As filed with the SEC on___________________. Registration No. 33-61079
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------
POST-EFFECTIVE AMENDMENT NO. 1 TO
FORM S-6
FOR REGISTRATION UNDER THE SECURITIES ACT OF 1933
OF SECURITIES OF UNIT INVESTMENT TRUSTS REGISTERED
ON FORM N-8B-2
-------------------
THE PRUDENTIAL VARIABLE
APPRECIABLE ACCOUNT
(Exact Name of Trust)
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
(Name of Depositor)
PRUDENTIAL PLAZA
NEWARK, NEW JERSEY 07102-3777
(800) 445-4571
(Address and telephone number of principal executive offices)
-------------------
THOMAS C. CASTANO
ASSISTANT SECRETARY
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
PRUDENTIAL PLAZA
NEWARK, NEW JERSEY 07102-3777
(Name and address of agent for service)
Copy to:
JEFFREY C. MARTIN
SHEA & GARDNER
1800 MASSACHUSETTS AVENUE, N.W.
WASHINGTON, D.C. 20036
-------------------
Prudential Survivorship Preferred Variable Appreciable Life Insurance
Contracts--Pursuant to Rule 24f-2 under the Investment Company Act of 1940, the
Registrant elects to register an indefinite amount of securities. (Title and
amount of securities being registered; proposed maximum aggregate offering
price; amount of filing fee).
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, 1995 pursuant to paragraph (b) of Rule 485
(date)
[ ] 60 days after filing pursuant to paragraph (a) of Rule 485
[ ] on ______________________ pursuant to paragraph (a) of Rule 485
(date)
<PAGE>
CROSS REFERENCE SHEET
(AS REQUIRED BY FORM N-8B-2)
N-8B-2 ITEM NUMBER LOCATION
------------------ --------
1. Cover Page
2. Cover Page
3. Not Applicable
4. Sale of the Contract and Sales Commissions
5. The Prudential Variable Appreciable Account
6. The Prudential Variable Appreciable Account
7. Not Applicable
8. Not Applicable
9. Litigation
10. Brief Description of the Contract;
Short-Term Cancellation Right, or "Free
Look"; Type of Insurance Amount; Changing
the Type of Insurance Amount; Premiums;
Contract Date; Allocation of Premiums;
Transfers; Charges and Expenses; How a
Contract's Cash Surrender Value Will Vary;
How a Fixed Insurance Amount Contract's
Death Benefit Will Vary; How a Variable
Insurance Amount Contract's Death Benefit
Will Vary; Surrender of a Contract;
Withdrawal of Excess Cash Surrender Value;
Decreases in Basic Insurance Amount; Lapse
and Reinstatement; When Proceeds are Paid;
Options on Lapse; Riders; Other General
Contract Provisions; Voting Rights;
Substitution of Series Fund Shares
11. Brief Description of the Contract; The
Prudential Variable Appreciable Account
12. Cover Page; Brief Description of the
Contract; The Prudential Series Fund, Inc.;
Sale of the Contract and Sales Commissions
13. Brief Description of the Contract; The
Prudential Series Fund, Inc.; Charges and
Expenses; Sale of the Contract and Sales
Commissions; Reduction of Charges for
Concurrent Sales to Several Individuals
14. Brief Description of the Contract;
Requirements for Issuance of a Contract
15. Brief Description of the Contract;
Allocation of Premiums; Transfers; The
Fixed-Rate Option
16. Brief Description of the Contract; Detailed
Information for Prospective Contract Owners
17. When Proceeds are Paid
18. The Prudential Variable Appreciable Account
19. Reports to Contract Owners
<PAGE>
N-8B-2 ITEM NUMBER LOCATION
------------------ --------
20. Not Applicable
21. Contract Loans
22. Not Applicable
23. Not Applicable
24. Other General Contract Provisions
25. The Prudential Insurance Company of America
26. Brief Description of the Contract; The
Prudential Series Fund, Inc.; Charges and
Expenses
27. The Prudential Insurance Company of America;
The Prudential Series Fund, Inc.
28. The Prudential Insurance Company of America;
Directors and Officers
29. The Prudential Insurance Company of America
30. Not Applicable
31. Not Applicable
32. Not Applicable
33. Not Applicable
34. Not Applicable
35. The Prudential Insurance Company of America
36. Not Applicable
37. Not Applicable
38. Sale of the Contract and Sales Commissions
39. Sale of the Contract and Sales Commissions
40. Not Applicable
41. Sale of the Contract and Sales Commissions
42. Not Applicable
43. Not Applicable
44. Brief Description of the Contract; The
Prudential Series Fund, Inc.; How a
Contract's Cash Surrender Value Will Vary;
How a Fixed Insurance Amount Contract's
Death Benefit Will Vary; How a Variable
Insurance Amount Contract's Death Benefit
Will Vary
45. Not Applicable
46. Brief Description of the Contract; The
Prudential Variable Appreciable Account; The
Prudential Series Fund, Inc.
47. The Prudential Variable Appreciable Account;
The Prudential Series Fund, Inc.
48. Not Applicable
49. Not Applicable
50. Not Applicable
<PAGE>
N-8B-2 ITEM NUMBER LOCATION
------------------ --------
51. Not Applicable
52. Substitution of Series Fund Shares
53. Tax Treatment of Contract Benefits
54. Not Applicable
55. Not Applicable
56. Not Applicable
57. Not Applicable
58. Not Applicable
59. Financial Statements; Financial Statements
of The Prudential Variable Appreciable
Account; Consolidated Financial Statements
of The Prudential Insurance Company of
America and Subsidiaries
<PAGE>
PART I
INFORMATION REQUIRED IN PROSPECTUS
<PAGE>
PROSPECTUS
MAY 1, 1996
THE PRUDENTIAL VARIABLE APPRECIABLE ACCOUNT
SURVIVORSHIP PREFERRED
This prospectus describes a flexible premium survivorship variable universal
life insurance contract offered by The Prudential Insurance Company of America
under the name PRUDENTIAL SURVIVORSHIP PREFERRED(SM) (the "Contract"). The
Contract provides life insurance coverage on two insureds with a death benefit
payable on the second death as long as the Contract is in force.
Purchasers have considerable flexibility as to when and in what amounts they pay
premiums. Subject to an initial premium, you can pay premium amounts as desired,
so long as sufficient money is in the Contract Fund to cover all charges. If
there is insufficient money in the Contract Fund, the Contract may lapse without
value.
There are two insurance amount types available. One type generally remains fixed
in the amount initially selected, the other will vary daily with the investment
performance of the investment options you select. For each type, there are two
premium levels which, if paid, provide death benefit guarantees.
A portion of the Contract's premiums and the earnings on those premiums will be
held in one or more of the following ways. They can be invested in one or more
of fifteen available subaccounts of The Prudential Variable Appreciable Account:
O MONEY MARKET
O DIVERSIFIED BOND
O GOVERNMENT INCOME
O ZERO COUPON BOND 2000
O ZERO COUPON BOND 2005
O CONSERVATIVE BALANCED
O FLEXIBLE MANAGED
O HIGH YIELD BOND
O STOCK INDEX
O EQUITY INCOME
O EQUITY
O PRUDENTIAL JENNISON
O SMALL CAPITALIZATION STOCK
O GLOBAL
O NATURAL RESOURCES
each of which invests in a corresponding portfolio of The Prudential Series
Fund, Inc. Or, they can be allocated to a FIXED-RATE OPTION. Other subaccounts
and portfolios may be added in the future. The attached prospectus for the
Series Fund, and the Series Fund's statement of additional information describe
the investment objectives of and the risks of investing in the portfolios.
Interest is credited daily upon any portion of the premium payment allocated to
the fixed-rate option at rates periodically declared by The Prudential in its
sole discretion but never less than an effective annual rate of 4%. This
prospectus describes the Contract generally and The Prudential Variable
Appreciable Account.
REPLACING EXISTING INSURANCE WITH A CONTRACT DESCRIBED IN THIS PROSPECTUS MAY
NOT BE TO YOUR ADVANTAGE. IF YOU CURRENTLY OWN A LIFE INSURANCE CONTRACT, THE
BENEFITS AND COSTS OF PURCHASING ADDITIONAL INSURANCE UNDER THE EXISTING POLICY
SHOULD BE COMPARED WITH THE BENEFITS AND COSTS OF PURCHASING THE CONTRACT
DESCRIBED IN THIS PROSPECTUS. IN MAKING THIS COMPARISON, YOU SHOULD CONSULT WITH
A QUALIFIED TAX ADVISOR.
PLEASE READ THIS PROSPECTUS AND KEEP IT FOR FUTURE REFERENCE. IT IS ATTACHED TO
A CURRENT PROSPECTUS FOR THE PRUDENTIAL SERIES FUND, INC.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
Prudential Plaza
Newark, New Jersey 07102-3777
Telephone: (800) 445-4571
*PRUDENTIAL SURVIVORSHIP PREFERRED is a service mark of The Prudential.
SVUL-1 Ed 5-96 Catalog # 64M631J
<PAGE>
PROSPECTUS CONTENTS
PAGE
DEFINITIONS OF SPECIAL TERMS USED .......................................... 1
BRIEF DESCRIPTION OF THE CONTRACT .......................................... 2
GENERAL INFORMATION ABOUT THE PRUDENTIAL, THE PRUDENTIAL VARIABLE
APPRECIABLE ACCOUNT, AND THE VARIABLE INVESTMENT OPTIONS AVAILABLE UNDER
THE CONTRACT ............................................................. 5
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA ............................ 5
THE PRUDENTIAL VARIABLE APPRECIABLE ACCOUNT ............................ 5
THE PRUDENTIAL SERIES FUND, INC ........................................ 6
WHICH INVESTMENT OPTION SHOULD BE SELECTED? ............................ 8
DETAILED INFORMATION FOR PROSPECTIVE CONTRACT OWNERS ....................... 8
REQUIREMENTS FOR ISSUANCE OF A CONTRACT ................................ 8
SHORT-TERM CANCELLATION RIGHT OR "FREE LOOK" ........................... 8
TYPE OF INSURANCE AMOUNT ............................................... 9
CHANGING THE TYPE OF INSURANCE AMOUNT .................................. 11
PREMIUMS ............................................................... 11
DEATH BENEFIT GUARANTEE ................................................ 12
CONTRACT DATE .......................................................... 14
ALLOCATION OF PREMIUMS ................................................. 14
TRANSFERS .............................................................. 15
DOLLAR COST AVERAGING .................................................. 16
CHARGES AND EXPENSES ................................................... 16
HOW A CONTRACT'S CASH SURRENDER VALUE WILL VARY ........................ 19
HOW A FIXED INSURANCE AMOUNT CONTRACT'S DEATH BENEFIT WILL VARY ........ 19
HOW A VARIABLE INSURANCE AMOUNT CONTRACT'S DEATH BENEFIT WILL VARY ..... 20
PARTICIPATION IN DIVISIBLE SURPLUS ..................................... 21
SURRENDER OF A CONTRACT ................................................ 21
WITHDRAWALS ............................................................ 22
DECREASES IN BASIC INSURANCE AMOUNT .................................... 22
WHEN PROCEEDS ARE PAID ................................................. 23
ILLUSTRATIONS OF CASH SURRENDER VALUES, DEATH BENEFITS, AND
ACCUMULATED PREMIUMS ................................................. 23
CONTRACT LOANS ......................................................... 25
SALE OF THE CONTRACT AND SALES COMMISSIONS ............................. 26
TAX TREATMENT OF CONTRACT BENEFITS ..................................... 26
WITHHOLDING ............................................................ 28
LAPSE AND REINSTATEMENT ................................................ 29
LEGAL CONSIDERATIONS RELATING TO SEX-DISTINCT PREMIUMS AND BENEFITS .... 29
OTHER GENERAL CONTRACT PROVISIONS ...................................... 30
RIDERS ................................................................. 31
THE FIXED-RATE OPTION .................................................. 31
VOTING RIGHTS .......................................................... 32
SUBSTITUTION OF SERIES FUND SHARES ..................................... 33
REPORTS TO CONTRACT OWNERS ............................................. 33
STATE REGULATION ....................................................... 33
EXPERTS ................................................................ 33
LITIGATION ............................................................. 34
ADDITIONAL INFORMATION ................................................. 34
FINANCIAL STATEMENTS ................................................... 34
DIRECTORS AND OFFICERS OF THE PRUDENTIAL ................................... 35
<PAGE>
PAGE
FINANCIAL STATEMENTS OF THE PRUDENTIAL VARIABLE APPRECIABLE ACCOUNT......... A1
CONSOLIDATED FINANCIAL STATEMENTS OF THE PRUDENTIAL INSURANCE COMPANY OF
AMERICA AND SUBSIDIARIES................................................ B1
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING IN ANY JURISDICTION IN WHICH
SUCH OFFERING MAY NOT LAWFULLY BE MADE. NO PERSON IS AUTHORIZED TO MAKE ANY
REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS AND THE PROSPECTUS AND STATEMENT OF ADDITIONAL INFORMATION FOR
THE PRUDENTIAL SERIES FUND, INC.
<PAGE>
DEFINITIONS OF SPECIAL TERMS
USED IN THIS PROSPECTUS
ACCUMULATED NET PAYMENTS--the actual premium payments you make accumulated at an
effective annual rate of 4% less any withdrawals you make accumulated at an
effective annual rate of 4%.
ATTAINED AGE--An insured's age on the Contract date plus the number of years
since then.
BASIC INSURANCE AMOUNT--The amount of life insurance as shown in the Contract.
Also known as the face amount.
CASH SURRENDER VALUE--The amount payable to the Contract owner upon surrender of
the Contract. It is equal to the Contract Fund minus any Contract debt.
CONTRACT--The PRUDENTIAL SURVIVORSHIP PREFERRED policy described in this
prospectus.
CONTRACT ANNIVERSARY--The same date as the Contract date in each later year.
CONTRACT DATE--The date the Contract is effective, as specified in the Contract.
CONTRACT DEBT--The principal amount of all outstanding loans plus any interest
accrued thereon.
CONTRACT FUND--The total amount credited to a specific Contract. On any date it
is equal to the sum of the amounts in all the subaccounts, the amount invested
under the fixed-rate option, and the principal amount of any Contract debt.
CONTRACT MONTH--A month that starts on the Monthly date.
CONTRACT OWNER--You. Unless a different owner is named in the application, the
owners of the Contract are the insureds jointly or the survivor of them. If the
Contract is owned jointly, the exercise of rights under the Contract must be
made by both jointly.
CONTRACT YEAR--A year that starts on the Contract date or on a Contract
anniversary.
DEATH BENEFIT--The amount payable to the beneficiary upon the second death of
two insureds.
FACE AMOUNT--See basic insurance amount.
FIXED-RATE OPTION--An investment option under which The Prudential guarantees
that interest will be added to the amount invested at a rate declared
periodically in advance.
INSURANCE AMOUNT--the amount we will pay upon the second death of two insureds
before reduction by any Contract debt and amounts needed to pay charges through
the date of death.
ISSUE AGE--An insured's age as of the
Contract date.
MONTHLY DATE--The Contract date and the same date in each subsequent month.
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA--Us, we, The Prudential. The company
offering the Contract.
THE PRUDENTIAL SERIES FUND, INC. (THE "SERIES FUND")--A mutual fund with
separate portfolios, one or more of which may be chosen as an underlying
investment for the Contract.
THE PRUDENTIAL VARIABLE APPRECIABLE ACCOUNT (THE "ACCOUNT")--A separate account
of The Prudential registered as a unit investment trust under the Investment
Company Act of 1940.
SUBACCOUNT--An investment division of the Account, the assets of which are
invested in the shares of the corresponding portfolio of the Series Fund.
VALUATION PERIOD--The period of time from one determination of the value of the
amount invested in a subaccount to the next. Such determinations are made when
the net asset values of the portfolios of the Series Fund are calculated, which
is generally at 4:15 p.m. New York City time on each day during which the New
York Stock Exchange is open.
WE-- The Prudential Insurance Company of America.
YOU--the owner[s] of the Contract.
1
<PAGE>
BRIEF DESCRIPTION OF THE CONTRACT
This section provides only an overview of the more significant provisions of the
Contract. It omits details which are provided in the rest of this prospectus.
The PRUDENTIAL SURVIVORSHIP PREFERRED Contract (referred to from now on as the
"Contract") is a flexible premium variable universal life insurance policy. It
is issued and sold by The Prudential Insurance Company of America ("The
Prudential"). The Contract provides life insurance coverage, with a death
benefit payable upon the second death of two insureds. A significant element of
the Contract is the Contract Fund, the amount of which changes every business
day. That amount represents the value of your Contract on that day.
A broad objective of the Contract is to provide benefits that will increase in
value if favorable investment results are achieved. The Prudential has
established a separate account, like a separate division within the Company,
called The Prudential Variable Appreciable Account (from now on, the "Account").
You may choose to have premiums, after the deduction of certain charges
(described below), invested into any one or more of the fifteen available
subaccounts of the Account.
The money allocated to each subaccount is immediately invested in a
corresponding portfolio of The Prudential Series Fund, Inc. (the "Series Fund"),
a series mutual fund for which The Prudential is the investment advisor.
o The MONEY MARKET PORTFOLIO is invested in short-term debt obligations
similar to those purchased by money market funds.
o The DIVERSIFIED BOND PORTFOLIO (formerly the Bond Portfolio) is invested
primarily in high quality medium-term corporate and government debt
securities.
o The GOVERNMENT INCOME PORTFOLIO (formerly the Government Securities
Portfolio) is invested primarily in U.S. Government Securities including
intermediate and long-term U.S. Treasury securities and debt obligations
issued by agencies of or instrumentalities established, sponsored or
guaranteed by the U.S. Government.
o The two ZERO COUPON BOND PORTFOLIOS -- 2000 AND 2005 are invested primarily
in debt obligations of the United States Treasury and investment grade
corporations that have been issued without interest coupons or stripped of
their unmatured interest coupons, interest coupons that have been stripped
from such debt obligations, and receipts and certificates for such stripped
debt obligations and stripped coupons.
o The CONSERVATIVE BALANCED PORTFOLIO (formerly the Conservatively Managed
Flexible Portfolio) is invested in a mix of money market instruments, fixed
income securities, and common stocks, in proportions believed by the
investment manager to be appropriate for an investor who desires
diversification of investment who prefers a relatively lower risk of loss
and a correspondingly reduced chance of high appreciation.
o The FLEXIBLE MANAGED PORTFOLIO (formerly the Aggressively Managed Flexible
Portfolio) is invested in a mix of money market instruments, fixed income
securities, and common stocks, in proportions believed by the investment
manager to be appropriate for an investor desiring diversification of
investment who is willing to accept a relatively high level of loss in an
effort to achieve greater appreciation.
o The HIGH YIELD BOND PORTFOLIO is invested primarily in high yield fixed
income securities of medium to lower quality, also known as high risk bonds.
o The STOCK INDEX PORTFOLIO is invested in common stocks selected to duplicate
the price and yield performance of the Standard & Poor's 500 Composite Stock
Price Index.
o The EQUITY INCOME PORTFOLIO (formerly the High Dividend Stock Portfolio) is
invested primarily in common stocks and convertible securities that provide
favorable prospects for investment income returns above those of the
Standard & Poor's 500 Stock Index or the NYSE Composite Index.
2
<PAGE>
o The EQUITY PORTFOLIO (formerly the Common Stock Portfolio) is invested
primarily in common stocks.
o The PRUDENTIAL JENNISON PORTFOLIO (formerly the Growth Stock Portfolio) is
invested primarily in equity securities of established companies with
above-average growth prospects.
o The SMALL CAPITALIZATION STOCK PORTFOLIO is invested primarily in equity
securities of publicly-traded companies with small market capitalization.
o The GLOBAL PORTFOLIO (formerly the Global Equity Portfolio) is invested in
common stocks and common stock equivalents (such as convertible debt
securities) of foreign and domestic insurers.
o The NATURAL RESOURCES PORTFOLIO is invested primarily in common stocks and
convertible securities of natural resource companies, and in securities
(typically debt securities or preferred stock) the terms of which are
related to the market value of a natural resource.
Further information about the Series Fund portfolios can be found under THE
PRUDENTIAL SERIES FUND, INC. on page 6 and in the attached prospectus for the
Series Fund.
You have an additional option which is regulated differently from the other 15
because it is not an investment company registered under the Investment Company
Act of 1940. This is a FIXED-RATE OPTION that increases the portion of your
Contract Fund allocated to this option at a guaranteed rate of interest.
Thus your Contract Fund value changes every day depending upon the change in the
value of the particular portfolios (or fixed-rate option) that you have selected
for the investment of your Contract Fund.
Although the selection of any of the subaccounts offers the possibility that
your Contract Fund value will increase if there is favorable investment
performance, you are subject to the risk that investment performance will be
unfavorable and that the value of your Contract Fund will decrease. The risk
will be different, depending upon which investment options you choose. See WHICH
INVESTMENT OPTION SHOULD BE SELECTED?, page 8. If you select the fixed-rate
option, you are credited with a declared rate or rates of interest but you
assume the risk that the rate may change, although it will never be lower than
an effective annual rate of 4%.
The Prudential deducts certain charges from each premium payment and from the
amounts held in the designated investment options. These charges, which are
largely designed to cover insurance costs and risks as well as sales and
administrative expenses, are fully described under CHARGES AND EXPENSES, on page
16. In brief, and subject to that fuller description, the following diagram
outlines the maximum charges which may be made:
3
<PAGE>
------------------------------------------------
DEDUCTIONS FROM PREMIUM PAYMENTS
o A charge of up to 7.5% is deducted for any
taxes attributable to premiums.
o A charge for sales expenses is deducted (this
charge depends upon the Contract year and the
amount paid during that year and disappears
after the twentieth year).
------------------------------------------------
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DAILY CHARGES
o Management fees and expenses are deducted from the assets of the Series
Fund.
o A daily charge equivalent to an annual rate of up to 0.9% is deducted from
the assets of the variable investment options for mortality and expense
risks.
- --------------------------------------------------------------------------------
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MONTHLY CHARGES
o The Contract Fund is reduced by a monthly administrative charge of up to
$7.50 per Contract and $0.07 per $1,000 of basic insurance amount in the
first Contract year; for Contract years after the first, the $0.07 per
$1,000 portion of the charge drops to $0.01 per $1,000 of basic insurance
amount.
o A cost of insurance ("COI") charge is deducted.
o The Contract Fund is reduced by a Death Benefit Guarantee risk charge of up
to $0.01 per $1,000 of the basic insurance amount.
o If the Contract includes riders, a deduction from the Contract Fund will be
made for charges applicable to those riders
o If the rating class of an insured results in an extra charge, that charge
will be deducted from the Contract Fund.
- --------------------------------------------------------------------------------
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ADDITIONAL CHARGES
o An administrative processing charge of up to $25 is made in connection with
any withdrawals.
o Although no such charge is currently being made, we reserve the right to
charge up to $25 for each decrease in basic insurance amount.
o An administrative processing charge of up to $25 will be made for each
transfer exceeding twelve in any Contract year.
- --------------------------------------------------------------------------------
There are two types of death benefit available. You may choose a Contract with a
fixed insurance amount under which the cash surrender value varies daily with
investment experience, and the basic insurance amount chosen by you at the
outset does not change. However, the Contract Fund may grow to a point where the
insurance amount may increase and vary with investment experience. If you choose
a Contract with a variable insurance amount, the cash surrender value and the
insurance amount both vary with investment experience. For either type of
insurance amount, as long as the Contract is in force, the insurance amount will
never be less than the basic insurance amount shown in your Contract.
See TYPE OF INSURANCE AMOUNT, page 9.
The Contract is a flexible premium contract - there are no scheduled premiums.
Except for the minimum initial premium, and subject to a minimum of $25 per
subsequent payment, the timing and amount of premium payments is discretionary
and the Contract will remain in force provided that the Contract Fund is
sufficient to cover the charges. However, if the premiums you pay on an
accumulated basis are high enough, and Contract debt does not exceed the
Contract Fund, The Prudential guarantees that your Contract will not lapse even
if investment experience is very unfavorable and the Contract Fund drops below
zero. There are two
4
<PAGE>
guarantees available, one that lasts for the lifetime of the Contract and
another that lasts for a stated, reasonably lengthy period. The guarantee for
the life of the Contract requires higher premium payments. See PREMIUMS, page
11, DEATH BENEFIT GUARANTEE, page 12 and LAPSE AND REINSTATEMENT, page 29.
While you decide when to make premium payments and, subject to a $25 minimum, in
what amounts, we do offer and suggest regular billing of premiums. When applying
for the Contract, you should discuss with your Prudential representative if you
would like to be billed, how frequently and for what amount. See PREMIUMS, page
11.
For a limited time, a Contract may be returned for a refund in accordance with
the terms of its "free look" provision. See SHORT-TERM CANCELLATION RIGHT OR
"FREE LOOK," page 8.
This Summary provides only a brief overview of the more significant aspects of
the Contract. Further detail is provided in the subsequent sections of this
prospectus and in the Contract. The Contract, including the application attached
to it, constitutes the entire agreement between the owner and The Prudential and
should be retained.
For the DEFINITIONS OF SPECIAL TERMS USED IN THIS PROSPECTUS, see page 1.
GENERAL INFORMATION ABOUT THE PRUDENTIAL, THE
PRUDENTIAL VARIABLE APPRECIABLE ACCOUNT, AND
THE VARIABLE INVESTMENT OPTIONS AVAILABLE
UNDER THE CONTRACT
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
The Prudential Insurance Company of America ("The Prudential") is a mutual
insurance company, founded in 1875 under the laws of the State of New Jersey. We
are licensed to sell life insurance and annuities in the District of Columbia,
Guam, and in all states. These Contracts are not offered in any state in which
the necessary approvals have not yet been obtained.
The Prudential's consolidated financial statements begin on page B1 and should
be considered only as bearing upon The Prudential's ability to meet its
obligations under the Contracts.
THE PRUDENTIAL VARIABLE APPRECIABLE ACCOUNT
The Prudential Variable Appreciable Account (the "Account") was established on
August 11, 1987 under New Jersey law as a separate investment account. The
Account meets the definition of a "separate account" under the federal
securities laws. The Account holds assets that are segregated from all of The
Prudential's other assets.
The obligations to Contract owners and beneficiaries arising under the Contract
are general corporate obligations of The Prudential. The Prudential is also the
legal owner of the assets in the Account. The Prudential will at all times
maintain assets in the Account with a total market value at least equal to the
reserve and other liabilities relating to the variable benefits attributable to
the Account. These assets may not be charged with liabilities which arise from
any other business The Prudential conducts. In addition to these assets, the
Account's assets may include funds contributed by The Prudential to commence
operation of the Account and may include accumulations of the charges The
Prudential makes against the Account. From time to time these additional assets
may be withdrawn by The Prudential.
5
<PAGE>
The Account is registered with the Securities and Exchange Commission ("SEC")
under the Investment Company Act of 1940 ("1940 Act") as a unit investment
trust, which is a type of investment company. This does not involve any
supervision by the SEC of the management or investment policies or practices of
the Account. For state law purposes, the Account is treated as a part or
division of The Prudential. The Account's financial statements begin on page A1.
Currently, you may invest in one or a combination of fifteen available
subaccounts within the Account, each of which invests in a single corresponding
portfolio of The Prudential Series Fund, Inc. Additional subaccounts may be
added in the future.
THE PRUDENTIAL SERIES FUND, INC.
The Prudential Series Fund, Inc. (the "Series Fund") is registered under the
1940 Act as an open-end diversified management investment company. Its shares
are currently sold only to separate accounts of The Prudential and certain
subsidiary insurers that offer variable life insurance and variable annuity
contracts. The Account will purchase and redeem shares from the Series Fund at
net asset value. Shares will be redeemed to the extent necessary for The
Prudential to provide benefits under the Contract and to transfer assets from
one subaccount to another, as requested by Contract owners. Any dividend or
capital gain distribution received from a portfolio of the Series Fund will be
reinvested immediately at net asset value in shares of that portfolio and
retained as assets of the corresponding subaccount.
The Prudential is the investment advisor for the assets of each of the
portfolios of the Series Fund. The Prudential's principal business address is
Prudential Plaza, Newark, New Jersey 07102-3777. The Prudential has a Service
Agreement with its wholly-owned subsidiary The Prudential Investment Corporation
("PIC"), which provides that, subject to The Prudential's supervision, PIC will
furnish investment advisory services in connection with the management of the
Series Fund. In addition, The Prudential has entered into a Subadvisory
Agreement with its wholly-owned subsidiary Jennison Associates Capital
Corporation ("Jennison"), under which Jennison furnishes investment advisory
services in connection with the management of the Prudential Jennison Portfolio.
Further detail is provided in the prospectus and statement of additional
information for the Series Fund. The Prudential, PIC, and Jennison are
registered as investment advisors under the Investment Advisers Act of 1940.
As an investment advisor, The Prudential charges the Series Fund a daily
investment management fee as compensation for its services. The following table
shows the investment management fee charged for each portfolio of the Series
Fund available to you.
6
<PAGE>
- --------------------------------------------------------------------------------
ANNUAL INVESTMENT
PORTFOLIO MANAGEMENT FEE AS
A PERCENTAGE OF
AVERAGE DAILY NET
ASSETS
- --------------------------------------------------------------------------------
Money Market Portfolio 0.40%
Diversified Bond Portfolio 0.40%
Government Income Portfolio 0.40%
Zero Coupon Bond Portfolios 0.40%
Conservative Balanced Portfolio 0.55%
Flexible Managed Portfolio 0.60%
High Yield Bond Portfolio 0.55%
Stock Index Portfolio 0.35%
Equity Income Portfolio 0.40%
Equity Portfolio 0.45%
Prudential Jennison Portfolio 0.60%
Small Capitalization Stock Portfolio 0.40%
Global Portfolio 0.75%
Natural Resources Portfolio 0.45%
- --------------------------------------------------------------------------------
In addition to the investment management fee, each portfolio incurs certain
expenses, such as accounting and custodian fees. The Prudential, on a
non-guaranteed basis, makes daily adjustments that will offset the effect on
Contract owners of some of these expenses to ensure that the portfolio expenses
indirectly borne by a Contract owner investing in the Zero Coupon Bond
Portfolios will not exceed the investment management fee.
Without such adjustments the portfolio expenses indirectly borne by a Contract
owner, expressed as a percentage of the average daily net assets by portfolio,
would have been 0.48% for the Zero Coupon Bond 2000 and 0.49% for the Zero
Coupon Bond 2005 Portfolios. The Prudential does not intend to discontinue these
adjustments in the future, although it retains the right to do so.
It is conceivable that in the future it may become disadvantageous for both
variable life insurance and variable annuity contract separate accounts to
invest in the same underlying mutual fund. Although neither the companies which
invest in the Series Fund, nor the Series Fund currently foresees any such
disadvantage, the Series Fund's Board of Directors intends to monitor events in
order to identify any material conflict between variable life insurance and
variable annuity contract owners and to determine what action, if any, should be
taken in response thereto. Material conflicts could result from such things as:
(1) changes in state insurance law; (2) changes in federal income tax law; (3)
changes in the investment management of any portfolio of the Series Fund; or (4)
differences between voting instructions given by variable life insurance and
variable annuity contract owners.
A FULL DESCRIPTION OF THE SERIES FUND, ITS INVESTMENT OBJECTIVES, MANAGEMENT,
POLICIES, AND RESTRICTIONS, ITS EXPENSES, THE RISKS ATTENDANT TO INVESTMENT
THEREIN--INCLUDING ANY RISKS ASSOCIATED WITH INVESTMENT IN THE HIGH YIELD BOND
PORTFOLIO, AND ALL OTHER ASPECTS OF ITS OPERATION IS CONTAINED IN THE ATTACHED
PROSPECTUS FOR THE SERIES FUND AND IN ITS STATEMENT OF ADDITIONAL INFORMATION,
WHICH SHOULD BE READ IN CONJUNCTION WITH THIS PROSPECTUS. THERE IS NO ASSURANCE
THAT THE INVESTMENT OBJECTIVES WILL BE MET.
7
<PAGE>
WHICH INVESTMENT OPTION SHOULD BE SELECTED?
Historically, for investments held over relatively long periods, the investment
performance of common stocks has generally been superior to that of short or
long-term debt securities, even though common stocks have been subject to much
more dramatic changes in value over short periods of time. Accordingly, the
Stock Index, Equity Income, Equity, Prudential Jennison, Small Capitalization
Stock, Global or Natural Resources Portfolios may be desirable options if you
are willing to accept such volatility in your Contract values. Each of these
equity portfolios involves somewhat different policies and investment risks.
You may prefer the somewhat greater protection against loss of principal (and
reduced chance of high total return) provided by the Government Income or
Diversified Bond Portfolios. There may be times when you desire even greater
safety of principal and may then prefer the Money Market Portfolio or the
fixed-rate option, recognizing that the level of short-term rates may change
rather rapidly. Money invested in a Zero Coupon Bond Portfolio and held to its
liquidation date will realize a predictable return, although the portfolio's
value may fluctuate significantly with changes in interest rates prior to its
liquidation date. If you are willing to take risks and possibly achieve a higher
total return, you may prefer the High Yield Bond Portfolio, recognizing that
with higher yielding, lower quality bonds the risks are greater. You may wish to
divide your invested premium among two or more of the portfolios. You may wish
to obtain diversification by relying on The Prudential's judgment for an
appropriate asset mix by choosing the Conservative Balanced or Flexible Managed
Portfolios.
You should make a choice that takes into account how willing you are to accept
investment risks, the manner in which your other assets are invested, and your
own predictions about what investment results are likely to be in the future.
The Prudential does recommend AGAINST frequent transfers among the several
investment options as experience generally indicates that "market timing"
investing, particularly by non-professional investors, is likely to prove
unsuccessful.
DETAILED INFORMATION FOR
PROSPECTIVE CONTRACT OWNERS
REQUIREMENTS FOR ISSUANCE OF A CONTRACT
The minimum basic insurance amount that can be applied for is $250,000. The
Contract may be issued on two insureds each between the ages of 20 and 85.
Before issuing any Contract, The Prudential requires evidence of insurability on
each insured which may include a medical examination. Non-smokers are offered
the most favorable cost of insurance rates. A higher cost of insurance rate
and/or additional charge is charged if an extra mortality risk is involved.
These are the current underwriting requirements. We reserve the right to change
them on a non-discriminatory basis.
SHORT-TERM CANCELLATION RIGHT OR "FREE LOOK"
Generally, you may return the Contract for a refund within 10 days after you
receive it, within 45 days after Part I of the application for insurance is
signed or within 10 days after The Prudential mails or delivers a Notice of
Withdrawal Right, whichever is latest. Some states allow a longer period of time
during which a Contract may be returned for a refund. A refund can be requested
by mailing or delivering the Contract to the representative who sold it or to
The Prudential Home Office specified in the Contract. A Contract returned
according to this provision shall be deemed void from the beginning. You will
then receive a refund of all premium payments made, plus or minus any change due
to investment experience in the value of the invested portion of the premiums,
calculated as if no charges had been made
8
<PAGE>
against the Account or the Series Fund. However, if applicable law so requires,
if you exercise your short-term cancellation right, you will receive a refund of
all premium payments made, with no adjustment for investment experience.
TYPE OF INSURANCE AMOUNT
You may select either of two types of insurance amount. Generally, a Contract
with a fixed insurance amount has an insurance amount equal to the basic
insurance amount. The death benefit of this type does not vary with the
investment performance of the investment options selected by you, except in
certain circumstances. See HOW A FIXED INSURANCE AMOUNT CONTRACT'S DEATH BENEFIT
WILL VARY, page 19. Favorable investment results of the variable investment
options to which the assets related to the Contract are allocated and payment of
additional premiums will generally result in increases in the cash surrender
value. See HOW A CONTRACT'S CASH SURRENDER VALUE WILL VARY, page 19.
A Contract with a variable insurance amount has an insurance amount which will
generally equal the basic insurance amount plus the Contract Fund. Since the
Contract Fund is a component of the insurance amount, favorable investment
performance and payment of additional premiums generally result in an increase
in the death benefit as well as in the cash surrender value. Over time, however,
the increase in the cash surrender value will be less than under a Contract with
a fixed insurance amount. This is because, given two Contracts with the same
basic insurance amount and equal Contract Funds, generally the cost of insurance
charge for a Contract with a variable insurance amount will be greater. See HOW
A CONTRACT'S CASH SURRENDER VALUE WILL VARY, page 19 and HOW A VARIABLE
INSURANCE AMOUNT CONTRACT'S DEATH BENEFIT WILL VARY, page 20. Unfavorable
investment performance will result in decreases in the insurance amount and in
the cash surrender value. But, as long as the Contract is not in default and
there is no Contract debt, the death benefit may not fall below the basic
insurance amount stated in the Contract.
In choosing an insurance amount type, you should also consider whether you
intend to use the withdrawal feature. Purchasers of Contracts with a fixed
insurance amount should note that any withdrawal may result in a reduction of
the basic insurance amount. In addition, we will not allow you to make a
withdrawal that will decrease the insurance amount below the minimum basic
insurance amount. See WITHDRAWALS, page 22.
Here are two examples of how the death benefit and cash surrender values may
vary for Contracts with fixed and variable insurance amounts. The graphs are
based on the same assumptions as the illustrations shown on pages T-1 through
T-4. Specifically, a Contract with a basic insurance amount of $1,000,000 has
been issued on the lives of a 55 year old male and a 50 year old female, both
non-smokers, with no extra risks or substandard ratings, and no extra benefit
riders added to the Contract. The first chart assumes that the target premium
amount (see PREMIUMS, page 11) is paid on each Contract anniversary, no loans
are taken, current charges will continue for the indefinite future, and there is
a uniform gross annual rate of return of 8%. The second chart makes the same
assumptions, except that it assumes that the maximum charges permitted by the
Contract are made.
9
<PAGE>
[The following table was represented as a line graph in the printed material.]
Current contractual charges
8% Gross Investment Return
Death Death Cash Cash
Benefit Benefit Surr. Value Surr. Value
Fixed Variable Fixed Variable
Year Ins. Amt Ins. Amt Ins. Amt Ins. Amt
---- -------- -------- -------- --------
1 1,000,000 1,007,472 7,472 7,472
2 1,000,000 1,019,176 19,177 19,176
3 1,000,000 1,031,613 31,616 31,613
4 1,000,000 1,044,821 44,829 44,821
5 1,000,000 1,058,839 58,858 58,839
6 1,000,000 1,073,707 73,744 73,707
7 1,000,000 1,089,464 89,532 89,464
8 1,000,000 1,106,150 106,266 106,150
9 1,000,000 1,123,802 123,992 123,802
10 1,000,000 1,142,457 142,758 142,457
11 1,000,000 1,162,151 162,612 162,151
12 1,000,000 1,182,916 183,605 182,916
13 1,000,000 1,204,781 205,788 204,781
14 1,000,000 1,227,769 229,216 227,769
15 1,000,000 1,251,900 253,944 251,900
16 1,000,000 1,277,183 280,032 277,183
17 1,000,000 1,303,622 307,544 303,622
18 1,000,000 1,331,209 336,550 331,209
19 1,000,000 1,359,925 367,124 359,925
20 1,000,000 1,389,728 399,349 389,728
21 1,000,000 1,421,516 434,282 421,516
22 1,000,000 1,454,284 471,119 454,284
23 1,000,000 1,487,898 509,981 487,898
24 1,000,000 1,522,180 551,011 522,180
25 1,034,047 1,556,899 594,280 556,899
26 1,087,035 1,591,770 639,432 591,770
27 1,132,707 1,626,448 686,489 626,448
28 1,183,896 1,660,523 735,339 660,523
29 1,256,697 1,693,497 785,436 693,497
30 1,273,723 1,724,797 837,976 724,797
31 1,337,701 1,753,779 891,801 753,779
32 1,374,167 1,779,744 947,701 779,744
33 1,427,335 1,801,929 1,005,166 801,929
34 1,489,269 1,819,541 1,063,764 819,541
35 1,529,437 1,831,758 1,124,586 831,758
36 1,579,254 1,837,747 1,187,409 837,747
37 1,639,799 1,836,637 1,251,755 836,637
38 1,711,851 1,827,542 1,316,808 827,542
39 1,746,167 1,809,539 1,385,847 809,539
40 1,807,134 1,781,689 1,457,366 781,689
41 1,868,833 1,743,012 1,531,831 743,012
42 1,931,792 1,692,507 1,609,827 692,507
43 2,011,202 1,629,117 1,690,086 629,117
44 2,076,871 1,551,751 1,775,104 551,751
45 2,145,745 1,459,246 1,865,865 459,246
46 2,189,820 1,243,316 1,937,894 243,316
47 2,252,097 1,117,618 2,047,361 117,618
48 2,322,463 0 2,170,526 0
49 2,440,808 0 2,302,649 0
50 2,547,366 0 2,449,390 0
[The following table was represented as a line graph in the printed material.]
Maximum contractual charges
8% Gross Investment Return
Death Death Cash Cash
Benefit Benefit Surr. Value Surr. Value
Fixed Variable Fixed Variable
Year Ins. Amt Ins. Amt Ins. Amt Ins. Amt
---- -------- -------- -------- --------
1 1,000,000 1,006,933 6,933 6,933
2 1,000,000 1,017,879 17,881 17,879
3 1,000,000 1,029,434 29,444 29,434
4 1,000,000 1,041,614 41,638 41,614
5 1,000,000 1,054,428 54,482 54,428
6 1,000,000 1,067,883 67,989 67,883
7 1,000,000 1,081,982 82,172 81,982
8 1,000,000 1,096,720 97,040 96,720
9 1,000,000 1,112,088 112,602 112,088
10 1,000,000 1,128,061 128,858 128,061
11 1,000,000 1,144,601 145,801 144,601
12 1,000,000 1,161,649 163,412 161,649
13 1,000,000 1,179,118 181,658 179,118
14 1,000,000 1,196,886 200,489 196,886
15 1,000,000 1,214,807 219,848 214,807
16 1,000,000 1,232,702 239,666 232,702
17 1,000,000 1,250,367 259,872 250,367
18 1,000,000 1,267,559 280,388 267,559
19 1,000,000 1,284,000 301,128 284,000
20 1,000,000 1,299,351 321,989 299,351
21 1,000,000 1,314,167 343,827 314,167
22 1,000,000 1,327,030 365,583 327,030
23 1,000,000 1,337,311 387,067 337,311
24 1,000,000 1,344,270 408,058 344,270
25 1,000,000 1,347,063 428,316 347,063
26 1,000,000 1,344,749 447,583 344,749
27 1,000,000 1,336,333 465,602 336,333
28 1,000,000 1,320,737 482,099 320,737
29 1,000,000 1,296,795 496,760 296,795
30 1,000,000 1,263,218 509,206 263,218
31 1,000,000 1,218,535 518,934 218,535
32 1,000,000 1,161,064 525,271 161,064
33 1,000,000 1,088,911 527,316 88,911
34 1,000,000 1,000,082 523,902 82
35 1,000,000 0 513,484 0
36 1,000,000 0 493,970 0
37 1,000,000 0 462,433 0
38 1,000,000 0 414,670 0
39 1,000,000 0 344,468 0
40 1,000,000 0 242,350 0
41 1,000,000 0 93,577 0
42 0 0 0 0
43 0 0 0 0
44 0 0 0 0
45 0 0 0 0
46 0 0 0 0
47 0 0 0 0
48 0 0 0 0
49 0 0 0 0
50 0 0 0 0
The way in which the cash surrender values and death benefits will change
depends significantly upon the investment results that are actually achieved.
10
<PAGE>
CHANGING THE TYPE OF INSURANCE AMOUNT
Subject to The Prudential's approval, you may change the type of insurance
amount. We will increase or decrease the basic insurance amount so that the
death benefit immediately after the change matches the death benefit immediately
before the change. There may be times when a change from one type of insurance
amount to the other may be desirable. You should consult your Prudential
representative from time to time about the choices available to you under the
Contract.
If you are changing your Contract's type of insurance amount from fixed to
variable, we will reduce the basic insurance amount by the amount in your
Contract Fund on the date the change takes place. The basic amount after the
change may not be lower than the minimum basic insurance amount applicable to
the Contract. If you are changing from a variable to a fixed insurance amount,
we will increase the basic insurance amount by the amount in your Contract Fund
on the date the change takes place. This is illustrated in the following chart.
----------------------------------------------------
CHANGING THE CHANGING THE
INSURANCE AMOUNT INSURANCE AMOUNT
FROM FROM
FIXED -> VARIABLE VARIABLE -> FIXED
- --------------------------------------------------------------------------------
BASIC INSURANCE
AMOUNT $300,000 -> $250,000 $300,000 -> $350,000
CONTRACT FUND $50,000 = $50,000 $50,000 = $50,000
DEATH BENEFIT* $300,000 = $300,000 $350,000 = $350,000
- --------------------------------------------------------------------------------
* assuming there is no Contract debt
- --------------------------------------------------------------------------------
To request a change, fill out an application for change which can be obtained
from your Prudential representative or any of our offices. If the change is
approved, we will recompute the Contract's charges and appropriate tables and
send you new Contract data pages. We may ask that you send us your Contract
before making the change.
PREMIUMS
The Contract is a flexible premium contract. The minimum initial premium is due
on or before the Contract date. Thereafter, you decide when you would like to
make premium payments and, subject to a $25 minimum, in what amounts. We reserve
the right to refuse to accept any payment that increases the insurance amount by
more than it increases the Contract Fund. See HOW A FIXED INSURANCE AMOUNT
CONTRACT'S DEATH BENEFIT WILL VARY, page 19 and HOW A VARIABLE INSURANCE AMOUNT
CONTRACT'S DEATH BENEFIT WILL VARY, page 20. There are circumstances under which
the payment of premiums in amounts that are too large may cause the Contract to
be characterized, under the Internal Revenue Code, as a Modified Endowment
Contract, which could be significantly disadvantageous. See TAX TREATMENT OF
CONTRACT BENEFITS, page 26.
Once the minimum initial premium payment is made, there are no required
premiums. However, there are several types of "premium" which may help you
understand how the Contract works.
MINIMUM INITIAL PREMIUM -- the premium needed to start the Contract. There is no
insurance under this Contract unless the minimum initial premium is paid.
11
<PAGE>
GUIDELINE PREMIUMS -- these are the premiums that, if paid at the beginning of
each Contract year, will keep the Contract in force regardless of investment
performance, assuming no loans or withdrawals. These guideline premiums will be
higher for a Contract with a variable insurance amount than for a Contract with
a fixed insurance amount. For a Contract with no riders or extra risk charges,
these premiums will be level. If certain riders are included, the guideline
premium may increase each year. Payment of guideline premiums at the beginning
of each Contract year is one way to achieve the Lifetime Death Benefit Guarantee
Values shown on the Contract data pages. See DEATH BENEFIT GUARANTEE, below.
When you purchase a Contract, your Prudential representative can tell you the
amount[s] of the guideline premium.
TARGET PREMIUMS -- these are the premiums that, if paid at the beginning of each
Contract year, will keep the Contract in force during the Limited Death Benefit
Guarantee period assuming no loans or withdrawals. As is the case with the
guideline premium, for a Contract with no riders or extra risk charges, these
premiums will be level. If certain riders are included, the target premium may
increase each year. Payment of target premiums at the beginning of each Contract
year is one way to achieve the Limited Death Benefit Guarantee Values shown on
the Contract data pages. At the end of the Limited Death Benefit Guarantee
period, continuation of the Contract will depend on the Contract Fund having
sufficient money to cover all charges or meeting the conditions of the Lifetime
Death Benefit Guarantee. See DEATH BENEFIT GUARANTEE, below. When you purchase a
Contract, your Prudential representative can tell you the amount[s] of the
target premium.
TARGET LEVEL PREMIUM -- For any Contract this is generally the target premium
minus any premiums for single life riders or any premiums associated with
aviation, avocation, occupational or temporary extras. We use the target level
premium in calculating the sales load (as shown under ADJUSTMENTS TO PREMIUM
PAYMENTS on your Contract's data pages). See CHARGES AND EXPENSES, page 16 and
SALE OF THE CONTRACT AND SALES COMMISSIONS, page 26.
We can bill you for any amount you select annually, semi-annually, quarterly or
monthly. Because the Contract is a flexible premium contract, there are no
scheduled premium due dates. When you receive a premium notice, you are not
required to pay this amount. The Contract will remain in force if either the
Contract Fund is sufficient to pay all charges or if you have paid sufficient
premiums on an accumulated basis to meet the conditions of the Death Benefit
Guarantee and Contract debt is not equal to or greater than the Contract Fund.
You may also pay premiums automatically through pre-authorized transfers from a
bank checking account. If you elect to use this feature, you choose the
frequency (monthly, quarterly, semi-annually or annually) and the amount of
premiums paid.
When you apply for the Contract, you should discuss with your Prudential
representative how frequently you would like to be billed (if at all) and for
what amount.
DEATH BENEFIT GUARANTEE
Although you decide what premium amounts you wish to pay, payment of sufficient
premium, on an accumulated basis, will guarantee that your policy will not lapse
and a death benefit will be paid upon the second death of two insureds. This
will be true even if, because of unfavorable investment experience, your
Contract Fund value drops to zero. However, the guarantee is contingent upon
Contract debt never being equal to or greater than the Contract Fund. See
CONTRACT LOANS, page 25. You should consider the importance of the Death Benefit
Guarantee to you when deciding on what amounts of premiums to pay into the
Contract.
For purposes of determining this guarantee, we calculate, and show in the
Contract data pages, two sets of amounts - the Lifetime Death Benefit Guarantee
Values and Limited Death
12
<PAGE>
Benefit Guarantee Values. These are not cash values that you can realize by
surrendering the Contract, nor are they death benefits payable. They are values
used solely to determine if a Death Benefit Guarantee is in effect. The Lifetime
Death Benefit Guarantee Values are shown for the lifetime of the Contract. The
Limited Death Benefit Guarantee Values are lower, but only apply for the length
of the Limited Death Benefit Guarantee period.
The length of the Limited Death Benefit Guarantee period is determined on a case
by case basis depending on things like the insureds' ages and extra rating
class, if any. The length of the Limited Death Benefit Guarantee period
applicable to your particular Contract is shown on the Contract data pages.
At the Contract date, and on each Monthly date, we calculate your Contract's
"Accumulated Net Payments" as of that date. Accumulated Net Payments equal the
premiums you paid, accumulated at an effective annual rate of 4%, less
withdrawals also accumulated at 4%.
At each Monthly date within the Limited Death Benefit Guarantee period, we will
compare your Accumulated Net Payments to the Limited Death Benefit Guarantee
Value as of that date. After the Limited Death Benefit Guarantee period, we will
compare your Accumulated Net Payments to the Lifetime Death Benefit Guarantee
Value as of that date. If your Accumulated Net Payments equal or exceed the
applicable (Lifetime or Limited) Death Benefit Guarantee Value and Contract debt
does not exceed the Contract Fund, then the Contract is kept in force,
regardless of the amount in the Contract Fund.
The Contract data pages show Lifetime Death Benefit Guarantee Values and Limited
Death Benefit Guarantee Values as of Contract anniversaries. Values for
non-anniversary Monthly dates will reflect the number of months elapsed between
Contract anniversaries.
Guideline and target premiums are premium levels that, if paid at the start of
each Contract year, correspond to the Lifetime and Limited Death Benefit
Guarantee Values, respectively (assuming no withdrawals or loans). See PREMIUMS,
page 11. They are one way of reaching the Death Benefit Guarantee Values; they
are certainly not the only way.
Here is a table of typical guideline and target premiums (to the nearest dollar)
along with corresponding Limited Death Benefit Guarantee periods. The examples
assume the insureds are a male and a female, both of the same age, both
non-smokers, with no extra risk or substandard ratings, and no extra benefit
riders added to the Contract.
13
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- --------------------------------------------------------------------------------
BASIC INSURANCE AMOUNT -- $250,000
ILLUSTRATIVE ANNUAL PREMIUMS
- --------------------------------------------------------------------------------
GUIDELINE PREMIUM TARGET PREMIUM
AGE OF TYPE OF CORRESPONDING TO CORRESPONDING TO THE
BOTH THE INSURANCE THE LIMITED DEATH BENEFIT
INSUREDS AMOUNT LIFETIME DEATH GUARANTEE VALUES AND
AT ISSUE CHOSEN BENEFIT GUARANTEE NUMBER OF YEARS OF
VALUES GUARANTEE
- --------------------------------------------------------------------------------
45 Fixed $3,713 $2,218 for 39 years
45 Variable $13,906 $2,218 for 37 years
55 Fixed $5,581 $3,601 for 29 years
55 Variable $20,349 $3,601 for 27 years
65 Fixed $9,618 $7,212 for 22 years
65 Variable $30,787 $7,212 for 20 years
- --------------------------------------------------------------------------------
The Death Benefit Guarantee allows considerable flexibility as to the timing of
premium payments. Your Prudential representative can supply sample illustrations
of various premium amount and frequency combinations that correspond to the
Death Benefit Guarantee Values.
You should consider carefully the value of maintaining the guarantee. It may be
preferable for you to pay generally higher premiums in all years, rather than
trying to make such payments on an as needed basis if the death benefit
guarantee is desired for lifetime protection. For example, if you pay only
enough premium to meet the Limited Death Benefit Guarantee Values, a substantial
amount may be required to meet the Lifetime Death Benefit Guarantee Values in
order to continue the guarantee at the end of the Limited Death Benefit
Guarantee period. In addition, it is possible that the payment required to
continue the guarantee after the Limited Death Benefit Guarantee period could
exceed the premium payments allowed to be paid without causing the Contract to
become a Modified Endowment Contract. See TAX TREATMENT OF CONTRACT BENEFITS,
page 26.
CONTRACT DATE
When the first premium payment is paid with the application for a Contract, the
Contract date will ordinarily be the later of the date of the application or the
date of the medical examination. If the first premium is not paid with the
application, the Contract date will ordinarily be 2 or 3 days after the
application is approved by The Prudential so that it will coincide with the date
on which the first premium is paid and the Contract is delivered. Under certain
circumstances, we may allow the Contract to be back dated for the purpose of
lowering one or both insureds' issue age[s], but only to a date not earlier than
six months prior to the date of the application. This may be advantageous for
some Contract owners as a lower issue age may result in lower current charges.
For a Contract that is backdated, the minimum initial premium will be treated as
if it were received on the back-dated Contract date and the current death
benefit and cash surrender value under the Contract will be equal to what they
would have been had the Contract been issued on the Contract date and had all
Contract charges been made.
ALLOCATION OF PREMIUMS
On the Contract date, the charge for sales expenses and the charge for taxes
attributable to premiums are deducted from the initial premium. The remainder of
the initial premium will be
14
<PAGE>
allocated on the Contract date among the subaccounts and/or the fixed-rate
option according to your desired allocation as specified in the application form
and the first monthly deductions are made. See CHARGES AND EXPENSES, page 16.
The invested portion of all subsequent premiums is placed in the selected
investment option[s] when we receive them. Thus, to the extent that the receipt
of the first premium precedes the Contract date, there will be a period during
which the Contract owner's initial premium will not be invested. The charge for
sales expenses and the charge for taxes attributable to premiums also apply to
all subsequent premium payments (there is no charge for sales expenses after the
twentieth Contract year); the remainder will be placed when received by The
Prudential in the subaccount[s], or the fixed-rate option, in accordance with
the allocation you previously designated. Provided the Contract is not in
default, you may change the way in which subsequent premiums are allocated by
giving written notice to a Prudential Home Office or by telephoning that Home
Office, unless you ask that transfers by telephone not be made. There is no
charge for reallocating future premiums. All percentage allocations must be in
whole numbers. For example, 33% can be selected but 33 1/3% cannot. Of course,
the total allocation to all selected investment options must equal 100%.
TRANSFERS
You may, up to twelve times in each Contract year, transfer amounts from one
subaccount to another subaccount or to the fixed-rate option without charge.
There is an administrative charge of up to $25 for each transfer made exceeding
twelve in any Contract year. All or a portion of the amount credited to a
subaccount may be transferred.
Transfers among subaccounts will take effect as of the end of the valuation
period in which a proper transfer request is received at a Prudential Home
Office. The request may be in terms of dollars, such as a request to transfer
$10,000 from one subaccount to another, or may be in terms of a percentage
reallocation among subaccounts. In the latter case, as with premium
reallocations, the percentages must be in whole numbers. You may transfer
amounts by proper written notice to a Prudential Home Office, or by telephone,
provided you are enrolled to use the Telephone Transfer System.
You will automatically be enrolled to use the Telephone Transfer System unless
you elect not to have this privilege. We will use reasonable procedures, such as
asking you to provide certain personal information provided on your application
for insurance, to confirm that instructions given by telephone are genuine. We
will not be held liable for following telephone instructions that we reasonably
believe to be genuine. The Prudential cannot guarantee that you will be able to
get through to complete a telephone transfer during peak periods such as periods
of drastic economic or market change.
On the liquidation date of a Zero Coupon Bond Subaccount, all the shares held by
it in the corresponding portfolio of the Series Fund will be redeemed and the
proceeds of the redemption applicable to each Contract will be transferred to
the Money Market Subaccount unless the Contract owner directs that it be
transferred to another investment option[s]. Affected Contract owners will be
notified in writing and given the opportunity to transfer their proceeds to
another subaccount or the fixed-rate option prior to the liquidation date.
Only one transfer from the fixed rate option will be permitted during the
Contract year and the maximum amount which may be transferred out of the fixed
rate option each year is the greater of (a) 25% of the amount in the fixed rate
option; and (b) $2,000. These limits are subject to change in the future. We may
waive these restrictions for limited periods of time
15
<PAGE>
in a non-discriminatory way, (e.g., when interest rates are declining). Note we
are currently waiving these restrictions and will continue to do so at least
through December 31, 1996.
DOLLAR COST AVERAGING
As an administrative practice, we are currently offering a feature called Dollar
Cost Averaging ("DCA"). Under this feature, either fixed dollar amounts or a
percentage of the amount designated for use under the DCA option will be
transferred periodically from the Money Market Subaccount into other investment
options available under the Contract, excluding the fixed-rate option. You may
choose to have periodic transfers made monthly, quarterly, semi-annually or
annually.
Each automatic transfer will take effect as of the end of the valuation period
on the date coinciding with the periodic timing you designated provided the New
York Stock Exchange is open on that date. If the New York Stock Exchange is not
open on that date, or if the date does not occur in that particular month, the
transfer will take effect as of the end of the valuation period which
immediately follows that date. Automatic transfers will continue until: (1) $50
or less remains of the amount designated for Dollar Cost Averaging, at which
time the remaining amount will be transferred; or (2) you give us notification
of a change in DCA allocation or cancellation of the feature. Currently, there
is no charge for using the Dollar Cost Averaging feature. We reserve the right
to change the requirements or discontinue the feature.
CHARGES AND EXPENSES
The total amount invested at any time under the Contract (the "Contract Fund")
consists of the sum of the amount credited to the subaccounts, the amount
allocated to the fixed-rate option, and the principal amount of any Contract
loan plus the amount of interest credited to the Contract upon that loan. See
CONTRACT LOANS, page 25. Most charges, although not all, are made by reducing
the Contract Fund.
This section provides a detailed description of each charge that is described
briefly in the chart on page 4, and an explanation of the purpose of the charge.
In several instances we will use the terms "maximum charge" and "current
charge." The "maximum charge," in each instance, is the highest charge that The
Prudential is entitled to make under the Contract. The "current charge" is the
lower amount that The Prudential is now charging. However, if circumstances
change, The Prudential reserves the right to increase each current charge, up to
but to no more than the maximum charge, without giving any advance notice.
DEDUCTIONS FROM PREMIUM PAYMENTS
(a) A charge of up to 7.5% is deducted from each premium for taxes attributable
to premiums. For these purposes, "taxes attributable to premiums" shall
include any federal, state or local income, premium, excise, business or any
other type of tax (or component thereof) measured by or based upon the
amount of premium received by The Prudential. That charge is currently made
up of two parts. The first part is in an amount based on an average of state
and local premium taxes. The current charge for this first part is 2.5% of
the premium. The second part is for federal income taxes measured by
premiums and it is currently equal to 1.25% of the premium. The Prudential
believes that this charge is a reasonable estimate of an increase in its
federal income taxes resulting from a 1990 change in the Internal Revenue
Code. It is intended to recover this increased tax.
16
<PAGE>
(b) A charge for sales expenses will be deducted from premium payments made
during the first twenty Contract years. This charge, often called a sales
load, is deducted to compensate us for things like the costs The Prudential
incurs in selling the Contracts, including commissions, advertising and the
printing and distribution of prospectuses and sales literature. The charge
is expressed as a percentage of premium. The charge is equal to 30% of
premiums paid in the first Contract year up to the amount of the target
level premium (see PREMIUMS, page 11) and 4% of premiums paid in excess of
the target level premium. For Contract years 2 through 20, the charge is
equal to 7.5% of the premiums paid in each Contract year up to the target
level premium and 4% of the premiums paid above the target level premium.
Generally, if the average age of the insureds is 59 years or more, these
charges may be reduced to comply with the requirements of certain provisions
of the Investment Company Act of 1940 and rules adopted by the Securities
and Exchange Commission. Depending upon state approval, this charge may be
reduced on a non-discriminatory basis in conjunction with the exchange of a
Prudential Survivorship Whole Life Contract for a PRUDENTIAL SURVIVORSHIP
PREFERRED Contract.
Paying less than the target level premium amount in the first Contract year
or paying more than the target level premium amount in any Contract year
could reduce your total sales load. For example, assume that a Contract has
a target level premium of $12,097.49 and the Contract owner would like to
pay ten target level premiums. If the Contract owner paid $24,194.98 (two
times the amount of the target level premium in every other policy year up
to the ninth year (i.e. in years 1, 3, 5, 7, 9), the sales load charge would
be $9,677.99. If however, the Contract owner paid $12,097.49 in each of the
first ten policy years, the total sales load would be $11,795.04.
Attempting to structure the timing and amount of premium payments to reduce
the potential sales load may increase the risk that your Contract will lapse
without value. Delaying the payment of target premium amounts to later years
will adversely affect the Death Benefit Guarantee if the accumulated premium
payments do not reach the accumulated values shown under your Contract's
Limited Death Benefit Guarantee Values. See DEATH BENEFIT GUARANTEE, page
12. In addition, there are circumstances where payment of premiums that are
too large may cause the Contract to be characterized as a Modified Endowment
Contract, which could be significantly disadvantageous. See TAX TREATMENT OF
CONTRACT BENEFITS, page 26.
DEDUCTIONS FROM PORTFOLIOS
The Account purchases shares of the Series Fund at net asset value. The net
asset value of those shares reflects portfolio management fees and expenses
already deducted from the assets of the Series Fund. The fees and expenses for
the Series Fund are briefly described under THE PRUDENTIAL SERIES FUND, INC. on
page 6 in connection with the general description of the Series Fund. More
detailed information is contained in the attached Series Fund prospectus.
DAILY DEDUCTION FROM THE CONTRACT FUND
Each day a charge is deducted from the assets of each of the subaccounts (the
"variable investment options") in an amount equivalent to an effective annual
rate of 0.9%. This charge is intended to compensate Prudential for assuming
mortality and expense risks under the Contract. The mortality risk assumed is
that the insureds may live for shorter periods of time than The Prudential
estimated when it determined what mortality charge to make. The expense risk
assumed is that expenses incurred in issuing and administering the Contract will
17
<PAGE>
be greater than The Prudential estimated in fixing its administrative charges.
The Prudential will realize a profit from this risk charge to the extent it is
not needed to provide benefits and pay expenses under the Contracts. This charge
is not assessed against amounts allocated to the fixed-rate option.
MONTHLY DEDUCTIONS FROM CONTRACT FUND
The following monthly charges are deducted proportionately from the dollar
amounts held in each of the chosen investment option[s].
a) An administrative charge based on the basic insurance amount is deducted.
The charge is intended to compensate us for things like processing claims,
keeping records and communicating with Contract owners. In the first year,
this charge consists of $5 per Contract plus $0.07 per $1,000 of basic
insurance amount. In all subsequent years, this charge will be $5 per
Contract. The Prudential reserves the right, however, to increase these
charges to $7.50 per Contract plus $0.07 per $1,000 of basic insurance
amount in the first Contract year and $7.50 per Contract plus $0.01 per
$1,000 of basic insurance amount in later years.
For example, a Contract with a basic insurance amount of $250,000 would
currently have a charge equal to $5 plus $17.50 for a total of $22.50 per
month for the first Contract year and $5 per month in all later years. The
maximum charge for this same Contract would be $7.50 plus $17.50 for a total
of $25 per month during the first Contract year. In later years, the maximum
charge would be $7.50 plus $2.50 for a total of $10 per month.
b) A cost of insurance ("COI") charge is deducted. Upon the second death of two
insureds, the amount payable to the beneficiary (assuming there is no
Contract debt) is larger than the Contract Fund-- significantly larger if
both insureds died in the early years of the Contract. The cost of insurance
charges collected from all Contract owners enables The Prudential to pay
this larger death benefit. The maximum COI charge is determined by
multiplying the "net amount at risk" under a Contract (the amount by which
the Contract's insurance amount exceeds the Contract Fund) by maximum COI
rates. The maximum COI rates are based upon both insureds' current attained
age, sex, smoking status, and extra rating class, if any.
For current COI charges, we use rates that are generally lower than the
maximum if both insureds are 36 years of age or older.
c) A charge of $0.01 per $1,000 of basic insurance amount is made to compensate
The Prudential for the risk we assume by providing the Death Benefit
Guarantee feature. See DEATH BENEFIT GUARANTEE, page 12.
d) You may add one or more of several riders to the Contract. Some riders are
charged for separately. If you add such a rider to the basic Contract,
additional charges will be deducted.
e) If an insured is in a substandard risk classification (for example, a person
in a hazardous occupation), additional charges will be deducted.
18
<PAGE>
TRANSACTION CHARGES
(a) An administrative processing charge of $10 is made in connection with each
withdrawal. We reserve the right to increase this charge up to $25 for each
withdrawal.
b) No administrative processing charge is currently being made in connection
with a decrease in basic insurance amount. We reserve the right to make such
a charge in an amount of up to $25 for each decrease.
(c) An administrative processing charge of up to $25 will be made for each
transfer exceeding 12 in any Contract year.
HOW A CONTRACT'S CASH SURRENDER VALUE WILL VARY
You may surrender the Contract for its net cash value. The Contract's cash
surrender value on any date will be the Contract Fund, defined under CHARGES AND
EXPENSES on page 16, reduced by any Contract debt. See CONTRACT LOANS, page 25.
The Contract Fund value changes daily, reflecting increases or decreases in the
value of the Series Fund portfolios in which the assets of the subaccount[s]
have been invested, interest credited on any amounts allocated to the fixed-rate
option, interest credited on any loan, and by the daily asset charge for
mortality and expense risks assessed against the variable investment options.
The Contract Fund value also changes to reflect the receipt of premium payments
and the monthly deductions described under CHARGES AND EXPENSES. Upon request,
The Prudential will tell you the cash surrender value of your Contract. It is
possible for the cash surrender value of a Contract to decline to zero because
of unfavorable investment performance.
The tables on pages T1 through T4 of this prospectus illustrate approximately
what the cash surrender values would be for representative Contracts paying
target premium amounts (see PREMIUMS, page 11), assuming hypothetical uniform
investment results in the Series Fund portfolios. Two of the tables assume
current charges will be made throughout the lifetime of the Contract and two
tables assume maximum charges will be made. See ILLUSTRATIONS OF CASH SURRENDER
VALUES, DEATH BENEFITS, AND ACCUMULATED PREMIUMS, page 23.
HOW A FIXED INSURANCE AMOUNT CONTRACT'S DEATH BENEFIT WILL VARY
As noted above, there are two types of the Contract, a fixed insurance amount
and a variable insurance amount. The death benefit under a Contract with a
variable insurance amount varies with investment performance while the death
benefit under a Contract with a fixed insurance amount does not, unless it must
be increased to comply with the Internal Revenue Code's definition of life
insurance.
Under a Contract with a fixed insurance amount, the death benefit is equal to
the basic insurance amount, reduced by any Contract debt. See CONTRACT LOANS,
page 25. If the Contract is kept in force for several years, depending on how
much premium you pay, and/or if investment performance is reasonably favorable,
the Contract Fund may grow to the point where The Prudential will increase the
insurance amount in order to ensure that the Contract will satisfy the Internal
Revenue Code's definition of life insurance. Thus, assuming no Contract debt,
the death benefit under a Contract with a fixed insurance amount will always be
the greater of: (1) the basic insurance amount; and (2) the Contract Fund before
the deduction of any monthly charges due on that date, multiplied by the
attained age factor that applies. A listing of attained age factors can be found
on the data pages of your Contract. The latter provision ensures that the
Contract will always have an insurance amount large enough to be treated as life
insurance for tax purposes under current law.
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<PAGE>
The following table illustrates at different ages how the attained age factor
affects the death benefit for different Contract Fund amounts. The table assumes
a $1,000,000 fixed insurance amount Contract was issued when the younger insured
was age 35 and there is no Contract debt.
Fixed Insurance Amount
- --------------------------------------------------------------------------------
IF THEN
- --------------------------------------------------------------------------------
THE CONTRACT
THE AND THE THE FUND AND THE
YOUNGER CONTRACT ATTAINED MULTIPLIED BY DEATH
INSURED IS FUND IS AGE FACTOR THE ATTAINED BENEFIT IS
AGE IS AGE FACTOR IS
- --------------------------------------------------------------------------------
40 $100,000 5.7 570,000 $1,000,000
40 $200,000 5.7 1,140,000 $1,140,000*
40 $300,000 5.7 1,710,000 $1,710,000*
- --------------------------------------------------------------------------------
60 $300,000 2.8 840,000 $1,000,000
60 $400,000 2.8 1,120,000 $1,120,000*
60 $600,000 2.8 1,680,000 $1,680,000*
- --------------------------------------------------------------------------------
80 $600,000 1.5 900,000 $1,000,000
80 $700,000 1.5 1,050,000 $1,050,000*
80 $800,000 1.5 1,200,000 $1,200,000*
- --------------------------------------------------------------------------------
* Note that the death benefit has been increased to comply with the Internal
Revenue Code's definition of life insurance. At this point, any additional
premium payment will increase the insurance amount by more than it increases
the Contract Fund.
- --------------------------------------------------------------------------------
This means, for example, that if the younger insured has reached the age of 60,
and the Contract Fund is $400,000, the death benefit will be $1,120,000, even
though the original basic insurance amount was $1,000,000. In this situation,
for every $1 increase in the Contract Fund, the insurance amount (and therefore
the death benefit) will be increased by $2.80. We reserve the right to refuse to
accept any premium payment that increases the insurance amount by more than it
increases the Contract Fund. If we exercise this right, it may in certain
situations result in the loss of the death benefit guarantee.
HOW A VARIABLE INSURANCE AMOUNT CONTRACT'S DEATH BENEFIT WILL VARY
Under a Contract with a variable insurance amount, while the Contract is in
force, the death benefit will never be less than the basic insurance amount
reduced by any Contract debt, but will also vary, immediately after it is
issued, with the investment results of the selected investment options. The
insurance amount may be further increased to ensure that the Contract will
satisfy the Internal Revenue Code's definition of life insurance. Thus, assuming
no Contract debt, the death benefit will always be the greater of: (1) the basic
insurance amount plus the Contract Fund; and (2) the Contract Fund before the
deduction of any monthly charges due on that date, multiplied by the attained
age factor that applies. A listing of attained age factors can be found on the
data pages of your Contract. The latter provision ensures that the Contract will
always have an insurance amount large enough to be treated as life insurance for
tax purposes under current law.
20
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The following table illustrates various attained age factors and Contract Funds
and the corresponding death benefits. The table assumes a $1,000,000 variable
insurance amount Contract was issued when the younger insured was age 35 and
there is no Contract debt.
Variable Insurance Amount
- --------------------------------------------------------------------------------
IF THEN
- --------------------------------------------------------------------------------
THE CONTRACT
THE AND THE THE FUND AND THE
YOUNGER CONTRACT ATTAINED MULTIPLIED BY DEATH
INSURED IS FUND IS AGE FACTOR THE ATTAINED BENEFIT IS
AGE IS AGE FACTOR IS
- --------------------------------------------------------------------------------
40 $100,000 5.7 570,000 $1,100,000
40 $200,000 5.7 1,140,000 $1,200,000
40 $300,000 5.7 1,710,000 $1,710,000*
- --------------------------------------------------------------------------------
60 $300,000 2.8 840,000 $1,300,000
60 $400,000 2.8 1,120,000 $1,400,000
60 $600,000 2.8 1,680,000 $1,680,000*
- --------------------------------------------------------------------------------
80 $600,000 1.5 900,000 $1,600,000
80 $700,000 1.5 1,050,000 $1,700,000
80 $800,000 1.5 1,200,000 $1,800,000
- --------------------------------------------------------------------------------
* Note that the death benefit has been increased to comply with the Internal
Revenue Code's definition of life insurance. At this point, any additional
premium payment will increase the insurance amount by more than it increases
the Contract Fund.
- --------------------------------------------------------------------------------
This means, for example, that if the younger insured has reached the age of 60,
and the Contract Fund is $600,000, the death benefit will be $1,680,000, even
though the original basic insurance amount was $1,000,000. In this situation,
for every $1 increase in the Contract Fund, the insurance amount (and therefore
the death benefit) will be increased by $2.80. We reserve the right to refuse to
accept any premium payment that increases the insurance amount by more than it
increases the Contract Fund. If we exercise this right, it may in certain
situations result in the loss of the death benefit guarantee.
PARTICIPATION IN DIVISIBLE SURPLUS
The Contract is eligible to be credited with part of The Prudential's divisible
surplus attributable to the Contracts ("dividends"), as determined annually by
The Prudential's Board of Directors. However, we do not expect to pay any
dividends to Contract owners of the Contracts while they remain in force because
favorable investment performance will be reflected in Contract values and
because we intend, if experience indicates that current charges are greater than
needed to cover expenses, to reduce those charges further so that there will be
no source of distributable surplus attributable to these Contracts.
SURRENDER OF A CONTRACT
A Contract may be surrendered for its cash surrender value while one or both of
the insureds is living. To surrender a Contract, you must deliver or mail it,
together with a written request, to a Prudential Home Office. The cash surrender
value of a surrendered Contract will be determined as of the end of the
valuation period in which such a request is received in the
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Home Office. Surrender of a Contract may have tax consequences. See TAX
TREATMENT OF CONTRACT BENEFITS, page 26.
WITHDRAWALS
Under certain circumstances, you may withdraw a portion of the Contract's cash
surrender value without surrendering the Contract. The amount that you may
withdraw is limited by the requirement that the cash surrender value after the
withdrawal may not be zero or less than zero after deducting the next monthly
charges. The amount withdrawn must be at least $500. There is an administrative
processing fee for each withdrawal equal to $10. The Prudential, however,
reserves the right to increase this charge up to $25. An amount withdrawn may
not be repaid except as a premium subject to the applicable charges. Upon
request, we will tell you how much you may withdraw. Withdrawal of the cash
surrender value may have tax consequences. See TAX TREATMENT OF CONTRACT
BENEFITS, page 26.
Whenever a withdrawal is made, the insurance amount and therefore the death
benefit payable will immediately be reduced by at least the amount of the
withdrawal. For a Contract with a variable insurance amount, this will not
change the basic insurance amount. However, under a Contract with a fixed
insurance amount, the resulting reduction in insurance amount usually requires a
reduction in the basic insurance amount. No withdrawal will be permitted under a
Contract with a fixed insurance amount if it would result in a basic insurance
amount of less than the minimum basic insurance amount. It is important to note,
however, that if the insurance amount is decreased at any time during the life
of the Contract, there is a possibility that the Contract might be classified as
a Modified Endowment Contract. See TAX TREATMENT OF CONTRACT BENEFITS, page 26.
Before making any withdrawal which causes a decrease in insurance amount, you
should consult with your Prudential representative.
When a withdrawal is made, the Contract Fund is reduced by the sum of the cash
withdrawn and the fee for the withdrawal. An amount equal to the reduction in
the Contract Fund will be withdrawn proportionally from the investment options
unless you direct otherwise.
Withdrawal of the cash surrender value increases the risk that the Contract Fund
may be insufficient to provide for benefits under the Contract. If such a
withdrawal is followed by unfavorable investment experience, the Contract may go
into default. Withdrawals may also affect whether a Contract is kept in force
under the Death Benefit Guarantee. This is because, for purposes of determining
whether a lapse has occurred, The Prudential treats withdrawals as a return of
premium. Therefore, withdrawals decrease the accumulated net payments. See DEATH
BENEFIT GUARANTEE, page 12.
DECREASES IN BASIC INSURANCE AMOUNT
As explained earlier, you may make a withdrawal (see WITHDRAWALS, above). You
also have the additional option of decreasing the basic insurance amount of your
Contract without withdrawing any cash surrender value. Contract owners who
conclude that, because of changed circumstances, the amount of insurance is
greater than needed will thus be able to decrease their amount of insurance
protection, and the monthly deductions for the cost of insurance, without
decreasing their current cash surrender value. The cash surrender value of the
Contract on the date of the decrease will not change, except that an
administrative processing fee of up to $25 may be deducted. If we ask you to,
you must send us your Contract to be endorsed. The Contract will be amended to
show the new basic insurance amount, charges, values in the appropriate tables
and the effective date of the decrease.
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The minimum permissible decrease for your Contract is shown under CONTRACT
LIMITATIONS in the data pages of your Contract. The basic insurance amount after
the decrease may not be lower than the minimum basic insurance amount. No
reduction will be permitted if it would cause the Contract to fail to qualify as
"life insurance" for purposes of Section 7702 of the Internal Revenue Code. A
decrease will not take effect if at least one insured is not living on the
effective date.
It is important to note, however, that if the basic insurance amount is
decreased at any time during the life of the Contract, there is a possibility
that the Contract might be classified as a Modified Endowment Contract. See TAX
TREATMENT OF CONTRACT BENEFITS, page 26. Before requesting any decrease in basic
insurance amount, you should consult with your Prudential representative.
WHEN PROCEEDS ARE PAID
The Prudential will generally pay any death benefit, cash surrender value, loan
proceeds or withdrawal within 7 days after receipt at a Prudential Home Office
of all the documents required for such a payment. Other than the death benefit,
which is determined as of the date of the second death, the amount will be
determined as of the end of the valuation period in which the necessary
documents are received. However, The Prudential may delay payment of proceeds
from the subaccount[s] and the variable portion of the death benefit due under
the Contract if the disposal or valuation of the Account's assets is not
reasonably practicable because the New York Stock Exchange is closed for other
than a regular holiday or weekend, trading is restricted by the SEC or the SEC
declares that an emergency exists.
With respect to the amount of any cash surrender value allocated to the
fixed-rate option, The Prudential expects to pay the cash surrender value
promptly upon request. However, The Prudential has the right to delay payment of
such cash surrender value for up to 6 months (or a shorter period if required by
applicable law). The Prudential will pay interest of at least 3% a year if it
delays such a payment for more than 30 days (or a shorter period if required by
applicable law).
ILLUSTRATIONS OF CASH SURRENDER VALUES, DEATH BENEFITS, AND ACCUMULATED PREMIUMS
The four tables that follow show how the death benefit and cash surrender values
change with the investment experience of the Account. They are "hypothetical"
because they are based, in part, upon several assumptions, each of which is
described below. All four tables assume, first, that a Contract with a basic
insurance amount of $1,000,000 has been bought by a 55 year old male and a 50
year old female, both non-smokers, with no extra risks or substandard ratings,
and no extra benefit riders added to the Contract. It is assumed that the target
premium amount (see PREMIUMS, page 11) is paid on each Contract anniversary and
that no loans are taken. The first table (page T1) assumes that a fixed
insurance amount Contract has been purchased and the second table (page T2)
assumes that a variable insurance amount Contract has been purchased. Both
assume that the current charges will continue for the indefinite future. The
third and fourth tables (pages T3 and T4) are based upon the same assumptions
except that it is assumed that the maximum contractual charges have been made
from the beginning. See CHARGES AND EXPENSES, page 16.
Another assumption is that the Contract Fund has been invested in equal amounts
in each of the 15 available portfolios of the Series Fund and no portion of the
Contract Fund has been allocated to the fixed-rate option. Finally, there are
four assumptions, shown separately, about the average investment performance of
the portfolios. The first is that there will be a uniform 0% gross rate of
return, that is, that the average value of the Contract Fund will
23
<PAGE>
uniformly be adversely affected by very unfavorable investment performance. The
other three assumptions are that investment performance will be at a uniform
gross annual rate of 4%, 8% and 12%. These, of course, are unrealistic
assumptions since actual returns will fluctuate from year to year. Nevertheless,
these assumptions help show how the Contract values will change with investment
experience.
The first column in the following tables shows the Contract year. The second
column, to provide context, shows what the aggregate amount would be if the
premiums had been invested in a savings account paying 4% compounded interest.
Of course, if that were done, there would be no life insurance protection. The
next four columns show the death benefit payable in each of the years shown for
the four different assumed investment returns. Note that a gross return (as well
as the net return) is shown at the top of each column. The gross return
represents the combined effect of income and capital appreciation of the
portfolios before any reduction is made for investment advisory fees or other
Series Fund expenses. The net return reflects an average total annual expenses
of the 15 portfolios of 0.55%, and the daily deduction from the Contract Fund of
0.9% per year. Thus, gross returns of 0%, 4%, 8% and 12% are the equivalent of
net returns of -1.45%, 2.55%, 6.55% and 10.55% respectively. The death benefits
and cash surrender values shown reflect the deduction of all expenses and
charges both from the Series Fund and under the Contract.
Note that under the variable insurance amount Contract the death benefit changes
to reflect investment returns, while under the fixed insurance amount Contract
the death benefit increases only if the Contract Fund becomes sufficiently large
that an increase in the death benefit is necessary in order to ensure that the
Contract will satisfy the Internal Revenue Code's definition of life insurance.
See TYPE OF INSURANCE AMOUNT, page 9.
Following these illustrations are two pages (pages T5 and T6) showing internal
rates of return (commonly referred to as IRRs) associated with the cash values
and death benefits shown on the preceding four pages. IRRs are often employed by
insurance companies to provide some indication of the rate of return that may be
thought of as earned upon your "investment" in the Contract (the aggregate
premiums paid) if the Contract were surrendered or if the insureds were to die.
The IRR on the death benefit is equivalent to an interest rate (after taxes) at
which an amount equal to the premiums illustrated on the preceding pages could
have been invested to arrive at the death benefit of the Contract. The IRR on
the cash surrender value is equivalent to an interest rate (after taxes) at
which an amount equal to the illustrated premiums could have been invested to
arrive at the cash surrender value of the Contract. The IRRs on page T5 are
based on the Contract values shown on pages T1 and T2. The IRRs on page T6 are
based on the Contract values shown on pages T3 and T4.
If you are considering the purchase of a variable life insurance contract from
another insurance company, you should not rely upon these tables for comparison
purposes. A comparison between two tables, each showing values for a 55 year old
man and a 50 year old woman, may be useful for a 55 year old man and a 50 year
old woman but would be inaccurate if made for insureds of other ages or sex.
Your Prudential representative can provide you with a hypothetical illustration
for your own age, sex, and rating class. You can obtain an illustration using
premium amounts and payment patterns that you wish to follow. You may use
assumed gross returns different than those shown in the tables, although
currently they may not be higher than 10%.
24
<PAGE>
<TABLE>
<CAPTION>
ILLUSTRATIONS
-------------
VARIABLE SURVIVORSHIP CONTRACT
FIXED INSURANCE AMOUNT
MALE PREFERRED ISSUE AGE 55
FEMALE PREFERRED ISSUE AGE 50
$ 1,000,000 DEATH BENEFIT
$ 12,097.49 ANNUAL PREMIUM PAYMENT
USING CURRENT CONTRACTUAL CHARGES
Death Benefit (1) Cash Surrender Value (1)
---------------------------------------------------- ----------------------------------------------------
Assuming Hypothetical Gross (and Net) Assuming Hypothetical Gross (and Net)
Premiums Annual Investment Return of Annual Investment Return of
End of Accumulated ---------------------------------------------------- ----------------------------------------------------
Policy at 4% Interest 0% Gross 4% Gross 8% Gross 12% Gross 0% Gross 4% Gross 8% Gross 12% Gross
Year Per Year (-1.45% Net) (2.55% Net) (6.55% Net) (10.55% Net) (-1.45% Net) (2.55% Net) (6.55% Net) (10.55% Net)
- ------ -------------- ------------ ----------- ----------- ------------ ------------ ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 $ 12,581 $1,000,000 $1,000,000 $1,000,000 $ 1,000,000 $ 6,875 $ 7,174 $ 7,472 $ 7,771
2 $ 25,666 $1,000,000 $1,000,000 $1,000,000 $ 1,000,000 $ 17,142 $ 18,147 $ 19,177 $ 20,231
3 $ 39,274 $1,000,000 $1,000,000 $1,000,000 $ 1,000,000 $ 27,227 $ 29,369 $ 31,616 $ 33,973
4 $ 53,426 $1,000,000 $1,000,000 $1,000,000 $ 1,000,000 $ 37,128 $ 40,836 $ 44,829 $ 49,123
5 $ 68,145 $1,000,000 $1,000,000 $1,000,000 $ 1,000,000 $ 46,835 $ 52,547 $ 58,858 $ 65,821
6 $ 83,452 $1,000,000 $1,000,000 $1,000,000 $ 1,000,000 $ 56,342 $ 64,495 $ 73,744 $ 84,220
7 $ 99,372 $1,000,000 $1,000,000 $1,000,000 $ 1,000,000 $ 65,638 $ 76,674 $ 89,532 $ 104,486
8 $ 115,928 $1,000,000 $1,000,000 $1,000,000 $ 1,000,000 $ 74,709 $ 89,075 $ 106,266 $ 126,805
9 $ 133,146 $1,000,000 $1,000,000 $1,000,000 $ 1,000,000 $ 83,542 $101,686 $ 123,992 $ 151,377
10 $ 151,054 $1,000,000 $1,000,000 $1,000,000 $ 1,000,000 $ 92,118 $114,493 $ 142,758 $ 178,427
15 $ 251,925 $1,000,000 $1,000,000 $1,000,000 $ 1,000,000 $130,316 $180,732 $ 253,944 $ 360,483
20 $ 374,650 $1,000,000 $1,000,000 $1,000,000 $ 1,327,308 $157,181 $247,475 $ 399,349 $ 653,846
25 $ 523,963 $1,000,000 $1,000,000 $1,034,047 $ 1,946,599 $167,639 $311,347 $ 594,280 $1,118,735
30 $ 705,626 $1,000,000 $1,000,000 $1,273,723 $ 2,766,692 $133,445 $348,874 $ 837,976 $1,820,192
35 $ 926,647 $ 0(2)$1,000,000 $1,529,437 $ 3,860,710 $ 0(2) $318,238 $1,124,586 $2,838,757
40 $1,195,553 $ 0 $1,000,000 $1,807,134 $ 5,329,994 $ 0 $125,730 $1,457,366 $4,298,382
45 $1,522,718 $ 0 $ 0(2)$2,145,745 $ 7,427,345 $ 0 $ 0(2)$1,865,865 $6,458,561
50 $1,920,764 $ 0 $ 0 $2,547,366 $10,389,004 $ 0 $ 0 $2,449,390 $9,989,427
</TABLE>
(1) Assumes no Contract loan has been made.
(2) Based on a gross return of 0% the Contract would go into default in policy
year 35. Based on a gross return of 4% the Contract would go into default in
policy year 42.
THE HYPOTHETICAL INVESTMENT RATES OF RETURN SHOWN ABOVE AND ELSEWHERE IN THIS
PROSPECTUS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF
PAST OR FUTURE INVESTMENT RATES OF RETURN. ACTUAL RATES OF RETURN MAY BE MORE OR
LESS THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS INCLUDING THE
INVESTMENT ALLOCATIONS MADE BY AN OWNER, PREVAILING INTEREST RATES, AND RATES OF
INFLATION. THE DEATH BENEFIT AND CASH SURRENDER VALUE FOR A CONTRACT WOULD BE
DIFFERENT FROM THOSE SHOWN IF THE ACTUAL RATES OF RETURN AVERAGED 0%, 4%, 8%,
AND 12% OVER A PERIOD OF YEARS BUT ALSO FLUCTUATED ABOVE OR BELOW THOSE AVERAGES
FOR INDIVIDUAL CONTRACT YEARS. NO REPRESENTATIONS CAN BE MADE BY THE PRUDENTIAL
OR THE SERIES FUND THAT THESE HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED FOR
ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
T1
<PAGE>
<TABLE>
<CAPTION>
VARIABLE SURVIVORSHIP CONTRACT
VARIABLE INSURANCE AMOUNT
MALE PREFERRED ISSUE AGE 55
FEMALE PREFERRED ISSUE AGE 50
$ 1,000,000 DEATH BENEFIT
$ 12,097.49 ANNUAL PREMIUM PAYMENT
USING CURRENT CONTRACTUAL CHARGES
Death Benefit (1) Cash Surrender Value (1)
---------------------------------------------------- ----------------------------------------------------
Assuming Hypothetical Gross (and Net) Assuming Hypothetical Gross (and Net)
Premiums Annual Investment Return of Annual Investment Return of
End of Accumulated ---------------------------------------------------- ----------------------------------------------------
Policy at 4% Interest 0% Gross 4% Gross 8% Gross 12% Gross 0% Gross 4% Gross 8% Gross 12% Gross
Year Per Year (-1.45% Net) (2.55% Net) (6.55% Net) (10.55% Net) (-1.45% Net) (2.55% Net) (6.55% Net) (10.55% Net)
- ------ -------------- ------------ ----------- ----------- ------------ ------------ ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 $ 12,581 $1,006,875 $1,007,174 $1,007,472 $1,007,771 $ 6,875 $ 7,174 $ 7,472 $ 7,771
2 $ 25,666 $1,017,141 $1,018,147 $1,019,176 $1,020,231 $ 17,141 $ 18,147 $ 19,176 $ 20,231
3 $ 39,274 $1,027,225 $1,029,366 $1,031,613 $1,033,970 $ 27,225 $ 29,366 $ 31,613 $ 33,970
4 $ 53,426 $1,037,121 $1,040,828 $1,044,821 $1,049,114 $ 37,121 $ 40,828 $ 44,821 $ 49,114
5 $ 68,145 $1,046,821 $1,052,530 $1,058,839 $1,065,800 $ 46,821 $ 52,530 $ 58,839 $ 65,800
6 $ 83,452 $1,056,315 $1,064,463 $1,073,707 $1,084,177 $ 56,315 $ 64,463 $ 73,707 $ 84,177
7 $ 99,372 $1,065,590 $1,076,617 $1,089,464 $1,104,406 $ 65,590 $ 76,617 $ 89,464 $ 104,406
8 $ 115,928 $1,074,631 $1,088,980 $1,106,150 $1,126,663 $ 74,631 $ 88,980 $106,150 $ 126,663
9 $ 133,146 $1,083,420 $1,101,534 $1,123,802 $1,151,140 $ 83,420 $101,534 $123,802 $ 151,140
10 $ 151,054 $1,091,935 $1,114,258 $1,142,457 $1,178,043 $ 91,935 $114,258 $142,457 $ 178,043
15 $ 251,925 $1,129,343 $1,179,327 $1,251,900 $1,357,498 $129,343 $179,327 $251,900 $ 357,498
20 $ 374,650 $1,153,669 $1,241,708 $1,389,728 $1,640,199 $153,669 $241,708 $389,728 $ 640,199
25 $ 523,963 $1,157,458 $1,292,050 $1,556,899 $2,083,074 $157,458 $292,050 $556,899 $1,083,074
30 $ 705,626 $1,109,262 $1,292,632 $1,724,797 $2,747,183 $109,262 $292,632 $724,797 $1,747,183
35 $ 926,647 $ 0(2)$1,180,232 $1,831,758 $3,709,231 $ 0(2) $180,232 $831,758 $2,709,231
40 $1,195,553 $ 0 $ 0(2)$1,781,689 $5,083,036 $ 0 $ 0(2) $781,689 $4,083,036
45 $1,522,718 $ 0 $ 0 $1,459,246 $7,079,439 $ 0 $ 0 $459,246 $6,079,439
50 $1,920,764 $ 0 $ 0 $ 0(2) $9,944,371 $ 0 $ 0 $ 0(2) $8,944,371
</TABLE>
(1) Assumes no Contract loan has been made.
(2) Based on a gross return of 0% the Contract would go into default in policy
year 35. Based on a gross return of 4% the Contract would go into default in
policy year 39. Based on a gross return of 8% the Contract would go into
default in policy year 48.
THE HYPOTHETICAL INVESTMENT RATES OF RETURN SHOWN ABOVE AND ELSEWHERE IN THIS
PROSPECTUS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF
PAST OR FUTURE INVESTMENT RATES OF RETURN. ACTUAL RATES OF RETURN MAY BE MORE OR
LESS THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS INCLUDING THE
INVESTMENT ALLOCATIONS MADE BY AN OWNER, PREVAILING INTEREST RATES, AND RATES OF
INFLATION. THE DEATH BENEFIT AND CASH SURRENDER VALUE FOR A CONTRACT WOULD BE
DIFFERENT FROM THOSE SHOWN IF THE ACTUAL RATES OF RETURN AVERAGED 0%, 4%, 8%,
AND 12% OVER A PERIOD OF YEARS BUT ALSO FLUCTUATED ABOVE OR BELOW THOSE AVERAGES
FOR INDIVIDUAL CONTRACT YEARS. NO REPRESENTATIONS CAN BE MADE BY THE PRUDENTIAL
OR THE SERIES FUND THAT THESE HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED FOR
ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
T2
<PAGE>
<TABLE>
<CAPTION>
VARIABLE SURVIVORSHIP CONTRACT
FIXED INSURANCE AMOUNT
MALE PREFERRED ISSUE AGE 55
FEMALE PREFERRED ISSUE AGE 50
$ 1,000,000 DEATH BENEFIT
$ 12,097.49 ANNUAL PREMIUM PAYMENT
USING MAXIMUM CONTRACTUAL CHARGES
Death Benefit (1) Cash Surrender Value (1)
---------------------------------------------------- ----------------------------------------------------
Assuming Hypothetical Gross (and Net) Assuming Hypothetical Gross (and Net)
Premiums Annual Investment Return of Annual Investment Return of
End of Accumulated ---------------------------------------------------- ----------------------------------------------------
Policy at 4% Interest 0% Gross 4% Gross 8% Gross 12% Gross 0% Gross 4% Gross 8% Gross 12% Gross
Year Per Year (-1.45% Net) (2.55% Net) (6.55% Net) (10.55% Net) (-1.45% Net) (2.55% Net) (6.55% Net) (10.55% Net)
- ------ -------------- ------------ ----------- ----------- ------------ ------------ ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 $ 12,581 $1,000,000 $1,000,000 $1,000,000 $1,000,000 $ 6,375 $ 6,654 $ 6,933 $ 7,212
2 $ 25,666 $1,000,000 $1,000,000 $1,000,000 $1,000,000 $ 15,973 $ 16,916 $ 17,881 $ 18,869
3 $ 39,274 $1,000,000 $1,000,000 $1,000,000 $1,000,000 $ 25,333 $ 27,338 $ 29,444 $ 31,651
4 $ 53,426 $1,000,000 $1,000,000 $1,000,000 $1,000,000 $ 34,436 $ 37,904 $ 41,638 $ 45,655
5 $ 68,145 $1,000,000 $1,000,000 $1,000,000 $1,000,000 $ 43,261 $ 48,590 $ 54,482 $ 60,986
6 $ 83,452 $1,000,000 $1,000,000 $1,000,000 $1,000,000 $ 51,782 $ 59,372 $ 67,989 $ 77,754
7 $ 99,372 $1,000,000 $1,000,000 $1,000,000 $1,000,000 $ 59,971 $ 70,220 $ 82,172 $ 96,084
8 $ 115,928 $1,000,000 $1,000,000 $1,000,000 $1,000,000 $ 67,796 $ 81,099 $ 97,040 $ 116,109
9 $ 133,146 $1,000,000 $1,000,000 $1,000,000 $1,000,000 $ 75,219 $ 91,970 $112,602 $ 137,976
10 $ 151,054 $1,000,000 $1,000,000 $1,000,000 $1,000,000 $ 82,193 $102,782 $128,858 $ 161,840
15 $ 251,925 $1,000,000 $1,000,000 $1,000,000 $1,000,000 $107,748 $153,220 $219,848 $ 317,522
20 $ 374,650 $1,000,000 $1,000,000 $1,000,000 $1,130,209 $106,073 $185,245 $321,989 $ 556,753
25 $ 523,963 $1,000,000 $1,000,000 $1,000,000 $1,575,124 $ 51,164 $172,318 $428,316 $ 905,244
30 $ 705,626 $1,000,000 $1,000,000 $1,000,000 $2,067,188 $ 0 $ 28,588 $509,206 $1,359,992
35 $ 926,647 $ 0(2)$ 0(2)$1,000,000 $2,611,184 $ 0(2) $ 0(2) $513,484 $1,919,988
40 $1,195,553 $ 0 $ 0 $1,000,000 $3,227,840 $ 0 $ 0 $242,350 $2,603,097
45 $1,522,718 $ 0 $ 0 $ 0(2) $4,003,016 $ 0 $ 0 $ 0(2) $3,480,884
50 $1,920,764 $ 0 $ 0 $ 0 $4,973,382 $ 0 $ 0 $ 0 $4,782,098
</TABLE>
(1) Assumes no Contract loan has been made.
(2) Based on a gross return of 0% the Contract fund would go to zero in year 27,
but because the Target Premium is being paid, the Contract is kept inforce
through the Limited Death Benefit Guarantee Period of 32 years. The Contract
would be in default at the beginning of year 33. Based on a gross return of
4% the Contract fund would go to zero in year 31, but because the Target
Premium is being paid, the Contract is kept inforce through the Limited
Death Benefit Guarantee Period of 32 years. The Contract would be in default
at the beginning of year 33. Based on a gross return of 8% the Contract
would go into default in policy year 42.
THE HYPOTHETICAL INVESTMENT RATES OF RETURN SHOWN ABOVE AND ELSEWHERE IN THIS
PROSPECTUS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF
PAST OR FUTURE INVESTMENT RATES OF RETURN. ACTUAL RATES OF RETURN MAY BE MORE OR
LESS THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS INCLUDING THE
INVESTMENT ALLOCATIONS MADE BY AN OWNER, PREVAILING INTEREST RATES, AND RATES OF
INFLATION. THE DEATH BENEFIT AND CASH SURRENDER VALUE FOR A CONTRACT WOULD BE
DIFFERENT FROM THOSE SHOWN IF THE ACTUAL RATES OF RETURN AVERAGED 0%, 4%, 8%,
AND 12% OVER A PERIOD OF YEARS BUT ALSO FLUCTUATED ABOVE OR BELOW THOSE AVERAGES
FOR INDIVIDUAL CONTRACT YEARS. NO REPRESENTATIONS CAN BE MADE BY THE PRUDENTIAL
OR THE SERIES FUND THAT THESE HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED FOR
ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
T3
<PAGE>
<TABLE>
<CAPTION>
VARIABLE SURVIVORSHIP CONTRACT
VARIABLE INSURANCE AMOUNT
MALE PREFERRED ISSUE AGE 55
FEMALE PREFERRED ISSUE AGE 50
$ 1,000,000 DEATH BENEFIT
$ 12,097.49 ANNUAL PREMIUM PAYMENT
USING MAXIMUM CONTRACTUAL CHARGES
Death Benefit (1) Cash Surrender Value (1)
---------------------------------------------------- ----------------------------------------------------
Assuming Hypothetical Gross (and Net) Assuming Hypothetical Gross (and Net)
Premiums Annual Investment Return of Annual Investment Return of
End of Accumulated ---------------------------------------------------- ----------------------------------------------------
Policy at 4% Interest 0% Gross 4% Gross 8% Gross 12% Gross 0% Gross 4% Gross 8% Gross 12% Gross
Year Per Year (-1.45% Net) (2.55% Net) (6.55% Net) (10.55% Net) (-1.45% Net) (2.55% Net) (6.55% Net) (10.55% Net)
- ------ -------------- ------------ ----------- ----------- ------------ ------------ ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 $ 12,581 $1,006,374 $1,006,653 $1,006,933 $1,007,212 $ 6,374 $ 6,653 $ 6,933 $ 7,212
2 $ 25,666 $1,015,971 $1,016,913 $1,017,879 $1,018,867 $ 15,971 $ 16,913 $ 17,879 $ 18,867
3 $ 39,274 $1,025,325 $1,027,330 $1,029,434 $1,031,641 $ 25,325 $ 27,330 $ 29,434 $ 31,641
4 $ 53,426 $1,034,416 $1,037,881 $1,041,614 $1,045,628 $ 34,416 $ 37,881 $ 41,614 $ 45,628
5 $ 68,145 $1,043,219 $1,048,543 $1,054,428 $1,060,924 $ 43,219 $ 48,543 $ 54,428 $ 60,924
6 $ 83,452 $1,051,704 $1,059,281 $1,067,883 $1,077,632 $ 51,704 $ 59,281 $ 67,883 $ 77,632
7 $ 99,372 $1,059,838 $1,070,061 $1,081,982 $1,095,859 $ 59,838 $ 70,061 $ 81,982 $ 95,859
8 $ 115,928 $1,067,582 $1,080,837 $1,096,720 $1,115,719 $ 67,582 $ 80,837 $ 96,720 $ 115,719
9 $ 133,146 $1,074,892 $1,091,560 $1,112,088 $1,137,332 $ 74,892 $ 91,560 $112,088 $ 137,332
10 $ 151,054 $1,081,711 $1,102,162 $1,128,061 $1,160,816 $ 81,711 $102,162 $128,061 $ 160,816
15 $ 251,925 $1,105,409 $1,149,794 $1,214,807 $1,310,086 $105,409 $149,794 $214,807 $ 310,086
20 $ 374,650 $1,098,456 $1,172,149 $1,299,351 $1,518,815 $ 98,456 $172,149 $299,351 $ 518,815
25 $ 523,963 $1,034,476 $1,134,759 $1,347,063 $1,789,002 $ 34,476 $134,759 $347,063 $ 789,002
30 $ 705,626 $1,000,000(2)$1,000,000(2)$1,263,218 $2,072,021 $ 0(2) $ 0(2) $263,218 $1,072,021
35 $ 926,647 $ 0 $ 0 $ 0(2) $2,260,384 $ 0 $ 0 $ 0(2) $1,260,384
40 $1,195,553 $ 0 $ 0 $ 0 $2,147,732 $ 0 $ 0 $ 0 $1,147,732
45 $1,522,718 $ 0 $ 0 $ 0 $1,341,240 $ 0 $ 0 $ 0 $ 341,240
50 $1,920,764 $ 0 $ 0 $ 0 $ 0(2) $ 0 $ 0 $ 0 $ 0(2)
</TABLE>
(1) Assumes no Contract loan has been made.
(2) Based on a gross return of 0% the Contract fund would go to zero in year 27,
but because the Target Premium is being paid, the Contract is kept inforce
through the Limited Death Benefit Guarantee Period of 30 years. The Contract
would be in default at the beginning of year 31. Based on a gross return of
4% the Contract fund would go to zero in year 30, but because the Target
Premium is being paid, the Contract is kept inforce through the Limited
Death Benefit Guarantee Period of 30 years. The Contract would be in default
at the beginning of year 31. Based on a gross return of 8% the Contract
would go into default in policy year 35. Based on a gross return of 12% the
Contract would go into default in policy year 47.
THE HYPOTHETICAL INVESTMENT RATES OF RETURN SHOWN ABOVE AND ELSEWHERE IN THIS
PROSPECTUS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF
PAST OR FUTURE INVESTMENT RATES OF RETURN. ACTUAL RATES OF RETURN MAY BE MORE OR
LESS THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS INCLUDING THE
INVESTMENT ALLOCATIONS MADE BY AN OWNER, PREVAILING INTEREST RATES, AND RATES OF
INFLATION. THE DEATH BENEFIT AND CASH SURRENDER VALUE FOR A CONTRACT WOULD BE
DIFFERENT FROM THOSE SHOWN IF THE ACTUAL RATES OF RETURN AVERAGED 0%, 4%, 8%,
AND 12% OVER A PERIOD OF YEARS BUT ALSO FLUCTUATED ABOVE OR BELOW THOSE AVERAGES
FOR INDIVIDUAL CONTRACT YEARS. NO REPRESENTATIONS CAN BE MADE BY THE PRUDENTIAL
OR THE SERIES FUND THAT THESE HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED FOR
ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
T4
<PAGE>
<TABLE>
<CAPTION>
INTERNAL RATES OF RETURN
------------------------
VARIABLE SURVIVORSHIP CONTRACT
MALE PREFERRED ISSUE AGE 55
FEMALE PREFERRED ISSUE AGE 50
$ 1,000,000 DEATH BENEFIT
$ 12,097.49 ANNUAL PREMIUM PAYMENT
USING CURRENT CONTRACTUAL CHARGES
FIXED INSURANCE AMOUNT
Internal Rates of Return on Death (1) Internal Rates of Return on Surrender (1)
---------------------------------------------------- ----------------------------------------------------
Assuming Hypothetical Gross (and Net) Assuming Hypothetical Gross (and Net)
Annual Investment Return of Annual Investment Return of
End of ---------------------------------------------------- ----------------------------------------------------
Policy 0% Gross 4% Gross 8% Gross 12% Gross 0% Gross 4% Gross 8% Gross 12% Gross
Year (-1.45% Net) (2.55% Net) (6.55% Net) (10.55% Net) (-1.45% Net) (2.55% Net) (6.55% Net) (10.55% Net)
------ ------------ ----------- ----------- ------------ ------------ ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
5 114.17% 114.17% 114.17% 114.17% -8.41% -4.66% -0.91% 2.83%
10 37.02% 37.02% 37.02% 37.02% -5.03% -1.01% 2.98% 6.95%
15 19.51% 19.51% 19.51% 19.51% -4.27% -0.06% 4.09% 8.18%
20 12.19% 12.19% 12.19% 14.43% -4.32% 0.21% 4.56% 8.74%
25 8.29% 8.29% 8.50% 12.45% -4.92% 0.22% 4.86% 9.01%
30 5.92% 5.92% 7.21% 11.17% -7.60% -0.26% 4.96% 9.06%
35 (2) 4.36% 6.30% 10.28% (2) -1.66% 4.90% 8.99%
40 3.26% 5.63% 9.64% -8.56% 4.79% 8.87%
45 (2) 5.19% 9.21% (2) 4.71% 8.77%
50 4.86% 8.90% 4.75% 8.79%
</TABLE>
(2) Based on a gross return of 0%, the Contract would go into default in policy
year 35. Based on a gross return of 4%, the Contract would go into default
in policy year 42.
VARIABLE INSURANCE AMOUNT
<TABLE>
<CAPTION>
Internal Rates of Return on Death (1) Internal Rates of Return on Surrender (1)
---------------------------------------------------- ----------------------------------------------------
Assuming Hypothetical Gross (and Net) Assuming Hypothetical Gross (and Net)
Annual Investment Return of Annual Investment Return of
End of ---------------------------------------------------- ----------------------------------------------------
Policy 0% Gross 4% Gross 8% Gross 12% Gross 0% Gross 4% Gross 8% Gross 12% Gross
Year (-1.45% Net) (2.55% Net) (6.55% Net) (10.55% Net) (-1.45% Net) (2.55% Net) (6.55% Net) (10.55% Net)
------ ------------ ----------- ----------- ------------ ------------ ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
5 116.49% 116.77% 117.08% 117.41% -8.42% -4.67% -0.92% 2.81%
10 38.58% 38.94% 39.38% 39.93% -5.07% -1.05% 2.95% 6.92%
15 20.83% 21.30% 21.95% 22.83% -4.37% -0.15% 3.99% 8.08%
20 13.33% 13.91% 14.80% 16.10% -4.56% -0.01% 4.34% 8.56%
25 9.22% 9.91% 11.08% 12.87% -5.50% -0.27% 4.42% 8.80%
30 6.48% 7.29% 8.78% 11.13% -9.52% -1.43% 4.15% 8.85%
35 (2) 5.13% 7.10% 10.11% (2) -5.46% 3.48% 8.79%
40 (2) 5.58% 9.47% (2) 2.20% 8.68%
45 3.84% 9.06% -0.76% 8.58%
50 (2) 8.78% (2) 8.49%
</TABLE>
(1) Assumes no Contract loan has been made.
(2) Based on a gross return of 0%, the Contract would go into default in policy
year 35. Based on a gross return of 4%, the Contract would go into default
in policy year 39. Based on a gross return of 8%, the Contract would go into
default in policy year 48.
THE HYPOTHETICAL INVESTMENT RATES OF RETURN SHOWN ABOVE AND ELSEWHERE IN THIS
PROSPECTUS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF
PAST OR FUTURE INVESTMENT RATES OF RETURN. ACTUAL RATES OF RETURN MAY BE MORE OR
LESS THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS INCLUDING THE
INVESTMENT ALLOCATIONS MADE BY AN OWNER, PREVAILING INTEREST RATES, AND RATES OF
INFLATION. THE DEATH BENEFIT AND CASH SURRENDER VALUE FOR A CONTRACT WOULD BE
DIFFERENT FROM THOSE SHOWN IF THE ACTUAL RATES OF RETURN AVERAGED 0%, 4%, 8%,
AND 12% OVER A PERIOD OF YEARS BUT ALSO FLUCTUATED ABOVE OR BELOW THOSE AVERAGES
FOR INDIVIDUAL CONTRACT YEARS. NO REPRESENTATIONS CAN BE MADE BY THE PRUDENTIAL
OR THE SERIES FUND THAT THESE HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED FOR
ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
T5
<PAGE>
<TABLE>
<CAPTION>
INTERNAL RATES OF RETURN
------------------------
VARIABLE SURVIVORSHIP CONTRACT
MALE PREFERRED ISSUE AGE 55
FEMALE PREFERRED ISSUE AGE 50
$ 1,000,000 DEATH BENEFIT
$ 12,097.49 ANNUAL PREMIUM PAYMENT
USING MAXIMUM CONTRACTUAL CHARGES
FIXED INSURANCE AMOUNT
Internal Rates of Return on Death (1) Internal Rates of Return on Surrender (1)
---------------------------------------------------- ----------------------------------------------------
Assuming Hypothetical Gross (and Net) Assuming Hypothetical Gross (and Net)
Annual Investment Return of Annual Investment Return of
End of ---------------------------------------------------- ----------------------------------------------------
Policy 0% Gross 4% Gross 8% Gross 12% Gross 0% Gross 4% Gross 8% Gross 12% Gross
Year (-1.45% Net) (2.55% Net) (6.55% Net) (10.55% Net) (-1.45% Net) (2.55% Net) (6.55% Net) (10.55% Net)
------ ------------ ----------- ----------- ------------ ------------ ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
5 114.17% 114.17% 114.17% 114.17% -10.98% -7.22% -3.47% 0.27%
10 37.02% 37.02% 37.02% 37.02% -7.18% -2.99% 1.14% 5.22%
15 19.51% 19.51% 19.51% 19.51% -6.86% -2.15% 2.36% 6.72%
20 12.19% 12.19% 12.19% 13.16% -8.74% -2.62% 2.64% 7.40%
25 8.29% 8.29% 8.29% 11.15% -19.05% -4.67% 2.58% 7.65%
30 5.92% 5.92% 5.92% 9.71% 0.00% -29.74% 2.10% 7.55%
35 (2) (2) 4.36% 8.63% (2) (2) 1.04% 7.30%
40 3.26% 7.82% -3.78% 7.02%
45 (2) 7.25% (2) 6.80%
50 6.83% 6.72%
</TABLE>
(2) Based on a gross return of 0%, the Contract would go into default in policy
year 33. Based on a gross return of 4%, the Contract would go into default
in policy year 33. Based on a gross return of 8%, the Contract would go into
default in policy year 42.
VARIABLE INSURANCE AMOUNT
<TABLE>
<CAPTION>
Internal Rates of Return on Death (1) Internal Rates of Return on Surrender (1)
---------------------------------------------------- ----------------------------------------------------
Assuming Hypothetical Gross (and Net) Assuming Hypothetical Gross (and Net)
Annual Investment Return of Annual Investment Return of
End of ---------------------------------------------------- ----------------------------------------------------
Policy 0% Gross 4% Gross 8% Gross 12% Gross 0% Gross 4% Gross 8% Gross 12% Gross
Year (-1.45% Net) (2.55% Net) (6.55% Net) (10.55% Net) (-1.45% Net) (2.55% Net) (6.55% Net) (10.55% Net)
------ ------------ ----------- ----------- ------------ ------------ ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
5 116.32% 116.58% 116.86% 117.18% -11.01% -7.25% -3.50% 0.23%
10 38.41% 38.75% 39.16% 39.67% -7.29% -3.10% 1.03% 5.11%
15 20.60% 21.03% 21.62% 22.44% -7.16% -2.44% 2.08% 6.44%
20 12.94% 13.45% 14.27% 15.49% -9.65% -3.37% 1.98% 6.80%
25 8.51% 9.10% 10.18% 11.93% -25.97% -6.99% 1.04% 6.75%
30 5.92% 5.92% 7.17% 9.72% 0.00% 0.00% -2.17% 6.30%
35 (2) (2) (2) 8.01% (2) (2) (2) 5.43%
40 6.30% 3.83%
45 3.54% -2.19%
50 (2) (2)
</TABLE>
(1) Assumes no Contract loan has been made.
(2) Based on a gross return of 0%, the Contract would go into default in policy
year 31. Based on a gross return of 4%, the Contract would go into default
in policy year 31. Based on a gross return of 8%, the Contract would go into
default in policy year 35. Based on a gross return of 12%, the Contract
would go into default in policy year 47.
THE HYPOTHETICAL INVESTMENT RATES OF RETURN SHOWN ABOVE AND ELSEWHERE IN THIS
PROSPECTUS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF
PAST OR FUTURE INVESTMENT RATES OF RETURN. ACTUAL RATES OF RETURN MAY BE MORE OR
LESS THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS INCLUDING THE
INVESTMENT ALLOCATIONS MADE BY AN OWNER, PREVAILING INTEREST RATES, AND RATES OF
INFLATION. THE DEATH BENEFIT AND CASH SURRENDER VALUE FOR A CONTRACT WOULD BE
DIFFERENT FROM THOSE SHOWN IF THE ACTUAL RATES OF RETURN AVERAGED 0%, 4%, 8%,
AND 12% OVER A PERIOD OF YEARS BUT ALSO FLUCTUATED ABOVE OR BELOW THOSE AVERAGES
FOR INDIVIDUAL CONTRACT YEARS. NO REPRESENTATIONS CAN BE MADE BY THE PRUDENTIAL
OR THE SERIES FUND THAT THESE HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED FOR
ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
T6
<PAGE>
CONTRACT LOANS
You may borrow from The Prudential an amount up to the current "loan value" of
your Contract less any existing Contract debt using the Contract as the only
security for the loan. The loan value at any time is equal to 90% of the
Contract Fund provided the Contract is not in default. A Contract in default has
no loan value.
Interest charged on a loan accrues daily. Interest is due on each Contract
anniversary or when the loan is paid back, whichever comes first. If interest is
not paid when due, it becomes part of the loan and we will charge interest on
it, too. Except in the case of preferred loans, we charge interest at an
effective annual rate of 5%.
A portion of any amount you borrow on or after the tenth Contract anniversary
may be considered a preferred loan. The maximum preferred loan amount is the
total amount you may borrow minus the total net premiums paid (net premiums
equal premiums paid less total withdrawals, if any). If the net premium amount
is less than zero, we will, for purposes of this calculation, consider is to be
zero. Only new loans borrowed after the tenth Contract anniversary may be
considered preferred loans; standard loans will not automatically be converted
into preferred loans. Preferred loans are charged interest at an effective
annual rate of 4.5%.
The term "Contract debt" means the amount of all outstanding loans plus any
interest accrued but not yet due. If at any time the Contract debt equals or
exceeds the Contract Fund, the Contract will go into default. We will notify you
of a 61-day grace period, within which time you may repay all or enough of the
loan to obtain a positive cash surrender value and thus keep the Contract in
force for a limited time. If the Contract debt equals or exceeds the Contract
Fund and you fail to keep the Contract in force, the amount of unpaid Contract
debt will be treated as a distribution which may be taxable. See TAX TREATMENT
OF CONTRACT BENEFITS, page 26 and LAPSE AND REINSTATEMENT, page 29.
When a loan is made, an amount equal to the loan proceeds will be transferred
out of the Account and/or the fixed-rate option, as applicable. Unless you ask
us to take the loan amount from specific investment options and we agree, the
reduction will be made in the same proportions as the value in each subaccount
and the fixed-rate option bears to the total value of the Contract. While a loan
is outstanding, the amount that was so transferred will continue to be treated
as part of the Contract Fund. It will be credited with an effective annual rate
of return of 4%. Therefore, the net cost of a standard loan is 1% and the net
cost of a preferred loan is 1/2%.
As long as Contract debt does not equal or exceed the Contract Fund, a loan will
not affect the Death Benefit Guarantee. Should the death benefit become payable
while a loan is outstanding, or should the Contract be surrendered, any Contract
debt will be deducted from the insurance amount or Contract Fund to calculate
the death benefit or the cash surrender value, as applicable. Loans from
Modified Endowment Contracts may be treated for tax purposes as distributions of
income. See TAX TREATMENT OF CONTRACT BENEFITS, page 26.
As stated above, any Contract debt will directly reduce a Contract's cash
surrender value and will be subtracted from the insurance amount to determine
the death benefit payable. In addition, even if the loan is fully repaid, it may
have an effect on future death benefits, because the investment results of the
selected investment options will apply only to the amount remaining invested
under those options. The longer the loan is outstanding, the greater the effect
is likely to be. The effect could be favorable or unfavorable. If investment
results are greater than the rate being credited upon the amount of the loan
while the loan is
25
<PAGE>
outstanding, values under the Contract will not increase as rapidly as they
would have if no loan had been made. If investment results are below that rate,
Contract values will be higher than they would have been had no loan been made.
When you repay all or part of a loan, we will increase the portion of the
Contract Fund in the investment options by the amount of the loan you repay
using the investment allocation of your most recent premium payment, plus
interest credits accrued on the loan since the last transaction date. We will
not increase the portion of the Contract Fund allocated to the investment
options by loan interest that is paid before we make it part of the loan. We
reserve the right to change the manner in which we allocate loan repayments.
SALE OF THE CONTRACT AND SALES COMMISSIONS
Pruco Securities Corporation ("Prusec"), an indirect wholly-owned subsidiary of
The Prudential, acts as the principal underwriter of the Contract. Prusec,
organized in 1971 under New Jersey law, is registered as a broker and dealer
under the Securities Exchange Act of 1934 and is a member of the National
Association of Securities Dealers, Inc. Prusec's principal business address is
1111 Durham Avenue, South Plainfield, New Jersey 07080. The Contract is sold by
registered representatives of Prusec who are also authorized by state insurance
departments to do so. The Contract may also be sold through other broker-dealers
authorized by Prusec and applicable law to do so. Registered representatives of
such other broker-dealers may be paid on a different basis than described below.
Generally, representatives will receive a commission of no more than 50% of the
premiums received in the first year on premiums up to the target level premium
(see PREMIUMS, page 11), no more than 4% commission on premiums received in the
first year in excess of the target level premium, no more than 4% of premiums
received in years two through ten, and no more than 2% of premiums received
thereafter. Representatives with less than 4 years of service may receive
compensation on a different basis. Representatives who meet certain productivity
or persistency standards may be eligible for additional compensation.
Sales expenses in any year are not equal to the deduction for sales load in that
year. The Prudential expects to recover its total sales expenses over the
periods the Contracts are in effect. To the extent that the sales charges are
insufficient to cover total sales expenses, the sales expenses will be recovered
from The Prudential's surplus which consists of, among other things, amounts
derived from mortality and expense risk charges.
TAX TREATMENT OF CONTRACT BENEFITS
Each prospective purchaser is urged to consult a qualified tax advisor. The
following discussion is not intended as tax advice, and it is not a complete
statement of what the effect of federal income taxes will be under all
circumstances. Rather, it provides information about how The Prudential believes
the tax laws apply in the most commonly occurring circumstances. There is no
guarantee, however, that the current federal income tax laws and regulations or
interpretations will not change.
TREATMENT AS LIFE INSURANCE. The Contract will be treated as "life insurance,"
as long as it satisfies certain definitional tests set forth in Sections 7702 of
the Internal Revenue Code (the "Code") and as long as the underlying investments
for the Contract satisfy diversification requirements under Section 817(h) of
the Code. (For further detail on diversification requirements, see DIVIDENDS,
DISTRIBUTIONS, AND TAXES in the attached prospectus for the Series Fund.)
The Prudential believes that it has taken adequate steps to cause the Contract
to be treated as life insurance for tax purposes. This means that (1) except as
noted below, the Contract
26
<PAGE>
owner should not be taxed on any part of the Contract Fund, including additions
attributable to interest, dividends or appreciation; and (2) the death benefit
should be excludible from the gross income of the beneficiary under Section
101(a) of the Code.
However, Section 7702 of the Code which defines life insurance for tax purposes
gives the Secretary of the Treasury authority to prescribe regulations to carry
out the purposes of the Section. In this regard, proposed regulations governing
mortality charges were issued in 1991. The mortality charges assumed for risks
under the Contract do not comply with the proposed regulations. In this regard,
the proposed regulations preclude the assumption of the industry's standard
mortality table for survivorship life insurance policies and do not provide for
the use of the substandard mortality risk assumptions used for the Contract.
Consequently, if such regulations were finalized in their current form, the
Contract may not qualify as life insurance for federal tax purposes or may be
classified as a Modified Endowment Contract. None of these proposed regulations
has yet been finalized. Additional regulations under Section 7702 may also be
promulgated in the future. Moreover, in connection with the issuance of
temporary regulations under Section 817(h), the Treasury Department announced
that such regulations do not provide guidance concerning the extent to which
Contract owners may direct their investments to particular divisions of a
separate account. Such guidance will be included in regulations or rulings under
Section 817(d) relating to the definition of a variable contract.
The Prudential intends to comply with final regulations or rulings issued under
sections 7702 and 817. Therefore, it reserves the right to make such changes as
it deems necessary to assure that the Contract continues to qualify as life
insurance for tax purposes. Any such changes will apply uniformly to affected
Contract owners and will be made only after advance written notice to affected
Contract owners.
PRE-DEATH DISTRIBUTIONS. The taxation of pre-death distributions depends on
whether the Contract is classified as a Modified Endowment Contract. The
following discussion first deals with distributions under Contracts not so
classified, and then with Modified Endowment Contracts.
1. A surrender or lapse of the Contract may have tax consequences. Upon
surrender, the owner will not be taxed on the cash surrender value except
for the amount, if any, that exceeds the gross premiums paid less the
untaxed portion of any prior withdrawals. The amount of any unpaid
Contract debt will, upon surrender or lapse, be added to the cash
surrender value and treated, for this purpose, as if it had been received.
Any loss incurred upon surrender is generally not deductible. The tax
consequences of a surrender may differ if the proceeds are received under
any income payment settlement option.
A withdrawal generally is not taxable unless it exceeds total premiums
paid to the date of withdrawal less the untaxed portion of any prior
withdrawals. However, under certain limited circumstances, in the first 15
Contract years all or a portion of a withdrawal may be taxable if the
Contract Fund exceeds the total premiums paid less the untaxed portions of
any prior withdrawals, even if total withdrawals do not exceed total
premiums paid to date.
Extra premiums for optional benefits and riders generally do not count in
computing gross premiums paid, which in turn determines the extent to
which a withdrawal might be taxed.
27
<PAGE>
Loans received under the Contract will ordinarily be treated as
indebtedness of the owner and will not be considered to be distributions
subject to tax. However, there is some risk the Internal Revenue Service
might assert the preferred loan should be treated as a distribution for
tax purposes because of the relatively low differential between the loan
interest rate and Contract's crediting rate. Were the Internal Revenue
Service to take this position, The Prudential would take reasonable steps
to avoid this result, including modifying the Contract's loan provisions.
2. Some of the above rules are changed if the Contract is classified as a
Modified Endowment Contract under Section 7702A of the Code. It is
possible for this Contract to be classified as a Modified Endowment
Contract under at least two circumstances: premiums in excess of the 7-pay
premiums allowed under Section 7702A are paid or a decrease in the
insurance amount is made (or a rider removed). Moreover, the addition of a
rider or the increase in the basic insurance amount after the Contract
date may have an impact on the Contract's status as a Modified Endowment
Contract. Contract owners contemplating any of these steps, particularly a
withdrawal that would reduce the basic insurance amount, should first
consult a qualified tax advisor and their Prudential representative.
If the Contract is classified as a Modified Endowment Contract, then
pre-death distributions, including loans, assignment and pledges are
includible in income to the extent that the Contract Fund exceeds the
gross premiums paid for the Contract increased by the amount of any loans
previously includible in income and reduced by any untaxed amounts
previously received other than the amount of any loans excludible from
income. These rules may also apply to pre-death distributions, including
loans, made during the two year period prior to the Contract becoming a
Modified Endowment Contract.
In addition, pre-death distributions from such Contracts (including full
surrenders) will be subject to a penalty of 10 per cent of the amount
includible in income unless the amount is distributed on or after age 59
1/2, on account of the taxpayer's disability or as a life annuity. It is
presently unclear how the penalty tax provisions apply to Contracts owned
by nonnatural persons such as corporations.
Under certain circumstances, multiple Modified Endowment Contracts issued
during any calendar year will be treated as a single contract for purposes
of applying the above rules.
WITHHOLDING
The taxable portion of any amounts received under the Contract will be subject
to withholding to meet federal income tax obligations, if the Contract owner
fails to elect that no taxes be withheld. The Prudential will provide the
Contract owner with forms and instructions concerning the right to elect that no
taxes be withheld from the taxable portion of any payment. All recipients may be
subject to penalties under the estimated tax payment rules if withholding and
estimated tax payments are not sufficient. Contract owners who do not provide a
social security number or other taxpayer identification number will not be
permitted to elect out of withholding. Special withholding rules apply to
payments to non-resident aliens.
OTHER TAX CONSIDERATIONS. Transfer of the Contract to a new owner or assignment
of the Contract may have tax consequences depending on the circumstances. In the
case of a transfer of the Contract for valuable consideration, the death benefit
may be subject to federal
28
<PAGE>
income taxes under section 101(a)(2) of the Code. In addition, a transfer of the
Contract to or the designation of a beneficiary who is either 37 1/2 years
younger than the Contract owner or a grandchild of the Contract owner may have
Generation Skipping Transfer tax consequences under Section 2601 of the Code.
In certain circumstances, deductions for interest paid or accrued on Contract
debt or on other loans that are incurred or continued to purchase or carry the
Contract may be denied under sections 163 of the Code as personal interest or
under section 264 of the Code. Contract owners should consult a tax advisor
regarding the application of these provisions to their circumstances.
Business-owned life insurance is subject to additional rules. Section 264(a)(1)
of the Code generally precludes business Contract owners from deducting premium
payments. Under section 264(a)(4) of the Code, a deduction is not allowed for
any interest paid or accrued on any Contract debt on an insurance policy to the
extent the indebtedness exceeds $50,000 per officer, employee or financially
interested person. The Congress is also considering legislation to deny interest
deductions generally for loans on business-owned policies. The Code also imposes
an indirect tax upon additions to the Contract Fund or the receipt of death
benefits under business-owned life insurance policies under certain
circumstances by way of the corporate alternative minimum tax.
The individual situation of each Contract owner or beneficiary will determine
the federal estate taxes and the state and local estate, inheritance and other
taxes due if the owner or insured dies.
LAPSE AND REINSTATEMENT
On each Monthly date, we will determine the value of the Contract Fund. If the
Contract Fund is zero or less, the Contract is in default unless it remains in
force under the Death Benefit Guarantee. See DEATH BENEFIT GUARANTEE, page 12.
If the Contract debt ever grows to be equal to or more than the Contract Fund,
the Contract will be in default. Should this happen, The Prudential will send
you a notice of default setting forth the payment necessary to keep the Contract
in force for three months from the date of default. This payment must be
received at The Prudential Home Office within the 61-day grace period after the
notice of default is mailed or the Contract will end and have no value. A
Contract that lapses and ends without value with an outstanding Contract loan
may have tax consequences. See TAX TREATMENT OF CONTRACT BENEFITS, page 26.
A Contract that ended in default may be reinstated within 5 years after the date
of default if the following conditions are met: (1) both insureds are alive or
if one insured is alive and the Contract ended without value after the death of
the other insured; (2) you must provide renewed evidence of insurability on any
insured who was living when the Contract went into default; and (3) submission
of certain payments sufficient to bring the Contract up to date and cover all
charges and deductions for the next three months. The date of reinstatement will
be the beginning of the Contract month that coincides with the or next follows
the date we approve your request. All required charges will be deducted from
your payment and the balance will be placed into your Contract Fund.
LEGAL CONSIDERATIONS RELATING TO SEX-DISTINCT PREMIUMS AND BENEFITS
The Contract generally employs mortality tables that distinguish between males
and females. Thus, premiums and benefits under Contracts issued on males and
females of the same age will generally differ. However, in those states that
have adopted regulations prohibiting
29
<PAGE>
sex-distinct insurance rates, premiums and cost of insurance charges will be
based on male rates whether the insureds are male or female. In addition,
employers and employee organizations considering purchase of a Contract should
consult their legal advisors to determine whether purchase of a Contract based
on sex-distinct actuarial tables is consistent with Title VII of the Civil
Rights Act of 1964 or other applicable law. The Prudential may offer the
Contract with male mortality rates to such prospective purchasers.
OTHER GENERAL CONTRACT PROVISIONS
ASSIGNMENT. This Contract may not be assigned if such assignment would violate
any federal, state or local law or regulation prohibiting sex distinct rates for
insurance. Generally, the Contract may not be assigned to an employee benefit
plan or program without The Prudential's consent. The Prudential assumes no
responsibility for the validity or sufficiency of any assignment, and we will
not be obligated to comply with any assignment unless we received a copy at one
of our Home Offices.
BENEFICIARY. The beneficiary is designated and named in the application by the
Contract owner. Thereafter, you may change the beneficiary, provided it is in
accordance with the terms of the Contract. Should the second insured to die do
so with no surviving beneficiary, that insured's estate will become the
beneficiary, unless someone other than the insureds owned the Contract. In that
case, we will make the Contract owner or the Contract owner's estate the
beneficiary.
INCONTESTABILITY. After the Contract has been in force during the lifetime of
both insureds for 2 years from the Contract date or, with respect to any change
in the Contract that requires The Prudential's approval and could increase its
liability, after the change has been in effect during at least one insured's
lifetime for 2 years from the effective date of the change, assuming enough
premium has been paid to cover the required charges, The Prudential will not
contest its liability under the Contract in accordance with its terms.
MISSTATEMENT OF AGE OR SEX. If an insured's stated age or sex or both are
incorrect in the Contract, The Prudential will adjust each benefit and any
amount to be paid, as required by law, to reflect the correct age and sex. Any
such benefit will be based on what the most recent deductions from the Contract
Fund would have provided at that insured's correct age and sex.
SETTLEMENT OPTIONS. The Contract grants to most owners, or to the beneficiary, a
variety of optional ways of receiving Contract proceeds, other than in a lump
sum. Any Prudential representative authorized to sell this Contract can explain
these options upon request.
SIMULTANEOUS DEATH. If both insureds die while the Contract is in force and we
find there is lack of sufficient evidence that they died other than
simultaneously, we will assume that the older insured died first.
SUICIDE EXCLUSION. Generally, if either insured, whether sane or insane, dies by
suicide within 2 years from the Contract date, the Contract will end and The
Prudential will return the premiums paid, less any Contract debt, and less any
withdrawals. If there is a surviving insured, The Prudential will make a new
contract available to that insured. The amount of coverage, issue age, contract
date, and underwriting classification will be the same as when this Contract was
issued.
30
<PAGE>
RIDERS
Contract owners may be able to obtain extra fixed benefits which may require an
additional premium. These optional insurance benefits will be described in what
is known as a "rider" to the Contract. Charges applicable to the riders will be
deducted from the Contract Fund on each Monthly date.
One rider gives insureds the option to exchange the Contract for two new life
insurance contracts, one on the life of each insured, in the event of a divorce
or if certain changes in tax law occur Exercise of this option may give rise to
taxable income. Another pays an additional amount if both insureds die within a
specified number of years. Another pays an additional amount if a specified
insured dies within a stated number of years. If the two insureds are not family
members (i.e. husband/wife or parent/child), charges for these single life
riders will be treated as pre-death distributions from the Contract. See TAX
TREATMENT OF CONTRACT BENEFITS, page 26. Certain restrictions may apply; they
are clearly described in the applicable rider. Any Prudential representative
authorized to sell the Contract can explain these extra benefits further.
Samples of the provisions are available from The Prudential upon written
request.
THE FIXED-RATE OPTION
BECAUSE OF EXEMPTIVE AND EXCLUSIONARY PROVISIONS, INTERESTS IN THE FIXED-RATE
OPTION UNDER THE CONTRACT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933 AND THE GENERAL ACCOUNT HAS NOT BEEN REGISTERED AS AN INVESTMENT COMPANY
UNDER THE INVESTMENT COMPANY ACT OF 1940. ACCORDINGLY, INTERESTS IN THE
FIXED-RATE OPTION ARE NOT SUBJECT TO THE PROVISIONS OF THESE ACTS, AND THE
PRUDENTIAL HAS BEEN ADVISED THAT THE STAFF OF THE SECURITIES AND EXCHANGE
COMMISSION HAS NOT REVIEWED THE DISCLOSURE IN THIS PROSPECTUS RELATING TO THE
FIXED-RATE OPTION. DISCLOSURE REGARDING THE FIXED-RATE OPTION MAY, HOWEVER, BE
SUBJECT TO CERTAIN GENERALLY APPLICABLE PROVISIONS OF FEDERAL SECURITIES LAWS
RELATING TO THE ACCURACY AND COMPLETENESS OF STATEMENTS MADE IN PROSPECTUSES.
As explained earlier, you may elect to allocate, either initially or by
transfer, all or part of the amount credited under the Contract to a fixed-rate
option, and the amount so allocated or transferred becomes part of The
Prudential's general assets. Sometimes this is referred to as The Prudential's
general account, which consists of all assets owned by The Prudential other than
those in the Account and in other separate accounts that have been or may be
established by The Prudential. Subject to applicable law, The Prudential has
sole discretion over the investment of the assets of the general account, and
Contract owners do not share in the investment experience of those assets.
Instead, The Prudential guarantees that the part of the Contract Fund allocated
to the fixed-rate option will accrue interest daily at an effective annual rate
that The Prudential declares periodically, but not less than an effective annual
rate of 4%. Currently, declared interest rates remain in effect from the date
money is allocated to the fixed-rate option until the first day of the same
month in the following year. At that time a new crediting rate will be declared
that will remain in effect for one year. Thereafter, a new crediting rate will
be declared each year and will remain in effect for the calendar year. The
Prudential reserves the right to change this practice. The Prudential is not
obligated to credit interest at a higher rate than an effective annual rate of
4%, although in our sole discretion we may do so. Different crediting rates may
be declared for different portions of the Contract Fund allocated to the
fixed-rate option. On request, you will be advised of the interest rates that
currently apply to your Contract.
Transfers from the fixed-rate option may be subject to strict limits. (See
TRANSFERS, page 15). The payment of any cash surrender value attributable to the
fixed-rate option may be delayed up to 6 months (see WHEN PROCEEDS ARE PAID,
page 23.
31
<PAGE>
VOTING RIGHTS
As stated above, all of the assets held in the subaccounts of the Account will
be invested in shares of the corresponding portfolios of the Series Fund. The
Prudential is the legal owner of those shares and as such has the right to vote
on any matter voted on at Series Fund shareholders meetings. However, The
Prudential will, as required by law, vote the shares of the Series Fund at any
regular and special shareholders meetings it is required to hold in accordance
with voting instructions received from Contract owners. The Series Fund will not
hold annual shareholders meetings when not required to do so under Maryland law
or the Investment Company Act of 1940. Series Fund shares for which no timely
instructions from Contract owners are received, and any shares attributable to
general account investments of The Prudential will be voted in the same
proportion as shares in the respective portfolios for which instructions are
received. Should the applicable federal securities laws or regulations, or their
current interpretation, change so as to permit The Prudential to vote shares of
the Series Fund in its own right, it may elect to do so.
Matters on which Contract owners may give voting instructions include the
following: (1) election of the Board of Directors of the Series Fund; (2)
ratification of the independent accountant of the Series Fund; (3) approval of
the investment advisory agreement for a portfolio of the Series Fund
corresponding to the Contract owner's selected subaccount[s]; (4) any change in
the fundamental investment policy of a portfolio corresponding to the Contract
owner's selected subaccount[s]; and (5) any other matter requiring a vote of the
shareholders of the Series Fund. With respect to approval of the investment
advisory agreement or any change in a portfolio's fundamental investment policy,
Contract owners participating in such portfolios will vote separately on the
matter, pursuant to the requirements of Rule 18f-2 under the 1940 Act.
The number of Series Fund shares for which instructions may be given by a
Contract owner is determined by dividing the portion of the value of the
Contract derived from participation in a subaccount, by the value of one share
in the corresponding portfolio of the Series Fund. The number of votes for which
each Contract owner may give The Prudential instructions will be determined as
of the record date chosen by the Board of Directors of the Series Fund. The
Prudential will furnish Contract owners with proper forms and proxies to enable
them to give these instructions. The Prudential reserves the right to modify the
manner in which the weight to be given voting instructions is calculated where
such a change is necessary to comply with current federal regulations or
interpretations of those regulations.
The Prudential may, if required by state insurance regulations, disregard voting
instructions if such instructions would require shares to be voted so as to
cause a change in the sub-classification or investment objectives of one or more
of the Series Fund's portfolios, or to approve or disapprove an investment
advisory contract for the Series Fund. In addition, The Prudential itself may
disregard voting instructions that would require changes in the investment
policy or investment advisor of one or more of the Series Fund's portfolios,
provided that The Prudential reasonably disapproves such changes in accordance
with applicable federal regulations. If The Prudential does disregard voting
instructions, it will advise Contract owners of that action and its reasons for
such action in the next annual or semi-annual report to Contract owners.
Contract owners also share with the owners of all Prudential Contracts and
policies the right to vote in elections for members of the Board of Directors of
The Prudential.
32
<PAGE>
SUBSTITUTION OF SERIES FUND SHARES
Although The Prudential believes it to be unlikely, it is possible that in the
judgment of its management, one or more of the portfolios of the Series Fund may
become unsuitable for investment by Contract owners because of investment policy
changes, tax law changes, or the unavailability of shares for investment. In
that event, The Prudential may seek to substitute the shares of another
portfolio or of an entirely different mutual fund. Before this can be done, the
approval of the SEC, and possibly one or more state insurance departments, may
be required. Contract owners will be notified of such substitution.
REPORTS TO CONTRACT OWNERS
Once each year you will be sent a statement that provides certain information
pertinent to your own Contract. This statement will detail values and
transactions made and specific Contract data that apply only to your particular
Contract. Currently we intend to provide three quarterly reports (in addition to
the year-end statement) which provide abbreviated information pertinent to your
own Contract.
You will also be sent an annual report for the Account and annual and
semi-annual reports of the Series Fund showing the financial condition of the
portfolios and the investments held in each.
STATE REGULATION
The Prudential is subject to regulation and supervision by the Department of
Insurance of the State of New Jersey, which periodically examines its operations
and financial condition. It is also subject to the insurance laws and
regulations of all jurisdictions in which it is authorized to do business.
The Prudential is required to submit annual statements of its operations,
including financial statements, to the insurance departments of the various
jurisdictions in which it does business to determine solvency and compliance
with local insurance laws and regulations.
In addition to the annual statements referred to above, The Prudential is
required to file with New Jersey and other jurisdictions a separate statement
with respect to the operations of all its variable contract accounts, in a form
promulgated by the National Association of Insurance Commissioners.
EXPERTS
The financial statements included in this prospectus for the years ended
December 31, 1994, 1993, and 1992 have been audited by Deloitte & Touche LLP,
independent auditors, as stated in their reports appearing herein, and are
included in reliance upon the reports of such firm given upon their authority as
experts in accounting and auditing. Deloitte & Touche LLP's principal business
address is Two Hilton Court, Parsippany, New Jersey 07054-0319. Actuarial
matters included in this prospectus have been examined by Andy Mirchuk, FSA,
MAAA, whose opinion is filed as an exhibit to the registration statement.
On March 12, 1996, Deloitte & Touche LLP was dismissed as the independent
accountants of The Prudential. There have been no disagreements with Deloitte &
Touche LLP on any matter of accounting principles or practices, financial
statement disclosure or auditing scope or procedure which, if not resolved to
the satisfaction of the accountant, would have caused them to make a reference
to the matter in their reports.
33
<PAGE>
LITIGATION
No litigation is pending that would have a material effect upon the Account or
the Series Fund.
ADDITIONAL INFORMATION
A registration statement has been filed with the SEC under the Securities Act of
1933, relating to the offering described in this prospectus. This prospectus
does not include all of the information set forth in the registration statement.
Certain portions have been omitted pursuant to the rules and regulations of the
SEC. The omitted information may, however, be obtained from the SEC's principal
office in Washington, D.C., upon payment of a prescribed fee.
Further information may also be obtained from The Prudential's office. The
address and telephone number are set forth on the cover of this prospectus.
FINANCIAL STATEMENTS
The consolidated financial statements of The Prudential and subsidiaries
included herein should be distinguished from the financial statements of the
Account, and should be considered only as bearing upon the ability of The
Prudential to meet its obligations under the Contracts.
The Account's assets are segregated from The Prudential's other assets. As of
December 31, 1995, the Account was used only by two other Prudential variable
life insurance products. The charges and expenses associated with PRUDENTIAL
SURVIVORSHIP PREFERRED are different from those of such other products and are
not reflected in the information concerning charges and expenses outlined in
Note 3 of financial statements of the Account.
34
<PAGE>
DIRECTORS AND OFFICERS OF THE PRUDENTIAL
The directors and certain officers of The Prudential, listed with their
principal occupations during the past 5 years, are shown below.
DIRECTORS OF THE PRUDENTIAL
FRANKLIN E. AGNEW. Director. -- Business Consultant and former Senior Vice
President of H.J. Heinz. Address: One Mellon Bank Center, Suite 2120,
Pittsburgh, PA 15219.
FREDERIC K. BECKER, Director. -- President of Wilentz, Goldman, and Spitzer (law
firm). Address: 90 Woodbridge Center Drive, Woodbridge, NJ 07095.
WILLIAM W. BOESCHENSTEIN, Director.--Director, Owens-Corning Fiberglas
Corporation. Address: One Seagate, Toledo, OH 43604.
LISLE C. CARTER, JR., Director.--Former Senior Vice President and General
Counsel, United Way of America. Address: 701 North Fairfax Avenue, Alexandria,
VA 22314.
JAMES G. CULLEN, Director.--Vice Chairman, Bell Atlantic Corporation since 1995;
1993 to 1995: President, Bell Atlantic Corporation; Prior to 1993: President,
New Jersey Bell. Address: 1310 North Court House Road, 11th floor, Alexandria,
VA 22201.
CAROLYNE K. DAVIS, Director.--Health Care Advisor, Ernst & Young. Address: 5480
Cayuga Lake Road, Romulus, NY 14541.
ROGER A. ENRICO, Director.--Chairman and Chief Executive Officer, Pepsico
Worldwide Restaurants since 1994; 1993 to 1994: Vice Chairman, Pepsi Co. Inc.;
1991 to 1993: Chairman and Chief Executive Officer, Pepsi Co. Worldwide Foods.
Address: 6303 Forest Park, Dallas, TX 75235.
ALLAN D. GILMOUR, Director.--Former Vice Chairman, Ford Motor Company. Address:
Prudential Plaza, Newark, NJ 07102-3777.
WILLIAM H. GRAY, III, Director.--President and Chief Executive Officer, United
Negro College Fund, Inc. since 1991. Address: 8260 Willow Oaks Corporate Drive,
Fairfax, VA 22031.
JON F. HANSON, Director.--Chairman, Hampshire Management Co. Address: 235 Moore
Street, Suite 200, Hackensack, NJ 07601.
CONSTANCE J. HORNER, Director.--Guest Scholar, The Brookings Institution since
1993; 1991 to 1992 Assistant to the President and Director of Presidential
Personnel, U.S. Government. Address: 1775 Massachusetts Avenue, N.W.,
Washington, DC 20036-2188.
ALLEN F. JACOBSON, Director.--Former Chairman and Chief Executive Officer,
Minnesota Mining & Manufacturing Co. Address: 30 Seventh Street East, St. Paul,
MN 55101-4901.
GARNETT L. KEITH, JR., Director and Vice Chairman.--Vice Chairman of The
Prudential. Address: Prudential Plaza, Newark, NJ 07102-3777.
BURTON G. MALKIEL, Director.--Professor, Princeton University. Address:
Princeton University, 110 Fisher Hall, Prospect Avenue, Princeton, NJ
08544-1021.
JOHN R. OPEL, Director.--Prior to 1994, Chairman of the Executive Committee,
International Business Machines Corporation. Address: 590 Madison Avenue, New
York, NY 10022.
ARTHUR F. RYAN, Chairman of the Board, President, and Chief Executive Officer.
- -- Chairman of the Board, President, and Chief Executive Officer, The Prudential
since 1994; Prior to 1994,
35
<PAGE>
President and Chief Operating Officer, Chase Manhattan Corporation. Address: 751
Broad Street, Newark, NJ 07102-3777.
CHARLES R. SITTER, Director.--Former President and Director, Exxon Corporation.
Address: 225 John W. Carpenter Freeway, Irving, TX 75062.
DONALD L. STAHELI, Director.--Chairman and Chief Executive Officer, Continental
Grain Company since 1994; Prior to 1994; Chairman, Continental Grain Company.
Address: 277 Park Avenue, New York, NY 10172.
RICHARD M. THOMSON, Director.--Chairman of the Board and Chief Executive
Officer, The Toronto-Dominion Bank. Address: P.O. Box 1, Toronto-Dominion
Centre, Toronto, Ontario, M5K 1A2, Canada.
P. ROY VAGELOS, M.D., Director.--Former Chairman, President and Chief Executive
Officer, Merck & Co., Inc. Address: One Crossroads Drive, Bedminster, NJ 07921.
STANLEY C. VAN NESS, Director.--Attorney, Picco, Herbert, and Kennedy (law
firm). Address: One State Street Square, Suite 1000, Trenton, NJ 08607-1388.
PAUL A. VOLCKER, Director.--Chairman, James D. Wolfensohn, Inc. Address: 599
Lexington Avenue, New York, NY 10022.
JOSEPH H. WILLIAMS, Director.--Director, The Williams Companies since 1994;
Prior to 1994: Chairman and Chief Executive Officer, The Williams Companies.
Address: P.O. Box 2400, Tulsa, OK 74102.
OTHER EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS
MARK B. GRIER, Chief Financial Officer.--Chief Financial Officer of The
Prudential since 1995; Prior to 1995: Executive Vice President and Head of
Global Markets, Chase Manhattan Corporation.
SUSAN L. BLOUNT, Vice President and Secretary.--Vice President and Secretary of
The Prudential since 1995; Prior to 1995: Assistant General Counsel for
Prudential Residential Services Company.
C. EDWARD CHAPLIN, Vice President and Treasurer.--Vice President and Treasurer
of The Prudential since 1995; 1993 to 1995: Managing Director and Assistant
Treasurer of The Prudential; 1992 to 1993: Vice President and Assistant
Treasurer, Banking and Cash Management for The Prudential; Prior to 1992:
Regional Vice President of Prudential Mortgage Capital Company.
36
<PAGE>
FINANCIAL STATEMENTS OF
THE PRUDENTIAL VARIABLE APPRECIABLE ACCOUNT
STATEMENTS OF NET ASSETS
December 31, 1995
<TABLE>
<CAPTION>
SUBACCOUNTS
--------------------------------------------------------------
MONEY DIVERSIFIED FLEXIBLE
TOTAL MARKET BOND EQUITY MANAGED
-------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
ASSETS
Investment in shares of The Prudential Series
Fund, Inc.
Portfolios at net asset value [Note 2].......... $3,599,591,117 $ 91,504,205 $ 102,110,437 $ 796,560,693 $ 955,172,457
-------------- -------------- -------------- -------------- --------------
LIABILITIES
Payable to Related Separate Account............. 112,981 0 112,981 0 0
-------------- -------------- -------------- -------------- --------------
NET ASSETS........................................ $3,599,478,136 $ 91,504,205 $ 101,997,456 $ 796,560,693 $ 955,172,457
============== ============== ============== ============== ==============
NET ASSETS, representing:
Equity of Contract owners....................... $3,588,840,453 $ 91,078,689 $ 101,673,097 $ 792,519,007 $ 953,458,614
Equity of The Prudential Insurance Company of
America....................................... 10,637,683 425,516 324,359 4,041,686 1,713,843
-------------- -------------- -------------- -------------- --------------
$3,599,478,136 $ 91,504,205 $ 101,997,456 $ 796,560,693 $ 955,172,457
============== ============== ============== ============== ==============
</TABLE>
STATEMENTS OF OPERATIONS
For the year ended December 31, 1995
<TABLE>
<CAPTION>
SUBACCOUNTS
--------------------------------------------------------------
MONEY DIVERSIFIED FLEXIBLE
TOTAL MARKET BOND EQUITY MANAGED
-------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME
Dividend distributions received................. $ 111,690,657 $ 4,806,197 $ 6,288,926 $ 14,649,870 $ 27,370,012
EXPENSES
Charges to Contract owners for assuming
mortality risk and expense risk [Note 3A]..... 22,111,170 588,554 636,478 4,664,094 5,819,777
Reimbursement for excess expenses [Note 3D]..... (38,198) 0 0 0 0
-------------- -------------- -------------- -------------- --------------
NET EXPENSES...................................... 22,072,972 588,554 636,478 4,664,094 5,819,777
-------------- -------------- -------------- -------------- --------------
NET INVESTMENT INCOME (LOSS)...................... 89,617,685 4,217,643 5,652,448 9,985,776 21,550,235
-------------- -------------- -------------- -------------- --------------
NET REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS
Capital gains distributions received............ 111,700,229 0 222,002 27,318,049 39,426,921
Realized gain (loss) on shares redeemed
[average cost basis].......................... 235,828 0 30,407 11,957 56,509
Net unrealized gain on investments.............. 427,073,308 0 10,042,691 129,700,617 110,261,394
-------------- -------------- -------------- -------------- --------------
NET GAIN (LOSS) ON INVESTMENTS.................... 539,009,365 0 10,295,100 157,030,623 149,744,824
-------------- -------------- -------------- -------------- --------------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS....................... $ 628,627,050 $ 4,217,643 $ 15,947,548 $ 167,016,399 $ 171,295,059
============== ============== ============== ============== ==============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A10 AND A11.
A1
<PAGE>
STATEMENTS OF NET ASSETS (CONTINUED)
December 31, 1995
<TABLE>
<CAPTION>
SUBACCOUNTS (CONTINUED)
------------------------------------------------------------------------------
ZERO ZERO
COUPON COUPON HIGH
CONSERVATIVE BOND BOND YIELD STOCK
BALANCED 1995 2000 BOND INDEX
-------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
ASSETS
Investment in shares of The Prudential Series
Fund, Inc.
Portfolios at net asset value [Note 2].......... $ 786,605,541 $ 0 $ 20,466,375 $ 68,050,361 $ 297,367,890
-------------- -------------- -------------- -------------- --------------
LIABILITIES
Payable to Related Separate Account............. 0 0 0 0 0
-------------- -------------- -------------- -------------- --------------
NET ASSETS........................................ $ 786,605,541 $ 0 $ 20,466,375 $ 68,050,361 $ 297,367,890
============== ============== ============== ============== ==============
NET ASSETS, representing:
Equity of Contract owners....................... $ 785,777,721 $ 0 $ 20,452,359 $ 67,967,542 $ 296,625,930
Equity of The Prudential Insurance Company of
America....................................... 827,820 0 14,016 82,819 741,960
-------------- -------------- -------------- -------------- --------------
$ 786,605,541 $ 0 $ 20,466,375 $ 68,050,361 $ 297,367,890
============== ============== ============== ============== ==============
<CAPTION>
EQUITY NATURAL
INCOME RESOURCES GLOBAL
-------------- -------------- --------------
<S> <C> <C> <C>
ASSETS
Investment in shares of The Prudential Series
Fund, Inc.
Portfolios at net asset value [Note 2].......... $ 223,168,163 $ 101,098,037 $ 49,702,460
-------------- -------------- --------------
LIABILITIES
Payable to Related Separate Account............. 0 0 0
-------------- -------------- --------------
NET ASSETS........................................ $ 223,168,163 $ 101,098,037 $ 49,702,460
============== ============== ==============
NET ASSETS, representing:
Equity of Contract owners....................... $ 222,179,341 $ 100,775,478 $ 49,235,307
Equity of The Prudential Insurance Company of
America....................................... 988,822 322,559 467,153
-------------- -------------- --------------
$ 223,168,163 $ 101,098,037 $ 49,702,460
============== ============== ==============
</TABLE>
STATEMENTS OF OPERATIONS (CONTINUED)
For the year ended December 31, 1995
<TABLE>
<CAPTION>
SUBACCOUNTS (CONTINUED)
------------------------------------------------------------------------------
ZERO ZERO
COUPON COUPON HIGH
CONSERVATIVE BOND BOND YIELD STOCK
BALANCED 1995 2000 BOND INDEX
-------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME
Dividend distributions received................. $ 30,522,743 $ 313,598 $ 837,457 $ 6,585,427 $ 5,408,994
EXPENSES
Charges to Contract owners for assuming
mortality risk and expense risk [Note 3A]..... 5,231,266 30,367 131,947 434,315 1,743,600
Reimbursement for excess expenses [Note 3D]..... 0 (6,868) (14,886) 0 0
-------------- -------------- -------------- -------------- --------------
NET EXPENSES...................................... 5,231,266 23,499 117,061 434,315 1,743,600
-------------- -------------- -------------- -------------- --------------
NET INVESTMENT INCOME (LOSS)...................... 25,291,477 290,099 720,396 6,151,112 3,665,394
-------------- -------------- -------------- -------------- --------------
NET REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS
Capital gains distributions received............ 26,552,510 77,686 759,176 0 2,097,393
Realized gain (loss) on shares redeemed
[average cost basis].......................... 97,662 (324,158) 16,969 (58,578) 293,916
Net unrealized gain on investments.............. 55,648,508 231,423 1,982,145 3,163,738 66,716,563
-------------- -------------- -------------- -------------- --------------
NET GAIN (LOSS) ON INVESTMENTS.................... 82,298,680 (15,049) 2,758,290 3,105,160 69,107,872
-------------- -------------- -------------- -------------- --------------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS....................... $ 107,590,157 $ 275,050 $ 3,478,686 $ 9,256,272 $ 72,773,266
============== ============== ============== ============== ==============
<CAPTION>
EQUITY NATURAL
INCOME RESOURCES GLOBAL
-------------- -------------- --------------
<S> <C> <C> <C>
INVESTMENT INCOME
Dividend distributions received................. $ 7,622,371 $ 1,146,237 $ 714,936
EXPENSES
Charges to Contract owners for assuming
mortality risk and expense risk [Note 3A]..... 1,320,659 630,840 260,887
Reimbursement for excess expenses [Note 3D]..... 0 (14) 0
-------------- -------------- --------------
NET EXPENSES...................................... 1,320,659 630,826 260,887
-------------- -------------- --------------
NET INVESTMENT INCOME (LOSS)...................... 6,301,712 515,411 454,049
-------------- -------------- --------------
NET REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS
Capital gains distributions received............ 9,279,251 4,578,307 915,804
Realized gain (loss) on shares redeemed
[average cost basis].......................... 46,601 68,144 4,998
Net unrealized gain on investments.............. 18,945,636 14,973,181 4,212,026
-------------- -------------- --------------
NET GAIN (LOSS) ON INVESTMENTS.................... 28,271,488 19,619,632 5,132,828
-------------- -------------- --------------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS....................... $ 34,573,200 $ 20,135,043 $ 5,586,877
============== ============== ==============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A10 AND A11.
A2
<PAGE>
STATEMENTS OF NET ASSETS (CONTINUED)
December 31, 1995
<TABLE>
<CAPTION>
SUBACCOUNTS
--------------------------------------------------------------
ZERO
COUPON SMALL
GOVERNMENT BOND PRUDENTIAL CAPITALIZATION
INCOME 2005 JENNISON STOCK
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
ASSETS
Investment in shares of The Prudential Series
Fund, Inc.
Portfolios at net asset value [Note 2].......... $ 73,135,507 $ 21,163,904 $ 7,658,781 $ 5,826,306
LIABILITIES
Payable to Related Separate Account............. 0 0 0 0
-------------- -------------- -------------- --------------
NET ASSETS........................................ $ 73,135,507 $ 21,163,904 $ 7,658,781 $ 5,826,306
============== ============== ============== ==============
NET ASSETS, representing:
Equity of Contract owners....................... $ 73,073,051 $ 21,001,313 $ 7,426,649 $ 5,596,355
Equity of The Prudential Insurance Company of
America....................................... 62,456 162,591 232,132 229,951
-------------- -------------- -------------- --------------
$ 73,135,507 $ 21,163,904 $ 7,658,781 $ 5,826,306
============== ============== ============== ==============
</TABLE>
STATEMENTS OF OPERATIONS (CONTINUED)
For the year ended December 31, 1995
<TABLE>
<CAPTION>
SUBACCOUNTS
--------------------------------------------------------------
ZERO
COUPON SMALL
GOVERNMENT BOND PRUDENTIAL CAPITALIZATION
INCOME 2005 JENNISON* STOCK*
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME
Dividend distributions received................. $ 4,467,531 $ 939,899 $ 376 $ 16,083
EXPENSES
Charges to Contract owners for assuming
mortality risk and expense risk [Note 3A]..... 478,032 118,323 12,370 9,661
Reimbursement for excess expenses [Note 3D]..... 0 (16,430) 0 0
-------------- -------------- -------------- --------------
NET EXPENSES...................................... 478,032 101,893 12,370 9,661
-------------- -------------- -------------- --------------
NET INVESTMENT INCOME (LOSS)...................... 3,989,499 838,006 (11,994) 6,422
-------------- -------------- -------------- --------------
NET REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS
Capital gains distributions received............ 0 425,717 0 47,413
Realized gain (loss) on shares redeemed
[average cost basis].......................... (8,599) 0 0 0
Net unrealized gain on investments.............. 7,403,233 3,328,939 281,405 181,809
-------------- -------------- -------------- --------------
NET GAIN (LOSS) ON INVESTMENTS.................... 7,394,634 3,754,656 281,405 229,222
-------------- -------------- -------------- --------------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS....................... $ 11,384,133 $ 4,592,662 $ 269,411 $ 235,644
============== ============== ============== ==============
*Commenced
Business
on 5/1/95
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A10 AND A11.
A3
<PAGE>
(This page intentionally left blank.)
A4
<PAGE>
FINANCIAL STATEMENTS OF
THE PRUDENTIAL VARIABLE APPRECIABLE ACCOUNT
STATEMENTS OF CHANGES IN NET ASSETS
For the years ended December 31, 1995 and 1994
<TABLE>
<CAPTION>
SUBACCOUNTS
--------------------------------------------------------------
MONEY DIVERSIFIED
TOTAL MARKET BOND
------------------------------ ------------------------------ ------------------------------
1995 1994 1995 1994 1995 1994
-------------- -------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
OPERATIONS:
Net investment income (loss)..... $ 89,617,685 $ 63,087,032 $ 4,217,643 $ 2,402,301 $ 5,652,448 $ 4,226,871
Capital gains distributions
received....................... 111,700,229 54,709,623 0 0 222,002 158,594
Realized gain (loss) on shares
redeemed
[average cost basis]........... 235,828 167,179 0 0 30,407 4,403
Net unrealized gain (loss) on
investments.................... 427,073,308 (155,373,175) 0 0 10,042,691 (7,162,380)
-------------- -------------- -------------- -------------- -------------- --------------
NET INCREASE (DECREASE) IN NET
ASSETS
RESULTING FROM OPERATIONS........ 628,627,050 (37,409,341) 4,217,643 2,402,301 15,947,548 (2,772,512)
-------------- -------------- -------------- -------------- -------------- --------------
NET INCREASE (DECREASE) IN NET
ASSETS
RESULTING FROM PREMIUM PAYMENTS
AND OTHER OPERATING TRANSFERS.... 394,015,275 560,003,324 8,955,240 6,444,757 9,712,345 11,829,119
-------------- -------------- -------------- -------------- -------------- --------------
NET INCREASE (DECREASE) IN NET
ASSETS
RESULTING FROM SURPLUS
TRANSFERS........................ (10,302,284) (942,487) 161,461 (213,654) 143,151 (532,267)
-------------- -------------- -------------- -------------- -------------- --------------
TOTAL INCREASE (DECREASE)
IN NET ASSETS.................... 1,012,340,041 521,651,496 13,334,344 8,633,404 25,803,044 8,524,340
NET ASSETS:
Beginning of year................ 2,587,138,095 2,065,486,599 78,169,861 69,536,457 76,194,412 67,670,072
-------------- -------------- -------------- -------------- -------------- --------------
End of year...................... $3,599,478,136 $2,587,138,095 $ 91,504,205 $ 78,169,861 $ 101,997,456 $ 76,194,412
============== ============== ============== ============== ============== ==============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A10 AND A11.
A5
<PAGE>
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
For the years ended December 31, 1995 and 1994
<TABLE>
<CAPTION>
SUBACCOUNTS (CONTINUED)
--------------------------------------------------------------
FLEXIBLE
EQUITY MANAGED
------------------------------ ------------------------------
1995 1994 1995 1994
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
OPERATIONS:
Net investment income (loss)..... $ 9,985,776 $ 7,323,925 $ 21,550,235 $ 14,060,998
Capital gains distributions
received....................... 27,318,049 19,666,506 39,426,921 18,931,168
Realized gain (loss) on shares
redeemed
[average cost basis]........... 11,957 86,672 56,509 0
Net unrealized gain (loss) on
investments.................... 129,700,617 (18,362,891) 110,261,394 (56,779,739)
-------------- -------------- -------------- --------------
NET INCREASE (DECREASE) IN NET
ASSETS
RESULTING FROM OPERATIONS........ 167,016,399 8,714,212 171,295,059 (23,787,573)
-------------- -------------- -------------- --------------
NET INCREASE (DECREASE) IN NET
ASSETS
RESULTING FROM PREMIUM PAYMENTS
AND OTHER OPERATING TRANSFERS.... 130,026,767 123,951,671 86,936,282 142,298,237
-------------- -------------- -------------- --------------
NET INCREASE (DECREASE) IN NET
ASSETS
RESULTING FROM SURPLUS
TRANSFERS........................ (595,673) 452,486 (2,895,506) (55,717)
-------------- -------------- -------------- --------------
TOTAL INCREASE (DECREASE)
IN NET ASSETS.................... 296,447,493 133,118,369 255,335,835 118,454,947
NET ASSETS:
Beginning of year................ 500,113,200 366,994,831 699,836,622 581,381,675
-------------- -------------- -------------- --------------
End of year...................... $ 796,560,693 $ 500,113,200 $ 955,172,457 $ 699,836,622
============== ============== ============== ==============
<CAPTION>
ZERO
COUPON
CONSERVATIVE BOND
BALANCED 1995
------------------------------ ------------------------------
1995 1994 1995 1994
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
OPERATIONS:
Net investment income (loss)..... $ 25,291,477 $ 16,966,301 $ 290,099 $ 263,254
Capital gains distributions
received....................... 26,552,510 6,635,310 77,686 1,011
Realized gain (loss) on shares
redeemed
[average cost basis]........... 97,662 31,649 (324,158) 586
Net unrealized gain (loss) on
investments.................... 55,648,508 (33,092,575) 231,423 (288,227)
-------------- -------------- -------------- --------------
NET INCREASE (DECREASE) IN NET
ASSETS
RESULTING FROM OPERATIONS........ 107,590,157 (9,459,315) 275,050 (23,376)
-------------- -------------- -------------- --------------
NET INCREASE (DECREASE) IN NET
ASSETS
RESULTING FROM PREMIUM PAYMENTS
AND OTHER OPERATING TRANSFERS.... 44,932,925 127,164,401 (5,059,111) 338,277
-------------- -------------- -------------- --------------
NET INCREASE (DECREASE) IN NET
ASSETS
RESULTING FROM SURPLUS
TRANSFERS........................ (3,421,660) (1,173,893) (20,536) (106,380)
-------------- -------------- -------------- --------------
TOTAL INCREASE (DECREASE)
IN NET ASSETS.................... 149,101,422 116,531,193 (4,804,597) 208,521
NET ASSETS:
Beginning of year................ 637,504,119 520,972,926 4,804,597 4,596,076
-------------- -------------- -------------- --------------
End of year...................... $ 786,605,541 $ 637,504,119 $ 0 $ 4,804,597
============== ============== ============== ==============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A10 AND A11.
A6
<PAGE>
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
For the years ended December 31, 1995 and 1994
<TABLE>
<CAPTION>
SUBACCOUNTS
----------------------------------------------------------------------------------------------
ZERO
COUPON HIGH
BOND YIELD STOCK
2000 BOND INDEX
------------------------------ ------------------------------ ------------------------------
1995 1994 1995 1994 1995 1994
-------------- -------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
OPERATIONS:
Net investment income (loss)..... $ 720,396 $ 1,032,410 $ 6,151,112 $ 4,958,854 $ 3,665,394 $ 3,181,988
Capital gains distributions
received....................... 759,176 31,655 0 38 2,097,393 267,733
Realized gain (loss) on shares
redeemed
[average cost basis]........... 16,969 1,031 (58,578) 5,625 293,916 58,302
Net unrealized gain (loss) on
investments.................... 1,982,145 (2,416,751) 3,163,738 (6,827,471) 66,716,563 (2,856,319)
-------------- -------------- -------------- -------------- -------------- --------------
NET INCREASE (DECREASE) IN NET
ASSETS
RESULTING FROM OPERATIONS........ 3,478,686 (1,351,655) 9,256,272 (1,862,954) 72,773,266 651,704
-------------- -------------- -------------- -------------- -------------- --------------
NET INCREASE (DECREASE) IN NET
ASSETS
RESULTING FROM PREMIUM PAYMENTS
AND OTHER OPERATING TRANSFERS.... 846,650 900,334 4,374,480 9,774,435 33,935,158 26,983,569
-------------- -------------- -------------- -------------- -------------- --------------
NET INCREASE (DECREASE) IN NET
ASSETS
RESULTING FROM SURPLUS
TRANSFERS........................ (645,588) 409,426 (119,164) (576,511) (100,558) (298,727)
-------------- -------------- -------------- -------------- -------------- --------------
TOTAL INCREASE (DECREASE)
IN NET ASSETS.................... 3,679,748 (41,895) 13,511,588 7,334,970 106,607,866 27,336,546
NET ASSETS:
Beginning of year................ 16,786,627 16,828,522 54,538,773 47,203,803 190,760,024 163,423,478
-------------- -------------- -------------- -------------- -------------- --------------
End of year...................... $ 20,466,375 $ 16,786,627 $ 68,050,361 $ 54,538,773 $ 297,367,890 $ 190,760,024
============== ============== ============== ============== ============== ==============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A10 AND A11.
A7
<PAGE>
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
For the years ended December 31, 1995 and 1994
<TABLE>
<CAPTION>
SUBACCOUNTS (CONTINUED)
----------------------------------------------------------------------------------------------
EQUITY NATURAL
INCOME RESOURCES GLOBAL**
------------------------------ ------------------------------ ------------------------------
1995 1994 1995 1994 1995 1994
-------------- -------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
OPERATIONS:
Net investment income (loss)..... $ 6,301,712 $ 4,108,092 $ 515,411 $ 203,463 $ 454,049 $ (11,478)
Capital gains distributions
received....................... 9,279,251 7,633,088 4,578,307 1,375,424 915,804 5,622
Realized gain (loss) on shares
redeemed
[average cost basis]........... 46,601 34,607 68,144 22,045 4,998 0
Net unrealized gain (loss) on
investments.................... 18,945,636 (11,478,198) 14,973,181 (5,314,192) 4,212,026 (1,421,127)
-------------- -------------- -------------- -------------- -------------- --------------
NET INCREASE (DECREASE) IN NET
ASSETS
RESULTING FROM OPERATIONS........ 34,573,200 297,589 20,135,043 (3,713,260) 5,586,877 (1,426,983)
-------------- -------------- -------------- -------------- -------------- --------------
NET INCREASE (DECREASE) IN NET
ASSETS
RESULTING FROM PREMIUM PAYMENTS
AND OTHER OPERATING TRANSFERS.... 38,554,244 51,018,498 9,214,757 22,317,372 16,098,541 29,174,840
-------------- -------------- -------------- -------------- -------------- --------------
NET INCREASE (DECREASE) IN NET
ASSETS
RESULTING FROM SURPLUS
TRANSFERS........................ (646,585) (376,490) (398,931) (47,480) (1,921,654) 2,190,839
-------------- -------------- -------------- -------------- -------------- --------------
TOTAL INCREASE (DECREASE)
IN NET ASSETS.................... 72,480,859 50,939,597 28,950,869 18,556,632 19,763,764 29,938,696
NET ASSETS:
Beginning of year................ 150,687,304 99,747,707 72,147,168 53,590,536 29,938,696 0
-------------- -------------- -------------- -------------- -------------- --------------
End of year...................... $ 223,168,163 $ 150,687,304 $ 101,098,037 $ 72,147,168 $ 49,702,460 $ 29,938,696
============== ============== ============== ============== ============== ==============
**Commenced
Business
on 5/1/94
<CAPTION>
GOVERNMENT
INCOME
------------------------------
1995 1994
-------------- --------------
<S> <C> <C>
OPERATIONS:
Net investment income (loss)..... $ 3,989,499 $ 3,587,433
Capital gains distributions
received....................... 0 0
Realized gain (loss) on shares
redeemed
[average cost basis]........... (8,599) (74,828)
Net unrealized gain (loss) on
investments.................... 7,403,233 (7,299,824)
-------------- --------------
NET INCREASE (DECREASE) IN NET
ASSETS
RESULTING FROM OPERATIONS........ 11,384,133 (3,787,219)
-------------- --------------
NET INCREASE (DECREASE) IN NET
ASSETS
RESULTING FROM PREMIUM PAYMENTS
AND OTHER OPERATING TRANSFERS.... 481,705 4,183,444
-------------- --------------
NET INCREASE (DECREASE) IN NET
ASSETS
RESULTING FROM SURPLUS
TRANSFERS........................ (293,673) (467,937)
-------------- --------------
TOTAL INCREASE (DECREASE)
IN NET ASSETS.................... 11,572,165 (71,712)
NET ASSETS:
Beginning of year................ 61,563,342 61,635,054
-------------- --------------
End of year...................... $ 73,135,507 $ 61,563,342
============== ==============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A10 AND A11.
A8
<PAGE>
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
For the years ended December 31, 1995 and 1994
<TABLE>
<CAPTION>
SUBACCOUNTS
--------------------------------------------------------------
ZERO
COUPON SMALL
BOND PRUDENTIAL CAPITALIZATION
2005 JENNISON* STOCK*
------------------------------ -------------- --------------
1995 1994 1995 1995
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
OPERATIONS:
Net investment income (loss)..... $ 838,006 $ 782,620 $ (11,994) $ 6,422
Capital gains distributions
received....................... 425,717 3,474 0 47,413
Realized gain (loss) on shares
redeemed
[average cost basis]........... 0 (2,913) 0 0
Net unrealized gain (loss) on
investments.................... 3,328,939 (2,073,481) 281,405 181,809
-------------- -------------- -------------- --------------
NET INCREASE (DECREASE) IN NET
ASSETS
RESULTING FROM OPERATIONS........ 4,592,662 (1,290,300) 269,411 235,644
-------------- -------------- -------------- --------------
NET INCREASE (DECREASE) IN NET
ASSETS
RESULTING FROM PREMIUM PAYMENTS
AND OTHER OPERATING TRANSFERS.... 2,469,936 3,624,370 7,175,027 5,360,329
-------------- -------------- -------------- --------------
NET INCREASE (DECREASE) IN NET
ASSETS
RESULTING FROM SURPLUS
TRANSFERS........................ 7,956 (146,182) 214,343 230,333
-------------- -------------- -------------- --------------
TOTAL INCREASE (DECREASE)
IN NET ASSETS.................... 7,070,554 2,187,888 7,658,781 5,826,306
NET ASSETS:
Beginning of year................ 14,093,350 11,905,462 0 0
-------------- -------------- -------------- --------------
End of year...................... $ 21,163,904 $ 14,093,350 $ 7,658,781 $ 5,826,306
============== ============== ============== ==============
*Commenced
Business
on 5/1/95
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A10 AND A11.
A9
<PAGE>
NOTES TO FINANCIAL STATEMENTS OF
THE PRUDENTIAL VARIABLE APPRECIABLE ACCOUNT
FOR THE YEARS ENDED DECEMBER 31, 1995 AND DECEMBER 31, 1994
NOTE 1: GENERAL
The Prudential Variable Appreciable Account (the "Account") of The
Prudential Insurance Company of America ("The Prudential") was
established on August 11, 1987 by a resolution of The Prudential's
Board of Directors in conformity with insurance laws of the State of
New Jersey. The assets of the Account are segregated from The
Prudential's other assets.
The Account is registered under the Investment Company Act of 1940, as
amended, as a unit investment trust. There are sixteen 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 The Prudential.
The Zero Coupon Bond 1995 subaccount was liquidated on November 15,
1995. On that date, all shares held in the corresponding portfolio of
the Series Fund were redeemed and the redemption proceeds were
transferred to the Money Market subaccount, unless otherwise directed,
in accordance with the prospectus.
NOTE 2: 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 of each portfolio held by the subaccounts of the
Account and the aggregate cost of investments in such shares at
December 31, 1995 were as follows:
<TABLE>
<CAPTION>
PORTFOLIOS
-----------------------------------------------------------------------------
PORTFOLIO MONEY DIVERSIFIED FLEXIBLE CONSERVATIVE
INFORMATION MARKET BOND EQUITY MANAGED BALANCED
- ------------------------- ------------- ------------- -------------- -------------- ---------------
<S> <C> <C> <C> <C> <C>
Number of shares: 9,150,420 9,025,842 31,067,291 53,483,137 51,382,708
Net asset value per
share: $ 10.0000 $ 11.3131 $ 25.6399 $ 17.8593 $ 15.3088
Cost: $ 91,504,205 $ 98,171,648 $ 646,301,327 $ 863,983,157 $ 746,204,653
<CAPTION>
PORTFOLIOS (CONTINUED)
-----------------------------------------------------------------------------
ZERO ZERO
COUPON COUPON HIGH
PORTFOLIO BOND BOND YIELD STOCK EQUITY
INFORMATION 1995 2000 BOND INDEX INCOME
- ------------------------- ------------- ------------- -------------- -------------- ---------------
<S> <C> <C> <C> <C> <C>
Number of shares: 0 1,541,954 8,723,958 14,901,125 13,715,785
Net asset value per
share: $ 0.0000 $ 13.2730 $ 7.8004 $ 19.9561 $ 16.2709
Cost: $ 0 $ 19,405,578 $ 69,244,984 $ 212,396,329 $ 206,403,917
</TABLE>
<TABLE>
<CAPTION>
PORTFOLIOS (CONTINUED)
--------------------------------------------------------------------------------------------
ZERO SMALL
PORTFOLIO NATURAL GOVERNMENT COUPON PRUDENTIAL CAPITALIZATION
INFORMATION RESOURCES GLOBAL INCOME BOND 2005 JENNISON STOCK
- ------------------------- ------------- ------------- -------------- -------------- --------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Number of shares: 5,853,358 3,199,757 6,240,811 1,604,549 610,418 492,362
Net asset value per
share: $ 17.2718 $ 15.5332 $ 11.7189 $ 13.1899 $ 12.5468 $ 11.8334
Cost: $ 83,470,176 $ 46,911,561 $ 70,390,270 $ 18,878,006 $ 7,377,376 $ 5,644,497
</TABLE>
NOTE 3: CHARGES AND EXPENSES
A. Mortality Risk and Expense Risk Charges
The mortality risk and expense risk charges at an effective annual rate of
up to 0.90% may be applied daily against the net assets representing equity
of the Contract owners held in each subaccount. For contracts with face
amounts of $100,000 or more, the annual rate is 0.60%.
A10
<PAGE>
B. Deferred Sales Charge
A deferred sales charge is imposed upon the surrender of certain variable
life insurance contracts to compensate The Prudential for sales and other
marketing expenses. The amount of any sales charge will depend on the number
of years that have elapsed since the Contract was issued. No sales charge
will be imposed after the tenth year of the Contract. No sales charge will
be imposed on death benefits.
C. Partial Withdrawal Charge
The partial withdrawal of the cash surrender value from certain variable
life insurance contracts invokes a charge equal to the lesser of $15 or 2%
of the amount withdrawn.
D. Expense Reimbursement
The Account is reimbursed by The Prudential, on a non-guaranteed basis, for
expenses incurred by the Series Fund in excess of the effective rate of
0.40% for all Zero Coupon Bond Portfolios, 0.45% for the Stock Index
Portfolio, 0.50% for the Equity Income Portfolio, 0.55% for the Natural
Resources Portfolio, and 0.65% for the High Yield Bond Portfolio of the
average daily net assets of these portfolios.
NOTE 4: TAXES
The operations of the subaccounts form a part of, and are taxed with,
the operations of The Prudential. Under the Internal Revenue Code, all
ordinary income and capital gains allocated to the Contract owners are
not taxed to The Prudential. As a result, the net asset values of the
subaccounts are not affected by federal income taxes on distributions
received by the subaccounts.
NOTE 5: NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM SURPLUS TRANSFERS
The increase (decrease) in net assets resulting from surplus transfers
represents the net contributions (withdrawals) of The Prudential to the
Account.
NOTE 6: RELATED PARTY TRANSACTIONS
The Prudential has purchased multiple individual contracts of the
Account insuring the lives of certain employees. The Prudential is the
owner and beneficiary of the contracts. Net premium payments of
approximately $22.9 million and $23.0 million for the years ended
December 31, 1995 and December 31, 1994, respectively, were directed to
the Flexible Managed subaccount. Equity of Contract owners in that
subaccount at December 31, 1995 and December 31, 1994 includes
approximately $190.4 million and $136.7 million, respectively, owned by
The Prudential.
A11
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Contract Owners of
The Prudential Variable Appreciable
Account and the Board of Directors
of The Prudential Insurance Company of America
Newark, New Jersey
We have audited the accompanying statements of net assets of The Prudential
Variable Appreciable Account of The Prudential Insurance Company of America
(comprising, respectively, the Money Market, Diversified Bond, Equity, Flexible
Managed, Conservative Balanced, Zero Coupon Bond 1995, Zero Coupon Bond 2000,
High Yield Bond, Stock Index, Equity Income, Natural Resources, Global,
Government Income, Zero Coupon Bond 2005, Prudential Jennison, and Small
Capitalization Stock subaccounts) as of December 31, 1995, the related
statements of operations for the periods presented in the year then ended, and
the statements of changes in net assets for each of the periods presented in the
two years then ended. 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 in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. Our procedures included
confirmation of securities owned as of December 31, 1995. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of each of the respective subaccounts
constituting The Prudential Variable Appreciable Account as of December 31,
1995, the results of their operations, and the changes in their net assets for
the respective stated periods in conformity with generally accepted accounting
principles.
Deloitte & Touche LLP
Parsippany, New Jersey
February 15, 1996
A12
<PAGE>
CONSOLIDATED FINANCIAL STATEMENTS OF
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
CONSOLIDATED STATEMENTS
OF FINANCIAL POSITION
December 31,
1995 1994
-------- --------
(In Millions)
ASSETS
Fixed maturities .............................. $ 85,585 $ 78,620
Equity securities ............................. 1,937 2,327
Mortgage loans ................................ 23,680 26,199
Investment real estate ........................ 1,568 1,600
Policy loans .................................. 6,800 6,631
Other invested assets ......................... 4,019 5,147
Short-term investments ........................ 7,874 10,630
Securities purchased under
agreements to resell ......................... 5,130 5,591
Trading account securities .................... 3,658 6,341
Cash .......................................... 1,633 1,109
Accrued investment income ..................... 1,915 1,932
Premiums due and deferred ..................... 2,402 2,712
Broker-dealer receivables ..................... 8,136 8,164
Other assets .................................. 6,608 6,266
Assets held in Separate Accounts .............. 58,435 48,633
-------- --------
TOTAL ASSETS ................................... $219,380 $211,902
======== ========
LIABILITIES, AVR AND SURPLUS
Liabilities:
Policy liabilities and insurance reserves:
Future policy benefits and claims ............ $ 94,973 $ 98,354
Unearned premiums ............................ 836 1,144
Other policy claims and
benefits payable ............................ 1,932 1,848
Policy dividends ............................. 1,894 1,822
Policyholder account balances ................ 12,540 12,195
Securities sold under agreements
to repurchase ................................ 7,993 8,919
Notes payable and other borrowings ............ 9,157 12,009
Broker-dealer payables ........................ 6,083 6,198
Other liabilities ............................. 14,976 11,983
Liabilities related to Separate Accounts ...... 57,586 47,946
-------- --------
Total Liabilities .............................. 207,970 202,418
-------- --------
Asset Valuation Reserve (AVR) .................. 2,742 2,035
-------- --------
Surplus:
Capital Notes ................................. 984 298
Special surplus fund .......................... 1,274 1,097
Unassigned surplus ............................ 6,410 6,054
-------- --------
Total Surplus .................................. 8,668 7,449
-------- --------
TOTAL LIABILITIES, AVR
AND SURPLUS ................................... $219,380 $211,902
======== ========
CONSOLIDATED STATEMENTS OF
OPERATIONS AND CHANGES IN SURPLUS AND ASSET VALUATION RESERVE (AVR)
Years Ended December 31,
1995 1994 1993
------- ------- -------
(In Millions)
REVENUE
Premiums and annuity
considerations ........................... $27,413 $29,698 $29,982
Net investment income ..................... 9,844 9,595 10,090
Broker-dealer revenue ..................... 3,800 3,677 4,025
Realized investment
gains/(losses) ........................... 882 (450) 953
Other income .............................. 972 1,037 924
------- ------- -------
Total Revenue .............................. 42,911 43,557 45,974
------- ------- -------
BENEFITS AND EXPENSES
Current and future benefits
and claims ............................... 27,854 30,788 30,573
Insurance and underwriting
expenses ................................. 4,577 4,830 4,982
Limited partnership matters ............... 0 1,422 390
General, administrative and
other expenses ........................... 6,034 5,794 5,575
------- ------- -------
Total Benefits and Expenses ................ 38,465 42,834 41,520
------- ------- -------
Income from operations
before dividends
and income taxes .......................... 4,446 723 4,454
Dividends to policyholders ................. 2,519 2,290 2,339
------- ------- -------
Income/(loss) before
income taxes .............................. 1,927 (1,567) 2,115
Income tax provision/(benefit) ............. 1,348 (392) 1,236
------- ------- -------
NET INCOME/(LOSS) .......................... 579 (1,175) 879
Surplus, beginning of year ................. 7,449 8,004 7,365
Issuance of Capital Notes
(after net charge-off of
non-admitted prepaid
postretirement benefit
cost of $113 in 1993) ..................... 686 0 185
Net unrealized investment
gains/(losses) and change
in AVR .................................... (46) 620 (425)
------- ------- -------
SURPLUS, END OF YEAR ....................... 8,668 7,449 8,004
------- ------- -------
AVR, beginning of year ..................... 2,035 2,687 2,457
Increase/(decrease) in AVR ................. 707 (652) 230
------- ------- -------
AVR, END OF YEAR ........................... 2,742 2,035 2,687
------- ------- -------
TOTAL SURPLUS AND AVR ...................... $11,410 $ 9,484 $10,691
======= ======= =======
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-1
<PAGE>
CONSOLIDATED FINANCIAL STATEMENTS OF
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
1995 1994 1993
-------- -------- --------
(In Millions)
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net income/(loss) ..................... $ 579 $(1,175) $ 879
Adjustments to reconcile net
income/(loss) to cash flows from
operating activities:
(Decrease)/increase in policy
liabilities and insurance
reserves ........................... (1,691) 1,289 2,747
Net increase in Separate
Accounts ........................... (162) (52) (59)
Realized investment
(gains)/losses ..................... (882) 450 (953)
Depreciation, amortization and
other non-cash items ............... 217 379 261
Gain on sale and results of
operations from reinsurance
segment ............................ (72) 0 0
Decrease/(increase) in
operating assets:
Mortgage loans ...................... (305) (226) (226)
Policy loans ........................ (169) (175) (174)
Securities purchased
under agreements to
resell ............................. 139 2,979 (2,049)
Trading account
securities ......................... 2,707 2,324 (2,087)
Broker-dealer
receivables ....................... 28 969 (1,803)
Other assets ........................ 205 3,254 (2,172)
(Decrease)/increase in
operating liabilities:
Securities sold under
agreements to repurchase ........... (475) (3,247) 1,134
Broker-dealer payables .............. (115) 788 1,280
Other liabilities ................... 501 (3,170) 1,794
-------- -------- --------
Cash Flows from Operating
Activities ........................... 505 4,387 (1,428)
-------- -------- --------
CASH FLOWS FROM
INVESTING ACTIVITIES:
Proceeds from the sale/maturity of:
Fixed maturities ..................... 100,317 90,914 100,023
Equity securities .................... 2,302 1,426 1,725
Mortgage loans ....................... 5,567 4,154 4,789
Investment real estate ............... 291 407 336
Other invested assets ................ 1,943 1,022 1,352
Property and equipment ............... 3 637 6
Sale of reinsurance segment .......... 790 0 0
Payments for the purchase of:
Fixed maturities ..................... (107,192) (91,032) (101,217)
Equity securities .................... (1,450) (1,535) (1,085)
Mortgage loans ....................... (3,002) (3,446) (3,530)
Investment real estate ............... (387) (161) (196)
Other invested assets ................ (515) (1,687) (531)
Property and equipment ............... (238) (392) (640)
Short-term investments (net) .......... 2,756 (4,281) (2,150)
Net change in cash placed as
collateral for securities loaned ..... 1,379 2,011 (589)
-------- -------- --------
Cash Flows from Investing
Activities ........................... $ 2,564 $ (1,963) $ (1,707)
-------- -------- --------
CASH FLOWS FROM
FINANCING ACTIVITIES:
Net (payments)/proceeds of
short-term debt ...................... $ (2,489) $ (1,115) $ 1,106
Proceeds from the issuance of
long-term debt ....................... 763 345 1,228
Payments for the settlement of
long-term debt ....................... (1,376) (760) (721)
Proceeds/(payments) from
unmatched securities purchased
under agreements to resell ........... 322 1,086 (47)
(Payments)/proceeds for
unmatched securities sold under
agreements to repurchase ............. (451) (2,537) 1,707
Proceeds from the issuance of
Capital Notes ........................ 686 0 298
-------- -------- --------
Cash Flows from
Financing Activities ................. (2,545) (2,981) 3,571
-------- -------- --------
Net increase/(decrease)
in cash .............................. 524 (557) 436
Cash, beginning of year ............... 1,109 1,666 1,230
-------- -------- --------
CASH, END OF YEAR ..................... $ 1,633 $ 1,109 $ 1,666
======== ======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Income tax payments, net of refunds, made during 1995, 1994 and 1993 were $430
million, $64 million and $933 million, respectively. Interest payments made
during 1995, 1994 and 1993 were $1,413 million, $1,429 million and $1,171
million, respectively.
The 1995 amounts are presented net of the cash flow activities of the
reinsurance segment.
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-2
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
For The Years Ended December 31, 1995, 1994 and 1993
1. ACCOUNTING POLICIES AND PRINCIPLES
A. PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
The Prudential Insurance Company of America ("Prudential"), a mutual life
insurance company, and its subsidiaries (collectively, "the Company"). The
activities of the Company cover a broad range of financial services,
including life and health care insurance, property and casualty insurance,
securities brokerage, asset management, investment advisory services, and
real estate development and brokerage. All significant intercompany
balances and transactions have been eliminated in consolidation.
B. BASIS OF PRESENTATION
The consolidated financial statements are presented in conformity with
generally accepted accounting principles ("GAAP"), which for mutual life
insurance companies and their insurance subsidiaries are statutory
accounting practices prescribed or permitted by the National Association of
Insurance Commissioners ("NAIC") and their respective domiciliary state
insurance departments. Prescribed statutory accounting practices include
publications of the NAIC, state laws, regulations and general
administrative rules. Permitted statutory accounting practices encompass
all accounting practices not so prescribed.
The Company, with permission from the New Jersey Department of Insurance
("the Department"), prepares an Annual Report that differs from the Annual
Statement filed with the Department in that subsidiaries are consolidated
and certain financial statement captions are presented differently.
Certain reclassifications have been made to the 1994 and 1993 financial
statements to conform to the 1995 presentation.
Management has used estimates and assumptions in the preparation of the
financial statements that affect the reported amounts of assets,
liabilities, revenue and expenses. Actual results could differ from those
estimates.
Life and General Insurance Operations--Life premiums are recognized as
income over the premium paying period of the related policies. Annuity
considerations are recognized as revenue when received. Health and property
and casualty premiums are earned ratably over the terms of the related
insurance and reinsurance contracts or policies. Expenses incurred in
connection with acquiring new insurance business, including such
acquisition costs as sales commissions, are charged to operations as
incurred.
Broker-Dealer Operations--The Company is engaged in the securities industry
in the United States, with operations in various foreign countries. Client
transactions are recorded on a settlement date basis. Securities and
commodities commission revenues and related expenses are accrued for client
transactions on a trade date basis. Investment banking revenue includes
advisory fees, selling concessions, management and underwriting fees, and
is recorded, net of related expenses, when the services are substantially
completed. Asset management and portfolio service fees are fees earned on
total assets under management and mutual funds sponsored by the Company and
third parties. Certain costs that are directly related to the sales of
mutual funds are deferred.
C. INVESTED ASSETS
Fixed maturities, which include long-term bonds and redeemable preferred
stock, are stated primarily at amortized cost.
Equity securities, which consist primarily of common stocks, are carried at
fair value.
Mortgage loans are stated primarily at unpaid principal balances. Mortgage
loans for non-life subsidiaries are recorded net of valuation reserves.
Investment real estate, except for real estate acquired in satisfaction of
debt, is carried at cost less accumulated straight-line depreciation,
encumbrances and permanent impairments in value. Real estate acquired in
satisfaction of debt, included in "Other assets," is carried at the lower
of cost or fair value less disposition costs.
Policy loans are stated at unpaid principal balances.
Other invested assets primarily represent the Company's investment in joint
ventures and other forms of partnerships. These investments are carried
primarily on the equity method where the Company has the ability to
exercise significant influence over the operating and financial policies of
the entity.
Short-term investments are stated at amortized cost, which approximates
fair value.
Securities purchased under agreements to resell and securities sold under
agreements to repurchase are collateralized financing transactions and are
carried at their contract amounts plus accrued interest. These agreements
are generally
F-3
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
collateralized by cash or securities with market values in excess of the
obligations under the contract. It is the Company's policy to take
possession of securities purchased under resale agreements, to value the
securities daily, and to require adjustment of the underlying collateral
when deemed necessary.
Trading account securities from broker-dealer operations are reported based
upon quoted market prices.
Securities lending is a program whereby securities are loaned to third
parties, primarily major brokerage firms. As of December 31, 1995 and 1994,
the estimated fair values of loaned securities were $7,982 million and
$8,506 million, respectively. Company and NAIC policies require a minimum
of 102% and 105% of the fair value of the domestic and foreign loaned
securities, respectively, to be separately maintained as collateral for the
loans. Cash collateral received is invested in short-term investments. The
offsetting collateral liability as of December 31, 1995 and 1994 is $5,690
million and $4,252 million, respectively. Non-cash collateral is recorded
in memorandum records and is not reflected in the consolidated financial
statements.
Derivative financial instruments--For the Company's non-insurance
subsidiaries, derivatives used for trading purposes are recorded at fair
value as of the reporting date. Realized and unrealized changes in fair
values are recognized in "Broker-dealer revenue" and "Other income" in the
period in which the changes occur. Gains and losses on hedges of existing
assets or liabilities are included in the carrying amount of those assets
or liabilities and are deferred and recognized in earnings in the same
period as the underlying hedged item. For interest rate swaps that qualify
for settlement accounting, the interest differential to be paid or received
under the swap agreements is accrued over the life of the agreements as a
yield adjustment. Gains and losses on early termination of derivatives that
modify the characteristics of designated assets and liabilities are
deferred and are amortized as an adjustment to the yield of the related
assets or liabilities over their remaining lives
Derivatives used in asset/liability risk management activities, which
support life and health insurance and annuity contracts, are recorded at
fair value with unrealized gains and losses recorded in "Net unrealized
investment gains/(losses) and change in AVR." Upon termination of
derivatives supporting life and health insurance and annuity contracts, the
interest-related gains and losses are amortized through the Interest
Maintenance Reserve (IMR).
D. SEPARATE ACCOUNTS
These assets and liabilities, reported at estimated market value, represent
segregated funds invested for pension and other clients. Investment risks
associated with market value changes are generally borne by the clients,
except to the extent of minimum guarantees made by the Company with respect
to certain accounts.
E. CAPITAL NOTES
Interest payments on the 1993 Capital Notes are preapproved by the
Department. This practice differs from that prescribed by the NAIC. The
NAIC practices provide for Insurance Commissioner approval of every
interest payment before the payment is made. The interest payments on the
Capital Notes issued in 1995 comply with prescribed NAIC practices.
Prudential has included all notes as a component of surplus (Note 7).
F. FUTURE APPLICATION OF ACCOUNTING STANDARDS
The Financial Accounting Standards Board (the "FASB") issued Interpretation
No. 40, "Applicability of Generally Accepted Accounting Principles to
Mutual Life Insurance and Other Enterprises," which, as amended, is
effective for fiscal years beginning after December 15, 1995.
Interpretation No. 40 changes the current practice of mutual life insurance
companies, with respect to utilizing statutory basis financial statements
for general purposes, in not allowing such financial statements to be
referred to as having been prepared in accordance with GAAP. Interpretation
No. 40 requires GAAP financial statements of mutual life insurance
companies to apply all GAAP pronouncements, unless specifically exempted.
Implementation of Interpretation No. 40 will require significant effort and
judgment. The Company is assessing the impact of Interpretation No. 40 on
its consolidated financial statements. Such effort has not been completed
and management currently believes surplus will increase significantly.
F-4
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
2. FUTURE POLICY BENEFITS, RESERVE FOR LOSSES AND LOSS EXPENSES
A. For life insurance, general insurance and annuities, unpaid claims and
claim adjustment expenses include estimates of benefits and associated
settlement expenses on reported claims and those which are incurred but not
reported.
Activity in the liability for unpaid claims and claim adjustment expenses
is:
<TABLE>
<CAPTION>
1995 1994 1993
--------------------- --------------------- -----------------------
Accident Property Accident Property Accident Property
and and and and and and
Health Casualty Health Casualty Health Casualty
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
(In Millions)
Balance at January 1 ........................ $2,738 $5,116 $2,654 $4,869 $2,623 $4,712
Less reinsurance recoverables .............. 23 1,018 15 1,070 22 1,107
------ ------ ------ ------ ------ ------
Net balance at January 1 .................... 2,715 4,098 2,639 3,799 2,601 3,605
------ ------ ------ ------ ------ ------
Incurred related to:
Current year ............................... 8,062 2,387 7,398 2,541 7,146 2,364
Prior years ................................ (48) 95 (105) 158 (167) 109
------ ------ ------ ------ ------ ------
Total incurred .............................. 8,014 2,482 7,293 2,699 6,979 2,473
------ ------ ------ ------ ------ ------
Paid related to:
Current year ............................... 5,972 1,010 5,568 1,237 5,336 1,119
Prior years ................................ 1,807 959 1,649 1,163 1,605 1,160
------ ------ ------ ------ ------ ------
Total paid .................................. 7,779 1,969 7,217 2,400 6,941 2,279
------ ------ ------ ------ ------ ------
Less reinsurance
segment (Note 10) .......................... 0 2,326 0 0 0 0
------ ------ ------ ------ ------ ------
Net balance at December 31 .................. 2,950 2,285 2,715 4,098 2,639 3,799
Plus reinsurance recoverables .............. 15 819 23 1,018 15 1,070
------ ------ ------ ------ ------ ------
Balance at December 31 ...................... $2,965 $3,104 $2,738 $5,116 $2,654 $4,869
====== ====== ====== ====== ====== ======
</TABLE>
As a result of changes in estimates of insured events in prior years, the
declines of $48 million, $105 million and $167 million in the provision for
claims and claim adjustment expenses for accident and health business in
1995, 1994 and 1993, respectively, were due to lower-than-expected trends
in claim costs and an accelerated decline in indemnity health business.
As a result of changes in estimates of insured events in prior years, the
provision for claims and claim adjustment expenses for property and
casualty business (net of reinsurance recoveries of $88 million, $47
million and $120 million in 1995, 1994 and 1993, respectively) increased by
$95 million, $158 million and $109 million in 1995, 1994 and 1993,
respectively, due to increased loss development and reserve strengthening
for asbestos and environmental claims.
B. Reserves for individual life insurance are calculated using various
methods, interest rates and mortality tables, which produce reserves that
meet the aggregate requirements of state laws and regulations.
Approximately 39% of individual life insurance reserves are determined
using the net level premium method, or by using the greater of the net
level premium reserve or the policy cash value. About 54% of individual
life insurance reserves are calculated according to the Commissioner's
Reserve Valuation Method ("CRVM"), or methods which compare CRVM to policy
cash values. The remaining reserves include universal life reserves which
are equal to the greater of the policyholder account value less the
unamortized expense allowance and the policy cash value, or are for
supplementary benefits whose reserves are calculated using methods,
interest rates and tables appropriate for the benefit provided.
For group life insurance, about 56% of the reserves are associated with
extended death benefits. These reserves are primarily calculated using
modified group tables at various interest rates. The remainder are unearned
premium reserves (calculated using the 1960 Commissioner's Standard Group
Table), reserves for group life fund accumulations and other miscellaneous
reserves.
Reserves for deferred individual annuity contracts are determined using the
Commissioner's Annuity Reserve Valuation Method. These account for 72% of
the individual annuity reserves. The remaining reserves are equal to the
present value of future payments with the annuity mortality table and
interest rates based on the date of issue or maturity as appropriate.
Reserves for other deposit funds or other liabilities with life
contingencies reflect the contract deposit account or experience
accumulation for the contract and any purchased annuity reserves. For money
purchase annuities issued in Canada, the reserve equals the present value
of each deposit accumulated to the end of its guarantee period at its
guaranteed interest rate, discounted at the valuation interest rate.
F-5
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
Accident and health reserves represent the present value of the future
potential payments, discounted for contingencies and interest. The
remaining material reserves for active life reserves and unearned premiums
are valued using the preliminary term method, gross premium valuation
method, or a pro-rata portion of gross premiums. Reserves are also held for
amounts not yet due on hospital benefits and other coverages.
The reserve for guaranteed interest contracts, deposit funds and other
liabilities without life contingencies equal either the present value of
future payments discounted at the guaranteed rate or the fund value.
3. INCOME TAXES
Under the Internal Revenue Code ("the Code"), Prudential and its life
insurance subsidiaries are taxed on their gain from operations after
dividends to policyholders. In calculating this tax, the Code requires the
capitalization and amortization of policy acquisition expenses.
The Code also imposes an "equity tax" on mutual life insurance companies
based on an imputed surplus which, in effect, reduces the deduction for
policyholder dividends. The amount of the equity tax is estimated in the
current year based on the anticipated equity tax rate, and is adjusted in
subsequent years as the rate is finalized.
Prudential files a consolidated federal income tax return with all of its
domestic subsidiaries. Net operating losses of the non-life subsidiaries may
be used in this consolidated return, but are limited each year to the lesser
of 35% of cumulative eligible non-life subsidiary losses or 35% of life
company taxable income. The provision reported in the consolidated financial
statements also includes tax liabilities for foreign subsidiaries.
The non-insurance subsidiaries of the Company recognize deferred tax assets
and liabilities for the expected future tax consequences of events that have
been recognized in their financial statements. Included in "Income tax
provision/(benefit)" are deferred taxes of $109 million, $(477) million and
$21 million for the years ended December 31, 1995, 1994 and 1993,
respectively.
At December 31, 1995, the Company had consolidated non-life tax loss
carryforwards of $595 million which will expire between 1998 and 2010, if not
utilized.
4. INVESTED ASSETS
A. FIXED MATURITIES
The Company invests in both investment grade and non-investment grade
public and private fixed maturities. The Securities Valuation Office of the
NAIC rates the fixed maturities held by insurers for regulatory purposes
and groups investments into six categories ranging from highest quality
bonds to those in or near default. The lowest three NAIC categories
represent primarily high-yield securities and are defined by the NAIC as
including any security with a public agency rating equivalent to B+ or B1
or less. These securities approximate 0.9% and 1.6% of the Company's
consolidated assets at December 31, 1995 and 1994, respectively.
The carrying value and estimated fair value of fixed maturities at December
31, 1995 and 1994, are as follows:
<TABLE>
<CAPTION>
1995
-------------------------------------------------
Gross Gross Estimated
Carrying Unrealized Unrealized Fair
Value Gains Losses Value
-------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
(In Millions)
U.S. Treasury securities and obligations of
U.S. government corporations and
agencies ..................................................... $16,494 $1,409 $ 1 $17,902
Obligations of U.S. states and their
political subdivisions ....................................... 1,365 70 2 1,433
Fixed maturities issued by foreign governments
and their agencies and political subdivisions ................ 3,641 275 4 3,912
Corporate securities .......................................... 58,998 4,792 108 63,682
Mortgage-backed securities .................................... 5,048 276 10 5,314
Other fixed maturities ........................................ 39 0 0 39
------- ------ ---- -------
Total ......................................................... $85,585 $6,822 $125 $92,282
======= ====== ==== =======
</TABLE>
F-6
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
1994
------------------------------------------------
Gross Gross Estimated
Carrying Unrealized Unrealized Fair
Value Gains Losses Value
-------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
(In Millions)
U.S. Treasury securities and obligations of
U.S. government corporations and agencies .................. $13,576 $ 122 $ 646 $13,052
Obligations of U.S. states and their
political subdivisions ..................................... 2,776 32 165 2,643
Fixed maturities issued by foreign governments
and their agencies and political subdivisions .............. 3,093 37 153 2,977
Corporate securities ........................................ 54,076 1,191 1,772 53,495
Mortgage-backed securities .................................. 4,889 82 148 4,823
Other fixed maturities ...................................... 210 0 0 210
------- ------ ------ -------
Total ....................................................... $78,620 $1,464 $2,884 $77,200
======= ====== ====== ========
</TABLE>
The carrying value and estimated fair value of fixed maturities at December
31, 1995, categorized by contractual maturity, are shown below. Actual
maturities may differ from contractual maturities because borrowers may
prepay obligations with or without call or prepayment penalties.
Estimated
Carrying Fair
Value Value
-------- ---------
(In Millions)
Due in one year or less .................... $ 398 $ 402
Due after one year through five years ...... 26,936 27,748
Due after five years through ten years ..... 23,124 24,637
Due after ten years ........................ 30,079 34,181
------- -------
80,537 86,968
Mortgage-backed securities ................. 5,048 5,314
------- -------
Total ...................................... $85,585 $92,282
======= =======
Proceeds from the sale and maturity of fixed maturities during 1995, 1994
and 1993 were $100,317 million, $90,914 million and $100,023 million,
respectively. Gross gains of $2,083 million, $693 million and $2,473
million and gross losses of $943 million, $2,009 million and $698 million
were realized on such sales during 1995, 1994 and 1993, respectively.
B. MORTGAGE LOANS
Mortgage loans at December 31, 1995 and 1994, are as follows:
<TABLE>
<CAPTION>
1995 1994
-------------------- --------------------
Amount Percent Amount Percent
------ ------- ------ -------
<S> <C> <C> <C> <C>
(In Millions)
Commercial and agricultural loans:
In good standing ...................................... $17,792 75.1% $19,752 75.4%
In good standing
with restructured terms .............................. 976 4.1% 1,412 5.4%
Past due 90 days or more .............................. 145 0.6% 339 1.3%
In process of foreclosure ............................. 158 0.7% 387 1.5%
Residential loans ...................................... 4,609 19.5% 4,309 16.4%
------- ----- ------- -----
Total mortgage loans ................................... $23,680 100.0% $26,199 100.0%
======= ===== ======= =====
</TABLE>
At December 31, 1995, the Company's mortgage loans were collateralized by
the following property types: office buildings (29%), retail stores (20%),
residential properties (19%), apartment complexes (13%), industrial
buildings (10%), agricultural properties (7%) and other commercial
properties (2%). The mortgage loans are geographically dispersed throughout
the United States and Canada with the largest concentrations in California
(23%) and New York (9%). Included in these balances
F-7
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
are mortgage loans with affiliated joint ventures of $653 million and $684
million at December 31, 1995 and 1994, respectively.
C. INVESTMENT REAL ESTATE
Accumulated depreciation on investment real estate was $643 million and
$748 million at December 31, 1995 and 1994, respectively.
D. OTHER INVESTED ASSETS
The Company's net equity in joint ventures and other forms of partnerships
amounted to $2,612 million and $3,357 million as of December 31, 1995 and
1994, respectively. The Company's share of net income from such entities
was $326 million, $354 million and $375 million for 1995, 1994 and 1993,
respectively.
E. NET UNREALIZED INVESTMENT GAINS/(LOSSES)
Net unrealized investment gains/(losses), which result principally from
changes in the carrying values of invested assets, were $661 million, $(32)
million and $(195) million for the years ended December 31, 1995, 1994 and
1993, respectively.
F. ASSET VALUATION RESERVE AND INTEREST MAINTENANCE RESERVE
These reserves are required for life insurance companies under NAIC
regulations. The AVR is calculated based on a statutory formula and is
designed to mitigate the effect of valuation and credit-related losses on
unassigned surplus. The IMR captures net realized capital gains and losses
resulting from changes in the general level of interest rates. These gains
and losses are amortized into investment income over the expected remaining
life of the investments sold. At December 31, 1995, the components of AVR
are 67% for fixed maturities, equity securities and short-term investments;
21% for mortgage loans; and 12% for investment real estate and other
invested assets. The IMR balance at December 31, 1995 and 1994 was $1,191
million and $502 million, respectively. During 1995, 1994 and 1993, $775
million, $(929) million and $1,082 million of net realized investment
gains/(losses) were deferred, respectively.
G. RESTRICTED ASSETS AND SPECIAL DEPOSITS
Assets in the amounts of $6,271 million and $5,901 million at December 31,
1995 and 1994, respectively, were on deposit with governmental authorities
or trustees as required by law. Assets valued at $3,558 million and $5,855
million at December 31, 1995 and 1994, respectively, were maintained as
compensating balances or pledged as collateral for bank loans and other
financing agreements. Restricted cash and securities of $1,137 million and
$897 million at December 31, 1995 and 1994, respectively, were included in
the consolidated financial statements. The restricted cash represents funds
deposited by clients and funds accruing to clients as a result of trades or
contracts.
5. EMPLOYEE BENEFIT PLANS
A. PENSION PLANS
The Company has several defined benefit pension plans, which cover
substantially all of its employees. Benefits are generally based on career
average earnings and credited length of service. The Company's funding
policy for U.S. plans is to contribute annually the amount necessary to
satisfy the Internal Revenue Service contribution guidelines.
Employee pension benefit plan status is as follows:
<TABLE>
<CAPTION>
September 30, 1995 September 30, 1994
------------------------ ------------------------
Assets Accumulated Assets Accumulated
Exceed Benefits Exceed Benefits
Accumulated Exceed Accumulated Exceed
Benefits Assets Benefits Assets
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
(In Millions)
Actuarial present value of benefit obligation:
Vested benefit obligation ..................................... $(3,270) $(236) $(2,749) $(207)
======= ===== ====== =====
Accumulated benefit obligation ................................ (3,572) (261) (3,025) (230)
======= ===== ====== =====
Projected benefit obligation ................................... (4,330) (297) (3,975) (272)
Plan assets at fair value ...................................... 6,688 206 5,524 180
------- ----- ------ -----
Plan assets in excess of projected benefit obligation .......... 2,358 (91) 1,549 (92)
Unrecognized transition amount ................................. (904) (4) (976) (4)
Unrecognized prior service cost ................................ 199 16 211 17
Unrecognized net (gain)/loss ................................... (753) 15 (18) 27
Additional minimum liability ................................... 0 (8) 0 (8)
------- ----- ------ -----
Prepaid/(accrued) pension cost ................................. $ 900 $ (72) $ 766 $ (60)
======= ===== ====== =====
</TABLE>
F-8
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
Plan assets consist primarily of equity securities, bonds, real estate and
short-term investments, of which $4,974 million and $4,325 million are
included in Separate Account assets and liabilities at December 31, 1995
and 1994, respectively.
In compliance with statutory accounting principles, Prudential's prepaid
pension costs of $900 million and $766 million at December 31, 1995 and
1994, respectively, are considered non-admitted assets. These assets are
excluded from the consolidated assets and the changes in these non-admitted
assets were $134 million, $(19) million, and $142 million in 1995, 1994 and
1993, respectively.
The components of the net periodic pension (benefit)/expense for 1995, 1994
and 1993 are as follows:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
(In Millions)
Service cost--benefits earned during the year ............................. $ 133 $ 163 $ 133
Interest cost on projected benefit obligation ............................. 392 311 301
Actual return on assets ................................................... (1,288) 56 (854)
Net amortization and deferral ............................................. 629 (639) 301
Net curtailment gains and special termination benefits .................... 0 156 0
------- ----- -----
Net periodic pension (benefit)/expense .................................... $ (134) $ 47 $(119)
======= ===== =====
</TABLE>
The net reduction to surplus relating to the Company's pension plans is $0,
$28 million and $23 million in 1995, 1994 and 1993, respectively, which
considers the changes in Prudential's non-admitted prepaid pension asset of
$134 million, $(19) million and $142 million, respectively. The accounting
assumptions used by Prudential were:
As of September 30,
--------------------
1995 1994 1993
---- ---- ----
Discount rate ................................. 7.5% 8.5% 7.0%
Rate of increase in compensation levels ....... 4.5% 5.5% 5.0%
Expected long-term rate of return on assest ... 9.0% 9.0% 9.0%
The 1995 pension benefit for the Company's non-U.S. plans is $8 million.
B. POSTRETIREMENT BENEFITS
The Company provides certain life insurance and health care benefits for
its retired employees. Substantially all of the Company's employees may
become eligible to receive a benefit if they retire after age 55 with at
least 10 years of service.
Postretirement benefits, with respect to Prudential, are recognized in
accordance with prescribed NAIC policy. Prudential has elected to amortize
its transition obligation over 20 years. The Company's funding of its
postretirement benefit obligations totaled $48 million, $31 million and
$404 million in 1995, 1994 and 1993, respectively.
F-9
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
For The Years Ended December 31, 1995, 1994 and 1993
The postretirement benefit plan status is as follows:
September 30,
------------------
1995 1994
-------- -------
(In Millions)
Accumulated postretirement benefit obligation (APBO):
Retirees ............................................... $(1,526) $(1,337)
Fully eligible active plan participants ................ (152) (188)
------- -------
Total APBO ............................................... (1,678) (1,525)
------- -------
Plan assets at fair value ................................ 1,309 1,232
------- -------
Funded status ............................................ (369) (293)
Unrecognized transition amount ........................... 423 448
Unrecognized net loss/(gain) ............................. 1 (41)
------- -------
Prepaid postretirement benefit cost ...................... $ 55 $ 114
======= =======
Plan assets consist of group and individual variable life insurance
policies, group life and health contracts and short-term investments, of
which $990 million and $996 million are included in the Consolidated
Statement of Financial Position at December 31, 1995 and 1994,
respectively. In compliance with statutory accounting principles,
Prudential's prepaid postretirement benefit costs of $99 million and $127
million at December 31, 1995 and 1994, respectively, are considered
non-admitted assets. These assets are excluded from the consolidated assets
and the changes in these non-admitted assets of $(28) million, $(90)
million and $217 million in 1995, 1994 and 1993, respectively, are reported
in "General, administrative and other expenses" in 1995 and 1994, and in
"Issuance of Capital Notes" in 1993.
Net periodic postretirement benefit cost for 1995, 1994 and 1993 includes
the following components:
<TABLE>
<CAPTION>
1995 1994 1993
----- ----- -----
<S> <C> <C> <C>
(In Millions)
Service cost .................................................. $ 56 $ 38 $ 41
Interest cost ................................................. 123 112 124
Actual return on plan assets .................................. (144) (98) (86)
Amortization of transition obligation ......................... 25 23 39
Other ......................................................... 47 (3) 77
Net curtailment and special termination benefits .............. 0 58 0
----- ---- ----
Net periodic postretirement benefit cost ...................... $ 107 $130 $195
===== ==== ====
</TABLE>
The net reduction to surplus relating to the Company's postretirement
benefit plans is $79 million, $40 million, and $412 million in 1995, 1994
and 1993, respectively, which considers the changes in the non-admitted
prepaid postretirement benefit cost of $(28) million, $(90) million and
$217 million in 1995, 1994 and 1993, respectively.
The accounting assumptions used by Prudential were:
<TABLE>
<CAPTION>
As of September 30,
------------------------------------------
1995 1994 1993
--------- -------- -------
<S> <C> <C> <C>
Discount rate ............................................... 7.5% 8.5% 7.0%
Expected long-term rate of return on plan assets ............ 8.0% 9.0% 9.0%
Rate of increase in compensation levels ..................... 4.5% 5.5% 5.0%
Health care cost trend rates ................................ 8.9-13.3% 9.1-13.9% 9.5-14.7%
Ultimate health care cost trend rate at 2006 ................ 5.0% 6.0% 5.0%
</TABLE>
The effect of a 1% increase in health care cost trend rates on the
September 30, 1995, accumulated postretirement benefit obligation and
service and interest costs would be $138 million and $16 million,
respectively.
C. POSTEMPLOYMENT BENEFITS
The Company accrues for 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,
1995 and 1994 was $102 million and $151 million, respectively. The Company
funded $45 million of postemployment benefits during 1995.
F-10
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
For The Years Ended December 31, 1995, 1994 and 1993
6. NOTES PAYABLE AND OTHER BORROWINGS
Notes payable and other borrowings consisted of the following:
<TABLE>
<CAPTION>
December 31, 1995 December 31, 1994
------------------------- -------------------------
Weighted Weighted
Average Average
Balance Cost of Funds Balance Cost of Funds
-------- ------------- ------- -------------
<S> <C> <C> <C> <C>
(In Millions)
Short-term debt:
Commercial paper ........................... $3,711 5.8% $ 4,108 5.6%
Medium-term notes payable .................. 9 7.4% 204 4.8%
Other ...................................... 2,007 6.4% 4,876 5.8%
------ -------
Total Short Term ............................ 5,727 6.0% 9,188 5.7%
------ -------
Long-term debt:
Notes payable .............................. 1,309 7.2% 1,684 7.3%
Medium-term notes payable .................. 377 5.6% 535 5.9%
Euro medium-term notes payable ............. 537 6.0% 584 4.7%
Other ...................................... 1,207 6.2% 18 10.3%
------ -------
Total Long Term ............................. 3,430 6.5% 2,821 6.5%
------ -------
Total ....................................... $9,157 6.2% $12,009 5.9%
====== =======
</TABLE>
Scheduled repayments of long-term debt as of December 31, 1995, are as
follows: $321 million in 1996, $448 million in 1997, $868 million in 1998,
$667 million in 1999, $620 million in 2000, and $593 million thereafter.
As of December 31, 1995, the Company had $6,770 million in lines of credit
from numerous financial institutions of which $4,263 million were unused.
7. SURPLUS
A. Capital Notes
A summary of the outstanding Capital Notes as of December 31, 1995 is as
follows:
Principal Interest Maturity
Issue Date (Par) Rate Date
---------- --------- -------- --------
(In Millions)
April 1993 ................ $ 300 6.875% April 2003
June 1995 ................. 250 7.650% July 2007
July 1995 ................. 100 8.100% July 2015
June 1995 ................. 350 8.300% July 2025
------
Total ..................... $1,000
======
The notes are subordinate in right of payment to policyholder claims and to
senior indebtedness, and principal repayments are subject to a risk-based
capital test.
The net proceeds from the April 1993 notes, approximately $298 million,
were contributed to a voluntary employee benefit association trust to
prefund certain obligations of Prudential to provide postretirement medical
and other benefits. This resulted in a prepaid asset, which is non-admitted
for statutory purposes. The net increase to surplus from the issuance of
the notes, including a tax benefit of $104 million less the charge-off of
the non-admitted asset of $217 million, was $185 million (Note 5B).
B. SPECIAL SURPLUS FUND
In accordance with the requirements of various states, a special surplus
fund has been established for contingency reserves of $1,274 million and
$1,097 million as of December 31, 1995 and 1994, respectively.
8. FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair values presented on the next page have been determined using
available information and reasonable valuation methodologies. Considerable
judgment is applied in interpreting data to develop the estimates of fair
value. Accordingly, such estimates
F-11
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
For The Years Ended December 31, 1995, 1994 and 1993
presented may not be realized in a current market exchange. The use of
different market assumptions and/or estimation methodologies could have a
material effect on the estimated fair values. The following methods and
assumptions were used in calculating the fair values. (For all other
financial instruments presented in the table, the carrying value is a
reasonable estimate of fair value.)
Fixed Maturities--Fair values for fixed maturities, other than private
placement securities, are based on quoted market prices or estimates from
independent pricing services. Fair values for private placement securities
are estimated using a discounted cash flow model which considers the
current market spreads between the U.S. Treasury yield curve and corporate
bond yield curve, adjusted for the type of issue, its current credit
quality and its remaining average life. The fair value of certain
non-performing private placement securities is based on amounts provided by
state regulatory authorities.
Equity Securities--Fair value is based on quoted market prices, where
available, or prices provided by state regulatory authorities.
Mortgage Loans--The fair value of residential mortgages is based on recent
market trades or quotes, adjusted where necessary for differences in risk
characteristics. The fair value of the commercial mortgage and agricultural
loan portfolio is primarily based upon the present value of the scheduled
cash flows discounted at the appropriate U.S. Treasury rate, adjusted for
the current market spread for a similar quality mortgage. For certain
non-performing and other loans, fair value is based upon the value of the
underlying collateral.
Policy Loans--The estimated fair value of policy loans is calculated using
a discounted cash flow model based upon current U.S. Treasury rates and
historical loan repayments.
Derivative Financial Instruments--The fair value of swap agreements is
estimated based on the present value of future cash flows under the
agreements discounted at the applicable zero coupon U.S. Treasury rate and
swap spread. The fair value of forwards and futures is estimated based on
market quotes for a transaction with similar terms, while the fair value of
options is based principally on market quotes. The fair value of loan
commitments is estimated based on fees actually charged or those currently
charged for similar arrangements, adjusted for changes in interest rates
and credit quality subsequent to origination.
Investment-Type Insurance Contract Liabilities--Fair values for the
Company's investment-type insurance contract liabilities are estimated
using a discounted cash flow model, based on interest rates currently being
offered for similar contracts.
Notes Payable and Other Borrowings--The estimated fair value of notes
payable and other borrowings is based on the borrowing rates currently
available to the Company for debt with similar terms and maturities.
The following table discloses the carrying amounts and estimated fair
values of the Company's financial instruments at December 31, 1995 and
1994.
<TABLE>
<CAPTION>
1995 1994
------------------------ -----------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
--------- ---------- --------- ----------
<S> <C> <C> <C> <C>
(In Millions)
FINANCIAL ASSETS:
Fixed maturities ........................... $ 85,585 $ 92,282 $ 78,620 $77,200
Equity securities .......................... 1,937 1,937 2,327 2,327
Mortgage loans ............................. 23,680 24,268 26,199 24,955
Policy loans ............................... 6,800 7,052 6,631 6,018
Short-term investments ..................... 7,874 7,874 10,630 10,630
Securities purchased under
agreements to resell ...................... 5,130 5,130 5,591 5,591
Trading account securities ................. 3,658 3,658 6,341 6,341
Cash ....................................... 1,633 1,633 1,109 1,109
Broker-dealer receivables .................. 8,136 8,136 8,164 8,164
Assets held in Separate Accounts ........... 58,435 58,435 48,633 48,633
Derivative financial instruments ........... 1,473 1,640 1,219 1,268
FINANCIAL LIABILITIES:
Investment-type insurance contracts ........ 35,336 36,258 39,747 38,934
Securities sold under agreements to
repurchase ................................ 7,993 7,993 8,919 8,919
Notes payable and other borrowings ......... 9,157 9,231 12,009 11,828
Broker-dealer payables ..................... 6,083 6,083 6,198 6,198
Liabilities related to Separate
Accounts .................................. 57,586 57,586 47,946 47,946
Derivative financial instruments ........... 1,704 1,781 1,611 1,665
</TABLE>
F-12
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
For The Years Ended December 31, 1995, 1994 and 1993
9. DERIVATIVE AND OFF-BALANCE SHEET CREDIT-RELATED INSTRUMENTS
A. Derivative Financial Instruments
Derivatives, including swaps, forwards, futures, options, and loan
commitments subject to market risk, are used for trading and other
than trading activities (Note 1C). The following two tables summarize
the Company's outstanding positions on a gross basis before netting
pursuant to rights of offset, qualifying master netting agreements
with counterparties or collateral arrangements as of December 31, 1995
and 1994, respectively:
DERIVATIVE FINANCIAL INSTRUMENTS
As of December 31, 1995
(In Millions)
<TABLE>
<CAPTION>
Trading Other Than Trading Total
-------------------- -------------------- -------------------------------
Estimated Estimated Carrying Estimated
Notional Fair Value Notional Fair Value Notional Amount Fair Value
-------- ---------- -------- ---------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Swaps:
Assets ................. $12,720 $1,131 $ 114 $ 10 $12,834 $1,132 $1,141
Liabilities ............ 11,488 1,317 4,476 62 15,964 1,371 1,379
Forwards:
Assets ................. 20,351 291 2,281 33 22,632 305 324
Liabilities ............ 22,068 278 6,675 48 28,743 291 326
Futures:
Assets ................. 1,387 14 2,590 34 3,977 20 48
Liabilities ............ 3,065 18 1,821 11 4,886 24 29
Options:
Assets ................. 1,961 20 4,345 97 6,306 20 117
Liabilities ............ 1,700 17 2,724 20 4,424 18 37
Loan Commitments:
Assets ................. 0 0 123 10 123 (4) 10
Liabilities ............ 0 0 1,412 10 1,412 0 10
------- ------ ------- ---- ------- ------ ------
Total:
Assets ................. $36,419 $1,456 $ 9,453 $184 $45,872 $1,473 $1,640
======= ====== ======= ==== ======= ====== ======
Liabilities ............ $38,321 $1,630 $17,108 $151 $55,429 $1,704 $1,781
======= ====== ======= ==== ======= ====== ======
</TABLE>
F-13
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
For The Years Ended December 31, 1995, 1994 and 1993
DERIVATIVE FINANCIAL INSTRUMENTS
As of December 31, 1994
(In Millions)
<TABLE>
<CAPTION>
Trading Other Than Trading Total
-------------------- -------------------- -------------------------------
Estimated Estimated Carrying Estimated
Notional Fair Value Notional Fair Value Notional Amount Fair Value
-------- ---------- -------- ---------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Swaps:
Assets ................. $13,852 $ 837 $ 184 $ 9 $14,036 $ 845 $ 846
Liabilities ............ 14,825 1,216 4,993 48 19,818 1,236 1,264
Forwards:
Assets ................. 21,988 300 2,720 24 24,708 312 324
Liabilities ............ 19,898 289 3,112 19 23,010 299 308
Futures:
Assets ................. 1,520 40 4,296 17 5,816 30 57
Liabilities ............ 1,878 35 505 3 2,383 35 38
Options:
Assets ................. 2,924 31 2,407 8 5,331 34 39
Liabilities ............ 3,028 38 2,217 2 5,245 40 40
Loan Commitments:
Assets ................. 0 0 212 2 212 (2) 2
Liabilities ............ 0 0 1,543 15 1,543 1 15
------- ------ ------- --- ------- ------ ------
Total:
Assets ................. $40,284 $1,208 $ 9,819 $60 $50,103 $1,219 $1,268
======= ====== ======= === ======= ====== ======
Liabilities ............ $39,629 $1,578 $12,370 $87 $51,999 $1,611 $1,665
======= ====== ======= === ======= ====== ======
</TABLE>
Derivatives Held for Trading Purposes--The Company uses derivatives
for trading purposes in securities broker-dealer activities and in a
limited-purpose swap subsidiary to meet the financial and hedging
needs of its customers. Net trading revenues for the years ended
December 31, 1995 and 1994, relating to forwards and futures and swaps
were $110 million, $42 million and $3 million, and $42 million, $33
million and $8 million, respectively. Net trading revenues for options
were not material. Average fair values for trading derivatives in an
asset position during the years ended December 31, 1995 and 1994 were
$1,394 million and $1,526 million, respectively, and for derivatives
in a liability position were $1,582 million and $1,671 million,
respectively. Of those derivatives held for trading purposes at
December 31, 1995, 55% of the notional amount consisted of interest
rate derivatives, 40% consisted of foreign currency derivatives, and
5% consisted of equity and commodity derivatives.
Derivatives Held for Purposes Other Than Trading--The Company uses
derivatives primarily for asset/liability risk management and to
reduce exposure to interest rate, currency and other market risks. Of
the total notional amount of derivatives held for purposes other than
trading at December 31, 1995, 16% were used by the Company to hedge
its investment portfolio to reduce interest rate, currency and other
market risks, and 84% were used to hedge interest rate risk related to
the Company's mortgage banking segment activities. Of those
derivatives held for purposes other than trading at December 31, 1995,
92% of notional consisted of interest rate derivatives and 8%
consisted of foreign currency derivatives.
B. Off-Balance Sheet Credit-Related Instruments
During the normal course of its business, the Company utilizes
financial instruments with off-balance sheet credit risk such as
commitments, financial guarantees, loans sold with recourse and
letters of credit. Commitments include commitments to purchase and
sell mortgage loans, the unfunded portion of commitments to fund
investments in private placement securities, and unused credit card
and home equity lines. The Company also provides financial guarantees
incidental to other transactions and letters of credit that guarantee
the performance of customers to third parties. These credit-related
financial instruments have off-balance sheet credit risk because only
their origination fees, if any, and accruals for probable losses, if
any, are recognized until the obligation under the instrument is
fulfilled or expires. These instruments can extend for several years
and expirations are not concentrated in any period. The Company seeks
to control credit risk associated with these instruments by limiting
credit, maintaining collateral where customary and appropriate, and
performing other monitoring procedures.
The notional amount of these instruments, which represents the
Company's maximum exposure to credit loss from other parties'
non-performance, was $15,498 million and $17,389 million at December
31, 1995 and 1994, respectively. Because many of these amounts expire
without being advanced in whole or in part, the notional amounts do
not represent future cash
F-14
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
For The Years Ended December 31, 1995, 1994 and 1993
flows. The above notional amounts include $6,001 million and $4,150
million of unused available lines of credit under credit card and home
equity commitments as of December 31, 1995 and 1994, respectively. The
Company has not experienced, and does not anticipate experiencing, all
of its customers exercising their entire available lines of credit at
any given point in time. The estimated fair value of off-balance sheet
credit-related instruments was $(67) million and $(91) million at
December 31, 1995 and 1994, respectively.
10. DIVESTITURES
In October 1995, the Company completed the sale of its reinsurance segment,
Prudential Reinsurance Holdings, Inc. ("Holdings"), through an initial
public offering of common stock. As a result of the sale, an after-tax gain
of $72 million was recorded in 1995.
In March 1995, the Company announced its intention to sell its mortgage
banking segment. On January 26, 1996, the Company entered into a definitive
agreement to sell substantially all the assets of Prudential Home Mortgage
Company, Inc. and it has also liquidated certain mortgage-backed securities
and extended warehouse loans. The Company recorded an after-tax loss of $98
million, which includes operating gains and losses, asset write downs, and
other costs directly related to the planned sale. The Company continues to
have discussions with prospective buyers for the sale of the remaining
assets.
A summary of the assets and liabilities of the mortgage banking segment at
December 31 follows:
ASSETS AND LIABILITIES OF MORTGAGE BANKING SEGMENT
1995 1994
------ ------
(In Millions)
Total assets ............................ $4,293 $4,357
Total liabilities ....................... 4,215 4,199
------ ------
Net assets .............................. $ 78 $ 158
====== ======
11. CONTINGENCIES
A. Aggregate Stop Loss Retrocession Agreement
As a result of the sale of Holdings, in 1995, Prudential Reinsurance
(a Holdings subsidiary) and Gibraltar Casualty Co. (a Prudential
subsidiary) entered into an Aggregate Stop Loss Agreement. The Stop
Loss Agreement is intended to mitigate the impact on Prudential
Reinsurance of adverse development of loss reserves as of June 30,
1995, of up to $375 million of the first $400 million of adverse
development. The Company has recorded a loss reserve of $230 million
as of December 31, 1995.
B. Environmental and Asbestos-Related Claims
The Company receives claims under expired contracts which assert
alleged injuries and/or damages relating to or resulting from toxic
torts, toxic waste and other hazardous substances. The liabilities for
such claims cannot be estimated by traditional reserving techniques.
As a result of judicial decisions and legislative actions, the
coverage afforded under these contracts may be expanded beyond their
original terms. Extensive litigation between insurers and insureds
over these issues continues and the outcome is not predictable. In
establishing the unpaid claim reserves for these losses, management
considered the available information. However, given the expansion of
coverage and liability by the courts and legislatures in the past, and
potential for other unfavorable trends in the future, the ultimate
cost of these claims could increase from the levels currently
established.
C. Lawsuits
Various lawsuits against the Company have arisen in the course of the
Company's business. In certain of these matters, large and/or
indeterminate amounts are sought.
Several purported class actions and individual actions have been
brought against the Company on behalf of those persons who purchased
life insurance policies allegedly because of deceptive sales practices
engaged in by the Company and its insurance agents in violation of
state and federal laws. The sales practices alleged to have occurred
are contrary to Company policy. Some of these cases seek very
substantial damages while others seek unspecified compensatory,
punitive and treble damages. The Company intends to defend these cases
vigorously.
F-15
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
For The Years Ended December 31, 1995, 1994 and 1993
In response to this litigation, several state insurance departments
have initiated market conduct examinations relating to Prudential's
sales practices. The Attorney General of one state has conducted an
investigation and made its report to the state insurance commissioner.
Another Attorney General has also made inquiries. The New Jersey
Insurance Commissioner is leading a multi-state task force of
insurance commissioners to examine life insurance industry sales and
marketing practices. There are now approximately thirty insurance
departments participating in this effort. The Company is cooperating
fully in this examination.
Litigation is subject to many uncertainties, and given the complexity
and scope of these suits, their outcome cannot be predicted. It is
also not possible to predict the likely results of any regulatory
inquiries or their effect on litigation which might be initiated in
response to widespread media coverage of these matters.
Accordingly, management is unable to make a meaningful estimate of the
amount or range of loss that could result from an unfavorable outcome
of all pending litigation and the regulatory inquiries. It is possible
that the results of operations or the cash flows of the Company in
particular quarterly or annual periods could be materially affected by
an ultimate unfavorable outcome of certain pending litigation and
regulatory matters.
Management believes, however, that the ultimate outcome of all pending
litigation and regulatory matters referred to above should not have a
material adverse effect on the Company's financial position.
In 1993, Prudential Securities Incorporated (PSI), a subsidiary of
Prudential, entered into an agreement with the Securities and Exchange
Commission, the National Association of Securities Dealers, Inc., and
state securities commissions whereby PSI agreed to pay $330 million
into a settlement fund to pay eligible claims on certain limited
partnership matters. Under this agreement, if partnership matter
claims exceed the established settlement fund, PSI is obligated to pay
such additional claims. The agreement also required PSI to take
measures to enhance the adequacy of its sales practices compliance
controls.
In October 1994, the United States Attorney for the Southern District
of New York (the "U.S. Attorney") filed a complaint against PSI in
connection with its sale of certain limited partnerships.
Simultaneously, PSI entered into an agreement to comply with certain
conditions for a period of three years, and to pay an additional $330
million into the settlement fund. At the end of the three year period,
assuming PSI has fully complied with the terms of the agreement, the
U.S. Attorney will institute no further action.
In the opinion of management, PSI is in compliance with all provisions
of the aforementioned agreements and, after consideration of
applicable accruals, the ultimate liability for litigation, including
partnership settlement matters, will not have a material adverse
effect on the Company's financial position.
F-16
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of The Prudential Insurance Company of America
Newark, New Jersey
We have audited the accompanying consolidated statements of financial position
of The Prudential Insurance Company of America and subsidiaries as of December
31, 1995 and 1994, and the related consolidated statements of operations and
changes in surplus and asset valuation reserve and of cash flows for each of the
three years in the period ended December 31, 1995. 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 in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of The Prudential Insurance Company of
America and subsidiaries as of December 31, 1995 and 1994, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1995 in conformity with generally accepted accounting
principles.
Deloitte & Touche LLP
Parsippany, New Jersey
March 1, 1996
F-17
<PAGE>
PRUDENTIAL SURVIVORSHIP PREFERRED(SM)
INSURANCE CONTRACTS
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
Prudential Plaza
Newark, New Jersey 07102-3777
Telephone: (800) 445-4571
<PAGE>
PART II
OTHER INFORMATION
<PAGE>
UNDERTAKING TO FILE REPORTS
Subject to the terms and conditions of Section 15(d) of the Securities Exchange
Act of 1934, the undersigned Registrant hereby undertakes to file with the
Securities and Exchange Commission such supplementary and periodic information,
documents, and reports as may be prescribed by any rule or regulation of the
Commission heretofore or hereafter duly adopted pursuant to authority conferred
in that section.
UNDERTAKING WITH RESPECT TO INDEMNIFICATION
The Prudential Directors' and Officers' Liability and Corporation Reimbursement
Insurance Program, purchased by The Prudential from Aetna Casualty & Surety
Company, CNA Insurance Companies, Lloyds of London, Great American Insurance
Company, Reliance Insurance Company, Corporate Officers & Directors Assurance
Ltd., A.C.E. Insurance Company, Ltd., XL Insurance Company, Ltd., and
Zurich-American Insurance Company, provides reimbursement for "Loss" (as defined
in the policies) which the Company pays as indemnification to its directors or
officers resulting from any claim for any actual or alleged act, error,
misstatement, misleading statement, omission, or breach of duty by persons in
the discharge of their duties in their capacities as directors or officers of
The Prudential, any of its subsidiaries, or certain investment companies
affiliated with The Prudential. Coverage is also provided to the individual
directors or officers for such Loss, for which they shall not be indemnified.
Loss essentially is the legal liability on claims against a director or officer,
including adjudicated damages, settlements and reasonable and necessary legal
fees and expenses incurred in defense of adjudicatory proceedings and appeals
therefrom. Loss does not include punitive or exemplary damages or the multiplied
portion of any multiplied damage award, criminal or civil fines or penalties
imposed by law, taxes or wages, or matters which are uninsurable under the law
pursuant to which the policies are construed.
There are a number of exclusions from coverage. Among the matters excluded are
Losses arising as the result of (1) claims brought about or contributed to by
the criminal or fraudulent acts or omissions or the willful violation of any law
by a director or officer, (2) claims based on or attributable to directors or
officers gaining personal profit or advantage to which they were not legally
entitled, and (3) claims arising from actual or alleged performance of, or
failure to perform, services as, or in any capacity similar to, an investment
adviser, investment banker, underwriter, broker or dealer, as those terms are
defined in the Securities Act of 1933, the Securities Exchange Act of 1934, the
Investment Advisers Act of 1940, the Investment Company Act of 1940, any rules
or regulations thereunder, or any similar federal, state or local statute, rule
or regulation.
The limit of coverage under the Program for both individual and corporate
reimbursement coverage is $150,000,000. The retention for corporate
reimbursement coverage is $10,000,000 per loss.
The relevant provisions of New Jersey law permitting or requiring
indemnification, New Jersey being the state of organization of The Prudential,
can be found in Section 14A:3-5 of the New Jersey Statutes Annotated. The text
of The Prudential's by-law 26, which relates to indemnification of officers and
directors, is incorporated by reference to Exhibit 1.A.(6)(b) of Post-Effective
Amendment No. 1 to the Registration Statement, filed April 25, 1996.
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.
II-1
<PAGE>
CONTENTS OF REGISTRATION STATEMENT
This Registration Statement comprises the following papers and documents:
The facing sheet.
Cross-reference to items required by Form N-8B-2.
The prospectus consisting of 75 pages.
The undertaking to file reports.
The undertaking with respect to indemnification.
The signatures.
Written consents of the following persons:
1. Deloitte & Touche LLP
2. Clifford E. Kirsch, Esq.
3. Andy Mirchuk, FSA, MAAA
The following exhibits:
1. The following exhibits correspond to those required by paragraph A of the
instructions as to exhibits in Form N-8B-2:
A. (1) Resolution of Board of Directors of The Prudential Insurance
Company of America establishing The Prudential Variable
Appreciable Account. (Note 2)
(2) Not Applicable.
(3) Distributing Contracts:
(a) Distribution Agreement between Pruco Securities
Corporation and The Prudential Insurance Company of
America. (Note 3)
(b) Proposed form of Agreement between Pruco Securities
Corporation and independent brokers with respect to the
Sale of the Contracts. (Note 3)
(c) Schedules of Sales Commissions. (Note 4)
(4) Not Applicable.
(5) Survivorship Preferred Variable Appreciable Life Insurance
Contract: (Note 3)
(6) (a) Charter of The Prudential Insurance Company of America,
as amended February 26,
1989. (Note 3)
(b) By-laws of The Prudential Insurance Company of America,
as amended August 8, 1995. (Note 1)
(7) Not Applicable.
(8) Not Applicable.
(9) Not Applicable.
(10) (a) Application Form. (Note 3)
(b) Supplement to the Application. (Note 3)
(11) Form of Notice of Withdrawal Right. (Note 4)
(12) Memorandum describing The Prudential's issuance, transfer, and
redemption procedures for the Contracts pursuant to Rule
6e-3(T)(b)(12)(iii) and method of computing adjustments in
payments and cash surrender values upon conversion to
fixed-benefit policies pursuant to Rule 6e-3(T)(b)(13)(v)(B).
(Note 3)
(13) Available Contract Riders and Endorsements:
(a) Option to Exchange for Separate Contracts. (Note 3)
(b) Rider for Term Insurance Benefit on Life of Second
Insured to Die. (Note 3)
(c) Rider for Term Insurance Benefit. (Note 3)
2. See Exhibit 1.A.(4).
3. Opinion and Consent of Clifford E. Kirsch, Esq. as to the legality of the
securities being registered. (Note 1)
4. None.
II-2
<PAGE>
5. Not Applicable.
6. Opinion and Consent of Andy Mirchuk, FSA, MAAA, as to actuarial matters
pertaining to the securities being registered. (Note 1)
7. The Prudential's representations regarding mortality and expense risks
and sales loads. (Note 1)
8. Powers of Attorney:
(a) F. Agnew, F. Becker, W. Boeschenstein
L. Carter, Jr., J. Cullen, C. Davis, R. Enrico
A. Gilmour, W. Gray, III, J. Hanson, C. Horner
A. Jacobson, G. Keith, B. Malkiel, J. Opel
A. Ryan, C. Sitter, D. Staheli, R. Thomson
P. Vagelos, S. Van Ness, P. Volcker, J. Williams (Note 2)
(b) M. Grier (Note 3)
27. Financial Data Schedule. (Note 1)
(Note 1) Filed herewith.
(Note 2) Incorporated by reference to Post-Effective Amendment No. 15 to Form
S-6, Registration No. 33-20000, filed May 1, 1995.
(Note 3) Incorporated by reference to Registrant's Form S-6, filed July 17,
1995.
(Note 4) Incorporated by reference to Pre-Effective Amendment No. 1 to this
Registration Statement, filed December 26, 1995.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant, The
Prudential Variable Appreciable Account, 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 Effective Amendment to the Registration
Statement pursuant to Rule 485(b)(1) and has duly 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, 1996.
(Seal) THE PRUDENTIAL VARIABLE APPRECIABLE ACCOUNT
(Registrant)
By: THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
(Depositor)
Attest: /s/ Thomas C. Castano By: /s/ Esther Milnes
-------------------------- ------------------------------------
Thomas C. Castano Esther Milnes
Assistant Secretary Vice President and Assistant Actuary
Pursuant to the requirements of the Securities Act of 1933, this Post-Effective
Amendment No. 1 to the Registration Statement has been signed below by the
following persons in the capacities indicated on this 25th day of April, 1996.
SIGNATURE AND TITLE
-------------------
/s/ *
- ---------------------------------
Arthur C. Ryan
Chairman of the Board, President
and Chief Executive Officer
/s/ *
- ---------------------------------
Garnett L. Keith, Jr.
Vice Chairman and Director
/s/ *
- --------------------------------- *By: /s/ Thomas C. Castano
Mark B. Grier -----------------------------
Principal Financial Officer Thomas C. Castano
(Attorney-in-Fact)
/s/ *
- ---------------------------------
Franklin E. Agnew
Director
/s/ *
- ---------------------------------
Frederic K. Becker
Director
/s/ *
- ---------------------------------
William W. Boeschenstein
Director
/s/*
- ---------------------------------
Lisle C. Carter, Jr.
Director
/s/ *
- ---------------------------------
James G. Cullen
Director
II-4
<PAGE>
/s/ *
- ---------------------------------
Carolyne K. Davis
Director
/s/ *
- ---------------------------------
Roger A. Enrico
Director
/s/ *
- ---------------------------------
Allan D. Gilmour
Director *By: /s/ Thomas C. Castano
-----------------------------
/s/ * Thomas C. Castano
- --------------------------------- (Attorney-in-Fact)
William H. Gray, III
Director
/s/ *
- ---------------------------------
Jon F. Hanson
Director
/s/ *
- ---------------------------------
Constance J. Horner
Director
/s/ *
- ---------------------------------
Allen F. Jacobson
Director
/s/ *
- ---------------------------------
Burton G. Malkiel
Director
/s/ *
- ---------------------------------
John R. Opel
Director
/s/ *
- ---------------------------------
Charles R. Sitter
Director
/s/ *
- ---------------------------------
Donald L. Staheli
Director
/s/ *
- ---------------------------------
Richard M. Thomson
Director
/s/ *
- ---------------------------------
P. Roy Vagelos, M.D.
Director
/s/ *
- ---------------------------------
Stanley C. Van Ness
Director
II-5
<PAGE>
/s/ *
- ---------------------------------
Paul A. Volcker
Director
/s/ *
- ---------------------------------
Joseph H. Williams
Director
II-6
<PAGE>
EXHIBIT INDEX
Consent of Deloitte & Touche LLP, independent auditors. Page II-7
1.A.(6)(b) By-laws of The Prudential Insurance Company of America Page II-9
3. Opinion and Consent of Clifford E. Kirsch, Esq. as to the
legality of the securities being registered. Page II-16
6. Opinion and Consent of Andy Mirchuk, FSA, MAAA, as to
actuarial matters pertaining to the securities being
registered. Page II-17
7. The Prudential's representations regarding mortality and
expense risks and sales loads. Page II-19
27. Financial Data Schedule. Page II-21
II-8
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Post-Effective Amendment No. 1 to Registration
Statement No. 33-61079 on Form S-6 of The Prudential Variable Appreciable
Account of The Prudential Insurance Company of America of our report dated
February 15, 1996, relating to the financial statements of The Prudential
Variable Appreciable Account, and of our report dated March 1, 1996 relating to
the consolidated financial statements of The Prudential Insurance Company of
America and subsidiaries appearing in the Prospectus, which is part of such
Registration Statement, and to the reference to us under the heading "Experts"
in such Prospectus.
/s/ Deloitte & Touche LLP
Parsippany, New Jersey
April 25, 1996
II-7
February 15, 1996
"By-laws" numbered 1 to 27, inclusive, is a true copy of the By-laws of the
Prudential Insurance Company of America adopted by the Directors August 10, 1943
as amended to and including August 8, 1995.
BY-LAWS OF THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
1. The business of the corporation shall be the making of insurance
upon the lives or health of persons and every insurance appertaining
thereto, the granting, purchasing and disposing of annuities, the
making of insurance against bodily injury or death by accident, the
making of legal services insurance, the assuming of risks through
extended reinsurance, and the providing of those kinds of services
that a domestic insurer is permitted to provide by Subtitle 3 of
Title 17B, of the New Jersey Statutes; and, as incidental to such
primary objects and purposes, the investment and reinvestment from
time to time of its capital, surplus and other funds or any part
thereof and the funds of other persons in such manner as may be
authorized or permitted by law.
2. The business of the corporation shall be managed by a board of
twenty-three directors, except when different persons hold the
offices of Chairman of the Board and President and the Chairman of
the Board and not the President is the Chief Executive Officer of
the corporation in which case the number shall be twenty-four. All
of the directors shall be policyholders of the corporation. Six
directors shall be such persons as may be appointed by the Chief
Justice of the Supreme Court of New Jersey as public directors
pursuant to the provisions of Subtitle 3 of Title 17B, of the New
Jersey Statutes, sixteen directors shall be elected by the
policyholders as provided by Subtitle 3 of Title 17B, of the New
Jersey Statutes; and in addition the Chairman of the Board and Chief
Executive Officer and the President elected and holding office as
such from time to time shall be ex officio directors.
The public directors and elected directors shall be classified as
provided by law. If the office of any elected director shall become
vacant by reason of death, resignation, or any other cause, the
Board shall by a majority vote of its entire number as then
constituted, elect a successor who shall hold office for the
unexpired term to which such vacancy relates.
3. Directors of the corporation shall be elected by a majority of the
votes cast at the annual election of directors held at the principal
office of the corporation in the City of Newark, New Jersey on the
first Tuesday in April of each year conducted in the manner provided
by Subtitle 3 of Title 17B, of the New Jersey Statutes.
4. Regular meetings of the Board of Directors shall be held at such
times as may be fixed from time to time by resolution of the Board
of Directors. All meetings of the Board of Directors whether regular
or special shall be held at the principal office of the corporation
in the City of Newark, New Jersey, or at such other place as the
Chairman of the Board and Chief Executive Officer may direct upon
notice as prescribed by By-law 5. Eleven directors shall be
necessary to constitute a quorum for the transaction of business at
any regular or special meeting of the Board of Directors.
Where appropriate communication facilities are reasonably available,
any or all directors shall have the right to participate in all or
any part of a meeting of the Board or a Committee of the Board by
means of conference telephone or any other means of communication by
which all persons participating in the meeting are able to hear each
other.
Any action required or permitted to be taken pursuant to
authorization voted at a meeting of the Board or any Committee
thereof may be taken without a meeting if, prior or subsequent to
the action, all members of the Board or such Committee, as the case
may be, consent thereto in writing and the written
II-9
<PAGE>
consents are filed with the minutes of the proceedings of the Board
or Committee. Such consent shall have the same effect as a unanimous
vote of the Board or Committee for all purposes.
5. Special meetings of the Board of Directors may be called at any time
by the Chairman of the Board and Chief Executive Officer, or may be
called at any time by five or more directors. Notice of any such
special meeting shall be given to each director either orally, by
mail, telephone, telegraph or otherwise, in time to afford to each
director time to attend such meeting if at the time of giving such
notice that director were at the place in which he or she usually
resides or does business. Such notice shall state the purpose of any
such special meeting.
6. (a)The officers of the corporation shall be a Chairman of the Board
and Chief Executive Officer, a President, one or more Vice Chairmen,
one or more Vice Presidents, one or more Secretaries, one or more
Assistant Secretaries, a Treasurer, a Deputy Treasurer, one or more
Assistant Treasurers, a Comptroller, one or more Assistant
Comptrollers, a Company Actuary, and one or more Actuaries. Any Vice
President may, in the discretion of the Board of Directors, be
designated at "Executive", "Senior" or such other designation as may
be deemed appropriate and, in the case of any appointed Vice
President, may be designated by the proper officer of the
corporation as "Departmental" or "Functional" classification or such
other designation as may be deemed appropriate; and any assistant
officer may, in the discretion of the Board of Directors, be
designated as "Associate", "Assistant" or such other designation as
may be deemed appropriate. Also, any Vice President, whether elected
by the Board of Directors or appointed by the proper officers of the
corporation, may be designated as the "President", "Secretary",
"Treasurer" or "Comptroller" or such other title or designation with
respect to a business unit of the corporation as may be deemed
appropriate by the Board of Directors or the proper officers of the
corporation, as the case may be.
(b)The officers at the level of Vice President and above, except
those designated by "Departmental" or "Functional" classification or
by "Second" or any succeeding ordinal number shall be elected by the
Board of Directors. An elected officer shall hold office for the
term for which he or she is elected as determined by the Board,
subject, however to the power of removal by the Board as hereinafter
set forth. The Board of Directors may at any time fill vacancies in
the elective offices, may at any time and from time to time elect
such additional persons as officers as it shall deem necessary, and
may, at its pleasure and in its absolute discretion, by a vote of
not less than fourteen of its members remove any officer with or
without cause and without notice. All other officers of the
corporation including those who are named officers for signatory
purposes only shall be appointed by the proper officer of the
corporation. An appointed officer shall hold office until his or her
resignation or until revocation of his or her appointment, with or
without cause, by such proper officer. No person shall be deemed to
be an officer of the corporation, except such as shall have been
elected or appointed and is holding office pursuant to the
provisions of this By-law. If the Board of Directors or a proper
officer of the corporation, as the case may be, shall deem it
appropriate, any one person may hold more than one of the foregoing
offices simultaneously.
(c)The several officers shall have such powers and authority and
perform such duties as commonly pertain to their respective offices
and as may be prescribed by the Board of Directors either by virtue
of these By-laws or otherwise or by the Chairman of the Board and
Chief Executive Officer, and the exercise of their powers shall
likewise be subject to such limitations as may be imposed by the
Board or by these By-laws or by the Chairman of the Board and Chief
Executive Officer, subject in all cases to the authority of the
Board. The Board of Directors shall fix the compensation of all
officers of the corporation at or above the level of Senior Vice
President and shall fix the initial compensation of all other
officers required to be elected by the Board of Directors at the
time of such election. The compensation for all officers other than
those whose compensation requires approval of the Board of Directors
under this By-law shall be fixed by the proper officer of the
corporation in accordance with the corporation's compensation plans.
7. The Chairman of the Board and Chief Executive Officer shall preside
at all meetings of the Board of Directors. In case of the absence or
disability of the Chairman of the Board and Chief Executive Officer,
the President or a Vice Chairman designated by the Chairman of the
Board and Chief Executive Officer shall preside. In the case of a
vacancy in the office of the Chairman of the Board and Chief
Executive
II-10
<PAGE>
Officer, the Board shall make such designation and in case of a
vacancy in the offices of the Chairman of the Board and Chief
Executive Officer, the President, and all Vice Chairmen, the Board
shall choose its presiding officer. The Chairman of the Board and
Chief Executive Officer shall be ex officio a member of all standing
committees except the Compensation Committee and the Auditing
Committee. The Chairman of the Board and Chief Executive Officer
shall have absolute power to supervise and direct the business of
the corporation, subject only to the power and authority of the
Board of Directors. He or she also shall have power, subject to the
power of the Board, to appoint or remove all persons employed or to
be employed by the corporation in any capacity whatsoever except the
officers elected by the Board of Directors and shall have power to
fix the compensation of all persons employed or to be employed by
the corporation other than the compensation of officers whose
compensation shall be fixed by the Board of Directors as provided in
these By-laws; provided, however, that the payment of such
compensation must be first authorized by the Board of Directors when
the amount to be paid any person in any year is such that approval
by the Board of Directors is required under the laws of New Jersey
or these By-laws.
8. The Chairman of the Board and Chief Executive Officer shall, with
the approval of the Board of Directors, designate the President, a
Vice Chairman or any other officer at or above the level of Senior
Vice President who, in the absence or disability of the Chairman of
the Board and Chief Executive Officer shall be vested with the
powers and required to perform the duties of the Chairman of the
Board and Chief Executive Officer except those pertaining to ex
officio membership on the Board of Directors and on standing
committees thereof. Such designation shall be made in writing,
presented to the Board of Directors at the stated meeting in January
of each year and shall be filed with the Secretary. When so acting
in the place of the Chairman of the Board and Chief Executive
Officer such person shall be designated as "Acting Chairman of the
Board and Chief Executive Officer". The Chairman of the Board and
Chief Executive Officer may at any time in like manner and with like
approval, change such designation and may also designate one or more
Vice Presidents to act in succession in the order designated by him
or her in the place of any acting Chairman of the Board and Chief
Executive Officer in case of the latter's absence, disability or
death. During a vacancy in the office of Chairman of the Board and
Chief Executive Officer, the Board shall make such designation. In
other respects, the President, each Vice Chairman and each Vice
President shall exercise such powers and perform such duties as may
be prescribed by the Chairman of the Board and Chief Executive
Officer or by the Board of Directors. The Chairman of the Board and
Chief Executive Officer, the President, each Vice Chairman, and any
one of the Vice Presidents shall have power to execute on behalf of
the corporation all instruments, deeds, contracts and other
corporate acts and papers, subject only to the provisions of By-law
24.
9. The Secretary shall be ex officio secretary of the Board of
Directors and of each of the standing committees except the Auditing
Committee. The Secretary shall attend all sessions of the Board of
Directors and of the Executive Committee and of the Finance
Committee and, when requested, any other committees of the Board.
The Secretary shall keep full and accurate minutes of the
proceedings of the Board and of the Executive Committee and Finance
Committee and shall enter such minutes in books provided for that
purpose. The Secretary shall furnish to the Board of Directors and
to all committees such corporate accounts and papers as may be
required by them. The Secretary shall have charge of the corporate
seal of the corporation and shall have power to affix the same to
corporate instruments and to attest the same. The Secretary shall
have power to execute on behalf of the corporation such instruments
as may be required to be executed by him or her. The Secretary shall
have custody of the books, papers and records of the corporation,
shall give all notices on behalf of the corporation except such as
may by any provision of the law be required to be given by any other
officer and shall conduct such correspondence and perform such other
duties as may be assigned to him or her by the Chairman of the Board
and Chief Executive Officer or by the Board of Directors.
10. The corporation shall have a common seal making the following
impression:
11. Each Assistant Secretary shall have power to execute on behalf of
the corporation such instruments as may be required to be executed
by the Secretary and to affix the seal of the corporation to
corporate instruments and to attest the same, subject, however, to
the provisions of By-law 24. Each Assistant
II-11
<PAGE>
Secretary shall perform such duties as may be assigned to him or her
from time to time by the Chairman of the Board and Chief Executive
Officer or the Secretary, subject, however, to the power of the
Board of Directors in the premises.
12. The Treasurer shall have custody of such funds of the corporation as
shall be placed in his or her keeping, shall open and maintain
accounts in banking institutions in the name of the corporation for
the deposit of such funds and may open and maintain accounts in the
names or titles of representatives of the corporation under such
conditions as he or she may deem appropriate, subject to supervision
by the Finance Committee. All funds shall be disbursed only by
instruments signed by two or more officials to be designated by the
Finance Committee or pursuant to procedures approved by the
Treasurer and the Comptroller. The Treasurer shall have custody of
such of the securities of the corporation as shall be placed in his
or her keeping and shall open and maintain accounts in banking
institutions in the name of the corporation for the custody of other
securities, including accounts maintained for the purpose of
participating in one or more securities systems designed to permit
the transfer of a security without physical delivery of the
certificate or other evidence of such security, subject to
supervision by the Finance Committee.
The Treasurer shall have the power to sell, assign or transfer
securities of the corporation on the authorization or direction of
the Finance Committee or to take such other action in connection
therewith as may be authorized or directed by the Finance Committee,
and shall have power to execute, on behalf of the corporation, all
instruments necessary or appropriate in the premises. The Treasurer
shall have the power to borrow funds on behalf of the corporation on
the authorization of the Finance Committee and perform such other
duties as may be assigned to him or her by the Chairman of the Board
and Chief Executive Officer or the Board of Directors. The Deputy
Treasurer and each Assistant Treasurer shall have power to perform,
on behalf of the corporation, such duties as are or may be required
to be performed by the Treasurer, and shall perform such other
duties as may be assigned to him or her from time to time by the
Chairman of the Board and Chief Executive Officer or the Treasurer.
13. The Comptroller shall supervise the accounts of the corporation,
shall have supervision over and responsibility for the books,
records, accounting and system of accounting and auditing in each
business unit of the corporation, and shall perform such other
duties as may be assigned to him or her by the Chairman of the Board
and Chief Executive Officer or the Board of Directors.
14. The Company Actuary shall represent the corporation in all actuarial
matters affecting the corporation's business not otherwise delegated
to a specific business unit, and shall have the authority to execute
on behalf of the corporation the statements that are filed annually
with the insurance regulators that describe the financial condition
of the corporation at the end of the year, and its business for that
year. The Company Actuary shall perform such other duties as may be
assigned to him or her by the Chairman of the Board and Chief
Executive Officer, the Board of Directors or any of the committees.
Each business unit shall designate an Actuary who shall supervise
the designing and pricing of insurance and annuity products for such
Actuary's business unit, the valuation of the liabilities of the
corporation with respect to such products, the making of estimates
as may be required of the future financial results of the
corporation, and the conduct of research relevant to these duties.
The Company Actuary also shall perform such other duties as may be
assigned to him or her by the Chairman of the Board and Chief
Executive Officer, the Board of Directors or any of the committees.
15. The standing committees shall be:
i. An Executive Committee consisting of a Chairman to be appointed
by the Board of Directors, the Chairman of each of the other
standing committees, the Chairman of the Board and Chief Executive
Officer and such other members as the Board shall appoint.
ii. A Finance Committee consisting of no fewer than five directors
in addition to the Chairman of the Board and Chief Executive
Officer.
II-12
<PAGE>
iii. A Committee on Dividends consisting of no fewer than five
directors in addition to the Chairman of the Board and Chief
Executive Officer.
iv. A Committee on Nominations consisting of no fewer than five
directors in addition to the Chairman of the Board and Chief
Executive Officer.
v. A Compensation Committee consisting of no fewer than five
non-officer directors.
vi. An Auditing Committee consisting of no fewer than five
non-officer directors.
vii. A Committee on Business Ethics consisting of no fewer than
three directors in addition to the Chairman of the Board and Chief
Executive Officer.
The Board of Directors shall determine the number and appoint the
members of each of the standing committees. All appointments to any
one of the standing committees shall be for such period as the Board
shall determine.
The Chairman of the Board and Chief Executive Officer may, in his or
her discretion from time to time, appoint any member of the Board to
serve temporarily upon any standing or special committee during the
absence or disability of any regular member thereof.
16. The Executive Committee shall have general supervision over the
business of the corporation and, in the intervals between meetings
of the Board of Directors, shall exercise the corporate powers of
the corporation including those delegated to other committees,
except to the extent that such powers are reserved to the Board of
Directors either by virtue of these By-laws or otherwise; provided,
however, that the Executive Committee may fill all vacancies in the
elective offices of the corporation except the office of the
Chairman of the Board and Chief Executive Officer, the President,
and any Vice Chairman until such time as the Board shall act
thereon; and provided further, the Executive Committee shall not
exercise powers delegated to any other committee unless the Chairman
and Chief Executive Officer shall determine that it is not possible
or convenient to convene such other committee within the time
required for taking action. All action of the Executive Committee
shall be reported to the Board of Directors and shall, except in
cases in which the rights or acts of third parties would be
affected, be subject to the direction of the Board.
17. The Finance Committee shall have supervision of the custody of the
funds and securities of the corporation and shall direct and control
the making, management and disposition of its investments. The
Finance Committee shall have full power to authorize the Treasurer
of the corporation to borrow funds, both on a secured or unsecured
basis, on behalf of the corporation. The Committee shall examine
into the state of the cash, funds and investments of the corporation
as often as it deems necessary or when so required to do by the
Board of Directors. All action of the Finance Committee shall be
reported to the Board of Directors and shall, except in cases in
which the rights or acts of third parties would be affected, be
subject to the direction of the Board.
18. The Committee on Dividends shall from time to time submit to the
Board of Directors recommendations and resolutions for the
disposition of the surplus earnings of the corporation, having
regard to the requirements of the business, the security and
adequacy of the reserves held for the performance of the
corporation's contracts and the contract rights of policyholders to
share in such earnings.
19. The Auditing Committee shall assist the Board of Directors in
fulfilling its fiduciary responsibilities relating to the
accounting, reporting and control practices of the corporation. In
so doing, the Committee shall: review the adequacy of the
corporation's system of internal control; recommend to the Board the
appointment of independent auditors; review the independent
auditors' annual audit plan, its control comments and
recommendations, and management's response to the recommendations;
review the effectiveness of the internal audit function, approve the
scope of the internal audit program and review internal audit
findings; and conduct such other inquiries and review such other
materials as the Committee
II-13
<PAGE>
deems appropriate. In carrying out its responsibilities, the
Committee may employ such auditors or accountants as it deems
advisable or may avail itself of the services of the regular
auditors or accountants of the corporation.
The Committee shall submit a report to the Board of Directors
annually describing the Committee's activities and containing any
recommendations which the Committee may have. The Committee shall
discharge any additional responsibilities as may be specified from
time to time by the Board of Directors.
20. The Committee on Nominations shall annually not later than the
regular June meeting of the Board of Directors recommend to the
Board for nomination as directors the names of four persons to
succeed the directors whose terms of office shall expire at the time
of the next annual election. Whenever a vacancy occurs in the Board
of Directors, the Committee on Nominations shall recommend a
suitable person to fill such vacancy, except that whenever a vacancy
results from the failure of a candidate for election to the Board of
Directors to be elected by a majority of votes cast, the public
directors then serving on the Board of Directors shall be
constituted as a special nominating committee to recommend a
suitable person to fill such vacancy.
21. The Compensation Committee shall recommend to the Board of Directors
the compensation to be paid to officers of the corporation at or
above the level of Senior Vice President and the initial
compensation of all other officers required to be elected by the
Board of Directors. The Compensation Committee also shall have the
authority to approve, modify and rescind the corporation's
compensation and employee benefits plans and to make such decisions
as are necessary to effect their administration. The Committee shall
have oversight responsibility with respect to compensation and
benefit plan administration, and will review other human resources
matters pertaining to executive succession and such other policies
and procedures as may be relevant to examine periodically. The
Committee shall further discharge any additional responsibilities as
may be specified from time to time by the Board of Directors.
22. The Committee on Business Ethics shall have responsibility to review
the corporation's policies on business ethics and from time to time
make recommendations to the Board of Directors concerning the
adoption and amendment of the corporation's published statement on
business ethics. The Committee shall have responsibility for
monitoring and enforcing compliance with By-law 27 and the
corporation's published statement on business ethics. It shall have
the authority to make determinations of all questions that may arise
thereunder, and to interpret and enforce the requirements thereof by
appropriate action. The Committee shall also have the authority to
grant exceptions thereunder which in the Committee's judgment are
appropriate or desirable under the circumstances. The Committee
shall further discharge any additional responsibilities as may be
specified from time to time by the Board of Directors.
23. The fiscal year of the corporation shall commence on the first day
of January and end on the thirty-first day of December in each year.
24. Either the Chairman of the Board and Chief Executive Officer and the
Secretary or the President and the Secretary shall, except as
otherwise provided in the following sentence, execute all contracts
of insurance and annuity either by signing such contracts manually
or by causing to be thereto affixed their respective facsimile
signatures duly adopted by each of them for the purpose with the
approval of the Board of Directors. The Board of Directors, in its
discretion, may authorize the execution in the same manner of any
such contracts issued out of any office outside of the United States
of America by the proper officers of such office. In case any
officer, as aforesaid, who shall have signed a contract form or
whose facsimile signature shall have been affixed thereto shall
cease to be such officer by reason of death or otherwise before such
contract shall have been issued and delivered, such contract may
nevertheless be issued and delivered unless the Board of Directors
shall otherwise determine, and any such contract so issued and
delivered shall be as binding upon the corporation as though every
officer who signed the same or whose facsimile signature was affixed
thereto, as aforesaid, had continued to be such officer of the
corporation.
II-14
<PAGE>
25. These By-laws may be altered, amended or rescinded without notice at
any regular meeting of the Board of Directors, or, upon such notice
as is prescribed by By-law 5, at any special meeting of the Board of
Directors, but in either case only by the vote of not less than
twelve members of the Board of Directors.
26. Except as otherwise provided in this By-law, the corporation shall
have the power conferred by Section 14A:3-5 of the New Jersey
Statutes to indemnify directors, officers, employees, and all other
corporate agents defined therein.
Any indemnification under this By-law pursuant to Section 14A:3-5,
New Jersey Statutes, shall be made by the corporation as authorized
in a specific case upon its being determined that (A) the costs,
disbursements and counsel fees included in any expenses for which
indemnification is made are reasonable, (B) except for
indemnification required by subsection 14A:3-5(4), indemnification
is proper in the circumstances because the corporate agent (i) met
the applicable standard of conduct set forth in subsection
14A:3-5(2) or subsection 14A:3-5(3), as the case may be, and (ii)
acted within what such agent reasonably believed to be the scope of
his or her employment and authority, and (C) any necessary court
order has been obtained.
Such determinations shall be made:
(a)With respect to a corporate agent who is or was a director or
officer of the corporation at or above the level of Senior Vice
President, or with respect to any other corporate agent if the
amount to be paid in indemnification to such corporate agent exceeds
$1 million:
(i)By the Board of Directors of the corporation, or a committee
thereof, acting by a majority vote of aquorum comprised of directors
who are not parties to or otherwise involved in the proceedings;
(ii) If such a quorum is not obtainable, or, even if obtainable and
such quorum of the Board of Directors or committee by majority vote
of the disinterested directors so directs, by independent legal
counsel, in a written opinion, such counsel to be designated by the
Board of Directors.
(b) With respect to any determinations not required to be made
pursuant to (a), by the general counsel of the corporation.
Expenses reasonably incurred by a corporate agent in connection with
a proceeding may be paid by the corporation in advance of the final
disposition of the proceeding. In the case of a director, such
expenses shall be paid when incurred; in the case of any other
corporate agent, such expenses may be paid if authorized in the
manner provided above for determination that indemnification is
proper. No such expenses shall be paid until the corporate agent
provides an undertaking to repay any amount so advanced if it shall
ultimately be determined that he or she is not entitled to be
indemnified as provided in this Bylaw.
Any right to indemnification provided by or pursuant to the
foregoing provisions of this By-law shall not be exclusive of any
other rights to which a corporate agent may be entitled as a matter
of law, by agreement or otherwise.
27. No director or employee of the corporation shall have any position
with, a substantial interest in or significant borrowing from any
other enterprise operated for profit, the existence of which would
conflict or might reasonably be supposed to conflict with the proper
performance of his or her responsibilities to the corporation, or
which might tend to affect his or her independence of judgment with
respect to transactions between the corporation and such other
enterprise.
Secretary
II-15
Exhibit 3
April 25, 1996
The Prudential Insurance Company
of America
Prudential Plaza
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 on
August 11, 1987 of The Prudential Variable Appreciable Account (the "Account")
by the Finance Committee of the Board of Directors of The Prudential Insurance
Company of America ("The Prudential") as a separate account for assets
applicable to certain variable life insurance contracts, pursuant to the
provisions of Section 17B:28-7 of the Revised Statutes of New Jersey. I am
responsible for oversight of the preparation and review of the Registration
Statements on Form S-6, as amended, filed by The Prudential with the Securities
and Exchange Commission (Registration No. 33-20000, Registration No. 33-25372
and Registration No. 33-61079) under the Securities Act of 1933 for the
registration of certain variable appreciable life insurance contracts issued
with respect to the Account.
I am of the following opinion:
1. The Prudential is a corporation duly organized under the laws of the
State 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 variable
appreciable life insurance contracts is not chargeable with
liabilities arising out of any other business The Prudential may
conduct.
4. The variable appreciable life insurance contracts are legal and
binding obligations of The 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,
Clifford E. Kirsch
II-16
Exhibit 6
April 25, 1996
The Prudential Insurance Company
Of America
Prudential Plaza
Newark, New Jersey 07102-3277
Gentlemen:
This opinion is furnished in connection with the registration by The Prudential
Insurance Company of America of Prudential Survivorship Preferred Variable
Appreciable Life Insurance Contract ("Contract") under the Securities Act of
1933. The prospectus included in the Post-Effective Amendment No. 1 to
Registration No. 33-61079 on Form S-6 describes the Contract. I have reviewed
the Contract and I have participated in the preparation and review of the
Registration Statement and Exhibits thereto. In my opinion:
1. The illustrations of cash surrender values and death benefits included in
the section of the prospectus entitled "Illustrations of Cash Surrender
Values, Death Benefits, and Accumulated Premiums", based on the
assumptions stated in the illustrations are consistent with the provisions
of the Contract. The rate structure of the Contract has not been designed
so as to make the relationship between premiums and benefits, as shown in
the illustrations, appear more favorable to the prospective purchaser of a
Contract issued on a male age 55 and a female age 50, than to prospective
purchasers of Contracts of different combinations of age, sex, or smoking
status.
2. The graphs included in the section of the prospectus entitled "Type of
Insurance Amount", based on the assumptions stated in the illustrations,
are consistent with the provisions of the Contract.
3. The examples shown in the section of the prospectus entitled "Changing the
Type of Insurance Amount" are consistent with the provisions of the
Contract.
4. The charts included in the sections of the prospectus "How a Fixed
Insurance Amount Contract's Death Benefit Will Vary" and "How a Fixed
Insurance Amount Contract's Death Benefit Will Vary" are consistent with
the provisions of the Contract.
II-17
<PAGE>
Page Two
April 25, 1995
5. The deduction in an amount equal to 1.25% of each premium is a reasonable
charge in relation to the additional income tax burden imposed upon The
Prudential Insurance Company of America as the result of the enactment of
Section 848 of the internal Revenue Code. In reaching that conclusion, a
number of factors were taken into account that, in my opinion, were
appropriate and which resulted in a project after-tax rate of return that
is a reasonable rate to use in discounting the tax benefit of the
deductions allowed in Section 848 in taxable years subsequent to the year
in which the premiums are received.
I hereby consent to the use of this opinion as an exhibit to the Registration
Statement and to the reference to my name under the heading "Experts" in the
prospectus.
Very truly yours,
Andy Mirchuk
II-18
EXHIBIT 7
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA'S REPRESENTATIONS REGARDING
MORTALITY, EXPENSE AND GUARANTEED MINIMUM DEATH BENEFIT RISKS AND SALES LOAD
This document sets forth, as required by Rule 6e-3(T) (b)(13) (iii)(F), a
representation regarding the level of charges for mortality, expense, and
guaranteed minimum death benefit risks assumed by The Prudential Insurance
Company of America (The Prudential") in connection with the issuance of
Prudential Survivorship Preferred Variable Appreciable Life Insurance Contracts
(the "Contracts") described in this registration statement. This document also
sets forth the representation regarding the expected costs of distributing the
contracts.
MORTALITY, EXPENSE, AND GUARANTEED MINIMUM DEATH BENEFITS RISKS
A daily charge is deducted from The Prudential Survivorship Preferred Account
(the "Account") for mortality and expense risks assumed by The Prudential. The
current charge is set at the maximum annual rate of 0.90%. In addition, The
Prudential deducts a monthly charge of not more than 0.01 per 1000 of the face
amount of insurance to compensate for the risk assumed by guaranteeing that, no
matter how unfavorable investment experience may be, the death benefit will
never be less than the guaranteed minimum death benefit so long as premiums less
withdrawals, accumulated at 4%, meet or exceed minimum values specified in the
contract. The Prudential has determined that these maximum charges are within
the range of industry practice for comparable contracts. The methodology used to
reach this conclusion was to identify the variable survivorship life insurance
contracts regarded as most closely comparable to the contracts in terms of
mortality and expense risks. The Prudential will maintain and make available to
the Commission on request a memorandum setting forth the basis for this
conclusion.
COSTS OF DISTRIBUTING THE CONTRACTS AND SALES LOADS
For up to 20 years, sales loads are deducted from premiums prior to their
allocation to the Account. Generally a higher sales load percentage is applied
to premiums received up to target premium with a lower rate applicable to
premiums received in each contract year in excess of target
II-19
<PAGE>
premiums. The total sales load charged to any contract will not exceed the sales
loads allowed as defined in sub-paragraph (b) (13)(i)(A) of the Rule. The
Prudential has applied for and the SEC has approved an exemption for compliance
with the stair-step requirement as defined in sub-paragraphs (b)(13)(ii) and
(d)(1)(ii). There are no contingent deferred sales charges (or surrender
charges) for this contract.
The Prudential has concluded that there is a reasonable likelihood that the
distribution financing arrangements of the Account will benefit the Account and
contract owners. The Prudential will maintain, and make available to the
Commission on request, a memorandum setting forth the basis for this
representation. Additionally, the Account will not invest in any management
investment company which proposes to or does formulate and approve any plan
under Rule 12b-1 to finance distribution expenses unless it has a Board of
Directors, a majority of the members of which are not interested persons of the
company, formulate and approve any such plan.
II-20
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