<PAGE> 1
As Filed with the SEC on April 28, 2000
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. 34
and
REGISTRATION STATEMENT UNDER
THE INVESTMENT COMPANY ACT OF 1940
AMENDMENT NO. 36
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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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C. CHRISTOPHER SPRAGUE
Assistant General Counsel
Prudential Investments Fund Management LLC
Gateway Center Three
100 Mulberry Street, 4th 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, 2000 pursuant to paragraph (b) of Rule 485
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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, 2000
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 Contract 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, 2000. 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. Loans.................................................................. 20
12. 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
LITIGATION.................................................................... 26
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 certain
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, under 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 a qualified arrangement that permits Participants, under 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 an investment option 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
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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
ANNUAL CONTRACT FEE (maximum)............................................ $30
ANNUAL EXPENSES (as a percentage of average net assets)
Mortality and Expense Risk Fees.......................................... None
Investment Management Fees............................................... 0.25%
Maximum 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%.
** Prudential may impose a reduced Administrative Fee where warranted by
economies of scale and the expense characteristics of the Contractholder's
retirement arrangement.
VCA 10 and VCA 11 Examples
These examples will help you compare the fees and expenses of the VCA 10 and VCA
11 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 $85 $123
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 $55 $123
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 $55 $123
</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.
<PAGE> 7
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
ANNUAL CONTRACT FEE (maximum).................................................. $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> 8
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% .03% .02% .02%
Total Annual Portfolio Expenses..... .57% .43% .47% .62%
</TABLE>
<TABLE>
<CAPTION>
Government
Global Income Stock Index
Portfolio Portfolio Portfolio
--------- ----------- ------------
<S> <C> <C> <C>
Investment Management Fee........... .75% .40% .35%
Other Expenses...................... .09% .04% .04%
Total Annual Portfolio Expenses..... .84% .44% .39%
</TABLE>
VCA 24 EXAMPLES
These examples will help you compare the fees and expenses 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............................... $84 $93 $103 $161
Diversified Bond.................................... 82 88 95 143
Equity.............................................. 82 89 97 148
Flexible Managed.................................... 84 93 105 165
Global.............................................. 86 100 117 189
Government Income................................... 82 88 95 144
Stock Index......................................... 81 86 93 139
</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............................... $14 $43 $73 $161
Diversified Bond.................................... 12 38 65 143
Equity.............................................. 12 39 67 148
Flexible Managed.................................... 14 43 75 165
Global.............................................. 16 50 87 189
Government Income................................... 12 38 65 144
Stock Index......................................... 12 36 63 139
</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.
The Financial Highlights Tables appear at the end of this Prospectus.
5
<PAGE> 9
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 six 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> 10
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. After the first year, 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. There are no mortality and expense risk fees under the Contracts.
WITHDRAWALS & TRANSFERS
As explained later, notices, forms and requests for transactions related to the
Contracts may be provided in traditional paper form or by electronic means,
including telephone and internet. Prudential reserves the right to vary the
means available, including limiting them to electronic means, from Contract to
Contract by Contract terms, related service agreements with the Contractholder,
or notice to the Contractholder and participants.
All permitted telephone transactions may normally be initiated by calling
Prudential at 800-458-6333. All permitted internet transactions may be made
through www.prudential.com. Prudential may provide other permitted telephone
numbers or internet addresses through the Contractholder or directly to
participants as authorized by the Contractholder.
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 - for example, Federal Express - to Prudential
Investments, 30 Scranton Office Park, Scranton, Pennsylvania 18507-1789 or
- 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" which means all requested information
must be submitted in a manner satisfactory to Prudential.
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.
Transaction requests (including death benefit claims) received directly by
Prudential in good order on a given Business Day before the established
transaction cutoff time (4 PM Eastern Time, or such earlier time that the New
York Stock Exchange may close or such earlier time that the Contractholder and
Prudential have agreed to) will be effective for that Business Day. For purposes
of the preceding sentence, we define "good order" generally as an instruction
received by Prudential that is sufficiently complete and clear that Prudential
does not need to exercise any discretion to follow such instruction.
7
<PAGE> 11
Prudential
Prudential is a mutual life insurance company incorporated in 1875 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. Prudential is working toward
completing this process in 2001 and currently expects adoption by the Board of
Directors to take place in the latter part of 2000. However, there is no
certainty that the demutualization will be completed in this timeframe or that
the necessary approvals will be obtained. Also, it is possible that after
careful review, Prudential could decide not to demutualize or could decide to
delay its plans.
The plan of reorganization, which has not been fully developed and approved,
would provide the criteria for determining eligibility and the methodology for
allocating shares or other consideration to those who would be eligible.
Generally the amount of shares or other consideration eligible customers would
receive would be based on a number of factors, including types, amounts and
issue years of the policies. As a general rule, owners of Prudential-issued
insurance policies and annuity contracts would be eligible, provided that their
policies were in force on the date Prudential's Board of Directors adopted a
plan of reorganization, while mutual fund customers and customers of the
company's subsidiaries would not be. It has not yet been determined whether any
exceptions to that general rule will be made with respect to policyholders and
contractholders of Prudential's subsidiaries. This does not constitute a
proposal, offer, solicitation or recommendation regarding any plan of
reorganization that may be proposed or a recommendation regarding the ownership
of any stock that could be issued in connection with any such demutualization.
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. VCA 10,
VCA 11 and the available Series Fund portfolios have different goals and
strategies which may affect the level of risk and return of your investment.
There is no guarantee that VCA 10, VCA 11 or any of the Series Fund portfolios
will meet their objectives.
8
<PAGE> 12
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 the possibility of 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. There is the
risk that the value of a particular debt instrument could decrease. Debt
investments 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 investment.
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 that VCA 10 anticipates purchasing at a later date. VCA 10 will
maintain appropriate liquid assets 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> 13
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 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. VCA 10 may
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> 14
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 this type of short
sale, VCA 10 owns the security sold (or one convertible into it), but borrows
the stock for the actual sale.
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 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 investment, an investment in VCA 10 could lose value, and you
could lose money.
More information about some of 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 maturity 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 for more information on these
requirements.)
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> 15
tively short period of time, in compliance with the rules applicable to money
market mutual funds.
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. VCA 11 may
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 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 investment, 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.
More information about some of the investment techniques described above,
is provided in the SAI.
An Investment in VCA 11 is not insured or guaranteed by the Federal Deposit
Insurance Corporation or any other government agency. Although VCA 11 seeks to
preserve the value of your investment, it is possible to lose money by investing
in VCA 11.
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. A total investment return consistent with a
conservatively managed diversified portfolio. To achieve this objective, we
invest in a mix of money market instruments, fixed income securities,
and common stocks.
<PAGE> 16
DIVERSIFIED BOND PORTFOLIO. A high level of income over a longer term while
providing reasonable safety of capital. To achieve this objective, we invest
primarily in higher-grade debt obligations and high-quality money market
investments.
EQUITY PORTFOLIO. Capital appreciation. To achieve this objective, we invest
primarily in common stocks of major established corporations as well as smaller
companies, that appear to offer attractive prospects of price appreciation.
FLEXIBLE MANAGED PORTFOLIO. A high total return consistent with an aggressively
managed diversified portfolio. To achieve this objective, we invest in a mix
of money market instruments, fixed income securities, and equity securities.
GLOBAL PORTFOLIO. Long-term growth of capital. To achieve this objective, we
invest primarily in common stocks (or their equivalents) of foreign and U.S.
companies.
GOVERNMENT INCOME PORTFOLIO. A high level of income over the long term
consistent with the preservation of capital. To achieve this objective, we
invest 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 by the U.S. Government.
STOCK INDEX PORTFOLIO. Investment results that generally correspond to the
performance of publicly traded common stocks. To achieve this objective, we
attempt to duplicate the price and yield performance of the Standard & Poor's
500 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 4:00 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 4:00 p.m. on that
day. We may impose a transaction cut-off time earlier than 4:00 p.m. for
retirement arrangements that make company stock available to Participants.
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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<PAGE> 17
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.
Prudential and PIC may use affiliated brokers to execute brokerage transactions
on behalf of VCA 10 and 11 as long as the commissions charged by such
affiliated brokers are comparable to the commissions received by other brokers
in connection with comparable transactions involving similar securities during a
comparable period of time. More information about brokerage transactions is
included in the SAI.
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
participating in the MEDLEY Program, the year in which the withdrawal is made
and the kind of retirement arrangement that covers the Participant. Such
participation in the MEDLEY Program ends on the date when the Participant
account under the Contract is cancelled. In the event of such cancellation
Prudential reserves the right to consider the Participant to be participating in
the Contract for a limited time (currently about one year) for the purposes of
calculating any withdrawal charge on the withdrawal of any future contributions.
The maximum deferred sales charges 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> 18
- - (except for IRAs) due to a Participant's resignation or retirement or
termination of the Participant's employment by the Contractholder, or
- - 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 may 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 0.25%
of their net assets. In addition, each is also charged a maximum annual
administration fee of 0.75% of its net assets. Prudential may impose a reduced
Administrative Fee where warranted by economies of scale and the expense
characteristics of the contractholder's retirement arrangement.
VCA 24 is subject to an annual administrative fee of 0.75% 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 printing costs,
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> 19
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 asset 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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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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- - Next, Units in the Government Income Portfolio of the Series Fund, and
- - 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 choose from these same 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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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
The way you provide all or some requests, consents, or notices under a Contract
(or related agreement or procedure) may include telephone access to an automated
system, telephone access to a staffed call center, or internet access through
www.prudential.com, as well as traditional paper. Prudential reserves the right
to vary the means available from Contract to Contract, including limiting them
to electronic means, by Contract terms, related service agreements with the
Contractholder, or notice to the Contractholder and Participants. If electronic
means are authorized, you will automatically be able to use them.
Prudential also will be able to use electronic means to provide notices to you,
provided your Contract or other agreement with the Contractholder does not
specifically limit these means. Electronic means will only be used, however,
when Prudential reasonably believes that you have effective access to the
electronic means and that they are allowed by applicable law. Also, you will be
able to receive a paper copy of any notice upon request.
For your protection and to prevent unauthorized exchanges, telephone calls and
other 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, telephone and other
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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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. 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.
12. 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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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 annual
and 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.
Advertising materials for a Separate Account may include biographical
information relating to its portfolio manager, and may include or refer to
commentary by the Separate Account's manager concerning investment style,
investment discipline, asset growth, current or past business experience,
business capabilities, political, economic or financial conditions and other
matters of general interest to investors. Advertising materials also may
include mention of The Prudential Insurance Company of America, its affiliates
and subsidiaries, and reference the assets, products and services of those
entities.
From time to time, advertising materials may include information concerning
retirement and investing for retirement, and may refer to Lipper rankings or
Morningstar ratings, other related analysis supporting those ratings, other
industry publications, business periodicals and market indexes. In addition,
advertising materials may reference studies or analyses performed by
Prudential or its affiliates.
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>
1999 1998 1997
-------- ---------- --------
<S> <C> <C> <C>
VCA 10 (83,117) ($1,425,180) ($32,895)
VCA 11 68,215 (1,588,734) 0
VCA 24 (475,162) 2,782,398 614,058
</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> 27
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> 28
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> 29
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
corresponds to 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.
Litigation
We are subject to legal and regulatory actions in the ordinary course of our
businesses, including class actions. Pending legal regulatory actions include
proceedings specific to our practices and proceedings generally applicable to
business practices in the industries in which we operate. As an example of such
litigation, in March, 2000, plaintiffs filed a purported class action against us
titled Olmsted v. Pruco Life Insurance Company of New Jersey and The Prudential
Insurance Company of America, alleging that certain fees and expenses charged to
the plaintiffs in connection with the sale of variable annuities since March 1,
1997 were excessive and unreasonable. In certain of these lawsuits, large and/or
indeterminate amounts are sought, including punitive or exemplary damages.
In particular, Pruco Life and Prudential have been subject to substantial
regulatory actions and civil litigation involving individual life insurance
sales practices. In 1996, Prudential, on behalf of itself and many of its life
insurance subsidiaries including Pruco Life, entered into settlement agreements
with relevant insurance regulatory authorities and plaintiffs in the principal
life insurance sales practices class action lawsuit covering policyholders of
individual permanent life insurance policies issued in the United States from
1982 to 1995. Pursuant to the settlements, the companies agreed to various
changes to their sales and business practices controls and a series of fines,
and are in the process of distributing final remediation relief to eligible
class members. In many instances, claimants have the right to "appeal" the
decision to an independent reviewer. The bulk of such appeals were resolved in
1999, and the balance is expected to be addressed in 2000. As of January 31,
2000, Prudential and/or Pruco Life remained a party to two putative class
actions and approximately 158 individual actions relating to permanent life
insurance policies issued in the United States between 1982 and 1995. Additional
suits may be filed by individuals who opted out of the settlements. While the
approval of the class action settlement is now final, Prudential and Pruco Life
remain subject to oversight and review by insurance regulators and other
regulatory authorities with respect to their sales practices and the conduct of
the remediation program. The U.S. District Court has also retained jurisdiction
as to all matters relating to the administration, consummation, enforcement and
interpretation of the settlements.
26
<PAGE> 30
In 1999, 1998, 1997 and 1996, Prudential recorded provision in its Consolidated
Statements of Operation of $100 million, $1,150 million, $2,030 million and
$1,125 million, respectively, to provide for estimated remediation costs, and
additional sales practices costs including related administrative costs,
regulatory fines, penalties and related payments, litigation costs and
settlements, including settlements associated with the resolution of claims of
deceptive sales practices asserted by policyholders who elected to "opt-out" of
the class action settlement and litigate their claims against Prudential
separately, and other fees and expenses associated with the resolution of sales
practices issues.
27
<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>
28
<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.
29
<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.
30
<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 four-year period ended December 31,
1999 has been audited by PricewaterhouseCoopers LLP, independent accountants,
whose unqualified report thereon appears in VCA 10's Annual Report dated
December 31, 1999. 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
---------------------------------------------------------------------------------------------------
12/31/99 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
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Investment Income... $ .1232 $ .0956 $ .0757 $ .0657 $ .0609 $ .0563 $ .0855 $ .0551 $ .0538 $ .0718
Expenses
For investment
management fee.. (.0172) (.0177) (.0154) (.0118) (.0094) (.0083) (.0077) (.0064) (.0056) (.0048)
For administrative
expenses not
covered by the
annual account
charge............ (.0513) (.0530) (.0461) (.0354) (.0282) (.0251) (.0230) (.0192) (.0169) (.0144)
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Net investment
income............ .0547 .0249 .0142 .0185 .0233 .0229 .0548 .0295 .0313 .0526
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Capital Changes
Net realized
gain (loss) on
investments..... .2537 .8002 1.2761 .5085 .3850 .1947 .2763 .2884 .1096 .0791
Net unrealized
appreciation
(depreciation)
of investments.. (.2814) (1.0426) .3841 .5682 .4744 (.2148) .2599 (.0823) .4478 (.2054)
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Net increase
(decrease) in
Unit Value........ .027 (.2175) 1.6744 1.0952 .8827 .0028 .5910 .2356 .5887 (.0737)
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Unit Value
Beginning of year 6.7952 7.0127 5.3383 4.2431 3.3604 3.3576 2.7666 2.5310 1.9423 2.0160
End of year....... $6.8222 $6.7952 $7.0127 $5.3383 $4.2431 $3.3604 $3.3576 $2.7666 $2.5310 $1.9423
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Ratio of Expenses to
average net
assets**.......... 1.00% 1.00% 1.00% 1.00% .99% 1.00% 1.00% .99% .99% 1.00%
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Ratio of net
investment income
to average net
assets............ .79% .36% .24% .39% .61% .68% 1.78% 1.14% 1.38% 2.74%
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Portfolio turnover
rate.............. 82% 49% 47% 52% 45% 32% 45% 65% 72% 106%
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Number of Units
outstanding for
Participants at
end of year
(000 omitted)..... 63,330 80,431 83,261 91,532 81,817 79,189 73,569 62,592 58,699 55,621
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
</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 Accumulation Unit Value of VCA 10. This charge is made by reducing
Participants' Accumulation Accounts by a number of Accumulation Units equal in
value to the charge.
31
<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 four-year period ended December 31,
1999 has been audited by PricewaterhouseCoopers LLP, independent accountants,
whose unqualified report thereon appears in VCA 11's Annual Report dated
December 31, 1999. 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
--------------------------------------------------------------------------------------------------
12/31/99 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
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Investment Income... $ .1378 $ .1411 $ .1353 $ .1281 $ .1313 $ .0912 $ .0682 $ .0812 $ .1215 $ .1464
Expenses
For investment
management fee.. (.0065) (.0062) (.0059) (.0056) (.0054) (.0052) (.0050) (.0049) (.0047) (.0044)
For administrative
expenses not
covered by the
annual account
charge............ (.0194) (.0186) (.0178) (.0170) (.0160) (.0154) (.0150) (.0147) (.0142) (.0131)
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Net investment
income............ .1119 .1163 .1116 .1055 .1099 .0706 .0482 .0616 .1026 .1289
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Net increase
(decrease) in
Unit Value........ .1119 .1163 .1116 .1055 .1099 .0706 .0482 .0616 .1026 .1289
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Unit Value
Beginning of year 2.5489 2.4326 2.3210 2.2155 2.1056 2.0350 1.9868 1.9252 1.8226 1.6937
End of year....... $2.6608 $2.5489 $2.4326 $2.3210 $2.2155 $2.1056 $2.0350 $1.9868 $1.9252 $1.8226
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Ratio of Expenses to
average net
assets**.......... .99% .99% .98% .98% .99% 1.00% .99% 1.00% 1.00% 1.00%
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Ratio of net
investment income
to average net
assets............ 4.29% 4.78% 4.73% 4.57% 5.08% 3.42% 2.40% 3.14% 5.47% 7.33%
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Number of Units
outstanding for
Participants at
end of year
(000 omitted)..... 34,100 34,882 35,757 38,315 34,136 35,448 29,421 27,518 26,400 25,174
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
</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 Accumulation Units equal in value to the charge.
32
<PAGE> 36
FINANCIAL INFORMATION
PARTICIPANT ACCUMULATION UNIT VALUES FOR VCA 24
<TABLE>
<CAPTION>
SUBACCOUNTS
- ------------------------------------------------------------------------------------------------------------------------------------
EQUITY
---------------------------------------------------------------------------------------------------
01/01/99 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
TO TO TO TO TO TO TO TO TO TO
12/31/99 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
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Beginning of period (rounded) $4.2286 $3.8962 $3.1487 $2.6769 $2.0541 $2.0136 $1.6646 $1.4690 $1.1745 $1.2484
End of period (rounded) $4.7195 $4.2286 $3.8962 $3.1487 $2.6769 $2.0541 $2.0136 $1.6646 $1.4690 $1.1745
Accumulation Units Outstanding
at end of period (000 omitted) 93,084 111,855 141,162 132,455 118,394 99,323 79,985 51,639 35,657 21,964
</TABLE>
<TABLE>
<CAPTION>
SUBACCOUNTS
- ------------------------------------------------------------------------------------------------------------------------------------
DIVERSIFIED BOND
---------------------------------------------------------------------------------------------------
01/01/99 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
TO TO TO TO TO TO TO TO TO TO
12/31/99 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
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Beginning of period (rounded) $2.3829 $2.2404 $2.0789 $2.0065 $1.6746 $1.7435 $1.5950 $1.4992 $1.2973 $1.2075
End of period (rounded) $2.3475 $2.3829 $2.2404 $2.0789 $2.0065 $1.6746 $1.7435 $1.5950 $1.4992 $1.2973
Accumulation Units Outstanding
at end of period (000 omitted) 20,408 23,260 19,114 20,280 16,898 14,575 14,481 10,103 7,928 5,824
</TABLE>
<TABLE>
<CAPTION>
SUBACCOUNTS
- ------------------------------------------------------------------------------------------------------------------------------------
FLEXIBLE MANAGED
---------------------------------------------------------------------------------------------------
01/01/99 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
TO TO TO TO TO TO TO TO TO TO
12/31/99 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
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Beginning of period (rounded) $3.1844 $2.9103 $2.4854 $2.2038 $1.7886 $1.8609 $1.6223 $1.5189 $1.2201 $1.2056
End of period (rounded) $3.4074 $3.1844 $2.9103 $2.4854 $2.2038 $1.7886 $1.8609 $1.6223 $1.5189 $1.2201
Accumulation Units Outstanding
at end of period (000 omitted) 47,774 53,275 64,184 59,681 51,419 44,729 36,035 23,410 16,859 12,229
</TABLE>
<TABLE>
<CAPTION>
SUBACCOUNTS
- ------------------------------------------------------------------------------------------------------------------------------------
CONSERVATIVE BALANCED
---------------------------------------------------------------------------------------------------
01/01/99 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
TO TO TO TO TO TO TO TO TO TO
12/31/99 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
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Beginning of period (rounded) $2.7909 $2.5165 $2.2364 $1.9993 $1.7175 $1.7473 $1.5691 $1.4781 $1.2508 $1.1971
End of period (rounded) $2.9538 $2.7909 $2.5165 $2.2364 $1.9993 $1.7175 $1.7473 $1.5691 $1.4781 $1.2508
Accumulation Units Outstanding
at end of period (000 omitted) 47,902 51,101 51,297 50,029 46,873 43,594 36,932 24,223 16,385 11,857
</TABLE>
<TABLE>
<CAPTION>
SUBACCOUNTS
- ------------------------------------------------------------------------------------------------------------------------------------
STOCK INDEX
---------------------------------------------------------------------------------------------------
01/01/99 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
TO TO TO TO TO TO TO TO TO TO
12/31/99 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
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Beginning of period (rounded) $5.5972 $4.3910 $3.3302 $2.7378 $2.0123 $2.0072 $1.8440 $1.7342 $1.3469 $1.4086
End of period (rounded) $6.6972 $5.5972 $4.3910 $3.3302 $2.7378 $2.0123 $2.0072 $1.8440 $1.7342 $1.3469
Accumulation Units Outstanding
at end of period (000 omitted) 80,502 78,885 85,941 80,572 51,701 40,522 32,178 20,554 10,724 4,232
</TABLE>
<TABLE>
<CAPTION>
SUBACCOUNTS
- ---------------------------------------------------------------------------------------------------------------
GLOBAL
------------------------------------------------------------------------------
01/01/99 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 TO
12/31/99 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> <C>
Beginning of period (rounded) $2.3269 $1.8815 $1.7836 $1.4975 $1.3020 $1.3791 $0.9707 $1.0127
End of period (rounded) $3.4236 $2.3269 $1.8815 $1.7836 $1.4975 $1.3020 $1.3791 $0.9707
Accumulation Units Outstanding
at end of period (000 omitted) 35,992 37,297 37,576 33,505 24,439 21,739 12,368 3,180
</TABLE>
<TABLE>
<CAPTION>
SUBACCOUNTS
- -----------------------------------------------------------------------------------------------------------------------------------
GOVERNMENT INCOME
--------------------------------------------------------------------------------------------------
01/01/99 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
TO TO TO TO TO TO TO TO TO TO
12/31/99 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
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Beginning of period (rounded) $1.7614 $1.6267 $1.6267 $1.4943 $1.4730 $1.2421 $1.3196 $1.1811 $1.1242 $1.0000
End of period (rounded) $1.7011 $1.7614 $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) 17,652 20,924 20,924 17,033 17,697 17,289 16,140 15,556 9,269 6,641
</TABLE>
33
<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
34
<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. 5/2000
<PAGE> 39
STATEMENT OF ADDITIONAL INFORMATION
May 1, 2000
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, 2000, 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> 40
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> 41
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, 1999 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, 1999. 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
1
<PAGE> 42
(0.25%) is for investment management. During 1999, 1998 and, 1997, Prudential
received $4,783,228, $5,890,071, and 5,388,303, respectively, from VCA 10 and
$900,712, $963,852 and $892,983, 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
1999, 1998 and, 1997, Prudential received $10,849,458, $10,057,907 and
$9,369,395, 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
1999, 1998 and, 1997, Prudential collected $89,020, $106,534 and $125,689,
respectively, from VCA 10 and $47,735, $47,451 and $58,601, respectively, from
VCA 11 in annual account charges. During 1999, 1998, and 1997, Prudential
collected $154,184, $152,129 and $294,865, 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 1999, 1998, and 1997, were $10,420, $9,116 and $18,599, respectively. The
deferred sales charges imposed on VCA 11 withdrawals during 1999, 1998, and
1997, were $2,716, $2,389 and $8,370, respectively. During 1999, 1998, and 1997,
the deferred sales charges imposed on withdrawals from VCA 24 were $40,815,
$38,089 and $93,520 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
2
<PAGE> 43
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.
VCA-10 and VCA-11 each has adopted a Code of Ethics. In addition,
Prudential, PIC, and PIMS have each adopted a Code of Ethics (the "Codes").
The Codes permit personnel subject to the Codes to invest in securities,
including securities that may be purchased or held by the Account. However, the
protective provisions of the Codes prohibit certain investments and limit such
personnel from making investments during periods when the account is making
such investments. VCA-24 is not required to adopt a Code of Ethics. These Codes
of Ethics can be reviewed and copied at the Commission's Public Reference Room
in Washington D.C. Information on the operation of the Public Reference Room
may be obtained by calling the Commission at 1-202-942-8090. These Codes of
Ethics are available on the EDGAR Database on the Commission's Internet site at
http://www.sec.gov, and copies on these Codes of Ethics may be obtained, after
paying a duplicating fee, by electronic request at the following E-mail
address: [email protected] or by writing the Commission's Public Reference
Station Washington, D.C. 20549-0102.
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.
3
<PAGE> 44
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
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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
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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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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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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 11 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 1999 and 1998 the total portfolio turnover rate for
VCA 10 was 82% and 49% respectively.
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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 1999, 1998 and
1997, the total dollar amount of commissions paid by VCA 10 to an affiliated
broker, Prudential Securities Incorporated, was $17,046, $8,801 and $27,462
respectively, which represented 1.1%, 1.0% and 3.3%, respectively, of the
aggregate brokerage commissions paid by
12
<PAGE> 53
VCA 10. For 1999, 1998 and 1997 Prudential Securities effected 1.2%, 1.2% and
3.1%, 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 1999, 1998, and 1997, $1,535,514, $901,787 and $828,324, respectively,
was paid to various brokers in connection with securities transactions for VCA
10.
CUSTODY OF SECURITIES
State Street Bank and Trust Company, 801 Pennsylvania, 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, 1999. 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, 1999 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.
13
<PAGE> 54
TABLE 1
AVERAGE ANNUAL TOTAL RETURN ASSUMING WITHDRAWAL
<TABLE>
<CAPTION>
ONE YEAR FIVE YEARS TEN YEARS
ENDED ENDED ENDED
12/31/99 12/31/99 12/31/99
-------- -------- --------
<S> <C> <C> <C>
VCA 10 .................... (5.85) 14.84 12.88
VCA 11 .................... (1.73) 4.36 4.54
VCA 24:
Diversified Bond ..... (7.50) 6.67 6.87
Government Income .... (9.43) 6.17 6.28
Conservative Balanced (0.21) 11.16 9.37
Flexible Managed ..... 0.95 13.48 10.85
Stock Index .......... 13.59 26.99 16.65
Equity ............... 5.45 17.80 14.02
Global ............... 41.13 21.13 12.32
</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
n
the following formula: P(1+T) = 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.
14
<PAGE> 55
TABLE 2
AVERAGE ANNUAL TOTAL RETURN ASSUMING NO WITHDRAWAL
<TABLE>
<CAPTION>
FIVE
ONE YEAR YEARS TEN YEARS
ENDED ENDED ENDED
12/31/99 12/31/99 12/31/99
-------- -------- --------
<S> <C> <C> <C>
VCA 10 .................... 0.40 15.21 12.96
VCA 11 .................... 4.39 4.79 4.62
VCA 24:
Diversified Bond ..... (1.49) 6.99 6.88
Government Income .... (3.42) 6.49 6.28
Conservative Balanced 5.84 11.45 9.39
Flexible Managed ..... 7.00 13.75 10.87
Stock Index .......... 19.65 27.17 16.66
Equity ............... 11.61 18.09 14.06
Global ............... 47.14 21.32 12.33
</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>
ONE YEAR FIVE YEARS TEN YEARS
ENDED ENDED ENDED
12/31/99 12/31/99 12/31/99
-------- -------- --------
<S> <C> <C> <C>
VCA 10 ................. 0.40 103.02 238.41
VCA 11 ................. 4.39 26.37 57.10
VCA 24:
Diversified Bond .... (1.49) 40.18 94.58
Government Income ... (3.42) 36.95 83.90
Conservative Balanced 5.84 71.98 145.40
Flexible Managed .... 7.00 90.50 180.74
Stock Index ......... 19.65 232.81 367.27
Equity .............. 11.61 129.76 273.10
Global .............. 47.14 162.95 219.94
</TABLE>
15
<PAGE> 56
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
current yield for VCA-11 for the seven day period ended December 31, 1999
was 5.04%.
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 amounts 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*
JOHN R. STRANGFELD, 46, Chairman of the Board, Director, President -- 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. Address: 100 Mulberry
Street, Gateway Center Three, Newark, New Jersey 07102.
SAUL K. FENSTER, 67, Director--President of New Jersey Institute of Technology.
Address: 323 Martin Luther King, Jr. Boulevard, Newark, New Jersey 07102.
W. SCOTT McDONALD, JR., 63, 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, 76, 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> 57
OFFICERS WHO ARE NOT DIRECTORS
DAVID R. ODENATH, JR., Vice President -- Chief Executive Officer and Chief
Operating Officer, Prudential Investments Fund Management LLC, since 1999;
prior to 1999, Senior Vice President of PaineWebber Group, Inc. Address: 100
Mulberry Street, Gateway Center Three, 14th Floor, Newark, New Jersey 07102.
LEE D. AUGSBURGER, Secretary, -- Assistant General Counsel of Prudential since
1997; prior to 1997, consultant with Price Waterhouse LLP. Address: 100
Mulberry Street, Gateway Center Three, 4th Floor, Newark, New Jersey 07102.
WILLIAM V. HEALEY, Assistant Secretary -- Vice President and Associate General
Counsel of Prudential and Chief legal officer of Prudential Investments, since
1998; Director, ICI Mutual Insurance Company since 1999; Prior to 1998,
Associate General Counsel of the Dreyfus Corporation (Dreyfus), a subsidiary of
Mellon Bank N.A. Address: 100 Mulberry Street, Gateway Center 3, 4th Floor,
Newark, New Jersey 07102.
C. CHRISTOPHER SPRAGUE, Assistant Secretary--Assistant General Counsel of
Prudential since 1994. Address: 100 Mulberry Street, Gateway Center 3, 4th
Floor, 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, 2005).
Member, Committee on Finance & Dividends; Member, Corporate Governance
Committee. Business consultant since 1987. Chief Financial Officer, H.J. Heinz
from 1971 to 1986. Mr. Agnew is also a director of Erie Plastics Corporation.
Age 65. Address: 600 Grant Street, Suite 660, Pittsburgh, PA 15219.
FREDERIC K. BECKER--Director since 1994 (current term expires April, 2005).
Member, Auditing Committee; Member, Corporate Governance Committee. President,
Wilentz Goldman and Spitzer, P.A. (law firm) since 1989, with firm since 1960.
Age 64. Address: 90 Woodbridge Center Drive, Woodbridge, NJ 07095.
GILBERT F. CASELLAS--Director since 1998 (current term expires April, 2003).
Member, Compensation Committee. President and Chief Operating Officer, The
Swarthmore Group, Inc. since 1999. Partner, McConnell Valdes, LLP in 1998.
Chairman, U.S. Equal Employment Opportunity Commission from 1994 to 1998. Age
47. Address: 1646 West Chester Pike, Suite 3, West Chester, PA 19382.
JAMES G. CULLEN--Director since 1994 (current term expires April, 2001). Member,
Compensation Committee; Member, Committee on Business Ethics. President & Chief
Operating Officer, Bell Atlantic Corporation, since 1998. President & Chief
Executive Officer, Telecom Group, Bell Atlantic Corporation, from 1997 to 1998.
Vice Chairman, Bell Atlantic Corporation from 1995 to 1997. President, Bell
Atlantic Corporation from 1993 to 1995. Mr. Cullen is also a director of Bell
Atlantic Corporation and Johnson & Johnson. Age 57. Address: 1310 North Court
House Road, 11th Floor, Alexandria, VA 22201.
CAROLYNE K. DAVIS--Director since 1989 (current term expires April, 2001).
Member, Committee on Business Ethics; Member, Compensation Committee.
Independent Health Care Advisor since 1997. Health Care Advisor, Ernst & Young,
LLP from 1985 to 1997. Dr. Davis is also a director of Beckman Coulter
Instruments, Inc., Merck & Co., Inc., Minimed Incorporated, Science Applications
International Corporation, and Beverley Enterprises. Age 68. Address: 751 Broad
Street, 21st Floor, Newark, NJ 07102-3777.
ROGER A. ENRICO--Director since 1994 (current term expires April, 2002). Member,
Committees on Nominations & Corporate Governance; Member, Compensation
Committee. Chairman and Chief Executive Officer, PepsiCo, Inc. since 1996. Mr.
Enrico originally joined PepsiCo, Inc. in 1971. Mr. Enrico is also a director of
A.H. Belo Corporation, Target Corporation, and Electronic Data Systems. Age 55.
Address: 700 Anderson Hill Road, Purchase, NY 10577.
ALLAN D. GILMOUR--Director since 1995 (current term expires April, 2003).
Member, Investment Committee; Member, Committee on Finance & Dividends. Retired
since 1995. Vice Chairman, Ford Motor Company, from 1993 to 1995. Mr. Gilmour
originally joined Ford in 1960. Mr. Gilmour is also a director of Whirlpool
Corporation, MediaOne Group, Inc., The Dow Chemical Company and DTE Energy
Company. Age 65. Address: 751 Broad Street, 21st Floor, Newark, NJ 07102-3777.
WILLIAM H. GRAY III--Director since 1991 (current term expires April, 2004).
Chairman, Committees on Nominations & Corporate Governance. Member, Executive
Committee; Member, Committee on Business Ethics. President and Chief Executive
Officer, The College Fund/UNCF since 1991. Mr. Gray served in Congress from 1979
to 1991. Mr. Gray is also a director of Chase Manhattan Corporation, Chase
Manhattan Bank, Municipal Bond Investors Assurance Corporation, Rockwell
International Corporation, Warner-Lambert Company, CBS Corporation, Electronic
Data Systems, and Ezgov.com, Inc. Age 58. Address: 8260 Willow Oaks Corp. Drive,
Fairfax,VA 22031-4511.
<PAGE> 58
JON F. HANSON--Director since 1991 (current term expires April, 2003). Member,
Investment Committee; Member, Committee on Business Ethics. Chairman, Hampshire
Management Company since 1976. Mr. Hanson is also a director of James E. Hanson
Management Company, Neumann Distributors, Inc., United Water Resources, and
Consolidated Delivery and Logistics. Age 63. Address: 235 Moore Street, Suite
200, Hackensack, NJ 07601.
GLEN H. HINER--Director since 1997 (current term expires April, 2001). Member,
Compensation Committee. Chairman and Chief Executive Officer, Owens Corning
since 1992. Senior Vice President and Group Executive, Plastics Group, General
Electric Company from 1983 to 1991. Mr. Hiner is also a director of Dana
Corporation, Owens Corning, and Kohler, Co. Age 65. Address: One Owens Corning
Parkway, Toledo, OH 43659.
CONSTANCE J. HORNER--Director since 1994 (current term expires April, 2002).
Member, Auditing Committee; Member, Committees on Nominations & Corporate
Governance. Guest Scholar, The Brookings Institution since 1993. Ms. Horner is
also a director of Foster Wheeler Corporation, Ingersoll-Rand Company, and
Pfizer, Inc. Age 58. Address: 1775 Massachusetts Ave., N.W. Washington, D.C.
20036-2188.
GAYNOR N. KELLEY--Director since 1997 (current term expires April, 2001).
Member, Auditing Committee. Retired since 1996. Chairman and Chief Executive
Officer, The Perkin Elmer Corporation from 1990 to 1996. Mr. Kelley is also a
director of Hercules Incorporated and Alliant Techsystems. Age 68. Address: 751
Broad Street, 21st Floor, Newark, NJ 07102-3777.
BURTON G. MALKIEL--Director since 1978 (current term expires April, 2002).
Chairman, Investment Committee; Member, Executive Committee; Member, Committee
on Finance & Dividends. Professor of Economics, Princeton University, since
1988. Dr. Malkiel is also a director of Banco Bilbao Vizcaya Gestinova, Baker
Fentress & Company, The Jeffrey Company, Select Sector SPDR Trusts, and Vanguard
Group, Inc. Age 67. Address: Princeton University, Department of Economics, 110
Fisher Hall, Prospect Avenue, Princeton, NJ 08544-1021.
ARTHUR F. RYAN--Chairman of the Board Chief Executive Officer and President of
Prudential since 1994. President and Chief Operating Officer, Chase Manhattan
Bank from 1990 to 1994, with Chase since 1972. Age 57. Address: 751 Broad
Street, Newark, NJ 07102-3777.
IDA F.S. SCHMERTZ--Director since 1997 (current term expires April, 2004).
Member, Audit Committee. Principal, Investment Strategies International since
1994. Age 65. Address: 751 Broad Street, 21st Floor, Newark, NJ 07102-3777.
CHARLES R. SITTER--Director since 1995 (current term expires April, 2003).
Member, Committee on Finance & Dividend; Member, Investment Committee. Retired
since 1996. President, Exxon Corporation from 1993 to 1996. Mr. Sitter began his
career with Exxon in 1957. Age 69. Address: 5959 Las Colinas Boulevard, Irving,
TX 75039-2298.
DONALD L. STAHELI--Director since 1995 (current term expires April, 2003).
Member, Compensation Committee; Member, Auditing Committee. Retired since 1996.
Chairman and Chief Executive Officer, Continental Grain Company from 1994 to
1997. President and Chief Executive Officer, Continental Grain Company from 1988
to 1994. Age 68 Address: 47 East South Temple, #501, Salt Lake City, UT 84150.
RICHARD M. THOMSON--Director since 1976 (current term expires April, 2004).
Chairman, Executive Committee; Chairman, Compensation Committee. Retired since
1998. Chairman of the Board, The Toronto-Dominion Bank from 1997 to 1998.
Chairman and Chief Executive Officer from 1978 to 1997. Mr. Thomson is also a
director of CGC, Inc., INCO, Limited, S.C. Johnson & Son, Inc., The Thomson
Corporation, Canadian Occidental Petroleum Ltd., The Toronto-Dominion Bank,
Ontario Power Generation, Inc., Canada Pension Plan Investment Board, and
TrizecHahn Corporation. Age 66. Address: P.O. Box 1, Toronto-Dominion Centre,
Toronto, Ontario, M5K 1A2, Canada.
<PAGE> 59
JAMES A. UNRUH--Director since 1996 (current term expires April, 2004). Member,
Committees on Nominations & Corporate Governance; Member, Investment Committee.
Founding Member, Alerion Capital Group, LLC since 1998. Chairman and Chief
Executive Officer, Unisys Corporation, from 1990 to 1997. Mr. Unruh is also a
director of Moss Software, Inc. Age 59. Address: 751 Broad Street, 21st Floor,
Newark, NJ 07102-3777.
P. ROY VAGELOS, M.D.--Director since 1989 (current term expires April, 2001).
Chairman, Auditing Committee; Member, Executive Committee; Member, Committees on
Nominations & Corporate Governance. Chairman, Regeneron Pharmaceuticals since
1995. Chairman, Advanced Medicines, Inc. since 1997. Chairman, Chief Executive
Officer and President, Merck & Co., Inc. from 1986 to 1995. Dr. Vagelos
originally joined Merck in 1975. Dr. Vagelos is also a director of The Estee
Lauder Companies, Inc. and PepsiCo., Inc. Age 70. Address: One Crossroads Drive,
Building A, 3rd Floor, Bedminster, NJ 07921.
STANLEY C. VAN NESS--Director since 1990 (current term expires April, 2002).
Chairman, Committee on Business Ethics; Member, Executive Committee; Member,
Auditing Committee. Partner, Herbert, Van Ness, Cayci & Goodell (law firm) since
1998. Counselor at Law, Picco Herbert Kennedy (law firm) from 1990 to 1998. Mr.
Van Ness is also a director of Jersey Central Power & Light Company. Age 66.
Address: 22 Chambers Street, Princeton, NJ 08542.
PAUL A. VOLCKER--Director since 1988 (current term expires April, 2004).
Chairman, Committee on Finance & Dividends; Member, Executive Committee; Member,
Committee on Nominations & Corporate Governance. Consultant since 1997. Chairman
and Chief Executive Officer, Wolfensohn & Co., Inc. 1995 to 1996. Chairman,
James D. Wolfensohn, Inc. 1988 to 1995. Mr. Volcker is also a director of
Nestle, S.A,. and as well as a Member of the Board of Overseers of TIAA-CREF.
Age 72. Address: 610 Fifth Avenue, Suite 420, New York, NY 10020.
JOSEPH H. WILLIAMS--Director since 1994 (current term expires April, 2002).
Member, Committee on Finance & Dividends; Member, Investment Committee.
Director, The Williams Companies since 1979. Chairman & Chief Executive Officer,
The Williams Companies from 1979 to 1993. Mr. Williams is also a director of The
Orvis Company, and AEA Investors, Inc. Age 66. Address: One Williams Center,
Tulsa, OK 74172.
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
PRINCIPAL OFFICERS
ARTHUR F. RYAN--Chairman of the Board, Chief Executive Officer, and President
since 1994; prior to 1994, President and Chief Operating Officer, Chase
Manhattan Corporation. Age 57.
MICHELE S. DARLING--Executive Vice President, Corporate Governance and Human
Resources since 2000; Executive Vice President, Human Resources from 1997 to
2000; prior to 1997, Executive Vice President, Human Resources, Canadian
Imperial Bank of Commerce. Age 46.
ROBERT C. GOLDEN--Executive Vice President, Operations and Systems since 1997;
prior to 1997, Executive Vice President, Prudential Securities. Age 53.
MARK B. GRIER--Executive Vice President, Financial Management since 2000;
Executive Vice President, Corporate Governance from 1998 to 2000; Executive
Vice President, Financial Management from 1997 to 1998; Chief Financial Officer
from 1995 to 1997; prior to 1995, Executive Vice President, Chase Manhattan
Corporation. Age 47.
JEAN D. HAMILTON--Executive Vice President, Prudential Institutional since 1998;
President, Diversified Group since 1995 to 1998; prior to 1995, President,
Prudential Capital Group. Age 53.
RODGER A. LAWSON--Executive Vice President, International Investments & Global
Marketing Communications since 1998; Executive Vice President, Marketing and
Planning from 1996 to 1998; President and CEO, Van Eck Global, from 1994 to
1996; prior to 1994, President and CEO, Global Private Banking, Bankers Trust
Company. Age 53.
<PAGE> 60
KIYOFUMI SAKAGUCHI--Executive Vice President, International Insurance since
1998; President, International Insurance Group from 1995 to 1998; prior to 1995,
Chairman and CEO, The Prudential Life Insurance Co., Ltd., Japan. Age 57.
JOHN R. STRANGFELD--Executive Vice President, Global Asset Management since
1998; Chief Executive Officer, Private Asset Management Group (PAMG) from 1996
to 1998; President, PAMG, from 1994 to 1996; prior to 1994, Senior Managing
Director. Age 46.
RICHARD J. CARBONE--Senior Vice President and Chief Financial Officer since
1997; Controller, Salomon Brothers, from 1995 to 1997; prior to 1995,
Controller, Bankers Trust. Age 52.
ANTHONY S. PISZEL--Senior Vice President and Controller since 2000; Vice
President and Controller from 1998 to 2000. Vice President, Enterprise Financial
Management from 1997 to 1998; prior to 1997, Chief Financial Officer, Individual
Insurance Group. Age 45.
SUSAN J. BLOUNT--Vice President and Secretary since 1995; prior to 1995,
Assistant General Counsel. Age 42.
C. EDWARD CHAPLIN--Vice President and Treasurer since 1995; prior to 1995,
Managing Director and Assistant Treasurer. Age 43.
<PAGE> 61
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
1999, 1998 and 1997, Prudential received $10,420, $9,116 and $18,599
respectively, as deferred sales charges from VCA 10. $680,590, $791,023 and
$860,025 respectively, were credited to other broker-dealers for the same
periods in connection with sales of the Contracts. During 1999, 1998 and 1997,
Prudential received $2,716, $2,389 and $8,370 respectively, from VCA 11 as
deferred sales charges and credited 114,958, 271,019 and 154,536,
respectively, to other broker-dealers in connection with sales of the
Contracts. During 1999, 1998 and 1997, Prudential received $40,815, $38,089 and
$93,520,
21
<PAGE> 62
respectively, from VCA 24 as deferred sales charges and credited $2,506,723,
$2,349,448, and $2,473,844, 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,
1998 and 1999 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, 1999, are included in this Statement of Additional Information,
beginning on the next page.
22
<PAGE> 63
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,
- ------------------------------------------------------------------------------------------------------------------------------------
1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INVESTMENT INCOME $.1232 $ .0956 $ .0757
EXPENSES
For investment management fee (.0172) (.0177) (.0154)
For administrative expenses (.0513) (.0530) (.0461)
- ------------------------------------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME .0547 .0249 .0142
CAPITAL CHANGES
Change in net realized gain on investments .2537 .8002 1.2761
Net change in unrealized appreciation
(depreciation) on investments (.2814) (1.0426) .3841
- ------------------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Unit
Accumulation Value .027 (0.2175) 1.6744
Accumulation Unit Value
Beginning of year 6.7952 7.0127 5.3383
- ------------------------------------------------------------------------------------------------------------------------------------
End of year $6.8222 $6.7952 $7.0127
- ------------------------------------------------------------------------------------------------------------------------------------
RATIO OF EXPENSES TO
AVERAGE NET ASSETS** 1.00% 1.00% 1.00%
- ------------------------------------------------------------------------------------------------------------------------------------
RATIO OF NET INVESTMENT INCOME TO
AVERAGE NET ASSETS** .79% .36% .24%
- ------------------------------------------------------------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE 82% 49% 47%
- ------------------------------------------------------------------------------------------------------------------------------------
NUMBER OF UNITS OUTSTANDING
for Participants at end of period
(000's omitted) 63,330 80,431 83,261
- ------------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
- --------------------------------------------------------------------------------------------------------
1996 1995
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
INVESTMENT INCOME $ .0657 $ .0609
EXPENSES
For investment management fee (.0118) (.0094)
For administrative expenses (.0354) (.0282)
- --------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME .0185 .0233
CAPITAL CHANGES
Change in net realized gain on investments .5085 .3850
Net change in unrealized appreciation
(depreciation) on investments .5682 .4744
- --------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Unit
Accumulation Value 1.0952 .8827
Accumulation Unit Value
Beginning of year 4.2431 3.3604
- --------------------------------------------------------------------------------------------------------
End of year $5.3383 $4.2431
- --------------------------------------------------------------------------------------------------------
RATIO OF EXPENSES TO
AVERAGE NET ASSETS** 1.00% 1.00%
- --------------------------------------------------------------------------------------------------------
RATIO OF NET INVESTMENT INCOME TO
AVERAGE NET ASSETS** .39% .61%
- --------------------------------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE 52% 45%
- --------------------------------------------------------------------------------------------------------
NUMBER OF UNITS OUTSTANDING
for Participants at end of period
(000's omitted) 91,532 81,817
- --------------------------------------------------------------------------------------------------------
</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 ON FINANCIAL STATEMENTS
A-1
<PAGE> 64
FINANCIAL HIGHLIGHTS FOR VCA-10
INCOME AND CAPITAL CHANGES PER ACCUMULATION UNIT*
(FOR AN ACCUMULATION UNIT OUTSTANDING THROUGHOUT THE YEAR)
<TABLE>
<CAPTION>
COMMON STOCK VALUE
INVESTMENTS SHARES [NOTE 2A]
- ------------------------------------------------------------------------------------
<S> <C> <C>
Aerospace/Defense - 3.9%
Lockheed Martin Corp. 346,900 7,588,438
Loral Space and
Communications Ltd. 384,900 9,357,881
------------
16,946,319
- ------------------------------------------------------------------------------------
Apparel - 0.2%
Liz Claiborne, Inc. 22,200 835,275
- ------------------------------------------------------------------------------------
AUTOS & TRUCKS - 2.1%
General Motors Corp. 90,900 6,607,294
Tower Automotive, Inc. (a) 154,800 2,389,725
------------
8,997,019
- ------------------------------------------------------------------------------------
CHEMICALS - 4.8%
Agrium, Inc. 188,000 1,480,500
CK Witco Corp. 317,400 4,245,225
Cytec Industries, Inc. (a) 338,000 7,816,250
French Fragrances, Inc. (a) 58,700 377,881
Praxair, Inc. 134,700 6,777,094
------------
20,696,950
- ------------------------------------------------------------------------------------
COMPUTER - 3.4%
Compaq Computer Corp. 279,500 7,563,969
Hewlett Packard Co. 62,700 7,143,881
------------
14,707,850
- ------------------------------------------------------------------------------------
COMPUTER RELATED - 4.5%
Computer Association
International 99,700 6,972,769
Electronic Data Systems Corp. 64,200 4,297,388
Seagate Technology, Inc. (a) 174,200 8,111,186
------------
19,381,343
- ------------------------------------------------------------------------------------
CONSUMER SERVICES - 4.8%
Convergys Corp. 239,800 7,373,850
Reynolds & Reynolds Co.
(Class 'A' Stock) 290,000 6,525,000
Service Corp. International 100,500 697,219
Unisys Corp. (a) 190,700 6,090,481
------------
20,686,550
- ------------------------------------------------------------------------------------
ELECTRICAL EQUIPMENT - 1.0%
Belden, Inc. 75,200 1,579,200
Hussmann International, Inc. 181,100 2,727,819
------------
4,307,019
- ------------------------------------------------------------------------------------
ELECTRONIC PARTS DISTRIBUTION - 0.7%
Arrow Electronics, Inc. (a) 55,200 1,400,700
Avnet, Inc. 23,300 1,409,650
------------
2,810,350
- ------------------------------------------------------------------------------------
ELECTRONICS - 4.5%
Micron Technology 51,900 4,035,225
National Semiconductor Corp. (a) 112,280 4,806,988
Peco Energy Co. 192,100 6,675,475
SCI System, Inc. 48,800 4,010,750
------------
19,528,438
- ------------------------------------------------------------------------------------
EXPLORATION & PRODUCTION - 5.1%
Coastal Corp. 185,900 6,587,831
Devon Energy Corp. 115,700 3,803,638
Kerr McGee Corp. 82,037 5,086,294
Royal Dutch Petroleum Co. 106,500 6,436,594
------------
21,914,357
- ------------------------------------------------------------------------------------
FINANCIAL SERVICES - 5.4%
Citigroup, Inc. 151,198 8,400,937
Financial Security Assurance
Holdings Corp. 64,300 3,351,638
Household International 162,300 6,045,675
Washington Mutual 221,800 5,766,800
------------
23,565,050
- ------------------------------------------------------------------------------------
FOODS/BEVERAGES - 2.8%
Delhaize America, Inc. 1 14
Diageo PLC SA ADR 172,000 5,504,000
Sara Lee Corp. 137,700 3,038,006
Suiza Foods Corp. (a) 88,600 3,510,775
------------
12,052,795
- ------------------------------------------------------------------------------------
HEALTHCARE - 9.2%
Columbia/HCA Healthcare Corp. 299,300 8,773,231
Foundation Health Systems (a)
(Class 'A' Stock) 100,600 999,713
Mallinckrodt, Inc. 124,000 3,944,750
Pacificare Health Systems (a) 58,300 3,089,900
Tenet Healthcare Corp. (a) 432,200 10,156,698
United HealthCare Corp. 105,500 5,604,688
Wellpoint Health Networks,
Inc. (a) 113,000 7,450,938
------------
40,019,918
- ------------------------------------------------------------------------------------
HOTELS & MOTELS - 0.7%
Hilton Hotels Corp. 277,700 2,672,861
RFS Hotel Investors, Inc. 30,200 315,213
-----------
2,988,074
- ------------------------------------------------------------------------------------
INSURANCE - 12.1%
Ace Ltd. 45,175 753,858
Berkley (W.R.) Corp. 275,500 5,751,063
Conseco, Inc. 302,200 5,401,825
Loews Corp. 86,500 5,249,469
- ------------------------------------------------------------------------------------
</TABLE>
SEE NOTES ON FINANCIAL STATEMENTS
A-2
<PAGE> 65
FINANCIAL STATEMENTS OF VCA-10
STATEMENT OF NET ASSETS AS OF DECEMBER 31, 1999
<TABLE>
<CAPTION>
COMMON STOCK VALUE
INVESTMENTS SHARES [NOTE 2A]
- ------------------------------------------------------------------------------------
<S> <C> <C>
INSURANCE (CONT'D)
Old Republic International Corp. 224,550 3,059,494
3COM Corp. 137,200 6,448,400
Torchmark Corp. 250,000 7,265,625
Travelers Property Casualty
(Class 'A' Stock) 119,900 4,106,575
Trenwick Group, Inc. 249,850 4,231,834
XL Capital Ltd.
(Class 'A' Stock) 197,914 10,266,789
------------
52,534,932
- ------------------------------------------------------------------------------------
LEISURE - 0.1%
Brunswick Corp. 26,400 587,400
- ------------------------------------------------------------------------------------
MACHINERY - 1.1%
Applied Power Co.
(Class 'A' Stock) 67,800 2,491,650
Columbus McKinnon Corp. 13,300 134,663
Hardinge, Inc. 178,775 2,335,248
-----------
4,961,561
- ------------------------------------------------------------------------------------
MEDIA - 3.0%
Belo (A.H.) Corp.
(Class 'A' Stock) 95,000 1,810,938
MediaOne Group, Inc. (a) 147,200 11,306,800
Young Broadcasting Corp. (a)
(Class 'A' Stock) 1,000 51,000
-------------
13,168,738
- ------------------------------------------------------------------------------------
METALS - 3.3%
Alcoa, Inc. 92,500 7,677,500
Broken Hill Proprietary
Company Ltd. ADR 162,700 4,321,719
The Carbide/Graphite Group (a) 368,500 2,395,250
-----------
14,394,469
- ------------------------------------------------------------------------------------
MISCELLANEOUS-INDUSTRIAL - 0.5%
Varian Medical Systems, Inc. 74,300 2,215,069
- ------------------------------------------------------------------------------------
OFFICE EQUIPMENT & SUPPLIES - 2.4%
Harris Corp. 182,400 4,867,800
Xerox Corp. 249,300 5,655,994
------------
10,523,794
- ------------------------------------------------------------------------------------
PAPER PRODUCTS - 3.5%
Georgia Pacific Corp.
(GP Group) 189,300 9,606,975
Georgia Pacific Corp.
(Timber Group) 101,800 2,506,825
Mead Corp. 73,700 3,201,344
------------
15,315,144
- ------------------------------------------------------------------------------------
PHOTOGRAPHY - 2.5%
Eastman Kodak Co. 160,600 10,639,750
- ------------------------------------------------------------------------------------
RAILROADS - 0.8%
Burlington Northern Santa Fe Corp. 150,700 3,654,475
- ------------------------------------------------------------------------------------
REGIONAL BANKS - 2.6%
Bank One Corp. 235,654 7,555,656
PNC Bank Corp. 79,300 3,528,850
------------
11,084,506
- ------------------------------------------------------------------------------------
RESTAURANTS - 2.0%
CKE Restaurants, Inc. 170,100 999,338
Darden Restaurants, Inc. 433,800 7,862,625
------------
8,861,963
- ------------------------------------------------------------------------------------
RETAIL - 4.4%
Dillards, Inc.
(Class 'A' Stock) 203,100 4,100,081
Federated Department Stores 131,200 6,633,800
Limited, Inc. 88,017 3,812,236
Payless Shoesource (a) 25,800 1,212,600
Toys R Us, Inc. 242,200 3,466,488
------------
19,225,205
- ------------------------------------------------------------------------------------
TELECOMMUNICATIONS - 4.9%
ALLTEL Corp. 123,778 10,234,893
GTE Corp. 90,200 6,364,738
SBC Communications, Inc. 93,400 4,553,250
------------
21,152,881
- ------------------------------------------------------------------------------------
TOBACCO 1.0%
Philip Morris Co. 189,900 4,403,306
- ------------------------------------------------------------------------------------
UTILITY - ELECTRIC 0.5%
Niagara Mohawk Holdings, Inc. (a) 17,100 238,331
NSTAR 51,500 2,085,750
------------
2,324,081
- ------------------------------------------------------------------------------------
TOTAL LONG-TERM INVESTMENTS - 97.8%
(Cost: $390,550,889) $424,484,581
- ------------------------------------------------------------------------------------
</TABLE>
SEE NOTES ON FINANCIAL STATEMENTS
A-3
<PAGE> 66
FINANCIAL HIGHLIGHTS FOR VCA-10
STATEMENT OF NET ASSETS AS OF DECEMBER 31, 1999
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
(000) [NOTE 2A]
- -------------------------------------------------------------------------------------
<S> <C> <C>
SHORT-TERM INVESTMENT - 2.5%
REPURCHASE AGREEMENT
Bear, Stearns & Co., Inc., 2.73%,
dated 12/31/99, due 1/3/00 in the
amount of $10,744,443 (cost
$10,742,000), value of the
collateral including accrued
interest - $10,962,946
$10,742 $10,742,000
- -------------------------------------------------------------------------------------
TOTAL INVESTMENTS - 100.3%
(Cost $401,292,889) $435,226,581
- -------------------------------------------------------------------------------------
OTHER ASSETS, LESS LIABILITIES
Dividends and Interest Receivable 704,021
Receivable for Investments Sold 5,529,003
Payable to bank (4,832)
Payable for Pending Capital Transactions (448,939)
Payable for Investments Purchased (7,228,655)
- -------------------------------------------------------------------------------------
LIABILITIES IN EXCESS
OF OTHER ASSETS - 0.3% (1,449,402)
- -------------------------------------------------------------------------------------
NET ASSETS - 100% $433,777,179
- -------------------------------------------------------------------------------------
Net Assets, representing:
Equity of Participants
63,329,581 Accumulation Units at an
Accumulation Unit Value of
$6.8222 432,044,474
Equity of Prudential Insurance
Company of America 1,732,705
---------------------
$433,777,179
- -------------------------------------------------------------------------------------
The following abbreviations are used in portfolio descriptions:
ADR - American Depository Receipt
PLC - Public Limited Company
SA - Sociedad Anomie (Spanish Corporation)
(a) Non-income producing security.
</TABLE>
SEE NOTES ON FINANCIAL STATEMENTS
A-4
<PAGE> 67
FINANCIAL STATEMENTS OF VCA-10
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1999
- --------------------------------------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME [NOTE 2B]
Dividends (net of $3,907 foreign withholding tax) $ 6,937,797
Interest 1,660,592
- -------------------------------------------------------------------------------------------------------------
TOTAL INCOME 8,598,389
- -------------------------------------------------------------------------------------------------------------
EXPENSES [NOTE 3]
Fees Charged to Participants for Investment Management Fee 1,196,014
Fees Charged to Participants for Administrative Expenses 3,587,214
- --------------------------------------------------------------------------------------------------------------
Total Expenses 4,783,228
- -------------------------------------------------------------------------------------------------------------
INVESTMENT INCOME -- NET 3,815,161
- -------------------------------------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS -- NET [NOTE 2B]
Realized Gain on Investments -- Net 21,727,366
Decrease in Unrealized Appreciation on Investments -- Net (23,170,828)
- -------------------------------------------------------------------------------------------------------------
NET LOSS ON INVESTMENTS (1,443,462)
- -------------------------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 2,371,699
==============================================================================================================
</TABLE>
<TABLE>
<CAPTION>
STATEMENTS OF CHANGES IN NET ASSETS
- ----------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1999 DECEMBER 31, 1998
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATIONS
Investment Income -- Net $ 3,815,161 $ 2,143,678
Realized Gain on Investments -- Net 21,727,366 67,764,851
Decrease In Unrealized Appreciation on Investments -- Net (23,170,828) (91,652,147)
- ----------------------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS 2,371,699 (21,743,618)
- ----------------------------------------------------------------------------------------------------------------------------------
CAPITAL TRANSACTIONS
Purchase Payments and Transfers In 57,561,612 118,653,634
Withdrawals and Transfers Out (174,198,348) (134,406,195)
Annual Account Charges Deducted from
Participants' Accounts [Note 3b] (89,020) (106,534)
- ----------------------------------------------------------------------------------------------------------------------------------
NET DECREASE IN NET ASSETS
RESULTING FROM CAPITAL TRANSACTIONS (116,725,756) (15,859,095)
- ----------------------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM SURPLUS TRANSFERS [NOTE 6] (83,117) (1,425,180)
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL DECREASE IN NET ASSETS (114,437,174) (39,027,893)
NET ASSETS
Beginning of Year 548,214,353 587,242,246
- ----------------------------------------------------------------------------------------------------------------------------------
End of Year $ 433,777,179 $548,214,353
==================================================================================================================================
</TABLE>
SEE NOTES ON FINANCIAL STATEMENTS
A-5
<PAGE> 68
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 investment
objective is long-term growth of capital. The Account's investments
are composed primarily of common stocks. Although variable annuity
payments differ according to the investment performance of the
Account, they are not affected by mortality or expense experience
because Prudential assumes the expense risk and the mortality risk
under the contracts.
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 exchange 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> 69
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> 70
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. For the year ended December 31, 1999 and the year ended
December 31, 1998, Prudential has advised the Account that
they received deferred sales charges of $10,420 and $9,116,
respectively.
A-8
<PAGE> 71
NOTES TO FINANCIAL STATEMENTS OF VCA-10
- -------------------------------------------------------------------------------
NOTE 4: PURCHASES AND SALES OF PORTFOLIO SECURITIES
For the year ended December 31, 1999, the aggregate cost of
purchases and the proceeds from sales of securities, excluding
short-term investments, were $367,726,205 and $475,639,924,
respectively.
NOTE 5: UNIT TRANSACTIONS
The number of Accumulation Units issued and redeemed for the years
ended December 31, 1999 and 1998 is as follows:
<TABLE>
<CAPTION>
1999 1998
------------------------------------------------------------------------------------
<S> <C> <C>
Units issued 8,372,387 17,443,446
------------------------------------------------------------------------------------
Units redeemed 26,439,756 20,273,521
------------------------------------------------------------------------------------
</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, 1999, Prudential Securities
Incorporated, an indirect, wholly owned subsidiary of Prudential,
earned $17,046 in brokerage commissions from portfolio transactions
executed on behalf of VCA-10. During the year ended December 31,
1999, Prudential has advised the Account that it received $24,016
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, 1999, $2,395,948 in participant
loans were withdrawn from VCA-10 and $1,733,215 of principal and
interest was repaid to VCA-10. For the year ended December 31, 1998
$2,651,758 in participant loans was withdrawn from VCA-10 and
$1,908,945 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> 72
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, 1999, 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 four years in the period then ended, in conformity with accounting
principles generally accepted in the United States. 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 auditing standards
generally accepted in the United States, which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits, which included confirmation of securities at December
31, 1999 by correspondence with the custodian, provide a reasonable basis for
the opinion expressed above. The accompanying finanicial highlights for the year
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 23, 2000
A-10
<PAGE> 73
FINANCIAL HIGHLIGHTS FOR VCA-11
INCOME AND CAPITAL CHANGES ACCUMULATION PER UNIT*
(FOR AN ACCUMULATION UNIT OUTSTANDING THROUGHOUT THE YEAR)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
- ----------------------------------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME................................................$ .1378 $ .1411 $ .1353 $ .1281 $ .1313))
EXPENSES
For investment management fee................................. (.0065) (.0062) (.0059) (.0056) (.0054)
For administrative expenses not covered
by the annual account charge............................... (.0194) (.0186) (.0178) (.0170) (.0160)
- ----------------------------------------------------------------------------------------------------------------------------------
NET INCREASE IN UNIT VALUE....................................... .1119 .1163 .1116 .1055 .1099
UNIT VALUE
Beginning of year............................................. 2.5489 2.4326 2.3210 2.2155 2.1056
- ----------------------------------------------------------------------------------------------------------------------------------
End of year................................................... $2.6608 $2.5489 $2.4326 $2.3210 $2.2155
- ----------------------------------------------------------------------------------------------------------------------------------
RATIO OF EXPENSES TO AVERAGE NET ASSETS**........................ .99% .99% .98% .98% .99%
- ----------------------------------------------------------------------------------------------------------------------------------
RATIO OF NET INVESTMENT INCOME TO
AVERAGE NET ASSETS**.......................................... 4.29% 4.78% 4.73% 4.57% 5.08%
- ----------------------------------------------------------------------------------------------------------------------------------
NUMBER OF UNITS OUTSTANDING
For Participants at end of year (000s omitted)................ 34,100 34,882 35,757 38,315 34,136
- ----------------------------------------------------------------------------------------------------------------------------------
</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> 74
<TABLE>
<CAPTION>
SHORT-TERM PRINCIPAL
INVESTMENTS [NOTE 2] AMOUNT VALUE
- -----------------------------------------------------------------------
<S> <C> <C>
OTHER CORPORATE DEBT - U.S. - 31.8%
(MEDIUM TERM NOTES, CORPORATE BONDS,
CORPORATE NOTES, FUNDING AGREEMENTS)
Associates Corp. of North America,
6.41025%# Medium Term Note
Due 6/29/2000 $2,200,000 $2,199,243
Bank One Corp.,
6.15375%# Medium Term Note
Due 8/21/2000 1,000,000 1,000,000
Bank One Corp.,
6.13%# Medium Term Note
Due 11/17/2000 2,000,000 2,000,473
Chrysler Financial Co. LLC,
6.375% Corporate Note
Due 1/28/2000 750,000 750,710
Citicorp, 6.5125%#
Medium Term Note
Due 8/2/2000 1,000,000 999,986
Citicorp, 5.94375%#
Medium Term Note
Due 8/10/2000 1,235,000 1,234,302
Commercial Credit Co.,
6.75% Corporate Bond
Due 5/15/2000 1,000,000 1,004,710
Conseco Finance Vehicle Trust,
6.62125%# Note
Due 1/5/2001 1,000,000 1,000,000
First Union Corp.,
6.60% Corporate Bond
Due 6/15/2000 700,000 702,981
Ford Motor Credit Co.,
6.0375%# Medium Term Note
Due 8/18/2000 2,000,000 1,998,982
Goldman Sachs Group L.P.,
6.00875%# Medium Term Note
Due 12/21/2000 3,800,000 3,800,000
IBM Corp., 6.375%
Corporate Note
Due 6/15/2000 352,000 352,997
International Lease Finance,
5.46% Medium Term Note
Due 3/10/2000 500,000 500,320
International Lease Finance,
6.625% Corporate Bond
Due 8/15/2000 500,000 502,273
Paccar Financial Corp.,
6.08% Medium Term Note
Due 7/12/2000 1,000,000 1,001,687
Restructured Asset Security
Enhanced Return, 6.56875%# Note
Due 1/21/2000 2,000,000 2,000,000
SHORT-TERM PRINCIPAL
INVESTMENTS [NOTE 2] AMOUNT VALUE
- -----------------------------------------------------------------------
Restructured Asset Security
Enhanced Return, 6.55875%# Note
Due 9/6/2000 1,000,000 1,000,000
Security Life of Denver,
6.24625%# Funding Agreement
Due 4/12/2000 1,000,000 1,000,000
Short Term Repackaged Asset
Trust, 1998-E, 6.56125%# Note
Due 8/18/2000 1,000,000 1,000,000
Strategic Money Market Trust,
1999-B, 6.18125%# Note
Due 3/15/2000 1,000,000 1,000,000
U.S. Bancorp, 6.5325%#
Medium Term Note
Due 9/20/2000 4,000,000 3,998,584
------------
29,047,248
COMMERCIAL PAPER - 26.4%
Associates First Capital Corp.,
6.25% Due 1/11/2000 $1,125,000 $1,122,461
Barton Capital Corp., 6.20%
Due 1/20/2000 2,100,000 2,084,087
Barton Capital Corp., 6.07%
Due 2/1/2000 2,346,000 2,322,266
Clipper Receivables Corp.,
6.10% Due 2/7/2000 985,000 974,986
Falcon Asset Securitization
Corp., 6.10%
Due 2/10/2000 475,000 466,951
Finova Capital Corp., 6.25%
Due 3/10/2000 2,000,000 1,970,139
Forrestal Funding Master
Trust 1999-A, 6.13%
Due 2/7/2000 1,090,000 1,079,049
General Electric Capital
Corp., 6.00%
Due 2/17/2000 1,400,000 1,384,600
General Electric Capital
Corp., 5.95%
Due 3/8/2000 3,000,000 2,935,046
General Motors Acceptance
Corp., 5.88%
Due 2/10/2000 4,000,000 3,938,587
PNC Funding Corp., 5.93%
Due 2/18/2000 1,000,000 983,857
PNC Funding Corp., 5.91%
Due 2/22/2000 3,000,000 2,955,182
Thunder Bay Funding, Inc.,
6.20% Due 1/18/2000 845,000 838,888
Triple-A One Funding Corp.,
6.44% Due 1/13/2000 1,056,000 1,050,522
----------
24,106,621
- -----------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
A-12
<PAGE> 75
FINANCIAL STATEMENTS OF VCA-11
STATEMENT OF NET ASSETS AS OF DECEMBER 31, 1999
SHORT-TERM PRINCIPAL
INVESTMENTS [NOTE 2] AMOUNT VALUE
- ------------------------------------------------------------------------------
OTHER BANK RELATED INSTRUMENTS - U.S. - 15.2%
(BANK NOTES, CERTIFICATES OF DEPOSIT)
American Express Centurion Bank,
6.43875%# Bank Note
Due 3/8/2000 $1,000,000 $1,000,000
Chase Manhattan Bank,
5.365% Certificate of Deposit
Due 5/22/2000 2,000,000 1,998,841
Comerica Bank, N.A.,
6.36125%# Bank Note
Due 6/13/2000 1,000,000 999,712
FCC National Bank,
5.14% Bank Note
Due 3/22/2000 1,000,000 999,925
First Union National Bank,
6.015%# Bank Note
Due 3/10/2000 1,000,000 1,000,000
First Union National Bank,
6.27%# Bank Note
Due 11/13/2000 2,800,000 2,803,360
Key Bank, N.A.,
5.125% Bank Note
Due 3/24/2000 1,500,000 1,499,657
Key Bank, N.A., 6.03125%#
Bank Note
Due 6/14/2000 1,000,000 999,734
Morgan Guaranty Trust Co.,
5.70% Certificate of Deposit
Due 7/19/2000 500,000 498,312
National City Bank of Cleveland,
6.65625%# Bank Note
Due 6/8/2000 1,100,000 1,100,980
Northern Trust Co.,
5.10% Bank Note
Due 2/22/2000 1,000,000 999,945
------------
13,900,466
- ------------------------------------------------------------------------------
COMMERCIAL PAPER - YANKEE - 11.8%
Alliance & Leicester PLC, 5.87%
Due 2/28/2000 3,000,000 2,954,018
ANZ (Delaware), Inc., 6.15%
Due 2/22/2000 1,000,000 988,042
Baus Funding LLC, 6.20%
Due 1/31/2000 2,500,000 2,477,437
Bradford & Bingley
Building Society, 6.03%
Due 2/7/2000 1,200,000 1,188,744
Nationwide Building Society,
6.00% Due 2/4/2000 2,400,000 2,374,000
SHORT-TERM
INVESTMENTS [NOTE 2]
- ------------------------------------------------------------------------------
Unifunding, Inc., 5.50%
Due 1/7/2000 861,000 860,079
-----------
10,842,320
- ------------------------------------------------------------------------------
OTHER CORPORATE DEBT - YANKEE - 5.5%
(MEDIUM TERM NOTES, CORPORATE BONDS)
Abbey National Treasury Services
PLC., 4.95% Medium Term Note
Due 2/3/2000 3,000,000 2,996,149
DaimlerChrysler North
America Holdings Corp.,
6.35675%# Medium Term Note
Due 7/6/2000 2,000,000 1,998,668
----------
4,994,817
- ------------------------------------------------------------------------------
CERTIFICATES OF DEPOSIT - YANKEE - 4.6%
Credit Communal De Belgique,
6.06% Due 1/31/2000 2,000,000 2,000,000
Deutsche Bank A.G., 4.98%
Due 2/2/2000 1,000,000 999,975
National Westminster
Bank PLC, 5.0475%
Due 2/9/2000 1,200,000 1,199,954
----------
4,199,929
- ------------------------------------------------------------------------------
CERTIFICATES OF DEPOSIT - FOREIGN - 3.3%
Royal Bank of Canada, 4.97%
Due 2/4/2000 2,000,000 1,999,928
Toronto Dominion Bank, 5.02%
Due 2/4/2000 1,000,000 999,973
-----------
2,999,901
- ------------------------------------------------------------------------------
TOTAL SHORT-TERM INVESTMENTS - 98.6%
(Cost: $90,091,302) 90,091,302
- ------------------------------------------------------------------------------
OTHER ASSETS, LESS LIABILITIES
Cash 95
Interest Receivable 1,139,382
Receivable for Pending Capital Transactions 153,928
- ------------------------------------------------------------------------------
TOTAL OTHER ASSETS, LESS LIABILITIES - 1.4% 1,293,405
- ------------------------------------------------------------------------------
NET ASSETS - 100% $91,384,707
- ------------------------------------------------------------------------------
NET ASSETS, REPRESENTING:
Equity of Participants
34,099,542 Accumulation Units at an
Accumulation Unit Value of $2.6608 90,731,697
Equity of The Prudential Insurance Company
of America 653,010
----------
$91,384,707
- ------------------------------------------------------------------------------
# Indicates a Variable Rate Security. Rate shown is rate in effect at December
31, 1999.
AG - Aktiengesellschaft (German Stock Co.)
LLC - Limited Liability Corporation
PLC - Public Limited Company
SEE NOTES TO FINANCIAL STATEMENTS
A-13
<PAGE> 76
<TABLE>
<CAPTION>
FINANCIAL STATEMENTS OF VCA-11
STATEMENT OF OPERATIONS
- ----------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1999
- ----------------------------------------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME [NOTE 2]
Interest $4,818,027
Realized Gain on Investment Transactions 602
- ----------------------------------------------------------------------------------------------------------------
TOTAL INCOME 4,818,629
- ----------------------------------------------------------------------------------------------------------------
EXPENSES [NOTE 3]
Fees Charged to Participants for Investment Management Services 225,178
Fees Charged to Participants for Administrative Expenses 675,534
- ----------------------------------------------------------------------------------------------------------------
TOTAL EXPENSES 900,712
- ----------------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME AND NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $3,917,917
================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
STATEMENTS OF CHANGES IN NET ASSETS
YEAR ENDED DECEMBER 31, 1999 DECEMBER 31, 1998
- ---------------------------------------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $3,917,917 $ 4,631,599
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CAPITAL TRANSACTIONS
Purchase Payments and Transfers In [Note 6 and 7] 109,601,188 168,192,543
Withdrawals and Transfers Out [Note 6 and 7] (111,670,643) (170,842,905)
Annual Account Charges Deducted from
Participants' Accounts [Note 4] (47,735) (47,451)
- ---------------------------------------------------------------------------------------------------------------------------
NET DECREASE IN NET ASSETS
RESULTING FROM CAPITAL TRANSACTIONS (2,117,190) (2,697,813)
- ---------------------------------------------------------------------------------------------------------------------------
NET INCREASE/DECREASE IN NET ASSETS
RESULTING FROM SURPLUS TRANSFER [NOTE 8] 68,215 (1,588,734)
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL INCREASE IN NET ASSETS 1,868,942 345,052
NET ASSETS
Beginning of Year 89,515,765 89,170,713
- ---------------------------------------------------------------------------------------------------------------------------
End of Year $91,384,707 $89,515,765
===========================================================================================================================
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
A-14
<PAGE> 77
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). The investment
objective of the Account is to realize a high level of current income as
is consisent with the preservation of capital and liquidity. Its
investments are primarily composed of short-term securities. The ability
of the issuers of the securities held by the Account to meet their
obligations may be affected by economic developments in a specific state,
industry or region. Although variable annuity payments differ according
to the investment performance of the Account, they are not affected by
mortality or expense experience because Prudential assumes the expense
risk and the mortality risk under the contracts.
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 ownership
or investment 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> 78
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 fiscal 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, 1999 and 1998, Prudential has advised the Account that
they received deferred sales charges of $2,716 and $2,389,
respectively.
NOTE 6: UNIT TRANSACTIONS
The number of Units issued and redeemed for the years ended December
31, 1999 and 1998 is as follows:
<TABLE>
1999 1998
--------------------------------------------------------------------
<S> <C> <C>
Units issued 42,139,173 67,777,991
--------------------------------------------------------------------
Units redeemed 42,927,959 68,652,928
--------------------------------------------------------------------
</TABLE>
A-16
<PAGE> 79
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 MEDLEY 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, 1999, $727,717 in participant loans
were withdrawn from VCA-11 and $295,519 of principal and interest was
repaid to VCA-11. For the year ended December 31, 1998, $850,931 in
participant loans were withdrawn from VCA-11 and $299,809 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 year ended
December 31, 1999, Prudential has advised the Account that it received
$8,695 in loan origination fees.
NOTE 8: NET DECREASE IN NET ASSETS RESULTING FROM SURPLUS TRANSFERS
The decrease in net assets from surplus for the year ended December
31, 1999 represents the net withdrawals from the Equity of Prudential
to VCA-11.
A-17
<PAGE> 80
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, 1999, 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 four years in the period then ended, in conformity with accounting
principles generally accepted in the United States. 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 auditing
standards generally accepted in the United States, which require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits, which included confirmation
of securities at December 31, 1999 by correspondence with the custodian,
provide a reasonable basis for the opinion expressed above. The finanicial
highlights for the year ended December 31, 1995 were audited by other
independent accountants whose report thereon dated February 15, 1996 expressed
an unqualified opinion on those financial highlights.
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York
February 23, 2000
A-18
<PAGE> 81
FINANCIAL STATEMENTS OF VCA-24
STATEMENTS OF NET ASSETS
DECEMBER 31, 1999
<TABLE>
<CAPTION>
SUBACCOUNTS
-------------------------------------------------------------------------------
DIVERSIFIED FLEXIBLE CONSERVATIVE
EQUITY BOND MANAGED BALANCED
------ ----------- -------- ------------
<S> <C> <C> <C> <C>
Investment in Shares of
The Prudential Series Fund,
Inc. Portfolios at Net
Asset Value [Note 2].................. $ 441,016,265 $ 48,422,048 $ 163,999,113 $ 142,830,442
NET ASSETS............................... $ 441,016,265 $ 48,422,048 $ 163,999,113 $ 142,830,442
============== =============== ============== ==============
NET ASSETS REPRESENTING:
Equity of Participants................ $ 439,308,612 $ 47,907,443 $ 162,782,646 $ 141,493,703
Equity of The Prudential
Insurance Company of America. 1,707,653 514,605 1,216,467 1,336,739
------------- --------------- ------------- -------------
Net Assets......................... $ 441,016,265 $ 48,422,048 $ 163,999,113 $ 142,830,442
============= =============== ============= =============
<CAPTION>
SUBACCOUNTS
---------------------------------------------------------
GOVERNMENT
STOCK INDEX GLOBAL INCOME
----------- ------ ----------
<S> <C> <C> <C>
Investment in Shares of
The Prudential Series Fund,
Inc. Portfolios at Net
Asset Value [Note 2].................. $540,872,453 $ 125,654,824 $30,521,806
NET ASSETS............................... $540,872,453 $125,654,824 $30,521,806
============ ============== =============
NET ASSETS REPRESENTING:
Equity of Participants................ $539,136,116 $123,222,589 $30,027,046
Equity of The Prudential
Insurance Company of America. 1,736,337 2,432,235 494,760
------------ ------------- -------------
Net Assets......................... $540,872,453 $125,654,824 $30,521,806
============ ============= =============
</TABLE>
STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
SUBACCOUNTS
DIVERSIFIED FLEXIBLE CONSERVATIVE
EQUITY BOND MANAGED BALANCED
------ ----------- --------- ------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME
Ordinary Dividend Distributions..... $ 7,663,863 $ --- $7,769 $5,888,320
Expense [Note 3]
Fees Charged to Participants
for Administrative Purposes... (3,414,454) (384,630) (1,250,156) (1,072,154)
------------ ----------- ----------- ----------
NET INVESTMENT INCOME.................. 4,249,409 (384,630) (1,242,387) 4,816,166
------------ ----------- ----------- ----------
NET REALIZED AND UNREALIZED
GAIN/LOSS ON INVESTMENTS
Capital Gains Distributions Received... 52,731,113 149,490 1,971,206 826,733
Net Realized Gain
on Investments...................... 19,682,560 (35,666) 68,898 369,733
Net Increase/(Decrease) in unrealized
Appreciation/(Depreciation)
on Investments...................... (25,492,894) (549,857) 10,554,704 2,251,991
------------ ----------- ----------- ----------
NET GAIN (LOSS) ON INVESTMENTS......... 46,920,779 (436,033) 12,594,808 3,448,457
------------ ----------- ----------- ----------
NET INCREASE/(DECREASE) IN NET
ASSETS RESULTING FROM OPERATIONS.... $51,170,188 $ (820,663) $11,352,421 $8,264,623
============ =========== =========== ==========
<CAPTION>
SUBACCOUNTS
GOVERNMENT
STOCK INDEX GLOBAL INCOME
----------- ------ ----------
<S> <C> <C> <C>
INVESTMENT INCOME
Ordinary Dividend Distributions........ $ 5,391,030 $418,473 $ ---
Expense [Note 3]
Fees Charged to Participants
for Administrative Purposes...... (3,760,901) (719,663) (247,500)
----------- ----------- -----------
NET INVESTMENT INCOME..................... 1,630,129 (301,190) (247,500)
----------- ----------- -----------
NET REALIZED AND UNREALIZED
GAIN/LOSS ON INVESTMENTS
Capital Gains Distributions Received...... 6,536,741 733,759 ---
Net Realized Gain
on Investments......................... 21,618,218 4,074,377 205,461
Net Increase/(Decrease) in unrealized
Appreciation/(Depreciation)
on Investments......................... 60,329,221 35,895,288 (1,175,639)
----------- ----------- -----------
NET GAIN (LOSS) ON INVESTMENTS............ 88,484,180 40,703,424 (970,178)
----------- ----------- -----------
NET INCREASE/(DECREASE) IN NET
ASSETS RESULTING FROM OPERATIONS....... $90,114,309 $40,402,234 $(1,217,678)
=========== =========== ===========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
A-19
<PAGE> 82
FINANCIAL STATEMENTS OF VCA-24
STATEMENTS OF CHANGES IN
NET ASSETS
<TABLE>
<CAPTION>
SUBACCOUNTS
-----------------------------------------------------------------
DIVERSIFIED
EQUITY BOND
------------------------------- ------------------------------
FOR THE PERIOD ENDED DEC. 31, 1999 DEC. 31, 1998 DEC. 31, 1999 DEC. 31, 1998
-------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS....... $51,170,188 $31,020,127 $(820,663) $2,993,664
------------- ------------- ------------- -------------
ACCUMULATION UNIT TRANSACTIONS
Purchase Payments and
Transfers In [Notes 7 & 8]......... 69,286,796 119,421,285 13,315,515 26,477,778
Withdrawals and
Transfers Out [Notes 7 & 8]........ (153,625,619) (227,004,940) (19,900,084) (16,800,497)
Annual Account Charges Deducted
From Participants' Accumulation
Accounts [Note 4].................. (55,043) (58,411) (9,849) (10,355)
------------- ------------- ------------- ------------
NET INCREASE/(DECREASE)
IN NET ASSETS RESULTING
FROM ACCUMULATION
UNIT TRANSACTIONS.................. (84,393,866) (107,642,066) (6,594,418) 9,666,926
NET INCREASE/(DECREASE) IN NET ASSETS
FROM SURPLUS TRANSFERS [NOTE 9].... (39,040) (9,423) (124,503) 150,438
------------- ------------ ------------ -----------
TOTAL INCREASE/(DECREASE) IN
NET ASSETS......................... (32,262,718) (76,631,362) (7,539,584) 12,811,028
NET ASSETS
Beginning of period................ 474,278,983 550,910,345 55,961,632 43,150,604
------------- ------------- ----------- -----------
End of period...................... $441,016,265 $474,278,983 $48,422,048 $55,961,632
============= ============= =========== ===========
<CAPTION>
SUBACCOUNTS
-------------------------------------------------------------------
FLEXIBLE CONSERVATIVE
MANAGED BALANCED
------------------------------- ------------------------------
FOR THE PERIOD ENDED DEC. 31, 1999 DEC. 31, 1998 DEC. 31, 1999 DEC. 31, 1998
------------- ------------- ------------- -------------
<C> <C> <C> <C>
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS....... $11,352,421 $13,683,586 $8,264,623 $14,217,978
------------- ------------- ------------ ------------
ACCUMULATION UNIT TRANSACTIONS
Purchase Payments and
Transfers In [Notes 7 & 8]......... 26,292,396 42,624,953 23,315,455 27,343,287
Withdrawals and
Transfers Out [Notes 7 & 8]........ (44,388,257) (73,203,087) (32,430,146) (27,813,972)
Annual Account Charges Deducted
From Participants' Accumulation
Accounts [Note 4].................. (20,350) (21,523) (21,971) (24,743)
------------- ------------- ------------- -------------
NET INCREASE/(DECREASE)
IN NET ASSETS RESULTING
FROM ACCUMULATION
UNIT TRANSACTIONS.................. (18,116,211) (30,599,657) (9,136,662) (495,428)
NET INCREASE/(DECREASE) IN NET ASSETS
FROM SURPLUS TRANSFERS [NOTE 9].... (94,886) 314,721 (88,148) 535,730
------------- ------------- ------------- -------------
TOTAL INCREASE/(DECREASE) IN
NET ASSETS......................... (6,858,676) (16,601,350) (960,187) 14,258,280
NET ASSETS
Beginning of period................ 170,857,789 187,459,139 143,790,629 129,532,349
------------- ------------- ------------- -------------
End of period...................... $163,999,113 $170,857,789 $142,830,442 $143,790,629
============= ============= ============= =============
</TABLE>
<TABLE>
<CAPTION>
SUBACCOUNTS
------------------------------------------------------------------------------
STOCK
INDEX GLOBAL
----------------------------------- ---------------------------------
FOR THE PERIOD ENDED DEC. 31, 1999 DEC. 31, 1998 DEC. 31, 1999 DEC. 31, 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS............ $ 90,114,309 $ 90,944,189 $ 40,402,234 $ 17,272,278
------------ ------------- ------------- -------------
ACCUMULATION UNIT TRANSACTIONS
Purchase Payments and
Transfers In [Notes 7 & 8].............. 150,527,441 170,811,372 34,220,362 56,489,382
Withdrawals and
Transfers Out [Notes 7 & 8]............ (142,799,902) (196,975,004) (37,281,767) (57,085,576)
Annual Account Charges Deducted
From Participants' Accumulation
Accounts [Note 4]....................... (41,285) (30,821) (2,564) ( 3,261)
NET INCREASE/(DECREASE) IN NET ASSETS
RESULTING FROM ACCUMULATION
UNIT TRANSACTIONS....................... 7,686,254 (26,194,453) (3,063,969) (599,455)
------------ ------------- ------------- -------------
NET INCREASE/(DECREASE) IN NET ASSETS
FROM SURPLUS TRANSFERS [NOTE 9]......... 25,395 854,183 (57,803) 792,964
TOTAL INCREASE/(DECREASE) IN
NET ASSETS.............................. 97,825,958 65,603,919 37,280,462 17,465,787
NET ASSETS
Beginning of period..................... 443,046,495 377,442,577 88,374,362 70,908,575
------------ ------------- ------------- -------------
End of period........................... $540,872,453 $ 443,046,496 $ 125,654,824 $ 88,374,362
============ ============= ============= =============
<CAPTION>
SUBACCOUNTS
--------------------------------
GOVERNMENT
INCOME
--------------------------------
FOR THE PERIOD ENDED DEC. 31, 1999 DEC. 31, 1998
------------- -------------
<S> <C> <C>
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS............ $(1,217,678) $2,483,691
------------- -------------
Purchase Payments and
Transfers In [Notes 7 & 8].............. 8,207,887 17,139,903
Withdrawals and
Transfers Out [Notes 7 & 8]............ (13,748,986) (10,414,039)
Annual Account Charges Deducted
From Participants' Accumulation
Accounts [Note 4]....................... (3,122) (3,015)
NET INCREASE/(DECREASE) IN NET ASSETS
RESULTING FROM ACCUMULATION
UNIT TRANSACTIONS....................... (5,544,221) 6,722,849
------------- -------------
NET INCREASE/(DECREASE) IN NET ASSETS
FROM SURPLUS TRANSFERS [NOTE 9]......... (96,178) 103,785
TOTAL INCREASE/(DECREASE) IN
NET ASSETS.............................. (6,858,077) 9,310,325
NET ASSETS
Beginning of period..................... 37,379,883 28,069,558
------------- -------------
End of period........................... $30,521,806 $37,379,883
============= =============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
A-20
<PAGE> 83
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"). Although variable annuity payments
differ according to the investment performance of the Account, they
are not affected by mortality or expense experience because
Prudential assumes the expense risk and the mortality risk under the
contracts.
SIGNIFICANT ACCOUNTING POLICIES
Investments--The investments in shares of the 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 Fund and
are recorded on the 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, 1999 are as follows:
<TABLE>
<CAPTION>
DIVERSIFIED FLEXIBLE CONSERVATIVE STOCK
EQUITY BOND MANAGED BALANCED INDEX
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Number of Shares 15,260,078 4,422,105 9,297,002 9,298,857 12,168,109
- ---------------------------------------------------------------------------------------------------------------------
NAV per Share $ 28.90 $ 10.95 $ 17.64 $ 15.36 $ 44.45
- ---------------------------------------------------------------------------------------------------------------------
Cost at 12-31-99 $385,876,353 $48,514,160 $157,828,851 $138,216,024 $313,023,686
- ---------------------------------------------------------------------------------------------------------------------
GOVERNMENT
GLOBAL INCOME
- -------------------------------------------------------
<S> <C> <C>
Number of Shares 4,055,998 2,642,581
- -------------------------------------------------------
NAV per Share $ 30.98 $ 11.55
- -------------------------------------------------------
Cost at 12-31-99 $75,494,516 $30,205,739
- -------------------------------------------------------
</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 reducing the number of Units held. 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> 84
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.
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, is as follows:
<TABLE>
<CAPTION>
1999
DIVERSIFIED FLEXIBLE CONSERVATIVE STOCK
EQUITY BOND MANAGED BALANCED INDEX
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Units issued 15,511,647 5,643,631 7,844,141 8,219,444 25,309,388
- ---------------------------------------------------------------------------------------------------------------------
Units redeemed 34,287,974 8,438,294 13,509,859 11,298,746 23,683,009
- ---------------------------------------------------------------------------------------------------------------------
GOVERNMENT
GLOBAL INCOME
- -----------------------------------------------------
<S> <C> <C>
Units issued 13,506,600 4,750,864
- -----------------------------------------------------
Units redeemed 14,773,914 7,976,407
- -----------------------------------------------------
</TABLE>
The number of units issued and redeemed during the year ended December 31, 1998
is as follows:
<TABLE>
<CAPTION>
1998
DIVERSIFIED FLEXIBLE CONSERVATIVE STOCK
EQUITY BOND MANAGED BALANCED INDEX
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Units issued 29,763,261 11,587,263 14,367,039 10,520,655 35,324,682
- ---------------------------------------------------------------------------------------------------------------------
Units redeemed 59,071,090 7,441,727 25,276,607 10,716,387 42,380,910
- ---------------------------------------------------------------------------------------------------------------------
GOVERNMENT
GLOBAL INCOME
- --------------------------------------------------
<S> <C> <C>
Units issued 27,406,256 10,169,570
- --------------------------------------------------
Units redeemed 27,684,604 6,278,998
- --------------------------------------------------
</TABLE>
A-22
<PAGE> 85
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, 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>
1999
DIVERSIFIED FLEXIBLE CONSERVATIVE STOCK
EQUITY BOND MANAGED BALANCED INDEX
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Loans $2,541,893 $374,373 $1,501,068 $748,314 $3,599,667
- -------------------------------------------------------------------------------------------------------------------
Repayments $1,594,864 $223,541 $ 864,067 $493,542 $1,856,162
- -------------------------------------------------------------------------------------------------------------------
<CAPTION>
1999
GOVERNMENT
GLOBAL INCOME
- ---------------------------------------------------
<S> <C> <C>
Loans $718,784 $235,769
- ---------------------------------------------------
Repayments $379,272 $ 91,359
- ---------------------------------------------------
</TABLE>
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 was as
follows:
<TABLE>
<CAPTION>
1998
DIVERSIFIED FLEXIBLE CONSERVATIVE STOCK
EQUITY BOND MANAGED BALANCED INDEX
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Loans $2,752,209 $418,846 $1,853,425 $829,592 $2,688,331
- --------------------------------------------------------------------------------------------------------------------
Repayments $1,681,829 $216,684 $ 781,480 $478,418 $1,692,528
- --------------------------------------------------------------------------------------------------------------------
<CAPTION>
1998
GOVERNMENT
GLOBAL INCOME
- --------------------------------------------------
<S> <C> <C>
Loans $553,774 $223,292
- --------------------------------------------------
Repayments $476,226 $ 93,403
- --------------------------------------------------
</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.
A-23
<PAGE> 86
NOTES TO FINANCIAL STATEMENTS OF VCA-24
- ------------------------------------------------------------------------------
NOTE 10: CONDENSED FINANCIAL INFORMATION
PARTICIPANT ACCUMULATION UNIT VALUES FOR VCA-24 UNIT
<TABLE>
<CAPTION>
EQUITY 01/01/99 01/01/98 01/01/97 01/01/96 01/01/95
TO TO TO TO TO
12/31/99 12/31/98 12/31/97 12/31/96 12/31/95
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Beginning of period (rounded) $4.2286 $3.8962 $3.1487 $ 2.6769 $ 2.0541
End of period (rounded) $4.7195 $4.2286 $3.8962 $ 3.1487 $ 2.6769
Accumulation Units
Outstanding at end of period
(000 omitted) 93,084 111,855 141,162 132,455 118,394
DIVERSIFIED BOND 01/01/99 01/01/98 01/01/97 01/01/96 01/01/95
TO TO TO TO TO
12/31/99 12/31/98 12/31/97 12/31/96 12/31/95
-------- -------- -------- --------- --------
Beginning of period (rounded) $2.3829 $2.2404 $2.0789 $ 2.0065 $ 1.6746
End of period (rounded) $2.3475 $2.3829 $2.2404 $ 2.0789 $ 2.0065
Accumulation Units
Outstanding at end of period
(000 omitted) 20,408 23,260 19,114 20,280 16,898
FLEXIBLE MANAGED 01/01/99 01/01/98 01/01/97 01/01/96 01/01/95
TO TO TO TO TO
12/31/99 12/31/98 12/31/97 12/31/96 12/31/95
-------- -------- -------- -------- --------
Beginning of period (rounded) $3.1844 $2.9103 $2.4854 $ 2.2038 $ 1.7886
End of period (rounded) $3.4074 $3.1844 $2.9103 $ 2.4854 $ 2.2038
Accumulation Units
Outstanding at end of period
(000 omitted) 47,774 53,275 64,184 59,681 51,419
CONSERVATIVE BALANCED 01/01/99 01/01/98 01/01/97 01/01/96 01/01/95
TO TO TO TO TO
12/31/99 12/31/98 12/31/97 12/31/96 12/31/95
-------- -------- -------- -------- --------
Beginning of period (rounded) $2.7909 $2.5165 $2.2364 $ 1.9993 $ 1.7175
End of period (rounded) $2.9538 $2.7909 $2.5165 $ 2.2364 $ 1.9993
Accumulation Units
Outstanding at end of period
(000 omitted) 47,902 51,101 51,297 50,029 46,873
STOCK INDEX 01/01/99 01/01/98 01/01/97 01/01/96 01/01/95
TO TO TO TO TO
12/31/99 12/31/98 12/31/97 12/31/96 12/31/95
-------- -------- -------- -------- --------
Beginning of period (rounded) $5.5972 $4.3910 $3.3302 $ 2.7378 $ 2.0123
End of period (rounded) $6.6972 $5.5972 $4.3910 $ 3.3302 $ 2.7378
Accumulation Units
Outstanding at end of period
(000 omitted) 80,502 78,885 85,941 80,572 51,701
GLOBAL 01/01/99 01/01/98 01/01/97 01/01/96 01/01/95
TO TO TO TO TO
12/31/99 12/31/98 12/31/97 12/31/96 12/31/95
-------- -------- -------- -------- --------
Beginning of period (rounded) $2.3269 $1.8815 $1.7836 $ 1.4975 $ 1.3020
End of period (rounded) $3.4236 $2.3269 $1.8815 $ 1.7836 $ 1.4975
Accumulation Units
Outstanding at end of period
(000 omitted) 35,992 37,297 37,576 33,505 24,439
GOVERNMENT INCOME 01/01/99 01/01/98 01/01/97 01/01/96 01/01/95
TO TO TO TO TO
12/31/99 12/31/98 12/31/97 12/31/96 12/31/95
-------- -------- -------- -------- --------
Beginning of period (rounded) $1.7614 $1.6267 $1.4943 $ 1.4730 $ 1.2421
End of period (rounded) $1.7011 $1.7614 $1.6267 $ 1.4943 $ 1.4730
Accumulation Units
Outstanding at end of period
(000 omitted) 17,652 20,924 17,033 17,697 17,289
</TABLE>
A-24
<PAGE> 87
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> 88
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
DECEMBER 31, 1999 AND 1998 (IN MILLIONS)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998
------------- -------------
<S> <C> <C>
ASSETS
Fixed maturities:
Available for sale, at fair value (amortized cost, 1999: $76,815; 1998: $76,997) $ 74,697 $ 80,158
Held to maturity, at amortized cost (fair value, 1999: $14,112; 1998: $17,906) 14,237 16,848
Trading account assets, at fair value 9,741 8,888
Equity securities, available for sale, at fair value (cost, 1999: $2,531; 1998: $2,583) 3,264 2,759
Mortgage loans on real estate 16,268 16,016
Investment real estate 770 675
Policy loans 7,590 7,476
Securities purchased under agreements to resell 13,944 10,252
Cash collateral for borrowed securities 7,124 5,622
Other long-term investments 4,087 3,474
Short-term investments 12,303 9,781
------------- -------------
Total investments 164,025 161,949
Cash 1,330 1,943
Accrued investment income 1,836 1,795
Broker-dealer related receivables 11,346 10,142
Deferred policy acquisition costs 7,324 6,462
Other assets 17,102 16,200
Separate account assets 82,131 80,931
------------- -------------
TOTAL ASSETS $ 285,094 $ 279,422
============= =============
LIABILITIES AND EQUITY
LIABILITIES
Future policy benefits $ 68,069 $ 67,059
Policyholders' account balances 31,578 33,098
Unpaid claims and claim adjustment expenses 2,829 3,806
Policyholders' dividends 1,484 1,444
Securities sold under agreements to repurchase 24,598 21,486
Cash collateral for loaned securities 10,775 7,132
Income taxes payable 804 785
Broker-dealer related payables 5,839 6,530
Securities sold but not yet purchased 6,968 5,771
Short-term debt 10,858 10,082
Long-term debt 5,513 4,734
Other liabilities 14,357 16,169
Separate account liabilities 82,131 80,931
------------- -------------
Total liabilities 265,803 259,027
------------- -------------
COMMITMENTS AND CONTINGENCIES (SEE NOTES 14 AND 15)
EQUITY
Accumulated other comprehensive income/(loss) (685) 1,232
Retained earnings 19,976 19,163
------------- -------------
Total equity 19,291 20,395
------------- -------------
TOTAL LIABILITIES AND EQUITY $ 285,094 $ 279,422
============= =============
</TABLE>
See Notes to Consolidated Financial Statements
B1
<PAGE> 89
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (IN MILLIONS)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998 1997
--------- -------- --------
REVENUES
<S> <C> <C> <C>
Premiums $ 9,475 $ 9,024 $ 9,015
Policy charges and fee income 1,516 1,465 1,423
Net investment income 9,424 9,535 9,482
Realized investment gains, net 924 2,641 2,168
Commissions and other income 5,279 4,471 4,480
--------- -------- --------
Total revenues 26,618 27,136 26,568
--------- -------- --------
BENEFITS AND EXPENSES
Policyholders' benefits 10,175 9,840 9,956
Interest credited to policyholders' account balances 1,811 1,953 2,170
Dividends to policyholders 2,571 2,477 2,422
General and administrative expenses 9,656 9,108 8,620
Sales practices remedies and costs 100 1,150 2,030
--------- -------- --------
Total benefits and expenses 24,313 24,528 25,198
--------- -------- --------
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES AND
EXTRAORDINARY ITEM 2,305 2,608 1,370
--------- -------- --------
Income taxes
Current 690 1,085 101
Deferred 352 (115) 306
--------- -------- --------
Total income taxes 1,042 970 407
--------- -------- --------
INCOME FROM CONTINUING OPERATIONS BEFORE EXTRAORDINARY ITEM 1,263 1,638 963
--------- -------- --------
DISCONTINUED OPERATIONS
Loss from healthcare operations, net of taxes - (298) (353)
Loss on disposal of healthcare operations, net of taxes (400) (223) -
--------- -------- --------
Net loss from discontinued operations (400) (521) (353)
--------- -------- --------
INCOME BEFORE EXTRAORDINARY ITEM 863 1,117 610
EXTRAORDINARY ITEM - DEMUTUALIZATION EXPENSES, NET OF TAXES (50) (11) -
--------- -------- --------
NET INCOME $ 813 $ 1,106 $ 610
========= ======== ========
</TABLE>
See Notes to Consolidated Financial Statements
B2
<PAGE> 90
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (IN MILLIONS)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ACCUMULATED OTHER COMPREHENSIVE INCOME/(LOSS)
----------------------------------------------------------------------
TOTAL
FOREIGN NET ACCUMULATED
CURRENCY UNREALIZED PENSION OTHER
TRANSLATION INVESTMENT LIABILITY COMPREHENSIVE
ADJUSTMENTS GAINS/(LOSSES) ADJUSTMENT INCOME/(LOSS)
----------- -------------- ---------- -------------
<S> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1996 $ (56) $ 1,136 $ (4) $ 1,076
Comprehensive income:
Net income
Other comprehensive income, net of tax:
Change in foreign currency translation
adjustments (29) (29)
Change in net unrealized investment gains 616 616
Additional pension liability adjustment (2) (2)
Other comprehensive income
Total comprehensive income
----------------------------------------------------------------------
BALANCE, DECEMBER 31, 1997 (85) 1,752 (6) 1,661
Comprehensive income:
Net income
Other comprehensive loss, net of tax:
Change in foreign currency translation
adjustments 54 54
Change in net unrealized investment gains (480) (480)
Additional pension liability adjustment (3) (3)
Other comprehensive loss
Total comprehensive income
----------------------------------------------------------------------
BALANCE, DECEMBER 31, 1998 (31) 1,272 (9) 1,232
Comprehensive income:
Net income
Other comprehensive loss, net of tax:
Change in foreign currency translation
adjustments 13 13
Change in net unrealized investment gains (1,932) (1,932)
Additional pension liability adjustment 2 2
Other comprehensive loss
Total comprehensive loss
----------------------------------------------------------------------
BALANCE, DECEMBER 31, 1999 $ (18) $ (660) $ (7) $ (685)
======================================================================
<CAPTION>
RETAINED TOTAL
EARNINGS EQUITY
--------- -------
<S> <C> <C>
BALANCE, DECEMBER 31, 1996 $ 17,447 $ 18,523
Comprehensive income:
Net income 610 610
Other comprehensive income, net of tax:
Change in foreign currency translation
adjustments (29)
Change in net unrealized investment gains 616
Additional pension liability adjustment (2)
-----------
Other comprehensive income 585
-----------
Total comprehensive income 1,195
-------------------------------
BALANCE, DECEMBER 31, 1997 18,057 19,718
Comprehensive income:
Net income 1,106 1,106
Other comprehensive loss, net of tax:
Change in foreign currency translation
adjustments 54
Change in net unrealized investment gains (480)
Additional pension liability adjustment (3)
-----------
Other comprehensive loss (429)
-----------
Total comprehensive income 677
-------------------------------
BALANCE, DECEMBER 31, 1998 19,163 20,395
Comprehensive income:
Net income 813 813
Other comprehensive loss, net of tax:
Change in foreign currency translation
adjustments 13
Change in net unrealized investment gains (1,932)
Additional pension liability adjustment 2
-------
Other comprehensive loss (1,917)
-------
Total comprehensive loss (1,104)
-------------------------------
BALANCE, DECEMBER 31, 1999 $ 19,976 $ 19,291
===============================
</TABLE>
See Notes to Consolidated Financial Statements
B3
<PAGE> 91
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (IN MILLIONS)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998 1997
----------- ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 813 $ 1,106 $ 610
Adjustments to reconcile net income to
net cash provided by operating activities:
Realized investment gains, net (915) (2,671) (2,209)
Policy charges and fee income (237) (232) (258)
Interest credited to policyholders' account balances 1,811 1,953 2,170
Depreciation and amortization 489 337 271
Loss on disposal of businesses 400 223 -
Change in:
Deferred policy acquisition costs (178) (174) (233)
Future policy benefits and other insurance liabilities 724 597 2,537
Trading account assets (853) (2,540) (1,825)
Income taxes payable 1,074 594 (1,391)
Broker-dealer related receivables/payables (1,898) 1,495 (672)
Securities purchased under agreements to resell (3,692) (1,591) (3,314)
Cash collateral for borrowed securities (1,502) (575) (2,631)
Cash collateral for loaned securities 3,643 (6,985) 5,668
Securities sold but not yet purchased 1,197 2,122 1,633
Securities sold under agreements to repurchase 3,112 9,139 4,844
Other, net (3,356) (5,234) 3,910
----------- ------------ ------------
CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES 632 (2,436) 9,110
----------- ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from the sale/maturity of:
Fixed maturities, available for sale 120,875 123,151 123,550
Fixed maturities, held to maturity 4,957 4,466 4,042
Equity securities, available for sale 3,190 2,792 2,572
Mortgage loans on real estate 2,640 4,090 4,299
Investment real estate 507 1,489 1,842
Other long-term investments 1,219 1,848 5,232
Payments for the purchase of:
Fixed maturities, available for sale (120,933) (126,742) (129,854)
Fixed maturities, held to maturity (2,414) (2,244) (2,317)
Equity securities, available for sale (2,779) (2,547) (2,461)
Mortgage loans on real estate (2,595) (3,719) (3,305)
Investment real estate (483) (31) (241)
Other long-term investments (1,354) (1,842) (4,173)
Short-term investments (2,510) 2,145 (2,848)
----------- ------------ ------------
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES 320 2,856 (3,662)
----------- ------------ ------------
</TABLE>
See Notes to Consolidated Financial Statements
B4
<PAGE> 92
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (IN MILLIONS)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998 1997
----------- ------------- ------------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Policyholders' account deposits 6,901 7,052 5,245
Policyholders' account withdrawals (9,835) (11,332) (9,873)
Net increase in short-term debt 444 2,422 305
Proceeds from the issuance of long-term debt 1,844 1,940 324
Repayments of long-term debt (919) (418) (464)
----------- ------------- ------------
CASH FLOWS USED IN FINANCING ACTIVITIES (1,565) (336) (4,463)
----------- ------------- ------------
NET (DECREASE)/INCREASE IN CASH (613) 84 985
CASH, BEGINNING OF YEAR 1,943 1,859 874
----------- ------------- ------------
CASH, END OF YEAR $ 1,330 $ 1,943 $ 1,859
=========== ============= ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Income taxes (received)/paid $ (344) $ 163 $ 968
----------- ------------- ------------
Interest paid $ 824 $ 864 $ 708
----------- ------------- ------------
</TABLE>
See Notes to Consolidated Financial Statements
B5
<PAGE> 93
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
1. BUSINESS
The Prudential Insurance Company of America and its subsidiaries
(collectively, "Prudential" or "the Company") provide financial services
throughout the United States and in many foreign countries. The Company's
businesses provide a full range of insurance, investment, securities and
other financial products and services to both retail and institutional
customers. Principal products and services provided include life
insurance, property and casualty insurance, annuities, mutual funds,
pension and retirement related investments and administration, asset
management, and securities brokerage.
DEMUTUALIZATION
On February 10, 1998, the Company's Board of Directors authorized
management to take the preliminary steps necessary to allow the Company to
demutualize and become a publicly traded stock company. On July 1, 1998,
legislation was enacted in New Jersey that would permit demutualization to
occur and that specified the process for conversion. Demutualization is a
complex process involving the development of a plan of reorganization,
approval of the plan by the Company's Board of Directors, a public hearing,
approval by two-thirds of the qualified policyholders who vote on the plan,
and review and approval by the New Jersey Department of Banking and
Insurance. The Company's management is in the process of developing a
proposed plan of demutualization, although there can be no assurance as to
the terms thereof or that the Company's Board of Directors will approve
such a plan.
The Company's management currently anticipates that the Company's proposed
plan of demutualization will include the establishment of a new holding
company, Prudential, Inc., whose stock will be publicly traded and of which
the Company's stock successor will become a direct or indirect wholly-owned
subsidiary. The consolidated financial statements of the Company prior to
the demutualization will become Prudential, Inc.'s consolidated financial
statements upon demutualization. The Company's management also currently
intends to propose that a corporate reorganization occur concurrently with
the demutualization whereby the stock of various of the Company's
subsidiaries (including Prudential Securities Group, the personal lines
property-casualty insurance companies and the international insurance
companies), the stock of a newly formed subsidiary containing the Company's
asset management operations, and certain prepaid pension expense,
post-employment benefits and certain other assets will be distributed to
Prudential, Inc. If effected, the corporate reorganization can be expected
to materially reduce invested assets, net income and total equity of The
Prudential Insurance Company of America, which would be an insurance
subsidiary of Prudential, Inc. after the corporate reorganization, although
it would have no effect on the consolidated assets, net income or total
equity of Prudential, Inc. As the terms of the foregoing transactions have
not been finalized by the Company or approved by the regulatory authority,
it is not currently possible to quantify their financial effect on the
Company.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of The
Prudential Insurance Company of America, a mutual life insurance company,
its majority-owned subsidiaries, and those partnerships and joint ventures
in which the Company has a controlling financial interest, except in those
instances where the Company cannot exercise control because the minority
owners have substantive participating rights in the operating and capital
B6
<PAGE> 94
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
decisions of the entity. The consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States ("GAAP"). All significant intercompany balances and
transactions have been eliminated.
USE OF ESTIMATES
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, in particular deferred policy
acquisition costs ("DAC") and future policy benefits, and disclosure of
contingent assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the period.
Actual results could differ from those estimates.
INVESTMENTS
FIXED MATURITIES classified as "available for sale" are carried at
estimated fair value. Fixed maturities that the Company has both the
positive intent and ability to hold to maturity are stated at amortized
cost and classified as "held to maturity." The amortized cost of fixed
maturities is written down to estimated fair value when a decline in value
is considered to be other than temporary. Unrealized gains and losses on
fixed maturities "available for sale," net of income tax and the effect on
deferred policy acquisition costs and future policy benefits that would
result from the realization of unrealized gains and losses, are included in
a separate component of equity, "Accumulated other comprehensive income."
TRADING ACCOUNT ASSETS AND SECURITIES SOLD BUT NOT YET PURCHASED are
carried at estimated fair value. Realized and unrealized gains and losses
on trading account assets and securities sold but not yet purchased are
included in "Commissions and other income."
EQUITY SECURITIES, available for sale, are comprised of common and
non-redeemable preferred stock and are carried at estimated fair value. The
associated unrealized gains and losses, net of income tax and the effect on
deferred policy acquisition costs and future policy benefits that would
result from the realization of unrealized gains and losses, are included in
a separate component of equity, "Accumulated other comprehensive
income/(loss)."
MORTGAGE LOANS ON REAL ESTATE are stated primarily at unpaid principal
balances, net of unamortized discounts and an allowance for losses. The
allowance for losses includes a loan specific reserve for impaired loans
and a portfolio reserve for incurred but not specifically identified
losses. Impaired loans include those loans for which a probability exists
that all amounts due according to the contractual terms of the loan
agreement will not be collected. Impaired loans are measured at the
present value of expected future cash flows discounted at the loan's
effective interest rate, or at the fair value of the collateral if the loan
is collateral dependent. Interest received on impaired loans, including
loans that were previously modified in a troubled debt restructuring, is
either applied against the principal or reported as revenue, according to
management's judgment as to the collectibility of principal. Management
discontinues accruing interest on impaired loans after the loans are 90
days delinquent as to principal or interest, or earlier when management has
serious doubts about collectibility. When a loan is recognized as impaired,
any accrued but uncollectible interest is reversed against interest income
of the current period. Generally, a loan is restored to accrual status
only after all delinquent interest and principal are brought current and,
in the case of loans where the payment of interest has been interrupted for
a substantial period, a regular payment performance has been established.
The portfolio reserve for incurred but not specifically identified losses
considers the Company's past loan loss experience, the current credit
composition of the portfolio, historical credit migration, property type
diversification, default and loss severity statistics and other relevant
factors.
B7
<PAGE> 95
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
INVESTMENT REAL ESTATE held for disposal is carried at the lower of
depreciated cost or fair value less estimated selling costs and is not
further depreciated once classified as such.
Real estate which the Company has the intent to hold for the production of
income is carried at depreciated cost less any write-downs to fair value
for impairment losses and is reviewed for impairment whenever events or
circumstances indicate that the carrying value may not be recoverable. An
impairment loss is recognized when the review indicates that the carrying
value of the investment real estate exceeds the estimated undiscounted
future cash flows (excluding interest charges) from the investment. At that
time, the carrying value of the investment real estate is written down to
fair value.
Charges relating to real estate held for disposal and impairments of real
estate held for investment are included in "Realized investment gains,
net." Depreciation on real estate held for the production of income is
computed using the straight-line method over the estimated lives of the
properties, and is included in "Net investment income."
POLICY LOANS are carried at unpaid principal balances.
SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL AND SECURITIES SOLD UNDER
AGREEMENTS TO REPURCHASE are treated as financing arrangements and are
carried at the amounts at which the securities will be subsequently resold
or reacquired, including accrued interest, as specified in the respective
agreements. The Company's policy is to take possession or control of
securities purchased under agreements to resell. Assets to be repurchased
are the same, or substantially the same, as the assets transferred and the
transferor, through right of substitution, maintains the right and ability
to redeem the collateral on short notice. The market value of securities
to be repurchased or resold is monitored, and additional collateral is
obtained, where appropriate, to protect against credit exposure.
SECURITIES BORROWED AND SECURITIES LOANED are treated as financing
arrangements and are recorded at the amount of cash advanced or received.
With respect to securities loaned, the Company obtains collateral in an
amount equal to 102% and 105% of the fair value of the domestic and foreign
securities, respectively. The Company monitors the market value of
securities borrowed and loaned on a daily basis with additional collateral
obtained as necessary. Non-cash collateral received is not reflected in
the consolidated statements of financial position because the debtor
typically has the right to redeem the collateral on short notice.
Substantially all of the Company's securities borrowed contracts are with
other brokers and dealers, commercial banks and institutional clients.
Substantially all of the Company's securities loaned are with large
brokerage firms.
Securities repurchase and resale agreements and securities borrowed and
loaned transactions are used to generate net investment income and
facilitate trading activity. These instruments are short-term in nature
(usually 30 days or less) and are collateralized principally by U.S.
Government and mortgage-backed securities. The carrying amounts of these
instruments approximate fair value because of the relatively short period
of time between the origination of the instruments and their expected
realization.
OTHER LONG-TERM INVESTMENTS primarily represent the Company's investments
in joint ventures and partnerships in which the Company does not exercise
control and derivatives held for purposes other than trading. Such joint
venture and partnership interests are generally accounted for using the
equity method of accounting, reduced for other than temporary declines in
value, except in instances in which the Company's interest is so minor that
it exercises virtually no influence over operating and financial policies.
In such instances, the Company applies the cost method of accounting. The
Company's net income from investments in joint ventures and partnerships is
generally included in "Net investment income." However, for certain real
estate joint ventures, Prudential's
B8
<PAGE> 96
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
interest is liquidated by means of one or more transactions that result in
the sale of the underlying invested assets to third parties and the
ultimate distribution of the proceeds to Prudential and other joint venture
partners in exchange for and settlement of the respective joint venture
interests. These transactions are accounted for as disposals of
Prudential's joint venture interests and the resulting gains and losses are
included in "Realized investment gains, net."
SHORT-TERM INVESTMENTS, including highly liquid debt instruments purchased
with an original maturity of twelve months or less, are carried at
amortized cost, which approximates fair value.
REALIZED INVESTMENT GAINS, NET are computed using the specific
identification method. Costs of fixed maturities and equity securities
are adjusted for impairments considered to be other than temporary.
Allowances for losses on mortgage loans on real estate are netted against
asset categories to which they apply and provisions for losses on
investments are included in "Realized investment gains, net."
Decreases in the carrying value of investment real estate held for
disposal are recorded in "Realized investment gains, net."
CASH
Cash includes cash on hand, amounts due from banks, and money market
instruments.
DEFERRED POLICY ACQUISITION COSTS
The costs that vary with and that are related primarily to the production
of new insurance and annuity business are deferred to the extent such costs
are deemed recoverable from future profits. Such costs include commissions,
costs of policy issuance and underwriting, and variable field office
expenses. Deferred policy acquisition costs are subject to recoverability
testing at the time of policy issue and loss recognition testing at the end
of each accounting period. Deferred policy acquisition costs, for certain
products, are adjusted for the impact of unrealized gains or losses on
investments as if these gains or losses had been realized, with
corresponding credits or charges included in "Accumulated other
comprehensive income."
For participating life insurance, deferred policy acquisition costs are
amortized over the expected life of the contracts (up to 45 years) in
proportion to estimated gross margins based on historical and anticipated
future experience, which is updated periodically. The average rate of
assumed investment yield used in estimating expected gross margins was
7.83% at December 31, 1999. The effect of changes in estimated gross
margins on unamortized deferred acquisition costs is reflected in "General
and administrative expenses" in the period such estimated gross margins are
revised. Policy acquisition costs related to interest-sensitive products
and certain investment-type products are deferred and amortized over the
expected life of the contracts (periods ranging from 15 to 30 years) in
proportion to estimated gross profits arising principally from investment
results, mortality and expense margins, and surrender charges based on
historical and anticipated future experience, which is updated
periodically. The effect of changes to estimated gross profits on
unamortized deferred acquisition costs is reflected in "General and
administrative expenses" in the period such estimated gross profits are
revised. Deferred policy acquisition costs related to non-participating
term insurance are amortized over the expected life of the contracts in
proportion to the premium income.
The Company has offered programs under which policyholders, for a selected
product or group of products, can exchange an existing policy or contract
issued by the Company for another form of policy or contract. These
transactions are known as internal replacements. If policyholders surrender
traditional life insurance policies in exchange for life insurance policies
that do not have fixed and guaranteed terms, the Company immediately charges
to expense the remaining unamortized DAC on the surrendered policies. For
other internal replacement transactions, the unamortized DAC on the
surrendered policies is immediately charged to expense if the terms of the
new policies are not substantially similar to those of the former policies.
If the new policies have terms that
B9
<PAGE> 97
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Amounts received as payment for interest-sensitive life contracts, deferred
annuities and participating group annuities are reported as deposits to
"Policyholders' account balances." Revenues from these contracts are
reflected in "Policy charges and fee income" and consist primarily of fees
assessed during the period against the policyholders' account balances for
mortality charges, policy administration charges and surrender charges.
Benefits and expenses for these products include claims in excess of related
account balances, expenses of contract administration, interest credited and
amortization of deferred policy acquisition costs.
For disability insurance, group life insurance, and property and casualty
insurance, premiums are recognized over the period to which the premiums
relate in proportion to the amount of insurance protection provided. Claim
and claim adjustment expenses are recognized when incurred.
Premiums, benefits and expenses are stated net of reinsurance ceded to other
companies. Estimated reinsurance receivables and the cost of reinsurance are
recognized over the life of the reinsured policies using assumptions
consistent with those used to account for the underlying policies.
FOREIGN CURRENCY TRANSLATION ADJUSTMENTS
Assets and liabilities of foreign operations and subsidiaries reported in
other than U.S. dollars are translated at the exchange rate in effect at the
end of the period. Revenues, benefits and other expenses are translated at
the average rate prevailing during the period. The effects of translating
the Statements of Financial Position of non-U.S. entities with functional
currencies other than the U.S. dollar are included, net of related hedge
gains and losses and income taxes, in "Accumulated other comprehensive
income (loss)," a separate component of equity.
COMMISSIONS AND OTHER INCOME
Commissions and other income principally includes securities and commodities
commission revenues, asset management fees, investment banking revenue and
realized and unrealized gains from trading activities of the Company's
securities business.
DERIVATIVE FINANCIAL INSTRUMENTS
Derivatives are financial instruments whose values are derived from interest
rates, foreign exchange rates, financial indices, or the value of securities
or commodities. Derivative financial instruments used by the Company include
swaps, futures, forwards and option contracts and may be exchange-traded or
contracted in the over-the-counter market. The Company uses derivative
financial instruments to seek to reduce market risk from changes in interest
rates or foreign currency exchange rates and to alter interest rate or
currency exposures arising from mismatches between assets and liabilities.
Additionally, derivatives are used in the broker-dealer business and in a
limited-purpose subsidiary for trading purposes.
To qualify as a hedge, derivatives must be designated as hedges for existing
assets, liabilities, firm commitments or anticipated transactions which are
identified and probable to occur, and effective in reducing the market risk
to which the Company is exposed. The effectiveness of the derivatives are
evaluated at the inception of the hedge and throughout the hedge period.
DERIVATIVES HELD FOR TRADING PURPOSES are used by the Company's securities
business to meet the needs of customers by structuring transactions that
allow customers to manage their exposure to interest rates, foreign exchange
rates, indices or prices of securities and commodities. Trading derivative
positions are valued daily, generally by obtaining quoted market prices or
through the use of pricing models. Values are affected by changes in
interest rates, currency exchange rates, credit spreads, market volatility
and liquidity. The Company monitors
B11
<PAGE> 98
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
these exposures through the use of various analytical techniques.
Derivatives held for trading purposes are included at fair value in "Trading
account assets," "Other liabilities" or "Broker-dealer related
receivables/payables" in the Consolidated Statements of Financial Position,
and realized and unrealized changes in fair value are included in
"Commissions and other income" of the Consolidated Statements of Operations
in the periods in which the changes occur. Cash flows from trading
derivatives are reported in the operating activities section of the
Consolidated Statements of Cash Flows.
DERIVATIVES HELD FOR PURPOSES OTHER THAN TRADING are primarily used to seek
to reduce exposure to interest rate and foreign currency risks associated
with assets held or expected to be purchased or sold, and liabilities
incurred or expected to be incurred. Additionally, other than trading
derivatives are used to change the characteristics of the Company's
asset/liability mix as part of the Company's risk management activities.
See Note 14 for a discussion of the accounting treatment of derivatives that
qualify as hedges. If the Company's use of other than trading derivatives
does not meet the criteria to apply hedge accounting, the derivatives are
recorded at fair value in "Other long-term investments" or "Other
liabilities" in the Consolidated Statements of Financial Position, and
changes in their fair value are included in "Realized investment gains, net"
without considering changes in the hedged assets or liabilities. Cash flows
from other than trading derivatives are reported in the investing activities
section in the Consolidated Statements of Cash Flows.
INCOME TAXES
The Company and its domestic subsidiaries file a consolidated federal income
tax return. The Internal Revenue Code (the "Code") limits the amount of
non-life insurance losses that may offset life insurance company taxable
income. The Code also imposes an "equity tax" on mutual life insurance
companies which, in effect, imputes an additional tax to the Company based
on a formula that calculates the difference between stock and mutual life
insurance companies' earnings. Income taxes include an estimate for changes
in the total equity tax to be paid for current and prior years. Subsidiaries
operating outside the United States are taxed under applicable foreign
statutes.
Deferred income taxes are recognized, based on enacted rates, when assets
and liabilities have different values for financial statement and tax
reporting purposes. A valuation allowance is recorded to reduce a deferred
tax asset to that portion that is expected to be realized.
EXTRAORDINARY ITEM - DEMUTUALIZATION EXPENSES, NET OF TAXES
The Consolidated Statements of Operations reflect extraordinary charges for
demutualization expenses of $50 million and $11 million, net of taxes of
zero, for the years ended December 31, 1999 and 1998, respectively.
Demutualization expenses consist primarily of the cost of engaging
independent accounting, actuarial, investment banking, legal and other
consultants to advise the Company and the New Jersey Department of Banking
and Insurance and the New York Department of Insurance in the
demutualization process and related matters. Future demutualization expenses
will also include the cost of printing and postage for communications with
policyholders.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" which requires that companies recognize
all derivatives as either assets or liabilities in the balance sheet and
measure those instruments at fair value. SFAS No. 133 does not apply to most
traditional insurance contracts. However, certain hybrid contracts that
contain features which may affect settlement amounts similarly to
derivatives may require separate accounting for the "host contract" and the
underlying "embedded derivative"
B12
<PAGE> 99
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
provisions. The latter provisions would be accounted for as derivatives as
specified by the statement.
SFAS No. 133 provides, if certain conditions are met, that a derivative may
be specifically designated as (1) a hedge of the exposure to changes in the
fair value of a recognized asset or liability or an unrecognized firm
commitment (fair value hedge), (2) a hedge of the exposure to variable cash
flows of a forecasted transaction (cash flow hedge), or (3) a hedge of the
foreign currency exposure of a net investment in a foreign operation, an
unrecognized firm commitment, an available-for-sale security or a
foreign-currency-denominated forecasted transaction (foreign currency
hedge).
Under SFAS No. 133, the accounting for changes in fair value of a derivative
depends on its intended use and designation. For a fair value hedge, the
gain or loss is recognized in earnings in the period of change together with
the offsetting loss or gain on the hedged item. For a cash flow hedge, the
effective portion of the derivative's gain or loss is initially reported as
a component of other comprehensive income and subsequently reclassified into
earnings when the forecasted transaction affects earnings. For a foreign
currency hedge, the gain or loss is reported in other comprehensive income
as part of the foreign currency translation adjustment. For all other
derivatives not designated as hedging instruments, the gain or loss is
recognized in earnings in the period of change. The Company is required to
adopt this Statement, as amended, as of January 1, 2001 and is currently
assessing the effect of the new standard.
In October 1998, the AICPA issued Statement of Position 98-7, "Deposit
Accounting: Accounting for Insurance and Reinsurance Contracts That Do Not
Transfer Insurance Risk" ("SOP 98-7"). This statement provides guidance on
how to account for insurance and reinsurance contracts that do not transfer
insurance risk. SOP 98-7 is effective for fiscal years beginning after June
15, 1999. The adoption of this statement is not expected to have a material
effect on the Company's financial position or results of operations.
RECLASSIFICATIONS
Certain amounts in prior years have been reclassified to conform to the
current year presentation.
3. DISCONTINUED OPERATIONS
In December 1998, the Company entered into a definitive agreement to sell
its healthcare business to Aetna, Inc. ("Aetna"). The sale was completed on
August 6, 1999. Included in this transaction were the Company's managed
medical care, point of service, preferred provider organization and
indemnity health lines, dental business, as well as the Company's
Administrative Services Only ("ASO") business. The healthcare business is
recorded as a discontinued operation in the accompanying consolidated
financial statements, with a measurement date of December 31, 1998.
Proceeds from the sale were $500 million of cash, $500 million of Aetna
three-year senior notes and stock appreciation rights covering one million
shares of Aetna common stock, valued at approximately $30 million at the
date of closing, with a term of five years and a reference price of $81.81
per Aetna common share. The sale resulted in a loss of $623 million, net of
tax. Loss from healthcare operations for 1998 includes results through
December 31, 1998 (the measurement date). Amounts within the footnotes have
been adjusted, where noted, to eliminate the impact of discontinued
operations and to be consistent with the presentation in the Consolidated
Statements of Operations.
The 1998 loss on disposal of $223 million, net of taxes, included
anticipated operating losses to be incurred by the healthcare business
subsequent to December 31, 1998 (the measurement date) through the expected
date of
B13
<PAGE> 100
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
3. DISCONTINUED OPERATIONS (continued)
the sale, as well as estimates of other costs the Company would incur in
connection with the disposition of the healthcare business. These include
costs attributable to facilities closure and systems terminations, severance
and termination benefits, payments to Aetna related to the ASO business and
estimated payments in connection with a medical loss ratio agreement
covering the fully insured medical and dental business (the "MLR
Agreement"). The MLR Agreement provides for payments either to or from Aetna
in the event that medical loss ratios (i.e., incurred medical expense
divided by earned premiums) for covered businesses are either less favorable
or more favorable than levels specified in the MLR Agreement for the years
1999 and 2000. The loss on disposal also included the estimated positive
impact of net curtailment gains from expected modifications of certain
pension and other postretirement benefit plans in which employees of the
healthcare business participate. (See Note 9).
In 1999 the Company recognized an additional loss on disposal of its
healthcare business of $400 million, after related tax benefits. The
additional loss resulted primarily from higher than anticipated healthcare
operating losses during the 1999 period through the August 6 closing date.
The higher losses resulted principally from adverse claims experience and
the impact of this experience on the evaluation of the Company's obligation
under the MLR Agreement. The pretax operating loss from the healthcare
business from January 1, 1999 through August 6, 1999 was $370 million, which
exceeded the original estimate of $160 million, recorded within the "Loss on
disposal of healthcare operations" in 1998. In addition to the obligations
noted above, the Company has retained certain liabilities pertaining to the
healthcare business, including all liabilities associated with litigation
which existed at August 6, 1999 or commences within two years of that date
with respect to claims that were incurred prior to August 6, 1999.
Management's best estimate of these costs is included in the loss on
disposal. It is possible that additional adjustments to estimates may be
necessary which might be material to future results of operations of a
particular quarterly or annual period.
Upon the closing of the sale of the healthcare business, the Company entered
into a coinsurance agreement with Aetna. The agreement is 100% indemnity
reinsurance on a coinsurance basis for all of the Company's insured medical
and dental business in-force upon the completion of the sale of the business
on August 6, 1999. The agreement requires the Company to issue additional
policies for new customers in response to proposals made to brokers or
customers within six months after the closing date and to renew insurance
policies until two years after the closing date. All such additional new and
renewal policies are 100% coinsured by Aetna, when issued. The purpose of
the agreement is to provide for the uninterrupted operation and growth,
including renewals of existing policies and issuance of new policies, of the
healthcare business that Aetna acquired from Prudential. The operation of
the business and the attendant risks, except for the existence of the MLR
Agreement as discussed above, were assumed entirely by Aetna. Consequently,
the following amounts pertaining to the agreement had no effect on the
Company's results of operations. The Company ceded premiums and benefits of
$896 million and $757 million, respectively, for the period from August 6,
1999 through December 31, 1999. Reinsurance recoverable under this
agreement, included in other assets, was $500 million at December 31, 1999.
The following table presents the results and the loss on the disposal of the
Company's healthcare business, determined as of the measurement date and
subsequently adjusted, which are included in "Discontinued Operations" in
the Consolidated Statements of Operations. Amounts for 1997 include revenues
and expenses relating to a contract with the American Association of Retired
Persons for healthcare and similar coverages which was terminated effective
December 31, 1997.
B14
<PAGE> 101
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
3. DISCONTINUED OPERATIONS (continued)
<TABLE>
<CAPTION>
1999 1998 1997
---------- ------------- -----------
(In Millions)
<S> <C> <C> <C>
Revenues $ - $ 7,461 $ 10,305
Policyholder benefits - (6,064) (8,484)
General and administrative expenses - (1,822) (2,364)
---------- ------------ ----------
Loss before income taxes - (425) (543)
Income tax benefit - 127 190
---------- ------------ ----------
Loss from operations - (298) (353)
Loss on disposal, net of tax benefits of $240 in 1999 and $131 in 1998 (400) (223) -
---------- ------------ ----------
Loss from discontinued operations, net of taxes $ (400) $ (521) $ (353)
========== ============ ==========
</TABLE>
B15
<PAGE> 102
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
4. INVESTMENTS
FIXED MATURITIES AND EQUITY SECURITIES
The following tables provide additional information relating to fixed
maturities and equity securities (excluding trading account assets) as of
December 31:
<TABLE>
<CAPTION>
1999
--------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
------------ ------------ ------------ ------------
(In Millions)
<S> <C> <C> <C> <C>
FIXED MATURITIES AVAILABLE FOR SALE
U.S. Treasury securities and obligations of
U.S. government corporations and agencies $ 5,594 $ 36 $ 236 $ 5,394
Obligations of U.S. states and
their political subdivisions 2,437 41 118 2,360
Foreign government bonds 4,590 140 90 4,640
Corporate securities 57,503 580 2,431 55,652
Mortgage-backed securities 6,566 96 135 6,527
Other 125 - 1 124
------------------------------------------------------------
Total fixed maturities available for sale $ 76,815 $ 893 $ 3,011 $ 74,697
============================================================
EQUITY SECURITIES AVAILABLE FOR SALE $ 2,531 $ 829 $ 96 $ 3,264
============================================================
</TABLE>
<TABLE>
<CAPTION>
1999
--------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
------------ ------------ ------------ ------------
(In Millions)
<S> <C> <C> <C> <C>
FIXED MATURITIES HELD TO MATURITY
U.S. Treasury securities and obligations of
U.S. government corporations and agencies $ 5 $ - $ - $ 5
Obligations of U.S. states and
their political subdivisions 81 1 3 79
Foreign government bonds 214 11 1 224
Corporate securities 13,883 280 408 13,755
Mortgage-backed securities 1 - - 1
Other 53 - 5 48
------------------------------------------------------------
Total fixed maturities held to maturity $ 14,237 $ 292 $ 417 $ 14,112
============================================================
</TABLE>
B16
<PAGE> 103
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
4. INVESTMENTS (CONTINUED)
<TABLE>
<CAPTION>
1998
-------------------------------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
-------------- -------------- --------------- --------------
(In Millions)
<S> <C> <C> <C> <C>
FIXED MATURITIES AVAILABLE FOR SALE
U.S. Treasury securities and obligations of
U.S. government corporations and agencies $ 5,761 $ 580 $ 9 $ 6,332
Obligations of U.S. states and
their political subdivisions 2,672 204 1 2,875
Foreign government bonds 3,486 258 59 3,685
Corporate securities 57,043 2,540 546 59,037
Mortgage-backed securities 7,935 208 14 8,129
Other 100 - - 100
-------------------------------------------------------------------------------
TOTAL FIXED MATURITIES AVAILABLE FOR SALE $ 76,997 $ 3,790 $ 629 $ 80,158
===============================================================================
Equity securities available for sale $ 2,583 $ 472 $ 296 $ 2,759
===============================================================================
</TABLE>
<TABLE>
<CAPTION>
1998
-------------------------------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
-------------- -------------- --------------- --------------
(In Millions)
<S> <C> <C> <C> <C>
FIXED MATURITIES HELD TO MATURITY
U.S. Treasury securities and obligations of
U.S. government corporations and agencies $ 5 $ - $ - $ 5
Obligations of U.S. states and
their political subdivisions 62 2 1 63
Foreign government bonds 216 8 1 223
Corporate securities 16,514 1,092 48 17,558
Mortgage-backed securities 1 - - 1
Other 50 6 - 56
-------------------------------------------------------------------------------
Total fixed maturities held to maturity $ 16,848 $ 1,108 $ 50 $ 17,906
===============================================================================
</TABLE>
B17
<PAGE> 104
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
4. INVESTMENTS (CONTINUED)
The amortized cost and estimated fair value of fixed maturities by
contractual maturities at December 31, 1999, is shown below:
<TABLE>
<CAPTION>
AVAILABLE FOR SALE HELD TO MATURITY
----------------------------------------- ----------------------------------------
ESTIMATED ESTIMATED
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
--------------- ----------------- ------------------ ------------------
(In Millions) (In Millions)
<S> <C> <C> <C> <C>
Due in one year or less $ 3,171 $ 3,166 $ 671 $ 671
Due after one year through five years 18,132 17,911 4,063 4,078
Due after five years through ten years 19,249 18,725 5,449 5,345
Due after ten years 29,697 28,368 4,053 4,017
Mortgage-backed securities 6,566 6,527 1 1
--------------- ----------------- ------------------ ------------------
Total $ 76,815 $ 74,697 $ 14,237 $ 14,112
=============== ================= ================== ==================
</TABLE>
Actual maturities may differ from contractual maturities because issuers
have the right to call or prepay obligations.
Proceeds from the repayment of held to maturity fixed maturities during
1999, 1998 and 1997 were $4,957 million, $4,466 million, and $4,042 million,
respectively. Gross gains of $73 million, $135 million, and $62 million, and
gross losses of $0 million, $2 million, and $1 million were realized on
prepayment of held to maturity fixed maturities during 1999, 1998 and 1997,
respectively.
Proceeds from the sale of available for sale fixed maturities during 1999,
1998 and 1997 were $117,547 million, $119,096 million and $120,604 million,
respectively. Proceeds from the maturity of available for sale fixed
maturities during 1999, 1998 and 1997 were $3,328 million, $4,055 million
and $2,946 million, respectively. Gross gains of $884 million, $1,765
million and $1,310 million, and gross losses of $1,231 million, $443 million
and $639 million were realized on sales and prepayments of available for
sale fixed maturities during 1999, 1998 and 1997, respectively.
Writedowns for impairments which were deemed to be other than temporary for
fixed maturities were $266 million, $96 million and $13 million and for
equity securities were $205 million, $95 million and $31 million for the
years 1999, 1998 and 1997, respectively.
During the years ended December 31, 1999 and 1998, certain securities
classified as held to maturity were either sold or transferred to the
available for sale portfolio. These actions were taken as a result of a
significant deterioration in creditworthiness. The aggregate amortized cost
of the securities sold or transferred was $230 million in 1999 and $73
million in 1998. Gross unrealized investment losses of $5 million in 1999
and $.4 million in 1998 were recorded in "Accumulated other comprehensive
income" at the time of the transfer. Prior to transfer, impairments related
to these securities, if any, were included in "Realized investment gains,
net." Realized gains on securities sold were $3 million in 1999.
B18
<PAGE> 105
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
4. INVESTMENTS (CONTINUED)
MORTGAGE LOANS ON REAL ESTATE
The Company's mortgage loans were collateralized by the following property
types at December 31:
<TABLE>
<CAPTION>
AMOUNT PERCENTAGE AMOUNT PERCENTAGE
(In Millions) OF TOTAL (In Millions) OF TOTAL
1999 1998
------------------------------------------- ------------------------------------------
<S> <C> <C> <C> <C>
Office Buildings $ 3,960 24.1% $ 4,156 25.3%
Retail stores 2,627 15.9% 2,866 17.4%
Residential properties 662 4.0% 716 4.3%
Apartment complexes 4,508 27.3% 4,179 25.4%
Industrial buildings 2,161 13.1% 1,971 12.0%
Agricultural properties 1,959 11.9% 1,936 11.8%
Other 612 3.7% 619 3.8%
------------------- ----------------- ------------------- ----------------
Subtotal 16,489 100% 16,443 100%
Allowance for losses (221) ================= (427) ================
------------------- -------------------
Net carrying value $ 16,268 $ 16,016
=================== ===================
</TABLE>
The mortgage loans are geographically dispersed throughout the United States
and Canada with the largest concentrations in California (23.4%) and New
York (10.1%) at December 31, 1999. Mortgage loans receivable at December 31,
1998 include $87 million from non-consolidated joint ventures.
Activity in the allowance for losses for all mortgage loans, for the years
ended December 31, is summarized as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------------------------- ------------------------ ------------------------
(IN MILLIONS)
<S> <C> <C> <C>
Allowance for losses, beginning of year $ 427 $ 450 $ 515
Release of allowance for losses (201) - (41)
Charge-offs, net of recoveries (5) (23) (24)
------------------------- ------------------------ ------------------------
Allowance for losses, end of year $ 221 $ 427 $ 450
========================= ======================== ========================
</TABLE>
The $201 million reduction of the mortgage loan allowance for losses in 1999
is primarily attributable to the improved economic climate, changes in the
nature and mix of borrowers and underlying collateral and a decrease in
impaired loans.
Impaired mortgage loans identified in management's specific review of
probable loan losses and the related allowance for losses at December 31,
are as follows:
<TABLE>
<CAPTION>
1999 1998
------------------------- -----------------------
(IN MILLIONS)
<S> <C> <C>
Impaired mortgage loans with allowance for losses $ 411 $ 501
Impaired mortgage loans with no allowance for losses 283 572
Allowance for losses, end of year (24) (45)
------------------------- -----------------------
Net carrying value of impaired mortgage loans $ 670 $ 1,028
========================= =======================
</TABLE>
B19
<PAGE> 106
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
4. INVESTMENTS (CONTINUED)
Impaired mortgage loans with no allowance for losses are loans in which the
fair value of the collateral or the net present value of the loans' expected
future cash flows equals or exceeds the recorded investment. The average
recorded investment in impaired loans before allowance for losses was $884
million, $1,329 million and $2,102 million during 1999, 1998 and 1997,
respectively. Net investment income recognized on these loans totaled $55
million, $94 million and $140 million for the years ended December 31, 1999,
1998 and 1997, respectively.
INVESTMENT REAL ESTATE
"Investment real estate" of $770 million and $675 million at December 31,
1999 and 1998, respectively, is directly owned. Of the Company's real
estate, $293 million and $675 million consists of commercial and
agricultural assets held for disposal at December 31, 1999 and 1998,
respectively. Impairment losses amounted to $3 million, $8 million and $40
million for the years ended December 31, 1999, 1998 and 1997, respectively,
and are included in "Realized investment gains, net."
RESTRICTED ASSETS AND SPECIAL DEPOSITS
Assets of $4,463 million and $2,803 million at December 31, 1999 and 1998,
respectively, were on deposit with governmental authorities or trustees as
required by certain insurance laws. Additionally, assets valued at $2,325
million and $3,898 million at December 31, 1999 and 1998, respectively, were
held in voluntary trusts. Of these amounts, $1,553 million and $3,131
million at December 31, 1999 and 1998, respectively, related to the multi-
state policyholder settlement described in Note 15. The remainder relates to
trusts established to fund guaranteed dividends to certain policyholders and
to fund certain employee benefits. Assets valued at $128 million and $173
million at December 31, 1999 and 1998, respectively, were pledged as
collateral for bank loans and other financing agreements. Restricted cash
and securities of $4,082 million and $2,366 million at December 31, 1999 and
1998, respectively, were included in the Consolidated Statements of
Financial Position in "Other assets." The restricted cash represents funds
deposited by clients and funds accruing to clients as a result of trades or
contracts.
OTHER LONG-TERM INVESTMENTS
The Company's "Other long-term investments" of $4,087 million and $3,474
million as of December 31, 1999 and 1998, respectively, are comprised of
$1,212 million and $1,133 million in real estate related interests and
$2,875 million and $2,341 million of non-real estate related interests. Net
investment income from other long-term investments was $365 million, $311
million and $443 million for 1999, 1998 and 1997, respectively.
B20
<PAGE> 107
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
4. INVESTMENTS (CONTINUED)
INVESTMENT INCOME AND INVESTMENT GAINS AND LOSSES
NET INVESTMENT INCOME arose from the following sources for the years ended
December 31:
<TABLE>
<CAPTION>
1999 1998 1997
-------------- -------------- --------------
(IN MILLIONS)
<S> <C> <C> <C>
Fixed maturities - available for sale $ 5,450 $ 5,366 $ 5,074
Fixed maturities - held to maturity 1,217 1,406 1,622
Trading account assets 622 677 504
Equity securities - available for sale 63 54 52
Mortgage loans on real estate 1,401 1,525 1,555
Investment real estate 101 230 565
Policy loans 448 410 396
Securities purchased under agreements to resell 25 18 15
Broker-dealer related receivables 976 836 706
Short-term investments 642 725 697
Other investment income 354 430 535
-------------- -------------- --------------
Gross investment income 11,299 11,677 11,721
Less investment expenses (1,824) (2,035) (2,027)
-------------- -------------- --------------
Subtotal 9,475 9,642 9,694
Less amount relating to discontinued operations (51) (107) (212)
-------------- -------------- --------------
Net investment income $ 9,424 $ 9,535 $ 9,482
============== ============== ==============
</TABLE>
B21
<PAGE> 108
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
4. INVESTMENTS (CONTINUED)
REALIZED INVESTMENT GAINS, NET, for the years ended December 31, were from
the following sources:
<TABLE>
<CAPTION>
1999 1998 1997
-------------------- ------------------ ------------------
(In Millions)
<S> <C> <C> <C>
Fixed maturities $ (557) $ 1,381 $ 684
Equity securities - available for sale 223 427 363
Mortgage loans on real estate 209 22 68
Investment real estate 106 642 700
Joint ventures and limited partnerships 656 454 289
Derivatives 305 (263) 108
Other (27) 8 (3)
-------------------- ------------------ ------------------
Subtotal 915 2,671 2,209
Less amount related to discontinued operations 9 (30) (41)
-------------------- ------------------ ------------------
Realized investment gains, net $ 924 $ 2,641 $ 2,168
==================== ================== ==================
</TABLE>
The "joint ventures and limited partnerships" category includes net realized
investment gains relating to real estate joint ventures' and partnerships'
sales of their underlying invested assets, as described more fully in Note
2, "Other long-term investments," amounting to $114 million, $177 million
and $56 million in 1999, 1998 and 1997, respectively.
Based on the carrying value, assets categorized as "non-income producing"
for the year ended December 31, 1999 included in fixed maturities available
for sale, mortgage loans on real estate and other long-term investments
totaled $15 million, $25 million and $1 million, respectively.
NET UNREALIZED INVESTMENT GAINS/LOSSES
Net unrealized investment gains on securities available for sale and certain
other long-term investments are included in the Consolidated Statements of
Financial Position as a component of "Accumulated other comprehensive
income." Changes in these amounts include reclassification adjustments to
avoid including in "Other comprehensive income/(loss)" those items that are
included as part of "Net income" for a period that also had been part of
"Other comprehensive income/(loss)" in earlier periods. The amounts for the
years ended December 31, are as follows:
B22
<PAGE> 109
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
4. INVESTMENTS (CONTINUED)
<TABLE>
<CAPTION>
Accumulated
other
IMPACT OF UNREALIZED INVESTMENT GAINS (LOSSES) ON: comprehensive
-------------------------------------------------- income/(loss)
Deferred related to net
Unrealized policy Future Deferred unrealized
gains(losses) on acquisition policy income tax investment
investments costs benefits (liability)benefit gains (losses)
------------- ----------- ----------- ------------------ ----------------
(In Millions)
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1996 $ 2,527 $ (193) $ (573) $ (625) $ 1,136
Net investment gains (losses) on
investments arising during the
period 2,667 - - (961) 1,706
Reclassification adjustment for
gains included in net income (986) - - 355 (631)
Impact of net unrealized investment - (154) - 55 (99)
gains on deferred policy acquisition
costs
Impact of net unrealized investment - - (563) 203 (360)
gains on future policy benefits
------------- ----------- ----------- ------------------ ----------------
Balance, December 31, 1997 4,208 (347) (1,136) (973) 1,752
Net investment gains (losses) on
investments arising during the
period 804 - - (282) 522
Reclassification adjustment for
gains included in net income (1,675) - - 588 (1,087)
Impact of net unrealized investment
gains on deferred policy acquisition
costs - 98 - (36) 62
Impact of net unrealized investment
gains on future policy benefits - - 38 (15) 23
------------- ----------- ----------- ------------------ ----------------
Balance, December 31, 1998 3,337 (249) (1,098) (718) 1,272
Net investment gains (losses) on
investments arising during the
period (5,089) - - 1,845 (3,244)
Reclassification adjustment for
gains included in net income 404 - - (146) 258
Impact of net unrealized investment
losses on deferred policy acquisition - 566 - (213) 353
costs
Impact of net unrealized investment
losses on future policy benefits - - 1,095 (394) 701
------------- ----------- ----------- ------------------ ----------------
Balance, December 31, 1999 $ (1,348) $ 317 $ (3) $ 374 $ (660)
============= =========== =========== ================== ================
</TABLE>
B23
<PAGE> 110
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
4. INVESTMENTS (CONTINUED)
The table below presents unrealized gains (losses) on investments by asset
class:
<TABLE>
<CAPTION>
As of December 31,
1999 1998 1997
------------------ ------------------ ------------------
(In Millions)
<S> <C> <C> <C>
Fixed maturities $ (2,118) $ 3,161 $ 3,774
Equity securities 733 176 434
Other long-term investments 37 - -
------------------ ------------------ ------------------
Unrealized gains (losses) on investments $ (1,348) $ 3,337 $ 4,208
================== ================== ==================
</TABLE>
5. DEFERRED POLICY ACQUISITION COSTS
The balances of and changes in deferred policy acquisition costs as of and
for the years ended December 31, are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------------------ ----------------- ------------------
(In Millions)
<S> <C> <C> <C>
Balance, beginning of year $ 6,462 $ 6,083 $ 6,095
Capitalization of commissions, sales and issue expenses 1,333 1,313 1,409
Amortization (1,155) (1,139) (1,176)
Change in unrealized investment gains 566 98 (154)
Foreign currency translation 118 107 (91)
------------------ ----------------- ------------------
Balance, end of year $ 7,324 $ 6,462 $ 6,083
================== ================= ==================
</TABLE>
6. POLICYHOLDERS' LIABILITIES
FUTURE POLICY BENEFITS at December 31, are as follows:
<TABLE>
<CAPTION>
1999 1998
------------ -----------
(In Millions)
<S> <C> <C>
Life insurance $ 51,667 $ 48,981
Annuities 14,138 15,360
Other contract liabilities 2,264 2,718
------------ -----------
Total future policy benefits $ 68,069 $ 67,059
============ ===========
</TABLE>
The majority of the Company's participating insurance is in its domestic
individual life insurance business. Participating insurance represented
approximately 90% of domestic individual life insurance inforce and
approximately 90% of domestic individual life insurance premiums for 1999,
1998 and 1997. Revenues and expenses of this business come directly from the
underlying policies and supporting assets.
B24
<PAGE> 111
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
6. POLICYHOLDERS' LIABILITIES (CONTINUED)
Life insurance liabilities include reserves for death and endowment policy
benefits, terminal dividends, premium deficiency reserves and certain health
benefits. Annuity liabilities include reserves for immediate annuities and
life contingent group annuities. Other contract liabilities primarily
consist of unearned premium and benefit reserves for group health products.
The following table highlights the key assumptions generally utilized in
calculating these reserves:
<TABLE>
<CAPTION>
PRODUCT MORTALITY INTEREST RATE ESTIMATION METHOD
- -------------------------- ------------------------- ------------- ------------------------
<S> <C> <C> <C>
Life insurance Generally, rates 2.5% to 11.5% Net level premium
guaranteed in calculating based on non-forfeiture
cash surrender values interest rate
Individual annuities 1971 and 1983 Individual 3.5% to 13.4% Present value of
Annuity Mortality expected future payments
Tables with certain based on historical
modifications experience
Group annuities 1950 and 1971 Group 3.8% to 17.3% Present value of
Annuity Mortality expected future payments
Tables with certain based on historical
modifications experience
Other contract liabilities 2.5% to 11.5% Present value of
expected future payments
based on historical
experience
</TABLE>
Premium deficiency reserves are established, if necessary, when the
liability for future policy benefits plus the present value of expected
future gross premiums are determined to be insufficient to provide for
expected future policy benefits and expenses and to recover any unamortized
acquisition costs. Premium deficiency reserves have been recorded for the
group single premium annuity business, which consists of limited-payment,
long duration, traditional and non-participating annuities, and for certain
individual health policies. Liabilities of $1,930 million and $1,844 million
is included in "Future policy benefits" with respect to these deficiencies
at December 31, 1999 and 1998, respectively.
POLICYHOLDERS' ACCOUNT BALANCES at December 31, are as follows:
<TABLE>
<CAPTION>
1999 1998
------------- --------------
(In Millions)
<S> <C> <C>
Individual annuities $ 4,612 $ 4,997
Group annuities 2,176 2,362
Guaranteed investment contracts and guaranteed interest accounts 13,429 14,408
Interest-sensitive life contracts 3,607 3,566
Dividend accumulations and other 7,754 7,765
------------- --------------
Policyholders' account balances $ 31,578 $ 33,098
============= ==============
</TABLE>
B25
<PAGE> 112
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
6. POLICYHOLDERS' LIABILITIES (CONTINUED)
Policyholders' account balances for interest-sensitive life and
investment-type contracts represent an accumulation of account deposits plus
credited interest less withdrawals, expenses and mortality charges.
Certain contract provisions that determine the policyholder account balances
are as follows:
<TABLE>
<CAPTION>
WITHDRAWAL/
PRODUCT INTEREST RATE SURRENDER CHARGES
- ----------------------------------- ------------- -----------------------------------
<S> <C> <C>
Individual annuities 3.0% to 11.3% 0% to 8% for up to 8 years
Group annuities 2.0% to 13.9% Contractually limited or subject
to market value adjustment
Guaranteed investment contracts and 3.9% to 15.4% Generally, subject to market value
Guaranteed interest accounts withdrawal provisions for any funds
withdrawn other than for benefit
responsive and contractual payments
Interest-sensitive life contracts 2.0% to 6.0% Various up to 10 years
Dividend accumulations and other 3.0% to 7.0% Withdrawal or surrender
contractually limited or subject
to market value adjustment
</TABLE>
B26
<PAGE> 113
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
6. POLICYHOLDERS' LIABILITIES (CONTINUED)
UNPAID CLAIMS AND CLAIM ADJUSTMENT EXPENSES. The following table provides a
reconciliation of the activity in the liability for unpaid claims and claim
adjustment expenses for property and casualty insurance, which includes the
Company's personal lines automobile and homeowner's business, as well as the
Company's wind-down commercial lines business, primarily environmental and
asbestos-related claims, and accident and health insurance at December 31:
<TABLE>
<CAPTION>
1999 1998 1997
-------------------------------- ---------------------------- ----------------------------
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 $ 1,090 $ 2,716 $ 1,857 $ 2,956 $ 1,932 $ 3,076
Less reinsurance recoverables, net 52 533 810 535 10 553
------------ ---------------- ------------- ------------ ------------- ------------
Net balance at January 1 1,038 2,183 1,047 2,421 1,922 2,523
------------ ---------------- ------------- ------------ ------------- ------------
Incurred related to:
Current year 4,110 1,249 6,132 1,314 8,379 1,484
Prior years (72) (54) (15) (154) 63 (50)
------------ ---------------- ------------- ------------ ------------- ------------
Total incurred 4,038 1,195 6,117 1,160 8,442 1,434
------------ ---------------- ------------- ------------ ------------- ------------
Paid related to:
Current year 3,397 700 5,287 717 6,673 739
Prior years 672 720 839 681 1,842 797
------------ ---------------- ------------- ------------ ------------- ------------
Total paid 4,069 1,420 6,126 1,398 8,515 1,536
------------ ---------------- ------------- ------------ ------------- ------------
Disposal of healthcare business
(See Note 3) (965) - - - - -
------------ ---------------- ------------- ------------ ------------- ------------
Net balance at December 31 42 1,958 1,038 2,183 1,849 2,421
Plus reinsurance recoverables, net 378 451 52 533 8 535
------------ ---------------- ------------- ------------ ------------- ------------
Balance at December 31 $ 420 $ 2,409 $ 1,090 $ 2,716 $ 1,857 $ 2,956
============ ================ ============= ============ ============= ===========
</TABLE>
The Accident and Health reinsurance recoverable balance at December 31, 1999
includes $371 million attributable to the Company's discontinued healthcare
business. The Accident and Health balance at December 31, 1998 and 1997
includes amounts attributable to the Company's discontinued healthcare
business of $1,026 million and $1,693 million, respectively.
The unpaid claims and claim adjustment expenses presented above include
estimates for liabilities associated with reported claims and for incurred
but not reported claims based, in part, on the Company's experience. Changes
in the estimated cost to settle unpaid claims are charged or credited to the
Consolidated Statement of Operations periodically as the estimates are
revised. Accident and Health unpaid claims liabilities are discounted using
interest rates ranging from 3.5% to 7.5%.
In 1999, 1998 and 1997, the amounts incurred for claims and claim adjustment
expenses for property and casualty related to prior years were primarily
driven by lower than anticipated losses for the auto line of business.
The amounts incurred for claims and claim adjustment expense for Accident
and Health related to prior years are primarily due to factors including
changes in claim cost trends and an accelerated decline in the indemnity
health business.
B27
<PAGE> 114
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
7. REINSURANCE
The Company participates in reinsurance in order to provide additional
capacity for future growth and limit the maximum net loss potential arising
from large risks. Life reinsurance is accomplished through various plans of
reinsurance, primarily yearly renewable term and coinsurance.
Property-casualty reinsurance is placed on a pro-rata basis and excess of
loss, including stop loss, basis. Reinsurance ceded arrangements do not
discharge the Company as the primary insurer. Ceded balances would represent
a liability of the Company in the event the reinsurers were unable to meet
their obligations to the Company under the terms of the reinsurance
agreements. Reinsurance premiums, commissions, expense reimbursements,
benefits and reserves related to reinsured long-duration contracts are
accounted for over the life of the underlying reinsured contracts using
assumptions consistent with those used to account for the underlying
contracts. The cost of reinsurance related to short-duration contracts is
accounted for over the reinsurance contract period. Amounts recoverable from
reinsurers, for both short and long-duration reinsurance arrangements, are
estimated in a manner consistent with the claim liabilities and policy
benefits associated with the reinsured policies.
The tables presented below exclude amounts pertaining to the Company's
discontinued healthcare operations. See Note 3 for a discussion of the
Company's coinsurance agreement with Aetna.
Reinsurance amounts included in the Consolidated Statements of Operations
for the years ended December 31, were as follows:
<TABLE>
<CAPTION>
1999 1998 1997
--------- ----------- ---------
(In Millions)
<S> <C> <C> <C>
Direct premiums $ 10,068 $ 9,637 $ 9,667
Reinsurance assumed 66 65 64
Reinsurance ceded (659) (678) (716)
----------- -------- ---------
Premiums $ 9,475 $ 9,024 $ 9,015
=========== ========= =========
Policyholders' benefits ceded $ 483 $ 510 $ 530
=========== ========= =========
</TABLE>
Reinsurance recoverables, included in "Other assets" in the Company's
Consolidated Statements of Financial Position at December 31, were as
follows:
<TABLE>
<CAPTION>
1999 1998
-------- -------
(In Millions)
<S> <C> <C>
Life insurance $ 576 $ 620
Property-casualty 473 564
Other reinsurance 90 92
---------- --------
$ 1,139 $ 1,276
========== ==========
</TABLE>
Two major reinsurance companies account for approximately 58% of the
reinsurance recoverable at December 31, 1999. The Company periodically
reviews the financial condition of its reinsurers and amounts recoverable
therefrom in order to minimize its exposure to loss from reinsurer
insolvencies, recording an allowance when necessary for uncollectible
reinsurance.
B28
<PAGE> 115
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:
<TABLE>
<CAPTION>
SHORT-TERM DEBT
1999 1998
-------- ---------
(In Millions)
<S> <C> <C>
Commercial paper (b) $ 7,506 $ 7,057
Notes payable 2,598 2,164
Current portion of long-term debt 754 861
---------- --------
TOTAL SHORT-TERM DEBT $ 10,858 $ 10,082
========== =========
</TABLE>
The weighted average interest rate on outstanding short-term debt was
approximately 5.2% and 5.4% at December 31, 1999 and 1998, respectively.
<TABLE>
<CAPTION>
LONG-TERM DEBT
DESCRIPTION MATURITY DATES RATE 1999 1998
------------ ---------------- ------------- --------- ------------
(In Millions)
<S> <C> <C> <C> <C>
Fixed rate notes 2000 - 2023 .50% - 12.28% $ 1,161 $ 1,480
Floating rate notes ("FRN") 2000 - 2003 (a) 865 767
Surplus notes 2003 - 2025 6.875% - 8.30% 987 987
Commercial paper backed by long-term
credit agreement (b) 2,500 1,500
-------- ---------
Total long-term debt $ 5,513 $ 4,734
</TABLE>
(a) Floating interest rates are generally based on such rates as LIBOR,
Constant Maturity Treasury, or the Federal Funds Rate. Interest on the
FRN's ranged from 6.17% to 14.00% for 1999 and 1998, respectively.
Included in the floating rate notes are equity indexed instruments. The
Company issued an S&P 500 index linked note of $29 million in September
of 1997. The interest rate on the note is based on the appreciation of
the S&P 500 index, with a contractual cap of 14%. At December 31, 1999
and 1998, the rate was 14%. Excluding this note, floating interest rates
ranged from 6.17% to 9.54% for 1999 and 4.04% to 7.9% for 1998.
(b) At December 31, 1999 and 1998, the Company classified $2.5 billion and
$1.5 billion, respectively, of its commercial paper as long-term debt.
This classification is supported by long-term syndicated credit line
agreements. The Company has the ability and intent to use these
agreements, if necessary, to refinance commercial paper on a long-term
basis.
B29
<PAGE> 116
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
8. SHORT-TERM AND LONG-TERM DEBT (continued)
The following table summarizes the Company's use of the proceeds from
issuing long-term debt:
<TABLE>
<CAPTION>
1999 1998
--------- ---------
(In Millions)
<S> <C> <C>
Corporate $ 1,782 $ 1,917
Investment related 1,121 751
Securities business related 2,610 2,066
---------- --------
Total long-term debt $ 5,513 $ 4,734
========== =========
</TABLE>
The net proceeds from the issuance of the Company's long-term debt may be
used for general corporate purposes. This includes investing in equity and
debt securities of subsidiaries, advancing funds to its subsidiaries for
liquidity and operational purposes, and supporting liquidity of the
Company's other businesses.
Investment related long-term debt consists of debt issued to finance
specific investment assets or portfolios of investment assets including real
estate, institutional spread lending investment portfolios and real estate
related investments held in consolidated joint ventures.
Securities business related long-term debt consists of debt issued to
finance primarily the liquidity of the Company's securities business. Loans
made by the Company to its securities subsidiaries using the proceeds from
the Company's issuance of long-term debt may be made on a long-term,
short-term, or subordinated basis, depending on the particular requirements
of its securities business.
Payment of interest and principal on the surplus notes issued after 1993, of
which $688 million were outstanding at December 31, 1999 and 1998, may be
made only with the prior approval of the Commissioner of Insurance of the
State of New Jersey.
In order to modify exposure to interest rate and currency exchange rate
movements, the Company utilizes derivative instruments, primarily interest
rate swaps, in conjunction with some of its debt issues. The effect of these
derivative instruments is included in the calculation of the interest
expense on the associated debt, and as a result, the effective interest
rates on the debt may differ from the rates reflected in the tables above.
Floating rates are determined by formulas and may be subject to certain
minimum or maximum rates.
SCHEDULED PRINCIPAL REPAYMENT OF LONG-TERM DEBT (In Millions)
2001 $ 738
2002 1,942
2003 459
2004 1,334
2005 58
2006 and thereafter 982
------------
TOTAL $ 5,513
=============
At December 31, 1999, the Company had $9,934 million in lines of credit from
numerous financial institutions of which $7,947 million were unused. These
lines of credit generally have terms ranging from one to five years.
The Company issues commercial paper primarily to manage operating cash flows
and existing commitments, meet working capital needs and take advantage of
current investment opportunities. A portion of commercial
B30
<PAGE> 117
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
---------------------------------------------------------------------------
8. SHORT-TERM AND LONG-TERM DEBT (continued)
paper borrowings are supported by various lines of credit referred to above.
At December 31, 1999 and 1998, the weighted average maturity of commercial
paper outstanding was 23 and 21 days, respectively.
Interest expense for short-term and long-term debt is $863 million, $920
million, and $743 million for the years ended December 31, 1999, 1998 and
1997, respectively. Securities business related interest expense of $254
million, $288 million, and $248 million in 1999, 1998 and 1997,
respectively, is included in "Net investment income."
9. EMPLOYEE BENEFIT PLANS
PENSION AND OTHER POSTRETIREMENT PLANS
The Company has funded non-contributory defined benefit pension plans which
cover substantially all of its employees. The Company also has several
non-funded non-contributory defined benefit plans covering certain
executives. Benefits are generally based on career average earnings and
credited length of service. The Company's funding policy is to contribute
annually an amount necessary to satisfy the Internal Revenue Service
contribution guidelines.
The Company provides certain life insurance and healthcare benefits ("Other
postretirement benefits") for its retired employees, their beneficiaries and
covered dependents. The healthcare plan is contributory; the life insurance
plan is non-contributory.
Substantially all of the Company's employees may become eligible to receive
benefits if they retire after age 55 with at least 10 years of service or
under certain circumstances after age 50 with at least 20 years of
continuous service. These benefits are funded as considered necessary by
Company management.
The Company has elected to amortize its transition obligation for other
postretirement benefits over 20 years.
Prepaid and accrued benefits costs are included in "Other assets" and "Other
liabilities," respectively, in the Company's Consolidated Statements of
Financial Position. The status of these plans as of September 30, adjusted
for fourth-quarter activity, is summarized below:
B31
<PAGE> 118
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
9. EMPLOYEE BENEFIT PLANS (CONTINUED)
<TABLE>
<CAPTION>
OTHER
PENSION BENEFITS POSTRETIREMENT BENEFITS
------------------------------ --------------------------------
1999 1998 1999 1998
--------------- -------------- --------------- --------------
(In Millions)
CHANGE IN BENEFIT OBLIGATION:
<S> <C> <C> <C> <C>
Benefit obligation at the beginning of period $ (6,309) $ (5,557) $ (2,213) $ (2,128)
Service cost (193) (159) (39) (35)
Interest cost (410) (397) (141) (142)
Plan participants' contributions - - (6) (6)
Amendments (2) (58) (2) -
Actuarial gains (losses) 974 (600) 312 (31)
Contractual termination benefits (53) (30) - -
Special termination benefits (51) - (2) -
Curtailment 206 - 43 -
Benefits paid 408 485 108 128
Foreign currency changes - 7 (1) 1
--------------- -------------- --------------- --------------
Benefit obligation at end of period $ (5,430) $ (6,309) $ (1,941) $ (2,213)
=============== ============== =============== ==============
CHANGE IN PLAN ASSETS:
Fair value of plan assets at beginning of period $ 8,427 $ 8,489 $ 1,422 $ 1,354
Actual return on plan assets 1,442 445 213 146
Transfer to third party (14) (4) - -
Contribution from pension plan - - - 31
Employer contributions 21 25 15 13
Plan participants' contributions - - 6 6
Withdrawal under IRS Section 420 - (36) - -
Benefits paid (408) (485) (108) (128)
Foreign currency changes - (7) - -
--------------- -------------- --------------- --------------
Fair value of plan assets at end of period $ 9,468 $ 8,427 $ 1,548 $ 1,422
=============== ============== =============== ==============
FUNDED STATUS:
Funded status at end of period $ 4,038 $ 2,118 $ (393) $ (791)
Unrecognized transition (asset) liability (448) (554) 462 660
Unrecognized prior service cost 225 335 2 -
Unrecognized actuarial net (gain) (2,514) (813) (746) (353)
Effects of fourth quarter activity (3) (9) - 2
--------------- -------------- --------------- --------------
Net amount recognized $ 1,298 $ 1,077 $ (675) $ (482)
=============== ============== =============== ==============
AMOUNTS RECOGNIZED IN THE STATEMENTS OF
FINANCIAL POSITION CONSIST OF:
Prepaid benefit cost $ 1,601 $ 1,348 $ - $ -
Accrued benefit liability (316) (287) (675) (482)
Intangible asset 6 7 - -
Accumulated other comprehensive income 7 9 - -
--------------- -------------- --------------- --------------
Net amount recognized $ 1,298 $ 1,077 $ (675) $ (482)
=============== ============== =============== ==============
</TABLE>
B32
<PAGE> 119
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
9. EMPLOYEE BENEFIT PLANS (CONTINUED)
The projected benefit obligations, accumulated benefit obligations and
fair value of plan assets for the pension plans with accumulated benefit
obligations in excess of plan assets were $401 million, $309 million and
$0, respectively, as of September 30, 1999 and $384 million, $284 million
and $0, respectively, as of September 30, 1998.
The effects of fourth quarter activity are summarized as follows:
<TABLE>
<CAPTION>
OTHER
PENSION BENEFITS POSTRETIREMENT BENEFITS
-------------------------------------------------------------
1999 1998 1999 1998
---------- ----------- ------------ ------------
(In Millions)
<S> <C> <C> <C> <C>
Contractual termination benefits $ (9) $ (14) $ - $ -
Employer contributions 6 5 - 2
---------- ----------- ------------ ------------
Effects of 4th quarter activity $ (3) $ (9) $ - $ 2
========== =========== ============ ============
</TABLE>
Pension plan assets consist primarily of equity securities, bonds, real
estate and short-term investments, of which $6,534 million and $5,926
million are included in Separate Account assets and liabilities at
September 30, 1999 and 1998, respectively.
Other postretirement plan assets consist of group and individual life
insurance policies, group life and health contracts, common stocks,
corporate debt securities, U.S. government securities and short-term
investments. During 1999 the assets of group life and health contracts
were transferred into common stocks, debt securities and short-term
investments. Plan assets include $434 million and $1,018 million of
Company insurance policies and contracts at September 30, 1999 and 1998,
respectively.
The Prudential Plan was amended during the time period presented to
provide contractual termination benefits to certain plan participants
whose employment had been terminated. Costs related to these amendments
are reflected in contractual termination benefits that follow.
B33
<PAGE> 120
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
9. EMPLOYEE BENEFIT PLANS (CONTINUED)
Net periodic benefit cost included in "General and administrative
expenses" in the Company's Consolidated Statements of Operations for the
years ended December 31, includes the following components:
<TABLE>
<CAPTION>
PENSION BENEFITS OTHER POSTRETIREMENT BENEFITS
----------------------------------------------------------------------------
1999 1998 1997 1999 1998 1997
---------- ----------- ---------- ---------- ---------- ----------
(In Millions)
COMPONENTS OF NET PERIODIC BENEFITS
COSTS:
<S> <C> <C> <C> <C> <C> <C>
Service cost $ 193 $ 159 $ 127 $ 39 $ 35 $ 38
Interest cost 410 397 376 141 142 149
Expected return on plan assets (724) (674) (617) (121) (119) (87)
Amortization of transition amount (106) (106) (106) 47 47 50
Amortization of prior service cost 45 45 42 - - -
Amortization of actuarial net (gain) loss 4 1 - (10) (13) (13)
Special termination benefits 51 - - 2 - -
Curtailment (gain) loss (122) 5 - 108 - -
Contractual termination benefits 48 14 30 - - -
---------- ----------- ---------- ---------- ---------- ----------
Subtotal (201) (159) (148) 206 92 137
Less amounts related to discontinued operations 84 25 - (130) (34) (38)
---------- ----------- ---------- ---------- ---------- ----------
Net periodic (benefit) cost $ (117) $ (134) $ (148) $ 76 $ 58 $ 99
========== =========== ========== ========== ========== ==========
</TABLE>
Discontinued operations amounts for 1998 and 1997 were included in loss
from healthcare operations. The 1999 amounts were included in loss on
disposal of healthcare operations. See Note 3 for discussion of the
disposal of the Company's healthcare business. Discontinued operations
for pension benefits in 1999 includes $122 million of curtailment gains
and $51 million of special termination benefit costs. Discontinued
operations for postretirement benefits in 1999 includes $108 million of
curtailment losses and $2 million of special termination benefit costs.
The assumptions at September 30, used by the Company to calculate the
benefit obligations as of that date and to determine the benefit cost in
the subsequent year are as follows:
<TABLE>
<CAPTION>
PENSION BENEFITS OTHER POSTRETIREMENT BENEFITS
------------------------------------------------------------------------
1999 1998 1997 1999 1998 1997
------ ------ ------ ------ ------ ------
WEIGHTED-AVERAGE ASSUMPTIONS:
<S> <C> <C> <C> <C> <C> <C>
Discount rate (beginning of period) 6.50% 7.25% 7.75% 6.50% 7.25% 7.75%
Discount rate (end of period) 7.75% 6.50% 7.25% 7.75% 6.50% 7.25%
Rate of increase in compensation 4.50% 4.50% 4.50% 4.50% 4.50% 4.50%
levels (beginning of period)
Rate of increase in compensation 4.50% 4.50% 4.50% 4.50% 4.50% 4.50%
levels (end of period)
Expected return on plan assets 9.50% 9.50% 9.50% 9.00% 9.00% 9.00%
Health care cost trend rates - - - 7.50 - 9.80% 7.80 - 11.00% 8.20 - 11.80%
Ultimate health care cost trend rate after gradual - - - 5.00% 5.00% 5.00%
decrease until 2006
</TABLE>
B34
<PAGE> 121
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:
<TABLE>
<CAPTION>
OTHER
POSTRETIREMENT BENEFITS
------------------------------
1999
-------------
(In Millions)
<S> <C>
ONE PERCENTAGE POINT INCREASE
Increase in total service and interest costs $ 25
Increase in postretirement benefit obligation 200
ONE PERCENTAGE POINT DECREASE
Decrease in total service and interest costs $ 20
Decrease in postretirement benefit obligation 167
</TABLE>
POSTEMPLOYMENT BENEFITS
The Company accrues postemployment benefits primarily for life and health
benefits provided to former or inactive employees who are not retirees. The
net accumulated liability for these benefits at December 31, 1999 and 1998
was $157 million and $135 million, respectively, and is included in "Other
liabilities."
OTHER EMPLOYEE BENEFITS
The Company sponsors voluntary savings plans for employees (401(k) plans).
The plans provide for salary reduction contributions by employees and
matching contributions by the Company of up to 3% of annual salary. The
matching contributions by the Company included in "General and
administrative expenses" are as follows:
<TABLE>
<CAPTION>
401(k) COMPANY MATCH
--------------------------------------------------------
1999 1998 1997
----------- ------------- -------------
(In Millions)
<S> <C> <C> <C>
Company match $ 60 $ 54 $ 63
Less amounts related to discontinued operations (8) (14) (16)
----------- -------------- -------------
401(k) Company match included in
general and administrative expenses $ 52 $ 40 $ 47
=========== ============== =============
</TABLE>
Discontinued operations amount for 1998 and 1997 were included in loss from
healthcare operations. The 1999 amount was included in loss on disposal of
healthcare operations.
B35
<PAGE> 122
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
10. INCOME TAXES
The components of income tax expense for the years ended December 31, were
as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------------- -------------- ---------------
(In Millions)
<S> <C> <C> <C>
Current tax expense (benefit):
U.S. $ 614 $ 883 $ (14)
State and local 84 54 51
Foreign (8) 148 64
------------ ------------- --------------
Total 690 1,085 101
Deferred tax expense (benefit):
U.S. 206 (93) 269
State and local 44 (6) 4
Foreign 102 (16) 33
------------ ------------- --------------
Total 352 (115) 306
Total income tax expense $ 1,042 $ 970 $ 407
============ ============= ==============
</TABLE>
Income from continuing operations before income taxes and extraordinary
item, for the years ended December 31, was as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------------- -------------- --------------
(In Millions)
<S> <C> <C> <C>
Domestic $ 1,989 $ 2,384 $ 1,039
International 316 224 331
------------ ------------- --------------
Total income from continuing operations
before income taxes and extraordinary item $ 2,305 $ 2,608 $ 1,370
============ ============= ==============
</TABLE>
The Company's income tax expense for the years ended December 31,
differs from the amount computed by applying the expected federal
income tax rate of 35% to income from continuing operations before
income taxes for the following reasons:
<TABLE>
<CAPTION>
1999 1998 1997
------------- -------------- ---------------
(In Millions)
<S> <C> <C> <C>
Expected federal income tax expense $ 807 $ 913 $ 480
Equity tax (benefit) 190 75 (65)
State and local income taxes 83 31 37
Tax-exempt interest and dividend received (63) (46) (67)
deduction
Other 25 (3) 22
------------ ------------- --------------
Total income tax expense $ 1,042 $ 970 $ 407
============ ============= ==============
</TABLE>
B36
<PAGE> 123
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
10. INCOME TAXES (CONTINUED)
Deferred tax assets and liabilities at December 31, resulted from the items
listed in the following table:
<TABLE>
<CAPTION>
1999 1998
------------ ------------
(In Millions)
<S> <C> <C>
Deferred tax assets
Insurance reserves $ 1,582 $ 1,807
Net unrealized investment(gains)/losses 474 (1,225)
Policyholder dividends 277 265
Net operating loss carryforwards 280 276
Litigation related reserves 61 87
Employee benefits 32 63
Other - 135
------------ ------------
Deferred tax assets before valuation allowance 2,706 1,408
Valuation allowance (24) (13)
------------ ------------
Deferred tax assets after valuation allowance 2,682 1,395
------------ ------------
Deferred tax liabilities
Deferred policy acquisition cost 1,942 1,697
Investments 284 151
Depreciation 59 64
------------ ------------
Deferred tax liabilities 2,285 1,912
------------ ------------
Net defered tax asset/(liability) $ 397 $ (517)
============ ============
</TABLE>
Management believes that based on its historical pattern of taxable
income, the Company will produce sufficient income in the future to realize
its deferred tax asset after valuation allowance. Adjustments to the
valuation allowance will be made if there is a change in management's
assessment of the amount of the deferred tax asset that is realizable. At
December 31, 1999 and 1998, respectively, the Company had federal life net
operating loss carryforwards of $660 million and $540 million, which expire
in 2012. At December 31, 1999 and 1998, respectively, the Company had
state operating loss carryforwards for tax purposes approximating $570
million and $1,278 million, which expire between 2000 and 2019.
Deferred taxes are not provided on the undistributed earnings of foreign
subsidiaries (considered to be permanent investments), which at
December 31, 1999 were $521 million. Determining the tax liability that
would arise if these earnings were remitted is not practical.
The Internal Revenue Service (the "Service") has completed all examinations
of the consolidated federal income tax returns through 1992. The Service
has begun their examination of the years 1993 through 1995.
B37
<PAGE> 124
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
11. STATUTORY NET INCOME AND SURPLUS
RECONCILIATION OF STATUTORY NET INCOME AND SURPLUS
Accounting practices used to prepare statutory financial statements for
regulatory purposes differ in certain instances from GAAP. The following
tables reconcile the Company's statutory net income and surplus as of and
for the years ended December 31, 1999, 1998, and 1997, determined in
accordance with accounting practices prescribed or permitted by the New
Jersey Department of Banking and Insurance, to net income and equity
determined using GAAP:
<TABLE>
<CAPTION>
1999 1998 1997
------------ -------------- -------------
(In Millions)
<S> <C> <C> <C>
STATUTORY NET INCOME $ 333 $ 1,247 $ 1,471
Adjustments to reconcile to net income on a GAAP basis:
Insurance revenues and expenses 136 (117) 12
Income taxes 436 128 601
Valuation of investments (27) (143) (62)
Realized investment gains 73 1,162 702
Litigation and other reserves (102) (1,150) (1,975)
Discontinued operations and other, net (36) (21) (139)
------------- -------------- -------------
GAAP NET INCOME $ 813 $ 1,106 $ 610
============= ============== =============
</TABLE>
<TABLE>
<CAPTION>
1999 1998
------------ --------------
(In Millions)
<S> <C> <C>
STATUTORY SURPLUS $ 9,249 $ 8,536
Adjustments to reconcile to equity on a GAAP basis:
Deferred policy acquisition costs 7,295 6,462
Valuation of investments 2,909 8,358
Future policy benefits and policyholder
account balances (1,544) (2,621)
Non-admitted assets 2,069 2,119
Income taxes 522 (576)
Surplus notes (987) (987)
Discontinued operations and other, net (222) (896)
------------- --------------
GAAP EQUITY $ 19,291 $ 20,395
============= ==============
</TABLE>
The New York State Insurance Department ("Department") recognizes only
statutory accounting for determining and reporting the financial condition
of an insurance company, for determining its solvency under the New York
Insurance Law and for determining whether its financial condition warrants
the payment of a dividend to its policyholders. No consideration is given
by the Department to financial statements prepared in accordance with GAAP
in making such determinations.
B38
<PAGE> 125
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
12. OPERATING LEASES
The Company occupies leased office space in many locations under various
long-term leases and has entered into numerous leases covering the long-term
use of computers and other equipment. At December 31, 1999, future minimum
lease payments under non-cancelable operating leases are, as follows:
<TABLE>
<CAPTION>
(In Millions)
<S> <C>
2000 $ 294
2001 265
2002 217
2003 178
2004 147
Remaining years after 2004 776
-----------
Total $ 1,877
===========
</TABLE>
Rental expense incurred for the years ended December 31, 1999, 1998 and 1997
was $278 million, $320 million and $352 million, respectively, excluding
expenses relating to the Company's healthcare business.
13. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values presented below have been determined by using
available market information and by applying valuation methodologies.
Considerable judgment is applied in interpreting data to develop the
estimates of fair value. Estimated fair values may not be realized in a
current market exchange. The use of different market assumptions and/or
estimation methodologies could have a material effect on the estimated fair
values. The following methods and assumptions were used in calculating the
estimated fair values (for all other financial instruments presented in the
table, the carrying values approximate estimated fair values).
FIXED MATURITIES AND EQUITY SECURITIES
Estimated fair values for fixed maturities and equity securities, other than
private placement securities, are based on quoted market prices or estimates
from independent pricing services. Generally fair values for private
placement fixed maturities are estimated using a discounted cash flow model
which considers the current market spreads between the U.S. Treasury yield
curve and corporate bond yield curve, adjusted for the type of issue, its
current credit quality and its remaining average life. The fair value of
certain non-performing private placement fixed maturities is based on
amounts estimated by management.
MORTGAGE LOANS ON REAL ESTATE
The estimated fair value of mortgage loans on real estate is primarily based
upon the present value of the expected future cash flows discounted at the
appropriate U.S. Treasury rate, adjusted for the current market spread for
similar quality mortgage.
POLICY LOANS
The estimated fair value of policy loans is calculated using a discounted
cash flow model based upon current U.S. Treasury rates and historical loan
repayments.
B39
<PAGE> 126
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
13. FAIR VALUE OF FINANCIAL INSTRUMENTS (continued)
DERIVATIVE FINANCIAL INSTRUMENTS
Refer to Note 14 for the disclosure of fair values on these instruments.
INVESTMENT CONTRACTS
For guaranteed investment contracts, income annuities, and other similar
contracts without life contingencies, estimated fair values are derived
using discounted projected cash flows, based on interest rates being offered
for similar contracts with maturities consistent with those of the contracts
being valued. For individual deferred annuities and other deposit
liabilities, fair value approximates carrying value.
DEBT
The estimated fair value of short-term and long-term debt is derived by
using discount rates based on the borrowing rates currently available to the
Company for debt with similar terms and remaining maturities.
B40
<PAGE> 127
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
13. FAIR VALUE OF FINANCIAL INSTRUMENTS (continued)
The following table discloses the carrying amounts and estimated fair values
of the Company's financial instruments at December 31:
<TABLE>
<CAPTION>
1999 1998
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
-------------- ------------- ------------- --------------
(In Millions)
FINANCIAL ASSETS:
Other than trading:
------------------
<S> <C> <C> <C> <C>
Fixed maturities:
Available for sale $ 74,697 $ 74,697 $ 80,158 $ 80,158
Held to maturity 14,237 14,112 16,848 17,906
Equity securities 3,264 3,264 2,759 2,759
Mortgage loans on real estate 16,268 15,826 16,016 16,785
Policy loans 7,590 7,462 7,476 8,123
Securities purchased under agreements to resell - - 1,737 1,737
Short-term investments 12,303 12,303 9,781 9,781
Mortgage securitization inventory 803 803 480 480
Cash 1,330 1,330 1,943 1,943
Restricted cash and securities 4,082 4,082 2,366 2,366
Separate Account assets 82,131 82,131 80,931 80,931
Trading:
-------
Trading account assets $ 9,741 $ 9,741 $ 8,888 $ 8,888
Broker-dealer related receivables 11,346 11,346 10,142 10,142
Securities purchased under agreements to resell 13,944 13,944 8,515 8,515
Cash collateral for borrowed securities 7,124 7,124 5,622 5,622
FINANCIAL LIABILITIES:
Other than trading:
------------------
Investment contracts $ 25,164 $ 25,352 $ 26,246 $ 27,051
Securities sold under agreements to repurchase 4,260 4,260 7,085 7,085
Cash collateral for loaned securities 2,582 2,582 2,450 2,450
Short-term and long-term debt 16,371 16,563 14,816 15,084
Securities sold but not yet purchased - - 2,215 2,215
Separate Account liabilities 82,131 82,131 80,931 80,931
Trading:
-------
Broker-dealer related payables $ 5,839 $ 5,839 $ 6,530 $ 6,530
Securities sold under agreements to repurchase 20,338 20,338 14,401 14,401
Cash collateral for loaned securities 8,193 8,189 4,682 4,682
Securities sold but not yet purchased 6,968 6,968 3,556 3,556
</TABLE>
<PAGE> 128
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
14. DERIVATIVE AND OFF-BALANCE SHEET CREDIT-RELATED INSTRUMENTS
INTEREST RATE SWAPS
The Company uses interest rate swaps to reduce market risks from changes in
interest rates and to manage interest rate exposures arising from mismatches
between assets and liabilities. Under interest rate swaps, the Company
agrees with other parties to exchange, at specified intervals, the
difference between fixed-rate and floating-rate interest amounts calculated
by reference to an agreed notional principal amount. Generally, no cash is
exchanged at the outset of the contract and no principal payments are made
by either party. Cash is paid or received based on the terms of the swap.
These transactions are entered into pursuant to master agreements that
provide for a single net payment to be made by one counterparty at each due
date. The fair value of swap agreements is estimated based on the present
value of future cash flows under the agreements, discounted at the
applicable zero coupon U.S. Treasury rate and swap spread.
If swap agreements meet the criteria for hedge accounting, net interest
receipts or payments are accrued and recognized over the life of the swap
agreements as an adjustment to interest income or expense of the hedged
item. Any unrealized gains or losses are not recognized until the hedged
item is sold or matures. Gains or losses on early termination of interest
rate swaps are deferred and amortized over the remaining period originally
covered by the swaps. If the criteria for hedge accounting are not met, the
swap agreements are accounted for at fair value with changes in fair value
reported in current period earnings.
FUTURES AND OPTIONS
The Company uses exchange-traded Treasury futures and options to reduce
market risks from changes in interest rates, to alter mismatches between the
duration of assets in a portfolio and the duration of liabilities supported
by those assets, and to hedge against changes in the value of securities it
owns or anticipates acquiring. The Company enters into exchange-traded
futures and options with regulated futures commissions merchants who are
members of a trading exchange. The fair value of those futures and options
is based on market quotes.
In exchange-traded futures transactions, the Company purchases or sells
contracts, the value of which are determined by the value of designated
classes of Treasury securities, and posts variation margins on a daily basis
in an amount equal to the difference in the daily market values of those
contracts. Futures are typically used to hedge duration mismatches between
assets and liabilities by replicating Treasury performance. Treasury futures
move substantially in value as interest rates change and can be used to
either modify or hedge existing interest rate risk. This strategy protects
against the risk that cash flow requirements may necessitate liquidation of
investments at unfavorable prices resulting from increases in interest
rates. This strategy can be a more cost effective way of temporarily
reducing the Company's exposure to a market decline than selling fixed
income securities and purchasing a similar portfolio when such a decline is
believed to be over.
If futures meet hedge accounting criteria, changes in their fair value are
deferred and recognized as an adjustment to the carrying value of the hedged
item. Deferred gains or losses from the hedges for interest-bearing
financial instruments are amortized as a yield adjustment over the remaining
lives of the hedged item. Futures that do not qualify as hedges are carried
at fair value with changes in value reported in current period earnings. The
gains and losses associated with anticipatory transactions are not material.
B42
<PAGE> 129
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
14. DERIVATIVE AND OFF-BALANCE SHEET CREDIT-RELATED INSTRUMENTS (CONTINUED)
When the Company anticipates a significant decline in the stock market which
will correspondingly affect its diversified portfolio, it may purchase put
index options where the basket of securities in the index is appropriate to
provide a hedge against a decrease in the value of the Company's equity
portfolio or a portion thereof. This strategy effects an orderly sale of
hedged securities. When the Company has large cash flows which it has
allocated for investment in equity securities, it may purchase call index
options as a temporary hedge against an increase in the price of the
securities it intends to purchase. This hedge is intended to permit such
investment transactions to be executed with less adverse market impact.
CURRENCY DERIVATIVES
The Company uses currency derivatives, including exchange-traded currency
futures and options, currency forwards and currency swaps, to reduce market
risks from changes in currency exchange rates with respect to investments
denominated in foreign currencies that the Company either holds or intends
to acquire and to alter the currency exposures arising from mismatches
between such foreign currencies and the U.S. dollar.
Under currency forwards, the Company agrees with other parties upon delivery
of a specified amount of a specified currency at a specified future date.
Typically, the price is agreed upon at the time of the contract and payment
for such a contract is made at the specified future date. Under currency
swaps, the Company agrees with other parties to exchange, at specified
intervals, the difference between one currency and another at a forward
exchange rate and calculated by reference to an agreed principal amount.
Generally, the principal amount of each currency is exchanged at the
beginning and termination of the currency swap by each party. These
transactions are entered into pursuant to master agreements that provide for
a single net payment to be made by one counterparty for payments made in the
same currency at each due date.
If currency derivatives are effective as hedges of foreign currency
translation and transaction exposures, gains or losses are recorded in
"Accumulated other comprehensive income." If currency derivatives do not
meet hedge accounting criteria, gains or losses from those derivatives are
recognized in "Realized investment gains, net."
FORWARDS
The Company uses forwards to manage market risks relating to interest rates
and commodities. Additionally, in connection with the Company's investment
banking activities, the Company trades in mortgage backed securities forward
contracts. Typically, the price is agreed upon at the time of the contract
and payment for such a contract is made at the specified future date.
If the forwards are effective as hedges, gains or losses are recorded in
"Accumulated other comprehensive income." If forwards do not meet hedge
accounting criteria, gains or losses from those forwards are recognized in
current period earnings.
The tables below summarize the Company's outstanding positions by derivative
instrument types as of December 31, 1999 and 1998. The amounts presented are
classified as either trading or other than trading, based on management's
intent at the time of contract inception and throughout the life of the
contract. The table includes the estimated fair values of outstanding
derivative positions only and does not include the changes in fair values of
associated financial and non-financial assets and liabilities, which
generally offset derivative notional amounts. The fair value amounts
presented also do not reflect the netting of amounts pursuant to right of
setoff, qualifying master netting agreements with counterparties or
collateral arrangements.
B43
<PAGE> 130
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
14. DERIVATIVE AND OFF-BALANCE SHEET CREDIT-RELATED INSTRUMENTS (CONTINUED)
DERIVATIVE FINANCIAL INSTRUMENTS
DECEMBER 31, 1999
(IN MILLIONS)
<TABLE>
<CAPTION>
TRADING OTHER THAN TRADING
------------------------- -------------------------
HEDGE ACCOUNTING
-------------------------
ESTIMATED ESTIMATED
NOTIONAL FAIR VALUE NOTIONAL FAIR VALUE
---------- ------------ ---------- ------------
<S> <C> <C> <C> <C>
SWAP INSTRUMENTS
Interest rate
Asset $ 7,116 $ 151 $ - $ -
Liability 6,490 137 - -
Currency
Asset 24 45 343 30
Liability 77 51 369 33
Equity and commodity
Asset 8 9 - -
Liability 8 5 - -
FORWARD CONTRACTS
Interest rate
Asset 14,837 105 - -
Liability 12,459 84 - -
Currency
Asset 11,181 275 54 2
Liability 10,377 247 841 16
Equity and commodity
Asset 1,664 68 - -
Liability 1,592 60 - -
FUTURES CONTRACTS
Interest rate
Asset 2,374 2 - -
Liability 3,017 3 - -
Equity and commodity
Asset 2,283 44 - -
Liability 837 57 - -
OPTION CONTRACTS
Interest rate
Asset 3,725 22 - -
Liability 2,185 11 - -
Currency
Asset 613 5 - -
Liability 4,439 5 - -
Equity and commodity
Asset 340 6 - -
Liability 366 3 - -
--------- ---------- ---------- ----------
TOTAL DERIVATIVES:
ASSETS $44,165 $ 732 $ 397 $ 32
========= ========== ========== ==========
LIABILITIES $41,847 $ 663 $ 1,210 $ 49
========= ========== ========== ==========
<CAPTION>
OTHER THAN TRADING TOTAL
------------------------- -------------------------
NON-HEDGE ACCOUNTING
-------------------------
ESTIMATED ESTIMATED
NOTIONAL FAIR VALUE NOTIONAL FAIR VALUE
---------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
SWAP INSTRUMENTS
Interest rate
Asset $ 2,185 $ 146 $ 9,301 $ 297
Liability 1,261 32 7,751 169
Currency
Asset - - 367 75
Liability - - 446 84
Equity and commodity
Asset 47 13 55 22
Liability - - 8 5
FORWARD CONTRACTS
Interest rate
Asset - - 14,837 105
Liability - - 12,459 84
Currency
Asset 1,182 16 12,417 293
Liability 1,347 21 12,565 284
Equity and commodity
Asset - - 1,664 68
Liability - - 1,592 60
FUTURES CONTRACTS
Interest rate
Asset 800 14 3,174 16
Liability 3,696 44 6,713 47
Equity and commodity
Asset 71 4 2,354 48
Liability 12 11 849 68
OPTION CONTRACTS
Interest rate
Asset - - 3,725 22
Liability 13 - 2,198 11
Currency
Asset 10 - 623 5
Liability 10 - 4,449 5
Equity and commodity
Asset - - 340 6
Liability - - 366 3
-------- -------- -------- --------
TOTAL DERIVATIVES:
ASSETS $ 4,295 $ 193 $48,857 $ 957
======== ======== ======== ========
LIABILITIES $ 6,339 $ 108 $49,396 $ 820
======== ======== ======== ========
</TABLE>
B44
<PAGE> 131
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
-------------------- --------------------------------------------- ---------------------
HEDGE ACCOUNTING NON-HEDGE ACCOUNTING
--------------------- --------------------
ESTIMATED ESTIMATED ESTIMATED ESTIMATED
NOTIONAL FAIR VALUE NOTIONAL FAIR VALUE NOTIONAL FAIR VALUE NOTIONAL FAIR VALUE
-------- ---------- -------- ---------- -------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
SWAP INSTRUMENTS
Interest rate
Asset $ 4,145 $ 204 $ - $ - $ 1,949 $ 73 $ 6,094 $ 277
Liability 4,571 192 - - 2,501 301 7,072 493
Currency
Asset 372 91 229 16 - - 601 107
Liability 263 84 464 46 - - 727 130
Equity and commodity
Asset 47 14 - - 22 7 69 21
Liability - - - - - - - -
FORWARD CONTRACTS
Interest rate
Asset 31,568 72 - - - - 31,568 72
Liability 24,204 56 - - - - 24,204 56
Currency
Asset 12,879 198 60 1 942 13 13,881 212
Liability 13,594 221 573 11 1,466 26 15,633 258
Equity and commodity
Asset 1,204 12 - - 2 - 1,206 12
Liability 1,355 3 - - - - 1,355 3
FUTURES CONTRACTS
Interest rate
Asset 2,429 10 - - 1,762 22 4,191 32
Liability 3,147 3 - - 478 4 3,625 7
Equity and commodity
Asset 843 51 - - 24 1 867 52
Liability 1,224 44 - - 53 1 1,277 45
OPTION CONTRACTS
Interest rate
Asset 2,500 10 - - 130 2 2,630 12
Liability 1,451 8 - - 98 - 1,549 8
Currency
Asset 4,882 101 - - - - 4,882 101
Liability 4,151 112 - - - - 4,151 112
Equity and commodity
Asset 928 2 - - - - 928 2
Liability 901 4 - - - - 901 4
------- ------- ------- ------- ------- ------- ------- -------
TOTAL DERIVATIVES:
ASSETS $61,797 $ 765 $ 289 $ 17 $ 4,831 $ 118 $66,917 $ 900
======= ======= ======= ======= ======= ======= ======= =======
LIABILITIES $54,861 $ 727 $ 1,037 $ 57 $ 4,596 $ 332 $60,494 $ 1,116
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
B45
<PAGE> 132
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
14. DERIVATIVE AND OFF-BALANCE SHEET CREDIT-RELATED INSTRUMENTS (CONTINUED)
The following table discloses net trading revenues by derivative instrument
types as of December 31:
<TABLE>
<CAPTION>
1999 1998 1997
----- ----- -----
(In Millions)
<S> <C> <C> <C>
Forwards $ 53 $ 67 $ 59
Futures 80 (5) 37
Swaps 16 (13) (13)
Options (14) - -
----- ----- -----
Net trading revenues $ 135 $ 49 $ 83
===== ===== =====
</TABLE>
Average fair values for trading derivatives in an asset position during the
years ended December 31, 1999 and 1998 were $789 million and $922 million,
respectively, and for derivatives in a liability position were $766 million
and $905 million, respectively. The average fair values do not reflect the
netting of amounts pursuant to the right of offset or qualifying master
netting agreements. Of those derivatives held for trading purposes at
December 31, 1999, 61% of the notional amount consisted of interest rate
derivatives, 33% consisted of foreign currency derivatives and 6% consisted
of equity and commodity derivatives. Of those derivatives held for purposes
other than trading at December 31, 1999, 65% of notional consisted of
interest rate derivatives, 34% consisted of foreign currency derivatives,
and 1% consisted of equity and commodity derivatives.
CREDIT RISK
The credit exposure of the Company's derivative contracts is limited to the
fair value at the reporting date. Credit risk is managed by entering into
transactions with creditworthy counterparties and obtaining collateral where
appropriate and customary. The Company also attempts to minimize its
exposure to credit risk through the use of various credit monitoring
techniques. At December 31, 1999 and 1998, approximately 81% and 95%,
respectively, of the net credit exposure for the Company from derivative
contracts is with investment-grade counterparties.
OFF-BALANCE SHEET CREDIT-RELATED INSTRUMENTS
During the normal course of its business, the Company utilizes financial
instruments with off-balance sheet credit risk such as commitments,
financial guarantees, loans sold with recourse and letters of credit.
Commitments include commitments to purchase and sell mortgage loans, the
underfunded portion of commitments to fund investments in private placement
securities and unused credit card and home equity lines.
In connection with the Company's consumer banking business, loan commitment
for credit cards and home equity lines of credit and other lines of credit
include agreements to lend up to specified limits to customers. It is
anticipated that commitment amounts will only be partially drawn down based
on overall customer usage patterns, and, therefore, do not necessarily
represent future cash requirements. The Company evaluates each credit
decision on such commitments at least annually and has the ability to cancel
or suspend such lines at its option. The total available lines of credit
card, home equity and other commitments were $2.7 billion, of which $2.0
billion remains available at December 31, 1999.
Also, in connection with the Company's investment banking activities, the
Company enters into agreements with mortgage originators and others to
provide financing on both a secured and an unsecured basis. Aggregate
financing commitments on a secured basis, for periods of less than one year,
approximate $4.9 billion, of which $2.73 billion remains available at
December 31, 1999. Unsecured commitments approximate $528 million, of which
$334 million remains available at December 3l, 1999.
B46
<PAGE> 133
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
14. DERIVATIVE AND OFF-BALANCE SHEET CREDIT-RELATED INSTRUMENTS (CONTINUED)
Other commitments primarily include commitments to purchase and sell
mortgage loans and the unfunded portion of commitments to fund investments
in private placement securities. These mortgage loans and private
commitments were $2.9 billion, of which $1.9 billion remain available at
December 31, 1999. Additionally, mortgage loans sold with recourse were $0.1
billion at December 31, 1999.
The Company also provides financial guarantees incidental to other
transactions and letters of credit that guarantee the performance of
customers to third parties. These credit-related financial instruments have
off-balance sheet credit risk because only their origination fees, if any,
and accruals for probable losses, if any, are recognized until the
obligation under the instrument is fulfilled or expires. These instruments
can extend for several years and expirations are not concentrated in any
period. The Company seeks to control credit risk associated with these
instruments by limiting credit, maintaining collateral where customary and
appropriate and performing other monitoring procedures. At December 31, 1999
these were immaterial.
15. CONTINGENCIES AND LITIGATION
STOP-LOSS REINSURANCE AND STOP-LOSS INDEMNIFICATION AGREEMENTS
On February 24, 2000, the Company entered into an agreement to sell 100% of
the capital stock of its subsidiary, Gibraltar Casualty Company
("Gibraltar") to Everest Reinsurance Holdings, Inc. (now known as Everest Re
Group, Ltd.) ("Everest"). The transaction is expected to be completed in the
second quarter of 2000, subject to approval by state regulators and other
customary closing conditions. Proceeds from the sale will consist of
approximately $52 million in cash, which approximated the book value of
Gibraltar at December 31, 1999. In connection with the sale, the Company
will provide a stop-loss indemnification agreement covering 80% of the first
$200 million of any adverse loss development in excess of Gibraltar's
carried reserves as of the closing date of the transaction, resulting in a
maximum potential exposure to the Company of $160 million. In connection
with the Company's 1995 sale of what is now Everest, Gibraltar had entered
into a stop-loss reinsurance agreement with Everest whereby Gibraltar
reinsured up to $375 million of the first $400 million of aggregate adverse
loss development, on an incurred basis, with respect to reserves recorded by
Everest as of June 30, 1995. Upon the expected completion of the
aforementioned sale of Gibraltar, the Company will no longer be subject to
exposure under the 1995 stop-loss agreement. Management believes that based
on currently available information and established reserves, the ultimate
settlement of claims under either the 1995 stop-loss agreement or the stop-
loss indemnification agreement should not have a material adverse effect on
the Company's financial position.
ENVIRONMENTAL AND ASBESTOS-RELATED CLAIMS
Certain of the Company's subsidiaries are subject to claims under expired
contracts that assert alleged injuries and/or damages relating to or
resulting from toxic torts, toxic waste and other hazardous substances. The
liabilities for these claims cannot be reasonably estimated using
traditional reserving techniques. The predominant source of such exposure
for the Company is Gibraltar, which, as discussed above, is expected to be
sold in the second quarter of 2000. The liabilities recorded for
environmental and asbestos-related claims, net of reinsurance recoverables,
of $342 million ($321 million for Gibraltar) and $239 million ($217 million
for Gibraltar) at December 31, 1999 and 1998, respectively, reflect the
Company's best estimate of ultimate claims and claim adjustment expenses
based upon known facts and current law. However, as a result of judicial
decisions and legislative actions, the coverage afforded under these
contracts may be expanded beyond their original terms. Given the expansion
of coverage and liability by the courts and legislatures in the past, and
the potential for other unfavorable trends in the future, the ultimate cost
of these claims could increase from the levels currently established.
Because of these uncertainties, these additional amounts, or a range of
these additional amounts, cannot be reasonably estimated, and could result
in a liability exceeding recorded liabilities by an amount that could be
material to the Company's results of operations in a future quarterly or
annual period. The Company's residual exposure pertaining to Gibraltar upon
completion of the expected sale, pursuant to a
B47
<PAGE> 134
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
15. CONTINGENCIES AND LITIGATION (continued)
stop-loss indemnification agreement, is discussed above. Management
believes that these claims should not have a material adverse
effect on the Company's financial position.
MANAGED CARE REIMBURSEMENT
The Company has reviewed its obligations retained in the sale of the
healthcare operations under certain managed care arrangements for
possible failure to comply with contractual and regulatory
requirements. It is the opinion of management that adequate
reserves have been established to provide for appropriate
reimbursements to customers.
LITIGATION
The Company is subject to legal and regulatory actions in the
ordinary course of its businesses, including class actions.
Pending legal and regulatory actions include proceedings specific
to the Company's practices and proceedings generally applicable to
business practices in the industries in which the Company
operates. In certain of these matters, large and/or indeterminate
amounts are sought, including punitive or exemplary damages.
In particular, the Company has been subject to substantial
regulatory actions and civil litigation involving individual life
insurance sales practices. In 1996, the Company entered into
settlement agreements with relevant insurance regulatory
authorities and plaintiffs in the principal life insurance sales
practices class action lawsuit covering policyholders of
individual permanent life insurance policies issued in the United
States from 1982 to 1995. Pursuant to the settlements, the Company
agreed to various changes to its sales and business practices
controls and a series of fines, and is in the process of
distributing final remediation relief to eligible class members.
In many instances, claimants have the right to "appeal" the
Company's decision to an independent reviewer. The bulk of such
appeals were resolved in 1999, and the balance is expected to be
addressed in 2000. As of January 31, 2000, the Company remained a
party to two putative class actions and approximately 158
individual actions relating to permanent life insurance policies
the Company issued in the United States between 1982 and 1995.
Additional suits may be filed by individuals who opted out of the
settlements. While the approval of the class action settlement is
now final, the Company remains subject to oversight and review by
insurance regulators and other regulatory authorities with respect
to its sales practices and the conduct of the remediation program.
The U.S. District Court has also retained jurisdiction as to all
matters relating to the administration, consummation, enforcement
and interpretation of the settlements. In November 1999, upon the
joint application of the Company and class counsel, the Court
ordered an investigation into certain allegations of improprieties
in the administration and implementation of the remediation
program at the Company's Plymouth, Minnesota facility. Class
counsel is expected to submit a summary of its findings pursuant
to the investigation to the Court in mid-April 2000.
In 1999, 1998, 1997 and 1996, the Company recorded provisions in its
Consolidated Statements of Operations of $100 million, $1,150
million, $2,030 million and $1,125 million, respectively, to
provide for estimated remediation costs, and additional sales
practices costs including related administrative costs, regulatory
fines, penalties and related payments, litigation costs and
settlements, including settlements associated with the resolution
of claims of deceptive sales practices asserted by policyholders
who elected to "opt-out" of the class action settlement and
litigate their claims against the Company separately, and other
fees and expenses associated with the resolution of sales
practices issues.
B48
<PAGE> 135
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
15. CONTINGENCIES AND LITIGATION (continued)
The following table summarizes the Company's charges for the
estimated total costs of sales practices remedies and additional
sales practices costs and the related liability balances as of the
dates indicated:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------
1999 1998 1997 1996
--------------------------------------------------------------------
(In Millions)
<S> <C> <C> <C> <C>
Liability balance at beginning of period $ 3,058 $ 2,553 $ 963 $ -
Charges to expense:
Remedy costs (99) 510 1,640 410
Additional sales practices costs 199 640 390 715
----------- --------- -------- --------
Total charges to expense 100 1,150 2,030 1,125
Amounts paid or credited:
Remedy costs 1,708 147 - -
Additional sales practices costs 559 498 440 162
----------- --------- -------- --------
Total amounts paid or credited 2,267 645 440 162
Liability balance at end of period $ 891 $ 3,058 $ 2,553 $ 963
=========== ========= ======== ========
</TABLE>
In 1996, the Company recorded in its Consolidated Statements of Operations
the cost of $410 million before taxes as a guaranteed minimum remediation
expense pursuant to the settlement agreement. Management had no better
information available at that time upon which to make a reasonable
estimate of the losses associated with the settlement. Charges were also
recorded in 1996 for estimated additional sales practices costs totaling
$715 million before taxes.
In 1997, management increased the estimated liability for the costs of
remedying policyholder claims by $1,640 million before taxes. This
increase was based on additional information derived from claim sampling
techniques, the terms of the settlement and the number of claim forms
received. The Company also recorded additional charges of $390 million to
recognize the increase in estimated total additional sales practices
costs.
In 1998, the Company recorded an additional charge of $510 million before
taxes to recognize the increase of the estimated total cost of remedying
policyholder claims to a total of $2,560 million before taxes. This
increase was based on (i) estimates derived from an analysis of claims
actually remedied (including interest); (ii) a sample of claims still to
be remedied; (iii) an estimate of additional liabilities associated with
a claimant's right to "appeal" the Company's decision; and (iv) an
estimate of an additional liability associated with the results of an
investigation by a court-appointed independent expert regarding the
impact of the Company's failure to properly implement procedures to
preserve all documents relevant to the class action and remediation
program. The Company also recorded additional charges of $640 million
before taxes to recognize the increase in estimated total additional
sales practices costs.
In 1999, as a result of a decrease in the estimated cost of remedying
policyholder claims, the Company recorded a credit of $99 million before
taxes to reduce its liability relative to remedy costs. The revised
estimate was based on additional information derived from claims actually
remedied and an evaluation of remaining obligations taking into
consideration experience in 1999. The Company also recorded a charge of
$199 million before taxes to recognize an increase in estimated total
additional sales practices costs based on additional information obtained
in 1999.
B49
<PAGE> 136
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
15. CONTINGENCIES AND LITIGATION (continued)
The Company's litigation is subject to many uncertainties, and given their
complexity and scope, the outcomes cannot be predicted. It is possible
that the results of operations or the cash flow of the Company, in a
particular quarterly or annual period, could be materially affected by an
ultimate unfavorable outcome of pending litigation and regulatory matters
depending, in part, upon the results of operation or cash flow for such
period. Management believes, however, that the ultimate resolution of all
pending litigation and regulatory matters, after consideration of
applicable reserves, should not have a material adverse effect on the
Company's financial position.
******
B50
<PAGE> 137
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Policyholders of
The Prudential Insurance Company of America
In our opinion, the accompanying consolidated statements of financial position
and the related consolidated statements of operations, of changes in equity and
of cash flows present fairly, in all material respects, the financial position
of The Prudential Insurance Company of America and its subsidiaries at December
31, 1999 and 1998, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 1999, in conformity
with accounting principles generally accepted in the United States. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States, which require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
PricewaterhouseCoopers LLP
New York, New York
March 21, 2000
B51
<PAGE> 138
<PAGE>
The Prudential Insurance Company of America
Consolidated Statements of Financial Position
December 31, 1999 and 1998 (In Millions)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998
--------------- ----------------
<S> <C> <C>
ASSETS
Fixed maturities:
Available for sale, at fair value (amortized cost, 1999: $76,815; 1998: $76,997) $ 74,697 $ 80,158
Held to maturity, at amortized cost (fair value, 1999: $14,112; 1998: $17,906) 14,237 16,848
Trading account assets, at fair value 9,741 8,888
Equity securities, available for sale, at fair value (cost, 1999: $2,531; 1998: $2,583) 3,264 2,759
Mortgage loans on real estate 16,268 16,016
Investment real estate 770 675
Policy loans 7,590 7,476
Securities purchased under agreements to resell 13,944 10,252
Cash collateral for borrowed securities 7,124 5,622
Other long-term investments 4,087 3,474
Short-term investments 12,303 9,781
--------------- ----------------
Total investments 164,025 161,949
Cash 1,330 1,943
Accrued investment income 1,836 1,795
Broker-dealer related receivables 11,346 10,142
Deferred policy acquisition costs 7,324 6,462
Other assets 17,102 16,200
Separate account assets 82,131 80,931
--------------- ----------------
TOTAL ASSETS $ 285,094 $ 279,422
=============== ================
LIABILITIES AND EQUITY
LIABILITIES
Future policy benefits $ 68,069 $ 67,059
Policyholders' account balances 31,578 33,098
Unpaid claims and claim adjustment expenses 2,829 3,806
Policyholders' dividends 1,484 1,444
Securities sold under agreements to repurchase 24,598 21,486
Cash collateral for loaned securities 10,775 7,132
Income taxes payable 804 785
Broker-dealer related payables 5,839 6,530
Securities sold but not yet purchased 6,968 5,771
Short-term debt 10,858 10,082
Long-term debt 5,513 4,734
Other liabilities 14,357 16,169
Separate account liabilities 82,131 80,931
--------------- ----------------
Total liabilities 265,803 259,027
--------------- ----------------
COMMITMENTS AND CONTINGENCIES (See Notes 14 and 15)
EQUITY
Accumulated other comprehensive income/(loss) (685) 1,232
Retained earnings 19,976 19,163
--------------- ----------------
Total equity 19,291 20,395
--------------- ----------------
TOTAL LIABILITIES AND EQUITY $ 285,094 $ 279,422
=============== ================
</TABLE>
See Notes to Consolidated Financial Statements
B1
<PAGE>
The Prudential Insurance Company of America
Consolidated Statements of Operations
Years Ended December 31, 1999, 1998 and 1997 (In Millions)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998 1997
--------------- -------------- --------------
<S> <C> <C> <C>
REVENUES
Premiums $9,475 $9,024 $9,015
Policy charges and fee income 1,516 1,465 1,423
Net investment income 9,424 9,535 9,482
Realized investment gains, net 924 2,641 2,168
Commissions and other income 5,279 4,471 4,480
--------------- -------------- --------------
Total revenues 26,618 27,136 26,568
--------------- -------------- --------------
BENEFITS AND EXPENSES
Policyholders' benefits 10,175 9,840 9,956
Interest credited to policyholders' account balances 1,811 1,953 2,170
Dividends to policyholders 2,571 2,477 2,422
General and administrative expenses 9,656 9,108 8,620
Sales practices remedies and costs 100 1,150 2,030
--------------- -------------- --------------
Total benefits and expenses 24,313 24,528 25,198
--------------- -------------- --------------
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES AND
EXTRAORDINARY ITEM 2,305 2,608 1,370
--------------- -------------- --------------
Income taxes
Current 690 1,085 101
Deferred 352 (115) 306
--------------- -------------- --------------
Total income taxes 1,042 970 407
--------------- -------------- --------------
INCOME FROM CONTINUING OPERATIONS BEFORE EXTRAORDINARY ITEM 1,263 1,638 963
--------------- -------------- --------------
DISCONTINUED OPERATIONS
Loss from healthcare operations, net of taxes - (298) (353)
Loss on disposal of healthcare operations, net of taxes (400) (223) -
--------------- -------------- --------------
Net loss from discontinued operations (400) (521) (353)
--------------- -------------- --------------
INCOME BEFORE EXTRAORDINARY ITEM 863 1,117 610
EXTRAORDINARY ITEM - DEMUTUALIZATION EXPENSES, NET OF TAXES (50) (11) -
--------------- -------------- --------------
NET INCOME $ 813 $1,106 $ 610
=============== ============== ==============
</TABLE>
See Notes to Consolidated Financial Statements
B2
<PAGE>
The Prudential Insurance Company of America
Consolidated Statements of Changes in Equity
Years Ended December 31, 1999, 1998 and 1997 (In Millions)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Accumulated Other Comprehensive Income/(Loss)
---------------------------------------------------------------------
Total
Foreign Net Accumulated
Currency Unrealized Pension Other
Translation Investment Liability Comprehensive
Adjustments Gains/(Losses) Adjustment Income/(Loss)
--------------- ----------------- ------------- -----------------
<S> <C> <C> <C> <C>
Balance, December 31, 1996 $ (56) $ 1,136 $ (4) $ 1,076
Comprehensive income:
Net income
Other comprehensive income, net of tax:
Change in foreign currency translation
adjustments (29) (29)
Change in net unrealized investment gains 616 616
Additional pension liability adjustment (2) (2)
Other comprehensive income
Total comprehensive income
---------------------------------------------------------------------
Balance, December 31, 1997 (85) 1,752 (6) 1,661
Comprehensive income:
Net income
Other comprehensive loss, net of tax:
Change in foreign currency translation
adjustments 54 54
Change in net unrealized investment gains (480) (480)
Additional pension liability adjustment (3) (3)
Other comprehensive loss
Total comprehensive income
---------------------------------------------------------------------
Balance, December 31, 1998 (31) 1,272 (9) 1,232
Comprehensive income:
Net income
Other comprehensive loss, net of tax:
Change in foreign currency translation
adjustments 13 13
Change in net unrealized investment gains (1,932) (1,932)
Additional pension liability adjustment 2 2
Other comprehensive loss
Total comprehensive loss
---------------------------------------------------------------------
Balance, December 31, 1999 $ (18) $ (660) $ (7) $ (685)
=====================================================================
<CAPTION>
Retained Total
Earnings Equity
-------------- ------------
<S> <C> <C>
Balance, December 31, 1996 $ 17,447 $18,523
Comprehensive income:
Net income 610 610
Other comprehensive income, net of tax:
Change in foreign currency translation
adjustments (29)
Change in net unrealized investment gains 616
Additional pension liability adjustment (2)
----------
Other comprehensive income 585
----------
Total comprehensive income 1,195
----------------------------
Balance, December 31, 1997 18,057 19,718
Comprehensive income:
Net income 1,106 1,106
Other comprehensive loss, net of tax:
Change in foreign currency translation
adjustments 54
Change in net unrealized investment gains (480)
Additional pension liability adjustment (3)
----------
Other comprehensive loss (429)
----------
Total comprehensive income 677
----------------------------
Balance, December 31, 1998 19,163 20,395
Comprehensive income:
Net income 813 813
Other comprehensive loss, net of tax:
Change in foreign currency translation
adjustments 13
Change in net unrealized investment gains (1,932)
Additional pension liability adjustment 2
----------
Other comprehensive loss (1,917)
----------
Total comprehensive loss (1,104)
----------------------------
Balance, December 31, 1999 $ 19,976 $19,291
============================
</TABLE>
See Notes to Consolidated Financial Statements
B3
<PAGE>
The Prudential Insurance Company of America
Consolidated Statements of Cash Flows
Years Ended December 31, 1999, 1998 and 1997 (In Millions)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998 1997
-------------- -------------- --------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 813 $ 1,106 $ 610
Adjustments to reconcile net income to
net cash provided by operating activities:
Realized investment gains, net (915) (2,671) (2,209)
Policy charges and fee income (237) (232) (258)
Interest credited to policyholders' account balances 1,811 1,953 2,170
Depreciation and amortization 489 337 271
Loss on disposal of businesses 400 223 -
Change in:
Deferred policy acquisition costs (178) (174) (233)
Future policy benefits and other insurance liabilities 724 597 2,537
Trading account assets (853) (2,540) (1,825)
Income taxes payable 1,074 594 (1,391)
Broker-dealer related receivables/payables (1,898) 1,495 (672)
Securities purchased under agreements to resell (3,692) (1,591) (3,314)
Cash collateral for borrowed securities (1,502) (575) (2,631)
Cash collateral for loaned securities 3,643 (6,985) 5,668
Securities sold but not yet purchased 1,197 2,122 1,633
Securities sold under agreements to repurchase 3,112 9,139 4,844
Other, net (3,356) (5,234) 3,910
-------------- -------------- --------------
Cash flows from (used in) operating activities 632 (2,436) 9,110
-------------- -------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from the sale/maturity of:
Fixed maturities, available for sale 120,875 123,151 123,550
Fixed maturities, held to maturity 4,957 4,466 4,042
Equity securities, available for sale 3,190 2,792 2,572
Mortgage loans on real estate 2,640 4,090 4,299
Investment real estate 507 1,489 1,842
Other long-term investments 1,219 1,848 5,232
Payments for the purchase of:
Fixed maturities, available for sale (120,933) (126,742) (129,854)
Fixed maturities, held to maturity (2,414) (2,244) (2,317)
Equity securities, available for sale (2,779) (2,547) (2,461)
Mortgage loans on real estate (2,595) (3,719) (3,305)
Investment real estate (483) (31) (241)
Other long-term investments (1,354) (1,842) (4,173)
Short-term investments (2,510) 2,145 (2,848)
-------------- -------------- --------------
Cash flows from (used in) investing activities 320 2,856 (3,662)
-------------- -------------- --------------
</TABLE>
See Notes to Consolidated Financial Statements
B4
<PAGE>
The Prudential Insurance Company of America
Consolidated Statements of Cash Flows (continued)
Years Ended December 31, 1999, 1998 and 1997 (In Millions)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998 1997
-------------- -------------- --------------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Policyholders' account deposits 6,901 7,052 5,245
Policyholders' account withdrawals (9,835) (11,332) (9,873)
Net increase in short-term debt 444 2,422 305
Proceeds from the issuance of long-term debt 1,844 1,940 324
Repayments of long-term debt (919) (418) (464)
-------------- -------------- --------------
Cash flows used in financing activities (1,565) (336) (4,463)
-------------- -------------- --------------
NET (DECREASE)/INCREASE IN CASH (613) 84 985
CASH, BEGINNING OF YEAR 1,943 1,859 874
-------------- -------------- --------------
CASH, END OF YEAR $ 1,330 $ 1,943 $ 1,859
============== ============== ==============
SUPPLEMENTAL CASH FLOW INFORMATION:
Income taxes (received)/paid $ (344) $ 163 $ 968
-------------- -------------- --------------
Interest paid $ 824 $ 864 $ 708
-------------- -------------- --------------
</TABLE>
See Notes to Consolidated Financial Statements
B5
<PAGE>
The Prudential Insurance Company of America
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
1. BUSINESS
The Prudential Insurance Company of America and its subsidiaries
(collectively, "Prudential" or "the Company") provide financial services
throughout the United States and in many foreign countries. The Company's
businesses provide a full range of insurance, investment, securities and
other financial products and services to both retail and institutional
customers. Principal products and services provided include life insurance,
property and casualty insurance, annuities, mutual funds, pension and
retirement related investments and administration, asset management, and
securities brokerage.
Demutualization
On February 10, 1998, the Company's Board of Directors authorized management
to take the preliminary steps necessary to allow the Company to demutualize
and become a publicly traded stock company. On July 1, 1998, legislation was
enacted in New Jersey that would permit demutualization to occur and that
specified the process for conversion. Demutualization is a complex process
involving the development of a plan of reorganization, approval of the plan
by the Company's Board of Directors, a public hearing, approval by
two-thirds of the qualified policyholders who vote on the plan, and review
and approval by the New Jersey Department of Banking and Insurance. The
Company's management is in the process of developing a proposed plan of
demutualization, although there can be no assurance as to the terms thereof
or that the Company's Board of Directors will approve such a plan.
The Company's management currently anticipates that the Company's proposed
plan of demutualization will include the establishment of a new holding
company, Prudential, Inc., whose stock will be publicly traded and of which
the Company's stock successor will become a direct or indirect wholly-owned
subsidiary. The consolidated financial statements of the Company prior to
the demutualization will become Prudential, Inc.'s consolidated financial
statements upon demutualization. The Company's management also currently
intends to propose that a corporate reorganization occur concurrently with
the demutualization whereby the stock of various of the Company's
subsidiaries (including Prudential Securities Group, the personal lines
property-casualty insurance companies and the international insurance
companies), the stock of a newly formed subsidiary containing the Company's
asset management operations, and certain prepaid pension expense,
post-employment benefits and certain other assets will be distributed to
Prudential, Inc. If effected, the corporate reorganization can be expected
to materially reduce invested assets, net income and total equity of The
Prudential Insurance Company of America, which would be an insurance
subsidiary of Prudential, Inc. after the corporate reorganization, although
it would have no effect on the consolidated assets, net income or total
equity of Prudential, Inc. As the terms of the foregoing transactions have
not been finalized by the Company or approved by the regulatory authority,
it is not currently possible to quantify their financial effect on the
Company.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements include the accounts of The Prudential
Insurance Company of America, a mutual life insurance company, its
majority-owned subsidiaries, and those partnerships and joint ventures in
which the Company has a controlling financial interest, except in those
instances where the Company cannot exercise control because the minority
owners have substantive participating rights in the operating and capital
B6
<PAGE>
The Prudential Insurance Company of America
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
decisions of the entity. The consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States ("GAAP"). All significant intercompany balances and
transactions have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, in particular deferred policy acquisition
costs ("DAC") and future policy benefits, and disclosure of contingent
assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the period. Actual results
could differ from those estimates.
Investments
Fixed maturities classified as "available for sale" are carried at estimated
fair value. Fixed maturities that the Company has both the positive intent
and ability to hold to maturity are stated at amortized cost and classified
as "held to maturity." The amortized cost of fixed maturities is written
down to estimated fair value when a decline in value is considered to be
other than temporary. Unrealized gains and losses on fixed maturities
"available for sale," net of income tax and the effect on deferred policy
acquisition costs and future policy benefits that would result from the
realization of unrealized gains and losses, are included in a separate
component of equity, "Accumulated other comprehensive income."
Trading account assets and securities sold but not yet purchased are carried
at estimated fair value. Realized and unrealized gains and losses on trading
account assets and securities sold but not yet purchased are included in
"Commissions and other income."
Equity securities, available for sale, are comprised of common and
non-redeemable preferred stock and are carried at estimated fair value. The
associated unrealized gains and losses, net of income tax and the effect on
deferred policy acquisition costs and future policy benefits that would
result from the realization of unrealized gains and losses, are included in
a separate component of equity, "Accumulated other comprehensive
income/(loss)."
Mortgage loans on real estate are stated primarily at unpaid principal
balances, net of unamortized discounts and an allowance for losses. The
allowance for losses includes a loan specific reserve for impaired loans and
a portfolio reserve for incurred but not specifically identified losses.
Impaired loans include those loans for which a probability exists that all
amounts due according to the contractual terms of the loan agreement will
not be collected. Impaired loans are measured at the present value of
expected future cash flows discounted at the loan's effective interest rate,
or at the fair value of the collateral if the loan is collateral dependent.
Interest received on impaired loans, including loans that were previously
modified in a troubled debt restructuring, is either applied against the
principal or reported as revenue, according to management's judgment as to
the collectibility of principal. Management discontinues accruing interest
on impaired loans after the loans are 90 days delinquent as to principal or
interest, or earlier when management has serious doubts about
collectibility. When a loan is recognized as impaired, any accrued but
uncollectible interest is reversed against interest income of the current
period. Generally, a loan is restored to accrual status only after all
delinquent interest and principal are brought current and, in the case of
loans where the payment of interest has been interrupted for a substantial
period, a regular payment performance has been established. The portfolio
reserve for incurred but not specifically identified losses considers the
Company's past loan loss experience, the current credit composition of the
portfolio, historical credit migration, property type diversification,
default and loss severity statistics and other relevant factors.
B7
<PAGE>
The Prudential Insurance Company of America
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Investment real estate held for disposal is carried at the lower of
depreciated cost or fair value less estimated selling costs and is not
further depreciated once classified as such.
Real estate which the Company has the intent to hold for the production of
income is carried at depreciated cost less any write-downs to fair value for
impairment losses and is reviewed for impairment whenever events or
circumstances indicate that the carrying value may not be recoverable. An
impairment loss is recognized when the review indicates that the carrying
value of the investment real estate exceeds the estimated undiscounted
future cash flows (excluding interest charges) from the investment. At that
time, the carrying value of the investment real estate is written down to
fair value.
Charges relating to real estate held for disposal and impairments of real
estate held for investment are included in "Realized investment gains, net."
Depreciation on real estate held for the production of income is computed
using the straight-line method over the estimated lives of the properties,
and is included in "Net investment income."
Policy loans are carried at unpaid principal balances.
Securities purchased under agreements to resell and securities sold under
agreements to repurchase are treated as financing arrangements and are
carried at the amounts at which the securities will be subsequently resold
or reacquired, including accrued interest, as specified in the respective
agreements. The Company's policy is to take possession or control of
securities purchased under agreements to resell. Assets to be repurchased
are the same, or substantially the same, as the assets transferred and the
transferor, through right of substitution, maintains the right and ability
to redeem the collateral on short notice. The market value of securities to
be repurchased or resold is monitored, and additional collateral is
obtained, where appropriate, to protect against credit exposure.
Securities borrowed and securities loaned are treated as financing
arrangements and are recorded at the amount of cash advanced or received.
With respect to securities loaned, the Company obtains collateral in an
amount equal to 102% and 105% of the fair value of the domestic and foreign
securities, respectively. The Company monitors the market value of
securities borrowed and loaned on a daily basis with additional collateral
obtained as necessary. Non-cash collateral received is not reflected in the
consolidated statements of financial position because the debtor typically
has the right to redeem the collateral on short notice. Substantially all of
the Company's securities borrowed contracts are with other brokers and
dealers, commercial banks and institutional clients. Substantially all of
the Company's securities loaned are with large brokerage firms.
Securities repurchase and resale agreements and securities borrowed and
loaned transactions are used to generate net investment income and
facilitate trading activity. These instruments are short-term in nature
(usually 30 days or less) and are collateralized principally by U.S.
Government and mortgage-backed securities. The carrying amounts of these
instruments approximate fair value because of the relatively short period of
time between the origination of the instruments and their expected
realization.
Other long-term investments primarily represent the Company's investments in
joint ventures and partnerships in which the Company does not exercise
control and derivatives held for purposes other than trading. Such joint
venture and partnership interests are generally accounted for using the
equity method of accounting, reduced for other than temporary declines in
value, except in instances in which the Company's interest is so minor that
it exercises virtually no influence over operating and financial policies.
In such instances, the Company applies the cost method of accounting. The
Company's net income from investments in joint ventures and partnerships is
generally included in "Net investment income." However, for certain real
estate joint ventures, Prudential's
B8
<PAGE>
The Prudential Insurance Company of America
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
interest is liquidated by means of one or more transactions that result in
the sale of the underlying invested assets to third parties and the ultimate
distribution of the proceeds to Prudential and other joint venture partners
in exchange for and settlement of the respective joint venture interests.
These transactions are accounted for as disposals of Prudential's joint
venture interests and the resulting gains and losses are included in
"Realized investment gains, net."
Short-term investments, including highly liquid debt instruments purchased
with an original maturity of twelve months or less, are carried at amortized
cost, which approximates fair value.
Realized investment gains, net are computed using the specific
identification method. Costs of fixed maturities and equity securities are
adjusted for impairments considered to be other than temporary. Allowances
for losses on mortgage loans on real estate are netted against asset
categories to which they apply and provisions for losses on investments are
included in "Realized investment gains, net." Decreases in the carrying
value of investment real estate held for disposal are recorded in "Realized
investment gains, net."
Cash
Cash includes cash on hand, amounts due from banks, and money market
instruments.
Deferred Policy Acquisition Costs
The costs that vary with and that are related primarily to the production of
new insurance and annuity business are deferred to the extent such costs are
deemed recoverable from future profits. Such costs include commissions,
costs of policy issuance and underwriting, and variable field office
expenses. Deferred policy acquisition costs are subject to recoverability
testing at the time of policy issue and loss recognition testing at the end
of each accounting period. Deferred policy acquisition costs, for certain
products, are adjusted for the impact of unrealized gains or losses on
investments as if these gains or losses had been realized, with
corresponding credits or charges included in "Accumulated other
comprehensive income."
For participating life insurance, deferred policy acquisition costs are
amortized over the expected life of the contracts (up to 45 years) in
proportion to estimated gross margins based on historical and anticipated
future experience, which is updated periodically. The average rate of
assumed investment yield used in estimating expected gross margins was 7.83%
at December 31, 1999. The effect of changes in estimated gross margins on
unamortized deferred acquisition costs is reflected in "General and
administrative expenses" in the period such estimated gross margins are
revised. Policy acquisition costs related to interest-sensitive products and
certain investment-type products are deferred and amortized over the
expected life of the contracts (periods ranging from 15 to 30 years) in
proportion to estimated gross profits arising principally from investment
results, mortality and expense margins, and surrender charges based on
historical and anticipated future experience, which is updated periodically.
The effect of changes to estimated gross profits on unamortized deferred
acquisition costs is reflected in "General and administrative expenses" in
the period such estimated gross profits are revised. Deferred policy
acquisition costs related to non-participating term insurance are amortized
over the expected life of the contracts in proportion to the premium income.
The Company has offered programs under which policyholders, for a selected
product or group of products, can exchange an existing policy or contract
issued by the Company for another form of policy or contract. These
transactions are known as internal replacements. If policyholders surrender
traditional life insurance policies in exchange for life insurance policies
that do not have fixed and guaranteed terms, the Company immediately charges
to expense the remaining unamortized DAC on the surrendered policies. For
other internal replacement transactions, the unamortized DAC on the
surrendered policies is immediately charged to expense if the terms of the
new policies are not substantially similar to those of the former policies.
If the new policies have terms that
B9
<PAGE>
The Prudential Insurance Company of America
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
are substantially similar to those of the earlier policies, the DAC is
retained with respect to the new policies.
For property and casualty insurance contracts, deferred policy acquisition
costs are amortized over the period in which related premiums are earned.
Future investment income is considered in determining the recoverability of
deferred policy acquisition costs.
For disability insurance, group life insurance, group annuities and
guaranteed investment contracts, acquisition costs are expensed as incurred.
Separate Account Assets and Liabilities
Separate account assets and liabilities are reported at estimated fair value
and represent segregated funds which are invested for certain policyholders,
pension funds and other customers. The assets consist of common stocks,
fixed maturities, real estate related securities, real estate mortgage loans
and short-term investments. The assets of each account are legally
segregated and are generally not subject to claims that arise out of any
other business of the Company. Investment risks associated with market value
changes are borne by the customers, except to the extent of minimum
guarantees made by the Company with respect to certain accounts. The
investment income and gains or losses for separate accounts generally accrue
to the policyholders and are not included in the Consolidated Statements of
Operations. Mortality, policy administration and surrender charges on the
accounts are included in "Policy charges and fee income." Asset management
fees charged to the accounts are included in "Commissions and other income."
Other Assets and Other Liabilities
Other assets consist primarily of prepaid benefit costs, reinsurance
recoverables, certain restricted assets, trade receivables, mortgage
securitization inventory, and property and equipment. Property and equipment
are stated at cost less accumulated depreciation. Depreciation is determined
using the straight-line method over the estimated useful lives of the
related assets which generally range from 3 to 40 years. Other liabilities
consist primarily of trade payables, employee benefit liabilities, and
reserves for sales practices remedies and costs.
Contingencies
Amounts related to contingencies are accrued if it is probable that a
liability has been incurred and an amount is reasonably estimable.
Management evaluates whether there are incremental legal or other costs
directly associated with the ultimate resolution of the matter that are
reasonably estimable and, if so, they are included in the accrual.
Policyholders' Dividends
The amount of the dividends to be paid to policyholders is determined
annually by the Company's Board of Directors. The aggregate amount of
policyholders' dividends is based on the Company's statutory results and
past experience, including investment income, realized investment gains, net
over a number of years, mortality experience and other factors.
Insurance Revenue and Expense Recognition
Premiums from participating insurance policies are recognized when due.
Benefits are recorded as an expense when they are incurred. A liability for
future policy benefits is recorded using the net level premium method.
Premiums from non-participating group annuities with life contingencies are
recognized when due. For single premium immediate annuities and structured
settlements with life contingencies, premiums are recognized when due with
any excess profit deferred and recognized in a constant relationship to the
amount of expected future benefit payments.
B10
<PAGE>
The Prudential Insurance Company of America
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Amounts received as payment for interest-sensitive life contracts, deferred
annuities and participating group annuities are reported as deposits to
"Policyholders' account balances." Revenues from these contracts are
reflected in "Policy charges and fee income" and consist primarily of fees
assessed during the period against the policyholders' account balances for
mortality charges, policy administration charges and surrender charges.
Benefits and expenses for these products include claims in excess of related
account balances, expenses of contract administration, interest credited and
amortization of deferred policy acquisition costs.
For disability insurance, group life insurance, and property and casualty
insurance, premiums are recognized over the period to which the premiums
relate in proportion to the amount of insurance protection provided. Claim
and claim adjustment expenses are recognized when incurred.
Premiums, benefits and expenses are stated net of reinsurance ceded to other
companies. Estimated reinsurance receivables and the cost of reinsurance are
recognized over the life of the reinsured policies using assumptions
consistent with those used to account for the underlying policies.
Foreign Currency Translation Adjustments
Assets and liabilities of foreign operations and subsidiaries reported in
other than U.S. dollars are translated at the exchange rate in effect at the
end of the period. Revenues, benefits and other expenses are translated at
the average rate prevailing during the period. The effects of translating
the Statements of Financial Position of non-U.S. entities with functional
currencies other than the U.S. dollar are included, net of related hedge
gains and losses and income taxes, in "Accumulated other comprehensive
income (loss)," a separate component of equity.
Commissions and Other Income
Commissions and other income principally includes securities and commodities
commission revenues, asset management fees, investment banking revenue and
realized and unrealized gains from trading activities of the Company's
securities business.
Derivative Financial Instruments
Derivatives are financial instruments whose values are derived from interest
rates, foreign exchange rates, financial indices, or the value of securities
or commodities. Derivative financial instruments used by the Company include
swaps, futures, forwards and option contracts and may be exchange-traded or
contracted in the over-the-counter market. The Company uses derivative
financial instruments to seek to reduce market risk from changes in interest
rates or foreign currency exchange rates and to alter interest rate or
currency exposures arising from mismatches between assets and liabilities.
Additionally, derivatives are used in the broker-dealer business and in a
limited-purpose subsidiary for trading purposes.
To qualify as a hedge, derivatives must be designated as hedges for existing
assets, liabilities, firm commitments or anticipated transactions which are
identified and probable to occur, and effective in reducing the market risk
to which the Company is exposed. The effectiveness of the derivatives are
evaluated at the inception of the hedge and throughout the hedge period.
Derivatives held for trading purposes are used by the Company's securities
business to meet the needs of customers by structuring transactions that
allow customers to manage their exposure to interest rates, foreign exchange
rates, indices or prices of securities and commodities. Trading derivative
positions are valued daily, generally by obtaining quoted market prices or
through the use of pricing models. Values are affected by changes in
interest rates, currency exchange rates, credit spreads, market volatility
and liquidity. The Company monitors
B11
<PAGE>
The Prudential Insurance Company of America
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
these exposures through the use of various analytical techniques.
Derivatives held for trading purposes are included at fair value in "Trading
account assets," "Other liabilities" or "Broker-dealer related
receivables/payables" in the Consolidated Statements of Financial Position,
and realized and unrealized changes in fair value are included in
"Commissions and other income" of the Consolidated Statements of Operations
in the periods in which the changes occur. Cash flows from trading
derivatives are reported in the operating activities section of the
Consolidated Statements of Cash Flows.
Derivatives held for purposes other than trading are primarily used to seek
to reduce exposure to interest rate and foreign currency risks associated
with assets held or expected to be purchased or sold, and liabilities
incurred or expected to be incurred. Additionally, other than trading
derivatives are used to change the characteristics of the Company's
asset/liability mix as part of the Company's risk management activities.
See Note 14 for a discussion of the accounting treatment of derivatives that
qualify as hedges. If the Company's use of other than trading derivatives
does not meet the criteria to apply hedge accounting, the derivatives are
recorded at fair value in "Other long-term investments" or "Other
liabilities" in the Consolidated Statements of Financial Position, and
changes in their fair value are included in "Realized investment gains, net"
without considering changes in the hedged assets or liabilities. Cash flows
from other than trading derivatives are reported in the investing activities
section in the Consolidated Statements of Cash Flows.
Income Taxes
The Company and its domestic subsidiaries file a consolidated federal income
tax return. The Internal Revenue Code (the "Code") limits the amount of
non-life insurance losses that may offset life insurance company taxable
income. The Code also imposes an "equity tax" on mutual life insurance
companies which, in effect, imputes an additional tax to the Company based
on a formula that calculates the difference between stock and mutual life
insurance companies' earnings. Income taxes include an estimate for changes
in the total equity tax to be paid for current and prior years. Subsidiaries
operating outside the United States are taxed under applicable foreign
statutes.
Deferred income taxes are recognized, based on enacted rates, when assets
and liabilities have different values for financial statement and tax
reporting purposes. A valuation allowance is recorded to reduce a deferred
tax asset to that portion that is expected to be realized.
Extraordinary Item - Demutualization Expenses, Net of Taxes
The Consolidated Statements of Operations reflect extraordinary charges for
demutualization expenses of $50 million and $11 million, net of taxes of
zero, for the years ended December 31, 1999 and 1998, respectively.
Demutualization expenses consist primarily of the cost of engaging
independent accounting, actuarial, investment banking, legal and other
consultants to advise the Company and the New Jersey Department of Banking
and Insurance and the New York Department of Insurance in the
demutualization process and related matters. Future demutualization expenses
will also include the cost of printing and postage for communications with
policyholders.
New Accounting Pronouncements
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" which requires that companies recognize
all derivatives as either assets or liabilities in the balance sheet and
measure those instruments at fair value. SFAS No. 133 does not apply to most
traditional insurance contracts. However, certain hybrid contracts that
contain features which may affect settlement amounts similarly to
derivatives may require separate accounting for the "host contract" and the
underlying "embedded derivative"
B12
<PAGE>
The Prudential Insurance Company of America
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
provisions. The latter provisions would be accounted for as derivatives as
specified by the statement.
SFAS No. 133 provides, if certain conditions are met, that a derivative may
be specifically designated as (1) a hedge of the exposure to changes in the
fair value of a recognized asset or liability or an unrecognized firm
commitment (fair value hedge), (2) a hedge of the exposure to variable cash
flows of a forecasted transaction (cash flow hedge), or (3) a hedge of the
foreign currency exposure of a net investment in a foreign operation, an
unrecognized firm commitment, an available-for-sale security or a
foreign-currency-denominated forecasted transaction (foreign currency
hedge).
Under SFAS No. 133, the accounting for changes in fair value of a derivative
depends on its intended use and designation. For a fair value hedge, the
gain or loss is recognized in earnings in the period of change together with
the offsetting loss or gain on the hedged item. For a cash flow hedge, the
effective portion of the derivative's gain or loss is initially reported as
a component of other comprehensive income and subsequently reclassified into
earnings when the forecasted transaction affects earnings. For a foreign
currency hedge, the gain or loss is reported in other comprehensive income
as part of the foreign currency translation adjustment. For all other
derivatives not designated as hedging instruments, the gain or loss is
recognized in earnings in the period of change. The Company is required to
adopt this Statement, as amended, as of January 1, 2001 and is currently
assessing the effect of the new standard.
In October 1998, the AICPA issued Statement of Position 98-7, "Deposit
Accounting: Accounting for Insurance and Reinsurance Contracts That Do Not
Transfer Insurance Risk" ("SOP 98-7"). This statement provides guidance on
how to account for insurance and reinsurance contracts that do not transfer
insurance risk. SOP 98-7 is effective for fiscal years beginning after June
15, 1999. The adoption of this statement is not expected to have a material
effect on the Company's financial position or results of operations.
Reclassifications
Certain amounts in prior years have been reclassified to conform to the
current year presentation.
3. DISCONTINUED OPERATIONS
In December 1998, the Company entered into a definitive agreement to sell
its healthcare business to Aetna, Inc. ("Aetna"). The sale was completed on
August 6, 1999. Included in this transaction were the Company's managed
medical care, point of service, preferred provider organization and
indemnity health lines, dental business, as well as the Company's
Administrative Services Only ("ASO") business. The healthcare business is
recorded as a discontinued operation in the accompanying consolidated
financial statements, with a measurement date of December 31, 1998
Proceeds from the sale were $500 million of cash, $500 million of Aetna
three-year senior notes and stock appreciation rights covering one million
shares of Aetna common stock, valued at approximately $30 million at the
date of closing, with a term of five years and a reference price of $81.81
per Aetna common share. The sale resulted in a loss of $623 million, net of
tax. Loss from healthcare operations for 1998 includes results through
December 31, 1998 (the measurement date). Amounts within the footnotes have
been adjusted, where noted, to eliminate the impact of discontinued
operations and to be consistent with the presentation in the Consolidated
Statements of Operations.
The 1998 loss on disposal of $223 million, net of taxes, included
anticipated operating losses to be incurred by the healthcare business
subsequent to December 31, 1998 (the measurement date) through the expected
date of
B13
<PAGE>
The Prudential Insurance Company of America
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
3. DISCONTINUED OPERATIONS (continued)
the sale, as well as estimates of other costs the Company would incur in
connection with the disposition of the healthcare business. These include
costs attributable to facilities closure and systems terminations, severance
and termination benefits, payments to Aetna related to the ASO business and
estimated payments in connection with a medical loss ratio agreement
covering the fully insured medical and dental business (the "MLR
Agreement"). The MLR Agreement provides for payments either to or from Aetna
in the event that medical loss ratios (i.e., incurred medical expense
divided by earned premiums) for covered businesses are either less favorable
or more favorable than levels specified in the MLR Agreement for the years
1999 and 2000. The loss on disposal also included the estimated positive
impact of net curtailment gains from expected modifications of certain
pension and other postretirement benefit plans in which employees of the
healthcare business participate. (See Note 9).
In 1999 the Company recognized an additional loss on disposal of its
healthcare business of $400 million, after related tax benefits. The
additional loss resulted primarily from higher than anticipated healthcare
operating losses during the 1999 period through the August 6 closing date.
The higher losses resulted principally from adverse claims experience and
the impact of this experience on the evaluation of the Company's obligation
under the MLR Agreement. The pretax operating loss from the healthcare
business from January 1, 1999 through August 6, 1999 was $370 million, which
exceeded the original estimate of $160 million, recorded within the "Loss on
disposal of healthcare operations" in 1998. In addition to the obligations
noted above, the Company has retained certain liabilities pertaining to the
healthcare business, including all liabilities associated with litigation
which existed at August 6, 1999 or commences within two years of that date
with respect to claims that were incurred prior to August 6, 1999.
Management's best estimate of these costs is included in the loss on
disposal. It is possible that additional adjustments to estimates may be
necessary which might be material to future results of operations of a
particular quarterly or annual period.
Upon the closing of the sale of the healthcare business, the Company entered
into a coinsurance agreement with Aetna. The agreement is 100% indemnity
reinsurance on a coinsurance basis for all of the Company's insured medical
and dental business in-force upon the completion of the sale of the business
on August 6, 1999. The agreement requires the Company to issue additional
policies for new customers in response to proposals made to brokers or
customers within six months after the closing date and to renew insurance
policies until two years after the closing date. All such additional new and
renewal policies are 100% coinsured by Aetna, when issued. The purpose of
the agreement is to provide for the uninterrupted operation and growth,
including renewals of existing policies and issuance of new policies, of the
healthcare business that Aetna acquired from Prudential. The operation of
the business and the attendant risks, except for the existence of the MLR
Agreement as discussed above, were assumed entirely by Aetna. Consequently,
the following amounts pertaining to the agreement had no effect on the
Company's results of operations. The Company ceded premiums and benefits of
$896 million and $757 million, respectively, for the period from August 6,
1999 through December 31, 1999. Reinsurance recoverable under this
agreement, included in other assets, was $500 million at December 31, 1999.
The following table presents the results and the loss on the disposal of the
Company's healthcare business, determined as of the measurement date and
subsequently adjusted, which are included in "Discontinued Operations" in
the Consolidated Statements of Operations. Amounts for 1997 include revenues
and expenses relating to a contract with the American Association of Retired
Persons for healthcare and similar coverages which was terminated effective
December 31, 1997.
B14
<PAGE>
The Prudential Insurance Company of America
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
3. DISCONTINUED OPERATIONS (continued)
<TABLE>
<CAPTION>
1999 1998 1997
--------------- --------------- --------------
(In Millions)
<S> <C> <C> <C>
Revenues $ - $ 7,461 $10,305
Policyholder benefits - (6,064) (8,484)
General and administrative expenses - (1,822) (2,364)
--------------- --------------- --------------
Loss before income taxes - (425) (543)
Income tax benefit - 127 190
--------------- --------------- --------------
Loss from operations - (298) (353)
Loss on disposal, net of tax benefits of $240 in 1999 and $131 in 1998 (400) (223) -
--------------- --------------- --------------
Loss from discontinued operations, net of taxes $ (400) $ (521) $ (353)
=============== =============== ==============
</TABLE>
B15
<PAGE>
The Prudential Insurance Company of America
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
4. INVESTMENTS
Fixed Maturities and Equity Securities
The following tables provide additional information relating to fixed
maturities and equity securities (excluding trading account assets) as of
December 31:
<TABLE>
<CAPTION>
1999
--------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------ ------------ ------------- ------------
(In Millions)
<S> <C> <C> <C> <C>
Fixed maturities available for sale
U.S. Treasury securities and obligations of
U.S. government corporations and agencies $ 5,594 $ 36 $ 236 $ 5,394
Obligations of U.S. states and
their political subdivisions 2,437 41 118 2,360
Foreign government bonds 4,590 140 90 4,640
Corporate securities 57,503 580 2,431 55,652
Mortgage-backed securities 6,566 96 135 6,527
Other 125 - 1 124
--------------------------------------------------------------
Total fixed maturities available for sale $ 76,815 $ 893 $ 3,011 $ 74,697
==============================================================
Equity securities available for sale $ 2,531 $ 829 $ 96 $ 3,264
==============================================================
</TABLE>
<TABLE>
<CAPTION>
1999
--------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------ ------------ ------------- ------------
(In Millions)
<S> <C> <C> <C> <C>
Fixed maturities held to maturity
U.S. Treasury securities and obligations of
U.S. government corporations and agencies $ 5 $ - $ - $ 5
Obligations of U.S. states and
their political subdivisions 81 1 3 79
Foreign government bonds 214 11 1 224
Corporate securities 13,883 280 408 13,755
Mortgage-backed securities 1 - - 1
Other 53 - 5 48
--------------------------------------------------------------
Total fixed maturities held to maturity $ 14,237 $ 292 $ 417 $ 14,112
==============================================================
</TABLE>
B16
<PAGE>
The Prudential Insurance Company of America
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
4. INVESTMENTS (continued)
<TABLE>
<CAPTION>
1998
--------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------ ------------ ------------- ------------
(In Millions)
<S> <C> <C> <C> <C>
Fixed maturities available for sale
U.S. Treasury securities and obligations of
U.S. government corporations and agencies $ 5,761 $ 580 $ 9 $ 6,332
Obligations of U.S. states and
their political subdivisions 2,672 204 1 2,875
Foreign government bonds 3,486 258 59 3,685
Corporate securities 57,043 2,540 546 59,037
Mortgage-backed securities 7,935 208 14 8,129
Other 100 - - 100
--------------------------------------------------------------
Total fixed maturities available for sale $ 76,997 $ 3,790 $ 629 $ 80,158
==============================================================
Equity securities available for sale $ 2,583 $ 472 $ 296 $ 2,759
==============================================================
</TABLE>
<TABLE>
<CAPTION>
1998
--------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------ ------------ ------------- ------------
(In Millions)
<S> <C> <C> <C> <C>
Fixed maturities held to maturity
U.S. Treasury securities and obligations of
U.S. government corporations and agencies $ 5 $ - $ - $ 5
Obligations of U.S. states and
their political subdivisions 62 2 1 63
Foreign government bonds 216 8 1 223
Corporate securities 16,514 1,092 48 17,558
Mortgage-backed securities 1 - - 1
Other 50 6 - 56
--------------------------------------------------------------
Total fixed maturities held to maturity $ 16,848 $ 1,108 $ 50 $ 17,906
==============================================================
</TABLE>
B17
<PAGE>
The Prudential Insurance Company of America
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
4. INVESTMENTS (continued)
The amortized cost and estimated fair value of fixed maturities by
contractual maturities at December 31, 1999, is shown below:
<TABLE>
<CAPTION>
Available for Sale Held to Maturity
---------------------------------- ----------------------------------
Estimated Estimated
Amortized Fair Amortized Fair
Cost Value Cost Value
--------------- -------------- --------------- --------------
(In Millions) (In Millions)
<S> <C> <C> <C> <C>
Due in one year or less $ 3,171 $ 3,166 $ 671 $ 671
Due after one year through five years 18,132 17,911 4,063 4,078
Due after five years through ten years 19,249 18,725 5,449 5,345
Due after ten years 29,697 28,368 4,053 4,017
Mortgage-backed securities 6,566 6,527 1 1
--------------- -------------- --------------- --------------
Total $ 76,815 $ 74,697 $ 14,237 $ 14,112
=============== ============== =============== ==============
</TABLE>
Actual maturities may differ from contractual maturities because issuers have
the right to call or prepay obligations.
Proceeds from the repayment of held to maturity fixed maturities during 1999,
1998 and 1997 were $4,957 million, $4,466 million, and $4,042 million,
respectively. Gross gains of $73 million, $135 million, and $62 million, and
gross losses of $0 million, $2 million, and $1 million were realized on
prepayment of held to maturity fixed maturities during 1999, 1998 and 1997,
respectively.
Proceeds from the sale of available for sale fixed maturities during 1999,
1998 and 1997 were $117,547 million, $119,096 million and $120,604 million,
respectively. Proceeds from the maturity of available for sale fixed
maturities during 1999, 1998 and 1997 were $3,328 million, $4,055 million and
$2,946 million, respectively. Gross gains of $884 million, $1,765 million and
$1,310 million, and gross losses of $1,231 million, $443 million and $639
million were realized on sales and prepayments of available for sale fixed
maturities during 1999, 1998 and 1997, respectively.
Writedowns for impairments which were deemed to be other than temporary for
fixed maturities were $266 million, $96 million and $13 million and for
equity securities were $205 million, $95 million and $31 million for the
years 1999, 1998 and 1997, respectively.
During the years ended December 31, 1999 and 1998, certain securities
classified as held to maturity were either sold or transferred to the
available for sale portfolio. These actions were taken as a result of a
significant deterioration in creditworthiness. The aggregate amortized cost
of the securities sold or transferred was $230 million in 1999 and $73
million in 1998. Gross unrealized investment losses of $5 million in 1999 and
$.4 million in 1998 were recorded in "Accumulated other comprehensive income"
at the time of the transfer. Prior to transfer, impairments related to these
securities, if any, were included in "Realized investment gains, net."
Realized gains on securities sold were $3 million in 1999.
B18
<PAGE>
The Prudential Insurance Company of America
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
4. INVESTMENTS (continued)
Mortgage Loans on Real Estate
The Company's mortgage loans were collateralized by the following property
types at December 31:
<TABLE>
<CAPTION>
Amount Percentage Amount Percentage
(In Millions) of Total (In Millions) of Total
1999 1998
---------------------------------- ---------------------------------
<S> <C> <C> <C> <C>
Office Buildings $ 3,960 24.1% $ 4,156 25.3%
Retail stores 2,627 15.9% 2,866 17.4%
Residential properties 662 4.0% 716 4.3%
Apartment complexes 4,508 27.3% 4,179 25.4%
Industrial buildings 2,161 13.1% 1,971 12.0%
Agricultural properties 1,959 11.9% 1,936 11.8%
Other 612 3.7% 619 3.8%
---------------- ---------------- --------------- ---------------
Subtotal 16,489 100% 16,443 100%
================ ===============
Allowance for losses (221) (427)
---------------- ---------------
Net carrying value $ 16,268 $ 16,016
================ ===============
</TABLE>
The mortgage loans are geographically dispersed throughout the United States
and Canada with the largest concentrations in California (23.4%) and New York
(10.1%) at December 31, 1999. Mortgage loans receivable at December 31, 1998
include $87 million from non-consolidated joint ventures.
Activity in the allowance for losses for all mortgage loans, for the years
ended December 31, is summarized as follows:
<TABLE>
<CAPTION>
1999 1998 1997
----------------- ----------------- -----------------
(In Millions)
<S> <C> <C> <C>
Allowance for losses, beginning of year $ 427 $ 450 $ 515
Release of allowance for losses (201) - (41)
Charge-offs, net of recoveries (5) (23) (24)
----------------- ----------------- -----------------
Allowance for losses, end of year $ 221 $ 427 $ 450
================= ================= =================
</TABLE>
The $201 million reduction of the mortgage loan allowance for losses in 1999
is primarily attributable to the improved economic climate, changes in the
nature and mix of borrowers and underlying collateral and a decrease in
impaired loans.
Impaired mortgage loans identified in management's specific review of
probable loan losses and the related allowance for losses at December 31, are
as follows:
<TABLE>
<CAPTION>
1999 1998
----------------- -----------------
(In Millions)
<S> <C> <C>
Impaired mortgage loans with allowance for losses $ 411 $ 501
Impaired mortgage loans with no allowance for losses 283 572
Allowance for losses, end of year (24) (45)
----------------- -----------------
Net carrying value of impaired mortgage loans $ 670 $ 1,028
================= =================
</TABLE>
B19
<PAGE>
The Prudential Insurance Company of America
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
4. INVESTMENTS (continued)
Impaired mortgage loans with no allowance for losses are loans in which the
fair value of the collateral or the net present value of the loans' expected
future cash flows equals or exceeds the recorded investment. The average
recorded investment in impaired loans before allowance for losses was $884
million, $1,329 million and $2,102 million during 1999, 1998 and 1997,
respectively. Net investment income recognized on these loans totaled $55
million, $94 million and $140 million for the years ended December 31, 1999,
1998 and 1997, respectively.
Investment Real Estate
"Investment real estate" of $770 million and $675 million at December 31,
1999 and 1998, respectively, is directly owned. Of the Company's real estate,
$293 million and $675 million consists of commercial and agricultural assets
held for disposal at December 31, 1999 and 1998, respectively. Impairment
losses amounted to $3 million, $8 million and $40 million for the years ended
December 31, 1999, 1998 and 1997, respectively, and are included in "Realized
investment gains, net."
Restricted Assets and Special Deposits
Assets of $4,463 million and $2,803 million at December 31, 1999 and 1998,
respectively, were on deposit with governmental authorities or trustees as
required by certain insurance laws. Additionally, assets valued at $2,325
million and $3,898 million at December 31, 1999 and 1998, respectively, were
held in voluntary trusts. Of these amounts, $1,553 million and $3,131 million
at December 31, 1999 and 1998, respectively, related to the multi-state
policyholder settlement described in Note 15. The remainder relates to trusts
established to fund guaranteed dividends to certain policyholders and to fund
certain employee benefits. Assets valued at $128 million and $173 million at
December 31, 1999 and 1998, respectively, were pledged as collateral for bank
loans and other financing agreements. Restricted cash and securities of
$4,082 million and $2,366 million at December 31, 1999 and 1998,
respectively, were included in the Consolidated Statements of Financial
Position in "Other assets." The restricted cash represents funds deposited by
clients and funds accruing to clients as a result of trades or contracts.
Other Long-Term Investments
The Company's "Other long-term investments" of $4,087 million and $3,474
million as of December 31, 1999 and 1998, respectively, are comprised of
$1,212 million and $1,133 million in real estate related interests and $2,875
million and $2,341 million of non-real estate related interests. Net
investment income from other long-term investments was $365 million, $311
million and $443 million for 1999, 1998 and 1997, respectively.
B20
<PAGE>
The Prudential Insurance Company of America
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
4. INVESTMENTS (continued)
Investment Income and Investment Gains and Losses
Net investment income arose from the following sources for the years ended
December 31:
<TABLE>
<CAPTION>
1999 1998 1997
------------- ------------ -------------
(In Millions)
<S> <C> <C> <C>
Fixed maturities - available for sale $ 5,450 $ 5,366 $ 5,074
Fixed maturities - held to maturity 1,217 1,406 1,622
Trading account assets 622 677 504
Equity securities - available for sale 63 54 52
Mortgage loans on real estate 1,401 1,525 1,555
Investment real estate 101 230 565
Policy loans 448 410 396
Securities purchased under agreements to resell 25 18 15
Broker-dealer related receivables 976 836 706
Short-term investments 642 725 697
Other investment income 354 430 535
------------- ------------ -------------
Gross investment income 11,299 11,677 11,721
Less investment expenses (1,824) (2,035) (2,027)
------------- ------------ -------------
Subtotal 9,475 9,642 9,694
Less amount relating to discontinued operations (51) (107) (212)
------------- ------------ -------------
Net investment income $ 9,424 $ 9,535 $ 9,482
============= ============ =============
</TABLE>
B21
<PAGE>
The Prudential Insurance Company of America
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
4. INVESTMENTS (continued)
Realized investment gains, net, for the years ended December 31, were from
the following sources:
<TABLE>
<CAPTION>
1999 1998 1997
--------------- --------------- ---------------
(In Millions)
<S> <C> <C> <C>
Fixed maturities $ (557) $ 1,381 $ 684
Equity securities - available for sale 223 427 363
Mortgage loans on real estate 209 22 68
Investment real estate 106 642 700
Joint ventures and limited partnerships 656 454 289
Derivatives 305 (263) 108
Other (27) 8 (3)
--------------- --------------- ---------------
Subtotal 915 2,671 2,209
Less amount related to discontinued operations 9 (30) (41)
--------------- --------------- ---------------
Realized investment gains, net $ 924 $ 2,641 $ 2,168
=============== =============== ===============
</TABLE>
The "joint ventures and limited partnerships" category includes net realized
investment gains relating to real estate joint ventures' and partnerships'
sales of their underlying invested assets, as described more fully in Note
2, "Other long-term investments," amounting to $114 million, $177 million
and $56 million in 1999, 1998 and 1997, respectively.
Based on the carrying value, assets categorized as "non-income producing"
for the year ended December 31, 1999 included in fixed maturities available
for sale, mortgage loans on real estate and other long-term investments
totaled $15 million, $25 million and $1 million, respectively.
Net Unrealized Investment Gains/Losses
Net unrealized investment gains on securities available for sale and certain
other long-term investments are included in the Consolidated Statements of
Financial Position as a component of "Accumulated other comprehensive
income." Changes in these amounts include reclassification adjustments to
avoid including in "Other comprehensive income/(loss)" those items that are
included as part of "Net income" for a period that also had been part of
"Other comprehensive income/(loss)" in earlier periods. The amounts for the
years ended December 31, are as follows:
B22
<PAGE>
The Prudential Insurance Company of America
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
4. INVESTMENTS (continued)
<TABLE>
<CAPTION>
Impact of unrealized investment gains (losses) on:
---------------------------------------------------------
Deferred
Unrealized policy Future Deferred
gains(losses) on acquisition policy income tax
investments costs benefits (liability)benefit
------------------ --------------- ---------------- ----------------------
(In Millions)
<S> <C> <C> <C> <C>
Balance, December 31, 1996 $ 2,527 $ (193) $ (573) $ (625)
Net investment gains (losses) on
investments arising during the
period 2,667 - - (961)
Reclassification adjustment for
gains included in net income (986) - - 355
Impact of net unrealized investment - (154) - 55
gains on deferred policy acquisition
costs
Impact of net unrealized investment - - (563) 203
gains on future policy benefits
------------------ --------------- ---------------- ----------------------
Balance, December 31, 1997 4,208 (347) (1,136) (973)
Net investment gains (losses) on
investments arising during the
period 804 - - (282)
Reclassification adjustment for
gains included in net income (1,675) - - 588
Impact of net unrealized investment
gains on deferred policy acquisition
costs - 98 - (36)
Impact of net unrealized investment
gains on future policy benefits - - 38 (15)
------------------ --------------- ---------------- ----------------------
Balance, December 31, 1998 3,337 (249) (1,098) (718)
Net investment gains (losses) on
investments arising during the
period (5,089) - - 1,845
Reclassification adjustment for
gains included in net income 404 - - (146)
Impact of net unrealized investment
losses on deferred policy acquisition - 566 - (213)
costs
Impact of net unrealized investment
losses on future policy benefits - - 1,095 (394)
------------------ --------------- ---------------- ----------------------
Balance, December 31, 1999 $ (1,348) $ 317 $ (3) $ 374
================== =============== ================ ======================
<CAPTION>
Accumulated
other
comprehensive
income/(loss)
related to net
unrealized
investment
gains (losses)
------------------
<S> <C>
Balance, December 31, 1996 $ 1,136
Net investment gains (losses) on
investments arising during the
period 1,706
Reclassification adjustment for
gains included in net income (631)
Impact of net unrealized investment (99)
gains on deferred policy acquisition
costs
Impact of net unrealized investment (360)
gains on future policy benefits
------------------
Balance, December 31, 1997 1,752
Net investment gains (losses) on
investments arising during the
period 522
Reclassification adjustment for
gains included in net income (1,087)
Impact of net unrealized investment
gains on deferred policy acquisition
costs 62
Impact of net unrealized investment
gains on future policy benefits 23
------------------
Balance, December 31, 1998 1,272
Net investment gains (losses) on
investments arising during the
period (3,244)
Reclassification adjustment for
gains included in net income 258
Impact of net unrealized investment
losses on deferred policy acquisition 353
costs
Impact of net unrealized investment
losses on future policy benefits 701
------------------
Balance, December 31, 1999 $ (660)
==================
</TABLE>
B23
<PAGE>
The Prudential Insurance Company of America
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
4. INVESTMENTS (continued)
The table below presents unrealized gains (losses) on investments by asset
class:
<TABLE>
<CAPTION>
As of December 31,
1999 1998 1997
------------- --------------- -------------
(In Millions)
<S> <C> <C> <C>
Fixed maturities $ (2,118) $ 3,161 $ 3,774
Equity securities 733 176 434
Other long-term investments 37 - -
------------- --------------- -------------
Unrealized gains (losses) on investments $ (1,348) $ 3,337 $ 4,208
============= =============== =============
</TABLE>
5. DEFERRED POLICY ACQUISITION COSTS
The balances of and changes in deferred policy acquisition costs as of and
for the years ended December 31, are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
--------- ---------- ----------
(In Millions)
<S> <C> <C> <C>
Balance, beginning of year $ 6,462 $ 6,083 $ 6,095
Capitalization of commissions, sales and issue
expenses 1,333 1,313 1,409
Amortization (1,155) (1,139) (1,176)
Change in unrealized investment gains 566 98 (154)
Foreign currency translation 118 107 (91)
--------- ---------- ----------
Balance, end of year $ 7,324 $ 6,462 $ 6,083
========= ========== ==========
</TABLE>
6. POLICYHOLDERS' LIABILITIES
Future policy benefits at December 31, are as follows:
1999 1998
-------- --------
(In Millions)
Life insurance $ 51,667 $ 48,981
Annuities 14,138 15,360
Other contract liabilities 2,264 2,718
-------- --------
Total future policy benefits $ 68,069 $ 67,059
======== ========
The majority of the Company's participating insurance is in its domestic
individual life insurance business. Participating insurance represented
approximately 90% of domestic individual life insurance inforce and
approximately 90% of domestic individual life insurance premiums for 1999,
1998 and 1997. Revenues and expenses of this business come directly from
the underlying policies and supporting assets.
B24
<PAGE>
The Prudential Insurance Company of America
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
6. POLICYHOLDERS' LIABILITIES (continued)
Life insurance liabilities include reserves for death and endowment policy
benefits, terminal dividends, premium deficiency reserves and certain
health benefits. Annuity liabilities include reserves for immediate
annuities and life contingent group annuities. Other contract liabilities
primarily consist of unearned premium and benefit reserves for group health
products.
The following table highlights the key assumptions generally utilized in
calculating these reserves:
<TABLE>
<CAPTION>
Product Mortality Interest Rate Estimation Method
- ---------------------------- --------------------------- -------------------------- ---------------------------
<S> <C> <C> <C>
Life insurance Generally, rates 2.5% to 11.5% Net level premium
guaranteed in calculating based on non-forfeiture
cash surrender values interest rate
Individual annuities 1971 and 1983 Individual 3.5% to 13.4% Present value of
Annuity Mortality expected future payments
Tables with certain based on historical
modifications experience
Group annuities 1950 and 1971 Group 3.8% to 17.3% Present value of
Annuity Mortality expected future payments
Tables with certain based on historical
modifications experience
Other contract liabilities 2.5% to 11.5% Present value of
expected future payments
based on historical
experience
</TABLE>
Premium deficiency reserves are established, if necessary, when the
liability for future policy benefits plus the present value of expected
future gross premiums are determined to be insufficient to provide for
expected future policy benefits and expenses and to recover any unamortized
acquisition costs. Premium deficiency reserves have been recorded for the
group single premium annuity business, which consists of limited-payment,
long duration, traditional and non-participating annuities, and for certain
individual health policies. Liabilities of $1,930 million and $1,844
million is included in "Future policy benefits" with respect to these
deficiencies at December 31, 1999 and 1998, respectively.
Policyholders' account balances at December 31, are as follows:
<TABLE>
<CAPTION>
1999 1998
------------ ------------
(In Millions)
<S> <C> <C>
Individual annuities $ 4,612 $ 4,997
Group annuities 2,176 2,362
Guaranteed investment contracts and guaranteed interest accounts 13,429 14,408
Interest-sensitive life contracts 3,607 3,566
Dividend accumulations and other 7,754 7,765
------------ ------------
Policyholders' account balances $ 31,578 $ 33,098
============ ============
</TABLE>
B25
<PAGE>
The Prudential Insurance Company of America
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
6. POLICYHOLDERS' LIABILITIES (continued)
Policyholders' account balances for interest-sensitive life and
investment-type contracts represent an accumulation of account deposits
plus credited interest less withdrawals, expenses and mortality charges.
Certain contract provisions that determine the policyholder account
balances are as follows:
<TABLE>
<CAPTION>
Withdrawal/
Product Interest Rate Surrender Charges
- ---------------------------------------------- -------------------------- -----------------------------------
<S> <C> <C>
Individual annuities 3.0% to 11.3% 0% to 8% for up to 8 years
Group annuities 2.0% to 13.9% Contractually limited or subject
to market value adjustment
Guaranteed investment contracts and 3.9% to 15.4% Generally, subject to market value
Guaranteed interest accounts withdrawal provisions for any funds
withdrawn other than for benefit
responsive and contractual payments
Interest-sensitive life contracts 2.0% to 6.0% Various up to 10 years
Dividend accumulations and other 3.0% to 7.0% Withdrawal or surrender
contractually limited or subject
to market value adjustment
</TABLE>
B26
<PAGE>
The Prudential Insurance Company of America
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
6. POLICYHOLDERS' LIABILITIES (continued)
Unpaid claims and claim adjustment expenses. The following table provides a
reconciliation of the activity in the liability for unpaid claims and claim
adjustment expenses for property and casualty insurance, which includes the
Company's personal lines automobile and homeowner's business, as well as the
Company's wind-down commercial lines business, primarily environmental and
asbestos-related claims, and accident and health insurance at December 31:
<TABLE>
<CAPTION>
1999 1998
-------------------------------- -------------------------------
Accident Property Accident Property
and Health and Casualty and Health and Casualty
-------------- --------------- -------------- --------------
(In Millions)
<S> <C> <C> <C> <C>
Balance at January 1 $ 1,090 $ 2,716 $ 1,857 $ 2,956
Less reinsurance recoverables, net 52 533 810 535
-------------- --------------- -------------- --------------
Net balance at January 1 1,038 2,183 1,047 2,421
-------------- --------------- -------------- --------------
Incurred related to:
Current year 4,110 1,249 6,132 1,314
Prior years (72) (54) (15) (154)
-------------- --------------- -------------- --------------
Total incurred 4,038 1,195 6,117 1,160
-------------- --------------- -------------- --------------
Paid related to:
Current year 3,397 700 5,287 717
Prior years 672 720 839 681
-------------- --------------- -------------- --------------
Total paid 4,069 1,420 6,126 1,398
-------------- --------------- -------------- --------------
Disposal of healthcare business (See Note 3) (965) - - -
-------------- --------------- -------------- --------------
Net balance at December 31 42 1,958 1,038 2,183
Plus reinsurance recoverables, net 378 451 52 533
-------------- --------------- -------------- --------------
Balance at December 31 $ 420 $ 2,409 $ 1,090 $ 2,716
============== =============== ============== ==============
<CAPTION>
1997
--------------------------------
Accident Property
and Health and Casualty
-------------- ---------------
(In Millions)
<S> <C> <C>
Balance at January 1 $ 1,932 $ 3,076
Less reinsurance recoverables, net 10 553
-------------- ---------------
Net balance at January 1 1,922 2,523
-------------- ---------------
Incurred related to:
Current year 8,379 1,484
Prior years 63 (50)
-------------- ---------------
Total incurred 8,442 1,434
-------------- ---------------
Paid related to:
Current year 6,673 739
Prior years 1,842 797
-------------- ---------------
Total paid 8,515 1,536
-------------- ---------------
Disposal of healthcare business (See Note 3) - -
-------------- ---------------
Net balance at December 31 1,849 2,421
Plus reinsurance recoverables, net 8 535
-------------- ---------------
Balance at December 31 $ 1,857 $ 2,956
============== ===============
</TABLE>
The Accident and Health reinsurance recoverable balance at December 31,
1999 includes $371 million attributable to the Company's discontinued
healthcare business. The Accident and Health balance at December 31, 1998
and 1997 includes amounts attributable to the Company's discontinued
healthcare business of $1,026 million and $1,693 million, respectively.
The unpaid claims and claim adjustment expenses presented above include
estimates for liabilities associated with reported claims and for incurred
but not reported claims based, in part, on the Company's experience.
Changes in the estimated cost to settle unpaid claims are charged or
credited to the Consolidated Statement of Operations periodically as the
estimates are revised. Accident and Health unpaid claims liabilities are
discounted using interest rates ranging from 3.5% to 7.5%.
In 1999, 1998 and 1997, the amounts incurred for claims and claim
adjustment expenses for property and casualty related to prior years were
primarily driven by lower than anticipated losses for the auto line of
business.
The amounts incurred for claims and claim adjustment expense for Accident
and Health related to prior years are primarily due to factors including
changes in claim cost trends and an accelerated decline in the indemnity
health business.
B27
<PAGE>
The Prudential Insurance Company of America
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
7. REINSURANCE
The Company participates in reinsurance in order to provide additional
capacity for future growth and limit the maximum net loss potential arising
from large risks. Life reinsurance is accomplished through various plans of
reinsurance, primarily yearly renewable term and coinsurance.
Property-casualty reinsurance is placed on a pro-rata basis and excess of
loss, including stop loss, basis. Reinsurance ceded arrangements do not
discharge the Company as the primary insurer. Ceded balances would
represent a liability of the Company in the event the reinsurers were
unable to meet their obligations to the Company under the terms of the
reinsurance agreements. Reinsurance premiums, commissions, expense
reimbursements, benefits and reserves related to reinsured long-duration
contracts are accounted for over the life of the underlying reinsured
contracts using assumptions consistent with those used to account for the
underlying contracts. The cost of reinsurance related to short-duration
contracts is accounted for over the reinsurance contract period. Amounts
recoverable from reinsurers, for both short and long-duration reinsurance
arrangements, are estimated in a manner consistent with the claim
liabilities and policy benefits associated with the reinsured policies.
The tables presented below exclude amounts pertaining to the Company's
discontinued healthcare operations. See Note 3 for a discussion of the
Company's coinsurance agreement with Aetna.
Reinsurance amounts included in the Consolidated Statements of Operations
for the years ended December 31, were as follows:
1999 1998 1997
--------- --------- ---------
(In Millions)
Direct premiums $ 10,068 $ 9,637 $ 9,667
Reinsurance assumed 66 65 64
Reinsurance ceded (659) (678) (716)
--------- --------- ---------
Premiums $ 9,475 $ 9,024 $ 9,015
========= ========= =========
Policyholders' benefits ceded $ 483 $ 510 $ 530
========= ========= =========
Reinsurance recoverables, included in "Other assets" in the Company's
Consolidated Statements of Financial Position at December 31, were as
follows:
1999 1998
---------- ----------
(In Millions)
Life insurance $ 576 $ 620
Property-casualty 473 564
Other reinsurance 90 92
---------- ----------
$ 1,139 $ 1,276
========== ==========
Two major reinsurance companies account for approximately 58% of the
reinsurance recoverable at December 31, 1999. The Company periodically
reviews the financial condition of its reinsurers and amounts recoverable
therefrom in order to minimize its exposure to loss from reinsurer
insolvencies, recording an allowance when necessary for uncollectible
reinsurance.
B28
<PAGE>
The Prudential Insurance Company of America
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
8. SHORT-TERM AND LONG-TERM DEBT
Debt consists of the following at December 31:
Short-term debt
1999 1998
----------- ----------
(In Millions)
Commercial paper (b) $ 7,506 $ 7,057
Notes payable 2,598 2,164
Current portion of long-term debt 754 861
----------- ----------
Total short-term debt $ 10,858 $ 10,082
=========== ==========
The weighted average interest rate on outstanding short-term debt was
approximately 5.2% and 5.4% at December 31, 1999 and 1998, respectively.
Long-term debt
<TABLE>
<CAPTION>
Description Maturity Dates Rate 1999 1998
- ----------- ----------------------- ------------------- ------------ ------------
(In Millions)
<S> <C> <C> <C> <C>
Fixed rate notes 2000 - 2023 .50% - 12.28% $ 1,161 $ 1,480
Floating rate notes ("FRN") 2000 - 2003 (a) 865 767
Surplus notes 2003 - 2025 6.875% - 8.30% 987 987
Commercial paper backed by long-term
credit agreement (b) 2,500 1,500
------------ ------------
Total long-term debt $ 5,513 $ 4,734
============ ============
</TABLE>
(a) Floating interest rates are generally based on such rates as LIBOR, Constant
Maturity Treasury, or the Federal Funds Rate. Interest on the FRN's ranged
from 6.17% to 14.00% for 1999 and 1998, respectively. Included in the
floating rate notes are equity indexed instruments. The Company issued an
S&P 500 index linked note of $29 million in September of 1997. The interest
rate on the note is based on the appreciation of the S&P 500 index, with a
contractual cap of 14%. At December 31, 1999 and 1998, the rate was 14%.
Excluding this note, floating interest rates ranged from 6.17% to 9.54% for
1999 and 4.04% to 7.9% for 1998.
(b) At December 31, 1999 and 1998, the Company classified $2.5 billion and $1.5
billion, respectively, of its commercial paper as long-term debt. This
classification is supported by long-term syndicated credit line agreements.
The Company has the ability and intent to use these agreements, if
necessary, to refinance commercial paper on a long-term basis.
B29
<PAGE>
The Prudential Insurance Company of America
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
8. SHORT-TERM AND LONG-TERM DEBT (continued)
The following table summarizes the Company's use of the proceeds from
issuing long-term debt:
1999 1998
--------------- ----------------
(In Millions)
Corporate $ 1,782 $ 1,917
Investment related 1,121 751
Securities business related 2,610 2,066
--------------- ----------------
Total long-term debt $ 5,513 $ 4,734
=============== ================
The net proceeds from the issuance of the Company's long-term debt may be
used for general corporate purposes. This includes investing in equity and
debt securities of subsidiaries, advancing funds to its subsidiaries for
liquidity and operational purposes, and supporting liquidity of the
Company's other businesses.
Investment related long-term debt consists of debt issued to finance
specific investment assets or portfolios of investment assets including real
estate, institutional spread lending investment portfolios and real estate
related investments held in consolidated joint ventures.
Securities business related long-term debt consists of debt issued to
finance primarily the liquidity of the Company's securities business. Loans
made by the Company to its securities subsidiaries using the proceeds from
the Company's issuance of long-term debt may be made on a long-term,
short-term, or subordinated basis, depending on the particular requirements
of its securities business.
Payment of interest and principal on the surplus notes issued after 1993, of
which $688 million were outstanding at December 31, 1999 and 1998, may be
made only with the prior approval of the Commissioner of Insurance of the
State of New Jersey.
In order to modify exposure to interest rate and currency exchange rate
movements, the Company utilizes derivative instruments, primarily interest
rate swaps, in conjunction with some of its debt issues. The effect of these
derivative instruments is included in the calculation of the interest
expense on the associated debt, and as a result, the effective interest
rates on the debt may differ from the rates reflected in the tables above.
Floating rates are determined by formulas and may be subject to certain
minimum or maximum rates.
Scheduled principal repayment of long-term debt (In Millions)
2001 $ 738
2002 1,942
2003 459
2004 1,334
2005 58
2006 and thereafter 982
------------------
Total $ 5,513
==================
At December 31, 1999, the Company had $9,934 million in lines of credit
from numerous financial institutions of which $7,947 million were unused.
These lines of credit generally have terms ranging from one to five years.
The Company issues commercial paper primarily to manage operating cash
flows and existing commitments, meet working capital needs and take
advantage of current investment opportunities. A portion of commercial
B30
<PAGE>
The Prudential Insurance Company of America
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
8. SHORT-TERM AND LONG-TERM DEBT (continued)
paper borrowings are supported by various lines of credit referred to
above. At December 31, 1999 and 1998, the weighted average maturity of
commercial paper outstanding was 23 and 21 days, respectively.
Interest expense for short-term and long-term debt is $863 million, $920
million, and $743 million for the years ended December 31, 1999, 1998 and
1997, respectively. Securities business related interest expense of $254
million, $288 million, and $248 million in 1999, 1998 and 1997,
respectively, is included in "Net investment income."
9. EMPLOYEE BENEFIT PLANS
Pension and Other Postretirement Plans
The Company has funded non-contributory defined benefit pension plans which
cover substantially all of its employees. The Company also has several
non-funded non-contributory defined benefit plans covering certain
executives. Benefits are generally based on career average earnings and
credited length of service. The Company's funding policy is to contribute
annually an amount necessary to satisfy the Internal Revenue Service
contribution guidelines.
The Company provides certain life insurance and healthcare benefits ("Other
postretirement benefits") for its retired employees, their beneficiaries
and covered dependents. The healthcare plan is contributory; the life
insurance plan is non-contributory.
Substantially all of the Company's employees may become eligible to receive
benefits if they retire after age 55 with at least 10 years of service or
under certain circumstances after age 50 with at least 20 years of
continuous service. These benefits are funded as considered necessary by
Company management.
The Company has elected to amortize its transition obligation for other
postretirement benefits over 20 years.
Prepaid and accrued benefits costs are included in "Other assets" and
"Other liabilities," respectively, in the Company's Consolidated Statements
of Financial Position. The status of these plans as of September 30,
adjusted for fourth-quarter activity, is summarized below:
B31
<PAGE>
The Prudential Insurance Company of America
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
9. EMPLOYEE BENEFIT PLANS (continued)
<TABLE>
<CAPTION>
Other
Pension Benefits Postretirement Benefits
---------------------------------- ---------------------------------
1999 1998 1999 1998
--------------- --------------- --------------- --------------
(In Millions)
<S> <C> <C> <C> <C>
Change in benefit obligation:
Benefit obligation at the beginning of period $ (6,309) $ (5,557) $ (2,213) $ (2,128)
Service cost (193) (159) (39) (35)
Interest cost (410) (397) (141) (142)
Plan participants' contributions - - (6) (6)
Amendments (2) (58) (2) -
Actuarial gains (losses) 974 (600) 312 (31)
Contractual termination benefits (53) (30) - -
Special termination benefits (51) - (2) -
Curtailment 206 - 43 -
Benefits paid 408 485 108 128
Foreign currency changes - 7 (1) 1
--------------- --------------- --------------- --------------
Benefit obligation at end of period $ (5,430) $ (6,309) $ (1,941) $ (2,213)
=============== =============== =============== ==============
Change in plan assets:
Fair value of plan assets at beginning of period $ 8,427 $ 8,489 $ 1,422 $ 1,354
Actual return on plan assets 1,442 445 213 146
Transfer to third party (14) (4) - -
Contribution from pension plan - - - 31
Employer contributions 21 25 15 13
Plan participants' contributions - - 6 6
Withdrawal under IRS Section 420 - (36) - -
Benefits paid (408) (485) (108) (128)
Foreign currency changes - (7) - -
--------------- --------------- --------------- --------------
Fair value of plan assets at end of period $ 9,468 $ 8,427 $ 1,548 $ 1,422
=============== =============== =============== ==============
Funded status:
Funded status at end of period $ 4,038 $ 2,118 $ (393) $ (791)
Unrecognized transition (asset) liability (448) (554) 462 660
Unrecognized prior service cost 225 335 2 -
Unrecognized actuarial net (gain) (2,514) (813) (746) (353)
Effects of fourth quarter activity (3) (9) - 2
--------------- --------------- --------------- --------------
Net amount recognized $ 1,298 $ 1,077 $ (675) $ (482)
=============== =============== =============== ==============
Amounts recognized in the Statements of
Financial Position consist of:
Prepaid benefit cost $ 1,601 $ 1,348 $ - $ -
Accrued benefit liability (316) (287) (675) (482)
Intangible asset 6 7 - -
Accumulated other comprehensive income 7 9 - -
--------------- --------------- --------------- --------------
Net amount recognized $ 1,298 $ 1,077 $ (675) $ (482)
=============== =============== =============== ==============
</TABLE>
B32
<PAGE>
The Prudential Insurance Company of America
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
9. EMPLOYEE BENEFIT PLANS (continued)
The projected benefit obligations, accumulated benefit obligations and fair
value of plan assets for the pension plans with accumulated benefit
obligations in excess of plan assets were $401 million, $309 million and
$0, respectively, as of September 30, 1999 and $384 million, $284 million
and $0, respectively, as of September 30, 1998.
The effects of fourth quarter activity are summarized as follows:
<TABLE>
<CAPTION>
Other
Pension Benefits Postretirement Benefits
--------------------------------- ---------------------------------
1999 1998 1999 1998
-------------- -------------- -------------- --------------
(In Millions)
<S> <C> <C> <C> <C>
Contractual termination benefits $ (9) $ (14) $ - $ -
Employer contributions 6 5 - 2
-------------- -------------- -------------- --------------
Effects of 4th quarter activity $ (3) $ (9) $ - $ 2
============== ============== ============== ==============
</TABLE>
Pension plan assets consist primarily of equity securities, bonds, real
estate and short-term investments, of which $6,534 million and $5,926
million are included in Separate Account assets and liabilities at
September 30, 1999 and 1998, respectively.
Other postretirement plan assets consist of group and individual life
insurance policies, group life and health contracts, common stocks,
corporate debt securities, U.S. government securities and short-term
investments. During 1999 the assets of group life and health contracts were
transferred into common stocks, debt securities and short-term investments.
Plan assets include $434 million and $1,018 million of Company insurance
policies and contracts at September 30, 1999 and 1998, respectively.
The Prudential Plan was amended during the time period presented to provide
contractual termination benefits to certain plan participants whose
employment had been terminated. Costs related to these amendments are
reflected in contractual termination benefits that follow.
B33
<PAGE>
The Prudential Insurance Company of America
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
9. EMPLOYEE BENEFIT PLANS (continued)
Net periodic benefit cost included in "General and administrative expenses"
in the Company's Consolidated Statements of Operations for the years ended
December 31, includes the following components:
<TABLE>
<CAPTION>
Pension Benefits Other Postretirement Benefits
----------------------------------------------------------------------------------
1999 1998 1997 1999 1998 1997
----------- ----------- ----------- ------------ ------------ ------------
(In Millions)
<S> <C> <C> <C> <C> <C> <C>
Components of net periodic benefits
costs:
Service cost $ 193 $ 159 $ 127 $ 39 $ 35 $ 38
Interest cost 410 397 376 141 142 149
Expected return on plan assets (724) (674) (617) (121) (119) (87)
Amortization of transition amount (106) (106) (106) 47 47 50
Amortization of prior service cost 45 45 42 - - -
Amortization of actuarial net (gain) loss 4 1 - (10) (13) (13)
Special termination benefits 51 - - 2 - -
Curtailment (gain) loss (122) 5 - 108 - -
Contractual termination benefits 48 14 30 - - -
----------- ----------- ----------- ------------ ------------ ------------
Subtotal (201) (159) (148) 206 92 137
Less amounts related to discontinued operations 84 25 - (130) (34) (38)
----------- ----------- ----------- ------------ ------------ ------------
Net periodic (benefit) cost $ (117) $ (134) $ (148) $ 76 $ 58 $ 99
=========== =========== =========== ============ ============ ============
</TABLE>
Discontinued operations amounts for 1998 and 1997 were included in loss
from healthcare operations. The 1999 amounts were included in loss on
disposal of healthcare operations. See Note 3 for discussion of the
disposal of the Company's healthcare business. Discontinued operations for
pension benefits in 1999 includes $122 million of curtailment gains and $51
million of special termination benefit costs. Discontinued operations for
postretirement benefits in 1999 includes $108 million of curtailment losses
and $2 million of special termination benefit costs.
The assumptions at September 30, used by the Company to calculate the
benefit obligations as of that date and to determine the benefit cost in
the subsequent year are as follows:
<TABLE>
<CAPTION>
Pension Benefits Other Postretirement Benefits
------------------------------------- --------------------------------------------------
1999 1998 1997 1999 1998 1997
---------- ----------- ----------- --------------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Weighted-average assumptions:
Discount rate (beginning of period) 6.50% 7.25% 7.75% 6.50% 7.25% 7.75%
Discount rate (end of period) 7.75% 6.50% 7.25% 7.75% 6.50% 7.25%
Rate of increase in compensation 4.50% 4.50% 4.50% 4.50% 4.50% 4.50%
levels (beginning of period)
Rate of increase in compensation 4.50% 4.50% 4.50% 4.50% 4.50% 4.50%
levels (end of period)
Expected return on plan assets 9.50% 9.50% 9.50% 9.00% 9.00% 9.00%
Health care cost trend rates - - - 7.50 - 9.80% 7.80 - 11.00% 8.20 - 11.80%
Ultimate health care cost trend rate - - - 5.00% 5.00% 5.00%
after gradual decrease until 2006
</TABLE>
B34
<PAGE>
The Prudential Insurance Company of America
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
9. EMPLOYEE BENEFIT PLANS (continued)
Assumed health care cost trend rates have a significant effect on the
amounts reported for the health care plan. A one-percentage point increase
and decrease in assumed health care cost trend rates would have the
following effects:
Other
Postretirement Benefits
----------------------------
1999
------------
(In Millions)
One percentage point increase
Increase in total service and interest costs $ 25
Increase in postretirement benefit obligation 200
One percentage point decrease
Decrease in total service and interest costs $ 20
Decrease in postretirement benefit obligation 167
Postemployment Benefits
The Company accrues postemployment benefits primarily for life and health
benefits provided to former or inactive employees who are not retirees. The
net accumulated liability for these benefits at December 31, 1999 and 1998
was $157 million and $135 million, respectively, and is included in "Other
liabilities."
Other Employee Benefits
The Company sponsors voluntary savings plans for employees (401(k) plans).
The plans provide for salary reduction contributions by employees and
matching contributions by the Company of up to 3% of annual salary. The
matching contributions by the Company included in "General and
administrative expenses" are as follows:
<TABLE>
<CAPTION>
401(k) Company Match
---------------------------------------------------
1999 1998 1997
-------------- --------------- --------------
(In Millions)
<S> <C> <C> <C>
Company match $ 60 $ 54 $ 63
Less amounts related to discontinued operations (8) (14) (16)
-------------- --------------- --------------
401(k) Company match included in
general and administrative expenses $ 52 $ 40 $ 47
============== =============== ==============
</TABLE>
Discontinued operations amounts for 1998 and 1997 were included in loss
from healthcare operations. The 1999 amount was included in loss on
disposal of healthcare operations.
B35
<PAGE>
The Prudential Insurance Company of America
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
10. INCOME TAXES
The components of income tax expense for the years ended December 31, were
as follows:
<TABLE>
<CAPTION>
1999 1998 1997
-------------- -------------- --------------
(In Millions)
<S> <C> <C> <C>
Current tax expense (benefit):
U.S. $ 614 $ 883 $ (14)
State and local 84 54 51
Foreign (8) 148 64
-------------- -------------- --------------
Total 690 1,085 101
Deferred tax expense (benefit):
U.S. 206 (93) 269
State and local 44 (6) 4
Foreign 102 (16) 33
-------------- -------------- --------------
Total 352 (115) 306
Total income tax expense $ 1,042 $ 970 $ 407
============== ============== ==============
</TABLE>
Income from continuing operations before income taxes and extraordinary
item, for the years ended December 31, was as follows:
<TABLE>
<CAPTION>
1999 1998 1997
-------------- -------------- ---------------
(In Millions)
<S> <C> <C> <C>
Domestic $ 1,989 $ 2,384 $ 1,039
International 316 224 331
-------------- -------------- ---------------
Total income from continuing operations
before income taxes and extraordinary item $ 2,305 $ 2,608 $ 1,370
============== ============== ===============
</TABLE>
The Company's income tax expense for the years ended December 31, differs
from the amount computed by applying the expected federal income tax rate
of 35% to income from continuing operations before income taxes for the
following reasons:
<TABLE>
<CAPTION>
1999 1998 1997
-------------- -------------- --------------
(In Millions)
<S> <C> <C> <C>
Expected federal income tax expense $ 807 $ 913 $ 480
Equity tax (benefit) 190 75 (65)
State and local income taxes 83 31 37
Tax-exempt interest and dividend received (63) (46) (67)
deduction
Other 25 (3) 22
-------------- -------------- --------------
Total income tax expense $ 1,042 $ 970 $ 407
============== ============== ==============
</TABLE>
B36
<PAGE>
The Prudential Insurance Company of America
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
10. INCOME TAXES (continued)
Deferred tax assets and liabilities at December 31, resulted from the items
listed in the following table:
<TABLE>
<CAPTION>
1999 1998
------------- ------------
(In Millions)
<S> <C> <C>
Deferred tax assets
Insurance reserves $ 1,582 $ 1,807
Net unrealized investment (gains)/losses 474 (1,225)
Policyholder dividends 277 265
Net operating loss carryforwards 280 276
Litigation related reserves 61 87
Employee benefits 32 63
Other - 135
------------- ------------
Deferred tax assets before valuation allowance 2,706 1,408
Valuation allowance (24) (13)
------------- ------------
Deferred tax assets after valuation allowance 2,682 1,395
------------- ------------
Deferred tax liabilities
Deferred policy acquisition cost 1,942 1,697
Investments 284 151
Depreciation 59 64
------------- ------------
Deferred tax liabilities 2,285 1,912
------------- ------------
Net defered tax asset/(liability) $ 397 $ (517)
============= ============
</TABLE>
Management believes that based on its historical pattern of taxable income,
the Company will produce sufficient income in the future to realize its
deferred tax asset after valuation allowance. Adjustments to the valuation
allowance will be made if there is a change in management's assessment of
the amount of the deferred tax asset that is realizable. At December 31,
1999 and 1998, respectively, the Company had federal life net operating loss
carryforwards of $660 million and $540 million, which expire in 2012. At
December 31, 1999 and 1998, respectively, the Company had state operating
loss carryforwards for tax purposes approximating $570 million and $1,278
million, which expire between 2000 and 2019.
Deferred taxes are not provided on the undistributed earnings of foreign
subsidiaries (considered to be permanent investments), which at December 31,
1999 were $521 million. Determining the tax liability that would arise if
these earnings were remitted is not practical.
The Internal Revenue Service (the "Service") has completed all examinations
of the consolidated federal income tax returns through 1992. The Service has
begun their examination of the years 1993 through 1995.
B37
<PAGE>
The Prudential Insurance Company of America
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
11. STATUTORY NET INCOME AND SURPLUS
Reconciliation of Statutory Net Income and Surplus
Accounting practices used to prepare statutory financial statements for
regulatory purposes differ in certain instances from GAAP. The following
tables reconcile the Company's statutory net income and surplus as of and
for the years ended December 31, 1999, 1998, and 1997, determined in
accordance with accounting practices prescribed or permitted by the New
Jersey Department of Banking and Insurance, to net income and equity
determined using GAAP:
<TABLE>
<CAPTION>
1999 1998 1997
---------------- --------------- ----------------
(In Millions)
<S> <C> <C> <C>
Statutory net income $ 333 $ 1,247 $ 1,471
Adjustments to reconcile to net income on a GAAP basis:
Insurance revenues and expenses 136 (117) 12
Income taxes 436 128 601
Valuation of investments (27) (143) (62)
Realized investment gains 73 1,162 702
Litigation and other reserves (102) (1,150) (1,975)
Discontinued operations and other, net (36) (21) (139)
---------------- --------------- ----------------
GAAP net income $ 813 $ 1,106 $ 610
================ =============== ================
</TABLE>
<TABLE>
<CAPTION>
1999 1998
---------------- ---------------
(In Millions)
<S> <C> <C>
Statutory surplus $ 9,249 $ 8,536
Adjustments to reconcile to equity on a GAAP basis:
Deferred policy acquisition costs 7,295 6,462
Valuation of investments 2,909 8,358
Future policy benefits and policyholder account balances (1,544) (2,621)
Non-admitted assets 2,069 2,119
Income taxes 522 (576)
Surplus notes (987) (987)
Discontinued operations and other, net (222) (896)
---------------- ---------------
GAAP equity $ 19,291 $ 20,395
================ ===============
</TABLE>
The New York State Insurance Department ("Department") recognizes only
statutory accounting for determining and reporting the financial condition
of an insurance company, for determining its solvency under the New York
Insurance Law and for determining whether its financial condition warrants
the payment of a dividend to its policyholders. No consideration is given by
the Department to financial statements prepared in accordance with GAAP in
making such determinations.
B38
<PAGE>
The Prudential Insurance Company of America
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
12. OPERATING LEASES (continued)
The Company occupies leased office space in many locations under various
long-term leases and has entered into numerous leases covering the long-term
use of computers and other equipment. At December 31, 1999, future minimum
lease payments under non-cancelable operating leases are, as follows:
(In Millions)
2000 $ 294
2001 265
2002 217
2003 178
2004 147
Remaining years after 2004 776
----------------
Total $ 1,877
================
Rental expense incurred for the years ended December 31, 1999, 1998 and 1997
was $278 million, $320 million and $352 million, respectively, excluding
expenses relating to the Company's healthcare business.
13. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values presented below have been determined by using
available market information and by applying valuation methodologies.
Considerable judgment is applied in interpreting data to develop the
estimates of fair value. Estimated fair values may not be realized in a
current market exchange. The use of different market assumptions and/or
estimation methodologies could have a material effect on the estimated fair
values. The following methods and assumptions were used in calculating the
estimated fair values (for all other financial instruments presented in the
table, the carrying values approximate estimated fair values).
Fixed maturities and Equity securities
Estimated fair values for fixed maturities and equity securities, other than
private placement securities, are based on quoted market prices or estimates
from independent pricing services. Generally fair values for private
placement fixed maturities are estimated using a discounted cash flow model
which considers the current market spreads between the U.S. Treasury yield
curve and corporate bond yield curve, adjusted for the type of issue, its
current credit quality and its remaining average life. The fair value of
certain non-performing private placement fixed maturities is based on
amounts estimated by management.
Mortgage loans on real estate
The estimated fair value of mortgage loans on real estate is primarily based
upon the present value of the expected future cash flows discounted at the
appropriate U.S. Treasury rate, adjusted for the current market spread for
similar quality mortgage.
Policy loans
The estimated fair value of policy loans is calculated using a discounted
cash flow model based upon current U.S. Treasury rates and historical loan
repayments.
B39
<PAGE>
The Prudential Insurance Company of America
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
13. FAIR VALUE OF FINANCIAL INSTRUMENTS (continued)
Derivative financial instruments
Refer to Note 14 for the disclosure of fair values on these instruments.
Investment contracts
For guaranteed investment contracts, income annuities, and other similar
contracts without life contingencies, estimated fair values are derived
using discounted projected cash flows, based on interest rates being offered
for similar contracts with maturities consistent with those of the contracts
being valued. For individual deferred annuities and other deposit
liabilities, fair value approximates carrying value.
Debt
The estimated fair value of short-term and long-term debt is derived by
using discount rates based on the borrowing rates currently available to the
Company for debt with similar terms and remaining maturities.
B40
<PAGE>
The Prudential Insurance Company of America
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
13. FAIR VALUE OF FINANCIAL INSTRUMENTS (continued)
The following table discloses the carrying amounts and estimated fair
values of the Company's financial instruments at December 31:
<TABLE>
<CAPTION>
1999 1998
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
--------------- --------------- --------------- --------------
(In Millions)
<S> <C> <C> <C> <C>
FINANCIAL ASSETS:
Other than trading:
Fixed maturities:
Available for sale $ 74,697 $ 74,697 $ 80,158 $ 80,158
Held to maturity 14,237 14,112 16,848 17,906
Equity securities 3,264 3,264 2,759 2,759
Mortgage loans on real estate 16,268 15,826 16,016 16,785
Policy loans 7,590 7,462 7,476 8,123
Securities purchased under agreements to resell - - 1,737 1,737
Short-term investments 12,303 12,303 9,781 9,781
Mortgage securitization inventory 803 803 480 480
Cash 1,330 1,330 1,943 1,943
Restricted cash and securities 4,082 4,082 2,366 2,366
Separate Account assets 82,131 82,131 80,931 80,931
Trading:
Trading account assets $ 9,741 $ 9,741 $ 8,888 $ 8,888
Broker-dealer related receivables 11,346 11,346 10,142 10,142
Securities purchased under agreements to resell 13,944 13,944 8,515 8,515
Cash collateral for borrowed securities 7,124 7,124 5,622 5,622
FINANCIAL LIABILITIES:
Other than trading:
Investment contracts $ 25,164 $ 25,352 $ 26,246 $ 27,051
Securities sold under agreements to repurchase 4,260 4,260 7,085 7,085
Cash collateral for loaned securities 2,582 2,582 2,450 2,450
Short-term and long-term debt 16,371 16,563 14,816 15,084
Securities sold but not yet purchased - - 2,215 2,215
Separate Account liabilities 82,131 82,131 80,931 80,931
Trading:
Broker-dealer related payables $ 5,839 $ 5,839 $ 6,530 $ 6,530
Securities sold under agreements to repurchase 20,338 20,338 14,401 14,401
Cash collateral for loaned securities 8,193 8,189 4,682 4,682
Securities sold but not yet purchased 6,968 6,968 3,556 3,556
</TABLE>
B41
<PAGE>
The Prudential Insurance Company of America
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
14. DERIVATIVE AND OFF-BALANCE SHEET CREDIT-RELATED INSTRUMENTS
Interest Rate Swaps
The Company uses interest rate swaps to reduce market risks from changes in
interest rates and to manage interest rate exposures arising from mismatches
between assets and liabilities. Under interest rate swaps, the Company
agrees with other parties to exchange, at specified intervals, the
difference between fixed-rate and floating-rate interest amounts calculated
by reference to an agreed notional principal amount. Generally, no cash is
exchanged at the outset of the contract and no principal payments are made
by either party. Cash is paid or received based on the terms of the swap.
These transactions are entered into pursuant to master agreements that
provide for a single net payment to be made by one counterparty at each due
date. The fair value of swap agreements is estimated based on the present
value of future cash flows under the agreements, discounted at the
applicable zero coupon U.S. Treasury rate and swap spread.
If swap agreements meet the criteria for hedge accounting, net interest
receipts or payments are accrued and recognized over the life of the swap
agreements as an adjustment to interest income or expense of the hedged
item. Any unrealized gains or losses are not recognized until the hedged
item is sold or matures. Gains or losses on early termination of interest
rate swaps are deferred and amortized over the remaining period originally
covered by the swaps. If the criteria for hedge accounting are not met, the
swap agreements are accounted for at fair value with changes in fair value
reported in current period earnings.
Futures and Options
The Company uses exchange-traded Treasury futures and options to reduce
market risks from changes in interest rates, to alter mismatches between the
duration of assets in a portfolio and the duration of liabilities supported
by those assets, and to hedge against changes in the value of securities it
owns or anticipates acquiring. The Company enters into exchange-traded
futures and options with regulated futures commissions merchants who are
members of a trading exchange. The fair value of those futures and options
is based on market quotes.
In exchange-traded futures transactions, the Company purchases or sells
contracts, the value of which are determined by the value of designated
classes of Treasury securities, and posts variation margins on a daily basis
in an amount equal to the difference in the daily market values of those
contracts. Futures are typically used to hedge duration mismatches between
assets and liabilities by replicating Treasury performance. Treasury futures
move substantially in value as interest rates change and can be used to
either modify or hedge existing interest rate risk. This strategy protects
against the risk that cash flow requirements may necessitate liquidation of
investments at unfavorable prices resulting from increases in interest
rates. This strategy can be a more cost effective way of temporarily
reducing the Company's exposure to a market decline than selling fixed
income securities and purchasing a similar portfolio when such a decline is
believed to be over.
If futures meet hedge accounting criteria, changes in their fair value are
deferred and recognized as an adjustment to the carrying value of the hedged
item. Deferred gains or losses from the hedges for interest-bearing
financial instruments are amortized as a yield adjustment over the remaining
lives of the hedged item. Futures that do not qualify as hedges are carried
at fair value with changes in value reported in current period earnings. The
gains and losses associated with anticipatory transactions are not material.
B42
<PAGE>
The Prudential Insurance Company of America
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
14. DERIVATIVE AND OFF-BALANCE SHEET CREDIT-RELATED INSTRUMENTS (continued)
When the Company anticipates a significant decline in the stock market which
will correspondingly affect its diversified portfolio, it may purchase put
index options where the basket of securities in the index is appropriate to
provide a hedge against a decrease in the value of the Company's equity
portfolio or a portion thereof. This strategy effects an orderly sale of
hedged securities. When the Company has large cash flows which it has
allocated for investment in equity securities, it may purchase call index
options as a temporary hedge against an increase in the price of the
securities it intends to purchase. This hedge is intended to permit such
investment transactions to be executed with less adverse market impact.
Currency Derivatives
The Company uses currency derivatives, including exchange-traded currency
futures and options, currency forwards and currency swaps, to reduce market
risks from changes in currency exchange rates with respect to investments
denominated in foreign currencies that the Company either holds or intends
to acquire and to alter the currency exposures arising from mismatches
between such foreign currencies and the U.S. dollar.
Under currency forwards, the Company agrees with other parties upon delivery
of a specified amount of a specified currency at a specified future date.
Typically, the price is agreed upon at the time of the contract and payment
for such a contract is made at the specified future date. Under currency
swaps, the Company agrees with other parties to exchange, at specified
intervals, the difference between one currency and another at a forward
exchange rate and calculated by reference to an agreed principal amount.
Generally, the principal amount of each currency is exchanged at the
beginning and termination of the currency swap by each party. These
transactions are entered into pursuant to master agreements that provide for
a single net payment to be made by one counterparty for payments made in the
same currency at each due date.
If currency derivatives are effective as hedges of foreign currency
translation and transaction exposures, gains or losses are recorded in
"Accumulated other comprehensive income." If currency derivatives do not
meet hedge accounting criteria, gains or losses from those derivatives are
recognized in "Realized investment gains, net."
Forwards
The Company uses forwards to manage market risks relating to interest rates
and commodities. Additionally, in connection with the Company's investment
banking activities, the Company trades in mortgage backed securities forward
contracts. Typically, the price is agreed upon at the time of the contract
and payment for such a contract is made at the specified future date.
If the forwards are effective as hedges, gains or losses are recorded in
"Accumulated other comprehensive income." If forwards do not meet hedge
accounting criteria, gains or losses from those forwards are recognized in
current period earnings.
The tables below summarize the Company's outstanding positions by derivative
instrument types as of December 31, 1999 and 1998. The amounts presented are
classified as either trading or other than trading, based on management's
intent at the time of contract inception and throughout the life of the
contract. The table includes the estimated fair values of outstanding
derivative positions only and does not include the changes in fair values of
associated financial and non-financial assets and liabilities, which
generally offset derivative notional amounts. The fair value amounts
presented also do not reflect the netting of amounts pursuant to right of
setoff, qualifying master netting agreements with counterparties or
collateral arrangements.
B43
<PAGE>
The Prudential Insurance Company of America
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
14. DERIVATIVE AND OFF-BALANCE SHEET CREDIT-RELATED INSTRUMENTS (continued)
DERIVATIVE FINANCIAL INSTRUMENTS
December 31, 1999
(In Millions)
<TABLE>
<CAPTION>
Trading Other than Trading
------------------------------------------ ------------------------------------------
Hedge Accounting
------------------------------------------
Estimated Estimated
Notional Fair Value Notional Fair Value
------------------ ------------------- ------------------ ------------------
<S> <C> <C> <C> <C>
Swap Instruments
Interest rate
Asset $ 7,116 $ 151 $ - $ -
Liability 6,490 137 - -
Currency
Asset 24 45 343 30
Liability 77 51 369 33
Equity and commodity
Asset 8 9 - -
Liability 8 5 - -
Forward contracts
Interest rate
Asset 14,837 105 - -
Liability 12,459 84 - -
Currency
Asset 11,181 275 54 2
Liability 10,377 247 841 16
Equity and commodity
Asset 1,664 68 - -
Liability 1,592 60 - -
Futures contracts
Interest rate
Asset 2,374 2 - -
Liability 3,017 3 - -
Equity and commodity
Asset 2,283 44 - -
Liability 837 57 - -
Option contracts
Interest rate
Asset 3,725 22 - -
Liability 2,185 11 - -
Currency
Asset 613 5 - -
Liability 4,439 5 - -
Equity and commodity
Asset 340 6 - -
Liability 366 3 - -
------------------ ------------------- ------------------ ------------------
Total Derivatives:
Assets $ 44,165 $ 732 $ 397 $ 32
================== =================== ================== ==================
Liabilities $ 41,847 $ 663 $ 1,210 $ 49
================== =================== ================== ==================
<CAPTION>
Other than Trading Total
------------------------------------------ ------------------------------------------
Non-Hedge Accounting
------------------------------------------
Estimated Estimated
Notional Fair Value Notional Fair Value
------------------- ------------------ ------------------ -------------------
<S> <C> <C> <C> <C>
Swap Instruments
Interest rate
Asset $ 2,185 $ 146 $ 9,301 $ 297
Liability 1,261 32 7,751 169
Currency
Asset - - 367 75
Liability - - 446 84
Equity and commodity
Asset 47 13 55 22
Liability - - 8 5
Forward contracts
Interest rate
Asset - - 14,837 105
Liability - - 12,459 84
Currency
Asset 1,182 16 12,417 293
Liability 1,347 21 12,565 284
Equity and commodity
Asset - - 1,664 68
Liability - - 1,592 60
Futures contracts
Interest rate
Asset 800 14 3,174 16
Liability 3,696 44 6,713 47
Equity and commodity
Asset 71 4 2,354 48
Liability 12 11 849 68
Option contracts
Interest rate
Asset - - 3,725 22
Liability 13 - 2,198 11
Currency
Asset 10 - 623 5
Liability 10 - 4,449 5
Equity and commodity
Asset - - 340 6
Liability - - 366 3
------------------- ------------------ ------------------ -------------------
Total Derivatives:
Assets $ 4,295 $ 193 $ 48,857 $ 957
=================== ================== ================== ===================
Liabilities $ 6,339 $ 108 $ 49,396 $ 820
=================== ================== ================== ===================
</TABLE>
B44
<PAGE>
The Prudential Insurance Company of America
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
14. DERIVATIVE AND OFF-BALANCE SHEET CREDIT-RELATED INSTRUMENTS (continued)
DERIVATIVE FINANCIAL INSTRUMENTS
December 31, 1998
(In Millions)
<TABLE>
<CAPTION>
Trading Other than Trading
------------------------------------------ ------------------------------------------
Hedge Accounting
------------------------------------------
Estimated Estimated
Notional Fair Value Notional Fair Value
------------------ ------------------- ------------------ ------------------
<S> <C> <C> <C> <C>
Swap Instruments
Interest rate
Asset $ 4,145 $ 204 $ - $ -
Liability 4,571 192 - -
Currency
Asset 372 91 229 16
Liability 263 84 464 46
Equity and commodity
Asset 47 14 - -
Liability - - - -
Forward contracts
Interest rate
Asset 31,568 72 - -
Liability 24,204 56 - -
Currency
Asset 12,879 198 60 1
Liability 13,594 221 573 11
Equity and commodity
Asset 1,204 12 - -
Liability 1,355 3 - -
Futures contracts
Interest rate
Asset 2,429 10 - -
Liability 3,147 3 - -
Equity and commodity
Asset 843 51 - -
Liability 1,224 44 - -
Option contracts
Interest rate
Asset 2,500 10 - -
Liability 1,451 8 - -
Currency
Asset 4,882 101 - -
Liability 4,151 112 - -
Equity and commodity
Asset 928 2 - -
Liability 901 4 - -
------------------ ------------------- ------------------ ------------------
Total Derivatives:
Assets $ 61,797 $ 765 $ 289 $ 17
================== =================== ================== ==================
Liabilities $ 54,861 $ 727 $ 1,037 $ 57
================== =================== ================== ==================
<CAPTION>
Other than Trading Total
------------------------------------------ ------------------------------------------
Non-Hedge Accounting
------------------------------------------
Estimated Estimated
Notional Fair Value Notional Fair Value
------------------- ------------------ ------------------ -------------------
<S> <C> <C> <C> <C>
Swap Instruments
Interest rate
Asset $ 1,949 $ 73 $ 6,094 $ 277
Liability 2,501 301 7,072 493
Currency
Asset - - 601 107
Liability - - 727 130
Equity and commodity
Asset 22 7 69 21
Liability - - - -
Forward contracts
Interest rate
Asset - - 31,568 72
Liability - - 24,204 56
Currency
Asset 942 13 13,881 212
Liability 1,466 26 15,633 258
Equity and commodity
Asset 2 - 1,206 12
Liability - - 1,355 3
Futures contracts
Interest rate
Asset 1,762 22 4,191 32
Liability 478 4 3,625 7
Equity and commodity
Asset 24 1 867 52
Liability 53 1 1,277 45
Option contracts
Interest rate
Asset 130 2 2,630 12
Liability 98 - 1,549 8
Currency
Asset - - 4,882 101
Liability - - 4,151 112
Equity and commodity
Asset - - 928 2
Liability - - 901 4
------------------- ------------------ ------------------ -------------------
Total Derivatives:
Assets $ 4,831 $ 118 $ 66,917 $ 900
=================== ================== ================== ===================
Liabilities $ 4,596 $ 332 $ 60,494 $ 1,116
=================== ================== ================== ===================
</TABLE>
B45
<PAGE>
The Prudential Insurance Company of America
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
14. DERIVATIVE AND OFF-BALANCE SHEET CREDIT-RELATED INSTRUMENTS (continued)
The following table discloses net trading revenues by derivative instrument
types as of December 31:
1999 1998 1997
-------- -------- --------
(In Millions)
Forwards $ 53 $ 67 $ 59
Futures 80 (5) 37
Swaps 16 (13) (13)
Options (14) - -
-------- -------- --------
Net trading revenues $ 135 $ 49 $ 83
======== ======== ========
Average fair values for trading derivatives in an asset position during the
years ended December 31, 1999 and 1998 were $789 million and $922 million,
respectively, and for derivatives in a liability position were $766 million
and $905 million, respectively. The average fair values do not reflect the
netting of amounts pursuant to the right of offset or qualifying master
netting agreements. Of those derivatives held for trading purposes at
December 31, 1999, 61% of the notional amount consisted of interest rate
derivatives, 33% consisted of foreign currency derivatives and 6% consisted
of equity and commodity derivatives. Of those derivatives held for purposes
other than trading at December 31, 1999, 65% of notional consisted of
interest rate derivatives, 34% consisted of foreign currency derivatives,
and 1% consisted of equity and commodity derivatives.
Credit Risk
The credit exposure of the Company's derivative contracts is limited to the
fair value at the reporting date. Credit risk is managed by entering into
transactions with creditworthy counterparties and obtaining collateral where
appropriate and customary. The Company also attempts to minimize its
exposure to credit risk through the use of various credit monitoring
techniques. At December 31, 1999 and 1998, approximately 81% and 95%,
respectively, of the net credit exposure for the Company from derivative
contracts is with investment-grade counterparties.
Off-Balance Sheet Credit-Related Instruments
During the normal course of its business, the Company utilizes financial
instruments with off-balance sheet credit risk such as commitments,
financial guarantees, loans sold with recourse and letters of credit.
Commitments include commitments to purchase and sell mortgage loans, the
underfunded portion of commitments to fund investments in private placement
securities and unused credit card and home equity lines.
In connection with the Company's consumer banking business, loan commitment
for credit cards and home equity lines of credit and other lines of credit
include agreements to lend up to specified limits to customers. It is
anticipated that commitment amounts will only be partially drawn down based
on overall customer usage patterns, and, therefore, do not necessarily
represent future cash requirements. The Company evaluates each credit
decision on such commitments at least annually and has the ability to cancel
or suspend such lines at its option. The total available lines of credit
card, home equity and other commitments were $2.7 billion, of which $2.0
billion remains available at December 31, 1999.
Also, in connection with the Company's investment banking activities, the
Company enters into agreements with mortgage originators and others to
provide financing on both a secured and an unsecured basis. Aggregate
financing commitments on a secured basis, for periods of less than one year,
approximate $4.9 billion, of which $2.73 billion remains available at
December 31, 1999. Unsecured commitments approximate $528 million, of which
$334 million remains available at December 3l, 1999.
B46
<PAGE>
The Prudential Insurance Company of America
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
14. DERIVATIVE AND OFF-BALANCE SHEET CREDIT-RELATED INSTRUMENTS (continued)
Other commitments primarily include commitments to purchase and sell
mortgage loans and the unfunded portion of commitments to fund investments
in private placement securities. These mortgage loans and private
commitments were $2.9 billion, of which $1.9 billion remain available at
December 31, 1999. Additionally, mortgage loans sold with recourse were $0.1
billion at December 31, 1999.
The Company also provides financial guarantees incidental to other
transactions and letters of credit that guarantee the performance of
customers to third parties. These credit-related financial instruments have
off-balance sheet credit risk because only their origination fees, if any,
and accruals for probable losses, if any, are recognized until the
obligation under the instrument is fulfilled or expires. These instruments
can extend for several years and expirations are not concentrated in any
period. The Company seeks to control credit risk associated with these
instruments by limiting credit, maintaining collateral where customary and
appropriate and performing other monitoring procedures. At December 31, 1999
these were immaterial.
15. CONTINGENCIES AND LITIGATION
Stop-Loss Reinsurance and Stop-Loss Indemnification Agreements
On February 24, 2000, the Company entered into an agreement to sell 100% of
the capital stock of its subsidiary, Gibraltar Casualty Company
("Gibraltar") to Everest Reinsurance Holdings, Inc. (now known as Everest Re
Group, Ltd.) ("Everest"). The transaction is expected to be completed in the
second quarter of 2000, subject to approval by state regulators and other
customary closing conditions. Proceeds from the sale will consist of
approximately $52 million in cash, which approximated the book value of
Gibraltar at December 31, 1999. In connection with the sale, the Company
will provide a stop-loss indemnification agreement covering 80% of the first
$200 million of any adverse loss development in excess of Gibraltar's
carried reserves as of the closing date of the transaction, resulting in a
maximum potential exposure to the Company of $160 million. In connection
with the Company's 1995 sale of what is now Everest, Gibraltar had entered
into a stop-loss reinsurance agreement with Everest whereby Gibraltar
reinsured up to $375 million of the first $400 million of aggregate adverse
loss development, on an incurred basis, with respect to reserves recorded by
Everest as of June 30, 1995. Upon the expected completion of the
aforementioned sale of Gibraltar, the Company will no longer be subject to
exposure under the 1995 stop-loss agreement. Management believes that based
on currently available information and established reserves, the ultimate
settlement of claims under either the 1995 stop-loss agreement or the
stop-loss indemnification agreement should not have a material adverse
effect on the Company's financial position.
Environmental and Asbestos-Related Claims
Certain of the Company's subsidiaries are subject to claims under expired
contracts that assert alleged injuries and/or damages relating to or
resulting from toxic torts, toxic waste and other hazardous substances. The
liabilities for these claims cannot be reasonably estimated using
traditional reserving techniques. The predominant source of such exposure
for the Company is Gibraltar, which, as discussed above, is expected to be
sold in the second quarter of 2000. The liabilities recorded for
environmental and asbestos-related claims, net of reinsurance recoverables,
of $342 million ($321 million for Gibraltar) and $239 million ($217 million
for Gibraltar) at December 31, 1999 and 1998, respectively, reflect the
Company's best estimate of ultimate claims and claim adjustment expenses
based upon known facts and current law. However, as a result of judicial
decisions and legislative actions, the coverage afforded under these
contracts may be expanded beyond their original terms. Given the expansion
of coverage and liability by the courts and legislatures in the past, and
the potential for other unfavorable trends in the future, the ultimate cost
of these claims could increase from the levels currently established.
Because of these uncertainties, these additional amounts, or a range of
these additional amounts, cannot be reasonably estimated, and could result
in a liability exceeding recorded liabilities by an amount that could be
material to the Company's results of operations in a future quarterly or
annual period. The Company's residual exposure pertaining to Gibraltar upon
completion of the expected sale, pursuant to a
B47
<PAGE>
The Prudential Insurance Company of America
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
15. CONTINGENCIES AND LITIGATION (continued)
stop-loss indemnification agreement, is discussed above. Management believes
that these claims should not have a material adverse effect on the Company's
financial position.
Managed Care Reimbursement
The Company has reviewed its obligations retained in the sale of the
healthcare operations under certain managed care arrangements for possible
failure to comply with contractual and regulatory requirements. It is the
opinion of management that adequate reserves have been established to
provide for appropriate reimbursements to customers.
Litigation
The Company is subject to legal and regulatory actions in the ordinary
course of its businesses, including class actions. Pending legal and
regulatory actions include proceedings specific to the Company's practices
and proceedings generally applicable to business practices in the industries
in which the Company operates. In certain of these matters, large and/or
indeterminate amounts are sought, including punitive or exemplary damages.
In particular, the Company has been subject to substantial regulatory
actions and civil litigation involving individual life insurance sales
practices. In 1996, the Company entered into settlement agreements with
relevant insurance regulatory authorities and plaintiffs in the principal
life insurance sales practices class action lawsuit covering policyholders
of individual permanent life insurance policies issued in the United States
from 1982 to 1995. Pursuant to the settlements, the Company agreed to
various changes to its sales and business practices controls and a series of
fines, and is in the process of distributing final remediation relief to
eligible class members. In many instances, claimants have the right to
"appeal" the Company's decision to an independent reviewer. The bulk of such
appeals were resolved in 1999, and the balance is expected to be addressed
in 2000. As of January 31, 2000, the Company remained a party to two
putative class actions and approximately 158 individual actions relating to
permanent life insurance policies the Company issued in the United States
between 1982 and 1995. Additional suits may be filed by individuals who
opted out of the settlements. While the approval of the class action
settlement is now final, the Company remains subject to oversight and review
by insurance regulators and other regulatory authorities with respect to its
sales practices and the conduct of the remediation program. The U.S.
District Court has also retained jurisdiction as to all matters relating to
the administration, consummation, enforcement and interpretation of the
settlements. In November 1999, upon the joint application of the Company and
class counsel, the Court ordered an investigation into certain allegations
of improprieties in the administration and implementation of the remediation
program at the Company's Plymouth, Minnesota facility. Class counsel is
expected to submit a summary of its findings pursuant to the investigation
to the Court in mid-April 2000.
In 1999, 1998, 1997 and 1996, the Company recorded provisions in its
Consolidated Statements of Operations of $100 million, $1,150 million,
$2,030 million and $1,125 million, respectively, to provide for estimated
remediation costs, and additional sales practices costs including related
administrative costs, regulatory fines, penalties and related payments,
litigation costs and settlements, including settlements associated with the
resolution of claims of deceptive sales practices asserted by policyholders
who elected to "opt-out" of the class action settlement and litigate their
claims against the Company separately, and other fees and expenses
associated with the resolution of sales practices issues.
B48
<PAGE>
The Prudential Insurance Company of America
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
15. CONTINGENCIES AND LITIGATION (continued)
The following table summarizes the Company's charges for the estimated total
costs of sales practices remedies and additional sales practices costs and
the related liability balances as of the dates indicated:
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------
1999 1998 1997 1996
---------------------------------------------
(In Millions)
<S> <C> <C> <C> <C>
Liability balance at beginning of period $ 3,058 $ 2,553 $ 963 $ -
Charges to expense:
Remedy costs (99) 510 1,640 410
Additional sales practices costs 199 640 390 715
--------- --------- --------- ---------
Total charges to expense 100 1,150 2,030 1,125
Amounts paid or credited:
Remedy costs 1,708 147 - -
Additional sales practices costs 559 498 440 162
--------- --------- --------- ---------
Total amounts paid or credited 2,267 645 440 162
Liability balance at end of period $ 891 $ 3,058 $ 2,553 $ 963
========= ========= ========= =========
</TABLE>
In 1996, the Company recorded in its Consolidated Statements of Operations
the cost of $410 million before taxes as a guaranteed minimum remediation
expense pursuant to the settlement agreement. Management had no better
information available at that time upon which to make a reasonable estimate
of the losses associated with the settlement. Charges were also recorded in
1996 for estimated additional sales practices costs totaling $715 million
before taxes.
In 1997, management increased the estimated liability for the costs of
remedying policyholder claims by $1,640 million before taxes. This increase
was based on additional information derived from claim sampling techniques,
the terms of the settlement and the number of claim forms received. The
Company also recorded additional charges of $390 million to recognize the
increase in estimated total additional sales practices costs.
In 1998, the Company recorded an additional charge of $510 million before
taxes to recognize the increase of the estimated total cost of remedying
policyholder claims to a total of $2,560 million before taxes. This increase
was based on (i) estimates derived from an analysis of claims actually
remedied (including interest); (ii) a sample of claims still to be remedied;
(iii) an estimate of additional liabilities associated with a claimant's
right to "appeal" the Company's decision; and (iv) an estimate of an
additional liability associated with the results of an investigation by a
court-appointed independent expert regarding the impact of the Company's
failure to properly implement procedures to preserve all documents relevant
to the class action and remediation program. The Company also recorded
additional charges of $640 million before taxes to recognize the increase in
estimated total additional sales practices costs.
In 1999, as a result of a decrease in the estimated cost of remedying
policyholder claims, the Company recorded a credit of $99 million before
taxes to reduce its liability relative to remedy costs. The revised estimate
was based on additional information derived from claims actually remedied
and an evaluation of remaining obligations taking into consideration
experience in 1999. The Company also recorded a charge of $199 million
before taxes to recognize an increase in estimated total additional sales
practices costs based on additional information obtained in 1999.
B49
<PAGE>
The Prudential Insurance Company of America
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
15. CONTINGENCIES AND LITIGATION (continued)
The Company's litigation is subject to many uncertainties, and given their
complexity and scope, the outcomes cannot be predicted. It is possible that
the results of operations or the cash flow of the Company, in a particular
quarterly or annual period, could be materially affected by an ultimate
unfavorable outcome of pending litigation and regulatory matters depending,
in part, upon the results of operation or cash flow for such period.
Management believes, however, that the ultimate resolution of all pending
litigation and regulatory matters, after consideration of applicable
reserves, should not have a material adverse effect on the Company's
financial position.
******
B50
<PAGE>
Report of Independent Accountants
---------------------------------
To the Board of Directors and Policyholders of
The Prudential Insurance Company of America
In our opinion, the accompanying consolidated statements of financial position
and the related consolidated statements of operations, of changes in equity and
of cash flows present fairly, in all material respects, the financial position
of The Prudential Insurance Company of America and its subsidiaries at December
31, 1999 and 1998, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 1999, in conformity
with accounting principles generally accepted in the United States. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States, which require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
PricewaterhouseCoopers LLP
New York, New York
March 21, 2000
B51
<PAGE> 139
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, 1999; the Statement of Operations for the period
ended December 31, 1999; the Statements of Changes in Net Assets for
the periods ended December 31, 1999 and 1998; 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, 1999 and 1998 the Statements of
Operations and Changes in Surplus and Asset Valuation Reserve and the
Statements of Cash Flows for the years ended December 31, 1999, 1998
and 1997; and the Notes relating thereto appear in the Statement of
Additional Information (Part B of the Registration Statement).
(b) EXHIBITS
<TABLE>
<S> <C>
(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 Incorporated by reference to Exhibit (4)
and The Prudential Variable Contract Account-11 of Post-Effective Amendment No. 33 to this
Registration Statement, filed April 30, 2000
(i) Amendment No. 1 to Investment Management Agreement between Incorporated by reference to Exhibit No. (4)(i)
Prudential and The Prudential Variable Contract Account-11 of Post-Effective Amendment No. 33 to this
Registration Statement, filed April 30, 2000
(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 Incorporated by reference to Exhibit No. (5)
Certain Contracts on a Variable of Post-Effective Amendment No. 33 to this
Basis between Prudential and The Registration Statement, filed April 30, 2000
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
</TABLE>
C-1
<PAGE> 140
<TABLE>
<S> <C>
(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
</TABLE>
C-2
<PAGE> 141
<TABLE>
<S> <C>
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
(11) (i) Investment Accounting Filed Herewith
Agreement between The Prudential
Insurance Company of America and
Investors Fiduciary Trust Company
(ii) First Amendment To Investment Filed Herewith
Accounting Agreement between The
Prudential Insurance Company of
America and Investors Fiduciary Trust
Company
(iii) Second Amendment to Investment Filed Herewith
Accounting Agreement between The Prudential
Insurance Company of America and Investors
Fiduciary Trust Company
</TABLE>
C-3
<PAGE> 142
<TABLE>
<S> <C>
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
(b)(ii) John R. Strangfeld Incorporated by reference to Post-Effective Amendment
No. 37 to Form N-1A, the Prudential Series Fund, Reg.
No. 2-80896, filed April __, 2000
(16) Calculation of Performance Data Appears under heading "Performance Information"
in theStatement of AdditionalInformation (Part B of
this Registration Statement)
</TABLE>
C-4
<PAGE> 143
<TABLE>
<S> <C>
(17) Codes of Ethics Filed herewith
(18) 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 __, 2000,
the text of which is hereby incorporated.
In addition to the subsidiaries shown on the Organization Chart, Prudential
holds all of the voting securities of Prudential's Gibraltar Fund, Inc., a
Maryland corporation, in three of its separate accounts. Prudential also holds
directly and in three of its 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.
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
of February 29, 2000, the number of contractowners of qualified and
non-qualified contracts offered by Registrant was 442.
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.
C-5
<PAGE> 144
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)
PIMS is distributor for the following open-end management
companies: Cash Accumulation Trust, COMMAND Money Fund, COMMAND
Government Fund, COMMAND Tax-Free Fund, Global Utility Fund, Inc.,
Nicholas-Applegate Fund, Inc. (Nicholas-Applegate Growth Equity Fund),
Prudential Balanced Fund, Prudential California Municipal Fund,
Prudential Diversified Bond Fund, Inc., Prudential Diversified Funds,
Prudential Emerging Growth Fund, Inc., Prudential Equity Fund, Inc.,
Prudential Equity Income Fund, Prudential Europe Growth Fund, Inc.,
Prudential Global Genesis Fund, Inc., Prudential Global Total Return
Fund, Inc., Prudential Government Income Fund, Inc., Prudential
Government Securities Trust, Prudential High Yield Fund, Inc.,
Prudential High Yield Total Return Fund, Inc., Prudential Index Series
Fund, Prudential Institutional Liquidity Portfolio, Inc., Prudential
International Bond Fund, Inc., Prudential Mid-Cap Value Fund,
Prudential MoneyMart Assets, Inc., Prudential Municipal Bond Fund,
Prudential Municipal Series Fund, Prudential National Municipals Fund,
Inc., Prudential Natural Resources Fund, Inc., Prudential Pacific
Growth Fund,Inc., Prudential Real Estate Securities Fund, Prudential
Sector Funds, Inc., Prudential Small-Cap Quantum Fund, Inc.,
Prudential Small Company Value Fund, Inc., Prudential Special Money
Market Fund, Inc., Prudential Structured Maturity Fund, Inc.,
Prudential Tax-Free Money Fund, Inc., Prudential Tax-Managed Funds,
Prudential 20/20 Focus Fund, Prudential World Fund, Inc., The
Prudential Investment Portfolios, Inc., Strategic Partners Series,
Target Funds and The Target Portfolio Trust.
PIMS is also distributor of the following unit investment trusts:
Separate Accounts: Prudential's Gibraltar Fund, Inc., The Prudential
Variable Contract Account-2, The Prudential Variable Contract
Account-10, The Prudential Variable Contract Account-11, The
Prudential Variable Contract Account-24, The Prudential Variable
Contract Account GI-2, The Prudential Discovery Select Group Variable
Contract Account, The Pruco Life Flexible Premium Variable Annuity
Account, The Pruco Life of New Jersey Premium Variable Annuity
Account, The Prudential Individual Variable Contract Account and The
Prudential Qualified Individual Variable Contract Account.
(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
William V. Healey*** Senior Vice President, Secretary and None
</TABLE>
C-6
<PAGE> 145
<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
Francis O. Odubekun*** Senior Vice President and None
Chief Operations 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
State Street Bank and Trust
801 Pennsylvania
Kansas City, Missouri 64105
ITEM 36. MANAGEMENT SERVICES
Not Applicable
C-7
<PAGE> 146
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 28th day of April, 2000.
THE PRUDENTIAL VARIABLE CONTRACT ACCOUNT-11
By: * JOHN R. STRANGFELD
-------------------------
John R. Strangfeld
Committee Chairman
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>
* JOHN R. STRANGFELD Committee Chairman, The Prudential Variable April 28, 2000
------------------------ Contract Account-11 Committee
John R. Strangfeld
/s/GRACE C.TORRES Treasurer and Principal April 28, 2000
-----------------
</TABLE>
C-8
<PAGE> 147
<TABLE>
<S> <C> <C>
Grace Torres Financial and Accounting Officer
*SAUL K. FENSTER Member, The Prudential Variable Contract April 28, 2000
---------------- Account-11 Committee
Saul K. Fenster
*W. SCOTT McDONALD, JR. Member, The Prudential Variable Contract April 28, 2000
----------------------- Account-11 Committee
W. Scott McDonald, Jr.
*JOSEPH WEBER Member, The Prudential Variable Contract April 28, 2000
------------- Account-11 Committee
Joseph Weber
*By: /s/ C. CHRISTOPHER SPRAGUE
--------------------------
C. Christopher Sprague
(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 28th day of April, 2000.
<TABLE>
<S> <C>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
By: /s/ JOHN R. STRANGFELD
---------------------
John R. Strangfeld
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 )
------------------- Senior Vice President )
Richard J. Carbone and Chief Financial Officer)
) April 28, 2000
*JAMES G. CULLEN )
---------------- )
James G. Cullen Director)
)
*CAROLYNE K. DAVIS )
------------------ )
Carolyne K. Davis Director)
</TABLE>
C-9
<PAGE> 148
<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 28, 2000
*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> 149
*By: /s/ C. CHRISTOPHER SPRAGUE
-----------------------
C. Christopher Sprague
(Attorney-in-Fact)
C-11
<PAGE> 150
EXHIBIT INDEX
<TABLE>
<CAPTION>
<S> <C>
(2) Rules and Regulations
(11)(i) Investment Accounting Agreement
(11)(ii) First Amendment to Investment Accounting
Agreement
(11)(iii)Second Amendment to Investment
Accounting Agreement
(13)(i) Consent of independent accountants
(17) Code of Ethics
(18) Financial Data Schedule
</TABLE>
C-12
<PAGE> 1
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
<PAGE> 2
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 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
<PAGE> 3
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 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
<PAGE> 4
(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 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
<PAGE> 5
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
<PAGE> 6
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.
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
<PAGE> 7
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.
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
<PAGE> 8
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> 9
(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
<PAGE> 10
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 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.
Section 11. Indemnification of Directors and Officers.
(a) Indemnification. VCA-11 shall indemnify present and former directors,
officers, employees and agents of the Account (each a "Covered Person") against
judgments, fines, settlements and expenses to the fullest extent authorized, and
in the manner permitted, by applicable federal and state law.
<PAGE> 11
(b) Advances. VCA-11 shall advance the expenses of Covered Persons who are
parties to any proceeding to the fullest extent authorized, and in the manner
permitted, by applicable federal and state law. For purposes of this paragraph,
"Proceeding" means any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative, or investigative.
(c) Procedure. Pursuant and subject to paragraphs (a) and (b), VCA-11 shall
indemnify each Covered Person against, or advance the expenses of any Covered
Person for, the amount of any deductible provided in any liability insurance
policy maintained by VCA-11.
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 (11)(i)
INVESTMENT ACCOUNTING AGREEMENT
THIS AGREEMENT made and effective as of this 2nd day of January, 1996, by
and between THE PRUDENTIAL INSURANCE COMPANY OF AMERICA, a New Jersey
corporation, having its principal place of business at 751 Broad Street, Newark,
New Jersey 07102-3777 (the "Company"), on behalf of the separate accounts listed
on Schedule I hereto, as it may be amended from time to time (each a "Registered
Account" and collectively the "Registered Accounts"), and INVESTORS FIDUCIARY
TRUST COMPANY, a state chartered trust company organized and existing under the
laws of the State of Missouri, having its principal place of business at 127
West 10th Street, Kansas City, Missouri, 64105 ("IFTC").
WHEREAS, each Registered Account is registered as an investment company
under the Investment Company Act of 1940 (the "1940 Act"); and
WHEREAS, IFTC performs certain investment accounting and recordkeeping
services on a computerized accounting system (the "Portfolio Accounting System")
which is suitable for maintaining certain accounting records of the Registered
Accounts; and
WHEREAS, the Company desires to appoint IFTC as investment accounting and
recordkeeping agent for the Registered Accounts, and IFTC is willing to accept
such appointment;
NOW, THEREFORE, in consideration of the mutual promises herein contained,
the parties hereto, intending to be legally bound, mutually covenant and agree
as follows:
1. Appointment of Recordkeeping Agent. The Company hereby constitutes and
appoints IFTC as investment accounting and recordkeeping agent for the
Registered Accounts to calculate the values and, if applicable, unit
values of the Registered Accounts and to perform certain other accounting
and recordkeeping functions for the Registered Accounts as set forth more
fully on Schedule II hereto and as required of such Registered Account
under Rule 31a of the 1940 Act with respect to portfolio transactions.
2. Representations and Warranties of the Company. The Company hereby
represents, warrants and acknowledges to IFTC:
A. That it is a corporation duly organized and existing and in good
standing under the laws of the State of New Jersey and that each
Registered Account is registered under the 1940 Act; and
B. That it has the requisite power and authority under applicable
law, its charter and its bylaws to enter into this Agreement; that
it has taken all requisite action necessary to appoint IFTC as
investment accounting and recordkeeping agent for the Registered
Accounts; that this Agreement has been duly executed and delivered
<PAGE> 2
by it; and that this Agreement constitutes its legal, valid and
binding obligation, enforceable in accordance with its terms.
3. Representations and Warranties of IFTC. IFTC hereby represents, warrants
and acknowledges to the Company:
A. That it is a trust company duly organized and existing and in good
standing under the laws of the State of Missouri, provided,
however, that it is considering merging with a newly-chartered
trust company which would be the surviving entity of such merger
and would continue the business of IFTC under the name Investors
Fiduciary Trust Company;
B. That it has the requisite power and authority under applicable
law, its charter and its bylaws to enter into and perform this
Agreement; that this Agreement has been duly executed and
delivered by IFTC; and that this Agreement constitutes a legal,
valid and binding obligation of IFTC, enforceable in accordance
with its terms; and
C. That the accounts and records maintained and preserved by IFTC
shall be the property of the Company and that it will not use any
information made available to it under the terms hereof for any
purpose other than complying with its duties and responsibilities
hereunder or as specifically authorized by the Company in writing.
4. Duties and Responsibilities of the Company.
A. The Company shall turn over to IFTC all of each Registered
Account's accounts and records previously maintained which IFTC
needs in order to fully and properly establish each Registered
Account's general ledger and auxiliary ledgers on the Portfolio
Accounting System, to accurately price each Registered Account's
securities and foreign currency holdings (if any), to calculate
their values and, if applicable, calculate their respective unit
values, and to fully and accurately prepare reports and answers
to requests pursuant to Section 5.F hereof. The Company shall also
provide to IFTC any additional information (including but not
limited to the declaration, record and payment dates and amounts
of any dividends or income and any other special actions required
concerning the securities of the Registered Accounts) necessary
for IFTC to fully and properly perform such duties and
responsibilities on an ongoing basis to the extent such
information is not readily available from generally accepted
securities industry services or publications to be used by IFTC in
performing its duties hereunder, as agreed upon in writing by IFTC
and the Company from time to time. Such additional information
shall be supplied in writing or its electronic or digital
equivalent prior to the close of the New York Stock Exchange on
each day on which IFTC prices the Registered Accounts' securities
and foreign currency holdings.
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<PAGE> 3
B. The Company shall pay to IFTC such compensation at such time as
may from time to time be agreed upon in writing by IFTC and the
Company. The initial compensation schedule is attached as Exhibit
A. The Company shall also reimburse IFTC within 30 days for all
reasonable out-of-pocket disbursements, costs and expenses
reasonably incurred by IFTC in connection with services performed
for the Company pursuant to this Agreement.
C. The Company shall notify IFTC of any statutes, rules, regulations,
requirements, or policies which relate to any Registered Accounts,
and of any changes therein, which may materially impact IFTC's
performance of its responsibilities described in Section 4.A,
above, or its related operational policies and procedures as they
relate to such Registered Accounts in a manner different from or
in addition to the requirements of the National Association of
Insurance Commissioners' accounting standards as applicable to
insurance company separate accounts or investment companies
registered under the 1940 Act in general.
D. The Company shall provide to IFTC, as conclusive proof of any fact
or matter which may reasonably be ascertained from the Company, a
certificate signed by the Company's president or other officer, or
other authorized individual, as requested by IFTC. The Company
shall also provide to IFTC instructions with respect to any matter
concerning this Agreement requested by IFTC. IFTC may rely upon
any instruction or information furnished by any person reasonably
believed by it to be an officer or agent of the Company and shall
not be held to have notice of any change of authority of any such
person until receipt of written notice thereof from the Company.
E. The Company shall preserve the confidentiality of the Portfolio
Accounting System and prevent its disclosure, except as required
by law, to other than its own employees who reasonably have a need
to know in connection with the use of the Portfolio Accounting
System contemplated hereunder, and the Company shall use its best
efforts to protect the rights of IFTC and IFTC's licensor in the
Portfolio Accounting System. IFTC's licensor is intended to be and
shall be a third party beneficiary of the Company's obligations
and undertakings contained in this paragraph.
5. Duties and Responsibilities of IFTC.
A. IFTC shall calculate each Registered Account's value and, if
applicable, unit value in accordance with instructions of the
Company and its accountants and/or other advisors and the rules of
the 1940 Act and the applicable prospectus. IFTC will price the
securities and foreign currency holdings of the Registered
Accounts for which market quotations are available by the use of
outside services designated by the Company which are normally used
and contracted with for this purpose; all
3
<PAGE> 4
other securities and foreign currency holdings will be priced in
accordance with the Company's instructions.
B. IFTC shall prepare and maintain, with the direction and as
interpreted by the Company or the Company's accountants and/or
other advisors, in complete, accurate, and current form, all
accounts and records needed to be maintained as a basis for
calculation of each Registered Account's value, and, if
applicable, unit value, and such other accounts and records as may
be agreed upon by the parties in writing. IFTC shall preserve such
records in the manner required by law until termination of this
Agreement, except as otherwise approved by the Company in writing.
C. IFTC shall make available to the Company and its authorized
representatives for inspection or reproduction within a reasonable
time, upon demand, all accounts and records of the Company
maintained and preserved by IFTC.
D. IFTC shall be entitled to rely conclusively on the completeness
and correctness of any and all accounts and records turned over to
it by the Company.
E. IFTC shall assist the Company's independent accountants or any
regulatory body in any requested review of the Company's accounts
and records maintained by IFTC, provided that written instructions
to do so are furnished to IFTC by the Company. IFTC shall be
reimbursed by the Company for all reasonable expenses and employee
time invested in any such review outside of routine and normal
periodic reviews.
F. Upon receipt from the Company of any necessary information or
instructions, IFTC shall provide information from the books and
records it maintains for the Company (i) that the Company needs
for completing Schedule D of the Annual Statement of the National
Association of Insurance Commissioners, tax returns,
questionnaires, or periodic reports to clients, (ii) that the
Registered Accounts' investment adviser needs for compliance with
the requirements of Rule 204-2 under the Investment Advisers Act
of 1940, as amended, and (iii) that the Company may need for such
other reports and information requests as the Company and IFTC
shall agree upon from time to time.
G. Additional Registered Accounts may be added to this Agreement,
provided that IFTC consents to such addition. Rates or charges for
each additional Registered Account shall be as agreed upon by IFTC
and the Company in writing.
H. IFTC shall not have any responsibility hereunder to the Company,
the Company's clients or any other person or entity for moneys or
securities of any Registered Account, whether held by the Company
or custodians of the Company.
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<PAGE> 5
I. IFTC agrees that, except as otherwise required by law, IFTC will
keep confidential all records of and information in its possession
relating to the Registered Accounts and will not disclose the same
to any person except at the request or with the consent of the
Company.
J. IFTC may not, except with the express written consent of the
Company in each instance, use the name of the Company or any
Company affiliate in advertising, publicity or similar materials
distributed to existing or prospective clients.
K. IFTC shall continuously maintain adequate insurance coverage
appropriate for its duties and responsibilities under this
Agreement.
6. Indemnification. IFTC shall not be responsible or liable for, and the
Company shall indemnify and hold IFTC harmless from and against, any and
all costs, expenses, losses, damages, charges, counsel fees, payments and
liabilities, which may be asserted against or incurred by IFTC or for
which it may be liable, arising out of or attributable to:
A. IFTC's action or omission to act pursuant hereto, except for any
loss or damage arising from IFTC's failure to perform its
obligations hereunder and/or any negligent act or willful
misconduct of IFTC.
B. IFTC's payment of money as requested by the Company, or the taking
of any action which might make IFTC liable for payment of money;
provided, however, that IFTC shall not be obligated to expend its
own moneys or to take any such action except in IFTC's sole
discretion.
C. IFTC's good faith reliance upon any instructions, advice, notice,
request, consent, certificate or other instrument or paper
appearing to it to be genuine and to have been properly executed.
D. IFTC's good faith reliance on the advice or opinion of counsel for
the Company (which will be obtained at the Company's expense) or
its own counsel (which will be obtained at IFTC's own expense), or
on the instructions, advice and statements of the Company, the
Company's accountants and officers or other authorized
individuals.
E. The purchase or sale of any securities or foreign currency
positions. Without limiting the generality of the foregoing, IFTC
shall be under no duty or obligation to inquire into:
5
<PAGE> 6
(1) The validity of the issue of any securities purchased by or
for any Registered Account, or the legality of the purchase
thereof, or the propriety of the purchase price; or
(2) The legality of the sale of any securities by or for any
Registered Account, or the propriety of the sale prices
F. Any error, omission, inaccuracy or other deficiency in any
Registered Account's accounts and records or other information
provided by or on behalf of the Company to IFTC, or the failure of
the Company to provide, or provide in a timely manner, any
accounts, records, or information pursuant to Section 4.A hereof.
G. Any defect in, failure of performance of or unavailability of any
computer system or application provided to IFTC by or on behalf
of the Company or any error, omission, inaccuracy or other
deficiency in the information thereby supplied to IFTC.
H. Any error, omission, inaccuracy or other deficiency in the records
or other information provided by any custodian of a Registered
Account which is not affiliated with IFTC (a "nonaffiliated
custodian"), or the failure of any such nonaffiliated custodian
to provide in a timely manner any information which such
nonaffiliated custodian is to provide IFTC on behalf of the
Company for purposes of Section 4.A hereof, except to the extent
attributable to any negligence or willful misconduct by IFTC.
7. Limitation of Damages. Notwithstanding anything herein to the contrary,
as between the parties IFTC shall not be liable for consequential,
special or punitive damages in any event other than cases of IFTC's gross
negligence.
8. Force Majeure. IFTC shall not be responsible or liable for its failure or
delay in performance of its obligations under this Agreement arising out
of or caused, directly or indirectly, by circumstances beyond its
reasonable control, including, without limitation: governmental or
exchange action, war, strike, riot, emergency, civil disturbance,
terrorism, vandalism, explosions, labor disputes not involving the IFTC
work force, freezes, floods, fires, tornados, acts of God or public
enemy, revolutions, or insurrection; provided, however, that IFTC agrees
to maintain a reasonable disaster recovery program designed to minimize
any loss of data or service interruption from such causes.
9. Procedures. IFTC and the Company may from time to time adopt procedures
as they agree upon, and IFTC may conclusively assume that any procedure
approved or directed by the Company or its accountants or other advisors
does not conflict with or violate any requirements of its charter or
bylaws, any applicable law, rule or regulation, any
6
<PAGE> 7
Registered Account's prospectus, or any order, decree or agreement by
which it may be bound.
10. Term and Termination. The initial term of this Agreement shall be a
period of one year commencing on the effective date hereof. This
Agreement shall continue thereafter until terminated by either the
Company or IFTC by notice in writing received by the other party not less
than one hundred twenty (120) days prior to the date upon which such
termination shall take effect. Upon termination of this Agreement:
A. The Company shall pay to IFTC its fees and compensation due
hereunder and its reimbursable disbursements, costs and expenses
paid or incurred to such date, except to the extent such fees,
compensation, disbursements, costs and expenses are being disputed
by the Company in good faith.
B. The Company shall designate a successor (which may be the Company)
by notice in writing to IFTC on or before the termination date.
C. IFTC shall deliver to the successor, or if none has been
designated, to the Company at IFTC's office, all records, funds
and other properties of the Company deposited with or held by IFTC
hereunder. In the event that neither a successor nor the Company
takes delivery of all records, funds and other properties of the
Company by the termination date, IFTC's sole obligation with
respect thereto from the termination date until delivery to a
successor or the Company shall be to exercise reasonable care to
hold the same in custody in its form and condition as of the
termination date, and IFTC shall be entitled to reasonable
compensation therefor, including but not limited to all of its
out-of-pocket costs and expenses incurred in connection therewith;
provided, that IFTC shall not be required to maintain and preserve
any records of the Company for more than ninety (90) days after
the termination date.
11. Notices. Notices, requests, instructions and other writings addressed to
the Company c/o The Prudential Asset Management Company, 71 Hanover Road,
Florham Park, New Jersey 07932 or at such address as the Company may have
designated to IFTC in writing, shall be deemed to have been properly
given to the Company hereunder; and notices, requests, instructions and
other writings addressed to IFTC at its offices at 127 West 10th Street,
Kansas City, MO 64105, Attn: Allen Strain, or to such other address as it
may have designated to the Company in writing, shall be deemed to have
been properly given to IFTC hereunder.
12. Limitation of Account Liability. Each Registered Account shall be
regarded for all purposes as a separate party apart from each other.
Unless the context otherwise requires, with respect to every transaction
covered by this Agreement, every reference herein to a Registered Account
or the Company shall be deemed to relate solely to the particular
7
<PAGE> 8
Registered Account to which such transaction relates. Under no
circumstances shall the rights, obligations or remedies with respect to a
particular Registered Account constitute a right, obligation or remedy
applicable to any other. The use of this single document to memorialize
the separate agreement of IFTC and the Company with respect to each
Registered Account is understood to be for clerical convenience only and
shall not constitute any basis for joining any Registered Accounts for
any reason.
13. Electronic Communications. If IFTC shall provide the Company direct
access to the Portfolio Accounting System or if IFTC and the Company
shall agree to utilize any electronic system of communication, the
Company shall be fully responsible for any and all consequences of the
use or misuse of the terminal device, passwords, access instructions and
other means of access to such system(s) which are utilized by, assigned
to or otherwise made available to the Company. The Company agrees to
implement and use its best efforts to enforce appropriate security
policies and procedures to prevent unauthorized or improper access to or
use of such system(s). IFTC shall be fully protected in acting hereunder
upon any instructions, communications, data or other information received
by IFTC by such means as fully and to the same effect as if delivered to
IFTC by written instrument signed by the requisite authorized
representative(s) of the Company. The Company shall indemnify and hold
IFTC harmless from and against any and all losses, damages, costs,
charges, counsel fees, payments, expenses and liability which may be
suffered or incurred by IFTC as a result of the use or misuse, whether
authorized or unauthorized, of any such system(s) by the Company or by
any person who acquires access to such system(s) through the terminal
device, passwords, access instructions or other means of access to such
system(s) which are utilized by, assigned to or otherwise made available
to the Company except to the extent attributable to any negligence or
willful misconduct by IFTC.
14. Miscellaneous
A. This Agreement shall be construed according to, and the rights and
liabilities of the parties hereto shall be governed by, the laws
of the State of Missouri, without reference to the choice of laws
principles thereof.
B. All terms and provisions of this Agreement shall be binding upon,
inure to the benefit of and be enforceable by the parties hereto
and their respective successors and permitted assigns.
C. The representations and warranties, the indemnification extended
hereunder, and the provisions of Section 4.E. are intended to and
shall continue after and survive the expiration, termination or
cancellation of this Agreement.
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<PAGE> 9
D. No provisions of the Agreement may be amended or modified in any
manner except by a written agreement properly authorized and
executed by each party hereto.
E. The failure of either party to insist upon the performance of any
terms or conditions of this Agreement or to enforce any rights
resulting from any breach of any of the terms or conditions of
this Agreement, including the payment of damages, shall not be
construed as a continuing or permanent waiver of any such terms,
conditions, rights or privileges, but the same shall continue and
remain in full force and effect as if no such forbearance or
waiver had occurred. No waiver, release or discharge of either
party's rights hereunder shall be effective unless contained in a
written instrument signed by the party sought to be charged.
F. The captions in this Agreement are included for convenience of
reference only, and in no way define or delimit any of the
provisions hereof or otherwise affect their construction or
effect.
G. This Agreement may be executed in two or more separate
counterparts, each of which shall be deemed an original but all of
which together shall constitute one and the same instrument.
H. If any part, term or provision of this Agreement is determined by
the courts or any regulatory authority to be illegal, in conflict
with any law or otherwise invalid, the remaining portion or
portions shall be considered severable and not be affected, and
the rights and obligations of the parties shall be construed and
enforced as if the Agreement did not contain the particular part,
term or provision held to be illegal or invalid.
I. This Agreement may not be assigned by either party without the
prior written consent of the other; provided, that the merger
described in Section 3.A hereof shall not be prohibited hereunder.
J. Neither the execution nor performance of this Agreement shall be
deemed to create a partnership or joint venture by and between the
Company and IFTC.
K. It is understood and agreed that IFTC will perform the services
hereunder as an independent contractor, and that during the
performance of the services, IFTC's employees will not be
considered employees of the Company within the meaning or the
application of any federal, state or local laws or regulations
including, but not limited to, laws or regulations covering
unemployment insurance, old age benefits, workers' compensation
insurance, industrial accident, labor or taxes of any kind.
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<PAGE> 10
L. Except as specifically provided herein, this Agreement does not in
any way affect any other agreements entered into among the parties
hereto and any actions taken or omitted by either party hereunder
shall not affect any rights or obligations of the other party
hereunder.
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
by their respective and duly authorized officers, to be effective as of the day
and year first above written.
INVESTORS FIDUCIARY TRUST COMPANY
By: /s/ Allen Strain
------------------------------------
Title: EVP
---------------------------------
THE PRUDENTIAL INSURANCE COMPANY
OF AMERICA
By: /s/ Gerald A. Fanzetti
------------------------------------
Title: Vice President
---------------------------------
10
<PAGE> 11
SCHEDULE I
Accounts:
Prudential Variable Contract Account - 2
Prudential Variable Contract Account - 10
Prudential Variable Contract Account - 11
11
<PAGE> 12
SCHEDULE II
ACCOUNTING AND RECORDKEEPING FUNCTIONS
I. Daily Procedures
A. Provide Prudential Asset Management Company (PAMCo) personnel
and/or the adviser(s) with a cash available balance within the
agreed upon time frame.
B. Reconcile the custodial bank account(s) and resolve any identified
problems.
C. Review trade activity transmitted to IFTC and ensure that all
trades have been properly recorded onto the Portfolio Accounting
System ("PAS"). Enter any trades received outside of the direct
transmission from PAMCo personnel or the investment adviser(s) in
the Portfolio Accounting System (PAS) before the close of business
on the day received, if received by 4:00 p.m. CT. Reconcile trade
activity to trade control reports received from the investment
adviser(s).
D. Reconcile aggregate shares and/or par value of each Account to the
aggregate amounts shown on a holdings report provided by the
investment adviser(s).
E. Record the unitholder activity received from PAMCo onto the PAS.
Reconcile the activity to reports received from PAMCo.
F. Review general ledger activity for reasonableness.
G. Review sources of corporate action activity (i.e.; Wall Street
Journal, Bloomberg Financial Markets, PAS reports) to determine if
securities in the portfolio(s) are impacted. Record the necessary
information to properly reflect the impact of the corporate action
activity on the records of the portfolio(s).
H. Perform market valuation on the portfolios that require daily
valuation using the pricing services(s) identified by PAMCo.
I. Transmit the required information to PAMCo for the unit value
calculations within the time frame agreed to by both parties.
II. Monthly Procedures
A. Reconcile asset listing received from custodial bank(s) to the
accounting records maintained on the PAS.
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B. Prepare monthly reporting package for PAMCo and investment
adviser(s). This information will be provided to PAMCo within 4
business days after receipt of monthly reports from the PAS.
Information will include:
- Analysis of monthly activity in significant accounts.
- PAS reports, as identified by PAMCo.
- Standard reporting information as requested by PAMCo.
C. Perform monthly reconciliation to Prudential's statutory
record-keeping system.
III. Periodic Procedures
A. Provide schedules supporting the investment records to respond to
requests from external auditors on an "as needed" basis.
B. Provide schedules to PAMCo supporting the investment records on an
"as needed" basis.
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<PAGE> 1
EXHIBIT (11)(ii)
FIRST AMENDMENT TO INVESTMENT ACCOUNTING AGREEMENT
THIS FIRST AMENDMENT TO INVESTMENT ACCOUNTING AGREEMENT (the "Amendment")
is made and entered into as of June 1, 1997 by and among THE PRUDENTIAL
INSURANCE COMPANY OF AMERICA ("Company"), a New Jersey corporation, and
INVESTORS FIDUCIARY TRUST COMPANY, a Missouri trust company ("IFTC").
RECITALS:
A. Company and IFTC are parties to that certain Investment Accounting
Agreement dated as of January 2, 1996 (the "Agreement") for investment
accounting and recordkeeping services for certain Registered Accounts, as
defined in the Agreement;
B. Company and IFTC are currently in the process of converting from the use
of PAS to another accounting system suitable for maintaining certain accounting
records, known as "PAM", or "Portfolio Accounting Manager", licensed for use
from Princeton Financial Services.
C. Company and IFTC desire to amend and supplement the Agreement upon
the following terms and conditions.
AGREEMENTS:
In consideration of mutual promises and other good and valuable consideration,
the receipt and sufficiency of which are hereby acknowledged, Company and IFTC
hereby agree that the Agreement is amended and supplemented as follows:
1. All references to "PAS" or the "Portfolio Accounting System" in the
Agreement will from the date of the conversion forward be considered
references to "PAM".
2. Section 4.B shall be deleted and replaced with the following: As
compensation for the services rendered hereunder, Company shall pay IFTC
a fee calculated in accordance with the Consolidated Prudential Fee
Schedule between Prudential Mutual Funds and Annuities and State Street
Bank and Trust dated April, 1997, as amended from time to time."
In all other respects, the Agreement is hereby ratified and confirmed and
remains in full force and effect.
IN WITNESS WHEREOF, the parties have caused this Amendment to be executed by
their duly authorized officers to be effective as of the date first above
written.
INVESTORS FIDUCIARY TRUST COMPANY
By: /s/ STEPHEN R. HILLIARD
---------------------------------------------
Stephen R. Hilliard, Executive Vice President
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
By: /s/ JAMES J. STRAINE
---------------------------------------------
James J. Straine, Vice President, Assistant
Treasurer
Copied for Microfisch on
Aug. 5, 1998
------------------------
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EXHIBIT (11)(iii)
SECOND AMENDMENT TO INVESTMENT ACCOUNTING AGREEMENT
THIS SECOND AMENDMENT TO INVESTMENT ACCOUNTING AGREEMENT (the
"Amendment") is made and entered into as of July 1, 1998 by and among THE
PRUDENTIAL INSURANCE COMPANY OF AMERICA ("Company"), a New Jersey corporation,
and INVESTORS FIDUCIARY TRUST COMPANY, a Missouri trust company ("IFTC").
RECITALS:
A. Company and IFTO are parties to that certain Investment Accounting
Agreement dated as of January 2, 1996, amended as of June 1, 1997 (the
"Agreement") for investment accounting and recordkeeping services for certain
Registered Accounts, as defined in the Agreement;
B. Company and IFTC desire to amend and supplement the Agreement upon the
following terms and conditions.
AGREEMENTS:
In consideration of mutual promises and other good and valuable consideration,
the receipt and sufficiency of which are hereby acknowledged, Company and IFTC
hereby agree that the Agreement is amended and supplemented as follows:
1. Schedule I shall be replaced in its entirety by the Schedule I dated July
1, 1998 attached hereto and incorporated herein by reference.
2. Section 1 is hereby amended to read:
1. Appointment of Recordkeeping Agent. The Company hereby constitutes and
appoints IFTC as investment accounting and recordkeeping agent for the
Registered Accounts to calculate the values and, if applicable, unit
values of the Registered Accounts and to perform certain other accounting
and recordkeeping functions for the Registered Accounts as set forth more
fully on Schedule II or Schedule IIA hereto and as required of such
Registered Account under Rule 3la of the 1940 Act with respect to
portfolio transactions.
3. Section 3.A. is hereby amended to read:
"That it is a trust company organized and existing and in good standing
under the laws of the State of Missouri."
4. Section 14.I. is hereby amended to read:
"This Agreement may not be assigned by either party without the prior
written consent of the other."
5. Section 11 is hereby amended to read:
"11. Notices. Notices, requests, instructions and other writings
addressed to the Company, c/o The Prudential Asset Management Company, 71
Hanover Road, Florham Park, New Jersey 07932 or at such address as the
Company may have designated to IFTC in writing, shall be deemed to have
been properly given to the Company hereunder. Notices, requests,
instructions and other writings addressed to an individual Registered
Account at the address
Copied for Microfisch on
11-9-98
------------------------
<PAGE> 2
SCHEDULE 1A
Date: July 1, 1998
Name: Address if different from Company:
Prudential Variable Contract Account - 2
Prudential Variable Contract Account - 10
Prudential Variable Contract Account - 11
Attn: Debra E. Goldberg
Prudential Group Variable Universal Life Vice President, Marketing
290 West Mount Pleasant Avenue
Livingston, NJ 07039-2729
<PAGE> 3
SCHEDULE IIA
ACCOUNTING AND RECORDKEEPING FUNCTIONS FOR PRUDENTIAL GROUP VARIABLE LIFE
SEPARATE ACCOUNT (GVUL):
I. Review trading information received daily from Prudential's Group Life
and Disability Insurance unit responsible for the administration of the
Prudential Group Variable Life separate account or such other agent as
Prudential may designate (the "Administrator").
II. As instructed by the Administrator, initiate and execute trades on behalf
of GVUL, making and receiving payment, as necessary, with the transfer
agents of the investment companies (the "Funds") underlying the
investment options available to GVUL participants, as agreed to by the
parties and set forth in the flow chart attached to this Schedule as
Appendix A.
III. Perform the appropriate accounting activities with respect to required
recordkeeping for GVUL including:
A. Accrual of expenses.
B. Recording of capital activity, including sub-accounts
C. Recording of investment activity of GVUL.
D. Obtain and record the daily net asset values (NAVs) of the Funds.
E. Compute daily unit values of each sub-account based on the Fund's
NAVs.
F. Transmit daily unit values of the GVUL sub-accounts to the
Administrator.
G. Post the relevant accounting information to the Administrator's
general ledger system.
H. Review such records on a regular basis for "reasonableness."
I. Periodically compute rate of return calculations s may be agreed
upon from time to time with the administrator
IV. Perform a reconciliation, not less frequently than monthly, of the
accounting records maintained by IFTC and the general ledger system of
the Administrator.
V. Prepare and transmit a monthly reporting package to the Administrator
with such reports as the parties agree.
VI. Provide schedules supporting the accounting records on an "as needed"
basis to respond to requests from external auditors and in response to
reasonable requests from the Administrator.
<PAGE> 4
set forth on Schedule I, hereto, or if, none, to the Company, or at such
address as the individual Registered Account may have designated to IFTC
in writing, shall be deemed to have been properly given to the individual
Registered Account hereunder. Notices, requests, instructions and other
writings addressed to IFTC at its offices at 801 Pennsylvania, Kansas
City, MO 64105, Attn: Investment Accounting Department, or to such other
address as it may have designated to the Company (or the individual
Registered Account if its address differs from the Company) in writing,
shall be deemed to have been properly given to IFTC hereunder.
In all other respects, the Agreement is hereby ratified and confirmed and
remains in full force and effect.
IN WITNESS WHEREOF, the parties have caused this Amendment to be executed by
their duly authorized officers to be effective as of the date first above
written.
INVESTORS FIDUCIARY TRUST COMPANY
By: /s/ STEPHEN R. HILLIARD
---------------------------------------------
Stephen R. Hilliard, Executive Vice President
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
By: /s/ KATHLEEN C. HOFFMAN
---------------------------------------------
Kathleen C. Hoffman
Vice President & Assistant Treasurer
<PAGE> 5
APPENDIX A
PROCESS OVERVIEW
<TABLE>
<CAPTION>
DAY 1 ACTIVITIES DAY 2 ACTIVITIES MONTHLY/OTHER
- ----------------------------------------- ---------------------------------------------------------------------- -----------------
FREQUENCY
<S> <C> <C> <C> <C> <C>
E) IFTC accrues the
daily expenses on
the PAM system IFTC prepares
reports for the
LINX summarizes F) IFTC records the compliance and
PGLS accounting for capital activity on statutory dept.,
the "capital activity" to the PAM system at
a portfolio level J) IFTC computes
Investor activity Application/Additional A) LINX transmits the B) IFTC initiates the NET Unit
received by funds are processed by Product/Portfolio and executes mutual G) IFTC records the Value
Prudential Prudential on the LINX level activity for fund trade orders investment activity
System the mutual fund buy at the previous onto the PAM system IFTC posts
Unit value or sell. day's NAV activity to POLS
received for IFTC H) IFTC obtains the in a summary
for the day LINX communicates C) Incoming Funds- NAV from the mutual basis
cash activity thru Corp Treasury moves fund complexes
the TTT process funds to IFTC K) IFTC transmits
I) Wires are sent the Net Unit
C) Outgoing Funds- to/from Mutual Values to the
IFTC moves funds to Fund Complexes to LINX System
wire to BONY settle trades
D) Cash file sent to
Prudential nightly
to summarize bank
activity
</TABLE>
Approximate Time Table - All are coded in E.S.T.
A) 7:00 AM
B) 9:00 AM
C) 12:00 AM - 4:00 PM
D) 10:00 PM
E) 11:00 AM
F) 12:00 AM
G) 2:00 PM
H) 7:00 PM
I) 9:00 AM - 4:00 PM
J) 7:30 PM
K) 8:00 PM
<PAGE> 6
[IFTC INVESTORS FIDUCIARY TRUST COMPANY LETTERHEAD]
July 30, 1998
Ms. Grace Torres
Prudential Investments
100 Mulberry Street
Gateway Center 3
Newark, NJ 07102-3772
Dear Grace:
Following are the proposed changes to the existing fee scheduled between State
Street and Prudential regarding the accounting charges for the Separate Accounts
that we have been discussing:
Section IV. Accounting Charges: Item B. addresses the charges related to the
Separate Accounts that are maintained on the PAM for Mutual Funds system. Due to
the addition of the types of separate accounts that are being serviced, the
pricing structure needs to be expanded to address the new services.
The current account type which is identified as "All other accounts"
needs to be renamed to be "Global and leveraged portfolios" with the
annual charge being $46,200.
A new category needs to be added which will cover the charges for the
portfolios that hold relatively few securities, such as mutual fund
related portfolios, outside managed mutual funds, real estate investment
trust portfolios, etc. This category will be identified as:
Other portfolios (including mutual fund and REIT portfolios): (Annual
Charges)
First 50 portfolios $7,200 per portfolio
Next 50 portfolios $4,200 per portfolio
Next 25 portfolios $3,000 per portfolio
Excess of 125 portfolios $2,400 per portfolio
An additional category needs to be added which will cover the charges for
the portfolios that will be maintained for the Group Variable Universal
Life product. This category will be identified as:
Group Variable Universal Life portfolios (Annual Charges)
First 50 portfolios $4,200 per portfolio 350
Next 25 portfolios $3,000 per portfolio 250
Excess of 75 portfolios $2,400 per portfolio 200
Please let me know how you would like to accomplish the actual amendment to the
fee schedule between our two organizations. If you have any questions, please
feel free to contact me at (816) 871-9631.
Best regards,
/s/ BILL DARK
William A. Dark
Vice President
<PAGE> 1
EXHIBIT (13)(i)
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Registration Statement on Form N-3 of our
reports dated February 23,2000, 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
Account - 24 which appear in such Registration Statement. We also consent to the
references to us under the headings "Experts" and "Financial Highlights" in such
Registration Statement.
PricewaterhouseCoopers LLP
New York, New York
April 28, 2000
<PAGE> 1
VCA 11 FUND
(THE FUND)
CODE OF ETHICS ADOPTED PURSUANT TO RULE 17j-1
UNDER THE INVESTMENT COMPANY ACT OF 1940
(THE CODE)
1. PURPOSES
The Code has been adopted by the Board of Directors/Trustees of the Fund,
in accordance with Rule 17j-1(c) under the Investment Company Act of 1940 (the
Act) and in accordance with the following general principles:
(1) THE DUTY AT ALL TIMES TO PLACE THE INTERESTS OF SHAREHOLDERS
FIRST.
Investment company personnel should scrupulously avoid
serving their own personal interests ahead of shareholders'
interests in any decision relating to their personal investments.
(2) THE REQUIREMENT THAT ALL PERSONAL SECURITIES TRANSACTIONS BE
CONDUCTED CONSISTENT WITH THE CODE AND IN SUCH A MANNER AS TO
AVOID ANY ACTUAL OR POTENTIAL CONFLICT OF INTEREST OR ANY ABUSE OF
AN INDIVIDUAL'S POSITION OF TRUST AND RESPONSIBILITY.
Investment company personnel must not only seek to achieve
technical compliance with the Code but should strive to abide by
its spirit and the principles articulated herein.
(3) THE FUNDAMENTAL STANDARD THAT INVESTMENT COMPANY PERSONNEL
SHOULD NOT TAKE INAPPROPRIATE ADVANTAGE OF THEIR POSITIONS.
Investment company personnel must avoid any situation that
might compromise, or call into question, their exercise of fully
independent judgment in the interest of shareholders, including,
but not limited to the receipt of unusual investment
opportunities, perquisites, or gifts of more than a de minimis
value from persons doing or seeking business with the Fund.
<PAGE> 2
Rule 17j-1 under the Act generally proscribes fraudulent or manipulative
practices with respect to a purchase or sale of a security held or to be
acquired (as such term is defined in Section 2.) by an investment company, if
effected by an associated person of such company.
The purpose of the Code is to establish procedures consistent with the
Act and Rule 17j-1 to give effect to the following general prohibitions as set
forth in Rule 17j-1(b) as follows:
(a) It shall be unlawful for any affiliated person of or
Principal Underwriter for a registered investment company, or any
affiliated person of an investment adviser of or principal underwriter
for a registered investment company in connection with the purchase or
sale, directly or indirectly, by such person of a security held or to be
acquired, by such registered investment company:
(1) To employ any device, scheme or artifice to defraud
such registered investment company;
(2) To make to such registered investment company any
untrue statement of a material fact or omit to state to such
registered investment company a material fact necessary in order
to make the statements made, in light of the circumstances under
which they are made, not misleading;
(3) To engage in any act, practice, or course of
business which operates or would operate as a fraud or deceit upon
any such registered investment company; or
(4) To engage in any manipulative practice with respect
to such registered investment company.
2. DEFINITIONS
(a) "Access Person" means any director/trustee, officer,
general partner or Advisory Person (including any Investment Personnel,
as that term is defined herein) of the Fund, the Manager, the
Adviser/Subadviser, or the Principal Underwriter.
(b) "Adviser/Subadviser" means the Adviser or Subadviser of
2
<PAGE> 3
the Fund or both as the context may require.
(c) "Advisory Person" means (i) any employee of the Fund,
Manager or Adviser/Subadviser (or of any company in a control
relationship to the Fund, Manager or Adviser/Subadviser) who, in
connection with his or her regular functions or duties, makes,
participates in, or obtains information regarding the purchase or sale of
a security by the Fund, or whose functions relate to the making of any
recommendations with respect to such purchases or sales; and (ii) any
natural person in a control relationship to the Fund who obtains
information concerning recommendations made to the Fund with regard to
the purchase or sale of a security.
(d) "Beneficial Ownership" will be interpreted in the same
manner as it would be under Securities Exchange Act Rule 16a-1(a)(2) in
determining which security holdings of a person are subject to the
reporting and short-swing profit provisions of Section 16 of the
Securities Exchange Act of 1934 and the rules and regulations thereunder,
except that the determination of direct or indirect beneficial ownership
will apply to all securities which an Access Person has or acquires
(Exhibit A).
(e) "Complex" means the group of registered investment
companies for which Prudential Investments Fund Management LLC serves as
Manager; provided, however, that with respect to Access Persons of the
Subadviser (including any unit or subdivision thereof), "Complex" means
the group of registered investment companies in the Complex advised by
the Subadviser or unit or subdivision thereof.
(f) "Compliance Officer" means the person designated by the
Manager, the Adviser/Subadviser, or Principal Underwriter (including his
or her designee) as having responsibility for compliance with the
requirements of the Code.
(g) "Control" will have the same meaning as that set forth in
Section 2(a)(9) of the Act.
(h) "Disinterested Director/Trustee" means a Director/ Trustee
of the Fund who is not an "interested person" of the Fund within the
meaning of Section 2(a)(19) of the Act.
An interested Director/Trustee who would not otherwise be deemed
to be an Access Person, shall be treated as a Disinterested
Director/Trustee for purposes of compliance with the provisions of the
Code.
(i) "Initial Public Offering" means an offering of securities
3
<PAGE> 4
registered under the Securities Act of 1933, the issuer of which,
immediately before the registration, was not subject to the reporting
requirements of sections 13 or 15(d) of the Securities Exchange Act of
1934.
(j) "Investment Personnel" means: (a) Portfolio Managers and
other Advisory Persons who provide investment information and/or advice
to the Portfolio Manager(s) and/or help execute the Portfolio
Manager's(s') investment decisions, including securities analysts and
traders; and (b) any natural person in a control relationship to the
Fund who obtains information concerning recommendations made to the Fund
with regard to the purchase or sale of a security.
(k) "Manager" means Prudential Investments Fund Management,
LLC.
(l) "Portfolio Manager" means any Advisory Person who has the
direct responsibility and authority to make investment decisions for the
Fund.
(m) "Private placement" means a limited offering that is exempt
from registration under the Securities Act of 1933 pursuant to section
4(2) or section 4(6) or pursuant to rule 504, rule 505 or rule 506 under
such Securities Act.
(n) "Security" will have the meaning set forth in Section
2(a)(36) of the Act, except that it will not include shares of registered
open-end investment companies, direct obligations of the Government of
the United States, , short-term debt securities which are "government
securities" within the meaning of Section 2(a)(16) of the Act, bankers'
acceptances, bank certificates of deposit, commercial paper and such
other money market instruments as are designated by the Compliance
Officer. For purposes of the Code, an "equivalent Security" is one that
has a substantial economic relationship to another Security. This would
include, among other things, (1) a Security that is exchangeable for or
convertible into another Security, (2) with respect to an equity
Security, a Security having the same issuer (including a private issue by
the same issuer) and any derivative, option or warrant relating to that
Security and (3) with respect to a fixed-income Security, a Security
having the same issuer, maturity, coupon and rating.
(o) "Security held or to be acquired" means any Security or any
equivalent Security which, within the most recent 15 days: (1) is or has
been held by the Fund; or (2) is being considered by the Fund or its
investment adviser for purchase by the Fund.
4
<PAGE> 5
3. APPLICABILITY
The Code applies to all Access Persons and the Compliance Officer
shall provide each Access Person with a copy of the Code. The
prohibitions described below will only apply to a transaction in a
Security in which the designated Access Person has, or by reason of such
transaction acquires, any direct or indirect Beneficial Ownership. The
Compliance Officer will maintain a list of all Access Persons who are
currently, and within the past five years, subject to the Code.
4. PROHIBITED PURCHASES AND SALES
A. INITIAL PUBLIC OFFERINGS
No Investment Personnel may acquire any Securities in an initial public
offering. For purposes of this restriction, "Initial Public Offerings" shall not
include offerings of government and municipal securities.
B. PRIVATE PLACEMENTS
No Investment Personnel may acquire any Securities in a private placement
without prior approval.
(i) Prior approval must be obtained in accordance with the
preclearance procedure described in Section 6 below. Such approval will
take into account, among other factors, whether the investment
opportunity should be reserved for the Fund and its shareholders and
whether the opportunity is being offered to the Investment Personnel by
virtue of his or her position with the Fund. The Adviser/Subadviser shall
maintain a record of such prior approval and reason for same, for at
least 5 years after the end of the fiscal year in which the approval is
granted.
5
<PAGE> 6
(ii) Investment Personnel who have been authorized to acquire
Securities in a private placement must disclose that investment to the
chief investment officer (including his or her designee) of the
Adviser/Subadviser (or of any unit or subdivision thereof) or the
Compliance Officer when they play a part in any subsequent consideration
of an investment by the Fund in the issuer. In such circumstances, the
Fund's decision to purchase Securities of the issuer will be subject to
an independent review by appropriate personnel with no personal interest
in the issuer.
C. BLACKOUT PERIODS
(i) Except as provided in Section 5 below, Access Persons are
prohibited from executing a Securities transaction on a day during which
any investment company in the Complex has a pending "buy" or "sell" order
in the same or an equivalent Security and until such time as that order
is executed or withdrawn; provided, however, that this prohibition shall
not apply to Disinterested Directors/Trustees except if they have actual
knowledge of trading by any fund in the Complex and, in any event, only
with respect to those funds on whose boards they sit.
This prohibition shall also not apply to Access Persons of the
Subadviser who do not, in the ordinary course of fulfilling his or her
official duties, have access to information regarding the purchase and
sale of Securities for the Fund and are not engaged in the day-to-day
operations of the Fund; provided that Securities investments effected by
such Access Persons during the proscribed
6
<PAGE> 7
period are not effected with knowledge of the purchase or sale of the
same or equivalent Securities by any fund in the Complex.
A "pending 'buy' or 'sell' order" exists when a decision to
purchase or sell a Security has been made and communicated.
(ii) Portfolio Managers are prohibited from buying or selling a
Security within seven calendar days before or after the Fund trades in
the same or an equivalent Security. Nevertheless, a personal trade by any
Investment Personnel shall not prevent a Fund in the same Complex from
trading in the same or an equivalent security. However, such a
transaction shall be subject to independent review by the Compliance
Officer.
(iii) If trades are effected during the periods proscribed in (i)
or (ii) above, except as provided in (iv) below with respect to (i)
above, any profits realized on such trades will be promptly required to
be disgorged to the Fund.
(iv) A transaction by Access Persons (other than Investment
Personnel) inadvertently effected during the period proscribed in (i)
above will not be considered a violation of the Code and disgorgement
will not be required so long as the transaction was effected in
accordance with the preclearance procedures described in Section 6 below
and without prior knowledge of trading by any fund in the Complex in the
same or an equivalent Security.
D. SHORT-TERM TRADING PROFITS
Except as provided in Section 5 below, Investment Personnel are
prohibited from profiting from a purchase and sale, or sale and purchase, of the
same or an equivalent
7
<PAGE> 8
Security within any 60 calendar day period. If trades are effected during the
proscribed period, any profits realized on such trades will be immediately
required to be disgorged to the Fund.
E. SHORT SALES
No Access Person may sell any security short which is owned by any Fund
in the Complex. Access Persons may, however make short sales when he/she owns an
equivalent amount of the same security.
F. OPTIONS
No Access Person may write a naked call option or buy a naked put option
on a security owned by any Fund in the Complex. Access Persons may purchase
options on securities not held by any Fund in the Complex, or purchase call
options or write put options on securities owned by any Fund in the Complex,
subject to preclearance and the same restrictions applicable to other
Securities. Access Persons may write covered call options or buy covered put
options on a Security owned by any Fund in the Complex at the discretion of the
Compliance Officer.
G. INVESTMENT CLUBS
No Access Person may participate in an investment club.
5. EXEMPTED TRANSACTIONS
Subject to preclearance in accordance with Section 6 below with respect
to subitems (b), (e), (f), (g) and (i) hereof, the prohibitions of Sections 4(C)
and 4(D) will not apply to the following:
(a) Purchases or sales of Securities effected in any account
8
<PAGE> 9
over which the Access Person has no direct or indirect influence or
control or in any account of the Access Person which is managed on a
discretionary basis by a person other than such Access Person and with
respect to which such Access Person does not in fact influence or control
such transactions.
(b) Purchases or sales of Securities (or their equivalents)
which are not eligible for purchase or sale by any fund in the Complex.
(c) Purchases or sales of Securities which are non-volitional
on the part of either the Access Person or any fund in the Complex.
(d) Purchases of Securities which are part of an automatic
dividend reinvestment plan.
(e) Purchases effected upon the exercise of rights issued by an
issuer pro rata to all holders of a class of its Securities, to the
extent such rights were acquired from such issuer, and sales of such
rights so acquired.
(f) Any equity Securities transaction, or series of related
transactions effected over a 30 calendar day period, involving 500 shares
or less in the aggregate, if (i) the Access Person has no prior knowledge
of activity in such security by any fund in the Complex and (ii) the
issuer is listed on The New York Stock Exchange or has a market
capitalization (outstanding shares multiplied by the current price per
share) greater than $1 billion (or a corresponding market capitalization
in foreign markets).
(g) Any fixed-income Securities transaction, or series of
related transactions effected over a 30 calendar day period, involving
100 units ($100,000 principal amount) or less in the aggregate, if the
Access Person has no prior knowledge of transactions in such Securities
by any fund in the Complex.
(h) Any transaction in index options effected on a broad-based
index (See Exhibit B.)(1)
(i) Purchases or sales of Securities which receive the prior
approval of the Compliance Officer (such person having no personal
interest in such purchases or sales), based on a determination that no
abuse is involved and that such purchases and sales are not likely to
have any economic impact on any fund in the Complex or on its ability to
- --------------
(1) Exhibit B will be amended by the Compliance Officer as necessary.
9
<PAGE> 10
purchase or sell Securities of the same class or other Securities of the
same issuer.
(j) Purchases or sales of Unit Investment Trusts.
6. PRECLEARANCE
Access Persons (other than Disinterested Directors/Trustees) must
preclear all personal Securities investments with the exception of those
identified in subparts (a), (c), (d), (h) and (j) of Section 5 above.
All requests for preclearance must be submitted to the Compliance Officer
for approval. All approved orders must be executed no later than 5:00 p.m. local
time on the business day following the date preclearance is granted. If any
order is not timely executed, a request for preclearance must be resubmitted.
7. REPORTING
(a) Disinterested Directors/Trustees shall report to the Secretary of
the Fund or the Compliance Officer the information described in Section 7(b)
hereof with respect to transactions in any Security in which such Disinterested
Director/Trustee has, or by reason of such transaction acquires, any direct or
indirect Beneficial Ownership in the Security only if such Disinterested
Director/Trustee, at the time of that transaction knew or, in the ordinary
course of fulfilling his or her official duties as a Director/Trustee of the
Fund, should have known that, during the 15-day period immediately preceding or
subsequent to the date of the transaction in a Security by such
Director/Trustee, such Security is or was purchased or sold by the Fund or was
being considered for purchase or sale by the Fund, the Manager or
Adviser/Subadviser; provided, however, that a Disinterested Director/Trustee is
not required to make a report with respect to
10
<PAGE> 11
transactions effected in any account over which such Director/Trustee does not
have any direct or indirect influence or control or in any account of the
Disinterested Director/Trustee which is managed on a discretionary basis by a
person other than such Director/Trustee and with respect to which such
Director/Trustee does not in fact influence or control such transactions. The
Secretary of the Fund or the Compliance Officer shall maintain such reports and
such other records to the extent required by Rule 17j-1 under the Act.
(b) Every report required by Section 7(a) hereof shall be made not
later than ten days after the end of the calendar quarter in which the
transaction to which the report relates was effected, and shall contain the
following information:
(i) The date of the transaction, the title and the number of shares,
and the principal amount of each Security involved;
(ii) The nature of the transaction (i.e., purchase, sale or any other
type of acquisition or disposition);
(iii) The price at which the transaction was effected;
(iv) The name of the broker, dealer or bank with or through whom the
transaction was effected; and
(v) The date that the report is submitted.
(c) Any such report may contain a statement that the report shall not
be construed as an admission by the person making such report that he or she has
any direct or indirect Beneficial Ownership in the Security to which the report
relates.
8. RECORDS OF SECURITIES TRANSACTIONS AND POST-TRADE REVIEW
Access Persons (other than Disinterested Directors/Trustees) are required
to direct their brokers to supply, on a timely basis, duplicate copies of
confirmations of all
11
<PAGE> 12
personal Securities transactions and copies of periodic statements for all
Securities accounts in which such Access Persons have a Beneficial Ownership
interest to the Compliance Officer. Such instructions must be made upon becoming
an Access Person and promptly as new accounts are established, but no later than
ten days after the end of a calendar quarter, with respect to any account
established by the Access Person in which any securities were held during the
quarter for the direct or indirect beneficial interest of the Access Person.
Notification must be made in writing and a copy of the notification must be
submitted to Compliance. This notification will include the broker, dealer or
bank with which the account was established and the date the account was
established.
Compliance with this Code requirement will be deemed to satisfy the
reporting requirements imposed on Access Persons under Rule 17j-1(d), provided,
however, that such confirmations and statements contain all the information
required by Section 7. b. hereof and are furnished within the time period
required by such section.
The Compliance Officer will periodically review the personal investment
activity and holdings reports of all Access Persons (including Disinterested
Directors/Trustees with respect to Securities transactions reported pursuant to
Section 7 above).
9. DISCLOSURE OF PERSONAL HOLDINGS
Within ten days after an individual first becomes an Access Person and
thereafter on an annual basis, each Access Person (other than Disinterested
Directors/Trustees) must disclose all personal Securities holdings. Such
disclosure must be made in writing and be as of the date the individual first
became an Access Person with respect to the initial report and by January 30 of
each year, including
12
<PAGE> 13
holdings information as of December 31, with respect to the annual report. All
such reports shall include the following: title, number of shares and principal
amount of each security held, name of broker, dealer or bank with whom these
securities are held and the date of submission by the Access Person.
10. GIFTS
Access Persons are prohibited from receiving any gift or other thing of
more than $100 in value from any person or entity that does business with or on
behalf of the Fund. Occasional business meals or entertainment (theatrical or
sporting events, etc.) are permitted so long as they are not excessive in number
or cost.
11. SERVICE AS A DIRECTOR
Investment Personnel are prohibited from serving on the boards of
directors of publicly traded companies, absent prior authorization based upon a
determination that the board service would be consistent with the interests of
the Fund and its shareholders. In the limited instances that such board service
is authorized, Investment Personnel will be isolated from those making
investment decisions affecting transactions in Securities issued by any publicly
traded company on whose board such Investment Personnel serves as a director
through the use of "Chinese Wall" or other procedures designed to address the
potential conflicts of interest.
12. CERTIFICATION OF COMPLIANCE WITH THE CODE
Access Persons are required to certify annually as follows:
(i) that they have read and understood the Code;
(ii) that they recognize that they are subject to the Code;
(iii) that they have complied with the requirements of the Code; and
13
<PAGE> 14
(iv) that they have disclosed or reported all personal Securities
transactions required to be disclosed or reported pursuant to the
requirements of the Code.
13. CODE VIOLATIONS
All violations of the Code will be reported to the Board of
Directors/Trustees of the Fund on a quarterly basis. The Board of
Directors/Trustees may take such action as it deems appropriate.
14. REVIEW BY THE BOARD OF DIRECTORS/TRUSTEES
The Board of Directors/Trustees will be provided with an annual report
which at a minimum:
(i) certifies to the Board that the Fund, Manager, Investment
Adviser/Subadviser, and Principal Underwriter has adopted procedures reasonably
necessary to prevent its Access persons from violating its Code.
(ii) summarizes existing procedures concerning personal investing and any
changes in the procedures made during the preceding year;
(iii) identifies material Code or procedural violations and sanctions
imposed in response to those material violations; and
(iv) identifies any recommended changes in existing restrictions or
procedures based upon the Fund's experience under the Code, evolving industry
practices, or developments in applicable laws and regulations.
The Board will review such report and determine if any further action is
required.
14
<PAGE> 15
EXPLANATORY NOTES TO CODE
1. No comparable Code requirements have been imposed upon Prudential
Mutual Fund Services LLC, the Fund's transfer agent, or those of its directors
or officers who are not Directors/Trustees or Officers of the Fund since they
are deemed not to constitute Access Persons or Advisory Persons as defined in
paragraphs (e)(1) and (2) of Rule 17j-1.
Dated: February 29, 2000
15
<PAGE> 16
Exhibit A
Definition of Beneficial Ownership
The term "beneficial ownership" of securities would include not only
ownership of securities held by an access person for his or her own
benefit,whether in bearer form or registered in his or her own name or
otherwise, but also ownership of securities held for his or her benefit by other
(regardless of whether or how they are registered) such as custodians, brokers,
executors, administrators, or trustees (including trusts in which he or she has
only a remainder interest), and securities held for his or her account by
pledges, securities owned by a partnership in which he or she should regard as a
personal holding corporation. Correspondingly, this term would exclude
securities held by an access person for the benefit of someone else.
Ordinarily, this term would not include securities held by executors or
administrators in estates in which an access person is a legatee or beneficiary
unless there is a specific legacy to such person of such securities or such
person is the sole legatee or beneficiary and there are other assets in the
estate sufficient to pay debts ranking ahead of such legacy, or the securities
are held in the estate more than a year after the decedent's death.
Securities held in the name of another should be considered as
"beneficially" owned by an access person where such person enjoys "benefits
substantially equivalent to ownership". The SEC has said that although the final
determination of beneficial ownership is a question to be determined in the
light of the facts of the particular case, generally a person is regarded as the
beneficial owner of securities held in the name of his or her spouse and their
minor children. Absent special circumstances such relationship ordinarily
results in such person obtaining benefits substantially equivalent to ownership,
e.g., application of the income derived from such securities to maintain a
common home, to meet expenses which such person otherwise would meet from other
sources, or the ability to exercise a controlling influence over the purchase,
sale or voting of such securities.
An access person also may be regarded as the beneficial owner of
securities held in the name of another person, if by reason of any contact,
understanding, relationship, agreement or other arrangement, he obtains
therefrom benefits substantially equivalent to those of ownership. Moreover, the
fact that the holder is a relative or relative of a spouse and sharing the same
home as an access person may in itself indicate that the access person would
obtain benefits substantially equivalent to those of ownership from securities
held in the name of such relative. Thus, absent countervailing facts, it is
expected that securities held by relatives who share the same home as an access
person will be treated as being beneficially owned by the access person.
An access person also is regarded as the beneficial owner of securities
held in the name of a spouse, minor children or other person, even though he
does not obtain therefrom the aforementioned benefits of ownership, if he can
vest or revest title in himself at once or at some future time.
<PAGE> 17
Exhibit B
INDEX OPTIONS ON A BROAD-BASED INDEX
<TABLE>
<CAPTION>
TICKER SYMBOL DESCRIPTION
<S> <C>
- --------------------------------------------------------------------------
NIK Nikkei 300 Index CI/Euro
- --------------------------------------------------------------------------
OEX S&P 100 Close/Amer Index
- --------------------------------------------------------------------------
OEW S&P 100 Close/Amer Index
- --------------------------------------------------------------------------
OEY S&P 100 Close/Amer Index
- --------------------------------------------------------------------------
SPB S&P 500 Index
- --------------------------------------------------------------------------
SPZ S&P 500 Open/Euro Index
- --------------------------------------------------------------------------
SPX S&P 500 Open/Euro Index
- --------------------------------------------------------------------------
SXZ S&P 500 (Wrap)
- --------------------------------------------------------------------------
SXB S&P 500 Open/Euro Index
- --------------------------------------------------------------------------
RUZ Russell 2000 Open/Euro Index
- --------------------------------------------------------------------------
RUT Russell 2000 Open/Euro Index
- --------------------------------------------------------------------------
MID S&P Midcap 400 Open/Euro Index
- --------------------------------------------------------------------------
NDX NASDAQ- 100 Open/Euro Index
- --------------------------------------------------------------------------
NDU NASDAQ- 100 Open/Euro Index
- --------------------------------------------------------------------------
NDZ NASDAQ- 100 Open/Euro Index
- --------------------------------------------------------------------------
NDV NASDAQ- 100 Open/Euro Index
- --------------------------------------------------------------------------
NCZ NASDAQ- 100 Open/Euro Index
- --------------------------------------------------------------------------
SML S&P Small Cap 600
- --------------------------------------------------------------------------
TPX U.S. Top 100 Sector
- --------------------------------------------------------------------------
SPL S&P 500 Long-Term Close
- --------------------------------------------------------------------------
ZRU Russell 2000 L-T Open./Euro
- --------------------------------------------------------------------------
VRU Russell 2000 Long-Term Index
- --------------------------------------------------------------------------
</TABLE>
<PAGE> 18
PRUDENTIAL INVESTMENT CORPORATION
PRUDENTIAL INVESTMENTS FUND MANAGEMENT LLC
PRUDENTIAL INVESTMENT MANAGEMENT SERVICES LLC
CODE OF ETHICS ADOPTED PURSUANT TO RULE 17j-1
UNDER THE INVESTMENT COMPANY ACT OF 1940
(THE CODE)
1. PURPOSES
The Code has been adopted by the Board of Directors/Trustees or the Duly
Appointed Officer-In-Charge of the Prudential Mutual Fund (hereinafter, referred
to as the "Fund"), the Manager, the Adviser/Subadviser, and the Principal
Underwriter in accordance with Rule 17j-1(c) under the Investment Company Act of
1940 (the Act) and in accordance with the following general principles:
(1) THE DUTY AT ALL TIMES TO PLACE THE INTERESTS OF SHAREHOLDERS
FIRST.
Investment company personnel should scrupulously avoid serving
their own personal interests ahead of shareholders' interests in any
decision relating to their personal investments.
(2) THE REQUIREMENT THAT ALL PERSONAL SECURITIES TRANSACTIONS BE
CONDUCTED CONSISTENT WITH THE CODE AND IN SUCH A MANNER AS TO AVOID
ANY ACTUAL OR POTENTIAL CONFLICT OF INTEREST OR ANY ABUSE OF AN
INDIVIDUAL'S POSITION OF TRUST AND RESPONSIBILITY.
Investment company personnel must not only seek to achieve
technical compliance with the Code but should strive to abide by its
spirit and the principles articulated herein.
(3) THE FUNDAMENTAL STANDARD THAT INVESTMENT COMPANY PERSONNEL SHOULD
NOT TAKE INAPPROPRIATE ADVANTAGE OF THEIR POSITIONS.
Investment company personnel must avoid any situation that might
<PAGE> 19
compromise, or call into question, their exercise of fully independent
judgment in the interest of shareholders, including, but not limited
to the receipt of unusual investment opportunities, perquisites, or
gifts of more than a de minimis value from persons doing or seeking
business with the Fund.
Rule 17j-1 under the Act generally proscribes fraudulent or manipulative
practices with respect to a purchase or sale of a security held or to be
acquired (as such term is defined in Section 2.) by an investment company, if
effected by an associated person of such company.
The purpose of the Code is to establish procedures consistent with the Act
and Rule 17j-1 to give effect to the following general prohibitions as set forth
in Rule 17j-1(b) as follows:
(a) It shall be unlawful for any affiliated person of or Principal
Underwriter for a registered investment company, or any affiliated person
of an investment adviser of or principal underwriter for a registered
investment company in connection with the purchase or sale, directly or
indirectly, by such person of a security held or to be acquired, by such
registered investment company:
(1) To employ any device, scheme or artifice to defraud such
registered investment company;
(2) To make to such registered investment company any untrue
statement of a material fact or omit to state to such registered
investment company a material fact necessary in order to make the
statements made, in light of the circumstances under which they are
made, not misleading;
(3) To engage in any act, practice, or course of business which
operates or would operate as a fraud or deceit upon any such
registered investment company; or
2
<PAGE> 20
(4) To engage in any manipulative practice with respect to such
registered investment company.
2. DEFINITIONS
(a) "Access Person" means any director/trustee, officer, general
partner or Advisory Person (including any Investment Personnel, as that
term is defined herein) of the Fund, the Manager, the Adviser/Subadviser,
or the Principal Underwriter.
(b) "Adviser/Subadviser" means the Adviser or Subadviser of the Fund
or both as the context may require.
(c) "Advisory Person" means (i) any employee of the Fund, Manager or
Adviser/Subadviser (or of any company in a control relationship to the
Fund, Manager or Adviser/Subadviser) who, in connection with his or her
regular functions or duties, makes, participates in, or obtains information
regarding the purchase or sale of a security by the Fund, or whose
functions relate to the making of any recommendations with respect to such
purchases or sales; and (ii) any natural person in a control relationship
to the Fund who obtains information concerning recommendations made to the
Fund with regard to the purchase or sale of a security.
(d) "Beneficial Ownership" will be interpreted in the same manner as
it would be under Securities Exchange Act Rule 16a-1(a)(2) in determining
which security holdings of a person are subject to the reporting and
short-swing profit provisions of Section 16 of the Securities Exchange Act
of 1934 and the rules and regulations thereunder, except that the
determination of direct or indirect beneficial ownership will apply to all
securities which an Access Person has or acquires (Exhibit A).
(e) "Complex" means the group of registered investment companies for
which Prudential Investments Fund Management LLC serves as Manager;
provided, however, that with respect to Access Persons of the Subadviser
(including any unit or subdivision thereof), "Complex" means the group of
registered investment companies in the Complex advised by the Subadviser or
unit or subdivision thereof.
(f) "Compliance Officer" means the person designated by the Manager,
the Adviser/Subadviser, or Principal Underwriter (including his or her
designee) as having responsibility for compliance with the requirements of
the Code.
3
<PAGE> 21
(g) "Control" will have the same meaning as that set forth in Section
2(a)(9) of the Act.
(h) "Disinterested Director/Trustee" means a Director/ Trustee of the
Fund who is not an "interested person" of the Fund within the meaning of
Section 2(a)(19) of the Act.
An interested Director/Trustee who would not otherwise be deemed to be
an Access Person, shall be treated as a Disinterested Director/Trustee for
purposes of compliance with the provisions of the Code.
(i) "Initial Public Offering" means an offering of securities
registered under the Securities Act of 1933, the issuer of which,
immediately before the registration, was not subject to the reporting
requirements of sections 13 or 15(d) of the Securities Exchange Act of
1934.
(j) "Investment Personnel" means: (a) Portfolio Managers and other
Advisory Persons who provide investment information and/or advice to the
Portfolio Manager(s) and/or help execute the Portfolio Manager's(s')
investment decisions, including securities analysts and traders ; and (b)
any natural person in a control relationship to the Fund who obtains
information concerning recommendations made to the Fund with regard to the
purchase or sale of a security.
(k) "Manager" means Prudential Investments Fund Management, LLC.
(l) "Portfolio Manager" means any Advisory Person who has the direct
responsibility and authority to make investment decisions for the Fund.
(m) "Private placement" means a limited offering that is exempt from
registration under the Securities Act of 1933 pursuant to section 4(2) or
section 4(6) or pursuant to rule 504, rule 505 or rule 506 under such
Securities Act.
(n) "Security" will have the meaning set forth in Section 2(a)(36) of
the Act, except that it will not include shares of registered open-end
investment companies, direct obligations of the Government of the United
States, , short-term debt securities which are "government securities"
within the meaning of Section 2(a)(16) of the Act, bankers' acceptances,
bank certificates of deposit, commercial paper and such other money market
instruments as are designated by the Compliance Officer. For
4
<PAGE> 22
purposes of the Code, an "equivalent Security" is one that has a
substantial economic relationship to another Security. This would include,
among other things, (1) a Security that is exchangeable for or convertible
into another Security, (2) with respect to an equity Security, a Security
having the same issuer (including a private issue by the same issuer) and
any derivative, option or warrant relating to that Security and (3) with
respect to a fixed-income Security, a Security having the same issuer,
maturity, coupon and rating.
(o) "Security held or to be acquired" means any Security or any
equivalent Security which, within the most recent 15 days: (1) is or has
been held by the Fund; or (2) is being considered by the Fund or its
investment adviser for purchase by the Fund.
3. APPLICABILITY
The Code applies to all Access Persons and the Compliance Officer shall
provide each Access Person with a copy of the Code. The prohibitions described
below will only apply to a transaction in a Security in which the designated
Access Person has, or by reason of such transaction acquires, any direct or
indirect Beneficial Ownership. The Compliance Officer will maintain a list of
all Access Persons who are currently, and within the past five years, subject to
the Code.
4. PROHIBITED PURCHASES AND SALES
A. INITIAL PUBLIC OFFERINGS
No Investment Personnel may acquire any Securities in an initial public
offering. For purposes of this restriction, "Initial Public Offerings" shall not
include offerings of government and municipal securities.
B. PRIVATE PLACEMENTS
No Investment Personnel may acquire any Securities in a private placement
without prior approval.
5
<PAGE> 23
(i) Prior approval must be obtained in accordance with the
preclearance procedure described in Section 6 below. Such approval will
take into account, among other factors, whether the investment opportunity
should be reserved for the Fund and its shareholders and whether the
opportunity is being offered to the Investment Personnel by virtue of his
or her position with the Fund. The Adviser/Subadviser shall maintain a
record of such prior approval and reason for same, for at least 5 years
after the end of the fiscal year in which the approval is granted.
(ii) Investment Personnel who have been authorized to acquire
Securities in a private placement must disclose that investment to the
chief investment officer (including his or her designee) of the
Adviser/Subadviser (or of any unit or subdivision thereof) or the
Compliance Officer when they play a part in any subsequent consideration of
an investment by the Fund in the issuer. In such circumstances, the Fund's
decision to purchase Securities of the issuer will be subject to an
independent review by appropriate personnel with no personal interest in
the issuer.
C. BLACKOUT PERIODS
(i) Except as provided in Section 5 below, Access Persons are
prohibited from executing a Securities transaction on a day during which
any investment company in the Complex has a pending "buy" or "sell" order
in the same or an equivalent Security and until such time as that order is
executed or withdrawn;
6
<PAGE> 24
provided, however, that this prohibition shall not apply to Disinterested
Directors/Trustees except if they have actual knowledge of trading by any
fund in the Complex and, in any event, only with respect to those funds on
whose boards they sit.
This prohibition shall also not apply to Access Persons of the
Subadviser who do not, in the ordinary course of fulfilling his or her
official duties, have access to information regarding the purchase and sale
of Securities for the Fund and are not engaged in the day-to-day operations
of the Fund; provided that Securities investments effected by such Access
Persons during the proscribed period are not effected with knowledge of the
purchase or sale of the same or equivalent Securities by any fund in the
Complex.
A "pending 'buy' or 'sell' order" exists when a decision to purchase
or sell a Security has been made and communicated.
(ii) Portfolio Managers are prohibited from buying or selling a
Security within seven calendar days before or after the Fund trades in the
same or an equivalent Security. Nevertheless, a personal trade by any
Investment Personnel shall not prevent a Fund in the same Complex from
trading in the same or an equivalent security. However, such a transaction
shall be subject to independent review by the Compliance Officer.
(iii) If trades are effected during the periods proscribed in (i) or
(ii) above, except as provided in (iv) below with respect to (i) above, any
profits realized on such trades will be promptly required to be disgorged
to the Fund.
(iv) A transaction by Access Persons (other than Investment Personnel)
7
<PAGE> 25
inadvertently effected during the period proscribed in (i) above will not
be considered a violation of the Code and disgorgement will not be required
so long as the transaction was effected in accordance with the preclearance
procedures described in Section 6 below and without prior knowledge of
trading by any fund in the Complex in the same or an equivalent Security.
D. SHORT-TERM TRADING PROFITS
Except as provided in Section 5 below, Investment Personnel are prohibited
from profiting from a purchase and sale, or sale and purchase, of the same or an
equivalent Security within any 60 calendar day period. If trades are effected
during the proscribed period, any profits realized on such trades will be
immediately required to be disgorged to the Fund.
E. SHORT SALES
No Access Person may sell any security short which is owned by any Fund in
the Complex. Access Persons may, however make short sales when he/she owns an
equivalent amount of the same security.
F. OPTIONS
No Access Person may write a naked call option or buy a naked put option on
a security owned by any Fund in the Complex. Access Persons may purchase options
on securities not held by any Fund in the Complex, or purchase call options or
write put options on securities owned by any Fund in the Complex, subject to
preclearance and the same restrictions applicable to other Securities. Access
Persons may write covered call options or buy covered put options on a Security
owned by any Fund in the Complex at the discretion of the Compliance Officer.
8
<PAGE> 26
G. INVESTMENT CLUBS
No Access Person may participate in an investment club.
5. EXEMPTED TRANSACTIONS
Subject to preclearance in accordance with Section 6 below with respect to
subitems (b), (e), (f), (g) and (i) hereof, the prohibitions of Sections 4(C)
and 4(D) will not apply to the following:
(a) Purchases or sales of Securities effected in any account over
which the Access Person has no direct or indirect influence or control or
in any account of the Access Person which is managed on a discretionary
basis by a person other than such Access Person and with respect to which
such Access Person does not in fact influence or control such transactions.
(b) Purchases or sales of Securities (or their equivalents) which are
not eligible for purchase or sale by any fund in the Complex.
(c) Purchases or sales of Securities which are non-volitional on the
part of either the Access Person or any fund in the Complex.
(d) Purchases of Securities which are part of an automatic dividend
reinvestment plan.
(e) Purchases effected upon the exercise of rights issued by an
issuer pro rata to all holders of a class of its Securities, to the extent
such rights were acquired from such issuer, and sales of such rights so
acquired.
(f) Any equity Securities transaction, or series of related
transactions effected over a 30 calendar day period, involving 500 shares
or less in the aggregate, if (i) the Access Person has no prior knowledge
of activity in such security by any fund in the Complex and (ii) the issuer
is listed on The New York Stock Exchange or has a market capitalization
(outstanding shares multiplied by the current price per share) greater than
$1 billion (or a corresponding market capitalization in foreign markets).
(g) Any fixed-income Securities transaction, or series of related
transactions effected over a 30 calendar day period, involving 100 units
($100,000 principal amount) or less in the aggregate, if the Access Person
has no prior knowledge of transactions in such Securities by any
9
<PAGE> 27
fund in the Complex.
(h) Any transaction in index options effected on a broad-based index
(See Exhibit B.)(1)
(i) Purchases or sales of Securities which receive the prior approval
of the Compliance Officer (such person having no personal interest in such
purchases or sales), based on a determination that no abuse is involved and
that such purchases and sales are not likely to have any economic impact on
any fund in the Complex or on its ability to purchase or sell Securities of
the same class or other Securities of the same issuer.
(j) Purchases or sales of Unit Investment Trusts.
6. PRECLEARANCE
Access Persons (other than Disinterested Directors/Trustees) must preclear
all personal Securities investments with the exception of those identified in
subparts (a), (c), (d), (h) and (j) of Section 5 above.
All requests for preclearance must be submitted to the Compliance Officer
for approval. All approved orders must be executed no later than 5:00 p.m. local
time on the business day following the date preclearance is granted. If any
order is not timely executed, a request for preclearance must be resubmitted.
7. REPORTING
(a) Disinterested Directors/Trustees shall report to the Secretary of the
Fund or the Compliance Officer the information described in Section 7(b) hereof
with respect to transactions in any Security in which such Disinterested
Director/Trustee has, or by reason of such transaction acquires, any direct or
indirect Beneficial Ownership in the
- ---------------------
(1) Exhibit B will be amended by the Compliance Officer as necessary.
10
<PAGE> 28
Security only if such Disinterested Director/Trustee, at the time of that
transaction knew or, in the ordinary course of fulfilling his or her official
duties as a Director/Trustee of the Fund, should have known that, during the
15-day period immediately preceding or subsequent to the date of the transaction
in a Security by such Director/Trustee, such Security is or was purchased or
sold by the Fund or was being considered for purchase or sale by the Fund, the
Manager or Adviser/Subadviser; provided, however, that a Disinterested
Director/Trustee is not required to make a report with respect to transactions
effected in any account over which such Director/Trustee does not have any
direct or indirect influence or control or in any account of the Disinterested
Director/Trustee which is managed on a discretionary basis by a person other
than such Director/Trustee and with respect to which such Director/Trustee does
not in fact influence or control such transactions. The Secretary of the Fund or
the Compliance Officer shall maintain such reports and such other records to the
extent required by Rule 17j-1 under the Act.
(b) Every report required by Section 7(a) hereof shall be made not later
than ten days after the end of the calendar quarter in which the transaction to
which the report relates was effected, and shall contain the following
information:
(i) The date of the transaction, the title and the number of shares,
and the principal amount of each Security involved;
(ii) The nature of the transaction (i.e., purchase, sale or any other
type of acquisition or disposition);
(iii) The price at which the transaction was effected;
(iv) The name of the broker, dealer or bank with or through whom the
transaction was effected; and
11
<PAGE> 29
(v) The date that the report is submitted.
(c) Any such report may contain a statement that the report shall not be
construed as an admission by the person making such report that he or she has
any direct or indirect Beneficial Ownership in the Security to which the report
relates.
8. RECORDS OF SECURITIES TRANSACTIONS AND POST-TRADE REVIEW
Access Persons (other than Disinterested Directors/Trustees) are required
to direct their brokers to supply, on a timely basis, duplicate copies of
confirmations of all personal Securities transactions and copies of periodic
statements for all Securities accounts in which such Access Persons have a
Beneficial Ownership interest to the Compliance Officer. Such instructions must
be made upon becoming an Access Person and promptly as new accounts are
established, but no later than ten days after the end of a calendar quarter,
with respect to any account established by the Access Person in which any
securities were held during the quarter for the direct or indirect beneficial
interest of the Access Person. Notification must be made in writing and a copy
of the notification must be submitted to Compliance. This notification will
include the broker, dealer or bank with which the account was established and
the date the account was established.
Compliance with this Code requirement will be deemed to satisfy the
reporting requirements imposed on Access Persons under Rule 17j-1(d), provided,
however, that such confirmations and statements contain all the information
required by Section 7. b. hereof and are furnished within the time period
required by such section.
The Compliance Officer will periodically review the personal investment
activity and holdings reports of all Access Persons (including Disinterested
Directors/Trustees
12
<PAGE> 30
with respect to Securities transactions reported pursuant to Section 7 above).
9. DISCLOSURE OF PERSONAL HOLDINGS
Within ten days after an individual first becomes an Access Person and
thereafter on an annual basis, each Access Person (other than Disinterested
Directors/Trustees) must disclose all personal Securities holdings. Such
disclosure must be made in writing and be as of the date the individual first
became an Access Person with respect to the initial report and by January 30 of
each year, including holdings information as of December 31, with respect to the
annual report. All such reports shall include the following: title, number of
shares and principal amount of each security held, name of broker, dealer or
bank with whom these securities are held and the date of submission by the
Access Person.
10. GIFTS
Access Persons are prohibited from receiving any gift or other thing of
more than $100 in value from any person or entity that does business with or on
behalf of the Fund. Occasional business meals or entertainment (theatrical or
sporting events, etc.) are permitted so long as they are not excessive in number
or cost.
11. SERVICE AS A DIRECTOR
Investment Personnel are prohibited from serving on the boards of directors
of publicly traded companies, absent prior authorization based upon a
determination that the board service would be consistent with the interests of
the Fund and its shareholders. In the limited instances that such board service
is authorized, Investment Personnel will be isolated from those making
investment decisions affecting transactions in Securities issued by any publicly
traded company on whose board such
13
<PAGE> 31
Investment Personnel serves as a director through the use of "Chinese Wall" or
other procedures designed to address the potential conflicts of interest.
12. CERTIFICATION OF COMPLIANCE WITH THE CODE
Access Persons are required to certify annually as follows:
(i) that they have read and understood the Code;
(ii) that they recognize that they are subject to the Code;
(iii) that they have complied with the requirements of the Code; and
(iv) that they have disclosed or reported all personal Securities
transactions required to be disclosed or reported pursuant to the
requirements of the Code.
13. CODE VIOLATIONS
All violations of the Code will be reported to the Board of
Directors/Trustees of the Fund on a quarterly basis. The Board of
Directors/Trustees may take such action as it deems appropriate.
14. REVIEW BY THE BOARD OF DIRECTORS/TRUSTEES
The Board of Directors/Trustees will be provided with an annual report
which at a minimum:
(i) certifies to the Board that the Fund, Manager, Investment
Adviser/Subadviser, and Principal Underwriter has adopted procedures reasonably
necessary to prevent its Access persons from violating its Code.
(ii) summarizes existing procedures concerning personal investing and any
changes in the procedures made during the preceding year;
(iii) identifies material Code or procedural violations and sanctions
imposed in
14
<PAGE> 32
response to those material violations; and
(iv) identifies any recommended changes in existing restrictions or
procedures based upon the Fund's experience under the Code, evolving industry
practices, or developments in applicable laws and regulations.
The Board will review such report and determine if any further action is
required.
15
<PAGE> 33
EXPLANATORY NOTES TO CODE
1. No comparable Code requirements have been imposed upon Prudential
Mutual Fund Services LLC, the Fund's transfer agent, or those of its directors
or officers who are not Directors/Trustees or Officers of the Fund since they
are deemed not to constitute Access Persons or Advisory Persons as defined in
paragraphs (e)(1) and (2) of Rule 17j-1.
Dated: February 29, 2000
16
<PAGE> 34
Exhibit A
Definition of Beneficial Ownership
The term "beneficial ownership" of securities would include not only
ownership of securities held by an access person for his or her own benefit,
whether in bearer form or registered in his or her own name or otherwise, but
also ownership of securities held for his or her benefit by other (regardless of
whether or how they are registered) such as custodians, brokers, executors,
administrators, or trustees (including trusts in which he or she has only a
remainder interest), and securities held for his or her account by pledges,
securities owned by a partnership in which he or she should regard as a personal
holding corporation. Correspondingly, this term would exclude securities held by
an access person for the benefit of someone else.
Ordinarily, this term would not include securities held by executors or
administrators in estates in which an access person is a legatee or beneficiary
unless there is a specific legacy to such person of such securities or such
person is the sole legatee or beneficiary and there are other assets in the
estate sufficient to pay debts ranking ahead of such legacy, or the securities
are held in the estate more than a year after the decedent's death.
Securities held in the name of another should be considered as
"beneficially" owned by an access person where such person enjoys "benefits
substantially equivalent to ownership". The SEC has said that although the final
determination of beneficial ownership is a question to be determined in the
light of the facts of the particular case, generally a person is regarded as the
beneficial owner of securities held in the name of his or her spouse and their
minor children. Absent special circumstances such relationship ordinarily
results in such person obtaining benefits substantially equivalent to ownership,
e.g., application of the income derived from such securities to maintain a
common home, to meet expenses which such person otherwise would meet from other
sources, or the ability to exercise a controlling influence over the purchase,
sale or voting of such securities.
An access person also may be regarded as the beneficial owner of securities
held in the name of another person, if by reason of any contact, understanding,
relationship, agreement or other arrangement, he obtains therefrom benefits
substantially equivalent to those of ownership. Moreover, the fact that the
holder is a relative or relative of a spouse and sharing the same home as an
access person may in itself indicate that the access person would obtain
benefits substantially equivalent to those of ownership from securities held in
the name of such relative. Thus, absent countervailing facts, it is expected
that securities held by relatives who share the same home as an access person
will be treated as being beneficially owned by the access person.
An access person also is regarded as the beneficial owner of securities
held in the name of a spouse, minor children or other person, even though he
does not obtain therefrom the aforementioned benefits of ownership, if he can
vest or revest title in himself at once or at some future time.
<PAGE> 35
Exhibit B
INDEX OPTIONS ON A BROAD-BASED INDEX
<TABLE>
<CAPTION>
TICKER SYMBOL DESCRIPTION
- --------------------------------------------------------------------
<S> <C>
NIK Nikkei 300 Index CI/Euro
- --------------------------------------------------------------------
OEX S&P 100 Close/Amer Index
- --------------------------------------------------------------------
OEW S&P 100 Close/Amer Index
- --------------------------------------------------------------------
OEY S&P 100 Close/Amer Index
- --------------------------------------------------------------------
SPB S&P 500 Index
- --------------------------------------------------------------------
SPZ S&P 500 Open/Euro Index
- --------------------------------------------------------------------
SPX S&P 500 Open/Euro Index
- --------------------------------------------------------------------
SXZ S&P 500 (Wrap)
- --------------------------------------------------------------------
SXB S&P 500 Open/Euro Index
- --------------------------------------------------------------------
RUZ Russell 2000 Open/Euro Index
- --------------------------------------------------------------------
RUT Russell 2000 Open/Euro Index
- --------------------------------------------------------------------
MID S&P Midcap 400 Open/Euro Index
- --------------------------------------------------------------------
NDX NASDAQ- 100 Open/Euro Index
- --------------------------------------------------------------------
NDU NASDAQ- 100 Open/Euro Index
- --------------------------------------------------------------------
NDZ NASDAQ- 100 Open/Euro Index
- --------------------------------------------------------------------
NDV NASDAQ- 100 Open/Euro Index
- --------------------------------------------------------------------
NCZ NASDAQ- 100 Open/Euro Index
- --------------------------------------------------------------------
SML S&P Small Cap 600
- --------------------------------------------------------------------
TPX U.S. Top 100 Sector
- --------------------------------------------------------------------
SPL S&P 500 Long-Term Close
- --------------------------------------------------------------------
ZRU Russell 2000 L-T Open./Euro
- --------------------------------------------------------------------
VRU Russell 2000 Long-Term Index
- --------------------------------------------------------------------
</TABLE>
<PAGE> 1
[ARTICLE] 6
[CIK] 0000701275
[NAME] THE PRUDENTIAL VARIABLE CONTRACT ACCOUNT-11
[SERIES]
[NUMBER] 001
[NAME] THE PRUDENTIAL VARIABLE CONTRACT ACCOUNT-11
<TABLE>
<S> <C>
[PERIOD-TYPE] YEAR
[FISCAL-YEAR-END] DEC-31-1999
[PERIOD-START] JAN-01-1999
[PERIOD-END] DEC-31-1999
[INVESTMENTS-AT-COST] 90,091,302
[INVESTMENTS-AT-VALUE] 90,091,302
[RECEIVABLES] 1,293,310
[ASSETS-OTHER] 95
[OTHER-ITEMS-ASSETS] 0
[TOTAL-ASSETS] 91,384,707
[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] 91,384,707
[DIVIDEND-INCOME] 0
[INTEREST-INCOME] 4,818,027
[OTHER-INCOME] 602
[EXPENSES-NET] 900,712
[NET-INVESTMENT-INCOME] 3,917,917
[REALIZED-GAINS-CURRENT] 0
[APPREC-INCREASE-CURRENT] 0
[NET-CHANGE-FROM-OPS] 3,917,917
[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] (47,735)
[NET-CHANGE-IN-ASSETS] 1,868,942
[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] 2.5489
[PER-SHARE-NII] 0.1119
[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] 2.6608
[EXPENSE-RATIO] 0.99
[AVG-DEBT-OUTSTANDING] 0
[AVG-DEBT-PER-SHARE] 0.00
</TABLE>
