AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 25, 2000.
REGISTRATION NO. 2-81318
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------
FORM N-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [ ]
PRE-EFFECTIVE AMENDMENT NO. [ ]
POST-EFFECTIVE AMENDMENT NO. 27 [X]
AND
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [ ]
AMENDMENT NO. 32 [X]
(Check appropriate box or boxes)
----------
THE PRUDENTIAL QUALIFIED INDIVIDUAL
VARIABLE CONTRACT ACCOUNT
(Exact Name of Registrant)
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
(Name of Depositor)
751 BROAD STREET
NEWARK, NEW JERSEY 07102-3777
(888) PRU-2888
(Address and telephone number of principal executive offices)
----------
THOMAS C. CASTANO
ASSISTANT SECRETARY
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
751 BROAD STREET
NEWARK, NEW JERSEY 07102-3777
(Name and address of agent for service)
COPIES TO:
LEE D. AUGSBURGER CHRISTOPHER E. PALMER
ASSISTANT GENERAL COUNSEL SHEA & GARDNER
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA 1800 MASSACHUSETTS AVENUE, N.W.
100 MULBERRY STREET WASHINGTON, D.C. 20036
NEWARK, NEW JERSEY 07102-4077
----------
It is proposed that this filing will become effective (check appropriate space):
[ ] immediately upon filing pursuant to paragraph (b) of Rule 485
[X] on May 1, 2000 pursuant to paragraph (b) of Rule 485
(date)
[ ] 60 days after filing pursuant to paragraph (a)(1) of Rule 485
on __________ pursuant to paragraph (a)(1) of Rule 485
(date)
If appropriate, check the following box:
[ ] This post-effective amendment designates a new effective date for a
previously filed post-effective amendment
Title of Securities Being Registered: Interests in Individual Variable
Annuity Contracts
================================================================================
<PAGE>
PART A
INFORMATION REQUIRED IN A PROSPECTUS
<PAGE>
QUALIFIED
VARIABLE
INVESTMENT
PLAN
THIS PROSPECTUS DESCRIBES A QUALIFIED INDIVIDUAL VARIABLE ANNUITY CONTRACT
OFFERED BY THE PRUDENTIAL INSURANCE COMPANY OF AMERICA.
The qualified Variable Investment Plan offers a wide variety of investment
choices, including a fixed interest-rate option, and 13 variable investment
options that invest in the following portfolios managed by Prudential:
CONSERVATIVE BALANCED
PORTFOLIO
DIVERSIFIED BOND PORTFOLIO
EQUITY INCOME PORTFOLIO
EQUITY PORTFOLIO
FLEXIBLE MANAGED PORTFOLIO
GLOBAL PORTFOLIO
GOVERNMENT INCOME PORTFOLIO
HIGH YIELD BOND PORTFOLIO
MONEY MARKET PORTFOLIO
NATURAL RESOURCES PORTFOLIO
PRUDENTIAL JENNISON PORTFOLIO
SMALL CAPITALIZATION STOCK
PORTFOLIO
STOCK INDEX PORTFOLIO
MAY 1, 2000
Please read this prospectus before purchasing a qualified Variable Investment
Plan contract and keep it for future reference. A current prospectus for the
underlying mutual fund accompanies this prospectus. This prospectus contains
important information about the mutual fund. Please read this prospectus and
keep it for reference.
To learn more about the qualified Variable Investment Plan, you can request a
copy of the 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 qualified Variable Investment Plan SAI, material incorporated
by reference, and other information regarding registrants that file
electronically with the SEC. The Table of Contents of the SAI is on Page 23 of
this prospectus. For a free copy of the SAI, call us at: (888) PRU-2888 or write
to us at:
The Prudential Insurance Company of America
751 Broad Street
Newark, New Jersey 07102-3777
Prudential Annuity Service Center
P.O. Box 14215
New Brunswick, New Jersey 08906
THE SEC HAS NOT DETERMINED THAT THIS CONTRACT IS 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 A VARIABLE ANNUITY IS SUBJECT TO RISK, INCLUDING THE POSSIBLE LOSS
OF YOUR MONEY. AN INVESTMENT IN THE QUALIFIED VARIABLE INVESTMENT PLAN IS NOT A
BANK DEPOSIT AND IS NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR
ANY OTHER GOVERNMENT AGENCY.
[PRUDENTIAL LOGO]
<PAGE>
QUALIFIED VARIABLE INVESTMENT PLAN VARIABLE ANNUITY
TABLE OF CONTENTS
CAPTION PAGE
- ------- ----
GLOSSARY ............................................................ ii
SUMMARY ............................................................. 1
SUMMARY OF CONTRACT EXPENSES ........................................ 4
EXPENSE EXAMPLES .................................................... 6
1. WHAT IS THE QUALIFIED VARIABLE INVESTMENT PLAN VARIABLE
ANNUITY? .................................................... 8
Beneficiary.................................................... 8
Death Benefit.................................................. 8
Short Term Cancellation Right or "Free Look" .................. 9
Other Contracts................................................ 9
2. WHAT INVESTMENT OPTIONS
CAN I CHOOSE?................................................ 9
Variable Investment Options ................................... 9
Fixed Interest-Rate Option..................................... 10
Transfers Among Options ....................................... 10
Dollar Cost Averaging ......................................... 10
Voting Rights ................................................. 11
Substitution................................................... 11
Other Changes.................................................. 11
3. WHAT KIND OF PAYMENTS WILL I RECEIVE DURING THE INCOME PHASE?
(ANNUITIZATION) ............................................. 11
Payment Provisions ............................................ 11
Option 1: Life Annuity with 120 Payments
(10 Years) Certain Option.....................................12
Option 2: Interest Payment Option ............................. 12
Option 3: Other Annuity Options ............................... 12
4. WHAT IS THE 1% BONUS?...........................................12
5. HOW CAN I PURCHASE A QUALIFIED VARIABLE INVESTMENT PLAN
VARIABLE ANNUITY CONTRACT? .................................. 12
Purchase Payments ............................................. 12
Allocation of Purchase Payments ............................... 12
Calculating Contract Value .................................... 13
CAPTION PAGE
- ------- ----
6. WHAT ARE THE EXPENSES ASSOCIATED WITH THE QUALIFIED VARIABLE
INVESTMENT PLAN VARIABLE ANNUITY CONTRACT? .................. 13
Insurance Charges ............................................. 13
Annual Contract Fee............................................ 13
Withdrawal Charge ............................................. 14
Bonus Recapture................................................ 14
Critical Care Access .......................................... 14
Premium Taxes ................................................. 15
7. HOW CAN I ACCESS MY MONEY? .................................... 15
Suspension of Payments or Transfers ........................... 15
8. WHAT ARE THE TAX CONSIDERATIONS ASSOCIATED WITH THE QUALIFIED
VARIABLE INVESTMENT PLAN VARIABLE ANNUITY CONTRACT? ......... 15
Annuity Qualification.......................................... 15
Taxes on Prudential............................................ 16
Retirement Arrangements Using the Contract..................... 16
Plans for Self-Employed Individuals.............................16
IRAs........................................................... 17
Simplified Employee Pension Plans ("SEPs")..................... 17
Disclosure and "Free Look"......................................17
TDAs............................................................17
Eligible Deferred Compensation Plans of State or
Local Governments and Tax Exempt Organizations............... 18
Qualified Pension and Profit Sharing Plans..................... 18
Minimum Distribution Option.................................... 19
Penalty for Early Withdrawals.................................. 19
Withholding.................................................... 19
Interested Party Disclosure.................................... 19
Additional Information......................................... 20
9. OTHER INFORMATION ............................................. 20
The Prudential Insurance Company of America.................... 20
The Separate Account .......................................... 20
Sale and Distribution of the Contract ......................... 21
Assignment .................................................... 21
Exchange Offer for Certain Contractowners...................... 21
Litigation..................................................... 22
Financial Statements .......................................... 23
Statement of Additional Information............................ 23
Accumulation Unit Values ...................................... 24
IRA Disclosure Statement ...................................... 30
i
<PAGE>
QUALIFIED VARIABLE INVESTMENT PLAN VARIABLE ANNUITY
GLOSSARY
We have tried to make this prospectus as easy to read and understand as
possible. By the nature of the contract, however, certain technical words or
terms are unavoidable. We have identified the following as some of these words
or terms.
- --------------------------------------------------------------------------------
ACCUMULATION PHASE. The period that begins with the Contract Date (see below
definition) 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.
ANNUITANT. The person whose life determines how long the contract lasts and the
amount of income payments that will be paid.
ANNUITY DATE. The date when income payments are scheduled to begin.
BONUS. The additional 1% of your purchase payments that we add to the value of
your contract. This amount is based on the purchase payments you make during the
first three years you own the contract. Payment of the bonus amount may be
limited to $1,000 each contract year. This amount is referred to in your
contract as an "additional amount."
BENEFICIARY. The person(s) or entity you have chosen to receive a death benefit.
CASH VALUE. The total value of your contract amount minus any applicable charges
or fees. This amount is referred to in your contract as the "contract fund."
CONTRACT DATE. The date we receive your initial purchase payment and all
necessary paperwork in good order in the Prudential Annuity Service Center.
Contract anniversaries are measured from the contract date. A contract year
begins on the contract date or on a contract anniversary.
CONTRACTOWNER, OWNER, OR YOU. The person entitled to the ownership rights under
the contract.
CONTRACT VALUE. The total value of the amounts in a contract allocated to the
variable investment options and the fixed interest-rate option as of a
particular date.
DEATH BENEFIT. If the annuitant dies, the designated person(s), that is, the
beneficiary, will receive the total value of the contract or, depending on the
age of the annuitant, the total amount invested in the contract, reduced
proportionately by withdrawals, whichever is greater.
FIXED INTEREST-RATE OPTION. An investment option that offers a fixed rate of
interest for a one-year period.
INCOME OPTIONS. Options under the contract that define the frequency and
duration of income payments. In your contract, they are referred to as payout or
annuity options.
PURCHASE PAYMENTS. The amount of money you pay us to purchase the contract.
Generally, you may make additional purchase payments at any time during the
accumulation phase.
PRUDENTIAL ANNUITY SERVICE CENTER. P.O. Box 14215, New Brunswick, New Jersey,
08906. The phone number is (888) PRU-2888.
SEPARATE ACCOUNT. Purchase payments allocated to the variable investment options
are held by Prudential in a separate account called the Prudential Qualified
Individual Variable Contract Account. The separate account is set apart from all
of the general assets of Prudential.
TAX DEFERRAL. This is a way to generally increase your assets without currently
being taxed. You do not pay taxes on your contract earnings until you take money
out of your contract.
VARIABLE INVESTMENT OPTION. When you choose a variable investment option, we
purchase shares of the mutual fund portfolio associated with that option. We
hold these shares in the separate account. The division of the separate account
is referred to in your contract as a subaccount.
ii
<PAGE>
QUALIFIED VARIABLE INVESTMENT PLAN VARIABLE ANNUITY
SUMMARY
FOR A MORE COMPLETE DISCUSSION OF THE FOLLOWING TOPICS, SEE THE CORRESPONDING
SECTION IN THE PROSPECTUS.
1. WHAT IS THE QUALIFIED VARIABLE INVESTMENT PLAN VARIABLE ANNUITY?
This variable annuity contract, offered by Prudential, is designed for use
in connection with various retirement arrangements. These retirement
arrangements receive favorable federal income tax benefits which are fully
explained in Section 8 entitled, "WHAT ARE THE TAX CONSIDERATIONS ASSOCIATED
WITH THE QUALIFIED VARIABLE INVESTMENT PLAN?". The contract is between your
employer (the owner) and us (the insurance company). Under certain circumstances
the contract is directly between you and the insurance company. The contract
provides a way of accumulating your savings by investing on a tax-deferred basis
in one or more of 13 variable investment options which are associated with
portfolios of the Prudential Series Fund, Inc., ("Series Fund"). There is also a
fixed interest-rate option. The contract is intended for retirement savings or
other long-term investment purposes and provides for a death benefit and
guaranteed income options.
The variable investment options are designed to offer the opportunity for
a better return than the fixed interest-rate option. However, this is NOT
guaranteed. It is possible, due to market changes, that your investments may
decrease in value.
The fixed interest-rate option offers an interest rate that is guaranteed
to be not less than 3% per year. While your money is in the fixed account, both
the interest amount that your money will earn and your principal amount is
guaranteed by us.
You can invest your money in any or all of the variable investment options
and the fixed interest-rate option. You are always allowed at least four
transfers each contract year among the variable investment options. There are
certain restrictions on transfers involving the fixed interest-rate option.
The contract, like all deferred annuity contracts, has two phases: the
accumulation phase and the income phase. During the accumulation phase, earnings
grow on a tax-deferred basis and are taxed as income when you make a withdrawal.
The income phase starts when you choose to begin receiving regular payments from
your contract. The amount of money you are able to accumulate in your contract
during the accumulation phase will help determine the amount of payments you
will receive during the income phase. Other factors will affect the amount of
your payments such as, age and the payout option you selected.
FREE LOOK. If you change your mind about owning the qualified Variable
Investment Plan contract, YOU MAY CANCEL YOUR CONTRACT WITHIN 10 DAYS AFTER
RECEIVING IT (or whatever time period is required in the state where the
contract was issued).
OTHER CONTRACTS. This prospectus describes the qualified Variable
Investment Plan contract which is currently offered for sale. There are earlier
versions of the contract which are no longer being offered. These earlier
versions have certain different features that are referred to throughout this
prospectus. Owners of previously offered contracts can find further information
in the Statement of Additional Information.
2. WHAT INVESTMENT OPTIONS CAN I CHOOSE?
You can invest your money in any or all of the variable investment options
that are described in the Series Fund prospectus located at the end of this
prospectus:
THE PRUDENTIAL SERIES FUND
The Prudential Series Fund, Inc. is a mutual fund made up of the following
portfolios. You may choose one or more of these portfolios as your variable
investment options.
Conservative Balanced Portfolio
Diversified Bond Portfolio
Equity Income Portfolio
Equity Portfolio
Flexible Managed Portfolio
Global Portfolio
Government Income Portfolio
High Yield Bond Portfolio
1
<PAGE>
QUALIFIED VARIABLE INVESTMENT PLAN VARIABLE ANNUITY
Money Market Portfolio
Natural Resources Portfolio
Prudential Jennison Portfolio
Small Capitalization Stock Portfolio
Stock Index Portfolio
Depending upon market conditions, you may earn or lose money in any of
these options. The value of your contract will fluctuate depending upon the
investment performance of the Series Fund portfolios you have chosen as your
variable investment options. Performance information for the variable investment
options is provided in the Accumulation Unit Values charts beginning on page 24
and in the Statement of Additional Information. Past performance is not a
guarantee of future results.
You may also put your money into the fixed interest-rate option.
3. WHAT KIND OF PAYMENTS WILL I RECEIVE DURING THE INCOME PHASE?
(ANNUITIZATION)
If you want to receive regular income from your annuity, you can choose
one of several options, including guaranteed payments for the annuitant's
lifetime. Once you begin receiving regular payments, you may not be able to
change your payment plan.
4. WHAT IS THE 1% BONUS?
We will add to your account an additional 1% of your purchase payments
during the first three years of your contract. Payment of the bonus amount may
be limited to $1,000 each contract year. After three contract years the
additional 1% may be added at our discretion. Also, the 1% will be recaptured if
you make a withdrawal within eight contract years after the purchase payment is
made.
5. HOW CAN I PURCHASE A QUALIFIED VARIABLE INVESTMENT PLAN VARIABLE ANNUITY
CONTRACT?
If you purchase this contract under a retirement plan, your purchase
payment would be made through payroll deduction or a similar arrangement with
your employer. You must make at least $300 in purchase payments during any 12
month period. If you purchase this contract outside of an employer sponsored
retirement plan, your purchase payments must be a minimum of $100.
6. WHAT ARE THE EXPENSES ASSOCIATED WITH THE QUALIFIED VARIABLE INVESTMENT
PLAN VARIABLE ANNUITY CONTRACT?
The contract has insurance features and investment features, and there are
costs related to each. Each year we deduct a $30 contract maintenance charge if
your contract value is less than $10,000 on the contract anniversary. For
insurance and administrative costs, we also deduct an annual charge of 1.20% of
the average daily value of all assets allocated to the variable investment
options. This charge is not assessed against amounts allocated to the fixed
interest-rate option.
There are a few states/jurisdictions that assess a premium tax when you
begin receiving regular income payments from your annuity. In those states, we
will assess the required premium tax charge which currently can range up to 5%.
The mutual fund portfolios also have their own expenses that apply to your
investment. These annual expenses currently range from 0.39% to 0.84% of the
average daily value of the portfolio.
7. HOW CAN I ACCESS MY MONEY?
You may take money out at any time during the accumulation phase. Each
contract year you may withdraw your contract earnings plus up to 10% of your
contract value (calculated as of the date of the first withdrawal made in that
contract year), without charge. Withdrawals in excess of earnings plus 10% of
your purchase payments may be subject to a withdrawal charge. This charge
initially is 8% but decreases 1% each contract year from the date that each
purchase payment was made. After the eighth contract year, there is no charge
for a withdrawal of that purchase payment. You may, however, be subject to
income tax and a tax penalty if you make an early withdrawal.
2
<PAGE>
QUALIFIED VARIABLE INVESTMENT PLAN VARIABLE ANNUITY
8. WHAT ARE THE TAX CONSIDERATIONS ASSOCIATED WITH THE QUALIFIED VARIABLE
INVESTMENT PLAN VARIABLE ANNUITY CONTRACT?
Your earnings are generally not taxed until withdrawn. If you take money
out during the accumulation phase, earnings are withdrawn first and are taxed as
income. If you are younger than age 59 1/2 when you take money out, you may be
charged a 10% federal tax penalty on the earnings in addition to ordinary
taxation. A portion of the payments you receive during the income phase may be
considered partly a return of your original investment. As a result, that
portion of each payment is not taxable as income. Generally, all amounts
withdrawn from IRA contracts are taxable and subject to the 10% penalty if
withdrawn prior to age 59 1/2.
9. OTHER INFORMATION
This contract is issued by The Prudential Insurance Company of America,
and sold by licensed representatives.
3
<PAGE>
QUALIFIED VARIABLE INVESTMENT PLAN VARIABLE ANNUITY
SUMMARY OF CONTRACT EXPENSES
The purpose of this summary is to help you to understand the costs you
will pay for the qualified Variable Investment Plan variable annuity contract.
This summary includes the expenses of the mutual fund associated with the
variable investment options but does not include any charge for premium taxes
that might be applicable in your state. More detailed information can be found
on page 13 in the section called, "WHAT ARE THE EXPENSES ASSOCIATED WITH THE
QUALIFIED VARIABLE INVESTMENT PLAN VARIABLE ANNUITY CONTRACT?". For more
detailed expense information about the Series Fund, please refer to the
prospectus located at the back of this prospectus.
<TABLE>
<CAPTION>
TRANSACTION EXPENSES CONTRACT YEARS AFTER PURCHASE PAYMENT
----------------------------------------------------------------------------------
<S> <C> <C>
WITHDRAWAL CHARGE: Year 0 ................... 8% plus return of 1% bonus
(SEE NOTE 1 BELOW) Year 1 ................... 7% plus return of 1% bonus
Year 2 ................... 6% plus return of 1% bonus
Year 3 ................... 5% plus return of 1% bonus
Year 4 ................... 4% plus return of 1% bonus
Year 5 ................... 3% plus return of 1% bonus
Year 6 ................... 2% plus return of 1% bonus
Year 7.................... 1% plus return of 1% bonus
After that ............... 0%
Contract years 1-8 after
purchase payment:
Return of bonus...........1%
ANNUAL CONTRACT FEE
AND FULL WITHDRAWAL FEE: ............................. $30.00
(SEE NOTE 2 BELOW)
ANNUAL ACCOUNT EXPENSES
----------------------------------------------------------------------------------
As a percentage of the average account value in the variable investment options.
MORTALITY AND EXPENSE RISK: ............................ 1.20%
</TABLE>
- --------------------------------------------------------------------------------
Note 1: Withdrawal charges are imposed only on purchase payments. You may
withdraw earnings without a charge. In addition, during any contract
year you may withdraw up to 10% of the total contract value (calculated
as of the date of the first withdrawal made in that contract year),
without charge. There is no withdrawal charge on any withdrawals made
under the CRITICAL CARE ACCESS option (see page 14).
Surrender charges are also waived when a death benefit is paid.
Note 2: This fee is only imposed if your contract value is less than $10,000 at
the time this fee is calculated.
4
<PAGE>
QUALIFIED VARIABLE INVESTMENT PLAN VARIABLE ANNUITY
SUMMARY OF CONTRACT EXPENSES
ANNUAL MUTUAL FUND EXPENSES
- --------------------------------------------------------------------------------
As a percentage of each option's average daily net assets:
INVESTMENT OTHER TOTAL
MANAGEMENT FEE EXPENSES EXPENSES
- --------------------------------------------------------------------------------
THE PRUDENTIAL SERIES FUND
Conservative Balanced Portfolio 0.55% 0.02% 0.57%
Diversified Bond Portfolio 0.40% 0.03% 0.43%
Equity Income Portfolio 0.40% 0.02% 0.42%
Equity Portfolio 0.45% 0.02% 0.47%
Flexible Managed Portfolio 0.60% 0.02% 0.62%
Global Portfolio 0.75% 0.09% 0.84%
Government Income Portfolio 0.40% 0.04% 0.44%
High Yield Bond Portfolio 0.55% 0.05% 0.60%
Money Market Portfolio 0.40% 0.02% 0.42%
Natural Resources Portfolio 0.45% 0.12% 0.57%
Prudential Jennison Portfolio 0.60% 0.03% 0.63%
Small Capitalization Stock Portfolio 0.40% 0.05% 0.45%
Stock Index Portfolio 0.35% 0.04% 0.39%
- --------------------------------------------------------------------------------
5
<PAGE>
QUALIFIED VARIABLE INVESTMENT PLAN VARIABLE ANNUITY
EXPENSE EXAMPLES
- --------------------------------------------------------------------------------
These examples will help you compare the fees and expenses of the different
variable investment options offered by the qualified Variable Investment Plan.
You can also use the examples to compare the cost of the qualified Variable
Investment Plan with other qualified variable annuity contracts.
- --------------------------------------------------------------------------------
EXAMPLE 1-IF YOU WITHDRAW YOUR ASSETS OR ANNUITIZE
Example 1 assumes that you invest $1,000 in the qualified Variable Investment
Plan and that you allocate all of your assets to one of the variable investment
options and withdraw all your assets or annuitize at the end of the time period
indicated. (Certain annuity options will not be subject to withdrawal charges.
See "WHAT KIND OF PAYMENTS WILL I RECEIVE DURING THE INCOME PHASE?
(ANNUITIZATION)" on page 11.) The example also assumes that your investment has
a 5% return each year and that the mutual fund's operating expenses remain the
same. Your actual costs may be higher or lower, but based on these assumptions,
your costs would be:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
THE PRUDENTIAL SERIES FUND
Conservative Balanced Portfolio $ 91 $ 101 $ 121 $ 219
Diversified Bond Portfolio $ 90 $ 96 $ 114 $ 204
Equity Income Portfolio $ 89 $ 96 $ 113 $ 203
Equity Portfolio $ 90 $ 98 $ 116 $ 208
Flexible Managed Portfolio $ 91 $ 102 $ 124 $ 224
Global Portfolio $ 94 $ 109 $ 135 $ 248
Government Income Portfolio $ 90 $ 97 $ 114 $ 205
High Yield Bond Portfolio $ 91 $ 102 $ 123 $ 222
Money Market Portfolio $ 89 $ 96 $ 113 $ 203
Natural Resources Portfolio $ 91 $ 101 $ 121 $ 219
Prudential Jennison Portfolio $ 92 $ 103 $ 124 $ 226
Small Capitalization Stock Portfolio $ 90 $ 97 $ 115 $ 206
Stock Index Portfolio $ 89 $ 95 $ 112 $ 200
- -----------------------------------------------------------------------------
</TABLE>
Notes:
THESE EXAMPLES SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN IN THE
EXAMPLES.
The charges shown in the 10 years column are the same for Example 1 and Example
2. This is because after 8 years we no longer deduct the withdrawal charges when
you make a withdrawal or when you begin the income phase of your contract.
6
<PAGE>
QUALIFIED VARIABLE INVESTMENT PLAN VARIABLE ANNUITY
EXAMPLE 2 - IF YOU DO NOT WITHDRAW YOUR ASSETS
Example 2 assumes that you invest $1,000 in the qualified Variable Investment
Plan and allocate all of your assets to one of the variable investment options
and DO NOT WITHDRAW any of your assets at the end of the time period indicated.
The example also assumes that your investment has a 5% return each year and that
the mutual fund's operating expenses remain the same. Your actual costs may be
higher or lower, but based on these assumptions, your costs would be:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
THE PRUDENTIAL SERIES FUND
Conservative Balanced Portfolio $ 19 $ 59 $ 101 $ 219
Diversified Bond Portfolio $ 18 $ 54 $ 94 $ 204
Equity Income Portfolio $ 17 $ 54 $ 93 $ 203
Equity Portfolio $ 18 $ 56 $ 96 $ 208
Flexible Managed Portfolio $ 19 $ 60 $ 104 $ 224
Global Portfolio $ 22 $ 67 $ 115 $ 248
Government Income Portfolio $ 18 $ 55 $ 94 $ 205
High Yield Bond Portfolio $ 19 $ 60 $ 103 $ 222
Money Market Portfolio $ 17 $ 54 $ 93 $ 203
Natural Resources Portfolio $ 19 $ 59 $ 101 $ 219
Prudential Jennison Portfolio $ 20 $ 61 $ 104 $ 226
Small Capitalization Stock Portfolio $ 18 $ 55 $ 95 $ 206
Stock Index Portfolio $ 17 $ 53 $ 92 $ 200
</TABLE>
- --------------------------------------------------------------------------------
Notes:
THESE EXAMPLES DO NOT SHOW PAST OR FUTURE EXPENSES. ACTUAL EXPENSES FOR A
PARTICULAR YEAR MAY BE MORE OR LESS THAN THOSE SHOWN IN THE EXAMPLES.
If your contract value is less than $10,000, on your contract anniversary (and
upon a surrender), we will deduct a $30 fee. The examples use an average number
as the amount of the annual contract fee. This amount was calculated by taking
the total annual contract fees collected in the preceding calendar year and then
dividing that number by the total assets allocated to the variable investment
options shown in the examples. Based on this calculation, the annual contract
fee is included as an annual charge of 0.02% of contract value. Your actual fees
will vary based on the amount of your contract and your specific allocation(s).
A table of accumulation unit values of interests in each variable investment
option appears under the caption "OTHER INFORMATION" in this prospectus
beginning on Page 24. Premium taxes are not reflected in these examples. Premium
taxes may apply, depending on the state where you live.
7
<PAGE>
QUALIFIED VARIABLE INVESTMENT PLAN VARIABLE ANNUITY
1. WHAT IS THE QUALIFIED VARIABLE INVESTMENT PLAN VARIABLE ANNUITY?
The qualified Variable Investment Plan Variable Annuity is a contract designed
for use in connection with various retirement arrangements. The contract is
between your employer who is the owner, and us, the insurance company, The
Prudential Insurance Company of America (Prudential, We or Us). Under certain
circumstances, the contract is directly between you and the insurance company.
Under our contract or agreement, in exchange for your payment to us, we promise
to pay you a guaranteed income stream. Your annuity is in the accumulation phase
until you decide to begin receiving annuity payments. The date you begin
receiving annuity payments is the annuity date. On the annuity date, your
contract switches to the income phase.
This annuity contract generally benefits from tax deferral. Tax deferral means
that you are not taxed on earnings or appreciation on the assets in your
contract until you withdraw money from your contract.
The qualified Variable Investment Plan is a variable annuity contract. This
means that during the accumulation phase, you can allocate your assets among 13
variable investment options and one guaranteed fixed interest-rate option. If
you select a variable investment option, the amount of money you are able to
accumulate in your contract during the accumulation phase depends upon the
investment performance of the mutual fund portfolio(s) that you have selected.
Because the value of the portfolios fluctuates, depending upon market
conditions, your assets can either increase or decrease in value. This is
important, since the amount of the annuity payments you receive during the
income phase depends upon the value of your contract at the time you begin
receiving payments.
As mentioned above, the qualified Variable Investment Plan also contains a
guaranteed fixed interest-rate option. This option offers an interest-rate that
is guaranteed by us for one year and will always be at least 3% per year.
The owner of the contract has the decision-making rights under the contract. You
will be the annuitant unless you designate someone else. The annuitant is the
person who receives the annuity payments when the income phase begins. The
annuitant is also the person whose life is used to determine how much and how
long these payments will continue. On and after the annuity date, the annuitant
is the owner and may not be changed. The beneficiary becomes the owner when a
death benefit is payable.
BENEFICIARY
The beneficiary is the person(s) or entity you name to receive any death
benefit. The beneficiary is named at the time the contract is issued, unless you
change it at a later date. Unless an irrevocable beneficiary has been named, you
can change the beneficiary at any time before the annuitant or last surviving
annuitant dies. Your written request becomes effective when we approve it.
DEATH BENEFIT
If the annuitant dies during the accumulation phase, we will, upon receiving
appropriate proof of death, pay a death benefit to the beneficiary designated by
the contractowner.
This is how the amount of the death benefit is calculated:
If the annuitant dies during the accumulation phase before age 65, the amount of
the death benefit will be the greater of (a) the current value of the contract
as of the date we receive appropriate proof of death, or (b) the total of all
purchase payments plus any bonus credited by Prudential, reduced proportionally
by withdrawals.
If the annuitant is age 65 or older, the amount of the death benefit will be the
current value of the contract as of the time we receive appropriate proof of
death.
Here is an example of how the death benefit is calculated:
8
<PAGE>
QUALIFIED VARIABLE INVESTMENT PLAN VARIABLE ANNUITY
Suppose a contractowner had made purchase payments and was credited a bonus
totaling $100,000 but, due to unfortunate investment results, the contract value
had decreased to $80,000. If the annuitant is younger than age 65, the death
benefit would still be $100,000. This amount, however, is reduced proportionally
when you make a withdrawal from the contract. If the contractowner had withdrawn
50% of the remaining $80,000, the death benefit would also be reduced by 50%.
Since the death benefit had been $100,000, it would now be $50,000. As stated
above, after age 65, the death benefit amount is simply the value of the
contract.
Death benefits payable under a qualified plan generally must be distributed
within five years after the annuitant's date of death. However, if the
beneficiary chooses an annuity payment option and if the annuity payments begin
within one year of the date of death, the death benefit may be distributed over
the beneficiary's life expectancy.
If the annuitant dies during the income phase, the death benefit, if any, is
determined by the type of annuity payment option you select.
SHORT TERM CANCELLATION RIGHT OR "FREE LOOK"
If you change your mind about owning the qualified Variable Investment Plan, you
may cancel your contract within 10 days after receiving it (or whatever period
is required in the state where the contract was issued). You can request a
refund by returning the contract either to the representative who sold it to
you, or to the Prudential Annuity Service Center at the address shown on the
first page of this prospectus. You will receive, depending on applicable law:
o Your full purchase payment, or
o The amount your contract is worth as of the day we receive your request.
This amount may be more or less than your original payment.
OTHER CONTRACTS
This prospectus describes the qualified Variable Investment Plan contract which
is currently being offered for sale. There are earlier versions of the contract
which are no longer offered. These earlier versions have some different features
which include differences in:
o payout options;
o sales charges on withdrawals;
o determination of payments to a beneficiary;
o determination of the amount of monthly variable annuity payments.
If you are an owner of a contract that is no longer offered for sale, you can
find further information regarding contract differences throughout this
prospectus and in the Statement of Additional Information.
2. WHAT INVESTMENT OPTIONS CAN I CHOOSE?
The contract gives you the choice of allocating your purchase payments to any
one or more of the 13 variable investment options, or a guaranteed fixed
interest-rate option. The 13 variable investment options invest in Prudential
Series Fund portfolios which are managed by Prudential. The Prudential Series
Fund has a separate prospectus that is provided with this prospectus. YOU SHOULD
READ THE PRUDENTIAL SERIES FUND PROSPECTUS BEFORE YOU DECIDE TO ALLOCATE YOUR
ASSETS TO A VARIABLE INVESTMENT OPTION USING THAT FUND.
VARIABLE INVESTMENT OPTIONS
The Prudential Series Fund, Inc.
The Prudential Series Fund, Inc. is managed by Prudential through another
company it owns called The Prudential Investment Corporation. The Prudential
Investment Corporation manages each of the portfolios of the Prudential Series
fund except the Prudential Jennison Portfolio. For this portfolio, Prudential
Investment Corporation oversees another company owned by Prudential called
Jennison Associates Capital Corp. which provides the day to day investment
advisory services.
Listed below are the Prudential Series Fund portfolios which are available as
variable
9
<PAGE>
QUALIFIED VARIABLE INVESTMENT PLAN VARIABLE ANNUITY
investment options. Each portfolio has a different investment objective.
o Conservative Balanced Portfolio
o Diversified Bond Portfolio
o Equity Income Portfolio
o Equity Portfolio
o Flexible Managed Portfolio
o Global Portfolio
o Government Income Portfolio
o High Yield Bond Portfolio
o Money Market Portfolio
o Natural Resources Portfolio
o Prudential Jennison Portfolio (domestic equity)
o Small Capitalization Stock Portfolio
o Stock Index Portfolio
FIXED INTEREST-RATE OPTION
We also offer a fixed interest-rate option. When you select this option, your
payment will earn interest at the established rate for a one-year period. This
rate will always be at least 3%. A new interest-rate period is established every
time you allocate or transfer money into the fixed interest-rate option. You may
have money allocated in more than one interest-rate period at the same time.
This could result in your money earning interest at different rates and each
interest-rate period maturing at a different time.
TRANSFERS AMONG OPTIONS
You are allowed to transfer, money among the variable investment options and
the fixed interest-rate option at least four times each contract year. We are
not currently enforcing this limit, however, we may do so in the future if it
becomes necessary due to excessive transfer activity. The minimum transfer
amount is $300 or the total amount in the investment option if it is less than
$300. Your transfer request may be made by telephone or in writing to the
Prudential Annuity Service Center. We have procedures in place to confirm that
instructions received by telephone are genuine. We will not be liable for
following telephone instructions that we reasonably believe to be genuine. Your
transfer request will take effect at the end of the business day on which it was
received.
YOU CAN MAKE TRANSFERS OUT OF THE FIXED INTEREST-RATE OPTION ONLY DURING THE
30-DAY PERIOD FOLLOWING YOUR CONTRACT ANNIVERSARY DATE.
The maximum amount you may transfer from the fixed interest-rate option is
limited to the greater of:
o 25% of the amount allocated to the fixed interest-rate option, or
o $2,000.
DOLLAR COST AVERAGING
The Dollar Cost Averaging (DCA) feature allows you to systematically transfer a
percentage amount out of the money market variable investment option and into
any other variable investment option(s). You can transfer money to more than one
variable investment option. The investment option used for the transfers is
designated as the DCA account. You may choose to have these automatic transfers
from the DCA made monthly. By allocating amounts on a regular schedule instead
of allocating the total amount at one particular time, you may be less
susceptible to the impact of market fluctuations.
When you establish your DCA account with your first purchase payment, you must
allocate either $2,000 or 10% of your purchase payment, whichever is greater, to
your DCA account. If you establish your DCA account at a later time, a minimum
of $2,000 is required. Once your DCA account is opened, as long as it has a
positive balance, you may allocate or transfer amounts to the DCA account just
as you would with any other investment option.
Once established, your first transfer out of the account must be at least 3.0%
of your DCA account. The minimum amount you can transfer into any one investment
option is $20. Transfers will continue automatically until the entire amount in
your DCA account has been transferred or until you tell us to discontinue the
transfers. You can allocate subsequent purchase payments to re-open the DCA
account at any time.
Your transfers will be made on the last calendar day of each month, provided
that the New York Stock Exchange is open on that date. If the New York Stock
Exchange is not open on a particular transfer
10
<PAGE>
QUALIFIED VARIABLE INVESTMENT PLAN VARIABLE ANNUITY
date, the transfer will take effect on the next business day.
Any transfers you make because of Dollar Cost Averaging are not counted toward
the four transfers you are allowed each year. This feature is available only
during the contract accumulation phase.
VOTING RIGHTS
Prudential is the legal owner of the shares in the Series Fund, however, we vote
the shares according to voting instructions received from contractowners. We
will mail you a proxy which is a form you need to complete and return to us to
tell us how you wish us to vote. When we receive those instructions, we will
vote all of the shares we own on your behalf, in accordance with those
instructions. We will vote the shares for which we do not receive instructions,
and the shares that we own directly, in the same proportion as the shares for
which instructions are received. We may change the way your voting instructions
are calculated if it is required by federal regulation.
SUBSTITUTION
We may substitute one or more of the Series Fund portfolios used by the variable
investment options. We may also cease to allow investments in existing
portfolios. We would do this only if events such as investment policy changes or
tax law changes make the portfolio unsuitable. We would not do this without the
approval of the Securities and Exchange Commission and necessary state insurance
department approvals. You will be given specific notice in advance of any
substitution we intend to make.
OTHER CHANGES
We may also make other changes to such things as the minimum amounts for
purchases, transfers and withdrawals. However, before imposing such changes we
will give you at least 90 days notice.
3. WHAT KIND OF PAYMENTS WILL I RECEIVE DURING THE INCOME PHASE? (ANNUITIZATION)
PAYMENT PROVISIONS
Under the terms of the currently offered contract the annuitant can begin
receiving annuity payments at any time on or before the contract anniversary
that coincides with or next follows the annuitant's 90th birthday. At our
discretion, annuity payments may start at a later date. Different payment
provisions and income payments apply to certain previously offered contracts.
See the discussion contained in the statement of additional information for
further details.
You should be aware that generally under most tax-favored plans, you must begin
receiving payments by age 70 1/2. See Section 8, "WHAT ARE THE TAX
CONSIDERATIONS ASSOCIATED WITH THE QUALIFIED VARIABLE INVESTMENT PLAN
CONTRACT?".
You may choose among the annuity options described below (subject to the
retirement arrangement that covers you) at any time before the annuity date.
During the income phase, all of the annuity options under the currently offered
contract are fixed annuity options. This means that your participation in the
variable investment options ends on the annuity date. At any time before your
annuity date, you may ask us to change the annuity date specified in your
contract to another date. Unless we consent, the new date may not be before the
first day of the month following the date we received your request OR after the
first day of the month following your 90th birthday.
As indicated above, when you decide to begin receiving annuity payments, your
participation in the variable investment options ends. The value of your
contract at that time, together with your choice of annuity option, will help
determine how much your income payments will be. You should be aware that,
depending on how recently you made purchase payments, you may be subject to
withdrawal charges and the recapture of bonus payments when you annuitize. For
certain annuity options, these withdrawal charges will be waived.
If you have not selected an annuity option by the agreed upon annuity date, a
complete withdrawal will automatically be processed as of that date.
11
<PAGE>
QUALIFIED VARIABLE INVESTMENT PLAN VARIABLE ANNUITY
OPTION 1. LIFE ANNUITY WITH 120 PAYMENTS
(10 YEARS) CERTAIN OPTION
Under this option, we will make annuity payments to the annuitant monthly,
quarterly, semiannually or annually as long as the annuitant is alive. If the
annuitant dies before we have made 10 years worth of payments, we will pay the
beneficiary the present value of the remaining certain period annuity payments
in one lump sum unless the annuitant has specifically instructed that the
remaining monthly annuity payments continue to be paid to the beneficiary. The
present value of the remaining certain period annuity payments is calculated by
using the interest-rate used to compute the amount of the original 120 payments.
The interest-rate used will always be at least 3.5% a year.
OPTION 2. INTEREST PAYMENT OPTION
Under this option, you can choose to have us hold all or a portion of your
contract assets in order to accumulate interest. You can receive interest
payments on a monthly, quarterly, semiannual or annual basis or you can allow
the interest to accrue on your contract assets. If you have not selected an
annuity option by the annuity date, this is the option we will automatically
select for you, unless prohibited by applicable law. Under this option, we will
pay you interest at an effective rate of at least 3% a year.
OPTION 3. OTHER ANNUITY OPTIONS
We currently offer a variety of other annuity options not described above. At
the time you choose to receive your annuity payments, we may make available to
you any of the annuity options that are offered at your annuity date.
These options are referred to in your contract as the supplemental life annuity
option. Under the supplemental life annuity option, we will waive withdrawal
charges that might be applicable under other annuity options. In addition, if
you select Option 1 without a right of withdrawal, we will effect that option
under the supplemental life annuity option, if doing so provides greater monthly
payments.
4. WHAT IS THE 1% BONUS?
During the first three contract years, we will add an additional 1% to every
purchase payment that you make. After that, we will add the 1% bonus at our
discretion. We may limit our payment of the bonus to $1,000 per contract year.
The bonus payment will be allocated to your contract based on the way your
purchase payment is allocated among the variable investment options and the
fixed interest-rate option.
The bonus amount will not be subject to the charge for premium taxes. We will,
however, take the bonus payments back if you make a withdrawal of a purchase
payment within eight contract years of the time that the purchase payment was
made. The only exception would be if you annuitize your contract in a way that
is not subject to a sales charge or if you make a withdrawal under the Critical
Care Access option.
5. HOW CAN I PURCHASE A QUALIFIED VARIABLE INVESTMENT PLAN VARIABLE ANNUITY
CONTRACT?
PURCHASE PAYMENTS
Under a retirement plan, purchase payments are made through payroll deduction or
a similar arrangement with an employer. These payments must total at least $300
during any 12-month period. If you purchase the qualified Variable Investment
Plan outside of an employer sponsored retirement plan, your purchase payments
must be a minimum of $100, with a maximum contribution of $2,000 annually.
Prudential currently accepts subsequent purchase payments below this $100
minimum amount. We reserve the right to again require a $100 minimum at some
future date.
ALLOCATION OF PURCHASE PAYMENTS
When you purchase a contract, we will allocate your purchase payment among the
variable investment options and the fixed interest-rate option in whole
percentages from 10% to 100%. You can change your allocations by writing or
telephoning us at the Prudential Annuity Service Center. If you make additional
purchase payments, they will be allocated in the same way as your most recent
purchase payment, unless you tell us otherwise.
We will credit initial purchase payments to your contract within two business
days from the day on which the payment is received at the Prudential Annuity
Service Center. Our business day closes
12
<PAGE>
QUALIFIED VARIABLE INVESTMENT PLAN VARIABLE ANNUITY
when the New York Stock Exchange does, usually at 4:00 p.m. Eastern time. If,
however, your first purchase payment is made and we do not have enough
information to establish your contract, we may need to contact you to request
the required information. If we are not able to get this information within five
business days, we will either return your purchase payment to you or get your
consent to continue holding it until we receive the necessary information.
CALCULATING CONTRACT VALUE
The value of the variable portion of your contract will go up or down depending
on the investment performance of the variable investment option(s) you choose.
To determine the value of your contract, we use a unit of measure called an
accumulation unit. An accumulation unit works like a share of a mutual fund.
Every day we determine the value of an accumulation unit for each of the
variable investment options. We do this by:
1. Adding up the total amount of money allocated to a specific investment
option;
2. Subtracting from that amount insurance charges and any other charges
such as taxes; and
3. Dividing this amount by the number of outstanding accumulation units.
When you make a purchase payment, we credit your contract with accumulation
units. The number of accumulation units credited to your contract is determined
by dividing the amount of the purchase payment allocated to an investment option
by the unit price of the accumulation unit for that investment option. We
calculate the unit price for each investment option after the New York Stock
Exchange closes each day and then credit your contract. The value of the
accumulation units can increase, decrease or remain the same from day to day.
The Accumulation Unit Values charts beginning on page 24 of this prospectus
give you more detailed information about the accumulation units of the variable
investment options associated with the Prudential Series Fund.
We cannot guarantee that the value of your contract will increase or that it
will not fall below the amount of your total purchase payments. However, we do
guarantee a minimum interest-rate of 3.0% a year on that portion of the contract
allocated to the fixed interest-rate option.
6. WHAT ARE THE EXPENSES ASSOCIATED WITH THE QUALIFIED VARIABLE INVESTMENT PLAN
VARIABLE ANNUITY CONTRACT?
There are charges and other expenses associated with the contract that reduce
the return on your investment. These charges and expenses are described below.
These charges are not assessed against amounts allocated to the fixed
interest-rate option.
INSURANCE CHARGES
Each day, we make a deduction for insurance charges as follows:
The mortality risk charge is for assuming the risk that the annuitant(s) will
live longer than expected based on our life expectancy tables. When this
happens, we pay a greater number of annuity payments. The expense risk charge is
for assuming that the current charges will be insufficient in the future to
cover the cost of administering the contract.
The mortality and expense risk charge is equal, on an annual basis, to 1.20% of
the daily value of the contract invested in the variable investment options,
after expenses have been deducted. This charge is not assessed against amounts
allocated to the fixed interest-rate option.
If the charges under the contract are not sufficient, then we will bear the
loss. We do, however, expect to profit from this charge. The mortality and
expense risk charge cannot be increased. Any profits made from this charge may
be used by us to pay for the costs of distributing the contracts.
ANNUAL CONTRACT FEE
During the accumulation phase, if your contract value is less than $10,000 on
the contract anniversary date, we will deduct $30 per contract
13
<PAGE>
QUALIFIED VARIABLE INVESTMENT PLAN VARIABLE ANNUITY
year. This annual contract fee is used for administrative expenses and cannot be
increased. The $30 charge will be deducted proportionately from each of the
investment options that you have selected. This charge will also be deducted
when you surrender your contract if your contract value is less than $10,000 at
that time.
WITHDRAWAL CHARGE
During the accumulation phase you can make withdrawals from your contract. Your
withdrawal request will be processed as of the date it is received by us in good
order at the Prudential Annuity Service Center.
When you make a withdrawal, money will be taken first from your earnings. When
your earnings have been used up, then we will take the money from your purchase
payments. You will not have to pay any withdrawal charge when you withdraw your
earnings. You will need to get our consent if you want to make a partial
withdrawal that is less than $300 or if making a partial withdrawal would reduce
your contract value to less than $300.
You may be subject to certain restrictions on the withdrawal of salary reduction
contributions and earnings invested in annuity contracts which are subject to
Section 403(b) of the Internal Revenue Code. Under these annuity contracts,
withdrawals may be made prior to age 59 1/2 if you leave your job, die or are
permanently disabled. For a complete discussion of these contracts, please refer
to Section 8 of this prospectus, "WHAT ARE THE TAX CONSIDERATIONS ASSOCIATED
WITH THE QUALIFIED INDIVIDUAL VARIABLE INVESTMENT PLAN VARIABLE ANNUITY
CONTRACT?".
The withdrawal charge is for the payment of the expenses involved in selling and
distributing the contracts, including sales commissions, printing of
prospectuses, sales administration, preparation of sales literature and other
promotional activities.
You can withdraw earnings plus up to 10% of the value of your total contract,
calculated as of the date of the first withdrawal made during a contract year
without paying a withdrawal charge. This amount is referred to as the
"charge-free" amount. During the first eight contract years following a purchase
payment, if your withdrawal is more than the charge-free amount, a withdrawal
charge will be applied.
For this purpose, we treat purchase payments as withdrawn on a first-in,
first-out basis.
The table below shows the withdrawal charges that would apply, based on the
number of contract years since the purchase payment was made:
Contract Years After Purchase Payment
-------------------------------------
0 ............................. 8%
1 ............................. 7%
2 ............................. 6%
3 ............................. 5%
4 ............................. 4%
5 ............................. 3%
6 ............................. 2%
7 ............................. 1%
After that ............................. 0%
BONUS RECAPTURE
The bonus amount will be deducted from your contract value if you withdraw a
purchase payment within eight contract years after the payment was made. If you
make a withdrawal eight contract years or more after a purchase payment that was
credited with the bonus, you can withdraw all or part of your purchase payment
and retain the bonus amount.
CRITICAL CARE ACCESS
We will allow you to withdraw money from the contract and waive any withdrawal
and annual contract fee, if the annuitant or the last surviving co-annuitant (if
applicable) becomes confined to an eligible nursing home or hospital for a
period of at least three consecutive months. You would need to provide us with
proof of the confinement. If a physician has certified that the annuitant or
last surviving co-annuitant is terminally ill (has six months or less to live)
there will be no charge imposed for withdrawals. Critical Care Access is not
available in all states.
14
<PAGE>
PREMIUM TAXES
Depending upon where you reside, it is possible that your premium payments may
be subject to taxation by federal, state or municipal agencies. We are
responsible for the payment of these taxes and will make a deduction from the
value of the contract to pay for them. Some of these taxes are due when the
contract is issued, others are due when annuity payments begin. It is our
current practice not to deduct these taxes until annuity payments begin. In the
few states that impose a tax, the current rates range up to 5%. If, in the
future, we are charged for additional taxes that are based upon purchase
payments, that charge may be passed on to the contractowner.
If you make a withdrawal eight contract years or more after a purchase payment
that was credited with the bonus, you can withdraw all or part of your purchase
payment and retain the bonus amount.
7. HOW CAN I ACCESS MY MONEY?
You can access your money by:
o Making a withdrawal (either partial or complete), or
o Electing to receive annuity payments during the income phase.
When you make a complete or partial withdrawal, you will receive the value of
your contract on the day you made the withdrawal, less any applicable charges
and fees as of the date we receive your request at the Prudential Annuity
Service Center in a form acceptable to us. Unless you tell us otherwise, any
partial withdrawal will be made proportionately from all of the variable
investment options as well as the fixed interest-rate option, depending on your
investment selections. You will have to receive our consent to make a partial
withdrawal if the amount is less than $300 or if as a result of the withdrawal
the value of your contract would be reduced to less than $300.
We will generally pay the withdrawal amount, less any required tax withholding,
within seven days after we receive a properly completed withdrawal request. We
will deduct applicable charges, if any, from the assets in your contract.
INCOME TAXES, TAX PENALTIES AND CERTAIN RESTRICTIONS MAY APPLY TO ANY WITHDRAWAL
YOU MAKE. FOR A MORE COMPLETE EXPLANATION, SEE SECTION 8 OF THIS PROSPECTUS AND
THE TAX DISCUSSION IN THE STATEMENT OF ADDITIONAL INFORMATION.
SUSPENSION OF PAYMENTS OR TRANSFERS
We may be required to suspend or postpone payments made in connection with
withdrawals or transfers for any period when:
1. The New York Stock Exchange is closed (other than customary weekend
and holiday closings);
2. Trading on the New York Stock Exchange is restricted;
3. An emergency exists during which sales of shares of the mutual funds
are not reasonable or We cannot reasonably value the accumulation
units; or
4. The Securities and Exchange Commission, by order, so permits
suspension or postponement of payments for the protection of owners.
We expect to pay the amount of any withdrawal or transfer made from your
investment options promptly upon request. We are, however, permitted to delay
payment for up to six months on withdrawals from the fixed interest-rate option.
If we delay payment for more than 30 days, we will pay you interest at an
annualized rate of at least 3%.
8. WHAT ARE THE TAX CONSIDERATIONS ASSOCIATED WITH THE QUALIFIED VARIABLE
INVESTMENT PLAN VARIABLE ANNUITY CONTRACT?
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. YOU SHOULD
CONSULT A QUALIFIED TAX ADVISER FOR COMPLETE INFORMATION AND ADVICE.
ANNUITY QUALIFICATION
This discussion assumes that the contract will be treated as an annuity contract
for federal income tax purposes. In order to qualify for the tax rules
15
<PAGE>
applicable to annuity contracts, the assets underlying the contract must be
diversified according to certain rules. For further detail on diversification
requirements, see the attached prospectus for the Series Fund. Tax rules also
require that we, and not you as the contractowner, must have sufficient control
over the underlying assets to be treated as the owner of the underlying assets
for tax purposes. We believe the contract is an annuity contract under the tax
rules. However, we reserve the right to make any changes we deem necessary to
assure that the contract qualifies as an annuity contract for tax purposes. Any
such changes will apply uniformly to affected contractowners and will be made
with as much advance notice to affected contractowners as is feasible under the
circumstances.
TAXES ON PRUDENTIAL
Although the separate account is registered as an investment company, it is not
a separate taxpayer for purposes of the Internal Revenue Code. The earnings of
the account are taxed as part of the operations of Prudential. No charge is
being made currently against the account for company federal income taxes. We
will review the question of a charge to the account for company federal income
taxes periodically. Such a charge may be made in future years for any federal
income taxes that would be attributable to the contract.
Under current law, Prudential may incur state and local taxes in addition to
premium taxes in several states. At present, these taxes are not significant and
they are not charged against the contract or the account. If there is a material
change in applicable state or local tax laws, the imposition of these taxes upon
Prudential that are attributable to the account may result in a corresponding
charge against the account.
RETIREMENT ARRANGEMENTS USING THE CONTRACT
The provisions of the Code that apply to retirement programs are complex, and
the tax rules vary according to the type of plan and its terms and conditions.
This section of the prospectus provides only general information about the types
of arrangements with which the contracts may be used. These arrangements include
individual retirement accounts and annuities ("IRAs"), simplified employee
pension plans ("SEPs"), tax deferred annuities ("TDAs"), and deferred
compensation plans of state and local governments and tax exempt organizations
("Section 457 Plans").
You should consult a qualified tax adviser before purchasing a contract,
particularly if you feel there is a possibility that you will be making
withdrawals from your contract before annuity payments begin. Withdrawals may be
subject to income tax consequences, including tax penalties.
In general, assuming that you comply with to the requirements and limitations of
the Code provisions applicable to the type of retirement arrangement in which
you are participating, purchase payments (other than after-tax employee
payments) under the contract will be deductible (or not includible in your
income) up to certain amounts each year. In addition, federal income tax
currently is not imposed upon the investment income and realized gains of the
subaccounts in which your purchase payments have been invested until a
distribution is received. When a distribution is received, either as a lump sum
or an annuity, all or a portion of the distribution is normally taxable as
ordinary income. In some cases, the tax on lump-sum distributions may be limited
by a special income-averaging rule.
You should be aware that tax favored plans such as IRAs generally provide tax
deferral regardless whether they invest in annuity contracts. This means that
when a tax favored plan invests in an annuity contract, it generally does not
result in any additional tax deferral benefits.
The comments which follow concerning specific tax favored plans are intended
merely to call attention to certain of their features. No attempt has been made
to discuss in full the tax ramifications involved or to offer tax advice. As
suggested above, a qualified tax adviser should be consulted for advice and
answers to any questions.
PLANS FOR SELF-EMPLOYED INDIVIDUALS
For self-employed individuals who establish qualified plans, contributions are
deductible within the limits prescribed by the Code. Annual deductible
contributions cannot exceed the lesser of $30,000 or 25% of "earned income." For
this purpose "earned income" is computed after the deduction for contributions
to the plan is considered.
Payments generally must begin by April 1 of the year following the later of the
calendar year in
16
<PAGE>
which the employee (1) attains age 70-1/2 or (2) retires.
IRAS
If you buy a contract for use as an IRA, we will provide you a copy of the
prospectus and the contract. The "IRA Disclosure Statement" on page 36 contains
information about eligibility, contribution limits, tax particulars and other
IRA information. In addition to this information (some of which is summarized
below), the IRS requires that you have a "free look" after making an initial
contribution to the contract. During this time, you can cancel the contract by
notifying us in writing, and we will refund all of the purchase payments under
the contract (or, if greater, the amount credited under the contract, calculated
as of the valuation period that we receive this cancellation notice).
For persons who establish IRAs, the annual contribution limit is the lesser of
(1) $2,000 or (2) 100% of earned income. An IRA contribution of up to $2,000 for
each spouse is permitted, including a non-working spouse, if the combined
compensation of both spouses is at least equal to the contributed amount
provided that the non-working spouse earns less than the working spouse and they
file a joint return. Generally, for traditional IRAs, distributions must begin
by April 1 of the year following attainment of age 70-1/2 and are subject to
certain minimum distribution requirements. Certain penalties may result if the
contribution or age limitations are exceeded.
Deductions for IRA contributions in those cases where an individual is an active
participant in an employer sponsored pension plan, SEP, SIMPLE, Section 403(a)
plan, or TDA are limited to individuals whose adjusted gross income is less than
certain specified amounts. These amounts are adjusted each year. For 1998, the
amounts are as follows: For married individuals who file a joint tax return, a
full deduction will be available if adjusted gross income is $50,000 or less.
For a single individual, the limit is $30,000. Partial deductions for IRA
contributions will be available for married joint filers who have adjusted gross
income of more than $50,000 and less than $60,000, and single individuals whose
adjusted gross income is less than $40,000. In the case of an individual who is
not an active participant in an employer sponsored plan as described above, but
whose spouse is an active participant, a full deduction will be available for
married joint filers if adjusted gross income is $150,000 or less, with partial
deductions being available for adjusted gross income up to $160,000.
SIMPLIFIED EMPLOYEE PENSION PLANS ("SEPS")
Under a SEP, annual employer contributions to an IRA established by an employee
are not includible in income up to the lesser of $30,000 or 15% of the
employee's earned income (excluding the employer's contribution to the SEP).
However, for these purposes, compensation in excess of certain limits
established by the IRS will not be considered. In 2000, this limit is $170,000.
In addition, a SEP must satisfy certain minimum participation requirements and
contributions may not discriminate in favor of highly compensated employees.
Contracts issued as IRAs established under a SEP must satisfy the requirements
described above for an IRA.
Certain SEP arrangements are permitted to allow employees to elect to reduce
their salaries by as much as $10,500 (in 2000, as indexed) and have their
employer contribute on their behalf to the SEP. These arrangements, called
salary reduction SEPs, are available only if the employer maintaining the SEP
has 25 or fewer employees and at least 50% of the eligible employees elect to
make salary reduction contributions. Other limitations may reduce the
permissible contribution level for highly compensated employees. New Salary
Reduction SEPs may not be established after 1996.
DISCLOSURE AND "FREE LOOK"
If you purchase a contract used as an IRA, including one established under a SEP
arrangement, you will be given disclosure material prepared by Prudential. The
material includes this prospectus, a copy of the contract, and a brochure
containing information about eligibility, contribution limits, tax consequences,
and other particulars concerning IRAs.
You must be given a "free look" after making an initial contribution in which to
affirm or reverse your decision to participate. Therefore, within the free look
period, you may cancel your contract by notifying Prudential in writing, and
Prudential will refund the purchase payments under the contract or, if greater,
the amount credited under the contract (less any bonus) computed as of the
valuation period that Prudential receives the notice for cancellation. See
SHORT-TERM CANCELLATION RIGHT OR "FREE LOOK," page 9.
TDAS
Tax law permits employers and employees of Section 501(c)(3) tax-exempt
organizations and public educational organizations to make, subject to certain
limitations, contributions to an annuity in which the employee's rights are
nonforfeitable (commonly referred to as a "tax deferred annuity" or "TDA"). The
amounts contributed under a TDA
17
<PAGE>
and earnings thereon are not taxable as income until distributed as annuity
income or otherwise.
Generally, contributions to a TDA may be made through a salary reduction
arrangement up to a maximum of $10,500 (in 2000, as indexed). However, under
certain special rules, the limit could be increased as much as $3,000. In
addition, the Code permits certain total distributions from a TDA to be "rolled
over" to another TDA or IRA. Certain partial distributions from a TDA may be
"rolled over" to an IRA.
An annuity contract will not qualify as a TDA, unless under such contract,
distributions from salary reduction contributions and earnings thereon (other
than distributions attributable to assets held as of December 31, 1988) may be
paid only on account of attainment of age 59-1/2, severance of employment,
death, total and permanent disability and, in limited circumstances, hardship.
(Such hardship withdrawals are permitted, however, only to the extent of salary
reduction contributions and not earnings thereon.)
The withdrawal restrictions referred to above do not apply to the transfer of
all or part of a contract owner's interest in his or her contract among the
available investment options offered by Prudential or to the direct transfer of
all or part of the contract owner's interest in the contract to a TDA of another
insurance company or to a mutual fund custodial account under Section 403(b)(7)
of the Code. In imposing the restrictions on withdrawals as described above,
Prudential is relying upon a no-action letter dated November28, 1998 from the
Chief of the Office of Insurance Products and Legal Compliance of the Securities
and Exchange Commission to the American Council of Life Insurance.
Employer contributions are subject generally to the same coverage, minimum
participation and nondiscrimination rules applicable to qualified pension and
profit-sharing plans. Distributions from a TDA generally must commence by April
1 of the calendar year following the later of the calendar year in which the
employee (1) attains age 70 1/2; or (2) retires. Distributions must satisfy
minimum distribution requirements similar to those that apply to qualified plans
generally.
ELIGIBLE DEFERRED COMPENSATION PLANS OF STATE OR LOCAL GOVERNMENTS AND TAX
EXEMPT ORGANIZATIONS
A contract may be used to fund an eligible deferred compensation plan of a state
or local government or a tax-exempt organization (commonly called a "Section 457
Plan"). The amounts contributed under such plans and increments thereon are not
taxable as income until distributed or otherwise made available to the employee
or other beneficiary. However, if the tax law requirements are not met,
employees may be required to include in gross income all or part of the
contributions and earnings thereon.
Assets of deferred compensation plans are generally part of the employer's
general assets. However, governmental employers are required to hold assets in a
trust, annuity contract or custodial account. Contributions generally may not
exceed the lesser of $8,000 (in 2000, as indexed) or 33-1/3% of the employee's
compensation.
Generally, distributions must begin by April 1 of the calendar year following
the later of the calendar year in which the employee (1) attains age 70-1/2; or
(2) retires. Distributions are subject to special minimum distribution rules in
addition to the minimum distribution requirements for qualified plans. Rollovers
are not permitted (other than between Section 457 Plans).
QUALIFIED PENSION AND PROFIT SHARING PLANS
A contract may be used to fund a qualified pension or profit-sharing plan. The
plan itself must satisfy the coverage, minimum participation, nondiscrimination,
minimum distribution, and all other requirements applicable generally to
qualified pension and profit-sharing plans. The Code also imposes dollar
limitations on contributions that may be made to or benefits that may be
received from a qualified pension or profit-sharing plan (including a limitation
of $10,500 (in 2000 as indexed) on the amount that an employee may contribute
through a "401(k) plan"). Generally, distributions from a qualified plan must
begin by April 1 of the calendar year following the later of the calendar year
in which the employee (1) attains age 70-1/2; or (2)
18
<PAGE>
retires. Distributions are subject to certain minimum distribution requirements.
MINIMUM DISTRIBUTION OPTION
The Minimum Distribution Option is a program available with IRA and SEP
programs. It enables the client to satisfy IRS minimum distribution
requirements, without having to annuitize or cash surrender their Contracts.
Distributions from traditional IRAs and SEPs must begin by April 1 of the year
following attainment of age 70-1/2. Each year until the maturity date,
Prudential will recalculate the minimum amount that you are required to withdraw
from your IRA or SEP. We will send you a check for the minimum distribution
amount less any partial withdrawals made during the year. Our calculations are
based solely on the cash value of the contract on the last day of the prior
calendar year. If you have other IRA accounts, you will be responsible for
taking the minimum distribution from each.
PENALTY FOR EARLY WITHDRAWALS
A 10% penalty tax will generally apply to the taxable part of distributions
received from an IRA, SEP, TDA, and qualified retirement plans before age
59-1/2. Limited exceptions are provided, such as where amounts are paid in the
form of a qualified life annuity, upon death or disability of the employee, to
pay certain medical expenses, or, in some cases, upon separation from service on
or after the attainment of age 55.
WITHHOLDING
Certain distributions from qualified retirement plans and TDAs will be subject
to mandatory 20% withholding unless the distribution is an eligible rollover
distribution that is "directly" rolled over into another qualified plan, TDA or
IRA. Unless you elect otherwise, the portion of any taxable amounts received
under your contract will be subject to withholding to meet federal tax
obligations.
The rate of withholding on periodic annuity payments where mandatory withholding
is not required will be determined on the basis of the withholding certificate
you may file with us. For payments not subject to mandatory withholding, if you
do not file such a certificate and you will be receiving periodic annuity
payments, you shall be treated, for purposes of determining your withholding
rate, as a married person with three exemptions; the rate of withholding on all
other payments under your contract, such as withdrawals, will be 10%. In the
absence of an election by you that we should not do so, it will withhold from
every withdrawal or annuity payment the appropriate percentage of the amount of
the payment that we reasonably believe is includible in gross income. We will
provide forms and instructions concerning the right to elect that no amount be
withheld from payments.
Recipients, including those who have elected out of withholding, must supply
their Taxpayer Identification Number (Social Security Number) to payers of
distributions for tax reporting purposes. Failure to furnish this number when
required may result in the imposition of a tax penalty and will subject the
distribution to the withholding requirements of the law described above.
Special withholding rules apply to nonresident aliens. Generally, there will be
no withholding for taxes until payments are actually received under the
contract. Distributions to contractowners under Section 457 Plans are treated as
the payment of wages for federal income tax purposes and thus are subject to the
general withholding requirements.
INTERESTED PARTY DISCLOSURE
The Employee Retirement Income Security Act of 1974 ("ERISA") prevents a
fiduciary with respect to a pension or profit-sharing plan from receiving any
benefit from any party dealing with the plan as a result of the sale of the
contract (other than benefits that would otherwise be provided in the plan).
Administrative exemptions issued by the IRS and the Department of Labor permit
transactions between insurance agents and qualified pension and profit sharing
plans and with SEP IRAs. To be able to rely on the exemption, certain
information must be disclosed to the plan fiduciary. The information that must
be disclosed includes the relationship between the agent and the insurer, a
description of any charges, fees, discounts, penalties or adjustments that may
be imposed in connection
19
<PAGE>
with the purchase, holding, exchange or termination of the contract, as well as
the commissions received by the agent.
In addition to disclosure, other conditions apply to the use of the exemption.
For example, a plan fiduciary may not be a partner or employee of the Prudential
representative making the sale. The fiduciary must not be a relative of the
representative (including spouse, direct descendant, spouse of a direct
descendant, ancestor, brother, sister, spouse of a brother or sister). The
representative may not be an employee, officer, director or partner of either
the independent fiduciary or the employer establishing the plan. No relative of
the representative may: (1) control, directly or indirectly, the corporation
establishing or maintaining the plan; (2) be either a partner with a 10% or more
interest in the partnership or the sole proprietor establishing or maintaining
the plan; or (3) be an owner of a 5% or more interest in a Subchapter S
Corporation establishing or maintaining the plan. In addition, no affiliate
(including relatives) of the representatives may be a trustee, administrator or
a fiduciary with written authority to acquire, manage or dispose of the assets
of the plan.
ADDITIONAL INFORMATION
For additional information about the requirements of federal tax law applicable
to tax favored plans, see the "IRA Disclosure Statement" on Page 36.
9. OTHER INFORMATION
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
The Prudential Insurance Company of America ("Prudential") is a mutual insurance
company founded in 1875 under the laws of the State of New Jersey. It is
licensed to sell life insurance and annuities in the District of Columbia, Guam,
the U.S. Virgin Islands and in all states. Prudential is subject to the
insurance laws and regulations of all states where it is licensed to do
business.
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 yet been developed and approved, would
provide the criteria for determining eligibility and the methodology for
allocating shares or other consideration to those who would be eligible.
Generally, the amount of shares or other consideration eligible customers would
receive would be based on a number of factors, including the types, amounts and
issue years of 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, such as the Pruco Life insurance companies, would not
be. It has not yet been determined whether any exceptions to that general
approach will be made with respect to policyholders and contractowners 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.
THE SEPARATE ACCOUNT
We have established a separate account, the Prudential Qualified Individual
Variable Contract Account ("separate account"), to hold the assets that are
associated with the contracts. The separate account was established under New
Jersey law on October 12, 1982, and is registered with the U.S. Securities and
Exchange Commission under the Investment Company Act of 1940, as a unit
investment trust, which is a type of investment company. The assets of the
separate account are held in the name of Prudential and legally belong to us.
These assets are kept separate from all of our other assets and may not be
charged with liabilities arising out of any other business we may conduct. More
detailed information about Prudential, including its consolidated financial
statements, are provided in the Statement of Additional Information.
20
<PAGE>
SALE AND DISTRIBUTION OF THE CONTRACT
Prudential Investment Management Services LLC ("PIMS"), 100 Mulberry Street,
Gateway Center Three, 14th Floor, Newark, New Jersey 07102-4077, acts as the
distributor of the contracts. PIMS is a wholly-owned subsidiary of Prudential
and is a limited liability corporation organized under Delaware law in 1996. It
is a registered broker-dealer under the Securities Exchange Act of 1934 and a
member of the National Association of Securities Dealers, Inc. Commissions for
the sales of contracts are paid to Prudential representatives and to other
independent broker-dealers who sell the contracts, and do not reduce the amount
of your investment. Registered representatives of independent broker-dealers may
be paid on a different basis than those affiliated with PIMS.
ASSIGNMENT
Since the contract is issued under a qualified plan, there may be limitations on
your ability to assign the contract. For further information please speak to
your representative.
EXCHANGE OFFER FOR CERTAIN CONTRACTOWNERS
Subject to regulatory approval, we may permit contractowners under certain
qualified plans to exchange their contracts for certain mutual funds or variable
annuity contracts.
MUTUAL FUND OFFER. We may permit the contractowners to exchange their contracts
for shares of certain mutual funds managed by Prudential Funds Investment
Management LLC, a wholly-owned subsidiary of Prudential. We will not charge any
fee at the time of the exchange. We will waive the following charges that might
otherwise be applicable to a withdrawal or surrender of the contract: the sales
charge on withdrawal, the recapture of additional amounts, and the annual
administrative charge. In addition, the mutual funds will waive any sales charge
that would usually be imposed on the purchase or sale of the mutual fund shares.
If the qualified plan has $1 million or more invested in one or more contracts,
the plan will generally be eligible for Class A shares of the mutual funds. If
the qualified plan has less than $1 million invested in one or more contracts,
the plan may be eligible for Class C shares of the mutual funds if certain
eligibility requirements are met. The plan sponsor, not the participants, may
be required to agree to make a payment approximating the contract's sales charge
if the plan terminates its recordkeeping with Prudential and/or makes certain
withdrawals from the funds while the contract's sales charge would have been in
effect. Before deciding to make any exchanges, you should carefully read the
prospectus for the mutual funds you are considering. The mutual funds are not
variable annuity contracts like the contracts, and therefore any investment in
the mutual funds does not come with the same features as the contracts, such as
the death benefit and the right to effect an annuity.
GROUP DISCOVERY SELECT OFFER. We may permit the contractowners to exchange
their contracts for Discovery Select Group Variable Annuity Contracts ("Group
Discovery Select") issued by Prudential. In general, this offer will be
available only to contractowners that are part of a qualified plan with 25 or
more participants. We may, however, make the offer available to certain group
plans using a single contract, even if the plan has fewer than 25 participants.
Group Discovery Select provides 22 investment options, some of which are managed
by a Prudential affiliate and some of which are managed by unaffiliated
advisors. We will not charge any fee at the time of the exchange. We will waive
the following charges that might otherwise be applicable to a withdrawal or
surrender of the contract: the sales charge on withdrawal, the recapture of
additional amounts, and the annual administrative charge. Contractowners
switching to Group Discovery Select will be subject to the charges under Group
Discovery Select, including the withdrawal charge. For purposes of that charge,
years of participation in the contract will be counted as years of participation
in Group Discovery Select. Before deciding to make any exchange, you should
carefully read the prospectus for Group Discovery Select and the prospectuses
for the investment options you are considering.
REQUIREMENTS. We will determine, in our sole discretion, to whom an exchange
offer will be made, the time period during which the exchange
21
<PAGE>
offer will be in effect, and when to terminate an exchange offer. We may
establish fixed periods of time for exchanges under a particular contract or
group of contracts (a "window") of at least 60 days in length. These exchange
offers are subject to termination and their terms are subject to change.
TAXES. 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 account under Section 408 of the Internal
Revenue Code elects to exchange from a contract to Discovery Select or to mutual
funds. For 403(b) plans, exchanges from a contract to a mutual fund will be
effected from a 403(b) annuity contract to a 403(b)(7) custodial account so that
the transaction will not constitute a taxable distribution. 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
than from annuity contracts.
DEMUTUALIZATION. If the plan sponsor or participants exchange a contract and if
Prudential demutualizes in the future, the contractowner might not receive
consideration it might otherwise have received or the amount of consideration
received could be smaller than had the contract not been exchanged. As a general
rule, owners of Prudential-issued insurance policies and annuity contracts would
be eligible, provided that their policies or contracts 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.
Decisions regarding the exchange of contracts should be based on the desire for
the features of the new product as well as your insurance needs, and not on
Prudential's potential demutualization.
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.
22
<PAGE>
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.
FINANCIAL STATEMENTS
The consolidated financial statements of Prudential and its subsidiaries and the
financial statements of the separate account associated with the qualified
Variable Investment Plan are included in the Statement of Additional
Information.
STATEMENT OF ADDITIONAL INFORMATION
CONTENTS:
o Company
o Directors and Officers
o Further Information Regarding Previously Offered Qualified Individual
Variable Investment Plan Contracts
o Participation in Divisible Surplus
o Performance Information
o Legal Opinions
o Experts
o Financial Information
23
<PAGE>
<TABLE>
ACCUMULATION UNIT VALUES
THE PRUDENTIAL QUALIFIED INDIVIDUAL VARIABLE CONTRACT ACCOUNT
(CONDENSED FINANCIAL INFORMATION)
<CAPTION>
SUBACCOUNTS
----------------------------------------------------------------
MONEY MARKET
----------------------------------------------------------------
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>
1. Accumulation unit value at beginning of period ................ $ 2.179 $ 2.092 $ 2.008 $ 1.931 $ 1.847
2. Accumulation unit value at end of period ...................... 2.260 2.179 2.092 2.008 1.931
3. Number of accumulation units outstanding at end of period ..... 45,896,939 42,185,333 42,127,659 51,204,795 51,330,984
----------------------------------------------------------------
<CAPTION>
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
----------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
1. Accumulation unit value at beginning of period ................ $ 3.397 $ 3.208 $ 2.990 $ 2.899 $ 2.430
2. Accumulation unit value at end of period ...................... 3.332 3.397 3.208 2.990 2.899
3. Number of accumulation units outstanding at end of period ..... 27,626,950 32,226,526 33,970,626 38,483,488 38,379,871
----------------------------------------------------------------
<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>
1. Accumulation unit value at beginning of period ................ $ 7.559 $ 6.996 $ 5.680 $ 4.850 $ 3.738
2. Accumulation unit value at end of period ...................... 8.402 7.559 6.996 5.680 4.850
3. Number of accumulation units outstanding at end of period ..... 100,845,742 122,166,242 136,204,888 142,993,051 134,801,790
----------------------------------------------------------------
<CAPTION>
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
----------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
1. Accumulation unit value at beginning of period ................ $ 4.944 $ 4.540 $ 3.895 $ 3.469 $ 2.828
2. Accumulation unit value at end of period ...................... 5.266 4.944 4.540 3.895 3.469
3. Number of accumulation units outstanding at end of period ..... 163,083,280 194,529,908 222,907,582 245,530,247 249,259,101
----------------------------------------------------------------
<CAPTION>
SUBACCOUNTS
-----------------------------------------------------
MONEY MARKET
-----------------------------------------------------
01/01/94 01/01/93 01/01/92 01/01/91
TO TO TO TO
12/31/94 12/31/93 12/31/92 12/31/91
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
1. Accumulation unit value at beginning of period ................ $ 1.796 $ 1.766 $ 1.722 $ 1.641
2. Accumulation unit value at end of period ...................... 1.847 1.796 1.766 1.722
3. Number of accumulation units outstanding at end of period ..... 43,401,237 42,593,593 51,724,305 51,946,977
-----------------------------------------------------
<CAPTION>
DIVERSIFIED BOND
-----------------------------------------------------
01/01/94 01/01/93 01/01/92 01/01/91
TO TO TO TO
12/31/94 12/31/93 12/31/92 12/31/91
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
1. Accumulation unit value at beginning of period ................ $ 2.541 $ 2.335 $ 2.204 $ 1.916
2. Accumulation unit value at end of period ...................... 2.430 2.541 2.335 2.204
3. Number of accumulation units outstanding at end of period ..... 39,963,983 41,705,404 34,565,884 26,914,460
-----------------------------------------------------
<CAPTION>
EQUITY
-----------------------------------------------------
01/01/94 01/01/93 01/01/92 01/01/91
TO TO TO TO
12/31/94 12/31/93 12/31/92 12/31/91
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
1. Accumulation unit value at beginning of period ................ $ 3.681 $ 3.056 $ 2.709 $ 2.176
2. Accumulation unit value at end of period ...................... 3.738 3.681 3.056 2.709
3. Number of accumulation units outstanding at end of period ..... 121,654,470 102,491,968 80,457,602 67,197,756
-----------------------------------------------------
<CAPTION>
FLEXIBLE MANAGED
-----------------------------------------------------
01/01/94 01/01/93 01/01/92 01/01/91
TO TO TO TO
12/31/94 12/31/93 12/31/92 12/31/91
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
1. Accumulation unit value at beginning of period ................ $ 2.955 $ 2.587 $ 2.434 $ 1.963
2. Accumulation unit value at end of period ...................... 2.828 2.955 2.587 2.434
3. Number of accumulation units outstanding at end of period ..... 265,104,376 245,194,868 214,343,734 191,130,125
-----------------------------------------------------
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
SUBACCOUNTS
---------------------------------------
MONEY MARKET
---------------------------------------
01/01/90 01/01/89 01/01/88
TO TO TO
12/31/90 12/31/89 12/31/88
----------- ----------- -----------
<S> <C> <C> <C>
1. Accumulation unit value at beginning of period ................ $ 1.536 $ 1.423 $ 1.341
2. Accumulation unit value at end of period ...................... 1.641 1.536 1.423
3. Number of accumulation units outstanding at end of period ..... 47,904,119 33,934,283 22,782,591
---------------------------------------
<CAPTION>
DIVERSIFIED BOND
---------------------------------------
01/01/90 01/01/89 01/01/88
TO TO TO
12/31/90 12/31/89 12/31/88
----------- ----------- -----------
<S> <C> <C> <C>
1. Accumulation unit value at beginning of period ................ $ 1.790 $ 1.596 $ 1.493
2. Accumulation unit value at end of period ...................... 1.916 1.790 1.596
3. Number of accumulation units outstanding at end of period ..... 23,633,524 22,074,086 19,475,497
---------------------------------------
<CAPTION>
EQUITY
---------------------------------------
01/01/90 01/01/89 01/01/88
TO TO TO
12/31/90 12/31/89 12/31/88
----------- ----------- -----------
<S> <C> <C> <C>
1. Accumulation unit value at beginning of period ................ $ 2.323 $ 1.812 $ 1.567
2. Accumulation unit value at end of period ...................... 2.176 2.323 1.812
3. Number of accumulation units outstanding at end of period ..... 61,186,048 57,285,028 56,763,669
---------------------------------------
<CAPTION>
FLEXIBLE MANAGED
---------------------------------------
01/01/90 01/01/89 01/01/88
TO TO TO
12/31/90 12/31/89 12/31/88
----------- ----------- -----------
<S> <C> <C> <C>
1. Accumulation unit value at beginning of period ................ $ 1.950 $ 1.621 $ 1.453
2. Accumulation unit value at end of period ...................... 1.963 1.950 1.621
3. Number of accumulation units outstanding at end of period ..... 190,783,212 186,540,213 192,115,646
---------------------------------------
</TABLE>
25
<PAGE>
<TABLE>
ACCUMULATION UNIT VALUES
THE PRUDENTIAL QUALIFIED VARIABLE CONTRACT ACCOUNT
(CONDENSED FINANCIAL INFORMATION) (CONTINUED)
<CAPTION>
SUBACCOUNTS
---------------------------------------------------------------
CONSERVATIVE BALANCED
---------------------------------------------------------------
01/01/99 01/01/98 01/01/97 01/01/96 01/01/95
TO TO TO T0 TO
12/31/99 12/31/98 12/31/97 12/31/96 12/31/95
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
1. Accumulation unit value at beginning of period ................ $ 4.238 $ 3.839 $ 3.424 $ 3.077 $ 2.655
2. Accumulation unit value at end of period ...................... 4.469 4.238 3.839 3.424 3.077
3. Number of accumulation units outstanding at end of period ..... 180,390,575 212,050,954 241,343,777 266,987,208 272,339,087
---------------------------------------------------------------
<CAPTION>
HIGH YIELD 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
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
1. Accumulation unit value at beginning of period ................ $ 2.227 $ 2.308 $ 2.053 $ 1.865 $ 1.605
2. Accumulation unit value at end of period ...................... 2.302 2.227 2.308 2.053 1.865
3. Number of accumulation units outstanding at end of period ..... 22,149,881 27,511,819 28,839,212 29,828,106 29,634,193
---------------------------------------------------------------
<CAPTION>
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
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
1. Accumulation unit value at beginning of period ................ $ 4.842 $ 3.816 $ 2.907 $ 2.401 $ 1.772
2. Accumulation unit value at end of period ...................... 5.768 4.842 3.816 2.907 2.401
3. Number of accumulation units outstanding at end of period ..... 87,982,261 89,752,143 89,281,291 83,246,633 69,315,117
---------------------------------------------------------------
<CAPTION>
EQUITY 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
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
1. Accumulation unit value at beginning of period ................ $ 3.963 $ 4.108 $ 3.044 $ 2.530 $ 2.104
2. Accumulation unit value at end of period ...................... 4.406 3.963 4.108 3.044 2.530
3. Number of accumulation units outstanding at end of period ..... 54,727,336 67,240,900 68,401,048 65,617,658 63,810,012
---------------------------------------------------------------
<CAPTION>
SUBACCOUNTS
-----------------------------------------------------
CONSERVATIVE BALANCED
-----------------------------------------------------
01/01/94 01/01/93 01/01/92 01/01/91
TO TO TO TO
12/31/94 12/31/93 12/31/92 12/31/91
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
1. Accumulation unit value at beginning of period ................ $ 2.713 $ 2.447 $ 2.316 $ 1.968
2. Accumulation unit value at end of period ...................... 2.655 2.713 2.447 2.316
3. Number of accumulation units outstanding at end of period ..... 288,743,247 254,782,768 205,054,881 162,911,208
-----------------------------------------------------
<CAPTION>
HIGH YIELD BOND
-----------------------------------------------------
01/01/94 01/01/93 01/01/92 01/01/91
TO TO TO TO
12/31/94 12/31/93 12/31/92 12/31/91
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
1. Accumulation unit value at beginning of period ................ $ 1.670 $ 1.417 $ 1.220 $ 0.887
2. Accumulation unit value at end of period ...................... 1.605 1.670 1.417 1.220
3. Number of accumulation units outstanding at end of period ..... 29,220,246 26,485,302 16,592,795 10,973,632
-----------------------------------------------------
<CAPTION>
STOCK INDEX
-----------------------------------------------------
01/01/94 01/01/93 01/01/92 01/01/91
TO TO TO TO
12/31/94 12/31/93 12/31/92 12/31/91
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
1. Accumulation unit value at beginning of period ................ $ 1.776 $ 1.639 $ 1.548 $ 1.208
2. Accumulation unit value at end of period ...................... 1.772 1.776 1.639 1.548
3. Number of accumulation units outstanding at end of period ..... 62,281,407 60,084,614 44,559,636 25,578,770
-----------------------------------------------------
<CAPTION>
EQUITY INCOME
-----------------------------------------------------
01/01/94 01/01/93 01/01/92 01/01/91
TO TO TO TO
12/31/94 12/31/93 12/31/92 12/31/91
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
1. Accumulation unit value at beginning of period ................ $ 2.099 $ 1.737 $ 1.596 $ 1.267
2. Accumulation unit value at end of period ...................... 2.104 2.099 1.737 1.596
3. Number of accumulation units outstanding at end of period ..... 56,103,455 37,355,905 18,299,120 9,795,017
-----------------------------------------------------
</TABLE>
26
<PAGE>
<TABLE>
<CAPTION>
SUBACCOUNTS
---------------------------------------
CONSERVATIVE BALANCED
---------------------------------------
01/01/90 01/01/89 01/01/88
TO TO TO
12/31/90 12/31/89 12/31/88
----------- ----------- -----------
<S> <C> <C> <C>
1. Accumulation unit value at beginning of period ................ $ 1.892 $ 1.637 $ 1.503
2. Accumulation unit value at end of period ...................... 1.968 1.892 1.637
3. Number of accumulation units outstanding at end of period ..... 149,027,248 140,207,386 137,719,157
---------------------------------------
<CAPTION>
HIGH YIELD BOND
---------------------------------------
01/01/90 01/01/89 01/01/88
TO TO TO
12/31/90 12/31/89 12/31/88
----------- ----------- -----------
<S> <C> <C> <C>
1. Accumulation unit value at beginning of period ................ $ 1.019 $ 1.052 $ 0.941
2. Accumulation unit value at end of period ...................... 0.887 1.019 1.052
3. Number of accumulation units outstanding at end of period ..... 10,683,985 13,396,197 10,451,423
---------------------------------------
<CAPTION>
STOCK INDEX
---------------------------------------
01/01/90 01/01/89 01/01/88
TO TO TO
12/31/90 12/31/89 12/31/88
----------- ----------- -----------
<S> <C> <C> <C>
1. Accumulation unit value at beginning of period ................ $ 1.268 $ 0.980 $ 0.859
2. Accumulation unit value at end of period ...................... 1.208 1.268 0.980
3. Number of accumulation units outstanding at end of period ..... 16,843,644 9,249,076 2,628,467
---------------------------------------
<CAPTION>
EQUITY INCOME
---------------------------------------
01/01/90 01/01/89 02/19/88*
TO TO TO
12/31/90 12/31/89 12/31/88
----------- ----------- -----------
<S> <C> <C> <C>
1. Accumulation unit value at beginning of period ................ $ 1.332 $ 1.099 $ 1.000
2. Accumulation unit value at end of period ...................... 1.267 1.332 1.099
3. Number of accumulation units outstanding at end of period ..... 7,313,593 4,663,452 1,002,158
---------------------------------------
</TABLE>
27
<PAGE>
<TABLE>
ACCUMULATION UNIT VALUES
THE PRUDENTIAL QUALIFIED INDIVIDUAL VARIABLE CONTRACT ACCOUNT
(CONDENSED FINANCIAL INFORMATION) (CONTINUED)
<CAPTION>
SUBACCOUNTS
----------------------------------------------------------------------------
NATURAL RESOURCES
----------------------------------------------------------------------------
01/01/99 01/01/98 01/01/97 01/01/96 01/01/95 01/01/94
TO TO TO TO TO TO
12/31/99 12/31/98 12/31/97 12/31/96 12/31/95 12/31/94
----------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
1. Accumulation unit value at beginning of
period ................................. $ 2.032 $ 2.481 $ 2.840 $2.196 $ 1.751 $ 1.851
2. Accumulation unit value at end of
period ................................. 2.931 2.032 2.481 2.840 2.196 1.751
3. Number of accumulation units outstanding
at end of period ....................... 15,795,474 19,843,969 26,401,911 26,504,833 23,280,453 22,768,479
----------------------------------------------------------------------------
<CAPTION>
GLOBAL
----------------------------------------------------------------------------
01/01/99 01/01/98 01/01/97 01/01/96 05/01/95* 01/01/94
TO TO TO TO TO TO
12/31/99 12/31/98 12/31/97 12/31/96 12/31/95 12/31/94
----------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
1. Accumulation unit value at beginning of
period ................................. $ 2.370 $ 1.917 $ 1.814 $ 1,533 $ 1.339 $ 1.425
2. Accumulation unit value at end of
period ................................. 3.472 2.370 1.917 1.814 1.533 1.339
3. Number of accumulation units outstanding
at end of period ....................... 42,332,925 44,432,955 51,481,170 50,862,779 44,920,771 43,407,964
----------------------------------------------------------------------------
<CAPTION>
GOVERNMENT INCOME
----------------------------------------------------------------------------
01/01/99 01/01/98 01/01/97 01/01/96 05/01/95* 01/01/94
TO TO TO TO TO TO
12/31/99 12/31/98 12/31/97 12/31/96 12/31/95 12/31/94
----------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
1. Accumulation unit value at beginning of
period ................................. $ 2.027 $ 1.881 $ 1.736 $ 1.719 $ 1.456 $ 1.553
2. Accumulation unit value at end of
period ................................. 1.949 2.027 1.881 1.736 1.719 1.456
3. Number of accumulation units outstanding
at end of period ....................... 31,209,489 38,187,837 39,604,005 50,735,981 55,130,988 64,574,144
----------------------------------------------------------------------------
<CAPTION>
PRUDENTIAL JENNISON
--------------------------------------------------------------
01/01/99 01/01/98 01/01/97 01/01/96 05/01/95*
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>
1. Accumulation unit value at beginning of
period ................................ $ 2.489 $ 1.832 $ 1.408 $ 1.245 $ 1.009
2. Accumulation unit value at end of
period ................................ 3.497 2.489 1.832 1.408 1.245
3. Number of accumulation units outstanding
at end of period ...................... 78,722,086 50,420,102 34,004,121 21,901,003 5,067,514
-------------------------------------------------------------
<CAPTION>
SMALL CAPITALIZATION STOCK
--------------------------------------------------------------
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>
1. Accumulation unit value at beginning of
period ................................ $ 1.708 $ 1.742 $ 1.408 $ 1.190 $ 1.002
2. Accumulation unit value at end of
period ................................ 1.902 1.708 1.742 1.408 1.190
3. Number of accumulation units outstanding
at end of period ...................... 28,555,699 31,702,794 25,991,072 13,432,923 3,599,798
--------------------------------------------------------------
<CAPTION>
SUBACCOUNTS
--------------------------------------------------------------
NATURAL RESOURCES
--------------------------------------------------------------
01/01/93 01/01/92 01/01/91 01/01/90 01/01/89
TO TO TO TO TO
12/31/93 12/31/92 12/31/91 12/31/90 12/31/89
---------- ----------------------- ---------- ----------
<S> <C> <C> <C> <C> <C>
1. Accumulation unit value at beginning of
period ................................ $ 1.497 $ 1.412 $ 1.295 $ 1.391 $ 1.038
2. Accumulation unit value at end of
period ................................ 1.851 1.497 1.412 1.295 1.391
3. Number of accumulation units outstanding
at end of period ...................... 14,307,513 10,080,734 9,150,881 8,875,236 2,829,046
--------------------------------------------------------------
</TABLE>
28
<PAGE>
<TABLE>
<CAPTION>
GLOBAL
--------------------------------------------------------------
01/01/93 01/01/92 01/01/91 01/01/90 01/01/89
TO TO TO TO TO
12/31/93 12/31/92 12/31/91 12/31/90 12/31/89
---------- ----------------------- ---------- ----------
<S> <C> <C> <C> <C> <C>
1. Accumulation unit value at beginning of
period .................................... $ 1.007 $ 1.056 $ 0.959 $ 1.115 $ 1.015
2. Accumulation unit value at end of
period .................................... 1.425 1.007 1.056 0.959 1.115
3. Number of accumulation units outstanding
at end of period .......................... 9,912,122 3,274,619 2,255,700 1,542,929 349,391
--------------------------------------------------------------
<CAPTION>
GOVERNMENT INCOME
----------------------------------------------------------------
01/01/93 01/01/92 01/01/91 01/01/90 01/01/89
TO TO TO TO TO
12/31/93 12/31/92 12/31/91 12/31/90 12/31/89
---------- ----------------------- ---------- ----------
<S> <C> <C> <C> <C> <C>
1. Accumulation unit value at beginning of
period .................................... $ 1.397 $ 1.335 $ 1.164 $ 1.108 $ 1.000
2. Accumulation unit value at end of
period .................................... 1.553 1.397 1.335 1.164 1.108
3. Number of accumulation units outstanding
at end of period .......................... 66,529,517 41,061,477 10,193,396 3,891,299 1,369,956
----------------------------------------------------------------
<CAPTION>
SUBACCOUNTS
-----------------
NATURAL RESOURCES
-----------------
01/01/88
TO
12/31/88
--------
<S> <C>
1. Accumulation unit value at beginning of period ................ $ 1.000
2. Accumulation unit value at end of period ...................... 1.038
3. Number of accumulation units outstanding at end of period ..... 820,249
--------
</TABLE>
29
<PAGE>
IRA DISCLOSURE STATEMENT
This statement is designed to help you understand the requirements of federal
tax law which apply to your individual retirement annuity (IRA), your Roth IRA,
your simplified employee pension IRA (SEP) for employer contributions, your
Savings Incentive Match Plan for Employees (SIMPLE) IRA, or to one you purchase
for your spouse. You can obtain more information regarding your IRA either from
your sales representative or from any district office of the Internal Revenue
Service. Those are federal tax law rules; state tax laws may vary.
FREE LOOK PERIOD
The annuity contract offered by this prospectus gives you the opportunity to
return the contract for a full refund within 10 days (or whatever period is
required by applicable state law) after it is delivered. This is a more liberal
provision than is required in connection with IRAs. To exercise this "free-look"
provision, return the contract to the representative who sold it to you or to
the Prudential Annuity Service Center at the address shown on the first page of
this prospectus.
ELIGIBILITY REQUIREMENTS
IRAs are intended for all persons with earned compensation whether or not they
are covered under other retirement programs. Additionally, if you have a
non-working spouse (and you file a joint tax return), you may establish an IRA
on behalf of your non-working spouse. A working spouse may establish his or her
own IRA. A divorced spouse receiving taxable alimony (and no other income) may
also establish an IRA.
CONTRIBUTIONS AND DEDUCTIONS
Contributions to your IRA will be deductible if you are not an "active
participant" in an employer maintained qualified retirement plan or you have
"Adjusted Gross Income" (as defined under Federal tax laws) which does not
exceed the "applicable dollar limit." IRA (or SEP) contributions must be made by
no later than the time you file your income tax return for that year. For a
single taxpayer, the applicable dollar limitation is $30,000, with the amount of
IRA contribution which may be deducted reduced proportionately for Adjusted
Gross Income between $30,000 - $40,000. For married couples filing jointly, the
applicable dollar limitation is $50,000, with the amount of IRA contribution
which may be deducted reduced proportionately for Adjusted Gross Income between
$50,000-$60,000. There is no deduction allowed for IRA contributions when
Adjusted Gross Income reaches $40,000 for individuals and $60,000 for married
couples filing jointly.
Contributions made by your employer to your SEP are excludable from your gross
income for tax purposes in the calendar year for which the amount is
contributed. Certain employees who participate in a SEP will be entitled to
elect to have their employer make contributions to their SEP on their behalf or
to receive the contributions in cash. If the
30
<PAGE>
employee elects to have contributions made on the employee's behalf to the SEP,
those funds are not treated as current taxable income to the employee. Elective
deferrals under a SEP are subject to an inflation-adjusted limit, which is
$10,500 in 2000. Salary-reduction SEPs (also called "SARSEPs") are available
only if at least 50% of the employees elect to have amounts contributed to the
SARSEP and if the employer has 25 or fewer employees at all times during the
preceding year. New SARSEPs may not be established after 1996.
The IRA maximum annual contribution and your tax deduction is limited to the
lesser of: (1) $2,000 or (2) 100% of your earned compensation. Contributions in
excess of the deduction limits may be subject to penalty. See below.
Under a SEP agreement, the maximum annual contribution which your employer may
make on your behalf to a SEP contract that is excludable from your income is the
lesser of 15% of your salary or $24,000. An employee who is a participant in a
SEP agreement may make after-tax contributions to the SEP contract, subject to
the contribution limits applicable to IRAs in general. Those employee
contributions will be deductible subject to the deductibility rules described
above.
The maximum tax deductible annual contribution that a divorced spouse with no
other income may make to an IRA is the lesser of (1) $2,000 or (2) 100% of
taxable alimony.
If you or your employer should contribute more than the maximum contribution
amount to your IRA or SEP, the excess amount will be considered an "excess
contribution." You are permitted to withdraw an excess contribution from your
IRA or SEP before your tax filing date without adverse tax consequences. If,
however, you fail to withdraw any such excess contribution before your tax
filing date, a 6% excise tax will be imposed on the excess for the tax year of
contribution.
Once the 6% excise tax has been imposed, an additional 6% penalty for the
following tax year can be avoided if the excess is (1) withdrawn before the end
of the following year, or (2) treated as a current contribution for the
following year. (See Premature Distributions below for penalties imposed on
withdrawal when the contribution exceeds $2,000.)
IRA FOR NON-WORKING SPOUSE
If you establish an IRA for yourself, you may also be eligible to establish an
IRA for your "non-working" spouse. In order to be eligible to establish such a
spousal IRA, you must file a joint tax return with your spouse and, if your
non-working spouse has compensation, his/her compensation must be less than your
compensation for the year. Contributions of up to $2,000 each may be made to
your IRA and the spousal IRA if the combined compensation of you and your spouse
is at least equal to the amount contributed. If requirements for deductibility
(including income levels) are met, you will be able to deduct an amount equal to
the least of (i) the amount contributed to the IRAs; (ii) $4,000; or (iii) 100%
of your combined gross income.
31
<PAGE>
Contributions in excess of the contribution limits may be subject to penalty.
See above under "Contributions and Deductions." If you contribute more than the
allowable amount, the excess portion will be considered an excess contribution.
The rules for correcting it are the same as discussed above for regular IRAs.
Other than the items mentioned in this section, all of the requirement generally
applicable to IRAs are also applicable to IRAs established for non-working
spouses.
ROLLOVER CONTRIBUTION
Once every year, you are permitted to withdraw any portion of the value of your
IRA or SEP and reinvest it in another IRA or bond. Withdrawals may also be made
from other IRAs and contributed to this contract. This transfer of funds from
one IRA to another is called a "rollover" IRA. To qualify as a rollover
contribution, the entire portion of the withdrawal must be reinvested in another
IRA within 60 days after the date it is received. You will not be allowed a
tax-deduction for the amount of any rollover contribution.
A similar type of rollover to an IRA can be made with the proceeds of a
qualified distribution from a qualified retirement plan or tax-sheltered
annuity. Properly made, such a distribution will not be taxable until you
receive payments from the IRA created with it. Unless you were a self-employed
participant in the distributing plan, you may later roll over such a
contribution to another qualified retirement plan as long as you have not mixed
it with IRA (or SEP) contributions you have deducted from your income. (You may
roll less than all of a qualified distribution into an IRA, but any part of it
not rolled over will be currently includable in your income without any capital
gains treatment.)
DISTRIBUTIONS
(A) PREMATURE DISTRIBUTIONS
At no time can your interest in your IRA or SEP be forfeited. To insure that
your contributions will be used for retirement, the federal tax law does not
permit you to use your IRA or SEP as security for a loan. Furthermore, as a
general rule, you may not sell or assign your interest in your IRA or SEP to
anyone. Use of an IRA (or SEP) as security or assignment of it to another will
invalidate the entire annuity. It then will be includable in your income in the
year it is invalidated and will be subject to a 10% penalty tax if you are not
at least age 59 1/2 or totally disabled. (You may, however, assign your IRA or
SEP without penalty to your former spouse in accordance with the terms of a
divorce decree.)
You may surrender any portion of the value of your IRA (or SEP). In the case of
a partial surrender which does not qualify as a rollover, the amount withdrawn
will be includable in your income and subject to the 10% penalty if you are not
at least age 59 1/2 or totally disabled unless you comply with special rules
requiring distributions to be made at least annually over your life expectancy.
32
<PAGE>
The 10% penalty tax does not apply to the withdrawal of an excess contribution
as long as the excess is withdrawn before the due date of your tax return.
Withdrawals of excess contributions after the due date of your tax return will
generally be subject to the 10% penalty unless the excess contribution results
from erroneous information from a plan trustee making an excess rollover
contribution or unless you are over age 59 1/2 or are disabled.
(B) DISTRIBUTION AT AFTER AGE 59 1/2
Once you have attained age 59 1/2 (or have become totally disabled), you may
elect to receive a distribution of your IRA (or SEP) regardless of when you
actually retire. In addition, you must commence distributions from your IRA by
April 1 following the year you attain age 70 1/2. You may elect to receive the
distribution under any one of the periodic payment options available under the
contract. The distributions from your IRA under any one of the period payment
options or in one sum will be treated as ordinary income as you receive them to
the degree that you have made deductible contributions. If you have made both
deductible and nondeductible contributions, a portion of the distribution
attributable to the nondeductible contribution will be tax-free.
(C) INADEQUATE DISTRIBUTIONS -- 50% TAX
Your IRA or SEP is intended to provide retirement benefits over your lifetime.
Thus, federal tax law requires that you either (1) receive a lump-sum
distribution of your IRA by April 1 of the year following the year in which you
attain age 70 1/2 or (2) start to receive periodic payments by that date. If you
elect to receive periodic payments, those payments must be sufficient to pay out
the entire value of your IRA during your life expectancy (or over the joint life
expectancies of you and your spouse). If the payments are not sufficient to meet
these requirements, an excise tax of 50% will be imposed on the amount of any
underpayment.
(D) DEATH BENEFITS
If you, (or your surviving spouse) die before receiving the entire value of your
IRA (or SEP), the remaining interest must be distributed to your beneficiary (or
your surviving spouse's beneficiary) in one lump-sum within 5 years of death, or
applied to purchase an immediate annuity for the beneficiary. This annuity must
be payable over the life expectancy of the beneficiary beginning within one year
after your or your spouse's death. If your spouse is the designated beneficiary,
he or she is treated as the owner of the IRA. If minimum required distributions
have begun, the entire amount must be distributed at least as rapidly as if the
owner had survived. A distribution of the balance of your IRA upon your death
will not be considered a gift for federal tax purposes, but will be included in
your gross estate for purposes of federal estate taxes.
33
<PAGE>
ROTH IRAS
Section 408A of the Tax Code permits eligible individuals to contribute to a
type of IRA known as a "Roth IRA." Contributions may be made to a Roth IRA by
taxpayers with adjusted gross incomes of less than $160,000 for married
individuals filing jointly and less than $100,000 for single individuals.
Married individuals filing separately are not eligible to contribute to a Roth
IRA. The maximum amount of contributions allowable for any taxable year to all
Roth IRAs maintained by an individual is generally the lesser of $2,000 and 100%
of compensation for that year (the $2,000 limit is phased out for incomes
between $150,000 and $160,000 for married and between $95,000 and $110,000 for
singles). The contribution limit is reduced by the amount of any contributions
made to a non-Roth IRA. Contributions to a Roth IRA are not deductible.
For taxpayers with adjusted gross income of $100,000 or less, all or part of
amounts in a non-Roth IRA may be converted, transferred or rolled over to a Roth
IRA. Some or all of the IRA value will typically be includable in the taxpayer's
gross income. If such a rollover, transfer or conversion occurred before January
1, 1999, the portion of the amount includable in gross income must be included
in income ratably over the next four years beginning with the year in which the
transaction occurred. Provided a rollover contribution meets the requirements of
IRAs under Section 408(d)(3) of the Code, a rollover may be made from a Roth IRA
to another Roth IRA.
UNDER SOME CIRCUMSTANCES, IT MAY NOT BE ADVISABLE TO ROLL OVER, TRANSFER OR
CONVERT ALL OR PART OF A NON-ROTH IRA TO A ROTH IRA. PERSONS CONSIDERING A
ROLLOVER, TRANSFER OR CONVERSION SHOULD CONSULT THEIR OWN TAX ADVISOR.
"Qualified distributions" from a Roth IRA are excludable from gross income. A
"qualified distribution" is a distribution that satisfies two requirements: (1)
the distribution must be made (a) after the owner of the IRA attains age 59 1/2;
(b) after the owner's death; (c) due to the owner's disability; or (d) for a
qualified first time homebuyer distribution within the meaning of Section
72(t)(2)(F) of the Code; and (2) the distribution must be made in the year that
is at least five years after the first year for which a contribution was made to
any Roth IRA established for the owner or five years after a rollover, transfer,
or conversion was made from a non-Roth IRA to a Roth IRA. Distributions from a
Roth IRA that are not qualified distributions will be treated as made first from
contributions and then from earnings, and taxed generally in the same manner as
distributions from a non-Roth IRA.
Distributions from a Roth IRA need not commence at age 70 1/2. However, if the
owner dies before the entire interest in a Roth IRA is distributed, any
remaining interest in the contract must be distributed by December 31 of the
calendar year containing the fifth anniversary of the owner's death subject to
certain exceptions.
REPORTING TO THE IRS
Whenever you are liable for one of the penalty taxes discussed above (6% for
excess contributions, 10% for premature distributions or 50% for underpayments),
you must file
34
<PAGE>
Form 5329 with the Internal Revenue Service. The form is to be attached to your
federal income tax return for the tax year in which the penalty applies. Normal
contributions and distributions must be shown on your income tax return for the
year to which they relate.
35
<PAGE>
PART B
INFORMATION REQUIRED IN A
STATEMENT OF ADDITIONAL INFORMATION
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
MAY 1, 2000
INDIVIDUAL VARIABLE ANNUITY CONTRACTS
OF THE PRUDENTIAL QUALIFIED INDIVIDUAL VARIABLE CONTRACT ACCOUNT
The Individual Variable Annuity Contract (the "contract") of The Prudential
Qualified Individual Variable Contract Account (the "account") is a variable
annuity contract issued by The Prudential Insurance Company of America
("Prudential"). The contracts are designed for use in connection with retirement
arrangements that qualify for federal tax benefits under Sections 401, 403(a),
403(b), 408 or 457 of the Internal Revenue Code. Purchase payments made through
payroll deduction or similar arrangements with an employer must be at least $300
during any 12-month period. Any other purchase payment must be at least $50
($100 or $300 under certain forms of the contract). Prudential currently accepts
subsequent purchase payments below this $100 minimum amount. We reserve the
right to again require a $100 minimum at some future date.
This statement of additional information is not a prospectus and should be
read in conjunction with the contract's prospectus, dated May 1, 2000, which is
available without charge upon written request to The Prudential Insurance
Company of America, 751 Broad Street, Newark, New Jersey 07102-3777, or by
telephoning (888) PRU-2888.
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
751 Broad Street
Newark, New Jersey 07102-3777
Telephone: (888) PRU-2888
QVIP-1B Ed 5-2000
Catalog # 64M100Y
<PAGE>
CONTENTS
PAGE
----
OTHER INFORMATION CONCERNING THE ACCOUNT
Company..................................................................... 1
Directors and Officers...................................................... 1
Further Information Regarding Previously Offered Individual Variable
Investment Contracts..................................................... 4
Distribution of the Contract................................................ 6
Participation in Divisible Surplus.......................................... 6
Performance Information..................................................... 7
Comparative Performance Information......................................... 9
Experts..................................................................... 9
Legal Opinions.............................................................. 9
Financial Statements........................................................ 9
FINANCIAL STATEMENTS OF THE PRUDENTIAL QUALIFIED INDIVIDUAL VARIABLE
CONTRACT ACCOUNT......................................................... A-1
CONSOLIDATED FINANCIAL STATEMENTS OF THE PRUDENTIAL INSURANCE COMPANY
OF AMERICA AND SUBSIDIARIES.............................................. B-1
DETERMINATION OF ACCUMULATION UNIT VALUES AND OF THE AMOUNT OF MONTHLY
VARIABLE ANNUITY PAYMENTS................................................ C-1
<PAGE>
COMPANY
The Prudential Insurance Company of America ("Prudential") is a mutual insurance
company founded in 1875 under the laws of the state of New Jersey. Prudential is
licensed to sell life insurance and annuities in the District of Columbia, Guam
and in all states.
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.
1
<PAGE>
JON F. HANSON--Director since 1991 (current term expires April, 2003). Member,
Investment Committee; Member, Committee on Business Ethics. Chairman, Hampshire
Management Company since 1976. Mr. Hanson is also a director of James E. Hanson
Management Company, Neumann Distributors, Inc., United Water Resources, and
Consolidated Delivery and Logistics. Age 63. Address: 235 Moore Street, Suite
200, Hackensack, NJ 07601.
GLEN H. HINER--Director since 1997 (current term expires April, 2001). Member,
Compensation Committee. Chairman and Chief Executive Officer, Owens Corning
since 1992. Senior Vice President and Group Executive, Plastics Group, General
Electric Company from 1983 to 1991. Mr. Hiner is also a director of Dana
Corporation, Owens Corning, and Kohler, Co. Age 65. Address: One Owens Corning
Parkway, Toledo, OH 43659.
CONSTANCE J. HORNER--Director since 1994 (current term expires April, 2002).
Member, Auditing Committee; Member, Committees on Nominations & Corporate
Governance. Guest Scholar, The Brookings Institution since 1993. Ms. Horner is
also a director of Foster Wheeler Corporation, Ingersoll-Rand Company, and
Pfizer, Inc. Age 58. Address: 1775 Massachusetts Ave., N.W. Washington, D.C.
20036-2188.
GAYNOR N. KELLEY--Director since 1997 (current term expires April, 2001).
Member, Auditing Committee. Retired since 1996. Chairman and Chief Executive
Officer, The Perkin Elmer Corporation from 1990 to 1996. Mr. Kelley is also a
director of Hercules Incorporated and Alliant Techsystems. Age 68. Address: 751
Broad Street, 21st Floor, Newark, NJ 07102-3777.
BURTON G. MALKIEL--Director since 1978 (current term expires April, 2002).
Chairman, Investment Committee; Member, Executive Committee; Member, Committee
on Finance & Dividends. Professor of Economics, Princeton University, since
1988. Dr. Malkiel is also a director of Banco Bilbao Vizcaya Gestinova, Baker
Fentress & Company, The Jeffrey Company, Select Sector SPDR Trusts, and Vanguard
Group, Inc. Age 67. Address: Princeton University, Department of Economics, 110
Fisher Hall, Prospect Avenue, Princeton, NJ 08544-1021.
ARTHUR F. RYAN--Chairman of the Board Chief Executive Officer and President of
Prudential since 1994. President and Chief Operating Officer, Chase Manhattan
Bank from 1990 to 1994, with Chase since 1972. Age 57. Address: 751 Broad
Street, Newark, NJ 07102-3777.
IDA F.S. SCHMERTZ--Director since 1997 (current term expires April, 2004).
Member, Audit Committee. Principal, Investment Strategies International since
1994. Age 65. Address: 751 Broad Street, 21st Floor, Newark, NJ 07102-3777.
CHARLES R. SITTER--Director since 1995 (current term expires April, 2003).
Member, Committee on Finance & Dividend; Member, Investment Committee. Retired
since 1996. President, Exxon Corporation from 1993 to 1996. Mr. Sitter began his
career with Exxon in 1957. Age 69. Address: 5959 Las Colinas Boulevard, Irving,
TX 75039-2298.
DONALD L. STAHELI--Director since 1995 (current term expires April, 2003).
Member, Compensation Committee; Member, Auditing Committee. Retired since 1996.
Chairman and Chief Executive Officer, Continental Grain Company from 1994 to
1997. President and Chief Executive Officer, Continental Grain Company from 1988
to 1994. Age 68 Address: 47 East South Temple, #501, Salt Lake City, UT 84150.
RICHARD M. THOMSON--Director since 1976 (current term expires April, 2004).
Chairman, Executive Committee; Chairman, Compensation Committee. Retired since
1998. Chairman of the Board, The Toronto-Dominion Bank from 1997 to 1998.
Chairman and Chief Executive Officer from 1978 to 1997. Mr. Thomson is also a
director of CGC, Inc., INCO, Limited, S.C. Johnson & Son, Inc., The Thomson
Corporation, Canadian Occidental Petroleum Ltd., The Toronto-Dominion Bank,
Ontario Power Generation, Inc., Canada Pension Plan Investment Board, and
TrizecHahn Corporation. Age 66. Address: P.O. Box 1, Toronto-Dominion Centre,
Toronto, Ontario, M5K 1A2, Canada.
2
<PAGE>
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.
3
<PAGE>
KIYOFUMI SAKAGUCHI--Executive Vice President, International Insurance since
1998; President, International Insurance Group from 1995 to 1998; prior to 1995,
Chairman and CEO, The Prudential Life Insurance Co., Ltd., Japan. Age 57.
JOHN R. STRANGFELD--Executive Vice President, Global Asset Management since
1998; Chief Executive Officer, Private Asset Management Group (PAMG) from 1996
to 1998; President, PAMG, from 1994 to 1996; prior to 1994, Senior Managing
Director. Age 46.
VIVIAN BANTA--Executive Vice President, Individual Financial Services since
2000; Consultant, Individual Financial Services from 1998 to 1999; Consultant,
Morgan Stanley from 1997 to 1998; Executive Vice President, Global Investor
Service, The Chase Manhattan Bank from 1991 to 1997. Age 49.
RICHARD J. CARBONE--Senior Vice President and Chief Financial Officer since
1997; Controller, Salomon Brothers, from 1995 to 1997; prior to 1995,
Controller, Bankers Trust. Age 52.
ANTHONY S. PISZEL--Senior Vice President and Controller since 2000; Vice
President and Controller from 1998 to 2000. Vice President, Enterprise Financial
Management from 1997 to 1998; prior to 1997, Chief Financial Officer, Individual
Insurance Group. Age 45.
SUSAN J. BLOUNT--Vice President and Secretary since 1995; prior to 1995,
Assistant General Counsel. Age 42.
C. EDWARD CHAPLIN--Vice President and Treasurer since 1995; prior to 1995,
Managing Director and Assistant Treasurer. Age 43.
FURTHER INFORMATION REGARDING PREVIOUSLY OFFERED
INDIVIDUAL VARIABLE INVESTMENT CONTRACTS
ANNUITY OPTIONS UNDER THE WVA-83 AND QVIP-84 CONTRACTS
If you own a WVA-83 contract or a QVIP-84 contract, the following provisions of
this section apply to you. You have considerable flexibility in selecting an
annuity: (1) you may select either a fixed-dollar or variable annuity (a
variable annuity is not available under Other Annuity Options described in item
5 below) or both; (2) you may select more than one annuity option; (3) if you
select a variable annuity, you may apply the value of your variable account to
only one or to two or more subaccounts, and not necessarily the same subaccount
distribution as you used before selecting an annuity. However, the initial
minimum monthly payment amount will be applicable to each payee, each annuity,
and each subaccount selected.
If you are covered under a tax-deferred annuity subject to Section 403(b) of the
Code and do not elect to effect an annuity before the date described in the
endorsement to your contract with respect to pre-1987 benefit accruals, a
variable life annuity with 120 payments certain will be purchased for you on the
first day of the month following such date. If any tax-deferred annuity
contractowner (with respect to post-1986 benefit accruals) or any other
contractowner has not elected to purchase an annuity before the end of his tax
year in which such election is required by or for the retirement arrangement
under which he is covered, a variable life annuity with 120 payments certain,
payable as described in item 2 below, will be purchased for him on the first day
of the month preceding the end of such tax year,
4
<PAGE>
unless a joint and survivor annuity payout is required by ERISA, in which case a
variable joint and survivor annuity, payable as described in item 3 below, will
be purchased for him.
Except as provided in the Annuity Certain option described in item 4 below, and
under certain forms of annuity available under the Other Annuity Options
described in item 5 below, once annuity payments begin, the annuitant cannot
surrender the annuity benefit and receive a one-sum payment instead of regular
annuity payments. However, as described under TRANSFERS in the prospectus, if a
variable annuity is selected, the annuitant may transfer the annuity funds
between subaccounts up to four times each contract year.
Additionally, an annuitant who is receiving a variable annuity may convert all
or a part of the variable annuity to a fixed-dollar annuity, provided: (1) the
fixed-dollar annuity is the same form of annuity as the variable annuity and has
the same certain or specified period as remained under the variable annuity on
the conversion date, (2) the present value on the conversion date of the
variable annuity, or portion of the variable annuity to be converted, calculated
in accordance with the contract, must produce a monthly payment of at least $20
under the fixed-dollar annuity, and (3) if only a portion of the variable
annuity is converted, the annuity units remaining in the unconverted portion
must be sufficient to produce a monthly payment on the conversion date of at
least $20.
After annuity payments begin, conversion may not be made from a fixed-dollar
annuity to a variable annuity.
The forms of annuity from which you may select are listed below. Under each, (1)
variable annuity payments can be expected to vary from month to month according
to the investment experience of the portfolio or portfolios in which your
variable account is invested, or (2) fixed-dollar annuity payments will be in
monthly installments of a guaranteed amount. For the reason explained on page
C-1 of this statement of additional information, if the assets of the subaccount
which you have selected do not earn an investment return of 4.7% a year, the
amount of payments under a variable annuity will decrease; conversely, if the
assets of the subaccount(s) which you have selected earn an investment return of
more than 4.7% a year, variable annuity payments will increase. If you choose to
convert your variable account into an annuity, but fail to select one or more of
the annuity options, we will provide the annuitant with a variable life annuity
with 120 payments certain.
1. LIFE ANNUITY. Payments will be made to the annuitant monthly during his or
her lifetime and will end with the last monthly payment before his or her death.
Should the annuitant die within a few years after payments begin, total payments
received will probably be substantially less than the value of your variable
account when annuity payments first began, and as little as one payment could be
received under this form of annuity.
2. LIFE ANNUITY WITH 120 PAYMENTS (10 YEARS) CERTAIN. Payments will be made to
the annuitant monthly during his or her lifetime. If the annuitant dies before
the 120th monthly payment is due, monthly annuity payments do not continue to
the beneficiary designated by the annuitant unless he or she chooses to do so.
Instead, the discounted value of the remaining unpaid installments, to and
including the 120th monthly payment, is payable to the beneficiary in one sum.
In calculating the discounted value of the unpaid future payments, we will
discount each such payment at an interest-rate of 3.5% a year. The monthly
payments under this form of annuity will be slightly lower than those payable
under the life annuity described above.
3. JOINT AND SURVIVOR LIFE ANNUITY. Payments will be made to the annuitant
monthly during his or her lifetime and, if the annuitant's spouse is living at
the time of the annuitant's death, to the spouse until his or her death. The
monthly payments to the spouse will be equal to those that would have been
received by the annuitant if he or she had survived unless a different amount is
required by applicable law or regulation or by the terms of a plan, including
joint and 50% spouse survivor annuity. Monthly payments under this form of
annuity will be less than the payments under either of the forms described
above.
4. ANNUITY CERTAIN. Payments will be made to the annuitant monthly for a period
of 60, 120, 180 or 240 months. During this period, the annuitant may elect to
receive a lump sum payment in lieu of the remaining monthly payments or to
receive a partial lump sum payment with reduced monthly payments thereafter. Any
partial lump sum payment must be $300 or more. Also, the initial reduced monthly
payment must equal to or exceed $20. If the annuitant dies during the
annuity-certain period, monthly payments will not continue to the beneficiary
you designate unless you so select. Instead, the beneficiary will receive a lump
sum payment. The amount of the lump sum payment (or partial lump sum payment) is
determined by discounting each remaining unpaid monthly payment (or the amount
by which each remaining monthly payment is reduced as a result of a partial lump
sum payment) at an interest-rate of 3.5% a year. This will be paid to the
annuitant or the annuitant's beneficiary, whichever is applicable.
5. OTHER ANNUITY OPTIONS. You may choose to receive the proceeds of your
contract fund in the form of payments like those of any annuity or life annuity
offered at your annuity date. Under the Supplemental Life Annuity option,
Prudential will waive withdrawal charges that might be applicable under options
1-4. Further, if you select option 1, 2, 3 or 4 without a right of withdrawal,
Prudential will effect that option under the Other Annuity Option if doing so
provides greater monthly payments.
5
<PAGE>
DIFFERENCES UNDER THE WVQ-83 CONTRACT
The descriptions of The Prudential Qualified Individual Variable Annuity
Contract in the prospectus generally apply to the VIP-86 contract (currently
offered for sale), the QVIP-84 contract and the WVQ-83 contract. Although
differences among the three forms of contract have been described, additional
differences between the earlier WVQ-83 contract and the two later forms of the
contract are set forth below.
1. SALES CHARGES ON WITHDRAWALS . . . Under the WVQ-83 contract, any amount
that you withdraw will be treated, for the purpose of determining the sales
charge, as a withdrawal of purchase payments, rather than investment income,
until you have withdrawn your total purchase payments. There will be no
sales charge on amounts withdrawn after all purchase payments have been
withdrawn. For sales charge purposes, purchase payments are deemed to be
withdrawn on a first-in, first-out basis. The amount of the sales charge
will depend on the amount withdrawn and the number of contract years that
have elapsed since you made the particular purchase payments deemed to be
withdrawn. The 10% free withdrawal privilege will be applied toward the
total amount withdrawn.
2. DETERMINATION OF MINIMUM AMOUNT PAYABLE TO A BENEFICIARY . . . Under the
WVQ-83 contract, the minimum amount payable to the beneficiary (due to the
death of the annuitant prior to age 65 and before the annuity date) will be
equal to the total amount of purchase payment you have made, less any
withdrawals (i.e., there is no proportional reduction of the minimum amount
as is the case under the QVIP-84 contract and the VIP-86 contract).
3. MODIFICATION OF SENTENCE ON PAGE C-1 OF THE STATEMENT OF ADDITIONAL
INFORMATION . . . The second sentence in the next to last paragraph under
section B, "Determination of the Amount of Monthly Variable Annuity
Payment", as it applies to the WVQ-83 Contract, is modified to read: "For
example, for a person of 65 years of age who has selected a lifetime
annuity with a guaranteed minimum of 120 payments, the applicable schedules
currently provide that 1,000 Annuity Units will result in the payment each
month of an amount equal to the value of 5.73 Annuity Units."
4. DETERMINATION OF AMOUNT OF MONTHLY VARIABLE ANNUITY PAYMENTS . . . Under
the WVQ-83 contract, the amount of each monthly variable annuity payment
made on the first day of the month will be equal to the Annuity Units
(determined as described on page C-1 of the statement of additional
information) multiplied by the Annuity Unit Value at the end of that day, if
a business day, or otherwise at the end of the last preceding business day.
DISTRIBUTION OF THE CONTRACT
Prudential Investment Management Services LLC ("PIMS"), a subsidiary of
Prudential offers the contracts on a continuous basis through corporate office
and regional home office employees in those states in which contracts may be
lawfully sold. It may also offer the contract through licensed insurance brokers
and agents, or through appropriately registered direct or indirect
subsidiary(ies) of Prudential, provided clearances to do so are obtained in any
jurisdiction where such clearances may be necessary. During 1999, 1998 and 1997,
the aggregate dollar amount of underwriting commissions paid to and the amounts
retained by PIMS were $2,578,901, $0 and $0 respectively. During 1999, 1998 and
1997 PIMS paid $2,578,901, $0 and $0 respectively to cover individual
representatives' commissions and other distribution expenses.
Prudential may pay trail commissions to registered representatives who maintain
an ongoing relationship with a contractholder. Typically, a trail commission is
a compensation that is paid periodically to a representative, the amount of
which is linked to the value of the contract and the amount of time that the
contract has been in effect.
PARTICIPATION IN DIVISIBLE SURPLUS
A mutual life insurance company, such as Prudential, differs from a stock life
insurance company in that it has no stockholders who are the owners of the
enterprise. Every owner of a Prudential contract participates in the divisible
surplus of Prudential, according to an annual determination of Prudential's
Board of Directors of the portion, if any, of the divisible surplus of the
entire company that is attributable to the class of contracts of which he or she
is an owner. Before annuity payments begin, it is unlikely that any dividends
will be payable to the owners of the contracts described in the prospectus
because the charges made by Prudential are not expected to exceed its actual
expenses in distributing and administering the contracts. However, there may be
dividends payable during the annuity income period.
6
<PAGE>
PERFORMANCE INFORMATION
The tables that follow provide performance information for each subaccount
through December 31, 1999. The performance information is based on historical
experience and does not indicate or represent future performance.
AVERAGE ANNUAL 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 each subaccount
other than the Money Market Subaccount. These figures assume withdrawal of the
investments at the end of the period other than to effect an annuity under the
contract.
TABLE 1
AVERAGE ANNUAL TOTAL RETURN
<TABLE>
<CAPTION>
FROM DATE
SUBACCOUNT
ONE YEAR FIVE YEARS TEN YEARS ESTABLISHED
DATE ENDED ENDED ENDED THROUGH
SUBACCOUNT ESTABLISHED 12/31/99 12/31/99 12/31/99 12/31/99
------------ ----------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
DIVERSIFIED BOND.................. 6/83 -8.37% 2.72% 7.41% 7.39%
GOVERNMENT INCOME................. 5/89 -10.19% 1.99% 5.23% 6.24%
CONSERVATIVE BALANCED............. 6/83 -1.12% 9.48% 10.35% 9.26%
FLEXIBLE MANAGED.................. 5/83 -0.05% 10.69% 12.31% 10.36%
HIGH YIELD BOND................... 2/87 -3.20% 5.65% 7.89% 6.48%
STOCK INDEX....................... 10/87 12.66% 23.43% 19.20% 17.39%
EQUITY INCOME..................... 2/88 4.67% 15.46% 14.70% 13.17%
EQUITY............................ 6/83 4.63% 14.70% 16.39% 13.54%
PRUDENTIAL JENNISON............... 5/95 34.22% N/A N/A 30.10%
SMALL CAPITALIZATION STOCK........ 5/95 4.84% N/A N/A 14.08%
GLOBAL............................ 5/89 40.25% 21.34% 11.00% 12.02%
NATURAL RESOURCES................. 5/88 37.97% 10.98% 10.73% 9.59%
</TABLE>
The average annual rates of total return shown above are computed by finding the
average annual compounded rates of return over the periods shown that would
equate the initial amount invested to the withdrawal value, in accordance with
the following formula: Px(1+T)(n)= ERA. In the formula, P is a hypothetical
investment of $1,000; T is the average annual total return; n is the number of
years; and ERA is the withdrawal value at the end of the periods shown. These
figures assume deduction of the maximum deferred sales charge that may be
applicable to a particular period. The annual contract fee is included, however,
it applies only if the contract fund is less than $10,000.
7
<PAGE>
NON-STANDARD TOTAL RETURN
TABLE 2 below shows the average annual rates of return as in Table 1, but
assumes that the investments are not withdrawn at the end of the period or that
the contractowner annuitizes at the end of the period.
TABLE 2
AVERAGE ANNUAL TOTAL RETURN ASSUMING NO WITHDRAWAL
<TABLE>
<CAPTION>
FROM DATE
SUBACCOUNT
ONE YEAR FIVE YEARS TEN YEARS ESTABLISHED
DATE ENDED ENDED ENDED THROUGH
SUBACCOUNT ESTABLISHED 12/31/99 12/31/99 12/31/99 12/31/99
---------- ----------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
DIVERSIFIED BOND.................. 6/83 -2.21% 3.19% 7.41% 7.39%
GOVERNMENT INCOME................. 5/89 -4.15% 2.47% 5.23% 6.24%
CONSERVATIVE BALANCED............. 6/83 5.14% 9.83% 10.35% 9.26%
FLEXIBLE MANAGED.................. 5/83 6.20% 11.02% 12.31% 10.36%
HIGH YIELD BOND................... 2/87 3.08% 6.07% 7.89% 6.48%
STOCK INDEX....................... 10/87 18.82% 23.61% 19.20% 17.39%
EQUITY INCOME..................... 2/88 10.89% 15.73% 14.70% 13.17%
EQUITY............................ 6/83 10.85% 14.98% 16.39% 13.54%
PRUDENTIAL JENNISON............... 5/95 40.24% N/A N/A 30.31%
SMALL CAPITALIZATION STOCK........ 5/95 11.06% N/A N/A 14.50%
GLOBAL............................ 5/89 46.22% 21.54% 11.00% 12.02%
NATURAL RESOURCES................. 5/88 43.96% 11.31% 10.73% 9.59%
</TABLE>
TABLE 3 shows the cumulative total return for the subaccounts, assuming no
withdrawal.
TABLE 3
CUMULATIVE TOTAL RETURN ASSUMING NO WITHDRAWAL
<TABLE>
<CAPTION>
FROM DATE
SUBACCOUNT
ONE YEAR FIVE YEARS TEN YEARS ESTABLISHED
DATE ENDED ENDED ENDED THROUGH
SUBACCOUNT ESTABLISHED 12/31/99 12/31/99 12/31/99 12/31/99
------------ ----------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
DIVERSIFIED BOND.................. 6/83 -2.21% 16.99% 104.36% 225.71%
GOVERNMENT INCOME................. 5/89 -4.15% 12.99% 72.24% 90.74%
CONSERVATIVE BALANCED............. 6/83 5.14% 59.83% 167.69% 334.03%
FLEXIBLE MANAGED.................. 5/83 6.20% 68.65% 219.16% 413.74%
HIGH YIELD BOND................... 2/87 3.08% 34.24% 113.80% 124.02%
STOCK INDEX....................... 10/87 18.82% 188.60% 479.08% 607.37%
EQUITY INCOME..................... 2/88 10.89% 107.60% 294.25% 333.99%
EQUITY............................ 6/83 10.85% 100.93% 356.29% 720.49%
PRUDENTIAL JENNISON............... 5/95 40.24% N/A N/A 244.12%
SMALL CAPITALIZATION STOCK........ 5/95 11.06% N/A N/A 88.18%
GLOBAL............................ 5/89 46.22% 165.26% 204.39% 235.65%
NATURAL RESOURCES................. 5/88 43.96% 70.84% 177.13% 190.98%
</TABLE>
8
<PAGE>
MONEY MARKET SUBACCOUNT YIELD
The "yield" and "effective yield" of the Money Market Subaccount for the seven
days ended December 31, 1999 were 6.6076% and 6.8263%, respectively.
The yield is computed by determining the net change, exclusive of capital
changes, in the value of a hypothetical pre-existing account having a balance of
one accumulation unit of the Money Market Subaccount at the beginning of the
period, subtracting a hypothetical charge reflecting deductions from contract
owner accounts, and dividing the difference by the value of the subaccount at
the beginning of the base period to obtain the base period return, and then
multiplying the base period return by (365/7), with the resulting figure carried
to the nearest ten-thousandth of 1%.
The deduction referred to above consists of the 1.20% charge for mortality and
expense risks. It does not reflect the deferred sales charge. It does reflect
the annual contract fee, however it will only be charged if the Contract Fund is
less than $10,000.
The effective yield is obtained by taking the base period return, adding 1,
raising the sum to a power equal to 365 divided by 7, and subtracting 1 from the
result, according to the following formula: Effective Yield = ((base period
return + 1) 365/7)-1.
The yields on amounts held in the Money Market Subaccount will fluctuate on a
daily basis. Therefore, the stated yields for any given period are not an
indication of future yields.
COMPARATIVE PERFORMANCE INFORMATION
Reports or advertising may include comparative performance information,
including, but not limited to: (1) comparisons to market indices such as the Dow
Jones Industrial Average, the Standard & Poor's 500 Index, the Value Line
Composite Index, the Russell 2000 Index, the Morgan Stanley World Index, the
Lehman Brothers bond indices; (2) comparisons to other investments, such as
certificates of deposit; (3) performance rankings assigned by services such as
Morningstar, Inc. and Variable Annuity Research and Data Services (VARDS), and
Lipper Analytical Services, Inc.; (4) data presented by analysts such as Dow
Jones, A.M. Best, The Bank Rate Monitor National Index; and (5) data in
publications such as The Wall Street Journal, Times, Forbes, Barrons, Fortune,
Money Magazine, and Financial World.
EXPERTS
The consolidated financial statements of Prudential and its subsidiaries as of
December 31, 1999 and 1998 and for each of the three years in the period ended
December 31, 1999 and the financial statements of the Prudential Qualified
Individual Variable Contract Account as of December 31, 1999 and for each of the
two years in the period then ended included in this statement of additional
information have been so included in reliance on the reports of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting. PricewaterhouseCoopers LLP's
principal business address is 1177 Avenue of the Americas, New York, New York
10036.
LEGAL OPINIONS
Shea & Gardner of Washington, D.C., has provided advice on certain matters
relating to the federal securities laws in connection with the contract.
FINANCIAL STATEMENTS
The consolidated financial statements of Prudential and its subsidiaries
included herein should be distinguished from the financial statements of the
Account, and should be considered only as bearing upon the ability of Prudential
to meet its obligations under the contracts.
9
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL STATEMENTS OF THE PRUDENTIAL
QUALIFIED INDIVIDUAL VARIABLE CONTRACT ACCOUNT
STATEMENTS OF NET ASSETS
December 31, 1999
SUBACCOUNTS
-----------------------------------------------------------------------------
MONEY DIVERSIFIED FLEXIBLE CONSERVATIVE
MARKET BOND EQUITY MANAGED BALANCED
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
------------- ------------ ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
ASSETS
Investment in The Prudential Series Fund, Inc.
Portfolios, at net asset value [Note 3] .... $ 102,983,399 $ 92,106,746 $ 848,065,757 $ 859,612,185 $ 806,889,013
Receivable from (Payable to) The Prudential
Insurance Company of America [Note 2] ........ 747,265 (51,815) (784,038) (810,436) (701,293)
------------- -------------- ------------- ------------- -------------
Net Assets ................................... $ 103,730,664 $ 92,054,931 $ 847,281,719 $ 858,801,749 $ 806,187,720
============= ============== ============= ============= =============
NET ASSETS, representing:
Equity of contract owners [Note 4] ........... $ 103,727,540 $ 92,047,747 $ 847,281,719 $ 858,791,659 $ 806,086,107
Equity of annuitants [Note 2] ................ 3,124 7,184 0 10,090 101,613
------------- -------------- ------------- ------------- -------------
$ 103,730,664 $ 92,054,931 $ 847,281,719 $ 858,801,749 $ 806,187,720
============= ============== ============= ============= =============
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A9 THROUGH A13
</TABLE>
A1
<PAGE>
<TABLE>
<CAPTION>
SUBACCOUNTS (CONTINUED)
- -----------------------------------------------------------------------------------------------------------------------------
HIGH SMALL
YIELD STOCK EQUITY NATURAL GOVERNMENT PRUDENTIAL CAPITALIZATION
BOND INDEX INCOME RESOURCES GLOBAL INCOME JENNISON STOCK
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
- ------------ ------------- ------------- ------------ ------------- ------------ ------------ --------------
<S> <C> <C> <C> <C> <C> <C> <C>
$ 51,113,351 $ 507,699,056 $ 241,428,156 $ 46,371,597 $ 147,096,949 $ 60,834,855 $ 275,166,987 $ 54,267,895
(123,881) (177,784) (275,433) (69,062) (117,882) 2,425 158,786 37,905
- ------------ ------------- ------------- ------------ ------------- ------------ ------------- ------------
$ 50,989,470 $ 507,521,272 $ 241,152,723 $ 46,302,535 $ 146,979,067 $ 60,837,280 $ 275,325,773 $ 54,305,800
============ ============= ============= ============ ============= ============ ============= ============
$ 50,989,470 $ 507,521,272 $ 241,152,723 $ 46,302,535 $ 146,979,067 $ 60,837,280 $ 275,325,773 $ 54,305,800
0 0 0 0 0 0 0 0
- ------------ ------------- ------------- ------------ ------------- ------------ ------------- ------------
$ 50,989,470 $ 507,521,272 $ 241,152,723 $ 46,302,535 $ 146,979,067 $ 60,837,280 $ 275,325,773 $ 54,305,800
============ ============= ============= ============ ============= ============ ============= ============
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A9 THROUGH A13
</TABLE>
A2
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL STATEMENTS OF THE PRUDENTIAL
QUALIFIED INDIVIDUAL VARIABLE CONTRACT ACCOUNT
STATEMENTS OF OPERATIONS
For the year ended December 31, 1999
SUBACCOUNTS
--------------------------------------------------------------------------------
MONEY DIVERSIFIED FLEXIBLE CONSERVATIVE
MARKET BOND EQUITY MANAGED BALANCED
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME
Dividend income ...................... $ 4,588,474 $ 0 $ 14,697,545 $ 41,531 $ 33,988,161
------------- ------------- ------------- ------------- -------------
EXPENSES
Charges to contract owners
for assuming mortality risk and
expense risk [Note 5A] ............. 1,120,824 1,197,325 10,522,881 10,753,496 10,082,536
------------- ------------- ------------- ------------- -------------
NET INVESTMENT INCOME (LOSS) ........... 3,467,650 (1,197,325) 4,174,664 (10,711,965) 23,905,625
------------- ------------- ------------- ------------- -------------
NET REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS
Capital gains distributions received 0 286,456 101,886,782 10,537,561 4,810,771
Realized gain (loss) on shares
redeemed ......................... 0 42,580 47,849,349 10,412,875 7,716,912
Net change in unrealized gain (loss)
on investments ................... 0 (1,175,122) (59,118,897) 46,767,214 8,000,290
------------- ------------- ------------- ------------- -------------
NET GAIN (LOSS) ON INVESTMENTS ......... 0 (846,086) 90,617,234 67,717,650 20,527,973
------------- ------------- ------------- ------------- -------------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM
OPERATIONS ........................... $ 3,467,650 $ (2,043,411) $ 94,791,898 $ 57,005,685 $ 44,433,598
============= ============= ============= ============= =============
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A9 THROUGH A13
</TABLE>
A3
<PAGE>
<TABLE>
<CAPTION>
SUBACCOUNTS (CONTINUED)
- -----------------------------------------------------------------------------------------------------------------------------------
HIGH SMALL
YIELD STOCK EQUITY NATURAL GOVERNMENT PRUDENTIAL CAPITALIZATION
BOND INDEX INCOME RESOURCES GLOBAL INCOME JENNISON STOCK
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
- ------------ ------------- ------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
$ 156,624 $ 5,013,627 $ 5,749,183 $ 291,665 $ 488,202 $ 0 $ 342,641 $ 0
- ------------ ------------- ------------- ------------- ------------- ------------- ------------- -------------
661,457 5,598,428 3,016,228 508,234 1,351,908 821,415 2,308,982 594,516
- ------------ ------------- ------------- ------------- ------------- ------------- ------------- -------------
(504,833) (584,801) 2,732,955 (216,569) (863,706) (821,415) (1,966,341) (594,516)
- ------------ ------------- ------------- ------------- ------------- ------------- ------------- -------------
0 6,110,934 27,370,482 0 856,023 0 10,933,146 931,404
(1,260,710) 18,189,838 10,236,723 (1,753,995) 3,549,582 346,759 1,618,260 (132,476)
3,687,427 59,085,429 (13,034,034) 17,243,182 43,378,457 (2,362,903) 60,215,915 5,148,160
- ------------ ------------- ------------- ------------- ------------- ------------- ------------- -------------
2,426,717 83,386,201 24,573,171 15,489,187 47,784,062 (2,016,144) 72,767,321 5,947,088
- ------------ ------------- ------------- ------------- ------------- ------------- ------------- -------------
$ 1,921,884 $ 82,801,400 $ 27,306,126 $ 15,272,618 $ 46,920,356 $ (2,837,559) $ 70,800,980 $ 5,352,572
============ ============= ============= ============= ============= ============= ============= =============
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A9 THROUGH A13
</TABLE>
A4
<PAGE>
<TABLE>
FINANCIAL STATEMENTS OF THE PRUDENTIAL
QUALIFIED INDIVIDUAL VARIABLE CONTRACT ACCOUNT
STATEMENTS OF CHANGES IN NET ASSETS
For the years ended December 31, 1999 and 1998
<CAPTION>
SUBACCOUNTS
----------------------------------------------------------------------------------------
MONEY MARKET DIVERSIFIED BOND EQUITY
PORTFOLIO PORTFOLIO PORTFOLIO
--------------------------- ---------------------------- ---------------------------
1999 1998 1999 1998 1999 1998
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
OPERATIONS
Net investment income (loss) ........ $ 3,467,650 $ 3,545,967 $ (1,197,325) $ 5,370,097 $ 4,174,664 $ 5,912,821
Capital gains distributions
received .......................... 0 0 286,456 396,981 101,886,782 101,863,900
Realized gain (loss) on shares
redeemed .......................... 0 0 42,580 306,757 47,849,349 39,343,642
Net change in unrealized gain
(loss)on investments .............. 0 0 (1,175,122) 146,776 (59,118,897) (72,205,407)
------------ ------------ ------------ ------------ ------------ ------------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM
OPERATIONS .......................... 3,467,650 3,545,967 (2,043,411) 6,220,611 94,791,898 74,914,956
------------ ------------ ------------ ------------ ------------ ------------
ANNUITY PAYMENTS AND
OTHER OPERATING TRANSFERS
Contract Owner Net Payments ......... 5,427,214 7,486,174 4,632,297 6,344,093 31,963,387 46,914,429
Annuity Payments .................... (545) (544) (1,126) (1,152) 0 (22,037)
Surrenders, Withdrawals
and Death Benefits ................ (26,570,806) (20,229,299) (16,877,894) (15,282,170) (150,993,473) (134,412,424)
Net Transfers From (To) Other
Subaccounts or Fixed Rate Option .. 29,561,390 13,069,309 (3,040,403) 3,298,352 (51,169,317) (15,332,940)
Deferred Sales and Other Charges .... (66,253) (76,358) (83,038) (94,053) (731,190) (843,428)
------------ ------------ ------------ ------------ ------------ ------------
NET INCREASE (DECREASE) IN
NET ASSETS RESULTING FROM
ANNUITY PAYMENTS AND
OTHER OPERATING TRANSFERS ........... 8,351,000 249,282 (15,370,164) (5,734,930) (170,930,593) (103,696,400)
NET INCREASE (DECREASE) IN NET
ASSETS RETAINED IN THE ACCOUNT
[Note 7] ............................ 0 (529,614) 0 (194,868) 0 (722,621)
------------ ------------ ------------ ------------ ------------ ------------
TOTAL INCREASE (DECREASE) IN
NET ASSETS .......................... 11,818,650 3,265,635 (17,413,575) 290,813 (76,138,695) (29,504,065)
NET ASSETS
Beginning of year ................... 91,912,014 88,646,379 109,468,506 109,177,693 923,420,414 952,924,479
------------ ------------ ------------ ------------ ------------ ------------
End of year ......................... $103,730,664 $ 91,912,014 $ 92,054,931 $109,468,506 $847,281,719 $923,420,414
============ ============ ============ ============ ============ ============
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A9 THROUGH A13
A5
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SUBACCOUNTS (CONTINUED)
- ---------------------------------------------------------------------------------------------------------------------------------
FLEXIBLE MANAGED CONSERVATIVE BALANCED HIGH YIELD BOND STOCK INDEX
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
- ------------------------------- ---------------------------- ----------------------------- ----------------------------
1999 1998 1999 1998 1999 1998 1999 1998
- ------------- -------------- ------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
$ (10,711,965) $ 20,051,376 $ 23,905,625 $ 27,417,584 $ (504,833) $ 5,477,003 $ (584,801) $ 153,344
10,537,561 98,762,284 4,810,771 53,408,819 0 0 6,110,934 6,652,420
10,412,875 16,536,785 7,716,912 9,947,763 (1,260,710) (159,739) 18,189,838 9,889,661
46,767,214 (49,354,872) 8,000,290 166,871 3,687,427 (7,558,861) 59,085,429 74,701,443
- ------------- -------------- ------------ ------------ ------------ ------------ ------------ ------------
57,005,685 85,995,573 44,433,598 90,941,037 1,921,884 (2,241,597) 82,801,400 91,396,868
- ------------- -------------- ------------ ------------ ------------ ------------ ------------ ------------
27,412,147 39,130,225 25,789,970 33,812,711 2,373,730 3,960,643 25,483,290 26,668,520
(2,360) (2,266) (16,273) (15,764) 0 0 0 0
(150,991,599) (149,422,147) (137,305,933) (130,545,685) (9,379,481) (9,250,924) (70,605,583) (44,608,635)
(35,677,916) (24,134,801) (24,878,546) (20,780,383) (5,144,225) 2,276,993 35,558,273 20,819,131
(802,889) (934,671) (592,729) (693,557) (44,107) (49,947) (329,193) (312,324)
- ------------- -------------- ------------ ------------ ------------ ------------ ------------ ------------
(160,062,617) (135,363,660) (137,003,511) (118,222,678) (12,194,083) (3,063,235) (9,893,213) 2,566,692
0 (4,244,029) 0 (1,642,222) 0 (21,233) 0 (357,938)
- ------------- -------------- ------------ ------------ ------------ ------------ ------------ ------------
(103,056,932) (53,612,116) (92,569,913) (28,923,863) (10,272,199) (5,326,065) 72,908,187 93,605,622
961,858,681 1,015,470,797 898,757,633 927,681,496 61,261,669 66,587,734 434,613,085 341,007,463
- ------------- -------------- ------------ ------------ ------------ ------------ ------------ ------------
$ 858,801,749 $ 961,858,681 $806,187,720 $898,757,633 $ 50,989,470 $ 61,261,669 $507,521,272 $434,613,085
============= ============== ============ ============ ============ ============ ============ ============
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A9 THROUGH A13
A6
</TABLE>
<PAGE>
<TABLE>
FINANCIAL STATEMENTS OF THE PRUDENTIAL
QUALIFIED INDIVIDUAL VARIABLE CONTRACT ACCOUNT
STATEMENTS OF CHANGES IN NET ASSETS
For the years ended December 31, 1999 and 1998
<CAPTION>
SUBACCOUNTS (CONTINUED)
----------------------------------------------------------------------------------------
EQUITY INCOME NATURAL RESOURCES GLOBAL
PORTFOLIO PORTFOLIO PORTFOLIO
---------------------------- --------------------------- ---------------------------
1999 1998 1999 1998 1999 1998
------------ ------------ ----------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
OPERATIONS
Net investment income (loss) .......... $ 2,732,955 $ 4,103,593 $ (216,569) $ (197,119) $ (863,706) $ 149,079
Capital gains distributions
received ............................ 27,370,482 16,581,485 0 2,893,218 856,023 4,418,940
Realized gain (loss) on shares
redeemed ............................ 10,236,723 4,094,389 (1,753,995) (2,075,232) 3,549,582 4,088,322
Net change in unrealized gain
(loss) on investments ............... (13,034,034) (36,267,579) 17,243,182 (10,231,060) 43,378,457 12,842,721
------------ ------------ ----------- ------------ ------------ ------------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM
OPERATIONS ............................ 27,306,126 (11,488,112) 15,272,618 (9,610,193) 46,920,356 21,499,062
------------ ------------ ----------- ------------ ------------ ------------
ANNUITY PAYMENTS
AND OTHER OPERATING TRANSFERS
Contract Owner Net Payments ......... 11,472,254 21,202,089 1,954,123 3,321,987 5,911,188 6,945,265
Annuity Payments .................... 0 0 0 0 0 0
Surrenders, Withdrawals
and Death Benefits ................ (40,479,199) (35,204,151) (6,658,245) (7,063,274) (16,208,291) (12,260,440)
Net Transfers From (To) Other
Subaccounts or Fixed Rate Option .. (23,404,862) 10,996,576 (4,541,622) (11,796,165) 5,158,748 (9,312,804)
Deferred Sales and Other Charges .... (204,506) (210,155) (46,489) (66,165) (90,820) (102,802)
------------ ------------ ----------- ------------ ------------ ------------
NET INCREASE (DECREASE) IN
NET ASSETS RESULTING FROM
ANNUITY PAYMENTS AND
OTHER OPERATING TRANSFERS ............. (52,616,313) (3,215,641) (9,292,233) (15,603,617) (5,229,175) (14,730,781)
NET INCREASE (DECREASE) IN NET
ASSETS RETAINED IN THE ACCOUNT
[Note 7] .............................. 0 (111,197) 0 (26,908) 0 (219,134)
------------ ------------ ----------- ------------ ------------ ------------
TOTAL INCREASE (DECREASE) IN
NET ASSETS ............................ (25,310,187) (14,814,950) 5,980,385 (25,240,718) 41,691,181 6,549,147
NET ASSETS
Beginning of year ..................... 266,462,910 281,277,860 40,322,150 65,562,868 105,287,886 98,738,739
------------ ------------ ----------- ------------ ------------ ------------
End of year ........................... $241,152,723 $266,462,910 $46,302,535 $ 40,322,150 $146,979,067 $105,287,886
============ ============ =========== ============ ============ ============
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A9 THROUGH A13
A7
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SUBACCOUNTS (CONTINUED)
----------------------------------------------------------------------------------------------------------
GOVERNMENT INCOME PRUDENTIAL JENNISON SMALL CAPITALIZATION STOCK
PORTFOLIO PORTFOLIO PORTFOLIO
------------------------------- ------------------------------ -------------------------------
1999 1998 1999 1998 1999 1998
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
$ (821,415) $ 3,423,468 $(1,966,341) $ (883,272) $ (594,516) $ (301,342)
0 0 10,933,146 1,841,662 931,404 3,319,291
346,759 397,895 1,618,260 313,054 (132,476) 33,186
(2,362,903) 1,717,447 60,215,915 27,217,490 5,148,160 (4,686,726)
------------ ------------ ------------ ------------ ------------ ------------
(2,837,559) 5,538,810 70,800,980 28,488,934 5,352,572 (1,635,591)
------------ ------------ ------------ ------------ ------------ ------------
1,993,741 2,795,927 19,998,730 15,796,256 5,522,945 8,492,629
0 0 0 0 0 0
(11,221,604) (9,266,485) (25,844,118) (8,774,689) (7,980,215) (4,824,181)
(4,469,238) 3,930,203 85,067,641 27,765,230 (2,662,297) 6,862,345
(48,553) (57,046) (170,908) (109,733) (67,969) (68,589)
------------ ------------ ------------ ------------ ------------ ------------
(13,745,654) (2,597,401) 79,051,345 34,677,064 (5,187,536) 10,462,204
0 (168,531) 0 (116,687) 0 (357,481)
------------ ------------ ------------ ------------ ------------ ------------
(16,583,213) 2,772,878 149,852,325 63,049,311 165,036 8,469,132
77,420,493 74,647,615 125,473,448 62,424,137 54,140,764 45,671,632
------------ ------------ ------------ ------------ ------------ ------------
$ 60,837,280 $ 77,420,493 $275,325,773 $125,473,448 $ 54,305,800 $ 54,140,764
============ ============ ============ ============ ============ ============
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A9 THROUGH A13
A8
</TABLE>
<PAGE>
NOTES TO FINANCIAL STATEMENTS OF
THE PRUDENTIAL QUALIFIED INDIVIDUAL VARIABLE CONTRACT ACCOUNT
DECEMBER 31, 1999
NOTE 1: GENERAL
The Prudential Qualified Individual Variable Contract Account (the
"Account") of The Prudential Insurance Company of America ("Prudential")
was established on October 12, 1982 by a resolution of Prudential's Board
of Directors, in conformity with insurance laws of the State of New Jersey.
The assets of the Account are segregated from Prudential's other assets.
The Account is registered under the Investment Company Act of 1940, as
amended, as a unit investment trust. The Account is a funding vehicle for
individual variable annuity contracts. There are thirteen subaccounts
within the Account, each of which invests only in a corresponding portfolio
of The Prudential Series Fund, Inc. (the "Series Fund"). The Series Fund is
a diversified open-end management investment company, and is managed by
Prudential.
NOTE 2: SIGNIFICANT ACCOUNTING POLICIES
The accompanying financial statements are prepared in conformity with
accounting principles generally accepted in the United States ( "GAAP ").
The preparation of the financial statements in conformity with GAAP
requires management to make estimates and assumptions that affect the
reported amounts and disclosures. Actual results could differ from those
estimates.
Investments--The investments in shares of the Series Fund are stated at the
net asset value of the respective portfolio.
Security Transactions--Realized gains and losses on security transactions
are reported on an average cost basis. Purchase and sale transactions are
recorded as of the trade date of the security being purchased or sold.
Distributions Received--Dividend and capital gain distributions received
are reinvested in additional shares of the Series Fund and are recorded on
the ex-dividend date.
Equity of Annuitants--Equity of annuitants represents reserve for amounts
currently payable to certain contract owners and is estimated using the
following factors: the 1983 A Mortality Table, the investment results of
annuitants' subaccounts, an assumed investment result of 3.5% and various
valuation interest rates ranging from 6.5% to 11%, depending on the
contract's year of issue.
Receivable from (Payable to) The Prudential Insurance Company of
America--At times, Prudential may owe an amount to or expect to receive an
amount from the Account primarily related to processing contract owner
payments, surrenders, withdrawals and death benefits. Also included in this
amount is a receivable from Prudential to fund annuitant reserves. This
amount is reflected in the Account's Statements of Net Assets as either a
receivable from or payable to Prudential. The receivable and or payable
does not have an effect on the Contract owner's account or the related unit
value.
A9
<PAGE>
NOTE 3: INVESTMENT INFORMATION FOR THE PRUDENTIAL SERIES FUND, INC. PORTFOLIOS
The net asset value per share for each portfolio of the Series Fund, the
number of shares (rounded) of each portfolio held by the subaccounts of the
Account and the aggregate cost of investments in such shares at December
31, 1999 were as follows:
<TABLE>
<CAPTION>
PORTFOLIOS
---------------------------------------------------------------------------------
MONEY DIVERSIFIED FLEXIBLE CONSERVATIVE
MARKET BOND EQUITY MANAGED BALANCED
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Number of shares (rounded): 10,298,340 8,411,575 29,344,836 48,730,849 52,531,837
Net asset value per share: $ 10.00 $ 10.95 $ 28.90 $ 17.64 $ 15.36
Cost: $102,983,399 $ 91,758,042 $683,264,513 $778,073,318 $758,149,529
<CAPTION>
PORTFOLIOS (CONTINUED)
---------------------------------------------------------------------------------
HIGH YIELD STOCK EQUITY NATURAL
BOND INDEX INCOME RESOURCES GLOBAL
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Number of shares (rounded): 6,796,988 11,421,801 12,368,246 2,668,101 4,748,126
Net asset value per share: $ 7.52 $ 44.45 $ 19.52 $ 17.38 $ 30.98
Cost: $54,471,617 $223,467,142 $214,145,825 $42,570,011 $74,461,915
<CAPTION>
PORTFOLIOS (CONTINUED)
-------------------------------------------------
SMALL
GOVERNMENT PRUDENTIAL CAPITALIZATION
INCOME JENNISON STOCK
------------ ------------ --------------
<S> <C> <C> <C>
Number of shares (rounded): 5,267,087 8,495,430 3,339,563
Net asset value per share: $ 11.55 $ 32.39 $ 16.25
Cost: $59,921,308 $176,777,316 $48,532,612
</TABLE>
NOTE 4: CONTRACT OWNER UNIT INFORMATION
Outstanding contract owner units (rounded), unit values and total value of
contract owner equity at December 31, 1999 were as follows:
<TABLE>
<CAPTION>
SUBACCOUNTS
------------------------------------------------------------------------------------
MONEY DIVERSIFIED FLEXIBLE CONSERVATIVE
MARKET BOND EQUITY MANAGED BALANCED
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
------------- ------------- ------------- ------------- --------------
<S> <C> <C> <C> <C> <C>
Contract Owner Units
Outstanding (rounded) ......... 45,896,939 27,626,950 100,845,742 163,083,280 180,390,575
Unit Value ...................... $ 2.26001 $ 3.33181 $ 8.40176 $ 5.26597 $ 4.46856
------------- ------------- ------------- ------------- -------------
TOTAL CONTRACT OWNER EQUITY ..... $ 103,727,540 $ 92,047,747 $ 847,281,719 $ 858,791,659 $ 806,086,107
============= ============= ============= ============= =============
<CAPTION>
SUBACCOUNTS (CONTINUED)
------------------------------------------------------------------------------------
HIGH
YIELD STOCK EQUITY NATURAL
BOND INDEX INCOME RESOURCES GLOBAL
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Contract Owner Units
Outstanding (rounded) ......... 22,149,881 87,982,261 54,727,336 15,795,474 42,332,925
Unit Value ...................... $ 2.30202 $ 5.76845 $ 4.40644 $ 2.93138 $ 3.47198
------------- ------------- ------------- ------------- -------------
TOTAL CONTRACT OWNER EQUITY ..... $ 50,989,470 $ 507,521,272 $ 241,152,723 $ 46,302,535 $ 146,979,067
============= ============= ============= ============= =============
<CAPTION>
SUBACCOUNTS (CONTINUED)
------------------------------------------------
SMALL
GOVERNMENT PRUDENTIAL CAPITALIZATION
INCOME JENNISON STOCK
PORTFOLIO PORTFOLIO PORTFOLIO
------------- ------------- -------------
<S> <C> <C> <C>
Contract Owner Units
Outstanding (rounded) ......... 31,209,489 78,722,086 28,555,699
Unit Value ...................... $ 1.94932 $ 3.49744 $ 1.90175
------------- ------------- -------------
TOTAL CONTRACT OWNER EQUITY ..... $ 60,837,280 $ 275,325,773 $ 54,305,800
============= ============= =============
</TABLE>
A10
<PAGE>
NOTE 5: CHARGES AND EXPENSES
A. Mortality Risk and Expense Risk Charges
The mortality risk and expense risk charges, at effective annual rates
of 0.8% and 0.4%, respectively (for a total of 1.2% per year), are
applied daily against the net assets representing equity of contract
owners and annuitants held in each subaccount. Mortality risk is that
annuitants may live longer than estimated and expense risk is that the
cost of issuing and administering the contracts may exceed related
charges by Prudential.
B. Deferred Sales Charges
A deferred sales charge is imposed upon withdrawals of certain
purchase payments to compensate Prudential for sales and other
marketing expenses. The amount of any sales charge will depend on the
amount withdrawn and the number of contract years that have elapsed
since the contract owner or annuitant made the purchase payments
deemed to be withdrawn. No sales charge is made against the withdrawal
of investment income. A reduced sales charge is imposed in connection
with the withdrawal of a purchase payment to effect an annuity if
three or more contract years have elapsed since the contract date,
unless the annuity effected is an annuity certain. No sales charge is
imposed on death benefit payments or on transfers made between
subaccounts.
C. Annual Maintenance Charge
An annual maintenance charge of $30 will be deducted if and only if
the contract fund is less than $10,000 on a contract anniversary or at
the time of a full withdrawal, including a withdrawal to effect an
annuity. The charge is made by reducing accumulation units credited to
a contract owner's account.
NOTE 6: TAXES
Prudential is taxed as a "life insurance company" as defined by the
Internal Revenue Code and the results of operations of the Account form a
part of Prudential's consolidated federal tax return. Under current federal
law, no federal income taxes are payable by the Account. As such, no
provision for tax liability has been recorded in these financial
statements.
A11
<PAGE>
NOTE 7: NET INCREASE (DECREASE) IN NET ASSETS RETAINED IN THE ACCOUNT
The increase (decrease) in net assets retained in the account represents
the net contributions (withdrawals) of Prudential to (from) the Account.
Effective October 13, 1998 Prudential no longer maintains a position in the
account. Previously, Prudential maintained a position in the Account for
liquidity purposes including unit purchases and redemptions, fund share
transactions and expense processing.
NOTE 8: UNIT ACTIVITY
Transactions in units (including transfers among subaccounts) for the years
ended December 31, 1999 and 1998 were as follows:
<TABLE>
<CAPTION>
SUBACCOUNTS
-------------------------------------------------------------------------------------------------
MONEY DIVERSIFIED
MARKET BOND EQUITY
PORTFOLIO PORTFOLIO PORTFOLIO
---------------------------- ---------------------------- ----------------------------
1999 1998 1999 1998 1999 1998
----------- ----------- ----------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Contract Owner
Contributions ....... 37,954,742 35,548,937 4,276,098 5,849,709 7,280,784 11,426,524
Contract Owner
Redemptions ......... (34,243,136) (35,491,263) (8,875,674) (7,593,809) (28,601,285) (25,465,170)
<CAPTION>
SUBACCOUNTS (CONTINUED)
-------------------------------------------------------------------------------------------------
FLEXIBLE CONSERVATIVE HIGH YIELD
MANAGED BALANCED BOND
PORTFOLIO PORTFOLIO PORTFOLIO
---------------------------- ---------------------------- ----------------------------
1999 1998 1999 1998 1999 1998
----------- ----------- ----------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Contract Owner
Contributions ....... 8,190,381 12,543,433 9,709,345 13,943,004 3,629,571 6,806,528
Contract Owner
Redemptions ......... (39,637,009) (40,921,107) (41,369,724) (43,235,827) (8,991,508) (8,133,921)
<CAPTION>
SUBACCOUNTS (CONTINUED)
-------------------------------------------------------------------------------------------------
STOCK EQUITY NATURAL
INDEX INCOME RESOURCES
PORTFOLIO PORTFOLIO PORTFOLIO
---------------------------- ---------------------------- ----------------------------
1999 1998 1999 1998 1999 1998
----------- ----------- ----------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Contract Owner
Contributions ....... 19,033,172 18,520,236 5,755,162 13,720,902 3,273,179 3,228,513
Contract Owner
Redemptions ......... (20,803,054) (18,049,384) (18,268,726) (14,881,050) (7,321,675) (9,786,455)
<CAPTION>
SUBACCOUNTS (CONTINUED)
-------------------------------------------------------------------------------------------------
GOVERNMENT PRUDENTIAL
GLOBAL INCOME JENNISON
PORTFOLIO PORTFOLIO PORTFOLIO
---------------------------- ---------------------------- ----------------------------
1999 1998 1999 1998 1999 1998
----------- ----------- ----------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Contract Owner
Contributions ....... 8,666,836 6,883,365 4,454,044 8,386,092 47,876,595 26,942,750
Contract Owner
Redemptions ......... (10,766,867) (13,931,580) (11,432,393) (9,802,260) (19,574,611) (10,526,769)
<CAPTION>
SUBACCOUNTS (CONTINUED)
----------------------------
SMALL
CAPITALIZATION
STOCK PORTFOLIO
----------------------------
1999 1998
----------- -----------
<S> <C> <C>
Contract Owner
Contributions ....... 8,871,000 14,556,317
Contract Owner
Redemptions ......... (12,018,095) (8,844,595)
</TABLE>
A12
<PAGE>
NOTE 9: PURCHASES AND SALES OF INVESTMENTS
The aggregate costs of purchases and proceeds from sales of investments in
the Series Fund for the year ended December 31, 1999 were as follows:
<TABLE>
<CAPTION>
PORTFOLIOS
-----------------------------------------------------------------------------------------------
MONEY DIVERSIFIED FLEXIBLE CONSERVATIVE
MARKET BOND EQUITY MANAGED BALANCED
------------ ------------ ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Purchases .......... $ 31,983,899 $ 1,578,173 $ 7,117 $ 0 $ 1,657,612
Sales .............. $(25,497,739) $(18,085,958) $(180,676,553) $(169,994,290) $(147,935,472)
<CAPTION>
PORTFOLIOS (CONTINUED)
-----------------------------------------------------------------------------------------------
HIGH YIELD STOCK EQUITY NATURAL
BOND INDEX INCOME RESOURCES GLOBAL
------------ ------------ ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Purchases .......... $ 1,902,885 $ 18,844,880 $ 418,143 $ 1,960,271 $ 4,223,489
Sales .............. $(14,634,543) $(34,158,736) $(55,775,252) $(11,691,676) $(10,686,691)
<CAPTION>
PORTFOLIOS (CONTINUED)
--------------------------------------------------------
SMALL
GOVERNMENT PRUDENTIAL CAPITALIZATION
INCOME JENNISON STOCK
------------ ------------ -------------
<S> <C> <C> <C>
Purchases .......... $ 1,416,083 $82,404,039 $ 2,660,842
Sales .............. $(15,985,576) $(5,820,461) $(8,480,799)
</TABLE>
A13
<PAGE>
Report of Independent Accountants
To the Contract Owners of the
Prudential Qualified Individual Variable Contract Account
and the Board of Directors of
The Prudential Insurance Company of America
In our opinion, the accompanying statements of net assets and the related
statements of operations and of changes in net assets present fairly, in all
material respects, the financial position of the subaccounts (Money Market
Portfolio, Diversified Bond Portfolio, Equity Portfolio, Flexible Managed
Portfolio, Conservative Balanced Portfolio, High Yield Bond Portfolio, Stock
Index Portfolio, Equity Income Portfolio, Natural Resources Portfolio, Global
Portfolio, Government Income Portfolio, Prudential Jennison Portfolio and Small
Capitalization Stock Portfolio) of the Prudential Qualified Individual Variable
Contract Account at December 31, 1999, the results of each of their operations
for the year then ended and the changes in each of their net assets for each of
the two years in the period then ended, in conformity with accounting principles
generally accepted in the United States. These financial statements are the
responsibility of The Prudential Insurance Company of America's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with generally accepted auditing standards generally accepted in the United
States, which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of fund shares owned at December 31, 1999,
provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
New York, New York
March 17, 2000
A14
<PAGE>
<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>
DETERMINATION OF ACCUMULATION UNIT VALUES AND
OF THE AMOUNT OF MONTHLY VARIABLE ANNUITY
PAYMENTS
A. ACCUMULATION UNIT VALUES
The value for each accumulation unit is computed as of the end of each valuation
period, also referred to in this section as business day.
On any given business day the value of accumulation units in each subaccount
will be determined by multiplying the value of a unit of that subaccount for the
preceding business day by the net investment factor for that subaccount for the
current business day. The net investment factor for any business day is
determined by dividing the value of the assets of the subaccount for that day by
the value of the assets of the subaccount for the preceding business day
(ignoring, for this purpose, changes resulting from new purchase payments and
withdrawals), and subtracting from the result the daily equivalent of the 1.2%
annual charge for expense risks and mortality risks. The value of the assets of
a subaccount is determined by multiplying the number of shares of the Series
Fund held by that subaccount by the net asset value of each share and adding the
value of dividends declared by the Series Fund but not yet paid.
B. DETERMINATION OF THE AMOUNT OF MONTHLY VARIABLE ANNUITY PAYMENT
When a contractowner elects to convert his or her variable account into monthly
variable annuity payments (an option available under the WVA-83 contract and the
VIP-84 contract, but NOT under the VIP-86 contract), the number of accumulation
units credited to him or her in each subaccount is first reduced to take into
account any applicable sales charge and any state premium taxes that may be
payable. The remaining accumulation units are then converted into a number of
annuity units of equal total value. As with accumulation units, the value of
each annuity unit also changes daily in accordance with the investment results
of the underlying Series Fund portfolio, after deduction of the daily equivalent
of the 1.2% annual charge for assuming expense and mortality risks.
Built into the value of annuity units is an assumption that the value of a
subaccount will grow by 3.5% each year. The reason for making this assumption is
explained more fully below. Accordingly, the value of an annuity unit always
increases by an amount that is somewhat less than the increase would have been
had this assumption not been made and decreases by an amount that is somewhat
greater than the decrease would have been had the assumption not been made. If
the value of the assets of a subaccount increases from one day to the next at a
rate equivalent to 4.7% per year (3.5% plus the annual charge of 1.2%), the
annuity unit value will not change. If the increase is less than at a rate
equivalent to 4.7% per year, the annuity unit value will decrease.
To determine the amount of each monthly variable annuity payment, the first step
is to refer to the Schedule of Annuity Rates set forth in the contract, relating
to the form of annuity selected by the contractowner. For example, for a man of
65 years of age who has selected a lifetime annuity with a guaranteed minimum of
120 payments, the applicable schedules currently provide that 1000 annuity units
will result in the payment each month of an amount equal to the value of 5.73
annuity units. (Due to the fact that the Schedule of Annuity Rates set forth in
the WVA-83 contract differs from that set forth in the VIP-84 contract, the
preceding sentence, as it applies to the WVA-83 contract, is modified. See item
3 under DIFFERENCES UNDER THE WVA-83 CONTRACT in this Statement of Additional
Information.) The amount of the first variable annuity payment made on the first
day of the month will be equal to that number of annuity units multiplied by the
annuity unit value at the end of that day, if a business day, or otherwise at
the end of the last preceding business day. The amount of each subsequent
variable annuity payment made on the first day of the month will be equal to the
number of annuity units multiplied by the annuity unit value at the end of the
last business day which is at least 5 days before the date the annuity payment
is due. (Under the WVA-83 contract, the amount of each variable annuity payment
made after the first payment is not determined as described in the preceding
sentence. See item 4 under DIFFERENCES UNDER THE WVA-83 CONTRACT in this
Statement of Additional Information.)
As stated above, the annuity unit values change in accordance with the
investment results of the subaccount but will not increase the amount of each
monthly variable payment unless the assets in the subaccount increase, after
deducting the 1.2% annual charge, at a rate greater than 3.5% per year. This
compensates for the fact that the annuity rate schedules have been constructed
upon the assumption that there will be a 3.5% annual increase in the value of
each subaccount. Although a different assumption could have been made, namely
that the subaccounts will not increase in value, this would have resulted in
smaller variable annuity payments immediately after annuitization and larger
payments in later years. This would have been advantageous for annuitants who
happen to live very long but disadvantageous to those who happen to die earlier.
Prudential believes that the 3.5% annual growth assumption is better for
contractowners, because it produces a better balance between early and later
variable annuity payments.
C-1
<PAGE>
QUALIFIED INDIVIDUAL VARIABLE CONTRACT ACCOUNT
VARIABLE ANNUITY CONTRACTS
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
751 BROAD STREET
NEWARK, NEW JERSEY 07102-3777
TELEPHONE: (888) PRU-2888
<PAGE>
PART C
OTHER INFORMATION
<PAGE>
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(a) FINANCIAL STATEMENTS
(1) Financial Statements of The Prudential Qualified Individual Variable
Contract Account (Registrant) consisting of the Statements of Net Assets, as
of December 31, 1999; the Statements of Operations for the year ended
December 31, 1999; the Statements of Changes in Net Assets for the years
ended December 31, 1999 and 1998; and the Notes relating
thereto appear in the Statement of Additional Information (Part B of the
Registration Statement).
(2) Consolidated Financial Statements of The Prudential Insurance Company of
America (Depositor) and its subsidiaries, consisting of the Consolidated
Statements of Financial Position as of December 31, 1999 and 1998; the
Consolidated Statements of Operations, Consolidated Statements of Changes
in Equity and Consolidated 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
(1) Resolution of the Board of Directors of The Prudential Insurance Company
of America establishing The Prudential Individual Variable Contract
Account. (Note 6)
(2) Agreements for custody of securities and similar investments--Not
Applicable.
(3) (a) Form of Distribution Agreement between Prudential Investment Services
LLC ("PIMS") (Underwriter) and The Prudential Insurance Company of
America (Depositor). (Note 1)
(b) Form of Selected Broker Agreement used by PIMS. (Note 1)
(4) (a) Individual Variable Annuity Contract (Form WVA-83). (Note 9)
(b) Special Page One to the Contract (Form WVA-83) for use in New York
issues. (Note 9)
(c) Endorsement WVA2-83 to the Contract (Form WVA-83) for use in New Jersey
issues. (Note 9)
(d) Special Page Six WVA-83 to the Contract (Form WVA-83) for use in
Oklahoma issues. (Note 9)
(e) Special Page Six WVA-83 to the Contract (Form WVA-83) for use in
California issues. (Note 9)
(f) Endorsement WVA 3-83 to the Contract (Form WVA-83) for use in Tennessee
issues. (Note 9)
(g) Endorsement WVA 4-83 to the Contract (Form WVA-83 and VIP-84) for use
in Texas issues. (Note 9)
(h) Endorsement WVA 5-83 to the Contract (Form WVA-83) for use in Texas and
Pennsylvania issues. (Note 9)
(i) Endorsement WVA 6-83 to the Contract (Form WVA-83) for use in
California issues. (Note 9)
(j) Endorsement COMB 84889-83 to the Contract (Form WVA-83) for use in the
District of Columbia and in all states except New York. (Note 9)
(k) Endorsement COMB 84890-83 to the Contract (Form WVA-83) for use in the
District of Columbia and in all states except New York. (Note 9)
(l) Individual Variable Annuity Contract (Form VIP-84). (Note 9)
(m) Special Page One to the Contract (Form VIP-84). (Note 9)
(n) Special Page Nineteen to the Contract (Form VIP-84) for use in New York
issues. (Note 9)
(o) Special Page Four to the Contract (Form VIP-84) for use in Oklahoma
issues. (Note 9)
(p) Special Page Seven to the Contract (Form VIP-84) for use in Oklahoma
issues. (Note 9)
(q) Special Page Four to the Contract (Form VIP-84) for use in California
issues. (Note 9)
(r) Special Page Seven to the Contract (Form VIP-84) for use in California
issues. (Note 9)
(s) Endorsement VIP 3-84 to the Contract (Form VIP-84) for use in
California issues. (Note 9)
(t) Endorsement WVA 13-85 to the Contract (Form VIP-84) for use in all the
states so that the Contract meets Internal Revenue Code Section 72(s)
requirements for an annuity. (Note 9)
(u) Endorsement VIP 6-85 to the Contract (Form VIP-84) for use in all the
states so that the Contract meets Internal Revenue Code Section 72(s)
requirements for an annuity. (Note 9)
C-1
<PAGE>
(v) Individual Variable Annuity Contract (Form VIP-86). (Note 9)
(w) Individual Variable Annuity Contract (Form VIP-86) revised. (Note 6)
(x) Special Jacket VIP-86 MN to the VIP-86 Contract for use in Minnesota
issues. (Note 9)
(y) Special Jacket VIP-86 NY to the VIP-86 Contract for use in New York
issues. (Note 9)
(z) Special Contract Data Page 3 (VIP-86) (MN) to the VIP-86 Contract for
use in Minnesota issues. (Note 9)
(aa) Special Page 7 (VIP-86) (NY) to the VIP-86 Contract for use in New York
issues. (Note 9)
(bb) Special Page 7 (VIP-86) (OK) to the VIP-86 Contract for use in
Oklahoma issues. (Note 9)
(cc) Special Page 8 (VIP-86)(SC) to the VIP-86 Contract for use in South
Carolina issues. (Note 9)
(dd) Special Page 8 (VIP-86) (OK) to the VIP-86 Contract for use in
Oklahoma issues. (Note 9)
(ee) Special Page 11 (VIP-86) (WA) to the VIP-86 Contract for use in
Washington issues. (Note 9)
(ff) Special Page 11 (VIP-86) (SC) to the VIP-86 Contract for use in
South Carolina issues. (Note 9)
(gg) Special Page 11 (VIP-86) (NY) to the VIP-86 Contract for use in New
York issues. (Note 9)
(hh) Special Page 11 (VIP-86) (WI) to the VIP-86 Contract for use in
Wisconsin issues. (Note 9)
(ii) Special Page 12 (VIP-86) (SC) to the VIP-86 Contract for use in South
Carolina and Washington issues. (Note 9)
(jj) Special Page 12 (VIP-86) (NY) to the VIP-86 Contract for use in New
York issues. (Note 9)
(kk) Special Page 12 (VIP-86) (WI) to the VIP-86 Contract for use in
Wisconsin issues. (Note 9)
(ll) Special Page 13 (VIP-86) (WI) to the VIP-86 Contract for use in
Wisconsin issues. (Note 9)
(mm) Special Page 14 (VIP-86) (WI) to the VIP-86 Contract for use in
Wisconsin issues. (Note 9)
(nn) Special Back Jacket Page 18 (VIP-86) (MN) to the VIP-86 Contract for
use in Minnesota issues. (Note 9)
(oo) Special Back Jacket Page 18 (VIP-86) (NY) to the VIP-86 Contract for
use in New York issues. (Note 9)
(pp) Special Jacket VIP-86-P to the VIP-86 Contract for use in
Pennsylvania issues. (Note 9)
(qq) Special Contract Data Page 3 (VIP-86) (MA) to the VIP-86 Contract for
use in Massachusetts issues. (Note 9)
(rr) Special Page 7 (VIP-86) (PA) to the VIP-86 Contract for use in
Pennsylvania issues. (Note 9)
(ss) Special Blank Page 13 (VIP-86) (MA) to the VIP-86 Contract for use
in Massachusetts issues. (Note 9)
(tt) Special Blank Page 17 (VIP-86-P) to the VIP-86 Contract for use in
Pennsylvania issues. (Note 9)
(uu) Special Back Jacket Page 18 (VIP-86-P) to the VIP-86 Contract for use
in Pennsylvania issues. (Note 9)
(vv) Endorsement VIP 501-86 to the VIP-86 Contract for use in all states
except Delaware, Georgia, Massachusetts, North Dakota, New York,
Oregon, Pennsylvania and Texas. (Note 9)
(ww) Endorsement COMB 84890-83 to the VIP-86 Contract for use in Montana.
(Note 9)
(xx) Endorsement Certification PLI 254-86 to the VIP-86 Contract for use in
Pennsylvania. (Note 9)
(yy) Endorsement PLI 288-88 to the VIP-86 Contract. (Note 9)
(zz) Waiver of Withdrawal Charges rider ORD 88753-92 to the VIP-86
Contract (at issue). (Note 9)
(aaa) Waiver of Withdrawal Charges rider ORD 88754-92 to the VIP-86 Contract
(after issue). (Note 9)
(bbb) Spousal Continuance rider ORD 89011-93 to the VIP contract (at issue).
(Note 2)
(ccc) Endorsement altering the Assignment provision ORD 83922-95. (Note 3)
(5) Application for Individual Variable Annuity Contract:
(a) Application Form VA 200 ED 07/83 for Individual Variable Annuity
Contract (Form WVA-83). (Note 9)
(b) Application Form VA 200 ED 5/84 for Individual Variable Annuity
Contract (Form VIP-84) for use by Prudential representatives. (Note 9)
(c) Application Form VA 200B ED 5/84 for Individual Variable Annuity
Contract (Form VIP-84) for use by Prudential Securities account
executives. (Note 9)
C-2
<PAGE>
(d) Revised Application Form VA 200 ED 5/84-Non-Qualified for Individual
Annuity Contract (Form VIP-84) for use by Prudential representatives.
(Note 9)
(e) Revised Application Form VA 200 Ed. 5/86-Non-Qualified. (Note 9)
(f) Revised Application Form VA 200 Ed. 5/86-Non-Qualified (NY) for use in
New York. (Note 9)
(g) Revised Application Form VA 200 Ed. 9/86-Non-Qualified. (Note 9)
(h) Revised Application Form VA 200 Ed. 11/86-Non-Qualified. (Note 9)
(i) Application for VIP annuity contract ORD 87348-92. (Note 2)
(j) Supplement to the Application for a VIP contract ORD 87454-92. (Note 2)
(6) (a) Charter of The Prudential Insurance Company of America, as amended
November 14, 1995. (Note 8)
(b) By-Laws of The Prudential Insurance Company of America, as amended
May. 12, 1998. (Note 5)
(7) Contract of reinsurance in connection with variable annuity
contract--Not Applicable.
(8) Other material contracts performed in whole or part after the date the
registration statement is filed:
(a) Purchase Agreement between The Prudential Series Fund, Inc. and The
Prudential Insurance Company of America. (Note 9)
(9) Opinion of Counsel and consent to its use as to legality of the
securities being registered. (Note 1)
(10) Written consent of PricewaterhouseCoopers LLP, independent accountants.
(Note 1)
(11) All financial statements omitted from Item 23, Financial
Statements--Not Applicable.
(12) Agreements in consideration for providing initial capital between or
among Registrant, Depositor, Underwriter, or initial contract-
owners--Not Applicable.
(13) Schedule of Performance Computations. (Note 1)
(14) Powers of Attorney.
(a) F. Agnew, F. Becker, J. Cullen, C. Davis, R. Enrico, A. Gilmour, W.
Gray, III, J. Hanson, G. Hiner, C. Horner, G. Kelley, B. Malkiel, A.
Ryan, I. Schmertz, C. Sitter, D. Staheli, R. Thomson, J. Unruh, R.
Vagelos, S. Van Ness, P. Volcker, J. Williams. (Note 4)
(b) A. Piszel. (Note 7)
(c) R. Carbone. (Note 10)
(d) G. Casellas. (Note 5)
- ----------
(Note 1) Filed herewith.
(Note 2) Incorporated by reference to Post-Effective Amendment No. 19 to
Form S-6, Registration No. 2-80897, filed April 28, 1994.
(Note 3) Incorporated by reference to Post-Effective Amendment No. 20 to Form
S-6, Registration No. 2-80897, filed February 27, 1995.
(Note 4) 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.
(Note 5) Incorporated by reference to Form S-6, Registration No. 333-64957,
filed September 30, 1998, on behalf of The Prudential Variable
Appreciable Account.
(Note 6) Incorporated by reference to Post-Effective Amendment No. 24 to Form
N-4, Registration No. 2-80897, filed April 24, 1998, on behalf of
The Prudential Individual Variable Contract Account.
(Note 7) Incorporated by reference to Post-Effective Amendment No. 4 to Form
N-4, Registration No. 333-23271, filed February 23, 1999, on behalf
of The Prudential Discovery Select Group Variable Contract Account.
(Note 8) Incorporated by reference to Post-Effective Amendment No. 9 to Form
S-1, Registration No. 33-20083, filed April 9, 1997, on behalf of the
Prudential Variable Contract Real Property Account.
(Note 9) Incorporated by reference to Post-Effective Amendment No. 26 to Form
N-4, Registration No. 2-81318, filed April 27, 1999, on behalf of The
Prudential Individual Variable Contract Account.
(Note 10) Incorporated by reference to Post-Effective Amendment No. 3 to
Form N-4, Registration No. 333-23271, filed October 16, 1998, on
behalf of The Prudential Discovery Select Group Variable Contract
Account.
ITEM 25. DIRECTORS AND OFFICERS OF THE DEPOSITOR
Incorporated by reference to The Prudential Individual Variable Contract Account
statement of additional information under "Directors and Officers" which is
located in Part B of this Registration Statement.
C-3
<PAGE>
ITEM 26. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH THE DEPOSITOR OR
REGISTRANT
The Prudential Insurance Company of America ("Prudential") is a mutual life
insurance company organized under the laws of New Jersey.
Prudential may be deemed to control The Prudential Series Fund, Inc., a Maryland
corporation which is registered as an open-end, diversified, management
investment company under the Investment Company Act of 1940, all the shares of
which are held by Prudential and the following separate accounts which are
registered as unit investment trusts under the Investment Company Act of 1940:
The Prudential Variable Appreciable Account, The Prudential Individual Variable
Contract Account (Registrant), The Prudential Qualified Individual Variable
Contract Account, The Prudential Variable Contract Account-24 (separate accounts
of Prudential); the Pruco Life PRUvider Variable Appreciable Account, the Pruco
Life Variable Universal Account, The Pruco Life Variable Insurance Account, the
Pruco Life Variable Appreciable Account, the Pruco Life Single Premium Variable
Life Account, the Pruco Life Flexible Premium Variable Annuity Account, the
Pruco Life Single Premium Variable Annuity Account (separate accounts of Pruco
Life Insurance Company ("Pruco Life")); the Pruco Life of New Jersey Variable
Insurance Account, the Pruco Life of New Jersey Variable Appreciable Account,
the Pruco Life of New Jersey Single Premium Variable Life Account, and the Pruco
Life of New Jersey Single Premium Variable Annuity Account (separate accounts of
Pruco Life Insurance Company of New Jersey ("Pruco Life of New Jersey")). Pruco
Life, an insurance company organized under the laws of Arizona, is a direct
wholly-owned subsidiary of Prudential. Pruco Life of New Jersey, an insurance
company organized under the laws of New Jersey, is a direct wholly-owned
subsidiary of Pruco Life, and an indirect wholly-owned subsidiary of Prudential.
Prudential holds all of the shares of Prudential's Gibraltar Fund, a Delaware
corporation, in three of its separate accounts. Each of these separate accounts
is a unit investment trust registered under the Investment Company Act of 1940.
Prudential's Gibraltar Fund is registered as an open-end, diversified,
management investment company under the Investment Company Act of 1940.
In addition, Prudential may also be deemed to be under common control with The
Prudential Variable Contract Account-2, The Prudential Variable Contract
Account-10, and The Prudential Variable Contract Account-11, separate accounts
of Prudential, all of which are registered as open-end, diversified, management
investment companies under the Investment Company Act of 1940.
The subsidiaries of Prudential and short descriptions of each are listed under
Item 25 of Post-Effective Amendment No. 34 to the Form N-IA Registration
Statement for The Prudential Series Fund, Inc., Registration No. 2-80896, filed
on or about April 24, 1998, the text of which is hereby incorporated.
ITEM 27. NUMBER OF CONTRACTOWNERS
As of February 29, 2000 there were 225,587 contractowners of qualified contracts
offered by the Registrant.
ITEM 28. INDEMNIFICATION
The Registrant, in conjunction with certain affiliates, maintains insurance on
behalf of any person who is or was a trustee, director, officer, employee or
agent of the Registrant, or who is or was serving at the request of the
Registrant as a trustee, director, officer, employee or agent of such other
affiliated trust or corporation, against any liability asserted against and
incurred by him or her arising out of his or her position with such trust or
corporation.
New Jersey, being the state of organization of Prudential Insurance Company of
America ("Prudential"), permits entities organized under its jurisdiction to
indemnify directors and officers with certain limitations. The relevant
provisions of New Jersey law permitting indemnification can be found in Section
14A:3-5 of the New Jersey Statutes Annotated. The text of Prudential's By-law
27, which relates to indemnification of officers and directors, is incorporated
by reference to Exhibit (8)(ii) of Post-Effective Amendment No. 12 to Form N-4,
Registration No. 33-25434, filed April 30, 1997, on behalf of the Prudential
Individual Variable Contract Account.
Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions or otherwise, the Registrant has
been advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
ITEM 29. 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.,
C-4
<PAGE>
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 GI-2,
The Prudential Discovery Select Group Variable Contract Account, The
Pruco Life Flexible Premium Variable Annuity Account, The Pruco Life of
New Jersey Flexible Premium Variable Annuity Account, The Prudential
Individual Variable Contract Account and The Prudential Qualified
Individual Variable Contract Account.
(b)(1) The following table sets forth certain information regarding
the officers and directors of PIMS:
<TABLE>
<CAPTION>
POSITIONS AND OFFICES POSITIONS AND OFFICES
NAME (1) WITH UNDERWRITER WITH REGISTRANT
------------------------ --------------------------------- ----------------------
<S> <C> <C>
Robert F. Gunia President None
Kevin B. Frawley Senior Vice President and Chief
Compliance Officer None
Jean D. Hamilton Executive Vice President None
John R. Strangfeld Executive Vice President None
Francis O. Odubekun Senior Vice President
and Chief Operations Officer None
William V. Healey Senior Vice President, Secretary
and Chief Legal Officer None
Margaret M. Deverell Vice President, Comptroller and
Chief Financial Officer None
C. Edward Chaplin Treasurer None
</TABLE>
------------------
(1) The address of each person named is Prudential Plaza, 751 Broad
Street, Newark, New Jersey 07102 unless otherwise noted.
(c) Not applicable.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
All accounts, books or other documents required to be maintained by Section
31(a) of the 1940 Act and the rules promulgated thereunder are maintained by the
Registrant through The Prudential Insurance Company of America, 751 Broad
Street, Newark, New Jersey 07102-3777.
ITEM 31. MANAGEMENT SERVICES
Summary of any contract not discussed in Part A or Part B of the Registration
Statement under which management-related services are provided to the
Registrant--Not applicable.
ITEM 32. UNDERTAKINGS
(a) Registrant undertakes 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 for so long as payments under the variable
annuity contracts may be accepted.
(b) Registrant undertakes to include either (1) 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 or
(2) a postcard or similar written communication affixed to or included
in the prospectus that the applicant can remove to send for a statement
of additional information.
(c) Registrant undertakes to deliver any statement of additional
information and any financial statements required to be made available
under this Form promptly upon written or oral request.
(d) The Prudential Insurance Company of America ("Prudential") hereby
represents that the fees and charges deducted under the Contract, in
the aggregate, are reasonable in relation to the services rendered, the
expenses expected to be incurred and the risks assumed by Prudential.
C-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that this Amendment is filed solely for one or more of the purposes
specified in Rule 485(b)(1) under the Securities Act of 1933 and that no
material event requiring disclosure in the prospectus, other than one listed in
Rule 485(b)(1), has occurred since the effective date of the most recent
Post-Effective Amendment to the Registration Statement which included a
prospectus and has caused this Registration Statement to be signed on its behalf
by the undersigned thereunto duly authorized, and its seal hereunto affixed and
attested, all in the city of Newark and the State of New Jersey, on this 25th
day of April, 2000.
(SEAL)
THE PRUDENTIAL QUALIFIED INDIVIDUAL VARIABLE CONTRACT ACCOUNT
(Registrant)
BY: THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
(Depositor)
Attest: /s/ THOMAS C. CASTANO By: /s/ ESTHER H. MILNES
------------------------------------ ---------------------------
THOMAS C. CASTANO ESTHER H. MILNES
ASSISTANT SECRETARY VICE PRESIDENT AND ACTUARY
As required by the Securities Act of 1933, this Post-Effective Amendment
No. 27 to the Registration Statement has been signed by the following persons in
the capacities and on the date indicated.
SIGNATURE AND TITLE
-------------------
/s/ * April 25, 2000
---------------------------------------
ARTHUR F. RYAN
CHAIRMAN OF THE BOARD, PRESIDENT,
AND CHIEF EXECUTIVE OFFICER
/s/ *
---------------------------------------
ANTHONY S. PISZEL
VICE PRESIDENT AND CONTROLLER
(CHIEF ACCOUNTING OFFICER)
/s/ *
---------------------------------------
RICHARD J. CARBONE
SENIOR VICE PRESIDENT AND
PRINCIPAL FINANCIAL OFFICER
/s/ *
---------------------------------------
FRANKLIN E. AGNEW
DIRECTOR
*By: /s/ THOMAS C. CASTANO
---------------------------
THOMAS C. CASTANO
(ATTORNEY-IN-FACT)
/s/ *
---------------------------------------
FREDERIC C. BECKER
DIRECTOR
/s/ *
---------------------------------------
GILBERT CASELLAS
DIRECTOR
/s/ *
---------------------------------------
JAMES G. CULLEN
DIRECTOR
/s/ *
---------------------------------------
CAROLYNE K. DAVIS
DIRECTOR
C-6
<PAGE>
SIGNATURE AND TITLE
-------------------
/s/ *
--------------------------------------- April 25, 2000
ROGER A. ENRICO
DIRECTOR
/s/ *
---------------------------------------
ALLAN D. GILMOUR
DIRECTOR
/s/ * * By: /s/ THOMAS C. CASTANO
--------------------------------------- ---------------------------
WILLIAM H. GRAY, III THOMAS C. CASTANO
DIRECTOR (ATTORNEY-IN-FACT)
/s/ *
---------------------------------------
JON F. HANSON
DIRECTOR
/s/ *
---------------------------------------
GLEN H. HINER, JR.
DIRECTOR
/s/ *
---------------------------------------
CONSTANCE J. HORNER
DIRECTOR
/s/ *
---------------------------------------
GAYNOR N. KELLEY
DIRECTOR
/s/ *
---------------------------------------
BURTON G. MALKIEL
DIRECTOR
/s/ *
---------------------------------------
IDA F.S. SCHMERTZ
DIRECTOR
/s/ *
---------------------------------------
CHARLES R. SITTER
DIRECTOR
/s/ *
---------------------------------------
DONALD L. STAHELI
DIRECTOR
/s/ *
---------------------------------------
RICHARD M. THOMSON
DIRECTOR
C-7
<PAGE>
/s/ *
---------------------------------------
JAMES A. UNRUH
DIRECTOR
/s/ * April 25, 2000
---------------------------------------
ROY VAGELOS, M.D.
DIRECTOR
/s/ *
---------------------------------------
STANLEY C. VAN NESS
DIRECTOR
/s/ *
---------------------------------------
PAUL A. VOLCKER
DIRECTOR
/s/ * *By: /s/ THOMAS C. CASTANO
--------------------------------------- -------------------------
JOSEPH H. WILLIAMS THOMAS C. CASTANO
DIRECTOR (ATTORNEY-IN-FACT)
C-8
<PAGE>
EXHIBIT INDEX
-------------
(3)(a) Form of Distribution Agreement between Prudential Investment
Management Services LLC("PIMS")(Underwriter) and The Prudential
Insurance Company of America (Depositor)
(b) Form of Selected Broker Agreement used by PIMS
(9) Opinion of Counsel and consent to its use as to legality of
the securities being registered
(10) Written consent of PricewaterhouseCoopers LLP, independent accountants
(13) Schedule of Performance Computations
C-9
DISTRIBUTION AGREEMENT
* * *
This Distribution Agreement made this __ day of ____________, 1999, by and
between The Prudential Insurance Company of America, a New Jersey corporation
("Company"), on its own behalf and on behalf of The Prudential Qualified
Individual Variable Contract Account ("Account") used to fund individual annuity
contracts and Prudential Investment Management Services LLC, a Delaware limited
liability company ("Distributor"), effective November __, 1999.
WITNESSETH:
WHEREAS, Company has established and maintains the Account, which is a
separate investment account, pursuant to the laws of the State of New Jersey for
the purpose of selling, among other variable contracts, the Qualified Variable
Investment Plan (Variable Annuity) variable annuity contract ("Contract"), to
commence after the effectiveness of the Registration Statement relating thereto
filed with the Securities and Exchange Commission on Form N-4 pursuant to the
Securities Act of 1933, as amended (the "1933 Act") and the Investment Company
Act of 1940 ("Investment Company Act"); and
WHEREAS, the Account is registered as a unit investment trust under the
Investment Company Act of 1940 (the "1940 Act"); and
WHEREAS, Distributor is registered as a broker-dealer under the Securities
Exchange Act of 1934 (the "Exchange Act") and is a member of the National
Association of Securities Dealers, Inc. ("NASD"); and
WHEREAS, Company and the Distributor wish to enter into an agreement to
have the Distributor act as Company's principal underwriter for the sale of the
Contract through the Account.
NOW, THEREFORE, for good and valuable consideration, the sufficiency of
which is acknowledged hereby, the parties agree as follows:
1. APPOINTMENT OF THE DISTRIBUTOR
Company agrees that during the term of this Agreement it will take all
action required to cause the Contract to comply as an insurance product and a
registered security with all applicable federal and state laws and regulations.
Company appoints Distributor and Distributor agrees to act as the principal
underwriter for the sale of Contract to the public, during the term of this
Agreement, in each state and other jurisdictions in which such Contract may
lawfully be sold. Distributor shall offer Contract for sale and distribution at
premium rates set by Company. Applications for Contract shall be solicited only
by representatives duly and appropriately licensed or otherwise qualified for
the sale of such Contract in each state or other jurisdiction. Company shall
undertake to appoint Distributor's qualified representatives as life insurance
agents of Company. Completed applications for Contract shall be transmitted
directly to
<PAGE>
Company for acceptance or rejection in accordance with underwriting
rules established by Company. Initial premium payments under the Contract shall
be made by check payable to Company and shall be held at all times by
Distributor or its representatives in a fiduciary capacity and remitted promptly
to Company. Anything in this Agreement to the contrary notwithstanding, Company
retains the ultimate right to control the sale of Contract and to appoint and
discharge life insurance agents of Company. Distributor shall be held to the
exercise of reasonable care in carrying out the provisions of this Agreement.
2. SALES AGREEMENTS
Distributor is hereby authorized to enter into separate written agreements,
on such terms and conditions as Distributor may determine not inconsistent with
the terms of this Agreement, with one or more organizations which agree to
participate in the distribution of Contract. Such organizations (hereafter
"Brokers" or "Broker") shall be both registered as a broker/dealer under the
Exchange Act and a member in good standing of the NASD. Broker and its agents or
representatives soliciting applications for Contract shall be duly and
appropriately licensed, registered, or otherwise qualified for the sale of such
Contract (and the riders and other policies offered in connection therewith)
under the insurance laws and any applicable blue-sky laws of each state or other
jurisdiction in which Company is licensed to sell the Contract.
Distributor shall have the responsibility for ensuring that Broker
supervises its representatives. Broker shall assume any legal responsibilities
of Company for the acts, commissions or defalcations of such representatives
insofar as they relate to the sale of the Contract. Applications for Contract
solicited by such Broker through its agents or representatives shall be
transmitted directly to Company, and if received by Distributor, shall be
forwarded to Company. All premium payments under the Contract shall be made by
check to Company and, if received by Distributor, shall be held at all times in
a fiduciary capacity and remitted promptly to Company.
3. LIFE INSURANCE LICENSING
Company shall be responsible for insuring that Brokers are duly qualified,
under the insurance laws of the applicable jurisdictions, to sell the Contract.
4. SUITABILITY
Company wishes to ensure that Contract sold by Distributor will be issued
to purchasers for whom the Contract will be suitable. Distributor shall take
reasonable steps to ensure that the various representatives appointed by it
shall not make recommendations to an applicant to purchase a Contract in the
absence of reasonable grounds to believe that the purchase of the Contract is
suitable for such applicant. While not limited to the following, a determination
of suitability shall be based on information furnished to representatives after
reasonable inquiry of such applicant concerning the applicant's insurance and
investment objectives, financial situation and needs, and the likelihood that
the applicant will continue to make the premium payments contemplated by the
Contract.
2
<PAGE>
5. PROMOTION MATERIALS
Company shall have the responsibility for furnishing to Distributor and its
representatives sales promotion materials and individual sales proposals related
to the sale of Contract. Distributor shall not use any such materials that have
not been approved by Company. Distributor shall be responsible for obtaining
NASD review of all promotional materials.
6. COMPENSATION
Company shall arrange for the payment of commissions directly to those
registered representatives of Distributor who are entitled thereto in connection
with the sale of the Contract on behalf of Distributor, in the amounts and on
such terms and conditions as Company and Distributor shall determine; provided
that such terms, conditions, and commissions shall be as set forth in, or as are
not inconsistent with, the Prospectus included as part of the Registration
Statement for the Contract and effective under the 1933 Act.
Company shall arrange for the payment of commissions directly to those
Brokers who sell Contract under agreements entered into pursuant to paragraph 2
hereof, in amounts as may be agreed to by the Company and specified in such
written agreements.
Company shall reimburse Distributor for the costs and expenses incurred by
Distributor in furnishing or obtaining the services, materials and supplies
required by the terms of this Agreement in the initial sales efforts and the
continuing obligations hereunder.
7. RECORDS
Distributor shall be responsible for maintaining records of representatives
licensed, registered, and otherwise qualified to sell Contract. Distributor
shall maintain such other records as are required of it by applicable laws and
regulations. The books, accounts, and records of Company, the Account, and
Distributor shall be maintained so as to clearly and accurately disclose the
nature and details of the transactions. All records maintained by Distributor in
connection with this Agreement shall be the property of Company and shall be
returned to Company upon termination of this Agreement, free from any claims or
retention of rights by Distributor. Distributor shall keep confidential any
information obtained pursuant to this Agreement and shall disclose such
information only if Company has authorized such disclosure or if such disclosure
is expressly required by applicable federal or state regulatory authorities.
8. INVESTIGATION AND PROCEEDING
(a) Distributor and Company agree to cooperate fully in any insurance
regulatory investigation or proceeding or judicial proceeding arising in
connection with Contract distributed under this Agreement. Distributor and
Company further agree to cooperate fully in any securities regulatory
investigation or proceeding or judicial proceeding with respect to Company,
Distributor, their affiliates and their agents or representatives to the extent
that such investigation or proceeding is in connection with Contract distributed
under this Agreement. Distributor shall furnish applicable federal and state
regulatory authorities with any information or reports in connection with its
services under this Agreement which such authorities may request in order to
ascertain whether Company's operations are being conducted in a manner
consistent with any applicable law or regulations.
3
<PAGE>
(b) In the case of a substantive customer complaint, Distributor and
Company will cooperate in investigating such complaint and any response to such
complaint will be sent to the other party to this Agreement for approval not
less than FIVE (5) BUSINESS Days prior to its being sent to the customer or
regulatory authority, except that if more prompt response is required, the
proposed response shall be communicated by telephone or telegraph.
9. TERMINATION
This Agreement may be terminated at any time by either party on SIXTY (60)
DAYS prior written notice to the other party, without payment of penalty. In the
event that the Agreement is assigned, however, it shall terminate automatically.
Upon termination of this Agreement, all authorizations, rights, and obligations
shall cease except the obligation to settle accounts hereunder, including
commissions on premiums subsequently received for Contract in effect at times of
termination, and the agreements contained in paragraph 8 hereof.
10. ASSIGNMENTS AND TRANSFERS
No transfer or assignment shall be effective without the prior written
consent of both the Company and the Distributor, except with respect to
transfers pursuant to Rule 2a-6 under the Investment Company Act. All agreements
that result from any assignment or transfer affecting New Jersey are subject to
the approval of the New Jersey Department of Insurance. Additional regulatory
approvals may also be required.
11. REGULATION
This Agreement shall be subject to the provisions of the 1940 Act and the
Exchange Act and the rules, regulations, and rulings thereunder and of the
applicable rules and regulations of the NASD, from time to time in effect, and
the terms hereof shall be interpreted and construed in accordance therewith.
12. SEVERABILITY
Should any provision of this Agreement be held or made invalid by a court
decision, statute, rule, or otherwise, the remainder of this Agreement shall not
be affected thereby.
13. WARRANTIES
Each party to this Agreement warrants to the other party as follows:
(a) it has full power and authority to execute and deliver this Agreement
and to perform and observe the provisions herein;
(b) the execution, delivery, and performance of this Agreement have been
authorized by all necessary corporate actions and do not and will not contravene
any requirement of law or any contractual restrictions or agreement binding on
or affecting such party or its assets; and
(c) this Agreement has been duly and properly executed and delivered by
such party and constitutes a legal, valid, and binding obligation of such party
enforceable with its terms.
4
<PAGE>
14. APPLICABLE LAW
This Agreement shall be construed and enforced in accordance with and
governed by the laws of the State of New Jersey.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the day and year first above written.
THE PRUDENTIAL LIFE INSURANCE COMPANY
OF AMERICA
By:
--------------------------------------
Name:
------------------------------------
Title:
-----------------------------------
PRUDENTIAL INVESTMENT MANAGEMENT
SERVICES LLC
By:
--------------------------------------
Name:
------------------------------------
Title:
-----------------------------------
BROKER AND AGENCY SALES AGREEMENT
PRUDENTIAL INVESTMENT MANAGEMENT SERVICES LLC
Prudential Investment Management Services LLC ("Distributor"),
_______________ ("Broker") and _______________ ("Agency"), which is an affiliate
of, or the same person as, Broker, or whose employees are also registered
representatives of Broker, or which is itself an individual who is an associated
person of Broker, each have agreed that Broker and Agency will participate in
the distribution of certain variable annuity and variable life insurance
contracts ("Contracts") funded by separate accounts ("Accounts") established and
maintained by The Prudential Insurance Company of America, Pruco Life Insurance
Company, and/or Pruco Life Insurance Company of New Jersey (collectively
"Company"), subject to the terms of this Broker and Agency Sales Agreement
("Agreement"). The Accounts are registered as unit investment trusts under the
Investment Company Act of 1940, as amended, ("Investment Company Act") and
interests in such Accounts are registered under the Securities Act of 1933, as
amended ("1933 Act") through means of registration statements, including
financial statements and exhibits thereto ("Registration Statements") filed with
the United States Securities and Exchange Commission ("SEC"), which Registration
Statements include prospectuses and statements of additional information
("Prospectuses"). The Contracts covered by this Agreement are specified in
Exhibit A hereto. Additional Contracts may be included in this Agreement upon
Distributor's written notification to Broker and Agency.
1. Registration, Licensing and Appointment
a. Broker represents and warrants that it is: (i) a broker-dealer
registered with the SEC; (ii) a member in good standing of the National
Association of Securities Dealers, Inc. ("NASD"); and (iii) licensed by the
appropriate regulatory agencies of each State or other jurisdiction in which
Broker will offer and sell Contracts and interests in any Accounts relating
thereto, to the extent necessary to perform the duties and activities
contemplated by this Agreement.
b. Agency represents and warrants that it is an insurance agency duly
licensed to solicit applications and sell Contracts in any state or other
jurisdiction in which the Agency intends to perform duties hereunder. In those
instances in which Agency is an individual, rather than a non-natural person,
Broker represents and warrants that said person is employed by Broker and is an
"associated person" of Broker, as that term is defined in Section 3(a)(18) of
the Securities Exchange Act of 1934, as amended ("1934 Act"), and that such
person is duly licensed to solicit applications and sell Contracts in any state
or other jurisdiction in which it intends to perform its duties hereunder.
c. Broker and Agency each represents and warrants that it, and each of its
partners, directors, officers, employees, registered representatives, associated
persons, and agents who will be utilized with respect to its duties and
activities under this Agreement, is either appropriately licensed or exempt from
the licensing requirements by the appropriate securities, insurance, or other
regulatory agencies of each state or other jurisdiction in which Contracts and
interests in any Accounts relating thereto will be offered and sold, and is, to
the extent necessary, appointed
- 1 -
<PAGE>
by the Company, or will be appointed by the Company, to sell the Contracts and
interests in the Accounts relating thereto, and to perform actions contemplated
by this Agreement. Broker and Agency shall ensure that each of those persons
fulfills any training requirements necessary to be so licensed. Broker and
Agency shall have the responsibility for monitoring and maintaining the records
of each of its partners, directors, officers, employees registered
representatives, associated persons, and agents who are licensed, registered, or
otherwise qualified to sell or service Contracts and interests in the Accounts
relating thereto, or to otherwise assist each other with the performance of its
respective duties and activities under this Agreement. Nothing herein shall
require the maintenance of duplicate records unless otherwise required by
applicable laws or regulations.
d. It is understood and agreed that the partners, directors, officers,
employees, registered representatives, associated persons and agents of Broker
engaged in the sale and service of Contracts may be employed by or associated
with Agency, whose partners, directors, officers, employees, registered
representatives, associated persons and agents are "associated persons" of
Broker within the meaning of Section 3(a)(18) of the 1934 Act. It is further
understood and agreed that records relating to sale and service of Contracts by
such associated persons may be maintained by Broker or Agency, as deemed
appropriate by those parties. Any books and records maintained by Agency in the
sale and service of Contracts will be deemed, for purposes of the 1934 Act, to
be books and records of Broker and will conform to the requirements of Section
17 of the 1934 Act and the rules thereunder and all necessary provisions of the
Investment Company Act. The manner in which the books and records of Broker and
Agency are made and maintained will permit supervisory personnel of Broker as
well as authorized examiners of the SEC, or of another appropriate governmental
agency or self-regulatory organization, to review data concerning transactions
under the Contracts effected through Agency to the same extent as if such
transactions had been effected through Broker itself. This may be accomplished
either through maintaining one set of books and records for Broker and Agency or
by maintaining separate sets of books and records with adequate integration,
through cross-referencing or otherwise, between records maintained by Broker and
those maintained by Agency.
e. Agency is vested under this Agreement with power and authority to select
and recommend individuals who are associated with Agency (or comprise the
Agency) and are registered representatives of Broker for appointment as
insurance agents of the Company. Only individuals so recommended by Agency to
the Distributor may become agents of the Company. Nothing in this Agreement is
to be construed as requiring the Company to obtain a license or issue a consent
or submission of appointment papers to enable any particular agent to sell
Contracts. All matters concerning the licensing of any individuals recommended
for appointment by Agency under any applicable state insurance law shall be a
matter directly between the Agency and such individual. Agency shall furnish the
Company with proof of proper licensing of such individual or other proof,
reasonably acceptable to the Company, of satisfaction by such individual of
licensing requirements prior to the appointment of any such individual as an
insurance agent of the Company. In conjunction with the submission of
appointment papers for all such individuals as insurance agents of the Company,
Agency represents that each individual is competent and qualified to act as an
insurance agent for the Company and to hold himself or herself out in good faith
to the general public. If Agency is an individual who is an associated person of
Broker,
- 2 -
<PAGE>
Broker represents that such individual is competent and qualified to act as an
insurance agent for the Company and to hold himself or herself out in good faith
to the general public. Broker and Agency acknowledge that Company, in its sole
discretion, may refuse to appoint as insurance agents of the Company any of the
Broker's or Agency's partners, directors, officers, employees, registered
representatives, associated persons, or agents. Broker and Agency further
acknowledge that Distributor and the Company each, in its sole discretion, may
refuse to do business with, or continue to do business with, any of Broker's or
Agency's partners, directors, officers, employees, registered representatives,
associated persons, or agents.
f. Broker and Agency each represents and warrants that it will promptly
advise Distributor and the Company in writing of any change in the status of
Broker or Agency, or any of its or their partners, directors, officers,
employees, registered representatives, associated persons, and agents utilized
with respect to its or their duties and activities under this Agreement to the
extent such change may adversely affect the performance of Broker's or Agency's
duties hereunder, and to promptly notify any such person if such person shall
become ineligible to sell or service Contracts or interests in any Accounts
relating thereto or to otherwise assist Broker or Agency with the performance of
its duties and activities under this Agreement.
g. Broker agrees that: (i) termination or suspension of its registration
with the SEC; (ii) termination or suspension of its membership with the NASD or,
if applicable, membership with the New York Stock Exchange; or (iii) termination
or suspension of its license to do business or to offer and sell Contracts and
interests in any Account relating thereto by any state or other jurisdiction or
federal regulatory agency shall immediately cause the termination of this
Agreement. Broker further agrees to immediately notify Distributor in writing of
any such action or event, and hereby acknowledges that any such action or event
constitutes a "material breach" of this Agreement.
h. Agency agrees that (i) termination or suspension of its license as an
insurance agency or agent, as appropriate, or (ii) termination or suspension of
its license to do business or to offer and sell Contracts and interests in any
Account relating thereto by any state or other jurisdiction or federal
regulatory agency, shall immediately cause the termination of this Agreement.
Agency further agrees to immediately notify Distributor in writing of any such
action or event, and hereby acknowledges that any such action or event
constitutes a "material breach" of this Agreement.
i. Broker agrees that this Agreement and the performance of its duties
hereunder is in all respects subject to the Conduct Rules of the NASD, including
interpretive guidance thereunder and NASD notices related thereto, and such
Conduct Rules shall control any provision to the contrary in this Agreement.
j. Broker and Agency agree to be bound by and to comply with all applicable
state and federal laws and all rules and regulations (including in particular
all applicable state insurance laws and regulations imposing licensing
requirements) promulgated thereunder generally affecting the sale or
distribution of the Contracts as variable insurance contracts or interests in
any Accounts relating thereto as securities.
- 3 -
<PAGE>
2. Solicitation of Applications
Pursuant to the authority delegated to it by the Company, during the term
of this Agreement Distributor hereby authorizes Broker and Agency to solicit
applications for the sale of Contracts, provided that a Registration Statement
under the 1933 Act and Investment Company Act is in effect relating to the
Contracts, the related Accounts and interests in any Account relating to the
Contracts, as appropriate, and provided further that Broker and Agency have been
notified in writing by Distributor of the states and jurisdictions in which such
Contracts and interests in any Account relating to the Contracts are qualified
for sale. In connection with the solicitation of applications for the sale of
Contracts, Broker and Agency are hereby authorized to offer any riders that are
available under the Contracts in accordance with written instructions furnished
by Distributor or the Company.
3. Orders and Delivery of Contracts
a. Broker and Agency agree to offer and sell interests in the Accounts
relating to the Contracts only at the public offering price applicable to such
interests at the time that the order with respect thereto is deemed received in
accordance with the Prospectus and the Contract. The procedures relating to all
orders and the handling of each order (including the forwarding of applications,
premium payments and loan repayments, and the effective time of orders received
from Broker or Agency) are subject to: (i) the terms of the then current
Prospectuses (including any amendments, supplements, or stickers thereto)
relating to each Contract or interests in any Accounts relating thereto, as
filed with the SEC; (ii) the new account application for each Contract, as
supplemented or amended from time to time; and (iii) Distributor's and/or the
Company's written instructions, procedures and guidelines, as provided to Broker
and Agency from time to time. To the extent that the Prospectuses contain
provisions that are inconsistent with this Agreement or any other document, the
terms of the Prospectuses shall be controlling.
b. Distributor reserves the right at any time, and without notice to Broker
or Agency, to suspend the sale of Contracts or interests in any Accounts
relating thereto, or to withdraw or limit the offering of Contracts or interests
in any Accounts relating thereto. Distributor and the Company each reserves the
unqualified right not to accept any specific application for the purchase of
Contracts.
c. In all offers and sales to the public of the Contracts, neither Broker
nor Agency is authorized to act as broker or agent for, or employee of,
Distributor or the Company, or any other dealer, and neither Broker nor Agency
shall in any manner represent to any third party that it has such authority or
is acting in such capacity. Rather, Broker and Agency each agrees that it is
acting as agent on behalf of its customers in all transactions in connection
with the Contracts or interests in any Accounts relating thereto, except as
otherwise provided herein. Broker and Agency each acknowledges that it is solely
responsible for all suitability determinations with respect to sales of
Contracts, or interests in any Accounts relating thereto, to its customers and
that neither Distributor nor the Company has any responsibility for the manner
of Broker's or Agency's performance of, or for Broker's or Agency's acts or
omissions in connection with, the duties and activities Broker and Agency
provide under this Agreement. Neither Broker nor Agency shall have authority on
behalf of Distributor or the Company to: (1) make, alter or
- 4 -
<PAGE>
discharge the Contracts or any other form or sales materials used in connection
with the Contracts or any other contract entered into pursuant to the Contracts;
(2) waive any forfeiture or extend the time of paying any premium or other
Contract provision; or (3) receive any monies or premiums due, or to become due,
to the Company, except for the sole purpose of forwarding monies or premiums to
the Company. All premiums derived from the sale or service of Contracts through
Agency will be sent directly to the Company by Broker and/or Agency, net of any
compensation due and owing Broker, as more fully described in Section 8 hereof
and Exhibit B. Such compensation shall be withheld or deducted from premiums
received by Broker and/or Agency, provided, however, that no monies received as
a result of Section 1035 exchanges, or as a result of direct transfers of assets
or direct payments made to the Company will be subject to any such withholding
or deduction for commission payments. In addition, it may be agreed upon by the
parties, from time to time, that no withholding or deductions from premiums
shall be permitted. Agency will not receive, accumulate or maintain custody of
premiums intended for payment under the Contracts, except as noted directly
above.
d. All orders are subject to acceptance by Distributor and the Company, in
the sole discretion of either, and become effective only upon confirmation by
Distributor.
e. Upon issuance of a Contract by the Company, the Company shall promptly
deliver such Contract to its purchaser.
4. Surrenders, Rebates and Exchanges
a. The Prospectuses describe the provisions whereby customers may exchange
or surrender their Contracts. Broker and Agency agree not to make any
representations to customers relating to the exchange or surrender of their
Contracts other than the statements contained in the Prospectuses. Broker and
Agency agree to comply with any restrictions and limitations on exchanges
described in the Prospectuses.
b. Broker and Agency agree that, with respect to any surrender request
which Broker or Agency has forwarded to the Company, if instructions in proper
form with respect to such surrender request are not received by the Company
within the time customary or the time required by law, the surrender may be
canceled forthwith without any responsibility or liability on Distributor's part
or on the part of the Company.
c. Broker and Agency acknowledge that payment of rebates on sales of
Contracts or the counseling of a customer to exchange a Contract without an
adequate basis for the exchange shall constitute a material breach of this
Agreement and shall immediately terminate the obligation of Distributor or the
Company to pay compensation hereunder with respect to such Contract.
5. Duties of Broker and Agency
a. Commencing at such time as the parties to this Agreement mutually shall
agree, Broker and Agency agree to use their best efforts to find applicants for
the purchase of Contracts who are acceptable to Distributor and the Company.
- 5 -
<PAGE>
b. Broker and Agency agree to enter orders for the purchase of Contracts,
or interests in any Accounts relating thereto or requests for surrender or
exchange of Contracts, only with Distributor and only with respect to
applications, purchase orders or requests Broker and Agency have already
received from customers.
c. Broker and Agency agree to maintain appropriate books and records
concerning all purchases and sales of Contracts made through Broker and Agency
and, in that regard, the activities of agents as are required to be maintained
by the SEC, the NASD and other regulatory authorities, including in particular
insurance regulatory agencies, to reflect adequately the Contracts processed
through the Agency, and each agrees to promptly furnish Distributor or
regulatory authorities with copies of such records upon request. The books,
accounts, and records of the Accounts, the Company, Distributor, Broker and
Agency relating to the sale and service of Contracts and, in that regard, the
activities of agents shall be maintained so as to disclose clearly and
accurately the nature and details of each transaction. In that regard, Broker
and Agency agree to provide Distributor with an application for each applicant
which, to the best of Broker's and Agency's knowledge, is complete and accurate
and meets all requirements necessary for the application to be considered to be
in good order. All records maintained by Broker in connection with this
Agreement shall be the property of the Company and shall be returned to the
Company upon termination of this Agreement free from any claims or retention of
rights by Broker. Nothing in this Section shall be interpreted to prevent the
Broker or Agency from retaining copies of any such other records which it, in
its discretion, deems necessary or desirable to be kept. Broker and Agency shall
keep confidential any information obtained pursuant to this Agreement and shall
disclose such information only if Distributor has authorized such disclosure, or
if such disclosure is required by any federal, state, or other regulatory
authorities, or by any court of competent jurisdiction.
d. Broker and Agency agree that if any Contract is surrendered within the
applicable "free look" period described in the Prospectuses, Broker and Agency
shall forfeit their rights to any concession or commission received with respect
to such Contract and shall forthwith refund to Distributor the full concession
allowed to Broker and Agency or commission paid to Broker and Agency on the
original sale. Distributor agrees to notify Broker and Agency of such surrender
within a reasonable time after such surrender. Termination or cancellation of
this Agreement shall not relieve Broker or Agency from its obligation under this
provision.
e. Broker and Agency agree that they, jointly and severally: (i) shall
assume responsibility for any loss to Distributor or the Company caused by a
correction to any order placed by Broker or Agency that is made subsequent to
the effective date of the order, provided such order correction was not based on
any negligence on Distributor's part; and (ii) will immediately pay such loss to
Distributor or the Company, as appropriate, upon notification.
f. Broker and Agency agree that in connection with orders for the purchase
of Contracts on behalf of any retirement plan accounts, by mail, telephone, or
wire, Broker and Agency shall act as agents for the custodian or trustee of such
plans (solely with respect to the time the application and payments are deemed
received), and Broker and Agency shall not place such an order with Distributor
until receipt from the customer of a completed application and initial premium
payment and, if such transaction represents the first contribution to such a
- 6 -
<PAGE>
retirement plan account, the completed documents necessary to establish the
retirement plan. Broker and Agency agree to indemnify the Company, Distributor,
and their affiliates for any claim, loss, or liability resulting from incorrect
instructions received by Distributor from Broker and Agency.
g. Broker and Agency agree not to make any conditional applications for the
purchase of Contracts and acknowledge that Distributor will not accept
conditional orders for the purchase of Contracts.
h. Broker and Agency agree to continuously use only Prospectuses and
marketing materials, which include articles of "advertisement" and "sales
literature" as they are defined in Rule 2210(a) of the NASD's Conduct Rules
("Marketing Materials"), relating to Contracts, and any amendments, supplements
or stickers thereto, that have been approved by the Company and provided to the
Broker and Agency by Distributor.
i. Broker and Agency agree to adequately train, control and supervise their
partners, directors, officers, employees, registered representatives, associated
persons and agents who sell or service the Contracts and to establish and
implement procedures reasonably designed to achieve compliance with applicable
federal and state securities and insurance laws and regulations, including the
rules of the SEC and NASD, relating to the sales practices of those persons.
Without limitation of the above, Broker and Agency agree to the following
supervisory responsibilities:
(1) Agency shall train, supervise and be solely responsible for the
conduct of its partners, directors, officers, employees, associated
persons and agents in their solicitation activities in connection with
the Contracts, and shall supervise their strict compliance with
applicable rules and regulations of any governmental or other
insurance authorities that have jurisdiction over insurance contract
activities, as well as the rules and procedures of the Distributor and
the Company pertaining to the solicitation, sale and submission of
applications for the Contracts and the provision of services relating
to the Contracts. Agency shall be solely responsible for background
investigations of the proposed agents to determine their
qualifications, good character and moral fitness to sell the
Contracts. If Agency is an individual and an associated person of
Broker, Agency shall be responsible for its conduct and compliance
with all applicable rules and regulations in its solicitation
activities in connection with the Contracts and the provision of
services relating to the Contracts. In addition, in such instance,
Broker shall also be responsible for any background investigation of
such Agency to determine its qualifications, good character and moral
fitness to sell the Contracts. Further, in such instance, Broker shall
supervise such Agency's conduct and Broker shall assume full
responsibility for such Agency's actions, course of conduct and
compliance with all applicable rules and regulations with respect to
Agency's solicitation activities in connection with Contracts and the
provision of services relating to the Contracts.
(2) Broker shall retain full responsibility for compliance with the
requirements of all applicable federal and state securities laws,
including without limitation, applicable no-action guidance from the
SEC staff, relating to the performance of its obligations set
- 7 -
<PAGE>
forth in this Agreement, and shall be responsible for securities
training, supervision and control of its partners, directors,
officers, employees, registered representatives, associated persons
and agents in connection with their solicitation activities and any
incidental services with respect to the Contracts and shall supervise
their strict compliance with applicable federal and state securities
laws and NASD requirements in connection with such solicitation
activities and with the rules and procedures of the Distributor and
the Company.
j. Broker and Agency each agrees that all out-of-pocket expenses incurred
by it in connection with its activities under this Agreement will be borne by
Broker or Agency, as appropriate.
k. Broker agrees that it will keep in force appropriate broker's blanket
bond insurance policies issued by a reputable bonding company covering any and
all acts of Broker's partners, directors, officers, employees, registered
representatives, associated persons, and agents adequate to reasonably protect
and indemnify the Distributor and the Company against any loss which any party
may suffer or incur, directly or indirectly, as a result of any action by Broker
or Broker's partners, directors, officers, employees, registered
representatives, associated persons, and agents.
l. Broker agrees that it will maintain the required net capital as
specified by the rules and regulations of the SEC, NASD and other regulatory
authorities.
m. Broker and Agency agree to promptly notify Distributor of any material
change or intention to materially change the marketing operations relating to
the Contracts. A material change may arise from a change in the terms used in or
the emphasis of any marketing operations employed by the Broker or Agency
concerning the Contract or any change in any aspect of any marketing campaign
employed by the Broker or Agency concerning the Contract.
n. Broker and Agency each agrees that premiums and other payments received
by it relating to the Contracts shall be held at all times in a fiduciary
capacity and such premiums and other payments, net of any compensation due and
owing the Broker and Agency, as described in Sections 3.c and 8 hereof, shall be
remitted promptly (and in no event later than two (2) business days after
receipt), together with such completed applications, forms and other required
documentation to an office of the Company designated by Distributor. Broker and
Agency each agrees to make all payments to Distributor under this Agreement in
Fed Funds, New York clearinghouse or other immediately available funds. Wire
transfers in payment of premiums shall be designated to The Prudential Insurance
Company of America, Pruco Life Insurance Company, or Pruco Life Insurance
Company of New Jersey, as the appropriate party may be. Broker and Agency
acknowledge that the Company retains the ultimate right to control the sale of
Contracts and that Distributor or the Company shall have the unconditional right
(i) to reject any application for the purchase of any Contract or any interests
in any Account relating thereto and (ii) to refuse any premium payments received
relating to any Contract. If the Company or Distributor rejects an application,
the Company immediately will return all payments directly to the applicant, and
Broker and Agency will be promptly notified of such action and shall immediately
remit any compensation retained by either or both of them to the Company. If any
- 8 -
<PAGE>
purchaser of any Contract elects to return or surrender a Contract pursuant to
applicable law, the purchaser will receive a refund of premium payments (or
other appropriate amounts) calculated in accordance with such applicable law and
the terms of the Contract and Prospectuses.
o. Broker and Agency each agrees that any material it develops, approves or
intends to use for sales, training, explanatory or other purposes in connection
with the solicitation of applications for Contracts (other than general
advertising materials which do not make specific reference to the Contracts)
will not be used without the prior written consent of Distributor, which will
not be unreasonably withheld. Distributor shall be responsible for securing and
will secure all required regulatory approvals relating to such materials.
p. Broker and Agency each understands and acknowledges that it is not
authorized by Distributor or the Company to give any information or make any
representation in connection with this Agreement or the offering or servicing of
Contracts other than those contained in the Prospectuses, the Contract or
related marketing materials, as supplemented or amended, unless Broker or Agency
is authorized in writing by Distributor or the Company to do so.
q. Broker and Agency shall promptly furnish to the Company, or its
authorized agent any reports and information that the Company may reasonably
request for the purpose of meeting the Company's reporting and recordkeeping
requirements under the insurance laws of any state, under any applicable federal
or state securities laws, rules or regulations, or the rules of the NASD.
r. Broker and Agency shall ensure that each partner, director, officer,
employee, associated person, registered representative, and agent appointed as
an agent of the Company shall comply with the "Standard of Conduct for Agents"
attached as Exhibit C.
t. Broker and Agency agree to promptly notify the Company, i.e., within one
(1) business day after receipt, of any customer complaint that directly or
indirectly concerns the Company. In the case of a customer complaint,
Distributor, Broker and Agency will cooperate in investigating any such
complaint, and any response by Broker or Agency to such complaint will be sent
to Distributor for written approval not less than five (5) business days prior
to its being sent to the customer or appropriate regulatory authority, except
that if a more prompt response is required, the proposed response shall be
communicated by telephone or facsimile. Distributor shall have final authority
to determine the content of each such response.
u. With respect to Contracts purchased by Broker for which Broker is the
owner of record, Broker agrees to perform all federal, state and local tax
reporting with respect to such Contracts in its capacity as owner of such
Contracts.
6. Duties of Distributor
a. Distributor agrees to take all actions necessary to effect and maintain
qualification of the Registration Statements and the Contracts under applicable
securities laws of the states or other jurisdictions where the Contracts and any
interests in any Accounts relating thereto are to be sold in accordance with the
terms of this Agreement. Maintenance of the qualification of the
- 9 -
<PAGE>
Contracts under applicable insurance laws of the states or other jurisdictions
where the Contracts are to be sold is the responsibility of the Company.
b. Distributor agrees, during the term of this Agreement, to promptly
notify Broker and Agency of the issuance of any stop order or similar suspension
order pertaining to the Registration Statements or any amendments thereto by the
SEC or any state or other jurisdiction, or the initiation of any proceedings for
that purpose relating to the registration, qualification, and/or offering of the
Contracts, or any interests in any Accounts relating thereto, and of any other
action or circumstance that may prevent the lawful sale of Contracts or any
interests in any Account relating thereto in any state or jurisdiction.
c. Distributor agrees, during the term of this Agreement, to promptly
advise Broker and Agency of any amendment or supplement to the Contract,
Registration Statement, including any amendment, supplement or sticker to the
Prospectuses. Furthermore, Distributor will provide Broker and Agency with a
reasonable quantity of any applicable Prospectuses and Marketing Materials and
any amendments, supplements or stickers thereto, to be used in connection with
the transactions contemplated by this Agreement. Such Prospectuses, Marketing
Materials, and any amendments, supplements or stickers thereto, shall be
approved (to the extent necessary) by all relevant regulatory authorities.
Distributor shall be responsible for obtaining any necessary regulatory
clearance or approval of such Marketing Materials.
7. Contracts
a. Broker and Agency each agrees that neither it nor any of its partners,
directors, officers, employees, registered representatives, associated persons,
and agents is authorized to give any information or make any representations
concerning the Contracts except those contained in the current Prospectuses,
Contracts or Marketing Materials for such Contracts.
b. Distributor acts solely as agent for the Company and the Accounts.
Distributor shall have no obligation or responsibility with respect to Broker's
or Agency's activities or those of the partners, directors, officers, employees,
registered representatives, associated persons or agents of Broker or Agency in
connection with the purchase or sale Contracts in any state or jurisdiction.
c. Broker and Agency each agrees not to solicit applications for Contracts
or to transact orders for Contracts in states or jurisdictions in which it has
not been informed that Contracts may be sold or in which it and its personnel
are not duly authorized to sell Contracts or interests in any Accounts relating
thereto, and Broker and Agency each further agrees that it will make no offers
or sales of Contracts or interests in any Accounts relating thereto in any
foreign jurisdiction, except with the express written consent of Distributor.
d. Distributor shall have no responsibility, under the laws regulating the
sale of securities or Contracts in the United States or any foreign
jurisdiction, with respect to the qualification, control, supervision or status
of Broker, Agency or the partners, directors, officers, employees, registered
representatives or agents of either selling Contracts or interests in any
Accounts relating thereto.
- 10 -
<PAGE>
8. Compensation
a. Pursuant to the distribution agreements between the Company and
Distributor, Distributor shall cause the Company to arrange for the payment of
commissions to Broker and Agency as compensation for the sale of each Contract
sold by any partner, director, officer, employee, registered representative,
associated person or agent of Broker or Agency. The amount of such commission
shall be based on the Compensation Schedule attached as Exhibit B. The
Compensation Schedule may hereafter be amended by Distributor, provided
Distributor gives Broker and Agency thirty (30) days written notice of any
change to the Compensation Schedule. No compensation is payable to any such
person unless the Broker, Agency and such person have first complied with all
applicable securities and insurance laws, rules, and regulations. The Company
shall identify to Broker and Agency with each such payment the name of the
registered representative or agent who solicited each Contract covered by the
payment. Broker and Agency each agrees to reflect all such commission payments
received by it or its partners, directors, officers, employees, registered
representatives, associated persons or agents on any report as required by
applicable laws and regulations, including Broker's FOCUS report and NASD fee
assessment reports. Notwithstanding any other provision in the Compensation
Schedule concerning charge-backs, if any Contract is returned or surrendered
within the applicable "free look" period, no compensation shall be paid and any
compensation retained by Broker or Agency in accordance with Exhibit B shall be
immediately remitted to the Company.
b. Broker and Agency shall have the right to withhold or deduct any part of
the premium it or they shall receive for purposes of payment of commissions due
and owing it or them, provided that (i) any withholding or deduction from
premium payments or other payments in order to pay commissions to Broker and/or
Agency shall be in accordance with Exhibit B hereof with respect to each payment
and (ii) no monies received as a result of Section 1035 exchanges, or direct
transfers of assets, or direct payments made to the Company shall be subject to
any withholding or deduction in order to pay commissions. Neither Broker, Agency
nor any partner, director, officer, employee, registered representative,
associated person or agent shall have an interest in any compensation paid by
the Company to Distributor, now or hereafter, in connection with the sale of any
Contracts hereunder. Further, Broker and Agency each acknowledges that agents
shall have no interest in this Agreement or right to any commissions to be paid
by the Distributor to the Broker or Agency.
c. Upon the termination of this Agreement, the Company will pay commissions
to the Broker and Agency on: (a) premiums which the Company receives within
SIXTY (60) DAYS of the termination date on applications submitted by the Broker
and Agency on or before the termination date provided that neither Broker or
Agency has received compensation in accordance with this Section 8, with respect
to any such applications, and (b) any trail commission which would otherwise be
due on business placed with Distributor prior to the termination date of this
Agreement, unless such receipt of trail commissions is determined to violate
current directives to the contrary as provided by the SEC, NASD or a court of
competent jurisdiction.
d. Distributor, the Company and Broker each agree to abide by all
record-keeping and other requirements relating to the receipt of "cash
compensation" and "non-cash
- 11 -
<PAGE>
compensation", as prescribed in NASD Conduct Rule 2820 or any amendment or
modification of that Rule.
9. Indemnification
a. Broker and Agency jointly and severally agree to indemnify, defend and
hold harmless Distributor and the Company and the predecessors, successors,
affiliates, each current or former partner, officer, director, employee,
shareholder or agent and each person who controls or is controlled by
Distributor or the Company from any and all losses, claims, liabilities, costs,
and expenses, including attorney fees, that may be assessed against or suffered
or incurred by any of them howsoever they arise, and as they are incurred, which
relate in any way to: (i) any alleged violation of any statute or regulation
(including without limitation the securities and insurance laws and regulations
of the United States or any state or foreign country) or any alleged tort or
breach of contract, related to the offer or sale by Broker and Agency of
Contracts or interests in any Accounts relating thereto pursuant to this
Agreement (except to the extent that the negligence of Distributor or the
Company or Distributor's failure to follow correct instructions received from
Broker is the cause of such loss, claim, liability, cost or expense); or (ii)
the breach by Broker or Agency of any of its representations and warranties
specified herein or Broker's or Agency's failure to comply with the terms and
conditions of this Agreement, whether or not such action, failure, error,
omission, misconduct or breach is committed by Broker, Agency, or a predecessor,
successor, affiliate, each current or former partner, officer, director,
employee, registered representative, associated person, or agent and each person
who controls or is controlled by Broker or Agency.
b. Distributor agrees to indemnify, defend and hold harmless Broker and
Agency and the predecessors, successors and affiliates, each current or former
partner, officer, director, employee, registered representative, associated
person, or agent, and each person who controls or is controlled by Broker or
Agency from any and all losses, claims, liabilities, costs and expenses,
including attorney fees, that may be assessed against or suffered or incurred by
any of them which arise, and which relate to any untrue statement of or omission
to state a material fact (except for information supplied by or on behalf of
Broker or Agency or for which Broker or Agency is responsible) contained in the
Prospectuses, Contracts or Marketing Materials provided by the Distributor to
Broker or Agency, required to be stated therein or necessary to make the
statements therein not misleading.
c. Each party agrees to notify the others, within a reasonable time, of any
claim or complaint or any enforcement action or other proceeding with respect to
Contracts offered hereunder, or interests in any Accounts relating thereto,
against such party or its partners, affiliates, officers, directors, employees,
registered representatives, associated person or agents, or any person who
controls such party, within the meaning of Section 15 of the 1933 Act.
d. Each party's obligations under these indemnification provisions shall
survive any termination of this Agreement.
- 12 -
<PAGE>
10. Termination and Amendment
a. In addition to the automatic termination of this Agreement specified in
this Agreement, each party to this Agreement may unilaterally terminate this
Agreement by giving thirty (30) days prior written notice to the other parties.
In addition, each party to this Agreement may terminate this Agreement
immediately by giving written notice to the other parties of another party's
material breach of this Agreement. Such notice shall be deemed to have been
given and to be effective on the date on which it was either delivered
personally to the other parties or any officer or member thereof, or was mailed
postpaid, sent via facsimile or delivered to a telegraph office for transmission
to the other parties' designated persons at the addresses shown herein or in the
most recent NASD Manual.
b. This Agreement shall terminate immediately upon the appointment of a
Trustee under the Securities Investor Protection Act for Broker or any other act
of insolvency by Broker or Agency.
c. The termination of this Agreement by any of the foregoing means shall
have no effect upon transactions entered into prior to the effective date of
termination and shall not relieve Broker or Agency of its obligations, duties
and indemnities specified in this Agreement. An order placed or application
submitted by Broker or Agency subsequent to its voluntary termination of this
Agreement will not serve to reinstate the Agreement. Reinstatement, except in
the case of a temporary suspension of Broker or Agency, will only be effective
upon written notification by Distributor.
d. This Agreement may be amended by Distributor at any time by written
notice to Broker and Agency. Broker's or Agency's placing of an order,
submitting an application or accepting payment of any kind after the effective
date and receipt of notice of such amendment shall constitute Broker's
acceptance of such amendment.
11. Distributor's Representations and Warranties
Distributor represents and warrants that:
a. It is a limited liability company duly organized and existing and in
good standing under the laws of the State of Delaware and is duly registered or
exempt from registration as a broker-dealer in all states and jurisdictions in
which it provides services as principal underwriter and distributor of the
Contracts.
b. It is a member in good standing of the NASD.
c. It is empowered under applicable laws and by Distributor's charter and
by-laws to enter into this Agreement and perform all activities and services of
the Distributor provided for herein and that there are no impediments, prior or
existing, regulatory, self-regulatory, administrative, civil or criminal matters
affecting Distributor's ability to perform under this Agreement.
- 13 -
<PAGE>
d. All requisite actions have been taken to authorize Distributor to enter
into and perform this Agreement.
12. Broker's Representations and Warranties
In addition to the representations and warranties found elsewhere in this
Agreement, Broker represents and warrants that:
a. It is duly organized and existing and in good standing under the laws of
the state, commonwealth or other jurisdiction in which Broker is organized and
that Broker will not offer Contracts or any interests in any Accounts relating
thereto for sale in any state or jurisdiction where such Contracts or any
interests in any Accounts relating thereto may not be legally sold or where
Broker is not qualified to act as a broker-dealer.
b. It is empowered under applicable laws and by Broker's organizational
documents to enter into this Agreement and perform all activities and services
of Broker provided for herein and that there are no impediments, prior or
existing, regulatory, self-regulatory, administrative, civil or criminal matters
affecting Broker's ability to perform under this Agreement.
c. All requisite actions have been taken to authorize Broker to enter into
and perform this Agreement. Broker further agrees that it will provide
Distributor with the name of Broker's designated "contact person" and furnish
other relevant information necessary for Distributor to communicate with such
designee.
d. It is not, at the time of the execution of this Agreement, subject to
any enforcement action or other proceeding with respect to its activities under
applicable state or federal laws, rules or regulations.
e. Broker further agrees that it will, upon request, send to Distributor
copies of (i) any report filed pursuant to NASD Conduct Rule 3070, including
without limitation quarterly reports filed pursuant to Rule 3070(C), (ii)
reports filed with any other self-regulatory organization in lieu of Rule 3070
reports pursuant to Rule 3070(e), and (iii) amendments to Broker's Form BD.
13. Agency's Representations and Warranties
In addition to the representations and warranties found elsewhere in this
Agreement, Agency represents and warrants that:
a. It is duly organized, if it is a non-natural person, and existing and in
good standing under the laws of the state, commonwealth or other jurisdiction in
which Agency is organized or domiciled and that Agency will not offer Contracts
or any interests in any Accounts relating thereto for sale in any state or
jurisdiction where such Contracts or any interests in any Accounts relating
thereto may not be legally sold or where Agency is not qualified to act as an
insurance agent.
- 14 -
<PAGE>
b. It shall take all necessary action to ensure that no individual shall
offer or sell the Contracts on behalf of Agency in any state or other
jurisdiction unless such individual is duly appointed as an agent of Agency (or
is itself the Agency), duly licensed and appointed as an agent of the Company
and appropriately licensed, registered or otherwise qualified to offer and sell
the Contracts to be offered and sold by such individual under the insurance laws
of such state or jurisdiction. Agency understands that certain states may
require that a special variable contracts examination be passed by each agent
before he or she can solicit applications for the Contracts.
c. It is empowered under applicable laws and by Agency's organizational
documents, if applicable, to enter into this Agreement and perform all
activities and services of Agency provided for herein and that there are no
impediments, prior or existing, regulatory, self-regulatory, administrative,
civil or criminal matters affecting Agency's ability to perform under this
Agreement.
d. All requisite actions have been taken to authorize Agency to enter into
and perform this Agreement.
e. It is not, at the time of the execution of this Agreement, subject to
any enforcement action or other proceeding with respect to its activities under
applicable state or federal laws, rules or regulations. Agency further agrees to
provide Broker and Distributor, upon request, all reasonable information
requested concerning any inspection, enforcement action or other proceeding with
respect to Agency's activities under applicable state or federal laws, rules or
regulations.
14. Dispute Resolution
In the event of a dispute concerning any provision of this Agreement, any
party may require the dispute to be submitted to binding arbitration under the
commercial arbitration rules and procedures of the NASD. The parties agree that,
to the extent permitted under such arbitration rules and procedures, the
arbitrators selected shall be from the securities industry. Judgment upon any
arbitration award may be entered by any state or federal court having
jurisdiction.
15. Governing Law
This Agreement shall be governed and construed in accordance with the laws
of the State of New Jersey, not including any provision which would require the
general application of the law of another jurisdiction.
16. Investigations and Proceedings
The parties to this Agreement agree to cooperate fully in any securities or
insurance regulatory investigation or proceeding or judicial proceeding with
respect to the others' activities under this Agreement and promptly to notify
the other parties of any such investigation or proceeding.
- 15 -
<PAGE>
17. Binding Nature, Assignability
This Agreement shall be binding upon and inure to the benefit of the
respective successors and permitted assigns of the parties hereto. A party
hereto may not assign any rights, obligations, or liabilities hereunder without
the prior written consent of the other parties.
18. Severability
Whenever possible, each provision of this Agreement shall be interpreted in
such manner as to be effective and valid under applicable law. If, however, any
provision of this Agreement is held under applicable law to be invalid, illegal,
or unenforceable in any respect, such provision shall be ineffective only to the
extent of such invalidity, and the validity, legality and enforceability of the
remaining provisions of this Agreement shall not be affected or impaired in any
way.
19. Captions
All captions used in this Agreement are for convenience only, are not a
part hereof, and are not to be used in construing or interpreting any aspect
hereof
- 16 -
<PAGE>
20. Entire Understanding
This Agreement contains the entire understanding of the parties hereto with
respect to the subject matter contained herein and supersedes all previous
agreements. This Agreement may be executed in one or more counterparts, which
together shall constitute a single document.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the day and year set forth below.
PRUDENTIAL INVESTMENT MANAGEMENT SERVICES LLC
By:
Name: ___________________________________________
Title: __________________________________________
Signature: ______________________________________
Date: ___________________________________________
BROKER:
By:
Name: ___________________________________________
Title: __________________________________________
Signature: ______________________________________
Date: ___________________________________________
NASD CRD#
Prudential Broker # _____________________________
(Internal Use Only)
AGENCY:
By:
Name: ___________________________________________
Title: __________________________________________
Address:_________________________________________
Tax Identification No. __________________________
Date:____________________________________________
- 17 -
<PAGE>
Exhibit C
Standard of Conduct for Agents
1. An agent shall be duly qualified, licensed and registered to solicit and
participate in the sale of Contracts and interests in any Accounts relating
thereto as provided in the Agreement.
2. An agent shall not solicit applications for the Contracts without
delivering the appropriate Prospectuses, the prospectus for any underlying
investment company and, where required by state insurance law (as set forth
in a notice to be supplied by the Company), the then currently effective
statement of additional information for the Contracts, and any other
information whose delivery is specifically required. In soliciting
applications for the Contracts, an agent shall only make statements, oral
or written, which are in accordance with the terms of the Agreement. An
agent shall utilize only those applications for the Contracts provided to
the Agency by the Distributor.
3. An agent shall recommend the purchase of a Contract to an applicant only if
he or she has reasonable grounds to believe that such purchase is suitable
for the applicant in accordance with, among other things, applicable
regulations of any state regulatory authority, the SEC and the NASD. While
not limited to the following, a determination of suitability shall be based
on information supplied to an agent after a reasonable inquiry concerning
the applicant's insurance and investment objectives and financial situation
and needs.
4. An agent shall require that any payment of an initial premium, whether in
the form of a check or otherwise, shall be drawn in U.S. dollars on a bank
located in the United States and made payable to the Company and, if in the
form of a check, signed by the applicant for the Contract. An agent shall
not accept third-party checks or cash for premiums.
5. All checks and applications for the Contracts received by an agent shall be
forwarded promptly (and in any event not later than two business days after
receipt), to the processing office designated by the Company.
6. An agent shall have no authority to endorse checks to the Company.
7. An agent shall have no authority to alter, modify, waive or change any of
the terms, rates, charges or conditions of the Contracts.
8. An agent shall make no representations concerning the continuation of
non-guaranteed terms or provisions of the Contracts.
9. An agent shall have no authority to advertise for, on behalf of, or with
respect to the Company, the Distributor, the Accounts, or the Contracts
except as provided in the Agreement.
10. An agent shall have no authority to solicit applications for Contracts or
premiums thereunder which will be subject to or in connection with any
so-called "market timing" or "asset allocation" program, plan, arrangement
or service which is not approved in advance by the Distributor and the
Company.
- 18 -
<PAGE>
11. An agent shall not furnish any transfer or other instructions by telephone
to the Distributor or the Company on behalf of an owner of a Contract
without having first obtained from such owner a written authorization in a
form acceptable to the Distributor or the Company.
12. An agent shall not encourage a prospective purchaser to surrender or
exchange an insurance policy or contract issued by the Company in order to
purchase a Contract or, conversely, to surrender or exchange a Contract in
order to purchase another insurance policy or contract issued by the
Company, without an adequate basis for the surrender or exchange and except
to the extent such surrenders or exchanges have been authorized by the
Distributor. In the event that an insurance policy or contract issued by
the Company is surrendered or exchanged in order to purchase a Contract, no
compensation shall be paid under the Agreement.
13. An agent shall act in accordance with the rules and procedures of the
Distributor and the Company in connection with any solicitation activities
relating to the Contracts.
- 19 -
EXHIBIT 9
April 24, 2000
The Prudential Insurance Company of America
751 Broad Street
Newark, New Jersey 07102-3777
Gentlemen:
In my capacity as Chief Counsel, Variable Products, Law Department of The
Prudential Insurance Company of America, I have reviewed the establishment of
The Prudential Qualified Individual Variable Contract Account (the "Account") on
October 12, 1982, by the Board of Directors of The Prudential Insurance Company
of America ("Prudential") as a separate account for assets applicable to certain
qualified variable annuity contracts, pursuant to the provisions of Section
17B:28-7 of the Revised Statutes of New Jersey. I was responsible for oversight
of the preparation and review of the Registration Statement on Form N-4, as
amended, filed by Prudential with the Securities and Exchange Commission
(Registration No. 2-81318) under the Securities Act of 1933 and the Investment
Company Act of 1940, for the registration of certain qualified variable annuity
contracts issued with respect to the Account.
I am of the following opinion:
(1) Prudential was duly organized under the laws of New Jersey and is a
validly existing corporation.
(2) The Account has been duly created and is validly existing as a
separate account pursuant to the aforesaid provisions of New Jersey
law.
(3) The portion of the assets held in the Account equal to the reserve and
other liabilities for variable benefits under the qualified variable
annuity contracts is not chargeable with liabilities arising out of
any other business Prudential may conduct.
(4) The qualified variable annuity contracts are legal and binding
obligations of Prudential, in accordance with their terms.
In arriving at the foregoing opinion, I have made such examination of law and
examined such records and other documents as I judged to be necessary or
appropriate.
I hereby consent to the filing of this opinion as an exhibit to the Registration
Statement.
Very truly yours,
/s/ CLIFFORD E. KIRSCH
----------------------------
Clifford E. Kirsch, Esq.
EXHIBIT 10
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Statement of Additional Information
constituting part of this Post-Effective Amendment No. 27 to the registration
statement on Form N-4 (the "Registration Statement") of our report dated March
17, 2000, relating to the financial statements of the Prudential Qualified
Individual Variable Contract Account, which appears in such Statement of
Additional Information.
We also consent to the use in the Statement of Additional Information
constituting part of this Registration Statement of our report dated March
21, 2000, relating to the consolidated financial statements of The Prudential
Insurance Company of America and its subsidiaries, which appears in such
Statement of Additional Information.
We also consent to the reference to us under the heading "Experts" in the
Statement of Additional Information.
/s/ PricewaterhouseCoopers LLP
- -------------------------------
New York, New York
April 21, 2000
<TABLE>
<CAPTION>
TABLE 1
-------
AVERAGE ANNUAL TOTAL RETURN
From Date
Subaccount
One Year Five Years Ten Years Established
Date Ended Ended Ended Through
Subaccount Established 12/31/1999 12/31/1999 12/31/1999 12/31/1999
- ---------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Diversified Bond 6/83 -8.37% 2.72% 7.41% 7.39%
Government Income 5/89 -10.19% 1.99% 5.23% 6.24%
Conservative Balanced 6/83 -1.12% 9.48% 10.35% 9.26%
Flexible Managed 5/83 -0.05% 10.69% 12.31% 10.36%
High Yield Bond 2/87 -3.20% 5.65% 7.89% 6.48%
Stock Index 10/87 12.66% 23.43% 19.20% 17.39%
Equity Income 2/88 4.67% 15.46% 14.70% 13.17%
Equity 6/83 4.63% 14.70% 16.39% 13.54%
Prudential Jennison 5/95 34.22% N/A N/A 30.10%
Small Capitalization Stock 5/95 4.84% N/A N/A 14.08%
Global 5/89 40.25% 21.34% 11.00% 12.02%
Natural Resources 5/88 37.97% 10.98% 10.73% 9.59%
</TABLE>
<TABLE>
<CAPTION>
TABLE 2
-------
AVERAGE ANNUAL TOTAL RETURN ASSUMING NO WITHDRAWAL
From Date
Subaccount
One Year Five Years Ten Years Established
Date Ended Ended Ended Through
Subaccount Established 12/31/1999 12/31/1999 12/31/1999 12/31/1999
- ---------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Diversified Bond 6/83 -2.21% 3.19% 7.41% 7.39%
Government Income 5/89 -4.15% 2.47% 5.23% 6.24%
Conservative Balanced 6/83 5.14% 9.83% 10.35% 9.26%
Flexible Managed 5/83 6.20% 11.02% 12.31% 10.36%
High Yield Bond 2/87 3.08% 6.07% 7.89% 6.48%
Stock Index 10/87 18.82% 23.61% 19.20% 17.39%
Equity Income 2/88 10.89% 15.73% 14.70% 13.17%
Equity 6/83 10.85% 14.98% 16.39% 13.54%
Prudential Jennison 5/95 40.24% N/A N/A 30.31%
Small Capitalization Stock 5/95 11.06% N/A N/A 14.50%
Global 5/89 46.22% 21.54% 11.00% 12.02%
Natural Resources 5/88 43.96% 11.31% 10.73% 9.59%
</TABLE>
<TABLE>
<CAPTION>
TABLE 3
-------
CUMULATIVE TOTAL RETURN ASSUMING NO WITHDRAWAL
From Date
Subaccount
One Year Five Years Ten Years Established
Date Ended Ended Ended Through
Subaccount Established 12/31/1999 12/31/1999 12/31/1999 12/31/1999
- ---------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Diversified Bond 6/83 -2.21% 16.99% 104.36% 225.71%
Government Income 5/89 -4.15% 12.99% 72.24% 90.74%
Conservative Balanced 6/83 5.14% 59.83% 167.69% 334.03%
Flexible Managed 5/83 6.20% 68.65% 219.16% 413.74%
High Yield Bond 2/87 3.08% 34.24% 113.80% 124.02%
Stock Index 10/87 18.82% 188.60% 479.08% 607.37%
Equity Income 2/88 10.89% 107.60% 294.25% 333.99%
Equity 6/83 10.85% 100.93% 356.29% 720.49%
Prudential Jennison 5/95 40.24% N/A N/A 244.12%
Small Capitalization Stock 5/95 11.06% N/A N/A 88.18%
Global 5/89 46.22% 165.26% 204.39% 235.65%
Natural Resources 5/88 43.96% 70.84% 177.13% 190.98%
</TABLE>
