investment gains on securities available for sale are
included in the Consolidated Statements of Financial Position as a
component of "Accumulated other comprehensive income." Changes in these
amounts include reclassification adjustments to avoid double-counting in
"Comprehensive income," items that are included as part of "Net income" for
a period that also had been part of "Other comprehensive income" in earlier
periods. The amounts for the years ended December 31, are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
(In Millions)
<S> <C> <C> <C>
Net unrealized investment gains, beginning of year $ 1,752 $ 1,136 $ 2,397
Changes in net unrealized investment gains attributable to:
Investments:
Net unrealized investment gains (losses) on investments arising
during the period 522 1,706 (1,281)
Reclassification adjustment for gains included in net income (1,087) (631) (471)
------- ------- -------
Change in net unrealized investment gains, net of adjustments (565) 1,075 (1,752)
Impact of net unrealized investment gains on:
Future policy benefits 23 (360) 318
Deferred policy acquisition costs 62 (99) 173
------- ------- -------
Change in net unrealized investment gains (480) 616 (1,261)
------- ------- -------
Net unrealized investment gains, end of year $ 1,272 $ 1,752 $ 1,136
======= ======= =======
</TABLE>
Unrealized gains (losses) on investments arising during the periods
reported in the above table are net of income tax expense (benefit) of $282
million, $961 million and $(647) million for the years ended December 31,
1998, 1997 and 1996, respectively.
Reclassification adjustments reported in the above table for the years
ended December 31, 1998, 1997 and 1996 are net of income tax expense of
$588 million, $355 million and $238 million, respectively.
The future policy benefits reported in the above table are net of income
tax expense (benefit) of $15 million, $(203) million and $161 million for
the years ended December 31, 1998, 1997 and 1996, respectively.
Deferred policy acquisition costs in the above tables for the years ended
December 31, 1998, 1997 and 1996 are net of income tax expense (benefit) of
$36 million, $(55) million and $88 million, respectively.
23
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
5. DEFERRED POLICY ACQUISITION COSTS
The balances of and changes in deferred policy acquisition costs as of and
for the years ended December 31, are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
(In Millions)
<S> <C> <C> <C>
Balance, beginning of year $ 6,083 $ 6,095 $ 5,892
Capitalization of commissions, sales and issue expenses 1,313 1,409 1,260
Amortization (1,139) (1,176) (1,261)
Change in unrealized investment gains 77 (154) 261
Foreign currency translation 128 (91) (57)
------- ------- -------
Balance, end of year $ 6,462 $ 6,083 $ 6,095
======= ======= =======
</TABLE>
6. POLICYHOLDERS' LIABILITIES
FUTURE POLICY BENEFITS at December 31, are as follows:
1998 1997
------- -------
(In Millions)
Life insurance $48,927 $46,765
Annuities 15,360 15,469
Other contract liabilities 4,842 5,133
------- -------
Future policy benefits $69,129 $67,367
======= =======
Life insurance liabilities include reserves for death and endowment policy
benefits, terminal dividends, premium deficiency reserves, and certain
health benefits. Annuity liabilities include reserves for immediate
annuities and non-participating group annuities. Other contract liabilities
primarily consist of unearned premium and benefit reserves for group health
products.
24
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
6. POLICYHOLDERS' LIABILITIES (CONTINUED)
The following table highlights the key assumptions generally utilized in
calculating these reserves:
<TABLE>
<CAPTION>
PRODUCT MORTALITY INTEREST RATE ESTIMATION METHOD
- --------------------------- ------------------------- ------------------------- ------------------------
<S> <C> <C> <C>
Life insurance Generally rates 2.5% to 7.5% Net level premium
guaranteed in calculating based on non-forfeiture
cash surrender values interest rate
Individual immediate 1983 Individual 3.5% to 11.25% Present value of
annuities Annuity Mortality expected future payments
Table with certain based on historical
modifications experience
Group annuities in 1950 Group 3.75% to 17.35% Present value of
payout status Annuity Mortality expected future
Table with certain payments
modifications based on historical
experience
Other contract liabilities - 5.3% to 7.0% Present value of
expected future
payments
based on historical
experience
</TABLE>
For the above categories, premium deficiency reserves are established, if
necessary, when the liability for future policy benefits plus the present
value of expected future gross premiums are insufficient to provide for
expected future policy benefits and expenses and to recover any unamortized
acquisition costs. A premium deficiency reserve has been recorded for the
group single premium annuity business, which consists of limited-payment,
long duration, traditional and non-participating annuities. A liability of
$1,780 million and $1,645 million is included in "Future policy benefits"
with respect to this deficiency for the years ended December 31, 1998 and
1997, respectively.
POLICYHOLDERS' ACCOUNT BALANCES at December 31, are as follows:
<TABLE>
<CAPTION>
1998 1997
-------- --------
(In Millions)
<S> <C> <C>
Individual annuities $ 4,997 $ 5,695
Group annuities and guaranteed investment contracts 16,770 19,053
Interest-sensitive life contracts 3,566 3,258
Dividend accumulations and other 5,641 5,240
------- --------
Policyholders' account balances $30,974 $ 33,246
======= ========
</TABLE>
Policyholders' account balances for interest-sensitive life and
investment-type contracts represent an accumulation of gross premium
payments plus credited interest less withdrawals, expenses and mortality
charges.
25
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
6. POLICYHOLDERS' LIABILITIES (Continued)
Certain contract provisions that determine the policyholder account
balances are as follows:
<TABLE>
<CAPTION>
WITHDRAWAL/
PRODUCT INTEREST RATE SURRENDER CHARGES
--------------------------------- ------------- -----------------------------------
<S> <C> <C>
Individual annuities 3.0% to 6.6% 0% to 8% for up to 8 years
Group annuities 5.0% to 13.4% Contractually limited or subject
to market value adjustment
Guaranteed investment contracts 3.9% to 15.4% Subject to market value withdrawal
payout status provisions for any funds withdrawn
other than for benefit responsive
and contractual payments
Interest-sensitive life contracts 4.0% to 6.5% Various up to 10 years
Dividend accumulations and other 3.0% to 4.5% --
</TABLE>
26
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
6. POLICYHOLDERS' LIABILITIES (Continued)
Unpaid Claims and Claim Adjustment Expenses. The following table provides
a reconciliation of the activity in the liability for unpaid claims and
claim adjustment expenses for property and casualty and accident and
health insurance at December 31:
<TABLE>
<CAPTION>
1998 1997 1996
-------------------------- -------------------------- -----------------------
ACCIDENT PROPERTY ACCIDENT PROPERTY ACCIDENT PROPERTY
AND HEALTH AND CASUALTY AND HEALTH AND CASUALTY AND HEALTH AND CASUALTY
---------- ------------ ---------- ------------ ---------- -------------
(In Millions)
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1 $ 1,908 $ 2,956 $ 1,990 $ 3,076 $ 2,033 $ 3,053
Less reinsurance recoverables 810 535 10 553 15 557
------- ------- ------- ------- ------- -------
Net balance at January 1 1,098 2,421 1,980 2,523 2,018 2,496
------- ------- ------- ------- ------- -------
Incurred related to:
Current year 6,127 1,354 8,348 1,525 8,391 1,760
Prior years 7 (194) 102 (91) (66) (25)
------- ------- ------- ------- ------- -------
Total incurred 6,134 1,160 8,450 1,434 8,325 1,735
------- ------- ------- ------- ------- -------
Paid related to:
Current year 5,289 717 6,676 739 6,589 908
Prior years 851 681 1,854 797 1,774 800
------- ------- ------- ------- ------- -------
Total paid 6,140 1,398 8,530 1,536 8,363 1,708
------- ------- ------- ------- ------- -------
Net balance at December 31 1,092 2,183 1,900 2,421 1,980 2,523
Plus reinsurance recoverables 52 533 8 535 10 553
------- ------- ------- ------- ------- -------
Balance at December 31 $ 1,144 $ 2,716 $ 1,908 $ 2,956 $ 1,990 $ 3,076
======= ======= ======= ======= ======= =======
</TABLE>
The Accident and Health balance at December 31 includes amounts
attributable to the Company's discontinued HealthCare business: 1998 -
$1,082; 1997 - $1,757 and 1996 - $1,750.
In 1998 and 1997, the changes in provision for claims and claim adjustment
expenses for property and casualty related to prior years are primarily
driven by lower than anticipated losses for the Voluntary Auto line of
business.
The changes in provision for claims and claim adjustment expense for
accident and health related to prior years are primarily due to such
factors as changes in claim cost trends and an accelerated decline in the
indemnity health business.
The unpaid claims and claim adjustment expenses presented above consist of
unpaid claim liabilities which include estimates for liabilities
associated with reported claims and for incurred but not reported claims
based, in part, on the Company's experience. Changes in the estimated cost
to settle unpaid claims are charged or credited to the Consolidated
Statement of Operations periodically as the estimates are revised.
Accident and health unpaid claims liabilities for 1998, 1997 and 1996
included above are discounted using interest rates ranging from 3.0%
to 6.0%.
27
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
7. REINSURANCE
The Company participates in reinsurance in order to provide greater
diversification of business, provide additional capacity for future growth
and limit the maximum net loss potential arising from large risks. Life
reinsurance is accomplished through various plans of reinsurance,
primarily yearly renewable term and coinsurance. Property-casualty
reinsurance is placed on both a pro-rata and excess of loss basis.
Reinsurance ceded arrangements do not discharge the Company or the
insurance subsidiaries as the primary insurer. Ceded balances would
represent a liability to the Company in the event the reinsurers were
unable to meet their obligations to the Company under the terms of the
reinsurance agreements. The Company periodically reviews the financial
condition of its reinsurers and amounts recoverable therefrom, recording
an allowance when necessary for uncollectible reinsurance.
Reinsurance amounts included in the Consolidated Statements of Operations,
excluding HealthCare, for the years ended December 31, were as follows:
1998 1997 1996
------- ------ -------
(In Millions)
Direct Premiums $9,615 $9,679 $10,690
Reinsurance Assumed 65 42 13
Reinsurance Ceded (656) (716) (704)
------ ------ -------
Premiums $9,024 $9,005 $ 9,999
====== ====== =======
Policyholders' benefits ceded $ 519 $ 530 $ 571
====== ====== =======
Reinsurance recoverables, included in "Other assets" in the Company's
Consolidated Statements of Financial Position, at December 31, were as
follows:
1998 1997
------ ------
(In Millions)
Life insurance $ 620 $ 685
Property-casualty 564 554
Other reinsurance 92 65
------ ------
$1,276 $1,304
====== ======
28
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
8. SHORT-TERM AND LONG-TERM DEBT
Debt consists of the following at December 31:
SHORT-TERM DEBT
1998 1997
------- ------
(In Millions)
Commercial paper $ 7,057 $4,268
Notes payable 2,164 2,151
Current portion of long-term debt 861 355
------- ------
Total short-term debt $10,082 $6,774
======= ======
The weighted average interest rate on outstanding short-term debt was
approximately 5.4% and 6.0% at December 31, 1998 and 1997, respectively.
The Company issues commercial paper primarily to manage operating cash flows and
existing commitments, meet working capital needs and take advantage of current
investment opportunities. Commercial paper borrowings are supported by various
lines of credit.
LONG-TERM DEBT
<TABLE>
<CAPTION>
DESCRIPTION MATURITY DATES RATE 1998 1997
- ----------- -------------- ---- ----- ----
(In Millions)
<S> <C> <C> <C> <C>
Floating rate notes ("FRN") 1999 - 2005 4.04-14.00%(a) $ 729 $ 324
Long term notes 1999 - 2023 5.5% - 12% 1,318 910
Zero coupon notes 1999 8.6% (b) 364 334
Canadian dollar notes - 7.0% - 9.125% - 117
Japanese yen notes 1999 - 2000 0.5% - 4.6% 160 178
Swiss francs notes - 3.875% - 120
Canadian dollar FRN 2003 5.25%-5.89% 96 96
Surplus notes 2003 - 2025 6.875% - 8.3% 987 986
Senior notes 1999 - 2006 6.375% 393 -
Commercial paper backed by long-term
credit agreements 1,500 1,500
Other notes payable 1999 - 2017 4% - 7.5% 48 63
------- -------
Subtotal 5,595 4,628
Less: current portion of long-term debt (861) (355)
------- -------
Total long-term debt $ 4,734 $ 4,273
======= =======
</TABLE>
(a) The Company issued an S&P 500 index linked note of $29 million in September
of 1997. The interest rate on the note is based on the appreciation of the
S&P 500 index, with a contractual cap of 14%. At December 31, 1998, this
rate was 14%. Excluding this note, floating rate note interest rates were
between 4.04% - 5.50%.
(b) The rate shown for zero coupon notes represents a level yield to maturity.
29
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
8. SHORT-TERM AND LONG-TERM DEBT (CONTINUED)
Payment of interest and principal on the surplus notes issued after 1993,
of which $686 million were outstanding at December 31, 1998, may be made
only with the prior approval of the Commissioner of Insurance of the State
of New Jersey.
In order to modify exposure to interest rate and currency exchange rate
movements, the Company utilizes derivative instruments, primarily interest
rate swaps, in conjunction with some of its debt issues. The effect of
these derivative instruments is included in the calculation of the
interest expense on the associated debt, and as a result, the effective
interest rates on the debt may differ from the rates reflected in the
tables above. Floating rates are determined by formulas and may be subject
to certain minimum or maximum rates.
Scheduled principal repayments of long-term debt as of December 31, 1998,
are as follows: $862 million in 1999, $560 million in 2000, $327 million
in 2001, $1,816 million in 2002, $458 million in 2003 and $1,575 million
thereafter.
At December 31, 1998, the Company had $9,853 million in lines of credit
from numerous financial institutions of which $8,330 million were unused.
These lines of credit generally have terms ranging from one to five years.
Interest expense for short-term and long-term debt is $920 million,
$743 million and $618 million for the years ended December 31, 1998, 1997
and 1996, respectively.
9. EMPLOYEE BENEFIT PLANS
PENSION AND OTHER POSTRETIREMENT PLANS
The Company has funded non-contributory defined benefit pension plans
which cover substantially all of its employees. The Company also has
several non-funded non-contributory defined benefit plans covering
certain executives. Benefits are generally based on career average
earnings and credited length of service. The Company's funding policy is
to contribute annually an amount necessary to satisfy the Internal
Revenue Service contribution guidelines.
The Company provides certain life insurance and health care benefits
("Other postretirement benefits") for its retired employees, their
beneficiaries and covered dependents. The healthcare plan is
contributory; the life insurance plan is non-contributory. Substantially
all of the Company's employees may become eligible to receive benefits if
they retire after age 55 with at least 10 years of service or under
certain circumstances after age 50 with at least 20 years of continuous
service. These benefits are funded as considered necessary by Company
management.
The Company has elected to amortize its transition obligation for other
postretirement benefits over 20 years.
30
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
9. EMPLOYEE BENEFIT PLANS (CONTINUED)
Prepaid and accrued benefit costs are included in "Other assets" and
"Other liabilities", respectively, in the Company's Consolidated
Statements of Financial Position. The status of these plans as of
September 30, adjusted for fourth quarter activity, is summarized below:
<TABLE>
<CAPTION>
OTHER
PENSION BENEFITS POSTRETIREMENT BENEFITS
---------------------- ------------------------
1998 1997 1998 1997
-------- ------- ------- -------
(In Millions) (In Millions)
<S> <C> <C> <C> <C>
CHANGE IN BENEFIT OBLIGATION:
Benefit obligation at the beginning of period $(5,557) $(5,148) $(2,128) $(2,002)
Service cost (159) (127) (35) (38)
Interest cost (397) (376) (142) (149)
Plan participants' contributions - - ( 6) (4)
Amendments (58) - - 31
Actuarial losses (600) (334) (31) (84)
Transfer to third party - 32 - -
Contractual termination benefits (30) (63) - -
Benefits paid 485 460 128 117
Foreign currency changes 7 (1) 1 1
------- ------- ------- -------
Benefit obligation at end of period $(6,309) $(5,557) $(2,213) $(2,128)
======= ======= ======= =======
CHANGE IN PLAN ASSETS:
Fair value of plan assets at beginning of period $ 8,489 $ 7,306 $ 1,354 $ 1,313
Actual return on plan assets 445 1,693 146 120
Transfer to third party (4) (32) - -
Contribution from pension plan - - 31 25
Employer contributions 25 16 13 9
Plan participants' contributions - - 6 4
Withdrawal under IRS Section 420 (36) (35) - -
Benefits paid (485) (460) (128) (117)
Foreign currency changes (7) 1 - -
------- ------- ------- -------
Fair value of plan assets at end of period $ 8,427 $ 8,489 $ 1,422 $ 1,354
======= ======= ======= =======
FUNDED STATUS:
Funded status at end of period $ 2,118 $ 2,932 $ (791) $ (774)
Unrecognized transition (asset) liability (554) (661) 660 707
Unrecognized prior service cost 335 327 - -
Unrecognized actuarial net gain (813) (1,644) (353) (364)
Effects of 4th quarter activity (9) (63) 2 33
------- ------- ------- -------
Net amount recognized $ 1,077 $ 891 $ (482) $ (398)
======= ======= ======= =======
AMOUNTS RECOGNIZED IN THE STATEMENTS OF FINANCIAL
POSITION CONSIST OF:
Prepaid benefit cost $ 1,348 $ 1,150 $ - $ -
Accrued benefit liability (287) (270) (482) (398)
Intangible asset 7 5 - -
Accumulated other comprehensive income 9 6 - -
-------- -------- -------- ---------
Net amount recognized $ 1,077 $ 891 $ (482) $ (398)
======== ======== ======== =========
</TABLE>
31
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
9. EMPLOYEE BENEFIT PLANS (CONTINUED)
The projected benefit obligation, accumulated benefit obligation and fair
value of plan assets for the pension plan with accumulated benefit
obligations in excess of plan assets were $384 million, $284 million and
$0, respectively, as of September 30, 1998 and $319 million, $226 million
and $ 0, respectively, as of September 30, 1997.
The effects of fourth quarter activity are summarized as follows:
<TABLE>
<CAPTION>
OTHER
PENSION BENEFITS POSTRETIREMENT BENEFITS
---------------------- -----------------------
1998 1997 1998 1997
------ ------- ------ ------
(In Millions)
<S> <C> <C> <C> <C>
Effect of IRS Section 420 transfer $ - $ (36) $ - $ -
Contractual termination benefits (14) (30) - -
Contribution from pension plan - - - 31
Employer contributions 5 3 2 2
----- ------- ------ ------
Effects of 4th quarter activity $ (9) $ (63) $ 2 $ 33
====== ======= ====== ======
</TABLE>
Pension plan assets consist primarily of equity securities, bonds, real estate
and short-term investments, of which $5,926 million and $6,022 million are
included in Separate Account assets and liabilities at September 30, 1998 and
1997, respectively.
Other postretirement plan assets consist of group and individual variable life
insurance policies, group life and health contracts, common stocks, U.S.
government securities and short-term investments. Plan assets include $1,018
million and $1,044 million of Company insurance policies and contracts at
September 30, 1998 and 1997, respectively.
Effective December 31, 1996, The Prudential Securities Incorporated Cash Balance
Plan (the "PSI Plan") was merged into The Retirement System for United States
Employees and Special Agents of The Prudential Insurance Company of America (the
"Prudential Plan"). The name of the merged plan is The Prudential Merged
Retirement Plan ("Merged Retirement Plan"). All of the assets of the Merged
Retirement Plan are available to pay benefits to participants and their
beneficiaries who are covered by the Merged Retirement Plan. The merger of the
plans had no effect on the December 31, 1996 results of operations.
During 1996, the Prudential Plan was amended to provide cost of living
adjustments for retirees. The effect of this plan amendment increased benefit
obligations and unrecognized prior service cost by $170 million at September 30,
1996. In addition, the Prudential Plan was amended to provide contractual
termination benefits to certain plan participants who were notified between
September 15, 1996 and December 31, 1998 that their employment had been
terminated. Costs related to these amendments are reflected below in contractual
termination benefits.
32
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
9. EMPLOYEE BENEFIT PLANS (CONTINUED)
Net periodic benefit cost included in "General and administrative expenses"
in the Company's Consolidated Statements of Operations for the years ended
December 31, includes the following components:
<TABLE>
<CAPTION>
OTHER
PENSION BENEFITS POSTRETIREMENT BENEFITS
----------------------------------- ------------------------------------
1998 1997 1996 1998 1997 1996
----------------------------------- ------------------------------------
(In Millions)
<S> <C> <C> <C> <C> <C> <C>
COMPONENTS OF NET PERIODIC BENEFITS COSTS:
Service cost $ 159 $ 127 $ 140 $ 35 $ 38 $ 45
Interest cost 397 376 354 142 149 157
Expected return on plan assets (674) (617) (594) (119) (87) (93)
Amortization of transition amount (106) (106) (107) 47 50 53
Amortization of prior service cost 45 42 26 - - -
Amortization of actuarial net (gain) loss 1 - - (13) (13) (3)
Curtailment gain (loss) 5 - - - - (9)
Contractual termination benefits 14 30 63 - - -
------- ------- ------- ------- ------- ------
Net periodic (benefit) cost $ (159) $ (148) $ (118) $ 92 $ 137 $ 150
======= ======= ======= ======= ======= ======
</TABLE>
The assumptions at September 30, used by the Company to calculate the benefit
obligations as of that date and to determine the benefit cost in the subsequent
year are as follows:
<TABLE>
<CAPTION>
OTHER
PENSION BENEFITS POSTRETIREMENT BENEFITS
------------------------------ ----------------------------------------
1998 1997 1996 1998 1997 1996
------------------------------ ----------------------------------------
<S> <C> <C> <C> <C> <C> <C>
WEIGHTED-AVERAGE ASSUMPTIONS:
Discount rate 6.50% 7.25% 7.75% 6.50% 7.25% 7.75%
Rate of increase in compensation levels 4.50% 4.50% 4.50% 4.50% 4.50% 4.50%
Expected return on plan assets 9.50% 9.50% 9.50% 9.00% 9.00% 9.00%
Health care cost trend rates - - - 7.80-11.00% 8.20-11.80% 8.50-12.50%
Ultimate health care cost trend rate
after gradual decrease until 2006 - - - 5.00% 5.00% 5.00%
</TABLE>
33
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
9. EMPLOYEE BENEFIT PLANS (CONTINUED)
Assumed health care cost trend rates have a significant effect on the
amounts reported for the health care plan. A one-percentage point
increase and decrease in assumed health care cost trend rates would have
the following effects:
OTHER
POSTRETIREMENT BENEFITS
-----------------------
1998
------
(In Millions)
ONE PERCENTAGE POINT INCREASE
Effect on total service and interest costs $ 24
Effect on postretirement benefit obligation (226)
ONE PERCENTAGE POINT DECREASE
Effect on total service and interest costs $ (19)
Effect on postretirement benefit obligation 187
POSTEMPLOYMENT BENEFITS
The Company accrues postemployment benefits primarily for life and health
benefits provided to former or inactive employees who are not retirees. The
net accumulated liability for these benefits at December 31, 1998 and 1997
was $135 million and $144 million, respectively, and is included in "Other
liabilities."
OTHER EMPLOYEE BENEFITS
The Company sponsors voluntary savings plans for employees (401(k) plans).
The plans provide for salary reduction contributions by employees and
matching contributions by the Company of up to 3% of annual salary,
resulting in $54 million, $63 million and $57 million of expenses included in
"General and administrative expenses" for 1998, 1997 and 1996, respectively.
DISCONTINUED OPERATIONS
In connection with the disposal of the Company's HealthCare business, as more
fully discussed in Note 3, the loss on disposal was reduced by an estimated
curtailment gain of $30 million.
34
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
10. INCOME TAXES
The components of income tax expense for the years ended December 31, were
as follows:
1998 1997 1996
------ ------ ------
(In Millions)
Current tax expense (benefit):
U.S. $ 983 $ (14) $ 400
State and local 54 51 108
Foreign 148 64 48
------ ------ ------
Total $1,185 $ 101 $ 556
====== ====== ======
Deferred tax expense (benefit):
U.S. $ (193) $ 269 $ (428)
State and local (6) 4 (2)
Foreign (16) 33 54
------ ------ ------
Total $ (215) $ 306 $ (376)
====== ====== ======
Total income tax expense $ 970 $ 407 $ 180
====== ====== ======
The Company's income tax expense for the years ended December 31, differs from
the amount computed by applying the expected federal income tax rate of 35% to
income from continuing operations before income taxes for the following reasons:
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ ------
(In Millions)
<S> <C> <C> <C>
Expected federal income tax expense $ 908 $ 480 $ 539
Equity tax (benefit) 75 (65) (365)
State and local income taxes 31 37 69
Tax-exempt interest and dividend received deduction (46) (67) (67)
Other
2 22 4
------ ------ ------
Total income tax expense $ 970 $ 407 $ 180
====== ====== ======
</TABLE>
35
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
10. INCOME TAXES (CONTINUED)
Deferred tax assets and liabilities at December 31, resulted from the items
listed in the following table:
1998 1997
------- -------
(In Millions)
Deferred tax assets
Insurance reserves $ 1,584 $ 1,482
Policyholder dividends 265 250
Net operating loss carryforwards 260 80
Litigation related reserves 104 178
Employee benefits 63 42
Other 134 287
------- -------
Deferred tax assets before valuation allowance 2,410 2,319
Valuation allowance (13) (18)
------- -------
Deferred tax assets after valuation allowance 2,397 2,301
------- -------
Deferred tax liabilities
Investments 1,414 1,867
Deferred policy acquisition costs 1,436 1,525
Depreciation 64 36
------- -------
Deferred tax liabilities 2,914 3,428
------- -------
Net deferred tax liability $ 517 $ 1,127
======= =======
Management believes that based on its historical pattern of taxable income, the
Company will produce sufficient income in the future to realize its deferred tax
asset after valuation allowance. Adjustments to the valuation allowance will be
made if there is a change in management's assessment of the amount of the
deferred tax asset that is realizable. At December 31, 1998 and 1997,
respectively, the Company had federal life net operating loss carryforwards of
$540 million and $1,200 million, which expire by 2012. At December 31, 1998 and
1997, respectively, the Company had state non-life operating loss carryforwards
for tax purposes approximating $1,059 million and $800 million, which expire by
2018.
The Internal Revenue Service (the "Service") has completed all examinations of
the consolidated federal income tax returns through 1989. The Service has
examined the years 1990 through 1992. Discussions are being held with the
Service with respect to proposed adjustments. Management, however, believes
there are adequate defenses against, or sufficient reserves to provide for such
adjustments. The Service has begun their examination of the years 1993 through
1995.
36
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
11. STATUTORY EQUITY AND INCOME
Applicable insurance department regulations require that the Company
prepare statutory financial statements in accordance with statutory
accounting practices prescribed or permitted by the New Jersey Department
of Banking and Insurance. Statutory accounting practices primarily differ
from GAAP by charging policy acquisition costs to expense as incurred,
establishing future policy benefits reserves using different actuarial
assumptions, not providing for deferred taxes, and valuing securities on a
different basis. The Company's statutory net income, as filed with the New
Jersey Department of Banking and Insurance was $1,247 million, $1,471
million and $1,402 million for the years 1998, 1997 and 1996,
respectively. Statutory capital and surplus, as filed, at December 31,
1998 and 1997 was $8,536 million and $9,242 million, respectively.
12. OPERATING LEASES
The Company and its subsidiaries occupy leased office space in many
locations under various long-term leases and have entered into numerous
leases covering the long-term use of computers and other equipment. At
December 31, 1998, future minimum lease payments under non-cancelable
operating leases are estimated as follows:
(In Millions)
1999 $ 295
2000 263
2001 231
2002 198
2003 157
Remaining years after 2003 753
-------
Total $ 1,897
=======
Amounts presented in the table above include operating leases relating to
the Company's HealthCare business. See Note 3 for a discussion of the
pending sale of this business. Amounts applicable to the HealthCare
business are $65 million in 1999, $58 million in 2000, $52 million in
2001, $45 million in 2002, $34 million in 2003 and $89 million thereafter.
Rental expense incurred for the years ended December 31, 1998, 1997 and
1996 was approximately $320 million, $352 million and $343 million,
respectively.
13. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values presented below have been determined using
available information and valuation methodologies. Considerable judgment
is applied in interpreting data to develop the estimates of fair value.
Accordingly, such estimates presented may not be realized in a current
market exchange. The use of different market assumptions and/or estimation
methodologies could have a material effect on the estimated fair values.
The following methods and assumptions were used in calculating the
estimated fair values (for all other financial instruments presented in
the table, the carrying value approximates estimated fair value).
37
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
13. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
FIXED MATURITIES AND EQUITY SECURITIES
Estimated fair values for fixed maturities and equity securities, other
than private placement securities, are based on quoted market prices or
estimates from independent pricing services. Fair values for private
placement securities are estimated using a discounted cash flow model
which considers the current market spreads between the U.S. Treasury yield
curve and corporate bond yield curve, adjusted for the type of issue, its
current credit quality and its remaining average life. The fair value of
certain non-performing private placement securities is based on amounts
estimated by management.
MORTGAGE LOANS ON REAL ESTATE
The estimated fair value of the mortgage loan portfolio is primarily based
upon the present value of the scheduled future cash flows discounted at
the appropriate U.S. Treasury rate, adjusted for the current market spread
for a similar quality mortgage. For certain non-performing loans, the
estimated fair value is based upon the present value of expected future
cash flows discounted at the appropriate U.S. Treasury rate adjusted for
current market spread for a similar quality mortgage.
POLICY LOANS
The estimated fair value of policy loans is calculated using a discounted
cash flow model based upon current U.S. Treasury rates and historical loan
repayments.
DERIVATIVE FINANCIAL INSTRUMENTS
The fair value of swap agreements is estimated based on the present value
of future cash flows under the agreements discounted at the applicable
zero coupon U.S. Treasury rate and swap spread. The fair value of
forwards, futures and options is estimated based on market quotes for a
transaction with similar terms. The estimated fair value of loan
commitments is derived by comparing the contractual stream of fees with
such fee streams adjusted to reflect current market rates that would be
applicable to instruments of similar type, maturity, and credit standing.
POLICYHOLDERS' ACCOUNT BALANCES
Estimated fair values of policyholders' account balances are derived by
using discounted projected cash flows, based on interest rates being
offered for similar contracts, with maturities consistent with those
remaining for the contracts being valued. For interest sensitive life
contracts, fair value approximates carrying value.
DEBT
The estimated fair value of short-term and long-term debt is derived by
using discount rates based on the borrowing rates currently available to
the Company for debt with similar terms and remaining maturities.
38
<PAGE>
- -------------------------------------------------------------------------------
13. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
The following table discloses the carrying amounts and estimated fair
values of the Company's financial instruments at December 31:
<TABLE>
<CAPTION>
1998 1997
----------------------- ------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
-------- ---------- -------- ----------
(In Millions)
<S> <C> <C> <C> <C>
FINANCIAL ASSETS:
Other than trading:
Fixed maturities:
Available for sale $ 80,158 $ 80,158 $ 75,270 $ 75,270
Held to maturity 16,848 17,906 18,700 19,894
Equity securities 2,759 2,759 2,810 2,810
Mortgage loans on real estate 16,495 17,265 16,004 16,703
Policy loans 7,476 8,037 7,034 7,201
Securities purchased under agreements to resell 1,737 1,737 - -
Short-term investments 9,781 9,781 12,106 12,106
Cash 1,943 1,943 1,859 1,859
Restricted Assets 2,366 2,366 1,835 1,835
Separate Account assets 81,621 81,621 73,839 73,839
Derivative financial instruments 132 135 93 92
Trading:
Trading account assets $ 8,888 $ 8,888 $ 6,347 $ 6,347
Broker-dealer related receivables 10,142 10,142 8,442 8,442
Derivative financial instruments 765 765 910 910
Securities purchased under agreements to resell 8,515 8,515 8,661 8,661
Cash collateral for borrowed securities 5,622 5,622 5,047 5,047
FINANCIAL LIABILITIES:
Other than trading:
Policyholders' account balances $ 30,974 $ 31,940 $ 33,246 $ 34,201
Securities sold under agreements to repurchase 7,085 7,085 85 85
Cash collateral for loaned securities 2,450 2,450 9,647 9,647
Short-term and long-term debt 14,816 15,084 11,047 11,131
Securities sold but not yet purchased 2,215 2,215 - -
Separate Account liabilities 80,931 80,931 73,451 73,451
Derivative financial instruments 390 391 100 99
Trading:
Broker-dealer related payables $ 6,530 $ 6,530 $ 3,338 $ 3,338
Derivative financial instruments 725 725 1,019 1,019
Securities sold under agreements to repurchase 14,401 14,401 12,262 12,262
Cash collateral for loaned securities 4,682 4,682 4,470 4,470
Securities sold but not yet purchased 3,556 3,556 3,648 3,648
</TABLE>
39
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
14. DERIVATIVE AND OFF-BALANCE SHEET CREDIT-RELATED INSTRUMENTS
INTEREST RATE SWAPS
The Company uses interest rate swaps to reduce market risks from changes in
interest rates and to alter interest rate exposures arising from mismatches
between assets and liabilities. Under interest rates swaps, the Company
agrees with other parties to exchange, at specified intervals the difference
between fixed-rate and floating-rate interest amounts calculated by
reference to an agreed notional principal amount. Generally, no cash is
exchanged at the outset of the contract and no principal payments are made
by either party. Cash is paid or received based on the terms of the swap.
These transactions are entered into pursuant to master agreements that
provide for a single net payment to be made by one counterparty at each due
date. The fair value of swap agreements is estimated based on the present
value of future cash flows under the agreements, discounted at the
applicable zero coupon U.S. Treasury rate and swap spread.
If swap agreements meet the criteria for hedge accounting, net interest
receipts or payments are accrued and recognized over the life of the swap
agreements as an adjustment to interest income or expense of the hedged
item. Any unrealized gains or losses are not recognized until the hedged
item is sold or matures. Gains or losses on early termination of interest
rate swaps are deferred and amortized over the remaining period originally
covered by the swaps. If the criteria for hedge accounting are not met, the
swap agreements are accounted for at market value with changes in fair value
reported in current period earnings.
FUTURES AND OPTIONS
The Company uses exchange-traded Treasury futures and options to reduce
market risks from changes in interest rates, to alter mismatches between the
duration of assets in a portfolio and the duration of liabilities supported
by those assets, and to hedge against changes in the value of securities it
owns or anticipates acquiring. The Company enters into exchange-traded
futures and options with regulated futures commissions merchants who are
members of a trading exchange. The fair value of futures and options is
based on market quotes for transactions with similar terms.
Under exchange-traded futures, the Company agrees to purchase a specified
number of contracts with other parties and to post variation margin on a
daily basis in an amount equal to the difference in the daily market values
of those contracts. Futures are typically used to hedge duration mismatches
between assets and liabilities by replicating Treasury performance. Treasury
futures move substantially in value as interest rates change and can be used
to either modify or hedge existing interest rate risk. This strategy
protects against the risk that cash flow requirements may necessitate
liquidation of investments at unfavorable prices resulting from increases in
interest rates. This strategy can be a more cost effective way of
temporarily reducing the Company's exposure to a market decline than selling
fixed income securities and purchasing a similar portfolio when such a
decline is believed to be over.
If futures meet hedge accounting criteria, changes in their fair value are
deferred and recognized as an adjustment to the carrying value of the hedged
item. Deferred gains or losses from the hedges for interest-bearing
financial instruments are amortized as a yield adjustment over the remaining
lives of the hedged item. Futures that do not qualify as hedges are carried
at fair value with changes in value reported in current period earnings. The
gains and losses associated with anticipatory transactions are not material.
40
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
14. DERIVATIVE AND OFF-BALANCE SHEET CREDIT-RELATED INSTRUMENTS (CONTINUED)
When the Company anticipates a significant decline in the stock market
which will correspondingly affect its diversified portfolio, it may
purchase put index options where the basket of securities in the index is
appropriate to provide a hedge against a decrease in the value of the
equity portfolio or a portion thereof. This strategy effects an orderly
sale of hedged securities. When the Company has large cash flows which it
has allocated for investment in equity securities, it may purchase call
index options as a temporary hedge against an increase in the price of the
securities it intends to purchase. This hedge permits such investment
transactions to be executed with the least possible adverse market impact.
Option premium paid or received is reported as an asset or liability and
amortized into income over the life of the option. If options meet the
criteria for hedge accounting, changes in their fair value are deferred
and recognized as an adjustment to the hedged item. Deferred gains or
losses from the hedges for interest-bearing financial instruments are
recognized as an adjustment to interest income or expense of the hedged
item. If the options do not meet the criteria for hedge accounting, they
are fair valued, with changes in fair value reported in current period
earnings.
CURRENCY DERIVATIVES
The Company uses currency derivatives, including exchange-traded currency
futures and options, currency forwards and currency swaps to reduce market
risks from changes in currency values of investments denominated in
foreign currencies that the Company either holds or intends to acquire and
to alter the currency exposures arising from mismatches between such
foreign currencies and the U.S. Dollar.
Under currency forwards, the Company agrees with other parties upon
delivery of a specified amount of specified currency at a specified future
date. Typically, the price is agreed upon at the time of the contract and
payment for such a contract is made at the specified future date. Under
currency swaps, the Company agrees with other parties to exchange, at
specified intervals, the difference between one currency and another at a
forward exchange rate and calculated by reference to an agreed principal
amount. Generally, the principal amount of each currency is exchanged at
the beginning and termination of the currency swap by each party. These
transactions are entered into pursuant to master agreements that provide
for a single net payment to be made by one counterparty for payments made
in the same currency at each due date.
If currency derivatives are effective as hedges of foreign currency
translation and transaction exposures, gains or losses are recorded in
"Accumulated other comprehensive income." If currency derivatives do not
meet hedge accounting criteria, gains or losses from those derivatives are
recognized in current period earnings.
The tables below summarize the Company's outstanding positions by
derivative instrument types as of December 31, 1998 and 1997. The amounts
presented are classified as either trading or other than trading, based on
management's intent at the time of contract inception and throughout the
life of the contract. The table includes the estimated fair values of
outstanding derivative positions only and does not include the changes in
fair values of associated financial and non-financial assets and
liabilities, which generally offset derivative notional amounts. The fair
value amounts presented also do not reflect the netting of amounts
pursuant to right of setoff, qualifying master netting agreements with
counterparties or collateral arrangements.
41
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
14. DERIVATIVE AND OFF-BALANCE SHEET CREDIT-RELATED INSTRUMENTS (CONTINUED)
DERIVATIVE FINANCIAL INSTRUMENTS
DECEMBER 31, 1998
(In Millions)
<TABLE>
<CAPTION>
TRADING OTHER THAN TRADING TOTAL
------------------------- ------------------------- -------------------------
ESTIMATED ESTIMATED ESTIMATED
NOTIONAL FAIR VALUE NOTIONAL FAIR VALUE NOTIONAL FAIR VALUE
-------- ---------- -------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Swaps:
Assets $ 4,564 $ 309 $ 2,200 $ 96 $ 6,764 $ 405
Liabilities 4,734 274 3,065 349 7,799 623
Forwards:
Assets 45,651 282 1,004 14 46,655 296
Liabilities 39,153 280 2,039 37 41,192 317
Futures:
Assets 3,272 61 1,786 23 5,058 84
Liabilities 4,371 47 531 5 4,902 52
Options:
Assets 8,310 113 130 2 8,440 115
Liabilities 6,388 124 213 - 6,601 124
-------- -------- -------- ------- -------- --------
Total:
Assets $ 61,797 $ 765 $ 5,120 $ 135 $ 66,917 $ 900
======== ======== ======== ======= ======== ========
Liabilities $ 54,646 $ 725 $ 5,848 $ 391 $ 60,494 $ 1,116
======== ======== ======== ======= ======== ========
</TABLE>
42
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
14. DERIVATIVE AND OFF-BALANCE SHEET CREDIT-RELATED INSTRUMENTS (CONTINUED)
DERIVATIVE FINANCIAL INSTRUMENTS
DECEMBER 31, 1997
(In Millions)
<TABLE>
<CAPTION>
TRADING OTHER THAN TRADING TOTAL
-------------------------- ------------------------- --------------------------
ESTIMATED ESTIMATED ESTIMATED
NOTIONAL FAIR VALUE NOTIONAL FAIR VALUE NOTIONAL FAIR VALUE
-------- ----------- -------- ----------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Swaps:
Assets $ 5,798 $ 316 $ 1,446 $ 67 $ 7,244 $ 383
Liabilities 5,439 418 1,197 70 6,636 488
Forwards:
Assets 29,947 438 1,171 25 31,118 463
Liabilities 29,985 461 687 8 30,672 469
Futures:
Assets 4,103 51 46 - 4,149 51
Liabilities 3,064 50 3,320 21 6,384 71
Options:
Assets 6,893 105 239 - 7,132 105
Liabilities 3,946 90 224 - 4,170 90
------- ------- ------- ------ ------- -------
Total:
Assets $46,741 $ 910 $ 2,902 $ 92 $49,643 $ 1,002
======= ======= ======= ====== ======= =======
Liabilities $42,434 $ 1,019 $ 5,428 $ 99 $47,862 $ 1,118
======= ======= ======= ====== ======= =======
</TABLE>
CREDIT RISK
The current credit exposure of the Company's derivative contracts is limited to
the fair value at the reporting date. Credit risk is managed by entering into
transactions with creditworthy counterparties and obtaining collateral where
appropriate and customary. The Company also attempts to minimize its exposure to
credit risk through the use of various credit monitoring techniques. At December
31, 1998 and 1997 approximately 97% and 95%, respectively, of the net credit
exposure for the Company from derivative contracts is with investment-grade
counterparties.
Net trading revenues for the years ended December 31, 1998, 1997 and 1996
relating to forwards, futures and swaps were $67 million, $(5) million and $(13)
million; $59 million, $37 million and $(13) million; and $42 million, $32
million and $(11) million, respectively. Net trading revenues for options were
not material. Average fair values for trading derivatives in an asset position
during the years ended December 31, 1998 and 1997 were $1,165 million and $1,015
million, respectively, and for derivatives in a liability position were $1,140
million and $1,166 million, respectively. Of those derivatives held for trading
purposes at December 31, 1998, 63% of the notional amount consisted of interest
rate derivatives, 32% consisted of foreign currency derivatives, and 5%
consisted of equity and commodity derivatives. Of those derivatives held for
purposes other than trading at December 31, 1998, 60% of notional consisted of
interest rate derivatives, 31% consisted of foreign currency derivatives, and 9%
consisted of equity and commodity derivatives.
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THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
14. DERIVATIVE AND OFF-BALANCE SHEET CREDIT-RELATED INSTRUMENTS (CONTINUED)
OFF-BALANCE SHEET CREDIT-RELATED INSTRUMENTS
During the normal course of its business, the Company utilizes financial
instruments with off-balance sheet credit risk such as commitments,
financial guarantees, loans sold with recourse and letters of credit.
Commitments include commitments to purchase and sell mortgage loans, the
underfunded portion of commitments to fund investments in private placement
securities, and unused credit card and home equity lines. In connection
with the Company's commercial banking business, loan commitments for credit
cards and home equity lines of credit include agreements to lend up to
specified limits to customers. It is anticipated that commitment amounts
will only be partially drawn down based on overall customer usage patterns,
and, therefore, do not necessarily represent future cash requirements. The
Company evaluates each credit decision on such commitments at least
annually and has the ability to cancel or suspend such lines at its option.
The total available lines of credit card and home equity commitments were
$3.0 billion of which $2.2 billion remains available at December 31, 1998.
Also in connection with the Company's investment banking activities, the
Company enters into agreements with mortgage originators and others to
provide financing on both a secured and unsecured basis. Aggregate
financing commitments on a secured basis approximate $6.1 billion of which
$3.3 billion remains available at December 31, 1998. Unsecured commitments
approximate $65.0 million, the majority of which is outstanding at December
31, 1998.
Other commitments substantially include commitments to purchase and sell
mortgage loans and the underfunded portion of commitments to fund
investments in private placement securities. These mortgage loans and
private commitments were $2.5 billion of which $1.8 billion remain
available at December 31, 1998. Additionally, mortgage loans sold with
recourse were $0.5 billion at December 31, 1998.
The Company also provides financial guarantees incidental to other
transactions and letters of credit that guarantee the performance of
customers to third parties. These credit-related financial instruments have
off-balance sheet credit risk because only their origination fees, if any,
and accruals for probable losses, if any, are recognized until the
obligation under the instrument is fulfilled or expires. These instruments
can extend for several years and expirations are not concentrated in any
period. The Company seeks to control credit risk associated with these
instruments by limiting credit, maintaining collateral where customary and
appropriate, and performing other monitoring procedures. At December 31,
1998 these were immaterial.
15. DIVESTITURE
On July 31, 1996, the Company sold a substantial portion of its Canadian
Branch business to the London Life Insurance Company ("London Life"). This
transaction was structured as a reinsurance transaction whereby London Life
assumed total liabilities of the Canadian Branch equal to $3,291 million as
well as a related amount of assets equal to $3,205 million. This transfer
resulted in a reduction of policy liabilities of $3,257 million and a
corresponding reduction in invested assets. The Company recognized an
after-tax gain in 1996 of $116 million as a result of this transaction,
recorded in "Realized investment gains, net."
16. CONTINGENCIES AND LITIGATION
STOP-LOSS REINSURANCE AGREEMENT
In connection with the sale in 1995 of its wholly-owned subsidiary
Prudential Reinsurance Company ("Pru Re"), the Company's subsidiary,
Gibraltar Casualty Insurance Company ("Gibraltar") entered into a stop-loss
reinsurance agreement with Pru Re whereby Gibraltar has reinsured up to
$375 million of the first $400 million of aggregate adverse loss
development on reserves recorded by Pru Re at June 30, 1995. The Company
has guaranteed
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THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
16. CONTINGENCIES AND LITIGATION (CONTINUED)
Gibraltar's obligations arising under the stop-loss agreement subject to a
limit of $375 million. Through December 31, 1998, Gibraltar has incurred
$375 million in losses under the stop-loss agreement, including $90 million
in 1998. Gibraltar has paid $197 million to Pru Re under the stop-loss
agreement.
ENVIRONMENTAL AND ASBESTOS-RELATED CLAIMS
Certain of the Company's subsidiaries received claims under expired
contracts which assert alleged injuries and/or damages relating to or
resulting from toxic torts, toxic waste and other hazardous substances. The
liabilities for such claims cannot be estimated by traditional reserving
techniques. As a result of judicial decisions and legislative actions, the
coverage afforded under these contracts may be expanded beyond their
original terms. Extensive litigation between insurers and insureds over
these issues continues and the outcome is not predictable. In establishing
the liability for unpaid claims for these losses, management considered the
available information. However, given the expansion of coverage and
liability by the courts and legislatures in the past, and potential for
other unfavorable trends in the future, the ultimate cost of these claims
could increase from the levels currently established.
MANAGED CARE REIMBURSEMENT
The Company has reviewed its obligations under certain managed care
arrangements for possible failure to comply with contractual and regulatory
requirements. It is the opinion of management that adequate reserves have
been established to provide for appropriate reimbursements to customers.
REINSURANCE AND PARTICIPATION AGREEMENT
The Company and a number of other insurers ("the Consortium") entered into
a Reinsurance and Participation Agreement (the "Agreement") with MBL Life
Assurance Corporation ("MBLLAC") and others, under which the Company and
the other insurers agreed to reinsure certain payments to be made to
contract holders by MBLLAC in connection with the plan of rehabilitation of
Mutual Benefit Life Insurance Company. Under the agreement, the Consortium,
subject to certain terms and conditions, will indemnify MBLLAC for the
ultimate net loss sustained by MBLLAC on each contract subject to the
Agreement. The ultimate net loss represents the amount by which the
aggregate required payments exceed the fair market value of the assets
supporting the covered contracts at the time such payments are due. The
Company's share of any net loss is 30.55%. The Company has determined that
it does not expect to make any payments to MBLLAC under the agreement. The
Company concluded this after testing a wide range of potentially adverse
scenarios during the rehabilitation period for MBLLAC. In November 1998,
the Rehabilitation Court approved the sale of MBLLAC's individual life
insurance and individual group annuity business to affiliates of SunAmerica
Inc. Upon the end of the rehabilitation period, expected during 1999, the
agreement will terminate.
LITIGATION
Various lawsuits against the Company have arisen in the course of the
Company's business. In certain of these matters, large and/or indeterminate
amounts are sought.
Two putative class actions and approximately 320 individual actions were
pending against the Company in the United States as of January 31, 1999
brought on behalf of those persons who purchased life insurance policies
allegedly because of deceptive sales practices engaged in by the Company
and its insurance agents in violation of state and federal laws. Additional
suits may be filed by individuals who opted out of the class action
settlement described below. The sales practices alleged to have occurred
are contrary to Company policy. Some of these cases seek substantial
damages while others seek unspecified compensatory, punitive and treble
damages. The Company intends to defend these cases vigorously.
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THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
16. CONTINGENCIES AND LITIGATION (CONTINUED)
A Multi-State Life Insurance Task Force (the "Task Force"), comprised of
insurance regulators from 29 states and the District of Columbia, was
formed in April 1995 to conduct a review of sales and marketing practices
throughout the life insurance industry. The Company was the initial focus
of the Task Force examination. On July 9, 1996, the Task Force released its
report on the Company's activities. The Task Force found that some sales of
life insurance policies by the Company had been improper and that the
Company's efforts to prevent such practices were not sufficiently
effective. Based on the findings, the Task Force recommended, and the
Company agreed to, various changes to its sales and business practices
controls, and a series of fines allocated to all 50 states and the District
of Columbia. In addition, the Task Force recommended a remediation program
pursuant to which the Company would offer relief to the policyowners who
were misled when they purchased permanent life insurance policies in the
United States from 1982 to 1995.
On October 28, 1996, the Company entered into a Stipulation of Settlement
with attorneys for the plaintiffs in the consolidated class action lawsuit
pending in a Multi-District Litigation proceeding in the U.S. District
Court for the District of New Jersey. The class action suit involved
alleged improprieties in connection with the Company's sale, servicing and
operation of permanent life insurance policies from 1982 through 1995.
Pursuant to the settlement, the Company agreed to provide certain
enhancements and changes to the remediation program previously accepted by
the Task Force, including some additional remedies. In addition, the
Company agreed that it would incur a minimum cost of $410 million in
providing remedies to policyowners under the program and, in specified
circumstances, agreed to make certain other payments and guarantees. Under
the terms of the settlement, the Company agreed to a minimum average cost
per remedy of $2,364 for up to 330,000 claims remedied and also agreed to
provide additional compensation to be determined by formula that will range
in aggregate amount from $50 million to $300 million depending on the total
number of claims remedied. At the end of the remediation program's claim
evaluation process, the Court will determine how the additional
compensation will be distributed.
The terms of the remediation program described above were enhanced again in
February 1997 pursuant to agreements reached with several states that had
not previously accepted the terms of the program. These changes were
incorporated as amendments to the above-described Stipulation of Settlement
and related settlement documents, and the amended Stipulation of Settlement
was approved as fair to class members by the U.S. District Court in March
1997. By that point in time, the Company had entered into agreements with
all 50 states and the District of Columbia pursuant to which each
jurisdiction had accepted the remediation plan and the Company had agreed
to pay approximately $65 million in fines, penalties and related payments.
The decision of the U.S. District Court to certify a class in the
above-described litigation for settlement purposes only and to approve the
class action settlement as described in the amended Stipulation of
Settlement was affirmed by the U.S. Court of Appeals for the Third Circuit
in July 1998 although the issue of class counsel's fees was sent back to
the U.S. District Court for review. The Supreme Court denied certiorari in
January 1999, thereby making final the approval of the class action
settlement.
While the approval of the class action settlement is now final, the Company
remains subject to oversight and review by insurance regulators and other
regulatory authorities with respect to its sales practices and the conduct
of the remediation program. The releases granted by the state insurance
regulators pursuant to the individual state settlement agreements do not
become final until the remediation program has been completed without any
material changes to which those regulators have not agreed. The U.S.
District Court has also retained jurisdiction as to all matters relating to
the administration, consummation, enforcement and interpretation of the
class action settlement.
Pursuant to the state agreements and the amended Stipulation of Settlement,
as approved by the U.S. District Court, the Company initiated its
remediation program in 1997. The Company mailed packages and provided broad
class notice to the owners of approximately 10.7 million policies eligible
to participate in the remediation program in
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THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
16. CONTINGENCIES AND LITIGATION (CONTINUED)
October 1996, informing them of their rights. Owners of approximately
21,800 policies elected to be excluded from the class action settlement. Of
those eligible to participate in the settlement, policyowners who believed
they were misled were invited to file a claim through an Alternative
Dispute Resolution ("ADR") process. The ADR process was established to
enable the Company to discharge its liability to the affected policyowners.
Policyowners who did not wish to file a claim in the ADR process were
permitted to choose from options available under Basic Claim Relief, such
as preferred rate premium loans, or annuities, mutual fund shares or life
insurance policies that the Company will enhance.
In January 1997 the U.S. District Court sanctioned and fined the Company
$1 million for failure to properly implement procedures for its employees
to retain documents in violation of the Courts' order that required the
parties to preserve all documents relevant to the class action and
remediation program. The Court ordered the Company to implement a document
retention policy and directed that an independent expert be engaged to
investigate the extent of document destruction and its impact on the
remediation program.
In response to the class notices, the owners of approximately 503,000
policies indicated an interest in a Basic Claim Relief remedy. Management
believes that costs associated with providing Basic Claim Relief will not
be material to the Company's financial position or results of operations.
The owners of approximately 1.16 million policies responded to the class
notices by indicating an intent to file an ADR claim. All policyholders
who responded were provided an ADR claim form for completion and
submission. The ADR process generally requires that individual claim forms
and files be reviewed by the Company and by one or more independent claim
evaluators. Approximately 649,000 claim forms were completed and returned
and approximately 591,000 decision letters had been mailed to claimants as
of January 31, 1999. In many instances, claimants have the right to
"appeal" the Company's decision to an independent reviewer. Management
believes that the bulk of such appeals will be resolved in 1999.
In 1996, the Company recorded in its Consolidated Statement of Operations
the cost of $410 million as a guaranteed minimum remediation expense
pursuant to the settlement agreement. Management had no better information
available at that time upon which to make a reasonable estimate of losses
associated with the settlement. In 1997, based on additional information
derived from claim sampling techniques, the terms of the settlement and
the number of claim forms received, management increased the estimated
liability for the cost of remedying policyholder claims in the ADR process
by $1.64 billion before taxes to approximately $2.05 billion before taxes,
of which $1.80 billion was funded in a settlement trust. Management
expressly noted that additional cost items were anticipated that could not
be fully evaluated at that time.
In 1998, based on estimates derived from an analysis of claims actually
remedied (including interest), a sample of claims still to be remedied, an
estimate of additional liability associated with the results of the
investigation by the independent expert regarding the impact of document
destruction on the ADR program, and an estimate of additional liabilities
associated with a claimant's right to "appeal" the Company's decision,
management increased the estimated liability for the cost of ADR remedies
by $.51 billion before taxes to a total of $2.56 billion before taxes, all
of which has been funded in a settlement trust as discussed in Note 4. The
Company has also recorded from 1996 through 1998 additional charges to
reflect ongoing administrative costs related to the ADR program,
regulatory fines, penalties and related payments, litigation costs and
settlements, and other fees and expenses associated with the resolution of
sales practices issues. While management believes the foregoing provisions
are reasonable estimates based on information currently available, the
ultimate amount of the total cost of remedied policyholder claims and
other related costs is dependent on complex and varying factors, including
the relief options still to be chosen by claimants, the dollar value of
those options, and the number and type of claims that may successfully be
appealed.
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THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
16. CONTINGENCIES AND LITIGATION (CONTINUED)
The Company's litigation is subject to many uncertainties, and given the
complexity and scope, the outcomes cannot be predicted with precision. It
is possible that the results of operations or the cash flow of the Company,
in particular quarterly or annual periods, could be materially affected by
an ultimate unfavorable outcome of the matters specifically discussed
above. Management believes, however, that the ultimate resolution of all
such matters, after consideration of applicable reserves, should not have a
material adverse effect on the Company's financial position.
******
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PART C - OTHER INFORMATION
ITEM 28. FINANCIAL STATEMENTS AND EXHIBITS
(a) FINANCIAL STATEMENTS
(1) The Financial Statements of The Prudential Variable Contract
Account-11 (Registrant) consisting of the Statement of Net Assets, as
of December 31, 1998; the Statement of Operations for the period
ended December 31, 1998; the Statements of Changes in Net Assets for
the periods ended December 31, 1998 and 1997; the Notes relating
thereto appear in the statement of additional information (Part B of
the Registration Statement).
(2) The Financial Statements of The Prudential Insurance Company of
America (Depositor) consisting of the Statements of Financial
Position as of December 31, 1998 and 1997 the Statements of
Operations and Changes in Surplus and Asset Valuation Reserve and the
Statements of Cash Flows for the years ended December 31, 1998, 1997
and 1996; and the Notes relating thereto appear in the Statement of
Additional Information (Part B of the Registration Statement).
(b) EXHIBITS
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(1) Resolution of the Board of Directors of Incorporated by reference to
The Prudential Insurance Company Exhibit (1) to Post Effective
of America establishing The Amendment No. 28 to the Registration
Prudential Variable Contract Statement of The Prudential Variable
Account-11 Contract Account-10, Registration
No. 2-76580, filed February 22, 1997
(2) Rules and Regulations of The Prudential Variable Filed herewith
Contract Account-11
(3) Custodian Agreement with Investors Incorporated by reference to Exhibit (3)
Fiduciary Trust Company to Post-Effective Amendment No. 31 to this
Registration Statement filed April 29, 1998
(4) Investment Management Agreement between Prudential Filed herewith
and The Prudential Variable Contract Account-11
(i) Amendment No. 1 to Investment Management Agreement between Filed herewith
Prudential and The Prudential Variable Contract Account-11
(ii) Service Agreement between Prudential and The Incorporated by reference to Exhibit (d)(4), Post-
Prudential Investment Corporation Effective Amendment No. 33 to Form N-1A, The
Prudential Series Fund, Inc., Reg. No. 2-80896,
filed April 28, 1997
(5) Agreement Relating to the Sale of Filed herewith
Certain Contracts on a Variable
Basis between Prudential and The
Prudential Variable Contract
Account-11
(i) Agreement for the Sale of Incorporated by reference to Exhibit
VCA-11 Contracts between 5(iii) to Post-Effective Amendment
Prudential, The Prudential Variable No. 29 to this Registration Statement,
Contract Account-11 and Prudential filed May 1, 1997
Investment Management Services LLC
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(6) (i)(a) Specimen Copy of Group Incorporated by reference to
Annuity Contract Form GVA-1000 for Exhibit (6)(i)(a) to Post-Effective
individual retirement annuities Amendment No. 9 to this
Registration Statement, filed
April 24, 1987
(i)(b) Specimen Copy of Group Incorporated by reference to
Annuity Contract Form GVA-1000 for Exhibit (6)(i)(b) to Post-Effective
individual retirement annuity Amendment No. 8 to this
contracts issued after May 1, 1987 Registration Statement, filed
April 1, 1987
(i)(c) Specimen Copy of Group Incorporated by reference to
Annuity Contract Form GVA-1000 for Exhibit (6)(i)(c) to Post-Effective
individual retirement annuity Amendment No. 11 to this
contracts issued after May 1, 1988 Registration Statement, filed
April 8, 1988
(i)(d) Specimen Copy of Group Incorporated by reference to
Annuity Contract Form GVA-1000 for Exhibit (6)(i)(d) to Post-Effective
individual retirement annuity Amendment No. 17 to this
contracts issued after May 1, 1990 Registration Statement, filed
April 30, 1990
(i)(e) Specimen Copy of Group Incorporated by reference to
Annuity Amendment Form GAA-7793 Exhibit (6)(i)(e) to Post-Effective
for individual retirement annuity Amendment No. 17 to this
contracts issued before May 1, 1990 Registration Statement, filed
April 30, 1990
(ii)(a) Specimen Copy of Group Incorporated by reference to
Annuity Contract Form GVA-120-82 Exhibit (6)(ii)(a) to Post-Effective
for tax-deferred annuities with Amendment No. 9 to this
modifications for certain tax changes Registration Statement, filed
and the exchange offer April 24, 1987
(ii)(b) Specimen Copy of Group Incorporated by reference to
Annuity Contract Form GVA-120-87 Exhibit (6)(ii)(b) to Post-Effective
for tax-deferred annuity contracts Amendment No. 8 to this
issued after May 1, 1987 Registration Statement, filed
April 1, 1987
(ii)(c) Specimen Copy of Group Incorporated by reference to
Annuity Contract Form GVA-120-87 Exhibit (6)(ii)(c) to Post-Effective
for tax-deferred annuity contracts Amendment No. 11 to this
issued after May 1, 1988 Registration Statement, filed
April 8, 1988
(ii)(d) Specimen Copy of Group Incorporated by reference to
Annuity Contract Form GVA-120-87 Exhibit (6)(ii)(d) to Post-Effective
for tax-deferred annuity contracts Amendment No. 17 to this
issued after May 1, 1990 Registration Statement, filed
April 30, 1990
(ii)(e) Specimen Copy of Group Incorporated by reference to
Annuity Amendment Form GAA-7764 Exhibit (G)(ii)(e) to Post-Effective
for tax-deferred annuity contracts Amendment No. 17 to this
issued before May 1, 1990 Registration Statement, filed
April 30, 1990
(iii)(a) Specimen Copy of Group Incorporated by reference to
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Annuity Contract Form GVA-1010 for Exhibit (6)(iii) (a) to Post-Effective
deferred compensation plans Amendment No. 9 to this
Registration Statement, filed
April 24, 1987
(iii)(b) Specimen Copy of Group Incorporated by reference to
Annuity Contract Form GVA-1010 for Exhibit (6)(iii)(b) to Post-Effective
deferred compensation plan Amendment No. 8 to this
contracts issued after May 1, 1987 Registration Statement, filed
April 1, 1987
(iii)(c) Specimen Copy of Group Incorporated by reference to
Annuity Contract Form GVA-1010 for Exhibit (6)(iii)(c) to Post-Effective
deferred compensation plan Amendment No. 11 to this
contracts issued after May 1, 1988 Registration Statement, filed
April 8, 1988
(iii)(d) Specimen Copy of Group Incorporated by reference to
Annuity Contract Form GVA-1010 for Exhibit (6)(iii)(d) to Post-Effective
deferred compensation plan Amendment No. 17 to this
contracts issued after May 1, 1990 Registration Statement, filed
April 30, 1990
(iii)(e) Specimen Copy of Group Incorporated by reference to
Annuity Amendment Form GAA-7792 Exhibit (6)(iii)(e) to Post-Effective
for deferred compensation plan Amendment No. 17 to this
contracts issued before May 1, 1990 Registration Statement, filed
April 30, 1990
(iii)(f) Specimen Copy of Group Incorporated by reference to
Annuity Contract Form Exhibit 1 to Post-Effective
GAA-7900-DefComp for deferred Amendment No. 27 to the
compensation plan contracts issued Registration Statement of The
before May 1, 1996 Prudential Variable Contract
Account-10, Registration Statement
No. 2-76580, filed April 29, 1996.
(iii)(g) Specimen Copy of Group Incorporated by reference to
Annuity Contract Form Exhibit 11 to Post-Effective
GAA-7900-DefComp-1 for deferred Amendment No. 27 to the
compensation plan contracts issued Registration Statement of The
before May 1, 1996 Prudential Variable Contract
Account-10, Registration Statement
No. 2-76580, filed April 29, 1996.
(iii)(h) Specimen Copy of Group Incorporated by reference to
Annuity Contract Form Exhibit 12 to Post-Effective
GAA-7900-Secular for deferred Amendment No. 27 to the
compensation plan contracts issued Registration Statement of The
before May 1, 1996 Prudential Variable Contract
Account-10, Registration Statement
No. 2-76580, filed April 29, 1996.
(iii)(i) Specimen Copy of Group Incorporated by reference to
Annuity Contract Form Exhibit 13 to Post-Effective
GAA-7900-Secular-1 for deferred Amendment No. 27 to the
compensation plan contracts issued Registration Statement of The
before May 1, 1996 Prudential Variable Contract
Account-10, Registration Statement
No. 2-76580, filed April 29, 1996.
(iv) Specimen Copy of Group Incorporated by reference to
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Annuity Contract Form GVA-110-82 Exhibit (6)(iv) to Post-Effective
for Keogh Plans Amendment No. 8 to this
Registration Statement, filed
April 1, 1987
(v) Specimen Copy of Group Incorporated by reference to
Annuity Contract Form GVA-7454 for Exhibit (4)(v) to Post-Effective
Participants governed by the Texas Amendment No. 5 to this
Optional Retirement Program Registration Statement, filed
April 30, 1985
(a) Modifications for certain tax Incorporated by reference to
changes Exhibit (6)(v)(a) to Post-Effective
Amendment No. 8 to this
Registration Statement, filed
April 1, 1987
(vi) Specimen Copy of Group Incorporated by reference to
Annuity Contract Form GVA-1010 for Exhibit (6)(vi) to Post-Effective
non-qualified deferred compensation Amendment No. 11 to this
plans Registration Statement, filed
April 8, 1988
(7) Application and Enrollment Forms as Incorporated by reference to
revised for use after May 1, 1991 Exhibit (7) to Post-Effective
Amendment No. 19 to this
Registration Statement, filed
April 29, 1991
(8)(i) Copy of the Charter of Prudential Incorporated by reference to
amended to and including Post-Effective Amendment No. 9 to
November 14, 1995 Form S-1, Registration No. 33-20083,
filed April 9, 1997 on behalf of
The Prudential Variable Contract
Real Property Account.
(ii) Copy of the By-Laws of Prudential, Incorporated by reference to Form S-6,
as amended to and including Registration No. 333-64957, filed on
May 12, 1998 September 30, 1998 on behalf of The
Prudential Variable Appreciable Account
(13) (i) Consent of independent accountants Filed herewith
(ii) Powers of Attorney
(a) Members of the Registrant's Committee: Messrs. Fenster, Incorporated by reference to Exhibit (13)(i)(a)
McDonald and Weber to Post-Effective Amendment No. 31 to this
Registration Statement filed April 29, 1998
(b) Directors and Officers of Prudential Incorporated by reference to Post-Effective
Amendment No. 10 to Form S-1, Registration
No. 33-20083, filed April 9, 1998 on behalf of
The Prudential Variable Contract Real Property
Account.
(b)(i) Anthony S. Piszel Incorporated by reference toPost-Effective
Amendment No. 4 for Form N-4, Registration No.
333-23271, filed February 23, 1999, on behalf of
The Prudential Discovery Select Group Variable
Contract Account
(16) Calculation of Performance Data Appears under heading "Performance Information"
in theStatement of AdditionalInformation (Part B of
this Registration Statement)
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(17) Financial Data Schedule Filed herewith.
</TABLE>
ITEM 29. DIRECTORS AND OFFICERS OF PRUDENTIAL
Information about Prudential's Directors and Executive Officers appears under
the headings "The Prudential Insurance Company of America-Directors" and "The
Prudential Insurance Company of America-Principal Officers" in the Statement of
Additional Information (Part B of this Registration Statement).
ITEM 30. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
Registrant is a separate account of The Prudential Insurance Company of America
(Prudential), a mutual life insurance company organized under the laws of the
State of New Jersey. The subsidiaries of Prudential are listed under Item 24 to
Post-Effective Amendment No. 36 to the Form N-1A Registration Statement for The
Prudential Series Fund, Inc., Registration No. 2-80896, filed April 28, 1999,
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 other separate accounts, and in The Prudential
Variable Contract Account-24, shares of The Prudential Series Fund, Inc., a
Maryland corporation. The balance of the shares 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 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 and The Prudential Variable Contract Account-10,
separate accounts of Prudential registered as open-end, diversified management
investment companies under the Investment Company Act of 1940, and with the
Prudential Variable Contract Account-24, a separate account of Prudential
registered as a unit investment trust.
Prudential is a mutual insurance company. The 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 31. NUMBER OF CONTRACTOWNERS
As of March 31, 1999, the number of contractowners of qualified contracts
offered by Registrant was 494, and the number of contractowners of
non-qualified contracts offered by Registrant was 6.
ITEM 32. 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.
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<PAGE> 142
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 (6)(b) of Form S-6, Registration No. 333-64957, filed
September 30, 1998, on behalf of The Prudential Variable Appreciable Account.
Insofar as indemnification for liabilities arising under the Securities Act of
1933 (the Act) may be permitted to directors, officers and controlling persons
of the Registrant pursuant to the foregoing provisions or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
ITEM 33. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
Prudential does have other business of a substantial nature besides activities
relating to the assets of the Registrant. Prudential is involved in insurance,
reinsurance, securities, pension services, real estate and banking.
The Prudential Investment Corporation (PIC) is an investment unit of Prudential
and is actively engaged in the business of giving investment advice. The
officers and directors of Prudential and PIC who are engaged directly or
indirectly in activities relating to the Registrant have no other business,
profession, vocation, or employment of a substantial nature, and have not had
such other connections during the past two years.
The business and other connections, including principal business addresses, of
Prudential's Directors are listed under "The Prudential Insurance Company of
America-Directors" and "The Prudential Insurance Company of America-Principal
Officers" in the Statement of Additional Information (Part B of this
Registration Statement).
ITEM 34. PRINCIPAL UNDERWRITER
(a) Prudential Investment Management Services LLC (PIMS), a direct
wholly-owned subsidiary of Prudential, acts as the principal
underwriter for The Prudential Variable Contract Account-2, the
Prudential Variable Contract Account-10, The Prudential Variable
Contract Account-24, and for the Registrant, all (except for The
Prudential Variable Contract Account-24) registered as open-end
management investment companies under the Investment Company Act of
1940.
(b) Information regarding the Directors and Officers of PIMS is set forth
below.
<TABLE>
<S> <C> <C>
Name and Principal Position and Offices Positions and Offices
Business Address with Underwriter with Registrant
---------------- ---------------- ---------------
Robert F. Gunia*** President None
Jean D. Hamilton* Executive Vice President None
John R. Strangfeld, Jr.*** Executive Vice President None
Brian Henderson*** Senior Vice President and None
Chief Operating Officer
William V. Healey*** Senior Vice President, Secretary and None
</TABLE>
C-6
<PAGE> 143
<TABLE>
<S> <C> <C>
Chief Legal Officer
Margaret M. Deverell*** Vice President, Comptroller and None
Chief Financial Officer
C. Edward Chaplin* Treasurer None
Kevin B. Frawley** Senior Vice President and Chief None
Compliance Officer
</TABLE>
- -------------------------
* Principal Business Address: 751 Broad Street, Newark, NJ 07102
** Principal Business Address: 213 Washington Street, Newark, NJ 07102
*** Principal Business Address: 100 Mulberry Street, Newark, NJ 07102
(c) Reference is made to the Sections entitled "Prudential" and "Contract
Charges" in the prospectus (Part A of this Registration Statement) and
"Sale of Contracts" in the Statement of Additional Information (Part B
of this Registration Statement).
ITEM 35. 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 Three Building and Gateway Center 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 07068
The Prudential Insurance Company of America
c/o Prudential Defined Contribution Services
30 Scranton Office Park
Scranton, Pennsylvania 18507-1789
Prudential Investments Fund Management LLC
Gateway Center Three
100 Mulberry Street, Newark, NJ 07102
Investors Fiduciary Trust Company
801 Pennsylvania
Kansas City, Missouri 64105
ITEM 36. MANAGEMENT SERVICES
Not Applicable
C-7
<PAGE> 144
ITEM 37. UNDERTAKINGS
The Prudential Insurance Company of America (Prudential) 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.
Subject to the terms and conditions of Section 15(d) of the Securities Exchange
Act of 1934, the undersigned Registrant hereby undertakes to file with the
Securities and Exchange Commission such supplementary and periodic information,
documents and reports as may be prescribed by any rule or regulation of the
Commission heretofore or hereafter duly adopted pursuant to authority conferred
in that section. Registrant also undertakes (1) to file a post-effective
amendment to this registration statement as frequently as is necessary to
ensure that the audited financial statements in the registration statement are
never more than 16 months old as long as payment under the contracts may be
accepted; (2) to affix to the prospectus a postcard that the applicant can
remove to send for a Statement of Additional Information or to include as part
of any application to purchase a contract offered by the prospectus, a space
that an applicant can check to request a Statement of Additional Information;
and (3) to deliver any Statement of Additional Information promptly upon
written or oral request.
Restrictions on withdrawal under Section 403(b) Contracts are imposed in
reliance upon, and in compliance with, a no-action letter issued by the Chief
of the Office of Insurance Products and Legal Compliance of the Securities and
Exchange Commission to the American Council of Life Insurance on November 28,
1988.
REPRESENTATION PURSUANT TO RULE 6c-7
Registrant represents that it is relying upon Rule 6c-7 under the Investment
Company Act of 1940 in connection with the sale of its group variable contracts
to participants in the Texas Optional Retirement Program. Registrant also
represents that it has complied with the provisions of paragraphs (a) - (d) of
the Rule.
SIGNATURES
As required by the Securities Act of 1933 and the Investment Company Act of
1940, the Registrant certifies that it meets the requirements of Securities Act
Rule 485(b) for effectiveness of this Registration Statement and has caused
this Registration Statement to be signed on its behalf, in the City of Newark,
and State of New Jersey on this 26th day of April, 1999.
THE PRUDENTIAL VARIABLE CONTRACT ACCOUNT-11
By: /s/ E. MICHAEL CAULFIELD
-------------------------
E. Michael Caulfield
President
SIGNATURES
As required by the Securities Act of 1933, this Registration Statement has
been signed below by the following persons in the capacities and on the dates
indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------------------------- ------------------------ ------------
<S> <C> <C>
/s/ E. MICHAEL CAULFIELD President, The Prudential Variable April 26, 1999
------------------------ Contract Account-11 Committee
E. Michael Caulfield
/s/GRACE C.TORRES Treasurer and Principal April 26, 1999
-----------------
</TABLE>
C-8
<PAGE> 145
<TABLE>
<S> <C> <C>
Grace Torres Financial and Accounting Officer
*SAUL K. FENSTER Member, The Prudential Variable Contract April 26, 1999
---------------- Account-11 Committee
Saul K. Fenster
*W. SCOTT McDONALD, JR. Member, The Prudential Variable Contract April 26, 1999
----------------------- Account-11 Committee
W. Scott McDonald, Jr.
*JOSEPH WEBER Member, The Prudential Variable Contract April 26, 1999
------------- Account-11 Committee
Joseph Weber
*By: /s/ CAREN CUNNINGHAM
--------------------
Caren Cunningham
(Attorney-in-Fact)
</TABLE>
SIGNATURES
As required by the Securities Act of 1933 and the Investment Company Act of
1940, The Prudential Insurance Company of America has caused this Amendment to
the Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Newark, and State of New Jersey, on
this 26th day of April, 1999.
<TABLE>
<S> <C>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
By: /s/ E. MICHAEL CAULFIELD
---------------------
E. Michael Caulfield
Executive Vice President
</TABLE>
As required by the Securities Act of 1933, this Amendment to the Registration
Statement has been signed below by the following Directors and Officers of The
Prudential Insurance Company of America in the capacities and on the dates
indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
------------------- ------------------- ------------
<S> <C> <C>
*ARTHUR F. RYAN Chairman of the Board, )
--------------- Chief Executive Officer )
Arthur F. Ryan and President )
)
*FRANKLIN E. AGNEW )
------------------ )
Franklin E. Agnew Director)
)
*FREDERIC K. BECKER )
------------------- )
Frederic K. Becker )
Director)
)
*MARTIN A. BERKOWITZ )
-------------------- )
Martin A. Berkowitz Senior Vice President)
)
*RICHARD J. CARBONE )
------------------- )
Richard J. Carbone Chief Financial Officer)
) April 26, 1999
*JAMES G. CULLEN )
---------------- )
James G. Cullen Director)
)
*CAROLYNE K. DAVIS )
------------------ )
Carolyne K. Davis Director)
</TABLE>
C-9
<PAGE> 146
<TABLE>
<S> <C> <C>
)
*ROGER A. ENRICO )
---------------- )
Roger A. Enrico Director)
)
*ALLAN D. GILMOUR )
----------------- )
Allan D. Gilmour )
)
*WILLIAM H. GRAY, III )
--------------------- Director)
William H. Gray, III )
)
*JON F. HANSON )
-------------- )
Jon F. Hanson Director)
)
*GLEN H. HINER, JR. )
------------------- )
Glen H. Hiner, Jr. Director)
)
*CONSTANCE J. HORNER )
-------------------- )
Constance J. Horner Director)
)
*GAYNOR KELLEY )
-------------- )
Gaynor Kelley Director)
)
*BURTON G. MALKIEL )
------------------ )
Burton G. Malkiel Director)
)
*IDA F.S. SCHMERTZ )
------------------ )
Ida F.S. Schmertz Director)
)
*CHARLES R. SITTER )
------------------ )
Charles R. Sitter Director)
)
*DONALD L. STAHELI )
------------------ )
Donald L. Staheli Director)
)
*RICHARD M. THOMSON )
------------------- )
Richard M. Thomson Director)
)
*JAMES A. UNRUH )
--------------- )
James A. Unruh Director)
) April 26, 1999
*P. ROY VAGELOS, M.D. )
--------------------- )
P. Roy Vagelos, M.D. Director)
)
*STANLEY C. VAN NESS )
-------------------- )
Stanley C. Van Ness Director)
)
*PAUL A. VOLCKER )
---------------- )
Paul A. Volcker Director)
)
*JOSEPH H. WILLIAMS )
------------------- )
Joseph H. Williams Director)
)
*ANTHONY S. PISZEL )
------------------ Vice President)
Anthony S. Piszel and Controller)
</TABLE>
C-10
<PAGE> 147
*By: /s/ CAREN CUNNINGHAM
-----------------
Caren Cunningham
(Attorney-in-Fact)
C-11
<PAGE> 148
EXHIBIT INDEX
<TABLE>
<CAPTION>
Page
<S> <C>
(2) Rules and Regulations of The Prudential Variable Contract Account-11 C-12
(4) Investment Management Agreement between Prudential and
The Prudential Variable Contract Acount-11 C-20
(4)(i) Amendment No. 1 to Investment Management Agreement between
Prudential and The Prudential Variable Contract Account-11 C-22
(5) Agreement Relating to the Sale of Certain Contracts on a Variable
Basis between Prudential and The Prudential Variable Contract
Account-11 C-23
(13)(i) Consent of independent accountants C-26
(17) Financial Data Schedule C-27
</TABLE>
C-12
<PAGE> 1
EXHIBIT (2)
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
VARIABLE CONTRACT ACCOUNT-11
RULES AND REGULATIONS
ARTICLE I
GENERAL
Section 1. Name. The name of this account shall be The Prudential Variable
Contract Account-11 ("VCA-11").
Section 2. Purpose. VCA-11 is a variable contract account established pursuant
to the provisions of Chapter 28 of Title 17B of the Revised Statutes of New
Jersey, as amended. Its purpose is to provide a funding medium for such
contracts on a variable basis issued and administered by The Prudential
Insurance Company of America ("Prudential") as Prudential shall elect to
designate as participating therein.
ARTICLE II
MEETINGS OF PERSONS HAVING VOTING RIGHTS IN VCA-11
Section 1. Meetings. Meetings of the persons having voting rights in respect
of VCA-11 under Section 6 of this Article may be called by a majority of the
Committee referred to in Article III hereof. The notice of the meeting shall
state the purpose or purposes of the meeting. All such meetings shall be held
at the Corporate Home Office of Prudential or at such other place as may be
determined by the Committee, at the time and place stated in the notice of the
meeting.
Section 2. Required Meetings. (a) In the event that at any time less than a
majority of members of the Committee holding office at that time were elected
by persons having voting rights in respect of VCA-11, the Committee shall
forthwith cause to be held as promptly as possible, and in any event within 60
days, a meeting of such persons for the purpose of electing Committee members
to fill any existing vacancies, unless the United States Securities and
Exchange Commission shall by order extend such period.
Section 3. Notice of Meeting. A written or printed notice stating the place,
day and hour of the meeting and the purpose or purposes for which the meeting
is called, shall be given by mail, postage prepaid, to each person having
voting rights in respect of VCA-11 as of
<PAGE> 2
the date of such meeting, at his address as carried on the records of VCA-11.
Such notice shall be placed in the mail not less than 25 days prior to the date
of the meeting.
Section 4. Quorum. Persons entitled to cast more than thirty-five percent of
the votes which may be cast in accordance with Section 6 of this Article II,
represented either in person or by proxy, shall constitute a quorum for the
transaction of business at any meeting provided for by this Article, except
insofar as a higher quorum for the transaction of any particular item of
business may be required by applicable law. If a quorum shall not be present,
persons entitled to cast more than fifty percent of the votes represented in
person or by proxy at the meeting may adjourn the meeting to some later time.
When a quorum is present, the vote of more than fifty percent of the votes
represented in person or by proxy shall determine any question except as may be
otherwise provided by these Rules and Regulations or by law.
Section 5. Proxies. A vote may be cast either in person or by proxy duly
executed in writing. A proxy for any meeting shall be valid for any
adjournment of such meeting.
Section 6. Voting. (a) For the purpose of determining the persons having
voting rights in respect of VCA-11 who are entitled to notice of and to vote at
any meeting of such persons or any adjournment thereof, or to express consent
to or dissent from any proposal without a meeting, or for the purpose of any
other action, the Committee may fix, in advance, a date as the record date for
any such determination of such persons. Such date shall not be more than 70
nor less than 10 days before the date of such meeting, nor more than 70 days
prior to any other action.
(b) The following persons shall have voting rights in respect of VCA-11 as of
the date of any meeting provided for by this Article:
(1) each person who had an individual accumulation
account in VCA-11 as of the record date fixed in accordance
with paragraph (a) of this Section;
(2) each holder of a contract issued in connection with
deferred compensation plans established under Section 457 of
the Internal Revenue Code under which one or more accumulation
accounts in VCA-11 are maintained as of the record date so
fixed; and
(3) Prudential, if it had its own funds invested in
VCA-11 as of the record date so fixed.
(c) The number of votes which each such
person described in Paragraph (b)(1) of this Section may cast at a meeting
provided for by this Article shall be equal to the number of dollars and
fractions thereof in his individual accumulation account in VCA-11 as of the
<PAGE> 3
record date fixed in accordance with Paragraph (a) of this Section. The number
of votes which each such person described in Paragraph (b)(2) of this Section
may cast at a meeting provided for by this Article shall be equal to the
aggregate number of dollars and fractions thereof in the accumulation accounts
under the contract as of the record date so fixed. The number of votes which
Prudential may cast at a meeting provided for by this Article shall be equal to
the number of dollars and fractions thereof of Prudential's own funds invested
in VCA-11 as of the record date so fixed; provided however, that:
(1) With respect to the election of members of the VCA-11
Committee, Prudential shall cast its votes FOR each nominee
and shall WITHHOLD its votes from each nominee in the same
proportion as all other votes represented at the meeting, in
person or by proxy; and
(2) With respect to each other issue considered at a
meeting, Prudential shall cast its votes FOR and AGAINST the
issue and shall ABSTAIN from casting its votes on the issue in
the same proportion as all other votes represented at the
meeting, in person or by proxy.
Section 7. Order of Business. The order of business at the meetings provided
for in this Article shall be determined by the presiding officer.
Section 8. Inspectors. At each meeting of persons having voting rights in
respect of VCA-11 the polls shall be opened and closed, the proxies and ballots
shall be received and be taken in charge, and all questions touching the
qualification of voters, the validity of proxies or the acceptance or rejection
of votes shall be decided by three inspectors. Such inspectors, who need not
be persons having voting rights in respect of VCA-11, shall be appointed by the
Committee before the meeting, or if no such appointment shall have been made,
then by the presiding officer of the meeting. In the event of failure, refusal
or inability of any inspector previously appointed to serve, the presiding
officer may appoint any person to fill such vacancy.
ARTICLE III
THE PRUDENTIAL VARIABLE CONTRACT ACCOUNT-11 COMMITTEE
Section 1. Composition. The Prudential Variable Contract Account-11 Committee
("Committee") shall consist of not less than three or more than nine members.
The initial Committee, which shall consist of five members, shall be appointed
by the Chairman of the Board and Chief Executive Officer, the President or the
Vice Chairman of Prudential. The Committee shall, prior to giving notice of
<PAGE> 4
each meeting at which members of the Committee are to be elected, fix the
number of members that shall constitute the Committee until the next such
meeting. The members of the Committee elected at the September 1988 meeting of
persons having voting rights in respect of VCA-11 shall serve indefinite terms.
Any vacancy may be filled either by vote of the Committee pursuant to Section 9
of this Article or by a ballot at a meeting of persons having voting rights in
respect of VCA-11. Members elected to the Committee pursuant to Section 9 of
this Article shall serve until the next meeting of persons having voting rights
in respect of VCA-11. Members elected by vote of persons having voting rights
in respect shall serve indefinite terms. Members of the Committee need not
have voting rights in respect of VCA-11.
Section 2. Powers. The Committee shall have the following powers:
(a) to negotiate and approve agreements, required by the
Investment Company Act of 1940, entered into by VCA-11
providing for services relating to investment management and
to the sale of contracts on a variable basis issued and
administered by Prudential to the extent they include
participating interests in VCA-11 and to submit any agreement
for investment management services to the persons having
voting rights in respect of VCA-11 for their approval;
(b) to determine the initial fundamental investment
policy of VCA-11 and review investments made for VCA-11 to
determine that they conform to such policy;
(c) to consider changes in the fundamental investment
policy of VCA-11 and submit any recommendations with respect
thereto to the persons having voting rights in respect of
VCA-11 for their approval;
(d) to select an independent public accountant for
VCA-11;
(e) to amend these Rules and Regulations without the
approval of persons having voting rights in respect of VCA-11;
(f) to authorize the filing of all registration
statements and applications for exemptions, and related
reports and documents to be filed by VCA-11 with the
Securities and Exchange Commission under the Investment
Company Act of 1940 and the Securities Act of 1933 and the
rules and regulations thereunder; and
(g) to perform such additional acts for VCA-11 as may be
required to comply with the Investment Company Act of 1940 or
as may be necessary to carry out the functions of VCA-11 as
provided for by resolution of the Board of Directors of
Prudential.
<PAGE> 5
Section 3. Subcommittees. The Committee may elect by vote of a majority
thereof, which majority shall include a majority of the members who are not
affiliated persons of Prudential, two or more of its members to constitute an
Executive Subcommittee, which subcommittee shall have, and may exercise when
the Committee is not in session, any or all powers of the Committee.
The Committee by a majority thereof may appoint from among its members
other subcommittees, from time to time, and may determine the number of members
(not less than two) composing such subcommittees, and their functions.
Each subcommittee may make rules for the notice and conduct of its
meetings and the keeping of the records thereof. The term of any member of any
subcommittee shall be fixed by the Committee but no member of a subcommittee
shall hold office after the first meeting of the Committee following a meeting
of the persons having voting rights in VCA-11 at which one or more members of
the Committee is elected, unless reappointed.
Section 4. Meetings. Regular meetings of the Committee shall be held at such
places and at such times as the Committee, by majority vote, may determine from
time to time, and if so determined, no call or notice thereof need be given
except that at least two days' notice shall be given of the first regular
meeting following a change in the date of regular meetings. Special meetings
of the Committee may be held at any time or place, whenever called by the
Chairman of the Committee, or two or more members of the Committee. Notice
thereof shall be given to each member by the Secretary or any Assistant
Secretary to the Committee, unless all members are present or unless those not
present shall have waived notice thereof in writing, which waivers shall be
filed with the records of the meeting. Notice of special meetings stating the
time and place thereof shall be given by mail to each member at his residence
or business address at least two days before the meeting, or by delivering or
telephoning the same to him personally or by telephoning the same to him at his
residence or business address at least one day before the meeting; provided,
that the Chairman of the Committee may prescribe a shorter notice to be given
personally or by telephone or telegraph to each member at his residence or
business address. The Chairman of the Committee shall preside at all meetings
of the Committee at which he is present.
Section 5. Quorum. A majority of the members of the Committee shall constitute
a quorum for the transaction of business. When a quorum is present at any
meeting, a majority of the members present shall decide any question brought
before such meeting except as otherwise provided by law, or by these Rules and
Regulations.
<PAGE> 6
Section 6. Action Other Than at Meetings. Any action which may validly be
taken by the Committee at a regular or special meeting thereof may also be
taken without a meeting, provided that unanimous approval of such action has
been obtained either by telephonic communication with or in writing from each
member of the Committee. A record of any such action shall be maintained as
part of the minutes of the meetings of the Committee.
Section 7. Officers. At the first meeting of the Committee and at the first
meeting following each meeting of persons having voting rights in respect of
VCA-11 at which one or more members of the Committee is elected, the Committee
shall elect one of its members to act as Chairman of the Committee and he shall
hold office until his successor is elected and qualified.
The Committee shall appoint a Secretary to the Committee and such
other officers and assistant officers as it may deem advisable. With the
exception of the Chairman, none of the officers or assistant officers need be
members of the Committee. The Secretary and any Assistant Secretary shall have
the power to certify the minutes of the meetings, or any portion thereof, of
the persons having voting rights in respect of VCA-11 and of the Committee,
shall perform the duties customarily associated with the Secretary of a
corporation, and shall perform such other duties and have such other powers as
the Committee shall designate from time to time. All other officers and
assistant officers shall perform such duties and have such powers as the
Committee shall designate from time to time.
Section 8. Resignations. Any member of the Committee, the Chairman, the
Secretary or any other officer or assistant officer may resign his membership
or office at any time by mailing or delivering his resignation in writing to
the Chairman or to a meeting of the Committee. Any such resignation shall take
effect at the time specified therein or, if the time be not specified, upon
acceptance thereof by the Committee.
Section 9. Vacancies. (a) Vacancies occurring by reason of death, resignation
or otherwise of members of the Committee may be filled by a majority vote of
all the remaining members, provided that, immediately after filling any such
vacancy at least two-thirds of the members then holding office shall have been
elected to such office by persons having voting rights in respect of VCA-11.
Members elected pursuant to this Section shall serve until the next meeting of
the persons having voting rights in respect of VCA-11.
<PAGE> 7
(b) The committee shall have and may exercise all its powers notwithstanding
the existence of one or more vacancies in its number, provided there are at
least three members in office. If the office of any member of any
subcommittee, or the Chairman of the Committee, the Secretary or any other
officer or assistant officer becomes vacant, the Committee may elect a
successor by vote of a majority of the members then in office. Each successor
shall hold office until his successor shall be duly elected or appointed and
qualified.
Section 10. Removal. Any member of the Committee, the Chairman, the Secretary
or any other officer or assistant officer may be removed from office by a vote
of three-fifths of the Committee members then in office.
No person shall serve as a member of the Committee after the persons
having two-thirds or more of the voting rights in respect of VCA-11 have
declared, either in a writing filed with Prudential or by votes cast in person
or by proxy at a meeting, called for such purpose, of persons having voting
rights in respect of VCA-11, that such person should be removed as a Committee
member.
The Committee shall promptly call a meeting of persons with voting
rights in respect of VCA-11 to vote on the removal of any Committee member when
asked to do so by persons having 10% or more of the voting rights in respect to
VCA-11.
Whenever ten or more persons having voting rights in respect of VCA-11
who hold, in the aggregate, interests in VCA-11 having an asset value of at
last $25,000 or 1% of the voting rights in respect to VCA-11, whichever is
less, shall advise the Committee in writing that they wish to communicate with
other persons having voting rights in respect of VCA-11 with a view to a
request for a meeting for the purpose of removing any member or members of the
Committee from office, and such advice is accompanied by a form of
communication and request which they wish to transmit, the Committee shall
within five business days after receiving such advice either afford such
persons access to a list of the names and addresses of persons having voting
rights in respect of VCA-11 or inform them as to the approximate number of
persons having voting rights in respect of VCA-11 and the approximate cost of
mailing the proposed form of communication and request.
If the Committee elects to provide the information regarding the
approximate number of persons having voting rights in respect of VCA-11 and the
approximate cost of mailing to them the proposed communication and form of
request, the Committee, upon the written request of those desiring such a
mailing, accompanied by a tender of the material to be mailed and of the
reasonable expenses of mailing, shall, with reasonable promptness, mail such
material to all persons having voting rights in respect of VCA-11 at their
addresses of record, unless within five business days after such tender the
Committee shall mail to the persons requesting the mailing and file with the
U.S. Securities and Exchange Commission, together with a copy of the material
to be mailed, a written
<PAGE> 8
statement signed by at least a majority of the members of the Committee to the
effect that in their opinion either such material contains untrue statements of
fact or omits to state facts necessary to make the statements contained therein
not misleading, or would be in violation of applicable law, and specifying the
basis of such opinion.
The Committee shall mail copies of such material to all persons having
voting rights in respect of VCA-11 with reasonable promptness after the entry
of an order by the Securities and Exchange Commission so providing and the
renewal of such tender.
ARTICLE IV
COMPENSATION
The members of the Committee who are affiliated with Prudential shall
not receive any additional compensation for services which they may perform for
or on behalf of VCA-11. Members of the Committee who are not so affiliated
shall be compensated by Prudential. The Secretary and other officers or
assistant officers shall serve without additional compensation.
ARTICLE V
CHANGE IN CLASSIFICATION OF VCA-11
Any plan of reorganization pursuant to which the classification of
VCA-11 is changed from a management company to a unit investment trust, as
defined in Section 4(2) of the Investment Company Act of 1940, must be
submitted to the persons holding voting rights in respect of VCA-11 and
approved by a majority of the votes cast by such persons.
<PAGE> 1
EXHIBIT (4)
INVESTMENT MANAGEMENT AGREEMENT
Statement of Facts
A. On January 12, 1982, the Board of Directors of The Prudential
Insurance Company of America ("Prudential") adopted a resolution establishing
The Prudential Variable Contract Account-11 ("VCA-11") as a funding medium for
such contracts on a variable basis sold and administered by Prudential as may
be designated by it as participating therein.
B. Pursuant to the requirements of the Investment Company Act of
1940 ("1940 Act") VCA-11 will be registered thereunder as an investment
company.
C. The 1940 Act forbids any person from acting as investment
manager to a registered investment company except pursuant to
a written contract and Prudential may be regarded as the
investment manager of VCA-11.
Agreement
NOW THEREFORE, Prudential and VCA-11 do agree as follows:
1. Prudential shall manage the investment and reinvestment of the
assets held in VCA-11 in a manner consistent with the investment policies as
set forth in the registration statement of VCA-11, as from time to time
amended, under the 1940 Act.
2. Prudential shall determine what securities shall be purchased
or sold for VCA-11 and shall arrange for the necessary placement of orders and
execution of transactions. All brokers' commissions, taxes or governmental
fees attributable to transactions for VCA-11, and all other applicable taxes
arising out of the investment operations of VCA-11, including income and
capital gains taxes, if any, shall be charged against VCA-11.
3. At least once each month Prudential shall furnish to The
Prudential Variable Contract Account-11 Committee ("Committee") a schedule of
the investments held in VCA-11 and shall include therein a statement of all
purchases and sales made on behalf of VCA-11 during the period since the
preceding report.
4. For the services performed hereunder, Prudential will, in
determining unit values under the contracts participating in VCA-11 and in the
manner specified in such contracts, deduct an investment management fee at the
effective annual rate of one-fourth of one percent (0.25 percent).
<PAGE> 2
5. This agreement shall remain in force until the first meeting
of the participants in VCA-11, and from year to year thereafter, but only so
long as such continuance is approved at least annually by the affirmative vote
of a majority of the members of the Committee, including the specific approval
of a majority of the members of the Committee who are not interested persons of
Prudential, or by a majority of the votes cast by those persons having voting
rights in respect of VCA-11, as provided for by the Rules and Regulations of
VCA-11.
6. This agreement shall automatically terminate in the event it
shall not be approved by a majority of the votes cast by those persons having
voting rights in respect of VCA-11 at their first meeting, or at any subsequent
meeting at which the question of the renewal or continuance of this agreement
shall be voted upon. This agreement shall also terminate automatically in the
event of its assignment by Prudential.
7. This agreement may be terminated at any time, and without
payment of any penalty, by the Committee or by a majority of the votes cast by
those persons having voting rights in respect of VCA-11, on 60 days' written
notice to Prudential. This agreement may be terminated by Prudential on 90
days' written notice to the Committee.
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed this 17th day of March, 1982.
<TABLE>
<S> <C>
THE PRUDENTIAL INSURANCE COMPANY
OF AMERICA
Attest:
/S/ By /S/
- -------------------------------- ---
Secretary Vice President
THE PRUDENTIAL VARIABLE CONTRACT
ACCOUNT-11
Witnessed:
/S/ By /S/
- -------------------------------- ---
Secretary to the Committee Chairman of the Committee
</TABLE>
<PAGE> 1
EXHIBIT (4)(i)
AMENDMENT NO. 1 to
INVESTMENT MANAGEMENT AGREEMENT
Amendment No. 1 dated as of the 10th day of June, 1983 to AGREEMENT
dated the 17th day of March, 1982 (herein referred to as the "Agreement") by
and between THE PRUDENTIAL INSURANCE COMPANY OF AMERICA (herein referred to as
"Prudential"), and THE PRUDENTIAL VARIABLE CONTRACT ACCOUNT-11 (herein referred
to as "VCA-11").
Prudential and VCA-11 hereby agree that Section 3 of the Agreement
shall be amended to read as follows:
"3. At least once every three months Prudential shall furnish to
The Prudential Variable Contract Account-11 Committee ("Committee") a schedule
of the investments held in VCA-11 and shall include therein a statement of all
purchases and sales made on behalf of VCA-11 during the period since the
preceding report."
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed on their behalf by their duly authorized officers as of the date first
hereinabove mentioned.
<TABLE>
<S> <C>
THE PRUDENTIAL INSURANCE COMPANY
OF AMERICA
Attest:
/S/ By /S/
- -------------------------------- ---
Secretary Vice President
THE PRUDENTIAL VARIABLE CONTRACT
ACCOUNT-11
Attest:
/S/ By /S/
- -------------------------------- ---
Secretary to the Committee Chairman of the Committee
</TABLE>
<PAGE> 1
EXHIBIT (5)
AGREEMENT RELATING TO THE SALE OF CERTAIN
CONTRACTS ON A VARIABLE BASIS
Statement of Facts
A. On January 12, 1982, the Board of Directors of The Prudential
Insurance Company of America ("Prudential") adopted a resolution establishing
The Prudential Variable Contract Account-11 ("VCA-11") as a funding medium for
such contracts on a variable basis sold and administered by Prudential as may
be designated by it as participating therein.
B. Prudential will perform administrative and record keeping
functions in connection with the contracts on a variable basis which it may
issue, including enrolling participants, receiving and allocating
contributions, maintaining participants' accumulation accounts, preparing and
distributing confirmations, statements and reports. More particularly,
Prudential will:
(a) maintain such books of account and records of all transactions
relating to VCA-11 as may be necessary to reflect clearly the
assets and liabilities attributable to VCA-11, and in that
connection all investments and liabilities attributable to
VCA-11, at all times, shall be identifiable and
distinguishable from the other investments and liabilities of
Prudential;
(b) prepare and transmit to the VCA-11 Committee for its approval
all notices, proxies, proxy statements and periodic reports
that are required to be, or may be, transmitted to persons
having voting rights in respect of VCA-11, as provided for by
the Rules and Regulations of VCA-11, and upon the Committee's
approval transmit the same to such persons;
(c) prepare and file all reports required by law to be
filed with any state or federal regulatory authority; and
(d) pay all costs, taxes and other expenses attributable
to the operations of VCA-11, including, but not limited to,
salary, rent, postage, telephone, travel, legal, actuarial and
accounting fees, office equipment, stationery, and maintenance
of computer and other systems, but excluding brokers'
commission, taxes or governmental fees attributable to
transactions for VCA-11, and all other applicable taxes
arising out of the investment operations of VCA-11, including
income and capital gains taxes, if any. Such payment shall
not result in any reduction of the value or number of Units
credited to persons who hold participating interests in VCA-11
or in the amounts which they are entitled to receive under
contracts on a variable basis issued by Prudential other than
in a manner set forth in
<PAGE> 2
each such contract. Each such contract will set forth, either
in terms of dollars or of a percentage, or both, by which the
value of the amounts credited to persons holding participating
interests in VCA-11 will be reduced, the charge that will be
made in order to provide funds intended to defray the expenses
of administering the contracts.
C. Prudential will sell its contracts on a variable basis through
agents employed by it and through independent brokers and will pay certain
sales commissions in that connection as well as other expenses attributable to
the marketing sale, and distribution of such contracts.
D. Pursuant to the requirements of the 1940 Act, VCA-11 will be
registered thereunder as an investment company.
E. The 1940 Act forbids any person from acting as principal
underwriter to a registered investment company except pursuant
to a written contract and Prudential may be regarded as the
principal underwriter of VCA-11.
Agreement
NOW THEREFORE, Prudential and VCA-11 agree as follows:
1. Prudential will sell contracts on a variable basis that
include participating interests in VCA-11.
2. Each form of contract on a variable basis participating in
VCA-11 sold by Prudential shall set forth explicitly a schedule of deferred
sales charges. The deferred sales charge is imposed on certain withdrawals
from VCA-11. This deferred sales charge will be retained by Prudential and may
be used by it, to the extent necessary, for the payment of commissions to
persons instrumental in the sale of such form of contract and for payment of
other expenses incurred in connection with the marketing, sale and distribution
of such form of contract.
3. Promptly after it issues a form of contract on a variable
basis that includes participating interests in VCA-11, Prudential shall advise
the Prudential Variable Contract Account-11 Committee ("Committee") of the
amount of the deferred sales charge that will be imposed upon withdrawals.
Prudential shall also promptly advise the Committee of any change in the form
of contract that increases or decreases such charge.
4. It is understood that the compensation to Prudential,
resulting from the deferred sales charge imposed upon withdrawals made by
participants under any form of contract on a variable basis, is separate and
apart from the additional compensation, more fully described in
<PAGE> 3
a separate contract between the parties also executed as of this date,
providing for the performance of investment management, and is also separate
from and additional to the charge or charges made, as described in Paragraph B,
subparagraph (d), of the Statement of Facts preceding this Agreement, for the
purpose of providing funds to defray the expenses of administering the
contracts.
5. This agreement shall remain in force until the first meeting
of the participants in VCA-11 and from year to year thereafter, but only so
long as such continuance is approved at least annually by the affirmative vote
of the Committee, including the specific approval of a majority of the members
of the Committee who are not persons affiliated with Prudential, or by a
majority of the votes cast by those persons having voting rights in respect of
VCA-11, as provided for by the Rules and Regulations of VCA-11.
6. This agreement shall automatically terminate in the event of
its assignment by Prudential.
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed this 17th day of March, 1982.
<TABLE>
<S> <C>
THE PRUDENTIAL INSURANCE COMPANY
OF AMERICA
Attest:
/S/ By /S/
- -------------------------------- ---
Secretary Vice President
THE PRUDENTIAL VARIABLE CONTRACT
ACCOUNT-11
Witnessed:
/S/ By /S/
- -------------------------------- ---
Secretary to the Committee Chairman of the Committee
</TABLE>
<PAGE> 1
EXHIBIT (13)(i)
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Statement of Additional Information
constituting part of this Post-Effective Amendment No. 33 to the registration
statement on Form N-3 of The Prudential Variable Contract Account-11 (the
"Registration Statement") of our reports dated February 25, 1999, relating to
the financial statements and financial highlights of The Prudential Variable
Contract Account-10, The Prudential Variable Contract Account-11 and The
Prudential Variable Contract-24, which appear in such Statement of Additional
Information.
We also consent to the use in the Statement of Additional Information
constituting part of this Registration Statement of our report dated February
26, 1999, relating to the consolidated financial statements of The Prudential
Insurance Company of America and its subsidiaries, which appears in such
Statement of Additional Information.
We also consent to the references to us under the headings "Financial
Highlights" in the Prospectus and "Experts" in the Statement of Additional
Information.
PricewaterhouseCoopers LLP
New York, New York
April 23, 1999
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000701275
<NAME> THE PRUDENTIAL VARIABLE CONTRACT ACCOUNT-11
<SERIES>
<NUMBER> 001
<NAME> THE PRUDENTIAL VARIABLE CONTRACT ACCOUNT-11
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<INVESTMENTS-AT-COST> 91,942,827
<INVESTMENTS-AT-VALUE> 91,942,827
<RECEIVABLES> 842,639
<ASSETS-OTHER> (3,269,701)
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 89,515,765
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 0
<TOTAL-LIABILITIES> 0
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 0
<SHARES-COMMON-STOCK> 53,217,753
<SHARES-COMMON-PRIOR> 35,757,000
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 0
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 5,595,451
<OTHER-INCOME> 0
<EXPENSES-NET> 963,852
<NET-INVESTMENT-INCOME> 4,631,599
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 4,631,599
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 168,192,543
<NUMBER-OF-SHARES-REDEEMED> (172,479,090)
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 345,052
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 240,963
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 963,852
<AVERAGE-NET-ASSETS> 0
<PER-SHARE-NAV-BEGIN> 2.4326
<PER-SHARE-NII> 0.1163
<PER-SHARE-GAIN-APPREC> 0.00
<PER-SHARE-DIVIDEND> 0.00
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 2.5489
<EXPENSE-RATIO> 0.99
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
