AS FILED WITH THE SEC ON ________________. REGISTRATION NO. 33-25372
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-6
POST-EFFECTIVE AMENDMENT NO. 15
FOR REGISTRATION UNDER THE SECURITIES ACT OF 1933
OF SECURITIES OF UNIT INVESTMENT TRUSTS REGISTERED
ON FORM N-8B-2
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THE PRUDENTIAL VARIABLE
APPRECIABLE ACCOUNT
(Exact Name of Trust)
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
(Name of Depositor)
751 BROAD STREET
NEWARK, NEW JERSEY 07102-3777
(800) 437-4016
(Address and telephone number of principal executive offices)
----------
THOMAS C. CASTANO
ASSISTANT SECRETARY
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
751 BROAD STREET
NEWARK, NEW JERSEY 07102-3777
(Name and address of agent for service)
Copy to:
JEFFREY C. MARTIN
SHEA & GARDNER
1800 MASSACHUSETTS AVENUE, N.W.
WASHINGTON, D.C. 20036
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It is proposed that this filing will become effective (check appropriate space):
[ ] immediately upon filing pursuant to paragraph (b) of Rule 485
[ ] on May 1, 1998 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"; Contract Forms;
Premiums; Contract Date; Allocation of Premiums;
Transfers; Charges and Expenses; How a Contract's
Cash Surrender Value Will Vary; How a Form A
Contract's Death Benefit Will Vary; How a Form B
Contract's Death Benefit Will Vary; Surrender of a
Contract; Withdrawal of Excess Cash Surrender Value;
Increases in Face Amount; Decreases in Face 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
20. Not Applicable
21. Contract Loans
<PAGE>
N-8B-2 ITEM NUMBER LOCATION
- ------------------ --------
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 Form A Contract's Death Benefit Will
Vary; How a Form B 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
51. Not Applicable
52. Substitution of Series Fund Shares
53. Tax Treatment of Contract Benefits
<PAGE>
N-8B-2 ITEM NUMBER LOCATION
- ------------------ --------
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>
CUSTOM VAL(SM)
PROSPECTUS
THE PRUDENTIAL
VARIABLE APPRECIABLE
ACCOUNT
MAY 1, 1998
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
<PAGE>
PROSPECTUS
MAY 1, 1998
THE PRUDENTIAL
VARIABLE APPRECIABLE ACCOUNT
CUSTOM VAL(sm)
LIFE
INSURANCE CONTRACTS
This prospectus describes two forms of a variable life insurance contract
offered by The Prudential Insurance Company of America ("Prudential") under the
name Custom VAL(sm) (the "Contract").* As of December 14, 1992, these Contracts
are no longer available for sale. These Contracts provide lifetime insurance
protection as long as certain minimum scheduled premiums are paid or are
provided for by favorable investment experience. Purchasers have considerable
flexibility as to when and in what amount they pay premiums.
One form of the Contract provides a death benefit that generally remains fixed
in the amount initially selected. A second form provides a death benefit that
may vary daily with the investment performance of one or more of several
investment options selected by the Contract owner. Under both forms, the death
benefit will not be less than a guaranteed minimum amount (generally the face
amount stated in the Contract). Both forms of the Contract have cash surrender
values which increase with the payment of each premium and which vary in amount
to reflect the investment results of the investment options selected by the
owner. The cash surrender value also decreases to reflect charges made by
Prudential. There is no guaranteed minimum cash surrender value.
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 current subaccounts of The Prudential Variable Appreciable Account
(the "Account"). They can be allocated to a FIXED-RATE OPTION. Or, they can be
invested in The Prudential Variable Contract Real Property Account (the "REAL
PROPERTY ACCOUNT") which is described in a prospectus that is attached to this
one. If one or more of the subaccounts is chosen, the assets of each subaccount
will be invested in a corresponding portfolio of The Prudential Series Fund,
Inc. (the "Series Fund"). 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 fifteen portfolios of the Series
Fund currently available to Contract owners: the MONEY MARKET PORTFOLIO, the
DIVERSIFIED BOND PORTFOLIO, the GOVERNMENT INCOME PORTFOLIO, two ZERO COUPON
BOND PORTFOLIOS with different liquidation dates-- 2000 and 2005, the
CONSERVATIVE BALANCED PORTFOLIO, the FLEXIBLE MANAGED PORTFOLIO, the HIGH YIELD
BOND PORTFOLIO, the STOCK INDEX PORTFOLIO, the EQUITY INCOME PORTFOLIO, the
EQUITY PORTFOLIO, the PRUDENTIAL JENNISON PORTFOLIO, the SMALL CAPITALIZATION
STOCK PORTFOLIO, the GLOBAL PORTFOLIO, and the NATURAL RESOURCES PORTFOLIO.
Other subaccounts and portfolios may be added in the future. Interest is
credited daily upon any portion of the premium payment allocated to the
fixed-rate option at rates periodically declared by Prudential in its sole
discretion but never less than 4%. This prospectus describes the Contracts
generally and The Prudential Variable Appreciable Account.
THE REPLACEMENT OF LIFE INSURANCE IS GENERALLY NOT IN THE INTEREST OF THE
CUSTOMER. IN MOST CASES, WHEN A CUSTOMER REQUIRES ADDITIONAL COVERAGE,
SUPPLEMENTING THE EXISTING POLICY BY PURCHASING ADDITIONAL INSURANCE OR A NEW
POLICY SHOULD BE REQUESTED, THEREBY PROTECTING THE BENEFITS OF THE ORIGINAL
POLICY. IF YOU ARE CONSIDERING REPLACING A POLICY, YOU SHOULD COMPARE THE
BENEFITS AND COSTS OF SUPPLEMENTING YOUR EXISTING POLICY WITH THE BENEFITS AND
COSTS OF PURCHASING THE CONTRACT DESCRIBED IN THIS PROSPECTUS AND 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. IT IS ALSO ATTACHED TO
A CURRENT PROSPECTUS FOR THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY ACCOUNT.
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
751 Broad Street
Newark, New Jersey 07102-3777
Telephone: (800) 437-4016
*VAL is a service mark of Prudential.
<PAGE>
PROSPECTUS CONTENTS
PAGE
----
DEFINITIONS OF SPECIAL TERMS USED IN THIS PROSPECTUS........................ 1
BRIEF DESCRIPTION OF THE CONTRACT........................................... 2
GENERAL INFORMATION ABOUT PRUDENTIAL, THE PRUDENTIAL VARIABLE
APPRECIABLE ACCOUNT, AND THE VARIABLE INVESTMENT OPTIONS
AVAILABLE UNDER THE CONTRACT.............................................. 4
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA............................... 4
THE PRUDENTIAL VARIABLE APPRECIABLE ACCOUNT............................... 4
THE PRUDENTIAL SERIES FUND, INC........................................... 5
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY ACCOUNT.................... 5
DETAILED INFORMATION FOR PROSPECTIVE CONTRACT OWNERS........................ 6
REQUIREMENTS FOR ISSUANCE OF A CONTRACT................................... 6
SHORT-TERM CANCELLATION RIGHT OR "FREE LOOK".............................. 6
CONTRACT FORMS............................................................ 6
PREMIUMS ................................................................. 7
CONTRACT DATE............................................................. 8
ALLOCATION OF PREMIUMS.................................................... 8
TRANSFERS................................................................. 9
CHARGES AND EXPENSES...................................................... 10
REDUCTION OF CHARGES FOR CONCURRENT SALES TO SEVERAL INDIVIDUALS.......... 13
HOW A CONTRACT'S CASH SURRENDER VALUE WILL VARY........................... 13
HOW A FORM A CONTRACT'S DEATH BENEFIT WILL VARY........................... 13
HOW A FORM B CONTRACT'S DEATH BENEFIT WILL VARY........................... 14
FLEXIBILITY AS TO PAYMENT OF PREMIUMS..................................... 14
PARTICIPATION IN DIVISIBLE SURPLUS........................................ 15
SURRENDER OF A CONTRACT................................................... 15
WITHDRAWAL OF EXCESS CASH SURRENDER VALUE................................. 15
INCREASES IN FACE AMOUNT.................................................. 16
DECREASES IN FACE AMOUNT.................................................. 17
WHEN PROCEEDS ARE PAID.................................................... 17
LIVING NEEDS BENEFIT...................................................... 18
ILLUSTRATIONS OF CASH SURRENDER VALUES, DEATH BENEFITS, AND
ACCUMULATED PREMIUMS.................................................... 18
CONTRACT LOANS............................................................ 20
SALE OF THE CONTRACT AND SALES COMMISSIONS................................ 21
TAX TREATMENT OF CONTRACT BENEFITS........................................ 21
WITHHOLDING............................................................... 22
LAPSE AND REINSTATEMENT................................................... 23
OPTIONS ON LAPSE.......................................................... 23
LEGAL CONSIDERATIONS RELATING TO SEX-DISTINCT PREMIUMS AND BENEFITS....... 24
OTHER GENERAL CONTRACT PROVISIONS......................................... 24
RIDERS ................................................................. 25
THE FIXED-RATE OPTION..................................................... 25
VOTING RIGHTS............................................................. 25
SUBSTITUTION OF SERIES FUND SHARES........................................ 26
REPORTS TO CONTRACT OWNERS................................................ 26
STATE REGULATION.......................................................... 26
EXPERTS ................................................................. 26
LITIGATION................................................................ 27
YEAR 2000 COMPLIANCE...................................................... 27
ADDITIONAL INFORMATION.................................................... 28
FINANCIAL STATEMENTS...................................................... 28
DIRECTORS AND OFFICERS OF PRUDENTIAL........................................ 29
<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, THE PROSPECTUS AND STATEMENT OF ADDITIONAL INFORMATION FOR THE
SERIES FUND, AND THE PROSPECTUS FOR THE REAL PROPERTY ACCOUNT.
<PAGE>
DEFINITIONS OF SPECIAL TERMS USED IN THIS
PROSPECTUS
ATTAINED AGE--The insured's age on the These assumptions include mortality
Contract date plus the number of years charges based on the 1980 CSO Table,
since then. an assumed annual net rate of return
of 5% per year, and deduction of the
CASH SURRENDER VALUE--The amount fees and charges specified in the
payable to the Contract owner upon Contract. For purposes of this
surrender of the Contract. It is equal Contract, the guideline annual premium
to the Contract fund minus any is used only in limiting sales
applicable contingent deferred sales charges.
and administrative charges and any
Contract debt. ISSUE AGE--The insured's age as of the
Contract date.
CONTRACT ANNIVERSARY--The same date as
the Contract date in each later year. LOAN VALUE--The maximum amount that a
Contract owner may borrow.
CONTRACT DATE--The date the Contract
is issued, as specified in the MONTHLY DATE--The Contract date and
Contract. the same date in each subsequent
month.
CONTRACT DEBT--The principal amount of
all outstanding loans plus any PRIMARY PREMIUM--The scheduled premium
interest accrued thereon. that a Contract owner would pay if
premiums were paid annually minus the
CONTRACT FUND--The total amount charge for taxes attributable to
credited to a specific Contract. On premiums, $38 and any extra premiums
any date it is equal to the sum of the for riders or substandard risks.
amounts in all the subaccounts or
other variable investment options, the SUBACCOUNT--An investment division of
amount invested under the fixed-rate the Account, the assets of which are
option, and the principal amount of invested in the shares of the
any Contract loan plus interest corresponding portfolio of the Series
credited on that amount. Fund.
CONTRACT OWNER--The person who TABULAR CONTRACT FUND VALUE--The
purchases the Contract and is entitled tabular Contract fund value for each
to exercise the rights described Contract year is an amount that is
therein. slightly less than the Contract fund
value that would result as of the end
CONTRACT YEAR--A year that starts on of such year if only scheduled
the Contract date or on a Contract premiums were paid when due, the
anniversary. selected investment options earned a
net return at a uniform rate of 4% per
DEATH BENEFIT--The amount payable to year, full mortality charges based
the beneficiary upon the death of the upon the 1980 CSO Table were deducted,
insured before the deduction of any maximum sales load and expense charges
outstanding Contract debt. were deducted, and there was no
Contract debt.
FACE AMOUNT--The initial amount of
life insurance as shown on the cover THE PRUDENTIAL SERIES FUND, INC. (THE
page of the Contract, or as shown in "SERIES FUND")--A mutual fund with
revised cover pages of the Contract separate portfolios, one or more of
following an increase or decrease in which may be chosen as an underlying
face amount. investment for the Contract.
FIXED-RATE OPTION--An investment THE PRUDENTIAL VARIABLE APPRECIABLE
option under which Prudential ACCOUNT (THE "ACCOUNT")--A separate
guarantees that interest will be added account of Prudential registered as a
to the amount deposited at a rate unit investment trust under the
declared periodically in advance. Investment Company Act of 1940.
GUARANTEED MINIMUM DEATH BENEFIT--The THE PRUDENTIAL VARIABLE CONTRACT REAL
guaranteed minimum amount (generally PROPERTY ACCOUNT (THE "REAL PROPERTY
the face amount) payable to the ACCOUNT")--A separate account of
beneficiary upon the death of the Prudential which invests, through a
insured, before the deduction of any partnership, primarily in
outstanding Contract debt, if income-producing real property.
scheduled premiums are paid on or
before the due date or during the VALUATION PERIOD--The period of time
grace period. Withdrawals of excess from one determination of the value of
cash surrender value may reduce the the amount invested in a subaccount to
guaranteed minimum death benefit. the next. Such determinations are made
when the net asset values of the
GUIDELINE ANNUAL PREMIUM ("GAP")--The portfolios of the Series Fund are
level annual premium payment necessary calculated, which is generally at 4:15
to provide the future benefits under p.m. New York City time on each day
the Contract through maturity, based during which the New York Stock
on certain assumptions specified in an Exchange is open.
SEC rule.
1
<PAGE>
BRIEF DESCRIPTION OF THE CONTRACT
This variable life insurance contract (the "Contract") provides features that
differ from those of other life insurance contracts offered by The Prudential
Insurance Company of America ("Prudential") that may make it attractive to and
suitable for certain purchasers. It is a variable contract, which means that the
cash surrender value it provides and, in some cases, the amount payable upon the
death of the insured, will depend upon the investment performance of the
variable investment options selected by the Contract owner in which the amounts
credited under the Contract are invested. The Contract sets forth an initial
face amount of insurance and a schedule of premiums which, if paid when due or
in advance, guarantees that at least that amount of insurance will be payable
upon the death of the insured. As of December 14, 1992, these Contracts are no
longer available for sale.
The Contract is available only to persons who choose an initial face amount of
insurance of $200,000 or more and who wish to provide for a schedule of
increasing premiums instead of a schedule of premiums that stays at the same or
"level" amount, as they do under most "whole life" insurance Contracts. For
Contracts that provide an initial face-amount of insurance of over $200,000, a
purchaser has a choice, within specified limits, of what that increasing
schedule of premiums will be. This choice should be made only after careful
discussion with a Prudential representative. There are advantages to fixing the
first year's premium at the low end of the permissible range, with succeeding
premiums increasing more rapidly, over a choice of a higher initial premium with
succeeding premiums still increasing, but more slowly. There are also
disadvantages and both are discussed more fully in the body of this prospectus.
At the time the Contract is purchased, the Contract owner decides in which of
the many available investment options the amounts held under the Contract--
derived from the payment of premiums and the earnings thereon--will be invested.
The cash surrender value of the Contract will increase with favorable investment
experience and decrease with unfavorable investment experience. The cash
surrender value of a Contract also reflects the imposition of the various
Contract charges. The Contract owner may, from time to time, change the way in
which future premiums will be allocated and transfer amounts already invested
under the Contract among the various investment options.
The owner may choose either of the two Contract Forms. Under Contract Form A,
the cash surrender value will vary with investment experience but the death
benefit generally will not change, except under certain circumstances described
later. Under Contract Form B, both the death benefit and the cash surrender
value will vary with investment experience, but the death benefit will never be
less than the face amount regardless of investment experience. See HOW A FORM A
CONTRACT'S DEATH BENEFIT WILL VARY, page 13 and HOW A FORM B CONTRACT'S DEATH
BENEFIT WILL VARY, page 14. There is no minimum cash surrender value under
either form of the Contract. Throughout this prospectus, unless specifically
stated otherwise, all descriptions of and references to the "Contract" apply to
both Form A and Form B Contracts. The owner of a Contract has the right under
certain conditions to increase or decrease the face amount of insurance. In the
case of an increase in face amount, one of the conditions is the provision of
evidence of insurability satisfactory to Prudential. See INCREASES IN FACE
AMOUNT, page 16 and DECREASES IN FACE AMOUNT, page 17.
If the scheduled premiums are paid by their due dates or within a 61-day grace
period the Contract will not lapse, even if investment experience is
unfavorable. Thus, the payment of scheduled premiums guarantees insurance
protection at least equal to the face amount of the Contract. A Contract owner,
however, is not required to adhere precisely to the schedule. The owner may,
within very broad limits, pay greater than scheduled premiums and the net
portion of such payments will promptly be invested in the manner previously
selected by the owner. Cash surrender values will increase whenever premiums are
paid. The failure to pay a scheduled premium, on the other hand, will not
necessarily result in lapse of the Contract. If the net investment experience
has been sufficiently favorable, with a consequent increase in the amount
credited under the Contract, and the Contract owner then fails to pay a premium
when due, Prudential will use the "excess" amount to pay the charges due under
the Contract and thus keep the Contract in force. So long as the excess amount
is sufficient, the Contract will not lapse despite the owner's failure to pay
scheduled premiums. See LAPSE AND REINSTATEMENT, page 23.
The premium schedule, which will be set forth in the Contract, depends on the
Contract's face amount, the insured's sex (except where unisex rates apply) and
age at issue, the insured's risk classification, the rate for taxes attributable
to premiums, the frequency with which premium payments are made and, for
Contracts providing more than $200,000 of insurance, the initial premium
selected by the purchaser. That initial premium, however, may not, in any event,
be less than a minimum amount fixed by Prudential. The scheduled premiums will
increase in each year until the Contract anniversary after the insured's 65th
birthday, or, if later, 7 years from the date the Contract is issued, at which
time the scheduled premium will increase more significantly and then will not
change for the remainder of the insured's life. The actual amount that will be
payable after that Contract anniversary may and often will, however, be lower
than that maximum amount. See PREMIUMS, page 7.
2
<PAGE>
There are circumstances, such as the payment of premiums substantially in excess
of scheduled premiums, under which the Contract may become a Modified Endowment
Contract under federal tax law. If it does, loans and other pre-death
distributions are includible in gross income on an income-first basis. A 10%
penalty tax may be imposed on income distributed before the insured attains age
59 1/2. Prospective purchasers and Contract owners are advised to consult a
qualified tax advisor before taking steps that may affect whether the Contract
becomes a Modified Endowment Contract. See TAX TREATMENT OF CONTRACT BENEFITS,
page 21.
The owner of a Contract may choose to have the premiums (after deduction of an
amount needed to pay taxes attributable to premiums, and a $2 administrative
charge) invested in one or more of fifteen subaccounts of The Prudential
Variable Appreciable Account (the "Account"). Each subaccount is invested in a
corresponding portfolio of The Prudential Series Fund, Inc. (the "Series Fund"),
a series mutual fund for which Prudential is the investment advisor. The MONEY
MARKET PORTFOLIO is invested in short-term debt obligations similar to those
purchased by money market funds; the DIVERSIFIED BOND PORTFOLIO is invested
primarily in high quality medium-term corporate and government debt securities;
the GOVERNMENT INCOME 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; the 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; the CONSERVATIVE BALANCED 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; the FLEXIBLE MANAGED
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; 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; 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; the EQUITY INCOME 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; the EQUITY PORTFOLIO is invested primarily in
common stocks; the PRUDENTIAL JENNISON PORTFOLIO is invested primarily in equity
securities of established companies with above-average growth prospects; the
SMALL CAPITALIZATION STOCK PORTFOLIO is invested primarily in equity securities
of publicly-traded companies with small market capitalization; the GLOBAL
PORTFOLIO is invested in common stocks and common stock equivalents (such as
convertible debt securities) of foreign and domestic issuers; and 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 5.
The Contract owner may also choose to invest part of his or her net premiums in
The Prudential Variable Contract Real Property Account ("Real Property
Account"), which through a partnership invests primarily in income-producing
real property. The investment objectives of the Real Property Account and the
partnership are described briefly under THE PRUDENTIAL VARIABLE CONTRACT REAL
PROPERTY ACCOUNT on page 5.
Because the assets that relate to the Contract may be invested in these various
investment options, the Contract offers an opportunity for the cash surrender
value to appreciate more rapidly than it would under comparable fixed-benefit
insurance. The owner, however, must accept the risk that if investment
performance is unfavorable the cash surrender value may not appreciate as
rapidly and, indeed, may decrease in value. Contract owners who prefer to avoid
this risk may elect to allocate part or all of the net premiums in a fixed-rate
option under which a stated interest rate is credited to the amount invested
under that option. See THE FIXED-RATE OPTION, page 25.
Prudential deducts certain charges from each premium payment and from the
amounts held in the designated investment options. In addition, Prudential makes
certain additional charges if a Contract lapses or is surrendered during the
first 10 Contract years. All 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 10. In brief, and subject to
that fuller description, the following charges may be made: (1) $2 is deducted
from each premium payment to cover premium collection and processing costs; (2)
a charge for taxes attributable to premiums is deducted from each premium
payment; (3) each month, the Contract fund is reduced by an administrative
charge of $6 per Contract plus $0.01 per $1,000 for face amounts exceeding
$100,000; (4) each month, a sales charge is deducted from the Contract fund in
the amount of 1/2 of 1% of the primary annual premium; Prudential now intends to
make this charge only for the first 5 Contract years; in addition, a contingent
deferred sales charge is assessed if the Contract lapses or is surrendered
during the first 10 years; the charge is 25% of the primary premium for
Contracts that terminate in the first year and it increases by 5% each year for
5 years after which it
3
<PAGE>
decreases uniformly until it becomes zero after the tenth year; (5) each month,
the Contract fund is reduced by a guaranteed minimum death benefit risk charge
of not more than $0.01 per $1,000 of the face amount of insurance; (6) each
month, a charge for anticipated mortality is deducted, with the maximum charge
based on the non-smoker/smoker 1980 CSO Tables; (7) a daily charge equivalent to
an annual rate of up to 0.6% is deducted from the assets of the subaccounts for
mortality and expense risks; (8) if the Contract lapses or is surrendered during
the first 10 years, a contingent deferred administrative charge is assessed;
during the first 5 years, this charge equals $5 per $1,000 of face amount and it
begins to decline uniformly after the fifth Contract year so that it disappears
on the tenth Contract anniversary; (9) an administrative processing charge equal
to the lesser of $15 or 2% of the amount withdrawn will be made in connection
with each withdrawal of excess cash surrender value; (10) an administrative
processing charge of $15 may be made in connection with each decrease in face
amount; (11) if the Contract includes riders, a monthly deduction from the
Contract fund will be made for charges applicable to those riders and a
deduction will also be made if the rating class of the insured results in an
extra charge; and (12) certain fees and expenses are deducted from the assets of
the Series Fund and Real Property Account. Because of these charges, and in
particular because of the significant charges deducted upon early surrender or
lapse, prospective purchasers should purchase a Contract only if they intend and
have the financial capability to keep it in force for a substantial period.
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 6.
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 document. That document, together with the
application attached to it, constitutes the entire agreement between the owner
and Prudential and should be retained.
For the DEFINITIONS OF SPECIAL TERMS USED IN THIS PROSPECTUS, see page 1.
GENERAL INFORMATION ABOUT 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 ("Prudential") is a mutual insurance
company, founded in 1875 under the laws of the State of New Jersey. Prudential
is currently considering reorganizing itself into a stock company. This form of
reorganization, known as demutualization, is a complex process that may take two
or more years to complete. No plan of demutualization has been adopted yet by
Prudential's Board of Directors. Adoption of a plan of demutualization would
occur only after enactment of appropriate legislation in New Jersey and would
have to be approved by Prudential policyholders and appropriate state insurance
regulators. Throughout the process, there will be a continuing evaluation by the
Board of Directors and management of Prudential as to the desirability of
demutualization. The Board of Directors, in its discretion, may choose not to
demutualize or to delay demutualization for a time.
Prudential is licensed to sell life insurance and annuities in the District of
Columbia, Guam, U.S. Virgin Islands, and in all states.
Prudential's consolidated financial statements begin on page B1 and should be
considered only as bearing upon 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
Prudential's other assets.
The obligations to Contract owners and beneficiaries arising under the Contract
are general corporate obligations of Prudential. Prudential is also the legal
owner of the assets in the Account. Prudential will 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
Prudential conducts. In addition to these assets, the Account's assets may
include funds contributed by Prudential to commence operation of the Account and
may include accumulations of the charges Prudential makes against the Account.
From time to time these additional assets will be transferred to Prudential's
general account.
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Before making any such transfer, Prudential will consider any possible adverse
impact the transfer might have on the Account.
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 Prudential. There are currently fifteen 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 Account's financial statements begin on page A1.
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 Prudential and certain other
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 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.
Prudential is the investment advisor for the assets of each of the portfolios of
the Series Fund. Prudential's principal business address is 751 Broad Street,
Newark, New Jersey 07102-3777. Prudential has a Service Agreement with its
wholly-owned subsidiary The Prudential Investment Corporation ("PIC"), which
provides that, subject to Prudential's supervision, PIC will furnish investment
advisory services in connection with the management of the Series Fund. In
addition, 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.
Prudential, PIC, and Jennison are registered as investment advisors under the
Investment Advisers Act of 1940.
As an investment advisor, Prudential charges the Series Fund a daily investment
management fee as compensation for its services. In addition to the investment
management fee, each portfolio incurs certain expenses, such as accounting and
custodian fees. See CHARGES AND EXPENSES, page 10.
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.
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY ACCOUNT
The Prudential Variable Contract Real Property Account (the "Real Property
Account") is a separate account of Prudential that, through a general
partnership formed by Prudential and two of its subsidiaries, invests primarily
in income-producing real property such as office buildings, shopping centers,
agricultural land, hotels, apartments or industrial properties. It also invests
in mortgage loans and other real estate-related investments, including
sale-leaseback transactions. The objectives of the Real Property Account and the
partnership are to preserve and protect capital, provide for compounding of
income as a result of reinvestment of cash flow from investments, and provide
for increases over time in the amount of such income through appreciation in the
value of assets.
The partnership has entered into an investment management agreement with
Prudential, under which Prudential selects the properties and other investments
held by the partnership. Prudential charges the partnership a daily fee for
investment management which amounts to 1.25% per year of the average daily gross
assets of the partnership.
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A FULL DESCRIPTION OF THE REAL PROPERTY ACCOUNT, ITS MANAGEMENT, POLICIES, AND
RESTRICTIONS, ITS CHARGES AND EXPENSES, THE RISKS ATTENDANT TO INVESTMENT
THEREIN, THE PARTNERSHIP'S INVESTMENT OBJECTIVES, AND ALL OTHER ASPECTS OF THE
REAL PROPERTY ACCOUNT'S AND THE PARTNERSHIP'S OPERATIONS IS CONTAINED IN THE
ATTACHED PROSPECTUS FOR THE REAL PROPERTY ACCOUNT, WHICH SHOULD BE READ TOGETHER
WITH THIS PROSPECTUS BY ANY CONTRACT OWNER CONSIDERING THE REAL ESTATE
INVESTMENT OPTION. THERE IS NO ASSURANCE THAT THE INVESTMENT OBJECTIVES WILL BE
MET.
DETAILED INFORMATION FOR PROSPECTIVE CONTRACT
OWNERS
REQUIREMENTS FOR ISSUANCE OF A CONTRACT
As of December 14, 1992, these Contracts are no longer available for sale. The
minimum initial guaranteed death benefit that can be applied for is $200,000.
The Contract may generally be issued on insureds between the ages of 20 and 79.
Before issuing any Contract, Prudential requires evidence of insurability which
will include a medical examination. Non-smokers who meet preferred underwriting
requirements are offered the most favorable premium rate. A higher premium is
charged if an extra mortality risk is involved. These are the current
underwriting requirements. The Company reserves the right to change them on a
non-discriminatory basis.
SHORT-TERM CANCELLATION RIGHT OR "FREE LOOK"
Generally, a Contract may be returned for a refund within 10 days after it is
received by the Contract owner, within 45 days after Part I of the application
for insurance is signed or within 10 days after 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 Home Office specified in the Contract. A Contract returned
according to this provision shall be deemed void from the beginning. The
Contract owner will then receive a refund of all premium payments made, plus or
minus any change due to investment experience. However, if applicable law so
requires, the Contract owner who exercises his or her short-term cancellation
right will receive a refund of all premium payments made, with no adjustment for
investment experience.
CONTRACT FORMS
A purchaser may select either of two forms of the Contract. Contract Form A has
a death benefit equal to the initial face amount of insurance. The death benefit
of a Form A Contract does not vary with the investment performance of the
investment options selected by the owner, except in certain circumstances. See
HOW A FORM A CONTRACT'S DEATH BENEFIT WILL VARY, page 13. Favorable investment
results of the variable investment options to which the assets related to the
Contract are allocated and payment of greater than scheduled premiums will
generally result in increases in the cash surrender value. See HOW A CONTRACT'S
CASH SURRENDER VALUE WILL VARY, page 13.
Contract Form B also has an initial face amount of insurance but favorable
investment performance and payment of greater than scheduled 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 the Form A Contract. See HOW A CONTRACT'S CASH SURRENDER VALUE WILL
VARY, page 13 and HOW A FORM B CONTRACT'S DEATH BENEFIT WILL VARY, page 14.
Unfavorable investment performance will result in decreases in the death benefit
(but never below the face amount stated in the Contract) and in the cash
surrender value.
Purchasers should select the Form that best meets their needs and objectives.
Purchasers who prefer to have favorable investment results and the payment of
greater than scheduled premiums emerge partly in the form of an increased death
benefit and partly in the form of increased cash surrender values should choose
Contract Form B. Purchasers who are satisfied with the amount of their insurance
coverage and wish to have favorable investment results and additional premiums
reflected to the maximum extent in increasing cash surrender values should
choose Contract Form A. See HOW A CONTRACT'S CASH SURRENDER VALUE WILL VARY,
page 13.
In choosing a Contract Form, purchasers should also consider whether they intend
to use the withdrawal feature. Purchasers of Form A Contracts should note that
an early withdrawal may result in a portion of the surrender charge being
deducted from the Contract fund. Furthermore, a purchaser of a minimum face
amount Form A Contract cannot make withdrawals unless the Contract's death
benefit has been increased to an amount in excess of the initial face amount.
Purchasers of Form B Contracts will not incur a surrender charge for a
withdrawal and are not precluded from making withdrawals if they purchase a
minimum size Contract. See WITHDRAWAL OF EXCESS CASH SURRENDER VALUE, page 15.
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PREMIUMS
Although Contract owners have the right to decide when to make premium payments
and in what amounts (see FLEXIBILITY AS TO PAYMENT OF PREMIUMS, page 14), each
Contract sets forth a premium schedule which, if paid, ensures that the Contract
will not lapse.
The initial scheduled premium amount is payable on the Contract date (the date
the Contract is issued, as noted in each individual Contract) and subsequent
premiums, which will be in increasing amounts, are payable on each subsequent
due date. These due dates will be annual, semi-annual, quarterly or monthly, as
selected by the purchaser. Contract owners who pay premiums other than on a
monthly basis will receive notice that a premium is due about 3 weeks before
each due date. Contract owners who pay premiums monthly will receive each year a
book with twelve coupons that will serve as a reminder. With Prudential's
consent, an owner may change the frequency of premium payments.
As stated in the Summary, for Contracts with an initial face-amount of insurance
of exactly $200,000, the Contract will set forth a schedule of premiums
determined by Prudential. For Contracts with higher initial face amounts, each
Contract owner may choose what the initial premium will be, as long as it is
greater than a minimum amount that depends upon the Contract's face amount, the
insured's sex (except where unisex rates apply) and age at issue, the insured's
risk classification, the rate for taxes attributable to premiums, and the
selected frequency of premium payments. Your Prudential representative will
inform you what that minimum amount is for any specified insured person.
Subsequent scheduled premiums will be in increasing amounts (with the rate of
increase dependent upon the amount of the initial premium--a lower initial
premium results in a higher rate of increase in the amounts of subsequent
premiums) until the Contract anniversary following the insured's 65th birthday,
or the seventh anniversary if later, after which the amount of the scheduled
premium will not change. The Contract will set forth the schedule of premiums
chosen by the purchaser as well as the maximum scheduled premium amount
(excluding the charge for taxes attributable to premiums) that will be due on
and after that anniversary. This maximum amount will generally be significantly
higher than the premium for the preceding year. However, if the amount invested
under the Contract, net of any excess premiums, is higher than it would have
been if only scheduled premiums had been paid, if maximum mortality and expense
charges had been deducted, and if a uniform net rate of return of 4% had been
earned by the selected investment options, Prudential will recompute the premium
amount payable after that anniversary and the new premium can be expected to be
less than the maximum premium amount stated in the Contract. The tables at pages
T1 through T8 show what the maximum premium will be after age 65 and what the
actual premium would be for certain hypothetical investment results and if lower
than maximum charges are made, as is currently contemplated.
To illustrate the range of premium schedules available, the following table
shows what the scheduled premiums might be for a 40 year old male in the
preferred rating class. One column shows the result of choosing the lowest
permissible initial premium; the second column shows what premium schedule would
result if a relatively high initial premium were to be chosen.
----------------------------------------------------------
FACE AMOUNT OF INSURANCE--$300,000
ILLUSTRATIVE PREMIUMS
----------------------------------------------------------
MALE AGE | EXAMPLE NO. 1 | EXAMPLE NO. 2
----------------|----------------------|------------------
40 | $ 1,713.27 | $ 2,472.45
45 | $ 1,941.84 | $ 2,586.73
50 | $ 2,301.02 | $ 2,766.33
55 | $ 2,962.24 | $ 3,096.94
60 | $ 4,052.04 | $ 3,641.84
64 | $ 5,515.31 | $ 4,373.47
65 and over | $16,980.61 | $15,411.22
----------------------------------------------------------
Prudential designed this Contract in order to accommodate the needs of a class
of persons who wish and are able to purchase a substantial amount of life
insurance but whose current financial situations may vary considerably.
Establishing a premium schedule with the lowest permissible initial premium is
suitable only for those persons who can confidently predict that their incomes
will increase as they grow older and that they will be able to pay the
significantly larger scheduled premiums that result from the choice of a low
initial premium. Although failure to pay scheduled premiums when due does not
mean that the Contract will necessarily lapse, (see LAPSE AND REINSTATEMENT,
page 23), Prudential does guarantee that the Contract will not lapse if the
scheduled premiums are paid when due. The payment of lower premiums during the
early years of a Contract means that there will be a smaller Contract fund
credited to the Contract so that there is a reduced possibility that there will
be an "excess amount" available to prevent the lapse of the Contract if a
scheduled premium is not paid. The purchase of a
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Contract and payment of premiums for several years followed by the lapse of the
Contract because of the inability to pay the increased premiums would be
imprudent and wasteful. A high price would have been paid and the purchaser
would have received only a small part of the benefits available under the
Contract.
If a Contract owner wishes, he or she may select a higher contemplated premium
schedule than the premium schedule set forth in the Contract. Prudential will
bill the owner for the chosen higher premiums. In general, the regular payment
of higher premiums will result in higher cash surrender values and, at least
under Form B, in higher death benefits.
The payment of premiums substantially in excess of scheduled premiums may cause
the Contract to become a Modified Endowment Contract for federal income tax
purposes. If this happens, loans and other distributions which would otherwise
not be taxable events may be subject to federal income taxation. See TAX
TREATMENT OF CONTRACT BENEFITS, page 21.
Certain term riders on term policies issued by Prudential may provide for a
conversion premium credit if the rider or policy is converted to a Prudential
whole-life policy, including the Contracts described in this prospectus. If a
Contract is purchased through exercise of such a conversion privilege, the first
year's scheduled premium will be reduced by the amount of the premium credit.
Prudential will add to first year scheduled premiums paid by the Contract owner
the pro rata portion of the premium credit.
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 Prudential so that it will coincide with or be
shortly prior to the date on which the first premium is paid. Under certain
circumstances, Prudential will permit a Contract to be back-dated but only to a
date not earlier than 6 months prior to the date of the application. It may be
advantageous for a Contract owner to have an earlier Contract date since that
may result in the use by Prudential of a lower issue age in determining the
amount of the scheduled premium. Prudential will require the payment of all
premiums that would have been due had the application date coincided with the
back-dated Contract date. The 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, all scheduled premiums been received on their due dates,
and all Contract charges been made. See CHARGES AND EXPENSES, page 10.
ALLOCATION OF PREMIUMS
On the Contract date, a $2 processing charge and the charge for taxes
attributable to premiums are deducted from the initial premium, and the first
monthly deductions are made. See CHARGES AND EXPENSES, page 10. The remainder of
the initial scheduled premium will be allocated on the Contract date among the
subaccounts, the fixed-rate option or the Real Property Account according to the
desired allocation specified in the application form. The invested portion of
any part of the first premium in excess of the scheduled initial premium, as
well as the invested portion of all subsequent premiums, are placed in the
selected investment option[s] on the date of receipt at a Home Office, but not
earlier than the Contract date. 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 $2 per payment
charge and the charge for taxes attributable to premiums also apply to all
subsequent premium payments; the remainder will be invested as of the end of the
valuation period when received at a Home Office in accordance with the
allocation previously designated by the Contract owner. Provided the Contract is
not in default, Contract owners may change the way in which subsequent premiums
are allocated by giving written notice to a Home Office or by telephoning that
Home Office, provided the Contract owner is enrolled to use the Telephone
Transfer System. There is no charge for reallocating future premiums. If any
part of the invested portion of a premium is allocated to a particular
investment option, that portion must be at least 10% on the date the allocation
takes effect. All percentage allocations must be in whole numbers. For example,
33% can be selected but 33 1/3% cannot. Of course, the total allocation of all
selected investment options must equal 100%.
Additionally, a feature called Dollar Cost Averaging ("DCA") is available to
Contract owners. Under this feature, premiums may be allocated to the portion of
the Money Market subaccount used for this feature (the "DCA account"), and
designated dollar amounts will be transferred monthly from the DCA account to
other investment options available under the Contract, excluding the Money
Market subaccount and the fixed-rate option, but including the Real Property
Account. Automatic monthly transfers must be at least 3% of the amount allocated
to the DCA account (that is, if $5,000 is designated, the minimum monthly
transfer is $150), with a minimum of $20 transferred into any one investment
option. These amounts are subject to change at Prudential's discretion. The
minimum transfer amount will only be recalculated if the amount designated for
transfer is increased.
Currently, the amount initially designated to DCA must be at least $2,000. This
minimum is subject to change at Prudential's discretion. After DCA has been
established and as long as the DCA account has a positive balance,
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Contract owners may allocate or transfer amounts to the DCA account, subject to
the limitations on premium payments and transfers generally. In addition, if
premiums are paid on an annual or semi-annual basis, and the Contract owner has
already established DCA, the premium allocation instructions may include an
allocation of all or a portion of all your premium payments to the DCA account.
Each automatic monthly transfer will take effect as of the end of the valuation
period on the Monthly Date, provided the New York Stock Exchange ("NYSE") is
open on that date. If the NYSE is not open on the Monthly Date, the transfer
will take effect as of the end of the valuation period on the next day that the
NYSE is open. If the Monthly Date does not occur in a particular month (e.g.,
February 30), the transfer will take effect as of the end of the valuation
period on the last day of the month that the NYSE is open. Automatic monthly
transfers will continue until the balance in the DCA account reaches zero, or
until the Contract owner gives notification of a change in allocation or
cancellation of the feature. If the Contract has outstanding premium allocation
to the DCA account, but the DCA option has previously been canceled, premiums
allocated to the DCA account will be allocated to the Money Market subaccount.
Currently, there is no charge for using the DCA feature.
TRANSFERS
If the Contract is not in default, or if the Contract is in force as variable
reduced paid-up insurance (see OPTIONS ON LAPSE, page 23), the owner may, up to
four times in each Contract year, transfer amounts from one subaccount to
another subaccount, to the fixed-rate option or to the Real Property Account.
Currently, you may make additional transfers with our consent. There is no
charge. All or a portion of the amount credited to a subaccount may be
transferred. A Contract owner who wishes to convert his or her variable Contract
to a fixed-benefit Contract may do so by requesting a transfer of the entire
amount held under the Contract to the fixed-rate option and by changing his or
her allocation instructions regarding future premiums.
Transfers among subaccounts will take effect as of the end of the valuation
period in which a proper transfer request is received at a 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. The Contract owner may transfer amounts by proper
written notice to a Home Office, or by telephone, provided the Contract owner is
enrolled to use the Telephone Transfer System. A Contract owner will
automatically be enrolled to use the Telephone Transfer System unless the
Contract is jointly owned or the Contract owner elects not to have this
privilege. Telephone transfers may not be available on policies that are
assigned, see ASSIGNMENT, page 24, depending on the terms of the assignment.
Prudential has adopted procedures designed to ensure that requests by telephone
are genuine. Prudential will not be held liable for following telephone
instructions that it reasonably believes to be genuine. Prudential cannot
guarantee that owners 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 subaccount. A transfer that occurs upon the liquidation
date of a Zero Coupon Bond Subaccount will not be counted as one of the four
permissible transfers in a Contract year.
Transfers from the fixed-rate option to the subaccounts or the Real Property
Account are currently permitted once each Contract year and only during the
30-day period beginning on the Contract anniversary. The maximum amount which
may be transferred out of the fixed-rate option each year is currently the
greater of: (a) 25% of the amount in the fixed-rate option, or (b) $2,000. Such
transfer requests prior to the Contract anniversary will be effected on the
Contract anniversary. Transfer requests received within the 30-day period
beginning on the Contract anniversary will be effected as of the end of the
valuation period in which a proper transfer request is received at a Home
Office. These limits are subject to change in the future. Transfers from the
Real Property Account are also subject to restrictions, and these restrictions
are described in the attached prospectus for that investment option.
Prudential may, on a non-discriminatory basis, permit the owner of a Custom
APPRECIABLE LIFE insurance policy issued by Prudential (a Custom APPRECIABLE
LIFE policy is a general account, universal life type policy with guaranteed
minimum values) to exchange his or her policy for a comparable Custom VAL
Contract with the same Contract date, scheduled premiums, and Contract fund. No
charge will be made for the exchange. There is no new "free look" right when a
Custom APPRECIABLE LIFE contract owner elects to exchange his or her policy for
a comparable Custom VAL Contract.
Although Prudential does not give tax advice, Prudential does believe, based on
its understanding of federal income tax laws as currently interpreted, that the
original date exchange of a Custom APPRECIABLE LIFE contract for a Custom VAL
Contract should be considered to be a tax-free exchange under the Internal
Revenue Code of 1986 as amended. It should be noted, however, that the exchange
of a Custom APPRECIABLE LIFE contract for a Custom VAL Contract may impact the
status of the Contract as a Modified Endowment Contract. See TAX TREATMENT OF
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CONTRACT BENEFITS, page 21. A contract owner should consult with his or her tax
advisor and Prudential representative before making an exchange.
The Contract was not designed for professional market timing organizations,
other organizations, or individuals using programmed, large, or frequent
transfers. A pattern of exchanges that coincides with a "market timing" strategy
may be disruptive to the subaccounts and will be discouraged. If such a pattern
were to be found, we may be required to modify the transfer procedures,
including but not limited to, not accepting transfer requests of an agent under
a power of attorney on behalf of more than one Contract owner.
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 held
in the Real Property Account, 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 20. Most charges,
although not all, are made by reducing the Contract fund.
Every charge made by Prudential under the Contract is described below.
1. A charge is deducted from each premium payment 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 Prudential. The state premium tax rates
generally range from 0.75% to 5% (but in some instances may exceed 5%). A
charge, currently in the amount of 1.25% of premiums is deducted for the
purpose of recovering a portion of Prudential's federal income tax burden
that is determined solely by the amount of premiums received; this charge
is not imposed on Contracts issued in connection with tax-qualified
pension plans. 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. During 1997, 1996 and 1995, Prudential received a total of
approximately $197,000, $134,000 and $131,000, respectively, in charges
for payment of premium taxes.
2. There is an administrative charge of $2 deducted from each premium payment
to cover the cost of collecting and processing premiums. Thus, Contract
owners who pay premiums annually will incur lower aggregate processing
charges than those who pay premiums more frequently. During 1997, 1996 and
1995, Prudential received a total of approximately $22,000, $38,000 and
$29,000, respectively, in processing charges.
3. On each Monthly date, the Contract fund is reduced by $6 per Contract plus
$0.01 per $1,000 for face amounts exceeding $100,000, to compensate
Prudential for administrative expenses incurred, among other things, in
processing claims, paying cash surrender values and death benefits, making
Contract changes, keeping records, and communicating with Contract owners.
Prudential currently intends to cap this charge at $15. This monthly
administrative charge will not be made if the Contract has been continued
in force pursuant to an option on lapse. During 1997, 1996 and 1995,
Prudential received a total of approximately $76,000, $74,000 and $72,000,
respectively, in monthly administrative charges. Prudential reserves the
right to increase this charge to no greater than $3 plus $0.03 per $1,000
of face amount of insurance, but it will not be increased to any amount
greater than actually needed to recover the expenses described above.
4. There is a charge to compensate Prudential for the cost of selling the
Contract. This cost includes sales commissions, advertising, and the
printing of prospectuses and sales literature. This charge is called the
"sales load" and consists of two parts: (1) a charge deducted monthly from
the Contract fund, which Prudential currently intends to make only during
the first 5 Contract years; and (2) a charge assessed upon lapse or
surrender if that occurs during the first 10 Contract years.
Subject to the limitations discussed below, on each Monthly date,
Prudential reduces the Contract fund by an amount equal to 0.5% of the
Contract's "primary annual premium," which is the gross annual scheduled
premium that would be payable if the Contract owner had elected to pay
premiums annually, reduced by the sum of the charges for taxes
attributable to premiums and $38 as well as by any extra premiums for
riders or because the insured is classified as high-risk. This deduction
is made without regard to whether the Contract owner is paying premiums
annually or more frequently. The deduction is lower for Contracts issued
on insureds over 60 years of age. Prudential does not intend to make this
monthly charge after the Contract has been in force for 5 years, but it
reserves the right to do so.
The second part of the sales load is made only if the Contract lapses or
is surrendered during the first 10 Contract years, or if a withdrawal is
made under a Form A Contract during that 10-year period. Moreover, this
charge will be reduced for Contracts that are in force for more than 5
years. For this reason this charge is sometimes described as a "contingent
deferred sales load" and its amount is determined as follows. Every
Contract has associated with it a Guideline Annual Premium ("GAP"). That
is an amount, generally significantly larger than the initial annual
scheduled premium for the Contract, which is determined actuarially
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in accordance with a definition set forth in a regulation of the
Securities and Exchange Commission ("SEC"). The maximum aggregate sales
load that Prudential will charge (that is, the sum of the first part of
the charge, the monthly sales load deduction, and the second part, the
sales charge payable upon surrender or lapse) will not be more than 30% of
the premiums actually paid until those premiums total one guideline annual
premium, plus no more than 9% of the next premiums paid until total
premiums are equal to five guideline annual premiums. During 1997, 1996
and 1995, Prudential received a total of approximately $512,000, $560,000
and $564,000, respectively, in sales load charges.
5. On each Monthly date, the Contract fund is reduced by a charge of not more
than $0.01 per $1,000 of face amount of insurance to compensate Prudential
for the risk it assumes 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 scheduled premiums are
paid on or before the due date or during the grace period. This charge
will not be made if the Contract has been continued in force pursuant to
an option on lapse. During 1997, 1996 and 1995, Prudential received a
total of approximately $67,000, $66,000 and $40,000, respectively, for
this risk charge.
6. Prudential deducts a mortality charge from the Contract fund on each
Monthly date. When an insured dies, the amount paid to the beneficiary is
larger than the Contract fund, significantly larger if the insured dies in
the early years of a Contract. The mortality charges are designed to
enable Prudential to pay this larger death benefit. The charge is
determined by multiplying the "net amount at risk" under a Contract (the
amount by which the Contract's death benefit, computed as if there were
neither riders nor Contract debt, exceeds the Contract fund) by a rate
based upon the insured's sex (except where unisex rates apply) and current
attained age, and the anticipated mortality for that class of persons. The
maximum rate that Prudential may charge is based upon the
non-smoker/smoker 1980 CSO Tables. However, Prudential has determined that
a lesser amount than that called for by these mortality tables will be
adequate to defray anticipated death benefits for insureds of particular
ages and is now making a lower mortality charge for such persons.
Prudential reserves the right to charge full mortality charges that are no
higher than those based on the 1980 CSO Tables described above. Persons
who are in a substandard risk classification will be assessed an
additional charge. The current lower mortality charges are not applicable
to Contracts in force pursuant to an option on lapse. See OPTIONS ON
LAPSE, page 23.
7. A charge is made to compensate Prudential for assuming mortality and
expense risks. This is done by deducting daily, from the assets of each of
the subaccounts and/or the Real Property Account (the "variable investment
options"), a percentage of those assets equivalent to an effective annual
rate of up to 0.6%. Prudential has reserved the right, however, to
increase this charge to 0.9%. The mortality risk assumed is that insureds
may live for a shorter period of time than 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 be
greater than Prudential estimated in fixing its administrative charges.
Should either of these developments occur, Prudential has guaranteed that
the death benefits and cash surrender values promised by the Contract will
not be reduced. During 1997, 1996 and 1995, Prudential received a total of
approximately $18,259,000, $14,468,000 and $11,516,000, respectively, in
mortality and expense risk charges. This charge is not assessed against
amounts allocated to the fixed-rate option.
8. There is an administrative charge to compensate Prudential for expenses
incurred in connection with the issuance of the Contract, other than sales
expenses. This charge is equal to $5 for each $1,000 of face amount of
insurance. This charge is made to cover the costs of processing
applications, conducting medical examinations, determining insurability
and the insured's risk class, and establishing records relating to the
Contract. However, this charge will not be made unless the Contract lapses
or is surrendered within the first 10 Contract years. In addition, the
charge will be reduced for Contracts that lapse or are surrendered before
the Contract's tenth anniversary but after the fifth anniversary,
declining daily at a constant rate so that the charge disappears on the
tenth anniversary. During 1997, 1996 and 1995, Prudential received a total
of approximately $44,000, $47,000 and $35,000, respectively, from
surrendered or lapsed Contracts. Prudential does not expect to make a
profit on this charge.
The charge made upon lapse or surrender during the first 10 Contract years
may, under certain circumstances, be less than the sum of the charge
described above and the second part of the sales load described in item 4.
The Contract sets forth the maximum surrender charges that will be made
during the first 10 Contract years and that maximum will control if it is
less than the sum of those two charges.
9. An administrative processing charge equal to the lesser of $15 or 2% of
the amount withdrawn will be made in connection with each withdrawal of
excess cash surrender value of a Contract. See WITHDRAWAL OF EXCESS CASH
SURRENDER VALUE, page 15. Prudential currently waives this charge if the
withdrawal is used to pay premiums on an automatic basis but reserves the
right to make this charge even in that situation.
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10. An administrative processing charge of $15 may be made in connection with
each decrease in face amount. See DECREASES IN FACE AMOUNT, page 17. This
charge and the charge in item 9 are intended to recover only the actual
cost of processing these transactions.
11. If the Contract includes riders, Prudential deducts any charges applicable
to those riders from the Contract fund on each Monthly date. In addition,
Prudential will deduct on each Monthly date any extra charge incurred
because of the rating class of the insured.
12. An investment advisory fee is deducted daily from each portfolio at a
rate, on an annualized basis, from 0.35% for the Stock Index Portfolio to
0.75% for the Global Portfolio. The expenses incurred in conducting the
investment operations of the portfolios (such as custodian fees and
preparation and distribution of annual reports) are paid out of the
portfolio's income. These expenses also vary from portfolio to portfolio.
The total expenses of each portfolio for the year 1997 expressed as a
percentage of the average assets during the year are shown below:
--------------------------------------------------------------------------
| | OTHER | TOTAL
| INVESTMENT | EXPENSES | EXPENSES
PORTFOLIO | ADVISORY | (AFTER EXPENSE | (AFTER EXPENSE
| FEE | REIMBURSEMENT)*| REIMBURSEMENT)*
---------------------------|------------|----------------|----------------
MONEY MARKET | 0.40% | 0.03% | 0.43%
DIVERSIFIED BOND | 0.40% | 0.03% | 0.43%
GOVERNMENT INCOME | 0.40% | 0.04% | 0.44%
ZERO COUPON BOND 2000 | 0.40% | 0.00%* | 0.40%*
ZERO COUPON BOND 2005 | 0.40% | 0.00%* | 0.40%*
CONSERVATIVE BALANCED | 0.55% | 0.01% | 0.56%
FLEXIBLE MANAGED | 0.60% | 0.02% | 0.62%
HIGH YIELD BOND | 0.55% | 0.02% | 0.57%
STOCK INDEX | 0.35% | 0.02% | 0.37%
EQUITY INCOME | 0.40% | 0.01% | 0.41%
EQUITY | 0.45% | 0.01% | 0.46%
PRUDENTIAL JENNISON | 0.60% | 0.04% | 0.64%
SMALL CAPITALIZATION STOCK | 0.40% | 0.10% | 0.50%
GLOBAL | 0.75% | 0.10% | 0.85%
NATURAL RESOURCES | 0.45% | 0.09% | 0.54%
-------------------------------------------------------------------------
* In addition to the investment management fee, each portfolio incurs
certain expenses, such as accounting and custodian fees. Prudential,
on a non-guaranteed basis, makes daily adjustments that will offset
the effect on Contract owners of some of these expenses incurred by
certain portfolios. Prudential currently makes such adjustments to
ensure that the portfolio expenses indirectly borne by a Contract
owner investing in: (1) the Zero Coupon Bond Portfolios will not
exceed the investment management fee; and: (2) the High Yield Bond,
Stock Index, Equity Income, and Natural Resources Portfolios will not
exceed the investment management fee plus 0.1% of the average daily
net assets of the portfolio. 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 0.66% for the Zero Coupon Bond Portfolio 2000 and 0.74% for the
Zero Coupon Bond Portfolio 2005 during 1997. No such adjustments were
necessary for the High Yield Bond, Stock Index, Equity Income and
Natural Resources Portfolios in 1997. Prudential intends to continue
making these adjustments in the future, although it retains the right
to stop doing so.
13. Although the Account is registered as a unit investment trust, it is not a
separate taxpayer for purposes of the Code. The earnings of the Account
are taxed as part of the operations of Prudential. No charge is currently
being made to the Account for company federal income taxes. Prudential
will review the question of a charge to the Account for company federal
income taxes periodically. Such a charge may be made in future years for
any Company federal income taxes that would be attributable to the
Account.
Under current law, Prudential may incur state and local taxes (in addition
to premium taxes) in several states. At present, these taxes are not
significant and they are not charged against the Account. If there is a
material change in the applicable state or local tax laws, the imposition
of any such taxes upon Prudential that are attributable to the Account may
result in a corresponding charge against the Account.
14. The investment management fee and other expenses charged against the Real
Property Account are described in the attached prospectus for that
investment option.
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<PAGE>
In several instances Prudential uses the terms "maximum charge" and "current
charge." The "maximum charge," in each instance, is the highest charge that
Prudential is entitled to make under the Contract. The "current charge" is the
lower amount that Prudential is now charging. However, if circumstances change,
Prudential reserves the right to increase each current charge, up to but to no
more than the maximum charge, without giving any advance notice.
REDUCTION OF CHARGES FOR CONCURRENT SALES TO SEVERAL INDIVIDUALS
Prudential may reduce the sales charges and/or other charges on individual
Contracts sold to members of a class of associated individuals, or to a trustee,
employer or other entity representing such a class, where it is expected that
such multiple sales will result in savings of sales or administrative expenses.
Prudential determines both the eligibility for such reduced charges, as well as
the amount of such reductions, by considering the following factors: (1) the
number of individuals; (2) the total amount of premium payments expected to be
received from these Contracts; (3) the nature of the association between these
individuals, and the expected persistency of the individual Contracts; (4) the
purpose for which the individual Contracts are purchased and whether that
purpose makes it likely that expenses will be reduced; and (5) any other
circumstances which Prudential believes to be relevant in determining whether
reduced sales or administrative expenses may be expected. Some of the reductions
in charges for these sales may be contractually guaranteed; other reductions may
be withdrawn or modified by Prudential on a uniform basis. Prudential's
reductions in charges for these sales will not be unfairly discriminatory to the
interests of any individual Contract owners.
HOW A CONTRACT'S CASH SURRENDER VALUE WILL VARY
The Contract's cash surrender value on any date will be the Contract fund,
defined under CHARGES AND EXPENSES on page 10, reduced by the deferred sales and
administrative charges, if any, and by any Contract debt. 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, the performance of the Real Property Account if that option has been
selected, interest credited on any amounts allocated to the fixed-rate option,
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 additional premium payments and the monthly deductions described
in the preceding section. Upon request, Prudential will tell a Contract owner
the cash surrender value of his or her Contract. It is possible for the cash
surrender value of a Contract to decline to zero because of unfavorable
investment performance, even if a Contract owner continues to pay scheduled
premiums when due.
The tables on pages T1 through T8 of this prospectus illustrate approximately
what the cash surrender values would be for representative Contracts with
typical premium schedules, assuming uniform hypothetical investment results in
the selected Series Fund portfolio[s]. The tables also show the maximum
scheduled premium for the period following the anniversary after the insured's
65th birthday, for each illustrated Contract under each of the assumed
investment returns.
HOW A FORM A CONTRACT'S DEATH BENEFIT WILL VARY
As noted above, there are two Forms of the Contract, Form A and Form B. The
death benefit under a Form B Contract varies with investment performance while
the death benefit under a Form A Contract does not, unless it must be increased
to comply with the Internal Revenue Code.
Under a Form A Contract, the guaranteed minimum death benefit is equal to the
face amount of insurance, reduced by any Contract debt. See CONTRACT LOANS, page
20. If the Contract is kept in force for several years and if investment
performance is reasonably favorable, the Contract fund value may grow to the
point where Prudential will increase the death benefit in order to ensure that
the Contract will satisfy the Internal Revenue Code's definition of life
insurance. Thus, the death benefit under a Form A Contract will always be the
greater of (1) the guaranteed minimum death benefit; and (2) the Contract fund
divided by the "net single premium" per $1 of death benefit at the insured's
attained age on that date. The latter provision ensures that the Contract will
always have a death benefit large enough to be treated as life insurance for tax
purposes under current law. The following table of illustrative net single
premiums for $1 of death benefit under Contracts issued on insureds in the
preferred rating class shows, for insureds of several ages, how much the death
benefit will be affected by a $1 change in the value of the Contract fund, at a
time when the death benefit becomes greater than the guaranteed minimum.
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- ------------------------------------ ------------------------------------
| | | INCREASE IN | | | | INCREASE IN |
| | | INSURANCE | | | | INSURANCE |
| MALE | NET | AMOUNT PER | | FEMALE | NET | AMOUNT PER |
| ATTAINED | SINGLE | $1 INCREASE | | ATTAINED | SINGLE | $1 INCREASE |
| AGE | PREMIUM | IN CONTRACT | | AGE | PREMIUM | IN CONTRACT |
| | | FUND | | | | FUND |
|----------|---------|-------------| |----------|---------|-------------|
| 25 | .17000 | $ 5.88 | | 25 | .15112 | $ 6.62 |
| 35 | .23700 | $ 4.22 | | 35 | .21127 | $ 4.73 |
| 55 | .45209 | $ 2.21 | | 55 | .40090 | $ 2.49 |
| 65 | .59468 | $ 1.68 | | 65 | .53639 | $ 1.86 |
- ------------------------------------ ------------------------------------
This means, for example, that if the Contract of a man who has reached the age
of 55 has a Contract fund of $100,000, the death benefit will be $221,000, even
though the original face amount was $200,000. Whenever the death benefit is
determined in this way, Prudential reserves the right to refuse to accept
further premium payments, although in practice the payment of the average of all
premiums paid over the last 5 years will generally be allowed.
HOW A FORM B CONTRACT'S DEATH BENEFIT WILL VARY
Under a Form B Contract, the death benefit, if premiums are paid when due or in
advance, will never be less than the initial face amount but will also vary,
immediately after it is issued, with the investment results of the selected
investment options. Generally speaking, a net investment return of more than 4%
will cause the death benefit to increase and a lower return will cause it to
decrease, but not lower than the guaranteed minimum. More specifically, each
Contract contains a table that sets forth a "tabular Contract fund value" as of
the end of each of the first 20 years of the Contract. Tabular Contract fund
values between Contract anniversaries are determined by interpolation. The
"tabular Contract fund value" for each Contract year is an amount that is
slightly less than the Contract fund value that would result as of the end of
such year if only scheduled premiums were paid, they were paid when due, the
selected investment options earned a net return at a uniform rate of 4% per
year, full mortality charges based upon the 1980 CSO Table were deducted,
maximum sales load and expense charges were deducted, and there were no Contract
debt. The death benefit under a Form B Contract with no withdrawals will be
equal to the face amount whenever the Contract fund is equal to or less than the
tabular Contract fund value.
If, because investment results are greater than a net return of 4%, or greater
than scheduled premiums are paid, or smaller than maximum charges are made
(reflecting Prudential's current practice), the Contract fund value is greater
than the tabular Contract fund value, then the death benefit will be the face
amount plus the amount of the difference. If, because investment results are
less favorable than a net return of 4%, the Contract fund value is less than the
tabular Contract fund value, the death benefit will not fall below the initial
face amount stated in the Contract; however, this unfavorable investment
experience must first be offset by favorable performance or by lower charges or
additional payments that bring the Contract fund up to the tabular Contract fund
level before subsequent favorable investment results or additional payments will
increase the death benefit. The death benefit does reflect a deduction for the
amount of any Contract debt. See CONTRACT LOANS, page 20.
As is the case under a Form A Contract, the Contract fund of a Form B Contract
could grow to the point where it is necessary to increase the death benefit by
an even greater amount in order to ensure that the Contract will satisfy the
Internal Revenue Code's definition of life insurance. Thus, the death benefit
under a Form B Contract will always be the greatest of (1) the face amount plus
the Contract fund minus the tabular Contract fund value; (2) the guaranteed
minimum death benefit; and (3) the Contract fund divided by the net single
premium per $1 of death benefit at the insured's attained age on that date.
If the net investment return in the selected investment option[s] is greater
than 4%, the Contract fund and cash surrender value for a Form B Contract can be
expected to be less than the Contract fund and cash surrender value for a Form A
Contract with identical premiums and investment experience. This is because the
monthly mortality charges under the Form B Contract will be higher to compensate
for the higher amount of insurance.
FLEXIBILITY AS TO PAYMENT OF PREMIUMS
In addition to being able to establish the premium schedule under the Contract,
the Contract owner enjoys considerable flexibility with respect to the payment
of premiums. The owner may, if desired, pay greater than scheduled premiums.
Conversely, payment of a scheduled premium need not be made if the Contract fund
is sufficiently large to enable the charges due under the Contract to be made
without causing the Contract to lapse. See LAPSE AND REINSTATEMENT, page 23. In
general, Prudential will accept any premium payment if the payment is at least
$25. Prudential does reserve the right, however, to limit unscheduled premiums
to a total of $10,000 in any Contract year, and to refuse to accept premiums
that would immediately result in more than a
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<PAGE>
dollar-for-dollar increase in the death benefit. The privilege of making large
or additional premium payments offers a way of investing amounts which
accumulate without current income taxation. There may, however, be a
disadvantage if substantial premium payments are made. The federal income tax
laws, discussed more fully under TAX TREATMENT OF CONTRACT BENEFITS on page 21,
may impose an income tax, as well as a penalty tax, upon distributions to
contract owners under life insurance contracts that are classified as Modified
Endowment Contracts. This Contract will not be so classified if scheduled
premiums are paid or, generally, even if additional premiums are paid that are
not substantially higher. It is possible, however, to make premium payments that
are high enough to cause the Contract to fall into that classification. A
Contract owner should consult with his or her Prudential representative before
making a large premium payment.
PARTICIPATION IN DIVISIBLE SURPLUS
The Contract is eligible to be credited with part of Prudential's divisible
surplus attributable to the Contracts ("dividends"), as determined annually by
Prudential's Board of Directors. However, Prudential does not expect to pay any
dividends to Contract owners of the Contracts while they remain in force because
it intends instead, if experience indicates that charges will be greater than
needed to cover expenses, or if mortality experience turns out to be more
favorable than expected, to distribute the portion of the divisible surplus
attributable to the Contract by reducing the charges. No dividends will be paid,
as such, but the Contract fund and cash surrender values will be increased. If a
Contract is kept in force for a number of years, there may be a termination
dividend added to the proceeds payable upon death or surrender.
SURRENDER OF A CONTRACT
A Contract may be surrendered for its cash surrender value while the insured is
living. In addition, a partial surrender may also be available. The Contract
will set forth, in addition to the initial face amount of insurance, a minimum
face amount to which the face amount may be reduced. That minimum face amount
will depend upon the premium schedule selected initially by the Contract owner,
but it will never be less than $200,000.
A partial surrender involves splitting the Contract into two Contracts. One
Contract is surrendered for its cash surrender value; the other is continued in
force on the same terms as in the original Contract, except that the premium
schedule, the cash surrender value and the guaranteed minimum death benefit will
all be proportionately reduced based upon the reduction in the face amount of
insurance. The Contract continued in force will be amended to show the new
face-amount, premium schedule, tabular values, monthly charges and, if
applicable, the new deferred sales and administrative charges.
To surrender a Contract in whole or in part, the owner must deliver or mail it,
together with a written request in a form that meets Prudential's needs, to a
Home Office. The cash surrender value of a surrendered or partially surrendered
Contract (which will take into account the deferred sales and administrative
charges, if any) will be determined as of the end of the valuation period in
which such a request is received in a Home Office. Surrender of all or part of a
Contract may have tax consequences. See TAX TREATMENT OF CONTRACT BENEFITS, page
21.
WITHDRAWAL OF EXCESS CASH SURRENDER VALUE
Under certain circumstances, a Contract owner may withdraw a portion of the
Contract's cash surrender value without surrendering the Contract in whole or in
part. The amount that a Contract owner may withdraw is limited by the
requirement that the Contract fund after withdrawal must not be less than the
tabular Contract fund value and, if there is any Contract debt outstanding, the
requested withdrawal must not reduce the cash surrender value to zero. The
amount withdrawn must be at least $2,000 under a Form A Contract and at least
$500 under a Form B Contract. An owner may make no more than four such
withdrawals in each Contract year, and there is an administrative processing fee
for each withdrawal equal to the lesser of $15 or 2% of the amount withdrawn. An
amount withdrawn may not be repaid except as a scheduled or unscheduled premium
subject to the applicable charges. Upon request, Prudential will tell a Contract
owner how much he or she may withdraw. Withdrawal of part of the cash surrender
value may have tax consequences. See TAX TREATMENT OF CONTRACT BENEFITS,
page 21.
Under a Form A Contract, the face amount of insurance will be reduced, but not
by more than the amount of the withdrawal. No partial withdrawal will be
permitted under a Form A Contract if it would result in a new face amount of
less than a minimum amount, which will be set forth in the Contract. It is
important to note, however, that if the face amount is decreased at any time
during the first 7 Contract years, there is danger that the Contract might be
classified as a Modified Endowment Contract. See TAX TREATMENT OF CONTRACT
BENEFITS, page 21. Before making any withdrawal which causes a decrease in face
amount, a Contract owner should consult with his or her Prudential
representative. Also, if a withdrawal under a Form A Contract is made before the
end of the tenth year, the Contract fund may be reduced not only by the amount
withdrawn but also by a proportionate amount of any surrender charges that would
be made if the Contract were surrendered. The proportion is based on the
percentage reduction in face amount. Form A Contract owners who make a partial
withdrawal will be sent
15
<PAGE>
replacement Contract pages showing the new face amount, new premium schedule,
maximum surrender charges, tabular values, and monthly deductions.
Under a Form B Contract, the cash surrender value and Contract fund value are
reduced by the amount of the withdrawal, and the death benefit is, accordingly,
also reduced. Neither the guaranteed face amount of insurance nor the amount of
scheduled premiums will be changed due to a withdrawal of excess cash surrender
value under a Form B Contract. No surrender charges will be assessed upon a
withdrawal under a Form B Contract.
Withdrawal of part 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 lapse even if scheduled premiums continue to be paid when due. This is
because, for purposes of determining whether a lapse has occurred, Prudential
treats withdrawals as a return of premium.
INCREASES IN FACE AMOUNT
Another attractive feature of this Contract is that an owner who wishes to
increase the amount of his or her insurance may do so by increasing the face
amount of the Contract (which is also the guaranteed minimum death benefit),
subject to state approval and underwriting requirements determined by
Prudential. An increase in face amount is in many ways similar to the purchase
of a second Contract, but it differs in the following respects: the minimum
permissible increase is $100,000, while the minimum for a new Contract is
$200,000; monthly fees are lower because only a single $6 per month
administrative charge is made rather than two; a combined premium payment
results in deduction of a single $2 per premium processing charge while separate
premium payments for separate Contracts would involve two charges; and the
Contract will lapse as a unit, unlike the case if two separate Contracts are
purchased. These differences aside, the decision to increase face amount is
comparable to the purchase of a second Contract in that it involves a commitment
to higher scheduled premiums in exchange for greater insurance benefits.
A Contract owner may elect to increase the face amount of his or her Contract no
earlier than the first anniversary of the Contract. The following conditions
must be met: (1) the owner must ask for the increase in writing on an
appropriate form; (2) the amount of the increase in face amount must be at least
$100,000; (3) the insured must supply evidence of insurability for the increase
satisfactory to Prudential; (4) if Prudential requests, the owner must send in
the Contract to be suitably endorsed; (5) the Contract must not be in default on
the date the increase takes effect; (6) the owner must pay an appropriate
premium at the time of the increase; (7) Prudential has the right to deny more
than one increase in a Contract year; and (8) if Prudential has, between the
Contract date and the date that any requested increase in face amount will take
effect, changed any of the bases on which benefits and charges are calculated
under newly issued Contracts, Prudential has the right to deny the increase.
Upon an increase in face amount, Prudential will, after consulting with the
Contract owner, establish a new premium schedule, and new tabular values.
Subsequent monthly deductions from the Contract fund will reflect the fact that
the face amount has been increased. The Contract owner has a choice, limited
only by applicable state law, as to whether these changes will be made as of the
prior or next Contract anniversary. There will be a payment required on the date
of increase; the amount of the payment will depend, in part, on which Contract
anniversary the Contract owner selects for the recomputation. Prudential will
tell the owner the amount of the required payment. It should also be noted that
an increase in face amount may impact the status of the Contract as a Modified
Endowment Contract. See TAX TREATMENT OF CONTRACT BENEFITS, page 21. Therefore,
before increasing the face amount, a Contract owner should consult with his or
her Prudential representative.
Provided the increase is approved, the new insurance will take effect once the
proper forms, any medical evidence necessary to underwrite the additional
insurance and any amount needed by the company have been received.
For the purpose of determining the sales load that will be charged after the
increase and upon any subsequent lapse or surrender, the Contract is treated as
if there were two separate Contracts, a "base Contract" representing the
Contract before the increase and an "incremental Contract" representing the
increase viewed as a separate Contract. At the time of the increase, a certain
portion of the Contract fund may be allocated to the incremental Contract as a
prepayment of premiums for purposes of the sales load limit. That portion is
equal to the Guideline Annual Premium ("GAP") of the incremental Contract
divided by the GAP of the entire Contract after the increase. Premium payments
made after the increase are also allocated between the base Contract and the
incremental Contract for purposes of the sales load limit. A portion of each
premium payment after the increase is allocated to the increase based on the GAP
for the incremental Contract divided by the GAP for the entire Contract. A
monthly deduction equal to 0.5% of the primary annual premium for each part of
the Contract (i.e., the base and incremental Contracts, respectively) will be
made until each part of the Contract has been in force for 5 years, although
Prudential reserves the right to continue to make this deduction thereafter.
Similarly, the amount, if any, of sales charges upon lapse or surrender and the
application of the overall limitation upon sales load, described under CHARGES
AND EXPENSES on page 10, will be determined as explained in that section as if
there were two Contracts rather than one. Moreover, the contingent deferred
administrative charge is also determined as if there
16
<PAGE>
were two separate Contracts. Thus, an owner considering an increase in face
amount should be aware that such an increase will entail charges, including
periodic sales load deductions and possible sales and administrative charges on
a subsequent surrender or lapse, comparable to the purchase of a new Contract.
Each Contract owner who elects to increase the face amount of his or her
Contract will be granted a "free-look" right which will apply only to the
increase in face amount, not the entire Contract. The right is comparable to the
right afforded to a purchaser of a new Contract. See SHORT-TERM CANCELLATION
RIGHT OR "FREE LOOK," page 6. The "free-look" right has to be exercised no later
than 45 days after execution of the application for the increase or, if later,
within 10 days after either receipt of the Contract as increased, or receipt of
the withdrawal right notice by the owner. Upon exercise of the "free-look"
right, the owner will receive a refund in the amount of the aggregate premiums
paid since the increase was requested and attributable to the increase, not the
base Contract, as determined pursuant to the proportional premium allocation
rule described above. There will be no adjustment for investment experience. All
charges deducted after the increase will be reduced to what they would have been
had no increase been effected. A Contract owner may transfer the total amount
attributable to the increase in face amount from the subaccounts or the Real
Property Account to the fixed-rate option.
Prudential will supply the Contract owner with pages which show the increased
face amount, the effective date of the increase, and the items described two
paragraphs above that have changed. The pages will also describe how the
increase in face amount affects the various provisions of the Contract,
including a statement that, for the amount of the increase in face amount, the
period stated in the Incontestability and Suicide provisions (see OTHER GENERAL
CONTRACT PROVISIONS, page 24) will run from the effective date of the increase.
DECREASES IN FACE AMOUNT
As explained earlier, a Contract owner may effect a partial surrender of a
Contract, (see SURRENDER OF A CONTRACT, page 15), or a partial withdrawal of
excess cash surrender value, (see WITHDRAWAL OF EXCESS CASH SURRENDER VALUE,
page 15). A Contract owner also has the additional option of decreasing the face
amount (which is also the guaranteed minimum death benefit) of his or her
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 $15 may be deducted from that value (unless
that fee is separately paid at the time the decrease in face amount is
requested). The Contract's Contract fund value, however, will be reduced by a
proportionate part of any sales and administrative charges that would be payable
if the Contract had been surrendered, that is, if this withdrawal is made before
the Contract's tenth anniversary or, if the face amount had previously been
increased, before the tenth anniversary after that increase. The premium
schedule for the Contract will also be revised and reduced. The Contracts of
owners who exercise the right to reduce the face amount will be amended to show
the new face amount, tabular values, scheduled premiums, monthly charges and, if
applicable, the remaining deferred sales and administrative charges.
No decreases in face amount will be permitted in the first Contract year. The
minimum permissible decrease is $10,000. The minimum amount to which the face
amount may be decreased is set forth in the Contract and it may be possible in
some cases, after discussion with a Home Office, to reduce the face amount even
further. If such a decrease is made, the new premium schedule and tabular values
will not be reduced in the same proportion as that the reduced face amount bears
to the initial face 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.
It is important to note, however, that if the face amount is decreased there is
a danger that the Contract might be classified as a Modified Endowment Contract.
See TAX TREATMENT OF CONTRACT BENEFITS, page 21. Before requesting any decrease
in face amount, a Contract owner should consult with his or her Prudential
representative.
WHEN PROCEEDS ARE PAID
Prudential will generally pay any death benefit, cash surrender value, loan
proceeds or withdrawal within 7 days after receipt at a Home Office of all the
documents required for such a payment. Other than the death benefit, which is
determined as of the date of death, the amount will be determined as of the end
of the valuation period in which the necessary documents are received at a Home
Office. However, 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, and with respect to a Contract in force as fixed reduced
paid-up insurance or as extended term insurance, Prudential expects to pay the
cash surrender value promptly upon request. However, Prudential has the right to
delay payment of such cash
17
<PAGE>
surrender value for up to 6 months (or a shorter period if required by
applicable law). 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).
LIVING NEEDS BENEFIT
Contract applicants may elect to add the LIVING NEEDS BENEFIT(sm) to their
Contracts at issue. The benefit may vary state-by-state, and a Prudential
representative should be consulted as to what extent the benefit is available in
a particular state and on any particular Contract.
Subject to state regulatory approval, the LIVING NEEDS BENEFIT allows the
Contract owner to elect to receive an accelerated payment of all or part of the
Contract's death benefit, adjusted to reflect current value, at a time when
certain special needs exist. The adjusted death benefit will always be less than
the death benefit, but will generally be greater than the Contract's cash
surrender value. One or both of the following options may be available. A
Prudential representative should be consulted as to whether additional options
may be available.
TERMINAL ILLNESS OPTION. This option is available if the insured is diagnosed as
terminally ill with a life expectancy of 6 months or less. When satisfactory
evidence is provided, Prudential will provide an accelerated payment of the
portion of the death benefit selected by the Contract owner as a LIVING NEEDS
BENEFIT. The Contract owner may (1) elect to receive the benefit in a single sum
or (2) receive equal monthly payments for 6 months. If the insured dies before
all of the payments have been made, the present value of the remaining payments
will be paid to the beneficiary designated in the LIVING NEEDS BENEFIT claim
form in a single sum.
NURSING HOME OPTION. This option is available after the insured has been
confined to an eligible nursing home for 6 months or more. When satisfactory
evidence is provided, including certification by a licensed physician, that the
insured is expected to remain in the nursing home until death, Prudential will
provide an accelerated payment of the portion of the death benefit selected by
the Contract owner as a LIVING NEEDS BENEFIT. The Contract owner may (1) elect
to receive the benefit in a single sum or (2) receive equal monthly payments for
a specified number of years (not more than 10 nor less than 2), depending upon
the age of the insured. If the insured dies before all of the payments have been
made, the present value of the remaining payments will be paid to the
beneficiary designated in the LIVING NEEDS BENEFIT claim form in a single sum.
All or part of the Contract's death benefit may be accelerated under the LIVING
NEEDS BENEFIT. If the benefit is only partially accelerated, a death benefit of
at least $25,000 must remain under the Contract. Prudential reserves the right
to determine the minimum amount that may be accelerated.
The LIVING NEEDS BENEFIT is available only to the extent regulatory approval has
been obtained. If desired by a Contract owner, the benefit must be requested on
the Contract's application. There is no charge for adding the benefit to the
Contract. However, an administrative charge (not to exceed $150) will be made at
the time the LIVING NEEDS BENEFIT is paid.
No benefit will be payable if the Contract owner is required to elect it in
order to meet the claims of creditors or to obtain a government benefit.
Prudential can furnish details about the amount of LIVING NEEDS BENEFIT that is
available to an eligible Contract owner under a particular Contract, and the
adjusted premium payments that would be in effect if less than the entire death
benefit is accelerated.
The Contract owner should consider whether adding this settlement option is
appropriate in his or her given situation. Adding the LIVING NEEDS BENEFIT to
the Contract has no adverse consequences; however, electing to use it could.
With the exception of certain business-related policies, the Health Insurance
Portability and Accountability Act of 1996 excludes from income the LIVING NEEDS
BENEFIT if the insured is terminally ill or chronically ill as defined by the
tax law (although the exclusion in the latter case may be limited). Contract
owners should consult a qualified tax advisor before electing to receive this
benefit. Receipt of a LIVING NEEDS BENEFIT payment may also affect a Contract
owner's eligibility for certain government benefits or entitlements.
ILLUSTRATIONS OF CASH SURRENDER VALUES, DEATH BENEFITS, AND
ACCUMULATED PREMIUMS
The following tables have been prepared to help show how values under the
Contract change with investment performance of the Account. It is assumed that
no portion of the Contract fund is allocated to the fixed-rate option or the
Real Property Account. The tables illustrate how cash surrender values
(reflecting the deduction of deferred sales load and administrative charges, if
any) and death benefits of Contracts issued on an insured of a given age would
vary over time if the gross investment return on the assets held in the Series
Fund portfolios were at uniform, after tax, annual rates of 0%, 6%, and 12% and
if exactly the premiums under differing premium schedules were paid. The death
benefits and cash surrender values would be different from those shown if the
returns averaged 0%, 6%, and 12% but fluctuated over and under those averages
throughout the years. The
18
<PAGE>
tables also provide information about premiums payable on and after the
anniversary following the insured's 65th birthday.
The death benefits and cash surrender values shown in the first four tables on
pages T1 through T4 are approximately those likely to be provided under the
Contract for the uniform hypothetical rates of return shown in these tables upon
the assumption that Prudential continues to make the insurance and
administrative charges that it is currently making. They also assume that
termination dividends will be paid and that the Contract fund will reflect a
reduction of charges Prudential currently applies to existing contracts and
expects to apply to this Contract. See PARTICIPATION IN DIVISIBLE SURPLUS, page
15. However, there is no guarantee as to the amount, if any, of termination
dividends that will be paid under a Contract. The death benefits and cash
surrender values shown in the next four tables on pages T5 through T8 are
calculated upon the assumption that the maximum mortality charges specified by
the 1980 CSO Table and maximum expense charges will be made throughout the life
of the Contract, and that no termination dividends are paid and no reduction of
charges will be made.
The amounts shown for the death benefit and cash surrender value as of each
Contract year reflect the fact that the net investment return of the assets held
in the subaccounts is lower than the gross, after-tax return of the Series
Fund's portfolios. Rather than including a separate table for each portfolio, it
is assumed that the investment management fee and other estimated Series Fund
expenses total 0.51%. The 0.51% figure is based on an average of the current
investment management fees of the fifteen available portfolios and an analysis
of historical operating expenses other than investment management fees, taking
into account applicable expense offsets described earlier in this prospectus.
Actual fees and expenses of the portfolios associated with a Contract may be
more or less than 0.51%, will vary from year to year, and, for any particular
Contract owner, will depend on how the Contract fund is allocated. In addition,
the tables reflect the daily charge to the Account for assuming mortality and
expense risks, which, is equivalent to an effective annual charge of 0.6% and on
a maximum basis is 0.9%. The tables show in the headings both the gross and the
corresponding net return. It is assumed that no charges for federal or state
income taxes are made against the Account (other than "taxes attributable to
premiums"). The tables assume that the insured is in the preferred rating class,
and the charge for federal, state and local taxes attributable to premiums is
3.25%.
Upon request, Prudential will furnish a comparable hypothetical illustration
based on the proposed insured's age and sex (except where unisex rates apply),
and on the requested face amount and selected premium schedules. The
illustrations can be prepared upon the assumptions that the insured is in the
preferred or standard rating class or in a different risk classification, and
can assume that annual, semi-annual, quarterly or monthly premiums are paid.
19
<PAGE>
<TABLE>
ILLUSTRATIONS
-------------
CUSTOM VAL LIFE INSURANCE CONTRACT
FORM A -- FIXED DEATH BENEFIT
MALE SELECT PREFERRED ISSUE AGE 35
$300,000 GUARANTEED DEATH BENEFIT
RATE SCHEDULE WITH HIGH INITIAL ANNUAL
PREMIUM OF $1,987.60 RISING TO
$3,983.46 AT AGE 64, MAXIMUM PREMIUM
AGE 65 AND LATER -- $15,664.08(1)
USING CURRENT CONTRACTUAL CHARGES
<CAPTION>
Death Benefit (2) Cash Surrender Value (2)
--------------------------------------- ---------------------------------------
Assuming Hypothetical Gross (and Net) Assuming Hypothetical Gross (and Net)
Premiums Annual Investment Return of Annual Investment Return of
End of Accumulated at --------------------------------------- ---------------------------------------
Policy Annual 4% Interest 0% Gross 6% Gross 12% Gross 0% Gross 6% Gross 12% Gross
Year Premium Per Year (1) (-1.11% Net) (4.89% Net) (10.89% Net) (-1.11% Net) (4.89% Net) (10.89% Net)
------ ------- -------------- ------------ ----------- ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 $ 1,988 $ 2,067 $300,000 $300,000 $ 300,000 $ 0 $ 0 $ 0
2 $ 1,997 $ 4,227 $300,000 $300,000 $ 300,000 $ 121 $ 390 $ 671
3 $ 2,010 $ 6,486 $300,000 $300,000 $ 300,000 $ 1,267 $ 1,793 $ 2,366
4 $ 2,025 $ 8,852 $300,000 $300,000 $ 300,000 $ 2,390 $ 3,261 $ 4,246
5 $ 2,039 $ 11,327 $300,000 $300,000 $ 300,000 $ 3,489 $ 4,792 $ 6,328
6 $ 2,058 $ 13,920 $300,000 $300,000 $ 300,000 $ 5,086 $ 6,917 $ 9,163
7 $ 2,078 $ 16,637 $300,000 $300,000 $ 300,000 $ 6,826 $ 9,285 $ 12,426
8 $ 2,098 $ 19,485 $300,000 $300,000 $ 300,000 $ 8,538 $ 11,729 $ 15,974
9 $ 2,121 $ 22,470 $300,000 $300,000 $ 300,000 $ 10,224 $ 14,254 $ 19,842
10 $ 2,146 $ 25,600 $300,000 $300,000 $ 300,000 $ 11,875 $ 16,858 $ 24,056
15 $ 2,311 $ 43,745 $300,000 $300,000 $ 300,000 $ 16,698 $ 28,269 $ 48,968
20 $ 2,607 $ 67,124 $303,230 $303,230 $ 303,230 $ 23,766 $ 46,060 $ 96,151
25 $ 3,107 $ 97,892 $306,458 $306,458 $ 335,653 $ 30,941 $ 69,179 $ 178,199
30 (Age 65) $ 3,983 $139,242 $306,450 $306,450 $ 524,878 $ 33,778 $ 95,866 $ 314,749
35 $15,664 $257,645 $307,180 $307,180 $ 787,498 $ 89,418 $164,027 $ 528,152
40 $15,664 $401,699 $307,870 $341,659 $1,182,784 $139,281 $253,843 $ 873,676
45 $15,664 $576,964 $308,476 $454,989 $1,787,846 $183,014 $364,556 $1,427,470
- ---------------
(1) For a hypothetical gross investment return of 0%, the premium after age 65 will be $15,664.08. For a gross return of
6%, the premium after age 65 will be $9,836.58. For a gross return of 12%, the premium after age 65 will be
$1,987.60. The premiums accumulated in column 3 are those payable if the gross investment return is 0%. For an
explanation of why the scheduled premium may significantly increase after age 65, see Premiums.
(2) Assumes no Contract loan has been made.
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%, 6%, 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 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.
</TABLE>
T1
<PAGE>
<TABLE>
CUSTOM VAL LIFE INSURANCE CONTRACT
FORM B -- VARIABLE DEATH BENEFIT
MALE SELECT PREFERRED ISSUE AGE 35
$300,000 GUARANTEED DEATH BENEFIT
RATE SCHEDULE WITH HIGH INITIAL ANNUAL
PREMIUM OF $1,987.60 RISING TO
$3,983.46 AT AGE 64, MAXIMUM PREMIUM
AGE 65 AND LATER -- $15,664.08(1)
USING CURRENT CONTRACTUAL CHARGES
<CAPTION>
Death Benefit (2) Cash Surrender Value (2)
--------------------------------------- ---------------------------------------
Assuming Hypothetical Gross (and Net) Assuming Hypothetical Gross (and Net)
Premiums Annual Investment Return of Annual Investment Return of
End of Accumulated at --------------------------------------- ---------------------------------------
Policy Annual 4% Interest 0% Gross 6% Gross 12% Gross 0% Gross 6% Gross 12% Gross
Year Premium Per Year (1) (-1.11% Net) (4.89% Net) (10.89% Net) (-1.11% Net) (4.89% Net) (10.89% Net)
------ ------- -------------- ------------ ----------- ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 $ 1,988 $ 2,067 $300,087 $300,181 $ 300,276 $ 0 $ 0 $ 0
2 $ 1,997 $ 4,227 $300,122 $300,391 $ 300,671 $ 19 $ 288 $ 568
3 $ 2,010 $ 6,486 $300,106 $300,632 $ 301,203 $ 1,063 $ 1,588 $ 2,159
4 $ 2,025 $ 8,852 $300,045 $300,912 $ 301,894 $ 2,184 $ 3,052 $ 4,033
5 $ 2,039 $ 11,327 $300,000 $301,233 $ 302,762 $ 3,309 $ 4,607 $ 6,136
6 $ 2,058 $ 13,920 $300,000 $301,677 $ 303,911 $ 5,075 $ 6,896 $ 9,130
7 $ 2,078 $ 16,637 $300,000 $302,173 $ 305,293 $ 6,814 $ 9,257 $ 12,377
8 $ 2,098 $ 19,485 $300,000 $302,728 $ 306,939 $ 8,524 $ 11,692 $ 15,903
9 $ 2,121 $ 22,470 $300,000 $303,343 $ 308,879 $ 10,208 $ 14,206 $ 19,742
10 $ 2,146 $ 25,600 $300,000 $304,019 $ 311,141 $ 11,859 $ 16,795 $ 23,917
15 $ 2,311 $ 43,745 $300,000 $308,380 $ 328,645 $ 16,681 $ 28,058 $ 48,323
20 $ 2,607 $ 67,124 $303,230 $319,537 $ 367,969 $ 23,878 $ 45,665 $ 94,097
25 $ 3,107 $ 97,892 $306,458 $337,608 $ 441,143 $ 31,210 $ 68,148 $ 171,683
30 (Age 65) $ 3,983 $139,242 $306,450 $362,506 $ 570,038 $ 34,237 $ 92,506 $ 300,038
35 $15,664 $257,645 $310,925 $391,517 $ 751,916 $ 89,528 $170,120 $ 504,396
40 $15,664 $401,699 $313,670 $441,120 $1,137,229 $138,415 $265,865 $ 840,106
45 $15,664 $576,964 $314,768 $519,060 $1,730,521 $179,854 $384,146 $1,381,755
- ---------------
(1) For a hypothetical gross investment return of 0%, the premium after age 65 will be $15,664.08. For a gross return of
6%, the premium after age 65 will be $12,679.27. For a gross return of 12%, the premium after age 65 will be
$1,987.60. The premiums accumulated in column 3 are those payable if the gross investment return is 0%. For an
explanation of why the scheduled premium may significantly increase after age 65, see Premiums.
(2) Assumes no Contract loan has been made.
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%, 6%, 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 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.
</TABLE>
T2
<PAGE>
<TABLE>
CUSTOM VAL LIFE INSURANCE CONTRACT
FORM A -- FIXED DEATH BENEFIT
MALE SELECT PREFERRED ISSUE AGE 35
$300,000 GUARANTEED DEATH BENEFIT
RATE SCHEDULE WITH LOW INITIAL ANNUAL
PREMIUM OF $1,371.58 RISING TO
$5,363.31 AT AGE 64, MAXIMUM PREMIUM
AGE 65 AND LATER -- $17,226.87(1)
USING CURRENT CONTRACTUAL CHARGES
<CAPTION>
Death Benefit (2) Cash Surrender Value (2)
--------------------------------------- ---------------------------------------
Assuming Hypothetical Gross (and Net) Assuming Hypothetical Gross (and Net)
Premiums Annual Investment Return of Annual Investment Return of
End of Accumulated at --------------------------------------- ---------------------------------------
Policy Annual 4% Interest 0% Gross 6% Gross 12% Gross 0% Gross 6% Gross 12% Gross
Year Premium Per Year (1) (-1.11% Net) (4.89% Net) (10.89% Net) (-1.11% Net) (4.89% Net) (10.89% Net)
------ ------- -------------- ------------ ----------- ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 $ 1,372 $ 1,426 $300,000 $300,000 $ 300,000 $ 0 $ 0 $ 0
2 $ 1,390 $ 2,929 $300,000 $300,000 $ 300,000 $ 0 $ 0 $ 0
3 $ 1,417 $ 4,520 $300,000 $300,000 $ 300,000 $ 0 $ 70 $ 421
4 $ 1,446 $ 6,205 $300,000 $300,000 $ 300,000 $ 399 $ 927 $ 1,528
5 $ 1,475 $ 7,987 $300,000 $300,000 $ 300,000 $ 1,043 $ 1,831 $ 2,763
6 $ 1,512 $ 9,879 $300,000 $300,000 $ 300,000 $ 2,044 $ 3,149 $ 4,509
7 $ 1,551 $ 11,888 $300,000 $300,000 $ 300,000 $ 3,307 $ 4,790 $ 6,689
8 $ 1,593 $ 14,020 $300,000 $300,000 $ 300,000 $ 4,565 $ 6,489 $ 9,054
9 $ 1,638 $ 16,284 $300,000 $300,000 $ 300,000 $ 5,823 $ 8,255 $ 11,631
10 $ 1,688 $ 18,691 $300,000 $300,000 $ 300,000 $ 7,072 $ 10,083 $ 14,436
15 $ 2,019 $ 33,270 $300,000 $300,000 $ 300,000 $ 10,361 $ 17,447 $ 30,072
20 $ 2,610 $ 53,615 $303,115 $303,115 $ 303,115 $ 16,686 $ 30,629 $ 61,565
25 $ 3,610 $ 83,017 $306,229 $306,229 $ 306,229 $ 25,092 $ 49,857 $118,435
30 (Age 65) $ 5,363 $126,619 $306,225 $306,225 $ 365,941 $ 32,661 $ 75,119 $220,141
35 $16,105 $244,772 $306,995 $306,995 $ 548,235 $ 90,549 $147,451 $368,348
40 $16,105 $388,523 $307,724 $327,260 $ 822,548 $142,936 $243,193 $608,176
45 $16,105 $563,418 $308,363 $453,259 $1,242,285 $189,934 $363,154 $992,378
- ---------------
(1) For a hypothetical gross investment return of 0%, the premium after age 65 will be $16,105.20. For a gross return of
6%, the premium after age 65 will be $11,940.92. For a gross return of 12%, the premium after age 65 will be
$1,371.58. The premiums accumulated in column 3 are those payable if the gross investment return is 0%. For an
explanation of why the scheduled premium may significantly increase after age 65, see Premiums.
(2) Assumes no Contract loan has been made.
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%, 6%, 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 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.
</TABLE>
T3
<PAGE>
<TABLE>
CUSTOM VAL LIFE INSURANCE CONTRACT
FORM B -- VARIABLE DEATH BENEFIT
MALE SELECT PREFERRED ISSUE AGE 35
$300,000 GUARANTEED DEATH BENEFIT
RATE SCHEDULE WITH LOW INITIAL ANNUAL
PREMIUM OF $1,371.58 RISING TO
$5,363.31 AT AGE 64, MAXIMUM PREMIUM
AGE 65 AND LATER -- $17,226.87(1)
USING CURRENT CONTRACTUAL CHARGES
<CAPTION>
Death Benefit (2) Cash Surrender Value (2)
--------------------------------------- ---------------------------------------
Assuming Hypothetical Gross (and Net) Assuming Hypothetical Gross (and Net)
Premiums Annual Investment Return of Annual Investment Return of
End of Accumulated at --------------------------------------- ---------------------------------------
Policy Annual 4% Interest 0% Gross 6% Gross 12% Gross 0% Gross 6% Gross 12% Gross
Year Premium Per Year (1) (-1.11% Net) (4.89% Net) (10.89% Net) (-1.11% Net) (4.89% Net) (10.89% Net)
------ ------- -------------- ------------ ----------- ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 $ 1,372 $ 1,426 $300,130 $300,190 $ 300,250 $ 0 $ 0 $ 0
2 $ 1,390 $ 2,929 $300,237 $300,404 $ 300,578 $ 0 $ 0 $ 0
3 $ 1,417 $ 4,520 $300,325 $300,647 $ 300,997 $ 0 $ 0 $ 275
4 $ 1,446 $ 6,205 $300,398 $300,925 $ 301,523 $ 157 $ 684 $ 1,282
5 $ 1,475 $ 7,987 $300,453 $301,238 $ 302,165 $ 799 $ 1,584 $ 2,511
6 $ 1,512 $ 9,879 $300,520 $301,619 $ 302,971 $ 2,033 $ 3,132 $ 4,484
7 $ 1,551 $ 11,888 $300,574 $302,046 $ 303,932 $ 3,294 $ 4,766 $ 6,652
8 $ 1,593 $ 14,020 $300,616 $302,525 $ 305,068 $ 4,549 $ 6,458 $ 9,001
9 $ 1,638 $ 16,284 $300,647 $303,057 $ 306,400 $ 5,804 $ 8,214 $ 11,557
10 $ 1,688 $ 18,691 $300,662 $303,641 $ 307,945 $ 7,050 $ 10,029 $ 14,333
15 $ 2,019 $ 33,270 $300,476 $307,423 $ 319,769 $ 10,315 $ 17,262 $ 29,608
20 $ 2,610 $ 53,615 $303,618 $317,154 $ 347,012 $ 16,682 $ 30,218 $ 60,076
25 $ 3,610 $ 83,017 $309,825 $333,512 $ 398,421 $ 25,095 $ 48,782 $ 113,691
30 (Age 65) $ 5,363 $126,619 $317,357 $356,784 $ 489,874 $ 32,357 $ 71,784 $ 204,874
35 $16,634 $247,751 $325,018 $386,064 $ 609,048 $ 91,321 $152,367 $ 375,351
40 $16,634 $395,127 $328,520 $436,671 $ 895,091 $143,529 $251,680 $ 661,633
45 $16,634 $574,432 $330,298 $516,663 $1,409,821 $187,889 $374,254 $1,125,983
- ---------------
(1) For a hypothetical gross investment return of 0%, the premium after age 65 will be $16,634.14. For a gross return of
6%, the premium after age 65 will be $14,534.73. For a gross return of 12%, the premium after age 65 will be
$7,448.10. The premiums accumulated in column 3 are those payable if the gross investment return is 0%. For an
explanation of why the scheduled premium may significantly increase after age 65, see Premiums.
(2) Assumes no Contract loan has been made.
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%, 6%, 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 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.
</TABLE>
T4
<PAGE>
<TABLE>
CUSTOM VAL LIFE INSURANCE CONTRACT
FORM A -- FIXED DEATH BENEFIT
MALE SELECT PREFERRED ISSUE AGE 35
$300,000 GUARANTEED DEATH BENEFIT
RATE SCHEDULE WITH HIGH INITIAL ANNUAL
PREMIUM OF $1,987.60 RISING TO
$3,983.46 AT AGE 64, MAXIMUM PREMIUM
AGE 65 AND LATER -- $15,664.08(1)
USING MAXIMUM CONTRACTUAL CHARGES
<CAPTION>
Death Benefit (2) Cash Surrender Value (2)
--------------------------------------- ---------------------------------------
Assuming Hypothetical Gross (and Net) Assuming Hypothetical Gross (and Net)
Premiums Annual Investment Return of Annual Investment Return of
End of Accumulated at --------------------------------------- ---------------------------------------
Policy Annual 4% Interest 0% Gross 6% Gross 12% Gross 0% Gross 6% Gross 12% Gross
Year Premium Per Year (1) (-1.41% Net) (4.59% Net) (10.59% Net) (-1.41% Net) (4.59% Net) (10.59% Net)
------ ------- -------------- ------------ ----------- ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 $ 1,988 $ 2,067 $300,000 $300,000 $300,000 $ 0 $ 0 $ 0
2 $ 1,997 $ 4,227 $300,000 $300,000 $300,000 $ 0 $ 31 $ 291
3 $ 2,010 $ 6,486 $300,000 $300,000 $300,000 $ 741 $ 1,219 $ 1,741
4 $ 2,025 $ 8,852 $300,000 $300,000 $300,000 $ 1,662 $ 2,442 $ 3,328
5 $ 2,039 $ 11,327 $300,000 $300,000 $300,000 $ 2,542 $ 3,697 $ 5,065
6 $ 2,058 $ 13,920 $300,000 $300,000 $300,000 $ 3,824 $ 5,430 $ 7,410
7 $ 2,078 $ 16,637 $300,000 $300,000 $300,000 $ 5,231 $ 7,363 $ 10,105
8 $ 2,098 $ 19,485 $300,000 $300,000 $300,000 $ 6,589 $ 9,325 $ 12,993
9 $ 2,121 $ 22,470 $300,000 $300,000 $300,000 $ 7,901 $ 11,318 $ 16,099
10 $ 2,146 $ 25,600 $300,000 $300,000 $300,000 $ 9,160 $ 13,338 $ 19,442
15 $ 2,311 $ 43,745 $300,000 $300,000 $300,000 $11,789 $ 21,003 $ 37,849
20 $ 2,607 $ 67,124 $300,000 $300,000 $300,000 $12,306 $ 28,704 $ 66,926
25 $ 3,107 $ 97,892 $300,000 $300,000 $300,000 $ 9,246 $ 35,069 $113,879
30 (Age 65) $ 3,983 $139,242 $300,000 $300,000 $325,094 $ 38 $ 37,575 $193,327
35 $15,664 $257,645 $300,000 $300,000 $456,179 $31,789 $ 89,562 $304,563
40 $15,664 $401,699 $300,000 $300,000 $636,805 $42,180 $145,461 $469,268
45 $15,664 $576,964 $300,000 $300,000 $883,267 $12,246 $211,330 $704,379
- ---------------
(1) For a hypothetical gross investment return of 0%, the premium after age 65 will be $15,664.08. For a gross return of
6%, the premium after age 65 will be $14,921.17. For a gross return of 12%, the premium after age 65 will be
$1,987.60. The premiums accumulated in column 3 are those payable if the gross investment return is 0%. For an
explanation of why the scheduled premium may significantly increase after age 65, see Premiums.
(2) Assumes no Contract loan has been made.
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%, 6%, 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 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.
</TABLE>
T5
<PAGE>
<TABLE>
CUSTOM VAL LIFE INSURANCE CONTRACT
FORM B -- VARIABLE DEATH BENEFIT
MALE SELECT PREFERRED ISSUE AGE 35
$300,000 GUARANTEED DEATH BENEFIT
RATE SCHEDULE WITH HIGH INITIAL ANNUAL
PREMIUM OF $1,987.60 RISING TO
$3,983.46 AT AGE 64, MAXIMUM PREMIUM
AGE 65 AND LATER -- $15,664.08(1)
USING MAXIMUM CONTRACTUAL CHARGES
<CAPTION>
Death Benefit (2) Cash Surrender Value (2)
--------------------------------------- ---------------------------------------
Assuming Hypothetical Gross (and Net) Assuming Hypothetical Gross (and Net)
Premiums Annual Investment Return of Annual Investment Return of
End of Accumulated at --------------------------------------- ---------------------------------------
Policy Annual 4% Interest 0% Gross 6% Gross 12% Gross 0% Gross 6% Gross 12% Gross
Year Premium Per Year (1) (-1.41% Net) (4.59% Net) (10.59% Net) (-1.41% Net) (4.59% Net) (10.59% Net)
------ ------- -------------- ------------ ----------- ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 $ 1,988 $ 2,067 $300,000 $300,012 $300,102 $ 0 $ 0 $ 0
2 $ 1,997 $ 4,227 $300,000 $300,032 $300,291 $ 0 $ 0 $ 188
3 $ 2,010 $ 6,486 $300,000 $300,058 $300,577 $ 538 $ 1,014 $ 1,534
4 $ 2,025 $ 8,852 $300,000 $300,095 $300,977 $ 1,457 $ 2,234 $ 3,116
5 $ 2,039 $ 11,327 $300,000 $300,140 $301,500 $ 2,364 $ 3,514 $ 4,874
6 $ 2,058 $ 13,920 $300,000 $300,195 $302,162 $ 3,816 $ 5,414 $ 7,381
7 $ 2,078 $ 16,637 $300,000 $300,259 $302,978 $ 5,223 $ 7,343 $ 10,062
8 $ 2,098 $ 19,485 $300,000 $300,336 $303,969 $ 6,581 $ 9,300 $ 12,933
9 $ 2,121 $ 22,470 $300,000 $300,424 $305,152 $ 7,893 $ 11,287 $ 16,015
10 $ 2,146 $ 25,600 $300,000 $300,524 $306,549 $ 9,153 $ 13,300 $ 19,325
15 $ 2,311 $ 43,745 $300,000 $301,230 $317,647 $11,783 $ 20,908 $ 37,325
20 $ 2,607 $ 67,124 $300,000 $302,346 $338,765 $12,299 $ 28,474 $ 64,893
25 $ 3,107 $ 97,892 $300,000 $303,960 $376,066 $ 9,240 $ 34,500 $106,606
30 (Age 65) $ 3,983 $139,242 $300,000 $306,139 $438,955 $ 31 $ 36,139 $168,955
35 $15,664 $257,645 $300,000 $308,899 $506,295 $31,782 $ 87,502 $284,898
40 $15,664 $401,699 $300,000 $314,585 $639,951 $42,171 $139,330 $464,696
45 $15,664 $576,964 $300,000 $324,254 $919,967 $12,234 $189,340 $733,646
- ---------------
(1) For a hypothetical gross investment return of 0%, the premium after age 65 will be $15,664.08. For a gross return of
6%, the premium after age 65 will be $15,337.20. For a gross return of 12%, the premium after age 65 will be
$8,265.13. The premiums accumulated in column 3 are those payable if the gross investment return is 0%. For an
explanation of why the scheduled premium may significantly increase after age 65, see Premiums.
(2) Assumes no Contract loan has been made.
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%, 6%, 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 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.
</TABLE>
T6
<PAGE>
<TABLE>
CUSTOM VAL LIFE INSURANCE CONTRACT
FORM A -- FIXED DEATH BENEFIT
MALE SELECT PREFERRED ISSUE AGE 35
$300,000 GUARANTEED DEATH BENEFIT
RATE SCHEDULE WITH LOW INITIAL ANNUAL
PREMIUM OF $1,371.58 RISING TO
$5,363.31 AT AGE 64, MAXIMUM PREMIUM
AGE 65 AND LATER -- $17,226.87(1)
USING MAXIMUM CONTRACTUAL CHARGES
<CAPTION>
Death Benefit (2) Cash Surrender Value (2)
--------------------------------------- ---------------------------------------
Assuming Hypothetical Gross (and Net) Assuming Hypothetical Gross (and Net)
Premiums Annual Investment Return of Annual Investment Return of
End of Accumulated at --------------------------------------- ---------------------------------------
Policy Annual 4% Interest 0% Gross 6% Gross 12% Gross 0% Gross 6% Gross 12% Gross
Year Premium Per Year (1) (-1.41% Net) (4.59% Net) (10.59% Net) (-1.41% Net) (4.59% Net) (10.59% Net)
------ ------- -------------- ------------ ----------- ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 $ 1,372 $ 1,426 $300,000 $300,000 $300,000 $ 0 $ 0 $ 0
2 $ 1,390 $ 2,929 $300,000 $300,000 $300,000 $ 0 $ 0 $ 0
3 $ 1,417 $ 4,520 $300,000 $300,000 $300,000 $ 0 $ 0 $ 0
4 $ 1,446 $ 6,205 $300,000 $300,000 $300,000 $ 0 $ 59 $ 553
5 $ 1,475 $ 7,987 $300,000 $300,000 $300,000 $ 42 $ 674 $ 1,428
6 $ 1,512 $ 9,879 $300,000 $300,000 $300,000 $ 768 $ 1,639 $ 2,721
7 $ 1,551 $ 11,888 $300,000 $300,000 $300,000 $ 1,737 $ 2,885 $ 4,372
8 $ 1,593 $ 14,020 $300,000 $300,000 $300,000 $ 2,680 $ 4,144 $ 6,124
9 $ 1,638 $ 16,284 $300,000 $300,000 $300,000 $ 3,600 $ 5,422 $ 7,992
10 $ 1,688 $ 18,691 $300,000 $300,000 $300,000 $ 4,494 $ 6,714 $ 9,983
15 $ 2,019 $ 33,270 $300,000 $300,000 $300,000 $ 5,746 $ 10,592 $ 19,530
20 $ 2,610 $ 53,615 $300,000 $300,000 $300,000 $ 5,919 $ 14,529 $ 34,746
25 $ 3,610 $ 83,017 $300,000 $300,000 $300,000 $ 4,281 $ 17,897 $ 59,608
30 (Age 65) $ 5,363 $126,619 $300,000 $300,000 $300,000 $ 0 $ 19,591 $102,438
35 $17,227 $251,090 $300,000 $300,000 $300,000 $38,807 $ 74,564 $194,082
40 $17,227 $402,528 $300,000 $300,000 $464,288 $58,395 $133,443 $342,138
45 $17,227 $586,776 $300,000 $300,000 $696,181 $43,083 $202,244 $555,183
- ---------------
(1) For a hypothetical gross investment return of 0%, the premium after age 65 will be $17,226.87. For a gross return of
6%, the premium after age 65 will be $16,776.60. For a gross return of 12%, the premium after age 65 will be
$8,650.93. The premiums accumulated in column 3 are those payable if the gross investment return is 0%. For an
explanation of why the scheduled premium may significantly increase after age 65, see Premiums.
(2) Assumes no Contract loan has been made.
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%, 6%, 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 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.
</TABLE>
T7
<PAGE>
<TABLE>
CUSTOM VAL LIFE INSURANCE CONTRACT
FORM B -- VARIABLE DEATH BENEFIT
MALE SELECT PREFERRED ISSUE AGE 35
$300,000 GUARANTEED DEATH BENEFIT
RATE SCHEDULE WITH LOW INITIAL ANNUAL
PREMIUM OF $1,371.58 RISING TO
$5,363.31 AT AGE 64, MAXIMUM PREMIUM
AGE 65 AND LATER -- $17,226.87(1)
USING MAXIMUM CONTRACTUAL CHARGES
<CAPTION>
Death Benefit (2) Cash Surrender Value (2)
--------------------------------------- ---------------------------------------
Assuming Hypothetical Gross (and Net) Assuming Hypothetical Gross (and Net)
Premiums Annual Investment Return of Annual Investment Return of
End of Accumulated at --------------------------------------- ---------------------------------------
Policy Annual 4% Interest 0% Gross 6% Gross 12% Gross 0% Gross 6% Gross 12% Gross
Year Premium Per Year (1) (-1.41% Net) (4.59% Net) (10.59% Net) (-1.41% Net) (4.59% Net) (10.59% Net)
------ ------- -------------- ------------ ----------- ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 $ 1,372 $ 1,426 $300,000 $300,008 $300,063 $ 0 $ 0 $ 0
2 $ 1,390 $ 2,929 $300,000 $300,020 $300,172 $ 0 $ 0 $ 0
3 $ 1,417 $ 4,520 $300,000 $300,036 $300,331 $ 0 $ 0 $ 0
4 $ 1,446 $ 6,205 $300,000 $300,058 $300,550 $ 0 $ 0 $ 309
5 $ 1,475 $ 7,987 $300,000 $300,084 $300,833 $ 0 $ 430 $ 1,179
6 $ 1,512 $ 9,879 $300,000 $300,114 $301,188 $ 762 $ 1,627 $ 2,701
7 $ 1,551 $ 11,888 $300,000 $300,151 $301,625 $ 1,731 $ 2,871 $ 4,345
8 $ 1,593 $ 14,020 $300,000 $300,194 $302,153 $ 2,673 $ 4,127 $ 6,086
9 $ 1,638 $ 16,284 $300,000 $300,243 $302,782 $ 3,594 $ 5,400 $ 7,939
10 $ 1,688 $ 18,691 $300,000 $300,299 $303,523 $ 4,488 $ 6,687 $ 9,911
15 $ 2,019 $ 33,270 $300,000 $300,685 $309,385 $ 5,740 $ 10,524 $ 19,224
20 $ 2,610 $ 53,615 $300,000 $301,299 $320,534 $ 5,913 $ 14,363 $ 33,598
25 $ 3,610 $ 83,017 $300,000 $302,212 $340,303 $ 4,275 $ 17,482 $ 55,573
30 (Age 65) $ 5,363 $126,619 $300,000 $303,522 $373,866 $ 0 $ 18,522 $ 88,866
35 $17,227 $251,090 $300,000 $306,093 $416,229 $38,798 $ 72,396 $182,532
40 $17,227 $402,528 $300,000 $311,699 $507,453 $58,384 $126,708 $322,462
45 $17,227 $586,776 $300,000 $321,463 $679,268 $43,069 $179,054 $536,859
- ---------------
(1) For a hypothetical gross investment return of 0%, the premium after age 65 will be $17,226.87. For a gross return of
6%, the premium after age 65 will be $17,039.30. For a gross return of 12%, the premium after age 65 will be
$13,293.69. The premiums accumulated in column 3 are those payable if the gross investment return is 0%. For an
explanation of why the scheduled premium may significantly increase after age 65, see Premiums.
(2) Assumes no Contract loan has been made.
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%, 6%, 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 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.
</TABLE>
T8
<PAGE>
CONTRACT LOANS
The owner may borrow from Prudential up to the "loan value" of the Contract,
using the Contract as the only security for the loan. The loan value is equal to
the sum of (1) 90% of an amount equal to the portion of the Contract fund value
attributable to the variable investment options and to any prior loan[s]
supported by the variable investment options, minus the portion of any charges
attributable to variable investment options that would be payable upon an
immediate surrender; plus (2) 100% of an amount equal to the portion of the
Contract fund value attributable to the fixed-rate option and to any prior
loan[s] supported by the fixed-rate option, minus the portion of any charges
attributable to the fixed-rate option that would be payable upon an immediate
surrender. The minimum amount that may be borrowed at any one time is $200
unless the proceeds are used to pay premiums on this Contract.
Under one of the loan provisions available under this Contract, interest charged
on a loan accrues daily at a fixed effective annual rate of 5.5%. Alternatively,
the Contract owner may elect a different loan provision available under the
Contract under which the interest rate will vary from time to time. The Contract
owner may switch from the fixed to variable interest loan provision, or
vice-versa, with Prudential's consent.
If an owner elects the variable loan interest rate provision, interest charged
on any loan will accrue daily at an annual rate Prudential determines at the
start of each Contract year (instead of at the fixed 5.5% rate). This interest
rate will not exceed the greater of (1) the "Published Monthly Average" for the
calendar month ending 2 months before the calendar month of the Contract
anniversary; or (2) 5%. And, it will never be greater than is permitted by law
in the state of issue of the Contract. The "Published Monthly Average" means
Moody's Corporate Bond Yield Average--Monthly Average Corporates, as published
by Moody's Investors Service, Inc. or any successor to that service, or if that
average is no longer published, a substantially similar average established by
the insurance regulator where the Contract is issued. The Published Monthly
Average in 1997 ranged from 7.03% to 7.99%.
Interest payments on any loan are due at the end of each Contract year. If
interest is not paid when due, it is added to the principal amount of the loan.
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 exceeds what
the cash surrender value would be if there were no Contract debt, Prudential
will notify the Contract owner of its intent to terminate the Contract in 61
days, within which time the owner 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 owner fails 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 - PRE-DEATH DISTRIBUTIONS, page
21 and LAPSE AND REINSTATEMENT, page 23.
When a loan is made, an amount equal to the loan proceeds will be transferred
out of the Account, the fixed-rate option and/or the Real Property Account, as
applicable. The reduction will normally be made in the same proportions as the
value in each subaccount, the fixed-rate option, and the Real Property Account
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 a rate of return of 4% if the loan is a
fixed-rate loan (5.5%) and with a rate of return of 1% lower than the interest
rate if it is a variable rate loan, rather than with the actual rate of return
of the subaccount[s], fixed-rate option or Real Property Account.
A loan will not affect the amount of the premiums due. 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 death benefit or the
cash surrender value. Loans from Modified Endowment Contracts may be treated for
tax purposes as distributions of income. See TAX TREATMENT OF CONTRACT BENEFITS,
page 21.
A loan will have an effect on a Contract's cash surrender value and may have an
effect on the death benefit, even if the loan is fully repaid, 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 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. A loan that is repaid will not
have any effect upon the guaranteed minimum death benefit.
Consider the Contract issued on a 35 year old male insured illustrated in the
table on page T3 with a 12% gross investment return. Assume a $5,000 fixed-rate
(5.5%) loan was made under this Contract at the end of Contract year 8 and
repaid at the end of Contract year 10 and loan interest was paid when due. Upon
repayment, the cash surrender value would be $13,720.90. This amount is lower
than the cash surrender value shown on that page for the end of Contract year 10
because the loan amount was credited with the 4% assumed rate of return rather
than the 10.89% net return for the designated subaccount[s] resulting from the
12% gross return in the underlying Series Fund.
20
<PAGE>
SALE OF THE CONTRACT AND SALES COMMISSIONS
Pruco Securities Corporation ("Prusec"), an indirect wholly-owned subsidiary of
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 751 Broad
Street, Newark, New Jersey 07102-3777. 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. Where the
insured is less than 60 years of age, the representative will generally receive
a commission of no more than 50% of the scheduled premiums for the first year,
no more than 12% of the scheduled premiums for the second, third, and fourth
years, no more than 3% of the scheduled premiums for the fifth through tenth
years, and no more than 2% of the scheduled premiums thereafter. For insureds
over 59 years of age, the commission will be lower. The representative may be
required to return all or part of the first year commission if the Contract is
not continued through the second year. Representatives with less than 3 years of
service may be paid on a different basis. Representatives who meet certain
productivity, profitability, and persistency standards with regard to the sale
of the Contract will be eligible for additional compensation.
Sales expenses in any year are not equal to the deduction for sales load in that
year. 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 Prudential's surplus, which may include amounts derived from the mortality
and expense risk charge and the guaranteed minimum death benefit risk charge
described in items 5 and 7 under CHARGES AND EXPENSES, page 10.
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 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.)
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 owner should not be taxed on any part of the Contract fund,
including additions attributable to interest, dividends or appreciation until
amounts are distributed under the Contract; 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 and proposed regulations relating to the
definition of life insurance were issued in 1992. 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.
Prudential intends to comply with final regulations 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
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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.
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.
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 substantially in
excess of scheduled premiums are paid or a decrease in the face amount of
insurance is made (or a rider removed). Moreover, the addition of a rider
or the increase in the face amount of insurance 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 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 and withdrawals, are includible
in income to the extent that the Contract fund prior to surrender charges
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 2 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, 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 or in certain other circumstances.
Contract owners who do not provide a social security number or other taxpayer
identification number will not be permitted to elect out of withholding. All
recipients of such amounts may be subject to penalties under the estimated tax
payment rules if withholding and estimated tax payments are not sufficient.
OTHER TAX CONSIDERATIONS. Transfer of the Contract to a new owner or assignment
of the Contract may have gift, estate and/or income tax consequences depending
on the circumstances. In the case of a transfer of the Contract for a valuable
consideration, the death benefit may be subject to federal 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. The Health Insurance Portability and Accountability Act of 1996
generally disallows tax deductions for interest on Contract debt on a
business-owned insurance policy effective (with certain transitional rules) for
interest paid or accrued after October 13, 1995. An exception permits the
deduction of interest on policy loans on Contracts for up to 20 key persons. The
interest deduction for Contract debt on such loans is limited to a prescribed
interest rate and a maximum aggregate loan amount of $50,000 per key insured
person. The Code also imposes an indirect tax upon additions to the Contract
fund or
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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
The Contract has an advantageous feature that is not typically found in similar
types of life insurance contracts. If scheduled premiums are paid on or before
each due date, or within the grace period after each due date, and there are no
withdrawals, a Contract will remain in force even if the investment results of
that Contract's variable investment option[s] have been so unfavorable that the
Contract fund has decreased to zero or less. Therefore, unlike most similar
types of life insurance contracts that lapse when the cash surrender value
decreases to zero even if premiums are paid, this Contract ensures that as long
as scheduled premiums are paid, insurance protection remains in effect.
In fact, even if a scheduled premium is not paid, the Contract will remain in
force as long as the Contract fund on any Monthly date is equal to or greater
than the tabular Contract fund value on the next Monthly date. This could occur
because of such factors as favorable investment experience, deduction of less
than the maximum permissible charges, or the previous payment of greater than
scheduled premiums.
However, if a scheduled premium is not paid, and the Contract fund is
insufficient to keep the Contract in force, the Contract will go into default.
Should this happen, Prudential will send the Contract owner a notice of default
setting forth the payment necessary to keep the Contract in force on a premium
paying basis. This payment must be received at a Home Office within the 61 day
grace period after the notice of default is mailed or the Contract will lapse. A
Contract that lapses with an outstanding Contract loan may have tax
consequences. See TAX TREATMENT OF CONTRACT BENEFITS on page 21.
A Contract that has lapsed may be reinstated within 5 years after the date of
default unless the Contract has been surrendered for its cash surrender value.
To reinstate a lapsed Contract, Prudential requires renewed evidence of
insurability, and submission of certain payments due under the Contract.
If a Contract does lapse, it may still provide some benefits. Those benefits are
described below under OPTIONS ON LAPSE.
OPTIONS ON LAPSE
If a Contract lapses, some life insurance coverage may continue in effect, or
the owner may choose to surrender the Contract for its cash surrender value.
1. FIXED EXTENDED TERM INSURANCE. With one exception, explained below, if the
owner does not communicate at all with Prudential, life insurance coverage will
continue for a length of time that depends on the cash surrender value on the
date of default, the amount of insurance, the rating classification, and the age
and sex (except where unisex rates apply) of the insured. The insurance amount
will be what it would have been on the date of default, taking into account any
Contract debt on that date. The amount will not change while the insurance stays
in force. This benefit is known as fixed extended term insurance. The owner will
be told in writing how long the insurance will be in effect. Fixed extended term
insurance has a cash surrender value, but no loan value.
Contracts issued on the lives of certain insureds in high risk rating classes
will include a statement that fixed extended term insurance will not be
provided. Under those Contracts, fixed reduced paid-up insurance (as described
in item 2 below) will generally be the automatic option provided on lapse.
However, if variable reduced paid-up insurance (as described in item 3 below) is
available and the amount of that insurance is at least as great as the amount of
fixed extended term insurance, then variable reduced paid-up insurance will be
the automatic option provided on lapse.
2. FIXED REDUCED PAID-UP INSURANCE. The owner may choose to have insurance
coverage provided for the lifetime of the insured. The insurance amount will
generally be lower than what fixed extended term insurance would provide. This
is known as fixed reduced paid-up insurance. The insurance amount will depend on
the cash surrender value on the date of default, the rating classification, and
the age and sex of the insured. The amount will not be less thereafter unless a
loan is taken against the fixed reduced paid-up insurance. The amount may
increase if any dividends are paid. Apart from the case described above in which
fixed reduced paid-up insurance is the automatic benefit provided on lapse, the
owner who wants fixed reduced paid-up insurance must ask for it in writing, in a
form that meets Prudential's needs, within three months of the date of default.
Prudential will, if asked, tell the owner what the amount of fixed reduced
paid-up insurance will be. Fixed reduced paid-up insurance has a cash surrender
value and a loan value. It is possible for this Contract to be become a Modified
Endowment Contract if this option is exercised. See TAX TREATMENT OF CONTRACT
BENEFITS, page 21.
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3. VARIABLE REDUCED PAID-UP INSURANCE. Variable reduced paid-up insurance
provides insurance coverage for the lifetime of the insured. The initial
insurance amount will depend upon the cash surrender value on the date of
default, the rating classification, and the age and sex (except where unisex
rates apply) of the insured. This initial insurance amount will be the same as
the amount of fixed reduced paid-up insurance that would have been provided had
that option been selected. This will be a new guaranteed minimum death benefit.
Aside from this guarantee, the cash surrender value and the amount of insurance
will vary with investment performance. Variable reduced paid-up insurance has a
loan privilege identical to that available on premium paying Contracts. See
CONTRACT LOANS, page 20. It is possible for this Contract to become a Modified
Endowment Contract if this option is exercised. See TAX TREATMENT OF CONTRACT
BENEFITS, page 21.
Except for the case described above in which variable reduced paid-up insurance
is the automatic option provided upon lapse, the owner who wants variable
reduced paid-up insurance must ask for it in writing, in a form that meets
Prudential's needs, within 3 months of the date of default. Variable reduced
paid-up insurance will be available only if the initial amount of insurance
would be at least $5,000 and the insured is not in one of the high risk rating
classes for which Prudential does not offer fixed extended term insurance.
4. PAYMENT OF CASH SURRENDER VALUE. The owner can receive the cash surrender
value by surrendering the Contract and making a proper written request. If
Prudential receives the request after the grace period expires, the cash
surrender value will be the net value of any fixed extended term insurance then
in force, or the net value of any reduced paid-up insurance then in force
(either fixed or variable), less any Contract debt. Surrender of the Contract
may have tax consequences. See TAX TREATMENT OF CONTRACT BENEFITS, page 21.
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 any states that have
adopted regulations prohibiting sex-distinct insurance rates, premiums and cost
of insurance charges will be based on a blended unisex rate whether the insured
is 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. Prudential
may offer the Contract with unisex mortality rates to such prospective
purchasers.
OTHER GENERAL CONTRACT PROVISIONS
BENEFICIARY. The beneficiary is designated and named in the application by the
Contract owner. Thereafter, the owner may change the beneficiary, provided it is
in accordance with the terms of the Contract. Should the insured die with no
surviving beneficiary, the insured's estate will become the beneficiary.
INCONTESTABILITY. After the Contract has been in force during the insured's
lifetime for 2 years from the Contract date or, with respect to any change in
the Contract that requires Prudential's approval and could increase its
liability, after the change has been in effect during the insured's lifetime for
2 years from the effective date of the change, Prudential will not contest its
liability under the Contract in accordance with its terms.
MISSTATEMENT OF AGE OR SEX. If the insured's stated age or sex (except where
unisex rates apply) or both are incorrect in the Contract, Prudential will
adjust the death benefits payable, as required by law, to reflect the correct
age and sex. Any death benefit will be based on what the most recent charge for
mortality would have provided at the correct age and sex.
SUICIDE EXCLUSION. Generally, if the insured, whether sane or insane, dies by
suicide within 2 years from the Contract date, Prudential will pay no more under
the Contract than the sum of the premiums paid.
If the insured, whether sane or insane, dies by suicide within 2 years from the
effective date of an increase in the face amount of insurance, Prudential will
pay, with respect to the amount of the increase, no more than the sum of the
scheduled premiums attributable to the increase.
ASSIGNMENT. This Contract may not be assigned if such assignment would violate
any federal, state or local law or regulation. Generally, the Contract may not
be assigned to an employee benefit plan or program without Prudential's consent.
Prudential assumes no responsibility for the validity or sufficiency of any
assignment, and it will not be obligated to comply with any assignment unless it
has received a copy at one of its Home Offices.
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.
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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 for the riders will be deducted
from the Contract fund on each Monthly date. One rider pays an additional amount
if the insured dies in an accident. Another waives certain premiums if the
insured is disabled within the meaning of the provision. Others pay an
additional amount if the insured dies within a stated number of years after
issue; similar benefits may be available if the insured's spouse or child should
die. The amounts of these benefits are fully guaranteed at issue; they do not
depend on the performance of the Account. 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 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
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, a Contract owner 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
Prudential's general assets. Sometimes this is referred to as Prudential's
general account, which consists of all assets owned by Prudential other than
those in the Account and in other separate accounts that have been or may be
established by Prudential. Subject to applicable law, 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, 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 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 Monthly date in the same
month in the following year. Thereafter, a new crediting rate will be declared
each year and will remain in effect for the calendar year. Prudential reserves
the right to change this practice. Prudential is not obligated to credit
interest at a higher rate than 4%, although in its sole discretion it may do so.
Different crediting rates may be declared for different portions of the Contract
fund allocated to the fixed-rate option. On request, a Contract owner will be
advised of the interest rates that currently apply to his or her Contract.
Transfers from the fixed-rate option are subject to strict limits. (See
TRANSFERS, page 9). 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 17).
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.
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, 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 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 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.
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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 Prudential instructions will be determined as of
the record date chosen by the Board of Directors of the Series Fund. Prudential
will furnish Contract owners with proper forms and proxies to enable them to
give these instructions. 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.
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, 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 Prudential reasonably disapproves such changes in accordance with
applicable federal regulations. If 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
Prudential.
SUBSTITUTION OF SERIES FUND SHARES
Although Prudential believes it to be unlikely, it is possible that in the
judgment of its management, one or more of the portfolios of the 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, 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 Contract year (except where the Contract is in force as fixed extended
term insurance or fixed reduced paid-up insurance), Contract owners will be sent
statements that provide certain information pertinent to their own Contract.
These statements detail values and transactions made and specific Contract data
that apply only to each particular Contract. On request, a Contract owner will
be sent a current statement in a form similar to that of the annual statement
described above, but Prudential may limit the number of such requests or impose
a reasonable charge if such requests are made too frequently.
Contract owners will also be sent annual and semi-annual reports of the Series
Fund showing the financial condition of the portfolios and the investments held
in each.
STATE REGULATION
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.
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, 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, 1997 and December 31, 1996 have been audited by Price Waterhouse
LLP, independent accountants, 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. Price Waterhouse LLP's
principal business address is 1177 Avenue of the Americas, New York, New York
10036.
The financial statements included in this prospectus for the year ended December
31, 1995 have been audited by Deloitte & Touche LLP, independent auditors, as
stated in their reports appearing herein, and are included in reliance
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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.
On March 12, 1996, Deloitte & Touche LLP was replaced as the independent
accountants of 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 reference to
the matter in their reports.
Actuarial matters included in this prospectus have been examined by Pamela A.
Schiz, FSA, MAAA, Actuarial Director of Prudential, whose opinion is filed as an
exhibit to the registration statement.
LITIGATION
On October 28, 1996, Prudential entered into a Stipulation of Settlement in a
multidistrict proceeding involving allegations of various claims relating to
Prudential's life insurance sales practices. (In re Prudential Insurance Company
of America Sales Practices Litigation, D.N.J., MDL No. 1061, Master Docket No.
95-4704 (AMW)). On March 7, 1997, the United States District Court for the
District of New Jersey approved the Stipulation of Settlement as fair,
reasonable and adequate, and later issued a Final Order and Judgement in the
consolidated class actions before the court, 962 F. Supp. 450 (March 17, 1997,
as amended April 14, 1997). The Court's Final Order and Judgement approving the
class Settlement has been appealed to the United States Court of Appeals for the
Third Circuit, which held a hearing on January 26, 1998. The Court has not yet
issued a ruling on the appeal.
Pursuant to the Settlement, Prudential agreed to provide and has begun to
implement an Alternative Dispute Resolution ("ADR") process for class members
who believe they were misled concerning the sale or performance of their life
insurance policies. Management now has information which allows for computation
of a reasonable estimate of losses associated with ADR claims. Based on this
information, management estimated the cost of remedying policyholder claims in
the ADR process before taxes to be approximately $2.05 billion. While management
believes these to be reasonable estimates based on information currently
available, the ultimate amount of the total cost of remedied policyholder claims
is dependent on complex and varying factors, including actual claims by eligible
policyholders, the relief options chosen and the dollar value of those options.
There are also additional elements of the ADR process which cannot be fully
evaluated at this time (e.g., claims which may be successfully appealed) which
could increase this estimate.
In addition, a number of actions have been filed against Prudential by
policyholders who have excluded themselves from the Settlement; Prudential
anticipates that additional suits may be filed by other policyholders.
Also, on July 9, 1996, a Multi-State Life Insurance Task Force comprised of
insurance regulators from 29 states and the District of Columbia, released a
report on Prudential's activities. As of February 24, 1997, Prudential had
entered into consent orders or agreements with all 50 states and the District of
Columbia to implement a remediation plan, whose terms closely parallel the
Settlement approved in the MDL proceeding, and agreed to a series of payments
allocated to all 50 states and the District of Columbia amounting to a total of
approximately $65 million. These agreements are now being implemented through
Prudential's implementation of the class Settlement.
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 regulatory inquiries. It is possible that the results of
operations or the cash flow of Prudential, 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 Prudential's
financial position, after consideration of applicable reserves.
YEAR 2000 COMPLIANCE
The services provided to the Contract owners by Prudential and Prusec depend on
the smooth functioning of their respective computer systems. The year 2000,
however, holds the potential for a significant disruption in the operation of
these systems. Many computer programs cannot distinguish the year 2000 from the
year 1900 because of the way in which dates are encoded. Left uncorrected, the
year "00" could cause systems to perform date comparisons and calculations
incorrectly that in turn could compromise the integrity of business records and
lead to serious interruption of business processes.
Prudential, Prusec's ultimate corporate parent, identified this issue as a
critical priority in 1995 and has established quality assurance procedures
including a certification process to monitor and evaluate enterprise-wide
conversion
27
<PAGE>
and upgrading of systems for "Year 2000" compliance. Prudential has also
initiated an analysis of potential exposure that could result from the failure
of major service providers such as suppliers, custodians and brokers, to achieve
Year 2000 compliance. Prudential expects to complete its adaptation, testing and
certification of software for Year 2000 compliance by December 31, 1998. During
1999, Prudential plans to conduct additional internal testing, to participate in
securities industry-wide test efforts and to complete major service provider
analysis and contingency planning.
The expenses of Prudential's Year 2000 compliance are allocated across its
various businesses, including those businesses not engaged in providing services
to Contract owners. Accordingly, while the expense is substantial in the
aggregate, it is not expected to have a material impact on Prudential's
abilities to meet its contractual commitments to Contract owners.
Prudential believes that it is well positioned to achieve the necessary
modifications and mitigate Year 2000 risks. However, if such efforts are not
completed on a timely basis, the Year 2000 issue could have a material adverse
impact on Prudential's operations, those of its subsidiary and affiliate
companies and/or the Account. Moreover, there can be no assurance that the
measures taken by Prudential's external service providers will be sufficient to
avoid any material adverse impact on Prudential's operations or those of its
subsidiary and affiliate companies.
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 Prudential's office. The address
and telephone number are set forth on the cover of this prospectus.
FINANCIAL STATEMENTS
The consolidated financial statements of 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 Prudential to meet its
obligations under the Contracts.
28
<PAGE>
DIRECTORS AND OFFICERS OF PRUDENTIAL
DIRECTORS OF PRUDENTIAL
FRANKLIN E. AGNEW - Director since 1994 (current term expires April, 2000).
Member, Committee on Dividends; Member, Finance Committee; Member Corporate
Governance Committee. Business consultant since 1987. Senior Vice President,
H.J. Heinz from 1971 to 1986. Mr. Agnew is also a director of Bausch & Lomb,
Inc. John Wiley & Sons, Inc. and Erie Plastics Corporation. Age 63. Address: 600
Grant Street, Suite 660, Pittsburgh, PA 15219.
FREDERICK K. BECKER - Director since 1994 (current term expires April, 1999).
Member, Auditing Committee, Member, Committee on Business Ethics; Member,
Corporate Governance Committee. President, Wilentz Goldman and Spitzer, P.A.
(law firm) since 1989, with firm since 1960. Age 62. Address: 90 Woodbridge
Center Drive, Woodbridge, NJ 07095.
JAMES G. CULLEN - Director since 1994 (current term expires April, 2001).
Member, Compensation Committee; Member, Committee on Business Ethics. President
& Chief Executive Officer, Telecom Group, Bell Atlantic Corporation, since 1997.
Vice Chairman, Bell Atlantic Corporation from 1995 to 1997. President, Bell
Atlantic Corporation from 1993 to 1995. Mr. Cullen is also a director of Bell
Atlantic Corporation and Johnson & Johnson. Age 55. Address: 1310 North Court
House Road, 11th Floor, Alexandria, VA 22201.
CAROLYNE K. DAVIS - Director since 1989 (current term expires April, 2001).
Member, Finance Committee; Member Committee on Business Ethics; Member,
Compensation Committee. Independent Health Care Advisor. National and
International Health Care Advisor, Ernst & Young, LLP from 1985 to 1997. Dr.
Davis is also a director of Beckman Instruments, Inc., Merck & Co., Inc.,
Science Applications International Corporation, Minimed Incorporated, and
Beverley Enterprises. Age 65. Address: 751 Broad Street, 23rd Floor, Newark, NJ
07102.
ROGER A. ENRICO - Director since 1994 (current term expires April, 2002).
Member, Committees on Nominations & Corporate Governance; Member, Compensation
Committee. Chairman and Chief Executive Officer, PepsiCo, Inc. since 1996.
Originally with PepsiCo, Inc. since 1971. Mr. Enrico is also a director of A.M.
Belo Corporation and Dayton Hudson Corporation. Age 53. Address: 700 Anderson
Hill Road, Purchase, NY 10577.
ALLAN D. GILMOUR - Director since 1995 (current term expires April, 1999).
Member, Finance Committee; Member, Committee on Dividends. Retired since 1995.
Vice Chairman, Ford Motor Company, from 1993 to 1995. Mr. Gilmour originally
joined Ford in 1960. Mr. Gilmour is also a director of Whirlpool Corporation,
USWest, Inc., The Dow Chemical Company and DTE Energy Company. Age 63. Address:
751 Broad Street, 23rd Floor, Newark, NJ 07102.
WILLIAM H. GRAY, III - Director since 1991 (current term expires April, 2000).
Member, Executive Committee; Member, Finance Committee; Chairman, Committees on
Nominations & Corporate Governance. President and Chief Executive Officer, The
College Fund/UNCF since 1991. Mr. Gray served in Congress from 1979 to 1991. Mr.
Gray is also a director of Chase Manhattan Corporation, The Chase Manhattan
Bank, Lotus Development Corporation, Municipal Bond Investors Assurance
Corporation, Rockwell International Corporation, Union-Pacific Corporation,
Warner-Lambert Company, Westinghouse Electric Corporation, and Electronic Data
Systems. Age 56. Address: 8260 Willow Oaks Corp. Drive, Fairfax, VA 22031-4511.
JON F. HANSON - Director since 1991 (current term expires April, 2003). Member,
Finance Committee; Member, Committee on Dividends. Chairman, Hampshire
Management Company since 1976. Mr. Hanson is also a director of United Water
Resources, Orange & Rockland Utilities, Inc., and Consolidated Delivery and
Logistics. Age 61. Address: 235 Moore Street, Suite 200, Hackensack, NJ 07601.
GLEN H. HINER, JR. - Director since 1997. (current term expires April, 2001).
Member, Compensation Committee. Chairman and Chief Executive Officer, Owens
Corning since 1991. Senior Vice President and Group Executive, Plastics Group,
General Electric Company from 1983 to 1991. Mr Hiner is also a director of Dana
Corporation. Age 64. Address: One Owens Corning Parkway, Toledo, OH 43659.
CONSTANCE J. HORNER - Director since 1994 (current term expires April, 2002).
Member, Auditing Committee; Member, Committees on Nominations & Corporate
Governance. Guest Scholar, The Brookings Institution since 1993. Ms. Horner is
also a director of Foster Wheeler Corporation, Ingersoll-Rand Corporation, and
Pfizer, Inc. Age 55. Address: 1775 Massachusetts Ave., N.W. Washington, D.C.
20036-2188.
GAYNOR N. KELLEY - Director since 1997 (current term expires April, 2001).
Member, Auditing Committee. Retired since 1996. Former Chairman and Chief
Executive Officer, The Perkins Elmer Corporation from 1990 to 1996. Mr. Kelley
is also a director of Hercules Incorporated, Arrow Electronics, Inc., and
Alliant Techsystems. Age 66. Address: 751 Broad Street, 23rd Floor, Newark, NJ
07102-3777.
BURTON G. MALKIEL - Director since 1978 (current term expires April, 2002).
Chairman, Finance Committee; Member, Executive Committee; Member, Committee on
Dividends. Professor of Economics, Princeton University,
29
<PAGE>
since 1988. Dr. Malkiel is also a director of Banco Bilbao Vizcaya, Baker
Fentress & Company, The Jeffrey Company. The Southern New England
Telecommunications Company, and Vanguard Group, Inc. Age 65. Address: Princeton
University, 110 Fisher Hall, Prospect Avenue, Princeton, NJ 08544-1021.
ARTHUR F. RYAN - Chairman of the Board, President and Chief Executive Officer of
Prudential since 1994. President and Chief Operating Officer, Chase Manhattan
Corp. from 1990 to 1994, with Chase since 1972. Age 55. Address: 751 Broad
Street, Newark, NJ 07102.
IDA F.S. SCHMERTZ - Director since 1997 (current term expires April, 2004).
Member, Finance Committee. Principal, Investment Strategies International since
1994. Age 63. Address: 751 Broad Street, 23rd Floor, Newark, NJ 07102.
CHARLES R. SITTER - Director since 1995 (current term expires April, 1999).
Member, Finance Committee; Member, Committee on Dividends. Retired since 1996.
President, Exxon Corporation from 1993 to 1996. Mr. Sitter began his career with
Exxon in 1957. Age 67. Address: 5959 Las Colinas Boulevard, Irving, TX
75039-2298.
DONALD L. STAHELI - Director since 1995 (current term expires April, 1999).
Member, Compensation Committee; Member, Auditing Committee. Retired since 1997.
Chairman and Chief Executive Officer, Continental Grain Company from 1994 to
1997. President and Chief Executive Officer, Continental Grain Company from 1988
to 1994. Mr. Staheli is also director of Bankers Trust Company and Bankers Trust
New York Corporation. Age 66. Address: 39 Locust Street, Suite 204, New Canaan,
CT 06840.
RICHARD M. THOMSON - Director since 1976 (current term expires April, 2000).
Chairman, Executive Committee; Chairman, Compensation Committee; Member,
Committee on Nominations & Corporate Governance. Chairman of the Board, The
Toronto-Dominion Bank since 1997. Chairman and Chief Executive Officer from 1978
to 1997. Mr. Thomson is also a director of CGC, Inc., INCO, Limited, S.C.
Johnson & Son, Inc., The Thomson Corporation, and Canadian Occidental Petroleum,
Ltd. Age 64. Address: P.O. Box 1, Toronto-Dominion Centre, Toronto, Ontario, M5K
1A2, Canada.
JAMES A. UNRUH - Director since 1996 (current term expires April, 2000). Member,
Compensation Committee. Retired since 1997. Chairman and Chief Executive
Officer, Unisys Corporation, from 1990 to 1997. Mr. Unruh is also a director of
Ameritech Corporation. Age 55. Address: Two Bala Plaza, Suite 300, Bala Cynwyd,
PA 19004.
P. ROY VAGELOS, M.D. - Director since 1989 (current term expires April, 2001).
Chairman, Auditing Committee; Member, Executive Committee; Member, Committees on
Nominations & Corporate Governance. Chairman, Regeneron Pharmaceuticals since
1995. Chairman and Chief Executive Officer, Merck & Co., Inc. from 1986 to 1994.
Dr. Vagelos is also a director of The Estee Lauder Companies, Inc. and PepsiCo.,
Inc. Age 68. Address: One Crossroads Drive, Building A, 3rd Floor, Bedminster,
NJ 07921.
STANLEY C. VAN NESS - Director since 1990 (current term expires April, 2002).
Chairman, Committee on Business Ethics; Member, Executive Committee; Member,
Auditing Committee. Counselor at Law, Picco Herbert Kennedy (law firm) from
1990. Mr. Van Ness is also a director of Jersey Central Power & Light Company.
Age 63. Address: 22 Chambers Street, Princeton, NJ 08542.
PAUL A. VOLCKER - Director since 1988 (current term expires April, 2000).
Chairman, Committee on Dividends; Member, Executive Committee; Member, Committee
on Nominations & Corporate Governance. Consultant since 1996. Chairman, James D.
Wolfensohn, Inc. from 1988 to 1996. Chief Executive Officer, James D.
Wolfensohn, Inc. from 1995 to 1996. Mr. Volcker is also a public member of the
Board of Governors of the American Stock Exchange, a member of the Board of
Overseers of TIAA-CREF, and a director of Nestle, S.A., UAL Corporation, and
Bankers Trust New York Corporation. Age 70, Address: 610 Fifth Avenue, Suite
420, New York, NY 10020.
JOSEPH H. WILLIAMS - Director since 1994 (current term expires April, 2002).
Member, Committee on Dividends; Member, Auditing Committee. Director, The
Williams Companies since 1971. Chairman & Chief Executive Officer, The Williams
Companies from 1979 to 1993. Mr. Williams is also a director of Flint
Industries, The Orvis Company, and MTC Investors, LLC. Age 64. Address: One
Williams Center, Tulsa, OK 74172.
PRINCIPAL OFFICERS OF PRUDENTIAL
ARTHUR F. RYAN - Chairman, President and Chief Executive Officer since 1994;
prior to 1994, President and Chief Operating Officer, Chase Manhattan
Corporation, New York, NY. Age 55.
E. MICHAEL CAULFIELD - Chief Executive Officer, Prudential Investments since
1996; Chief Executive Officer, Money Management Group from 1995 to 1996; prior
to 1995, President, Prudential Preferred Financial Services. Age 51.
MICHELE S. DARLING - Executive Vice President Human Resources since 1997; prior
to 1997, Executive Vice President, Canadian Imperial Bank of Commerce, Toronto,
Canada. Age 44.
30
<PAGE>
ROBERT C. GOLDEN - Executive Vice President Corporate Operations and Systems
since 1997; prior to 1997, Executive Vice President, Prudential Securities, New
York, NY. Age 51.
MARK B. GRIER - Executive Vice President, Financial Management since 1997; Chief
Financial Officer from 1995 to 1997; prior to 1995, Executive Vice President,
Chase Manhattan Corporation, New York, NY. Age 44.
RODGER A. LAWSON - Executive Vice President, Marketing and Planning since 1996;
President and CEO, Van Eck Global, New York, NY, from 1994 to 1996; prior to
1994, President and CEO, Global Private Banking, Bankers Trust Company, New
York, NY. Age 50.
JOHN V. SCICUTELLA - Chief Executive Officer, Individual Insurance Group since
1997; Executive Vice President Operations and Systems from 1995 to 1997; prior
to 1995, Executive Vice President, Chase Manhattan Corporation. Age 48.
JOHN R. STRANGFELD - Executive Vice President, Private Asset Management Group
(PAMG) since 1998; President, PAMG, from 1996 to 1998; prior to 1996, Senior
Managing Director. Age 44.
R. BROCK ARMSTRONG - Senior Vice President, Individual Insurance Development
since 1997; prior to 1997, Executive Vice President, London Life Insurance
Company, London, Canada. Age 50.
JAMES J. AVERY, JR. - Senior Vice President & Chief Actuary since 1997;
President Prudential Select from 1995 to 1997; prior to 1995, Chief Financial
Officer, Prudential Select. Age 46.
MARTIN A. BERKOWITZ - Senior Vice President and Comptroller since 1995; prior to
1995, Senior Vice President and CFO, Prudential Investment Corporation. Age 48.
WILLIAM M. BETHKE - Chief Investment Officer since 1997; prior to 1997, Senior
Vice President. Age 50.
RICHARD J. CARBONE - Senior Vice President and Chief Financial Officer since
1997. Controller, Salomon Brothers, New York, NY, from 1995 to 1997; prior to
1995, Controller, Bankers Trust, New York, NY. Age 50.
LEO J. CORBETT - Senior Vice President, Individual Insurance Marketing since
1997; prior to 1997, Managing Director, Lehman Brothers, New York, NY. Age 49.
MARK R. FETTING - President, Prudential Retirement Services since 1996; prior to
1996, President, Prudential Defined Contribution Services. Age 43.
WILLIAM D. FRIEL - Senior Vice President and Chief Information Officer since
1993. Age 59.
JONATHAN M. GREENE - President, Investment Management since 1996; prior to 1996,
Vice President, T. Rowe Price, Baltimore, MD. Age 54.
JEAN D. HAMILTON - President, Diversified Group since 1995; prior to 1995,
President, Prudential Capital Group. Age 51.
RONALD P. JOELSON - Senior Vice President, Guaranteed Products since 1997;
President, Prudential Investments Guaranteed Products from 1996 to 1998; prior
to 1996, Managing Director, Enterprise Planning Unit. Age 40.
IRA J. KLEINMAN - Executive Vice President, International Insurance Group, since
1997; prior to 1997, Senior Vice President. Age 51.
NEIL A. MCGUINNESS - Senior Vice President, Marketing, Prudential Investments,
since 1996; prior to 1996, Managing Director, Putnam Investments, Boston, MA.
Age 51.
PRISCILLA A. MYERS - Senior Vice President, Audit, Compliance and Investigation
since 1995. Vice President and Auditor from 1989 to 1995. Age 48.
RICHARD O. PAINTER - President, Prudential Insurance & Financial Services since
1995; prior to 1995, Senior Vice President, New York Life, New York, NY. Age 50.
I. EDWARD PRICE - Senior Vice President and Actuary since 1995; prior to 1995,
Chief Executive Officer, Prudential International Insurance. Age 55.
KIYOFUMI SAKAGUCHI - President, International Insurance Group since 1995; prior
to 1995, Chairman and CEO, The Prudential Life Insurance Co., Ltd., Japan. Age
55.
BRIAN M. STORMS - President, Mutual Funds and Annuities, Prudential Investments
since 1996; prior to 1996, Managing Director, Fidelity Investments, Boston. Age
43.
ROBERT J. SULLIVAN - Senior Vice President, Sales, Prudential Investments since
1997; prior to 1997, Managing Director, Fidelity Investments, Boston. Age 59.
SUSAN J. BLOUNT - Vice President and Secretary since 1995; prior to 1995,
Assistant General Counsel. Age 40.
31
<PAGE>
C. EDWARD CHAPLIN - Vice President and Treasurer since 1995; prior to 1995,
Managing Director and Assistant Treasurer. Age 41.
Prudential officers are elected annually.
32
<PAGE>
FINANCIAL STATEMENTS OF THE PRUDENTIAL
VARIABLE APPRECIABLE ACCOUNT
STATEMENTS OF NET ASSETS
December 31,1997
<TABLE>
<CAPTION>
SUBACCOUNTS
---------------------------------------------------------------------------
MONEY DIVERSIFIED FLEXIBLE CONSERVATIVE
MARKET BOND EQUITY MANAGED BALANCED
----------- -------------- ---------- ------------ -------------
<S> <C> <C> <C> <C> <C>
ASSETS
Investment in shares of The Prudential Series
Fund, Inc. Portfolios at net asset value
Note 3]........................................ $ 95,104,276 $ 128,910,758 $1,371,724,697 $1,347,792,874 $1,027,307,312
Receivable from The Prudential Insurance Company
of America [Note 2]............................ 0 210,649 1,983,972 1,392,602 1,041,151
------------- -------------- -------------- --------------- --------------
Net Assets................................... $ 95,104,276 $ 129,121,407 $1,373,708,669 $1,349,185,476 $1,028,348,463
============= ============== ============== =============== ==============
NET ASSETS, representing:
Equity of Contract owners....................... $ 93,269,424 $ 129,121,407 $1,373,708,669 $1,349,185,476 $1,028,348,463
Equity of The Prudential Insurance Company of
America........................................ 1,834,852 0 0 0 0
------------- -------------- -------------- --------------- --------------
$ 95,104,276 $ 129,121,407 $1,373,708,669 $1,349,185,476 $1,028,348,463
</TABLE>
STATEMENTS OF OPERATIONS
For the year ended December 31, 1997
<TABLE>
<CAPTION>
SUBACCOUNTS
---------------------------------------------------------------------------
MONEY DIVERSIFIED FLEXIBLE CONSERVATIVE
MARKET BOND EQUITY MANAGED BALANCED
----------- -------------- ---------- ------------ -------------
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME
Dividend distributions received................. $ 5,094,912 $ 9,043,537 $ 28,870,327 $ 38,256,221 $ 45,612,319
EXPENSES
Charges to Contract owners for assuming
mortality risk and expense risk [Note 5A]...... 661,235 866,520 8,895,624 8,970,935 7,210,074
Reimbursement for excess expenses [Note 5D]..... 0 0 0 0 0
------------- -------------- -------------- --------------- --------------
NET EXPENSES...................................... 661,235 866,520 8,895,624 8,970,935 7,210,074
------------- -------------- -------------- --------------- --------------
NET INVESTMENT INCOME (LOSS)...................... 4,433,677 8,177,017 19,974,703 29,285,286 38,402,245
------------- -------------- -------------- --------------- --------------
NET REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS
Capital gains distributions received............ 0 1,452,476 73,183,544 201,042,079 110,154,176
Realized gain on shares redeemed
[average cost basis]........................... 0 107,543 7,311,176 3,097,268 2,680,112
Net change in unrealized gain (loss) on
investments..................................... 0 (702,474) 158,043,072 (37,001,732) (36,006,094)
------------- -------------- -------------- --------------- --------------
NET GAIN (LOSS) ON INVESTMENTS.................... 0 857,545 238,537,792 167,137,615 76,828,194
------------- -------------- -------------- --------------- --------------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS....................... $ 4,433,677 $ 9,034,562 $ 258,512,495 $ 196,422,901 $115,230,439
============= ============== ============== =============== ==============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A11 THROUGH A16
A1
<PAGE>
<TABLE>
<CAPTION>
SUBACCOUNTS (CONTINUED)
- ----------------------------------------------------------------------------------------------------------------------------------
ZERO COUPON HIGH ZERO COUPON
BOND YIELD STOCK EQUITY NATURAL GOVERNMENT BOND
2000 BOND INDEX INCOME RESOURCES GLOBAL INCOME 2005
----------- ------------- ------------- -------------- -------------- ------------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
$ 19,851,827 $ 91,667,936 $ 621,342,649 $ 440,639,081 $ 130,634,104 $ 108,510,148 $ 74,232,937 $ 23,208,325
30,059 0 829,507 390,168 19,080 0 29,557 40,656
- -------------- -------------- -------------- --------------- --------------- -------------- --------------- --------------
$ 19,881,886 $ 91,667,936 $ 622,172,156 $ 441,029,249 $ 130,653,184 $ 108,510,148 $ 74,262,494 $ 23,248,981
============== ============== ============== =============== =============== ============== =============== ==============
$ 19,881,886 $ 91,609,007 $ 622,172,156 $ 441,029,249 $ 130,653,184 $ 108,451,737 $ 74,262,494 $ 23,248,981
0 58,929 0 0 0 58,411 0 0
- -------------- -------------- -------------- --------------- --------------- -------------- -------------- -------------
$ 19,881,886 $ 91,667,936 $ 622,172,156 $ 441,029,249 $ 130,653,184 $ 108,510,148 $ 74,262,494 $ 23,248,981
============== ============== ============== =============== =============== ============== =============== ==============
</TABLE>
<TABLE>
<CAPTION>
SUBACCOUNTS (CONTINUED)
- ----------------------------------------------------------------------------------------------------------------------------------
ZERO COUPON HIGH ZERO COUPON
BOND YIELD STOCK EQUITY NATURAL GOVERNMENT BOND
2000 BOND INDEX INCOME RESOURCES GLOBAL INCOME 2005
----------- ------------- ------------- -------------- -------------- ------------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
$ 1,012,102 $ 8,213,223 $ 8,102,242 $ 9,608,504 $ 757,192 $ 1,281,804 $ 4,704,795 $ 1,246,707
141,029 618,514 3,790,129 2,532,105 1,079,034 686,676 515,147 152,442
- -------------- -------------- -------------- --------------- --------------- -------------- -------------- --------------
(53,201) 0 0 0 0 0 0 (73,169)
87,828 618,514 3,790,129 2,532,105 1,079,034 686,676 515,147 79,273
- -------------- -------------- -------------- --------------- --------------- -------------- -------------- --------------
924,274 7,594,709 4,312,113 7,076,399 (321,842) 595,128 4,189,648 1,167,434
- -------------- -------------- -------------- --------------- --------------- -------------- -------------- --------------
804,923 0 17,197,911 39,390,070 16,426,552 5,120,114 0 489,749
46,554 311,580 6,786,808 3,982,449 1,240,093 309,311 44,975 71,812
(497,282) 2,620,272 113,415,557 59,248,683 (35,487,893) (917,843) 1,925,166 526,125
- -------------- -------------- -------------- --------------- --------------- -------------- -------------- --------------
354,195 2,931,852 137,400,276 102,621,202 (17,821,248) 4,511,582 1,970,141 1,087,686
- -------------- -------------- -------------- --------------- --------------- -------------- -------------- --------------
$ 1,278,469 $ 10,526,561 $ 141,712,389 $ 109,697,601 $ (18,143,090) $ 5,106,710 $ 6,159,789 $ 2,255,120
============== ============== ============== =============== =============== ============== =============== ==============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A11 THROUGH A16
A2
<PAGE>
FINANCIAL STATEMENTS OF THE PRUDENTIAL
VARIABLE APPRECIABLE ACCOUNT
STATEMENTS OF NET ASSETS
December 31,1997
<TABLE>
<CAPTION>
SUBACCOUNTS
-----------------------------
SMALL
PRUDENTIAL CAPITALIZATION
JENNISON STOCK
----------- --------------
<S> <C> <C>
ASSETS
Investment in shares of The Prudential Series
Fund, Inc.
Portfolios at net asset value [Note 3]......... $ 91,416,002 $ 75,467,339
Receivable from The Prudential Insurance Company
of America [Note 2]............................ 15,109 0
------------ -------------
Net Assets................................... $ 91,431,111 $ 75,467,339
============ =============
NET ASSETS, representing:
Equity of Contract owners....................... $ 91,431,111 $ 75,284,611
Equity of The Prudential Insurance Company of
America........................................ 0 182,728
------------ -------------
$ 91,431,111 $ 75,467,339
============ =============
</TABLE>
STATEMENTS OF OPERATIONS
For the year ended December 31, 1997
<TABLE>
<CAPTION>
SUBACCOUNTS
-----------------------------
SMALL
PRUDENTIAL CAPITALIZATION
JENNISON STOCK
----------- --------------
<S> <C> <C>
INVESTMENT INCOME
Dividend distributions received................. $ 157,623 $ 330,650
EXPENSES
Charges to Contract owners for assuming
mortality risk and expense risk [Note 5A] ..... 439,584 320,322
Reimbursement for excess expenses [Note 5D]..... 0 0
------------ -------------
NET EXPENSES...................................... 439,584 320,322
------------ -------------
NET INVESTMENT INCOME (LOSS) ..................... (281,961) 10,328
------------ -------------
NET REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS..........................
Capital gains distributions received............ 5,052,341 4,897,323
Realized gain on shares redeemed
[average cost basis] .......................... 525,215 46,921
Net change in unrealized gain (loss) on
investments..................................... 10,743,964 5,112,289
------------ -------------
NET GAIN (LOSS) ON INVESTMENTS.................... 16,321,520 10,056,533
NET INCREASE (DECREASE) IN NET ASSETS.............
RESULTING FROM OPERATIONS......................... $ 16,039,559 $ 10,066,861
============ =============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A11 THROUGH A16
A3
<PAGE>
(THIS PAGE IS 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, 1997, 1996 and 1995
<TABLE>
<CAPTION>
SUBACCOUNTS
------------------------------------------------------------------------------------
MONEY DIVERSIFIED
MARKET BOND
---------------------------------------- ------------------------------------------
1997 1996 1995 1997 1996 1995
---------- ----------- ------------ ----------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
OPERATIONS
Net investment income (loss).............. $ 4,433,677 $ 4,058,398 $ 4,217,643 $ 8,177,017 $ 6,388,307 $ 5,652,448
Capital gains distributions received...... 0 0 0 1,452,476 0 222,002
Realized gain (loss) on shares redeemed
[average cost basis] .................... 0 0 0 107,543 19,658 30,407
Net change in unrealized gain (loss) on
investments............................. 0 0 0 (702,474) (2,104,541) 10,042,691
------------ ------------ ------------ ------------ ------------- ------------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS................. 4,433,677 4,058,398 4,217,643 9,034,562 4,303,424 15,947,548
------------ ------------ ------------ ------------ ------------- ------------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM PREMIUM PAYMENTS
AND OTHER OPERATING TRANSFERS
[Note 7].................................. (6,936,043) 768,830 8,955,240 3,856,643 10,268,006 9,712,345
------------ ------------ ------------ ------------ ------------- ------------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM EQUITY TRANSFERS
[Note 8].................................. (147,721) 1,422,930 161,461 (196,475) (142,209) 143,151
------------ ------------ ------------ ------------ ------------- ------------
TOTAL INCREASE (DECREASE) IN NET ASSETS (2,650,087) 6,250,158 13,334,344 12,694,730 14,429,221 25,803,044
------------ ------------ ------------ ------------ ------------- ------------
NET ASSETS:
Beginning of year......................... 97,754,363 91,504,205 78,169,861 116,426,677 101,997,456 76,194,412
------------ ------------ ------------ ------------ ------------- ------------
End of year............................... $ 95,104,276 $ 97,754,363 $ 91,504,205 $129,121,407 $116,426,677 $101,997,456
============ ============ ============ ============ ============= ============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A11 THROUGH A16
A5
<PAGE>
<TABLE>
<CAPTION>
SUBACCOUNTS (CONTINUED)
- -----------------------------------------------------------------------------------------------------------------------------------
FLEXIBLE CONSERVATIVE
EQUITY MANAGED BALANCED
- ------------------------------------------- ------------------------------------------ ------------------------------------------
1997 1996 1995 1997 1996 1995 1997 1996 1995
- ------------- ------------ ------------- ------------- ------------- ------------ -------------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$ 19,974,703 $ 16,848,341 $ 9,985,776 $ 29,285,286 $ 25,347,934 $ 21,550,235 $ 38,402,245 $ 29,326,106 $25,291,477
73,183,544 92,436,486 27,318,049 201,042,079 106,224,518 39,426,921 110,154,176 55,843,548 26,552,510
7,311,176 755,380 11,957 3,097,268 487,657 56,509 2,680,112 627,498 97,662
158,043,072 41,805,447 129,700,617 (37,001,732) (5,082,172) 110,261,394 (36,006,094) 10,273,250 55,648,508
- -------------- ------------- ------------- ------------- ------------- ------------ ------------- ------------- -----------
258,512,495 151,845,654 167,016,399 196,422,901 126,977,937 171,295,059 115,230,439 96,070,402 107,590,157
- -------------- ------------- ------------- ------------- ------------- ------------ ------------- ------------- -----------
55,194,557 116,044,081 130,026,767 15,507,613 57,031,152 86,936,282 (5,484,215) 36,970,919 44,932,925
- -------------- ------------- ------------- ------------- ------------- ------------ ------------- ------------- -----------
(1,730,961) (2,717,850) (595,673) (332,076) (1,594,508) (2,895,506) 98,440 (1,143,063) (3,421,660)
- -------------- ------------- ------------- ------------- ------------- ------------ ------------- ------------- -----------
311,976,091 265,171,885 296,447,493 211,598,438 182,414,581 255,335,835 109,844,664 131,898,258 149,101,422
- -------------- ------------- ------------- ------------- ------------- ------------ ------------- ------------- -----------
1,061,732,578 796,560,693 500,113,200 1,137,587,038 955,172,457 699,836,622 918,503,799 786,605,541 637,504,119
- -------------- -------------- ------------- ------------- ------------- ------------ ------------- ------------- -----------
$1,373,708,669 $1,061,732,578 $796,560,693 $1,349,185,476 $1,137,587,038 $ 955,172,457 $1,028,348,463 $ 918,503,799 $786,605,541
============== ============== ============= ============== ============== ============== ============== ============= ============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A11 THROUGH A16
A6
<PAGE>
FINANCIAL STATEMENTS OF THE PRUDENTIAL
VARIABLE APPRECIABLE ACCOUNT
STATEMENTS OF CHANGES IN NET ASSETS
For the years ended December 31,1997, 1996 and 1995
<TABLE>
<CAPTION>
SUBACCOUNTS
----------------------------------------------------------------------------------
ZERO COUPON HIGH YIELD
BOND 2000 BOND
----------------------------------------------------------------------------------
1997 1996 1995 1997 1996 1995
<S> <C> <C> <C> <C> <C> <C>
OPERATIONS
Net investment income (loss).............. $ 924,274 $ 715,166 $ 720,396 $ 7,594,709 $ 6,844,609 $ 6,151,112
Capital gains distributions received...... 804,923 0 759,176 0 0 0
Realized gain (loss) on shares redeemed
[average cost basis] .................... 46,554 27,409 16,969 311,580 20,787 (58,578)
Net change in unrealized gain (loss) on
investments............................. (497,282) (556,648) 1,982,145 2,620,272 581,780 3,163,738
----------- ----------- ----------- ----------- ------------ -----------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS................. 1,278,469 185,927 3,478,686 10,526,561 7,447,176 9,256,272
----------- ----------- ----------- ----------- ------------ -----------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM PREMIUM PAYMENTS
AND OTHER OPERATING TRANSFERS
[Note 7].................................. (1,405,154) (613,550) 846,650 374,682 5,326,899 4,374,480
----------- ----------- ----------- ----------- ------------ -----------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM EQUITY TRANSFERS
[Note 8]................................. (63,959) 33,778 (645,588) (110,168) 52,425 (119,164)
----------- ----------- ----------- ----------- ------------ -----------
TOTAL INCREASE (DECREASE) IN NET ASSETS (190,644) (393,845) 3,679,748 10,791,075 12,826,500 13,511,588
NET ASSETS:
Beginning of year......................... 20,072,530 20,466,375 16,786,627 80,876,861 68,050,361 54,538,773
----------- ----------- ----------- ----------- ------------ -----------
End of year............................... $19,881,886 $20,072,530 $20,466,375 $91,667,936 $ 80,876,861 $ 68,050,361
=========== =========== =========== =========== ============ ===========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A11 THROUGH A16
A7
<PAGE>
<TABLE>
<CAPTION>
SUBACCOUNTS (CONTINUED)
- -----------------------------------------------------------------------------------------------------------------------------------
STOCK EQUITY NATURAL
INDEX INCOME RESOURCES
- -------------------------------------------- ------------------------------------------- ------------------------------------------
1997 1996 1995 1997 1996 1995 1997 1996 1995
- ------------- -------------- ------------- ------------- ------------- ------------- ------------ -------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$ 4,312,113 $ 4,179,793 $ 3,665,394 $ 7,076,399 $ 7,350,510 $ 6,301,712 $ (321,842) $ (14,823) $ 515,411
17,197,911 4,749,836 2,097,393 39,390,070 9,133,917 9,279,251 16,426,552 17,021,108 4,578,307
6,786,808 263,052 293,916 3,982,449 171,030 46,601 1,240,093 341,761 68,144
113,415,557 61,075,735 66,716,563 59,248,683 32,816,172 18,945,636 (35,487,893) 13,941,557 14,973,181
- ------------- ------------- ------------- ------------- ------------ ------------ ------------ ------------ ------------
141,712,389 70,268,416 72,773,266 109,697,601 49,471,629 34,573,200 (18,143,090) 31,289,603 20,135,043
- ------------- ------------- ------------- ------------- ------------ ------------ ------------ ------------ ------------
58,525,779 55,125,681 33,935,158 36,671,034 23,125,635 38,554,244 2,933,126 13,900,701 9,214,757
- ------------- ------------- ------------- ------------- ------------ ------------ ------------ ------------ ------------
(910,143) 82,144 (100,558) (393,762) (711,051) (646,585) (148,013) (277,180) (398,931)
- ------------- ------------- ------------- ------------- ------------ ------------ ------------ ------------ ------------
199,328,025 125,476,241 106,607,866 145,974,873 71,886,213 72,480,859 (15,357,977) 44,913,124 28,950,869
422,844,131 297,367,890 190,760,024 295,054,376 223,168,163 150,687,304 146,011,161 101,098,037 72,147,168
- ------------- ------------- ------------- ------------- ------------ ------------ ------------ ------------ ------------
$ 622,172,156 $ 422,844,131 $ 297,367,890 $ 441,029,249 $295,054,376 $ 223,168,163 $130,653,184 $ 146,011,161 $101,098,037
============= ============= ============= ============= ============ ============= ============ ============= ============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A11 THROUGH A16
A8
<PAGE>
FINANCIAL STATEMENTS OF THE PRUDENTIAL
VARIABLE APPRECIABLE ACCOUNT
STATEMENTS OF CHANGES IN NET ASSETS
For the years ended December 31,1997, 1996 and 1995
<TABLE>
<CAPTION>
SUBACCOUNTS
-----------------------------------------------------------------------------------
GOVERNMENT
GLOBAL INCOME
-----------------------------------------------------------------------------------
1997 1996 1995 1997 1996 1995
------------ ------------ ------------- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
OPERATIONS
Net investment income (loss)................ $ 595,128 $ 1,332,143 $ 454,049 $ 4,189,648 $ 4,157,421 $ 3,989,499
Capital gains distributions received...... 5,120,114 1,298,584 915,804 0 0 0
Realized gain (loss) on shares redeemed
[average cost basis] .................... 309,311 16,670 4,998 44,975 22,685 (8,599)
Net change in unrealized gain (loss) on
investments............................... (917,843) 9,125,406 4,212,026 1,925,166 (3,090,993) 7,403,233
------------ ------------ ------------- ------------- ------------ -----------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS................. 5,106,710 11,772,803 5,586,877 6,159,789 1,089,113 11,384,133
------------ ------------ ------------- ------------- ------------ -----------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM PREMIUM PAYMENTS
AND OTHER OPERATING TRANSFERS
[Note 7].................................. 17,556,139 24,827,377 16,098,541 (4,821,038) (1,166,024) 481,705
------------ ------------ ------------- ------------- ------------ -----------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM EQUITY TRANSFERS
[Note 8].................................. (317,463) (137,878) (1,921,654) (923,259) 788,406 (293,673)
------------ ------------ ------------- ------------- ------------ -----------
TOTAL INCREASE (DECREASE) IN NET ASSETS 22,345,386 36,462,302 19,763,764 415,492 711,495 11,572,165
NET ASSETS:
Beginning of year......................... 86,164,762 49,702,460 29,938,696 73,847,002 73,135,507 61,563,342
------------ ------------ ------------- ------------- ------------ -----------
End of year............................... $108,510,148 $ 86,164,762 $ 49,702,460 $ 74,262,494 $ 73,847,002 $ 73,135,507
============ ============ ============= ============= ============ ============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A11 THROUGH A16
A9
<PAGE>
<TABLE>
<CAPTION>
SUBACCOUNTS (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------
ZERO COUPON PRUDENTIAL* SMALL CAPITALIZATION*
BOND 2005 JENNISON STOCK
- ------------------------------------------- ---------------------------------------- ------------------------------------------
1997 1996 1995 1997 1996 1995 1997 1996 1995
- -------------- ------------ ----------- ------------ ------------ ---------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$ 1,167,434 $ 1,002,734 $ 838,006 $ (281,961) $ (85,477) $ (11,994) $ 10,328 $ 53,279 $ 6,422
489,749 246,221 425,717 5,052,341 0 0 4,897,323 489,855 47,413
71,812 290 0 525,215 0 0 46,921 (7,039) 0
526,125 (1,505,763) 3,328,939 10,743,964 3,012,624 281,405 5,112,289 2,049,209 181,809
- ------------- ------------ ----------- ----------- ----------- --------- ------------ ------------ ----------
2,255,120 (256,518) 4,592,662 16,039,559 2,927,147 269,411 10,066,861 2,585,304 235,644
- ------------- ------------ ----------- ----------- ----------- --------- ------------ ------------ ----------
(1,177,300) 1,428,479 2,469,936 34,918,336 30,275,275 7,175,027 37,146,522 20,015,548 5,360,329
- ------------- ------------ ----------- ----------- ----------- --------- ------------ ------------ ----------
(648,770) 484,066 7,956 (773,643) 385,656 214,343 (151,200) (22,002) 230,333
- ------------- ------------ ----------- ----------- ----------- --------- ------------ ------------ ----------
429,050 1,656,027 7,070,554 50,184,252 33,588,078 7,658,781 47,062,183 22,578,850 5,826,306
22,819,931 21,163,904 14,093,350 41,246,859 7,658,781 0 28,405,156 5,826,306 0
- ------------- ------------ ----------- ------------ ----------- --------- ------------ ------------ ----------
$ 23,248,981 $ 22,819,931 $21,163,904 $ 91,431,111 $ 41,246,859 $7,658,781 $ 75,467,339 $ 28,405,156 $ 5,826,306
============= ============ =========== ============ ============ ========== ============ ============ ===========
</TABLE>
*Commenced Business on 5/1/95.
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A11 THROUGH A16
A10
<PAGE>
NOTES TO FINANCIAL STATEMENTS OF
THE PRUDENTIAL VARIABLE APPRECIABLE ACCOUNT
For the Year Ended December 31, 1997
NOTE 1: GENERAL
The Prudential Variable Appreciable Account (the "Account") of The
Prudential Insurance Company of America ("Prudential") was
established on August 11, 1987 by a resolution of Prudential's Board
of Directors in conformity with insurance laws of the State of New
Jersey. The assets of the Account are segregated from Prudential's
other assets. Proceeds from the purchases of Prudential Variable
Appreciable Life (PVAL) and Prudential Survivorship Preferred (SVUL)
Contracts are invested in the Account.
The Account is registered under the Investment Company Act of 1940,
as amended, as a unit investment trust. There are fifteen subaccounts
within the Account, each of which invests only in a corresponding
portfolio of The Prudential Series Fund, Inc. (the "Series Fund").
The Series Fund is a diversified open-end management investment
company, and is managed by Prudential.
NOTE 2: SIGNIFICANT ACCOUNTING POLICIES
The financial statements are prepared in conformity with generally
accepted accounting principles (GAAP). The preparation of the
financial statements, in conformity with GAAP, requires management to
make estimates and assumptions that affect the reported amounts and
disclosures. Actual results could differ from those estimates.
Investments -- The investments in shares of the Series Fund are
-----------
stated at the net asset value of the respective portfolio.
Security Transactions -- Realized gains and losses on security
----------------------
transactions are reported on an average cost basis. Purchase and sale
transactions are recorded as of the trade date of the security being
purchased or sold.
Distributions Received -- Dividend and capital gain distributions
-----------------------
received are reinvested in additional shares of the Series Fund and
are recorded on the ex-dividend date.
Equity of The Prudential Insurance Company of America -- Prudential
-------------------------------------------------------
maintains a position in the Account for liquidity purposes including
unit purchases and redemptions, fund share transactions, and expense
processing. Prudential monitors the balance daily and transfers funds
based upon anticipated activity. At times, Prudential may owe an
amount to the Account, which is reflected in the Account's Statements
of Net Assets as a receivable from Prudential. The receivable does
not have an effect on the Contract owner's account or the related
unit value.
A11
<PAGE>
NOTE 3: INVESTMENT INFORMATION FOR THE PRUDENTIAL SERIES FUND, INC.
PORTFOLIOS
The net asset value per share for each portfolio of the Series Fund,
the number of shares of each portfolio held by the subaccounts of the
Account and the aggregate cost of investments in such shares at
December 31, 1997 were as follows:
<TABLE>
<CAPTION>
PORTFOLIOS
--------------------------------------------------------------------------------
MONEY DIVERSIFIED FLEXIBLE CONSERVATIVE
MARKET BOND EQUITY MANAGED BALANCED
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Number of Shares: 9,510,428 11,695,927 44,150,785 77,995,962 68,623,393
Net asset value per share: $ 10.00000 $ 11.02185 $ 31.06909 $ 17.28029 $ 14.97022
Cost: $ 95,104,276 $ 127,778,984 $ 1,021,616,812 $ 1,298,687,478 $ 1,012,639,267
</TABLE>
<TABLE>
<CAPTION>
PORTFOLIOS (CONTINUED)
--------------------------------------------------------------------------------
ZERO
COUPON HIGH
BOND YIELD STOCK EQUITY NATURAL
2000 BOND INDEX INCOME RESOURCES
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Number of Shares: 1,574,685 11,255,154 20,560,943 19,682,485 8,569,396
Net asset value per share: $ 12.60686 $ 8.14453 $ 30.21956 $ 22.38737 $ 15.24426
Cost: $ 19,844,960 $ 89,660,507 $ 361,879,797 $ 331,809,980 $ 134,552,580
</TABLE>
PORTFOLIOS (CONTINUED)
<TABLE>
<CAPTION>
PORTFOLIOS (CONTINUED)
--------------------------------------------------------------------------------
ZERO
COUPON SMALL
GOVERNMENT BOND PRUDENTIAL CAPITALIZATION
GLOBAL INCOME 2005 JENNISON STOCK
--------------------------------------------------------------------------------
Number of Shares: 6,054,080 6,442,232 1,842,520 5,155,568 4,737,126
Net asset value per share: $ 17.92348 $ 11.52286 $ 12.59597 $ 17.73151 $ 15.93104
Cost: $ 97,511,686 $ 72,653,528 $ 21,902,064 $ 77,378,009 $ 68,124,032
NOTE 4: CONTRACT OWNER UNIT INFORMATION
Outstanding Contract owner units, unit values and total value of
Contract owner equity at December 31, 1997 were as follows:
SUBACCOUNTS
--------------------------------------------------------------------------------
MONEY DIVERSIFIED FLEXIBLE CONSERVATIVE
MARKET BOND EQUITY MANAGED BALANCED
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Contract Owner Units Outstanding (PVAL) 38,909,139.353 37,082,552.171 192,670,577.036 270,135,601.789 218,020,371.531
Unit Value (PVAL) ......................$ 1.58873 $ 2.17433 $ 4.29156 $ 3.07895 $ 2.55041
-------------- -------------- --------------- --------------- ---------------
Contract Owner Equity (PVAL) ...........$ 61,816,117 $ 0,629,705 $ 826,857,342 $ 831,734,011 $ 556,041,336
-------------- -------------- --------------- --------------- ---------------
Contract Owner Units Outstanding
(PVAL $100,000+ face) ................18,458,545.137 22,697,498.739 129,893,269.042 171,984,362.751 189,705,796.235
Unit Value (PVAL $100,000+ face) .......$ 1.54794 $ 2.11769 $ 4.18060 $ 2.99911 $ 2.48409
-------------- -------------- --------------- --------------- ---------------
Contract Owner Equity (PVAL
$100,000+ face) ......................$ 28,572,720 $ 48,066,266 $ 543,031,800 $ 515,800,022 $ 471,246,271
-------------- -------------- --------------- --------------- ---------------
Contract Owner Units Outstanding (SVUL) 2,648,352.917 380,114.649 2,579,924.823 1,234,178.929 836,953.765
Unit Value (SVUL) ......................$ 1.08769 $ 1.11923 $ 1.48048 $ 1.33809 $ 1.26752
-------------- -------------- --------------- --------------- ---------------
Contract Owner Equity (SVUL) ...........$ 2,880,587 $ 425,436 $ 3,819,527 $ 1,651,443 $ 1,060,856
-------------- -------------- --------------- --------------- ---------------
TOTAL CONTRACT OWNER EQUITY ............$ 93,269,424 $ 129,121,407 $1,373,708,669 $1,349,185,476 $1,028,348,463
============== ============== =============== =============== ===============
</TABLE>
A12
<PAGE>
<TABLE>
<CAPTION>
SUBACCOUNTS (CONTINUED)
--------------------------------------------------------------------------------
ZERO COUPON HIGH YIELD STOCK EQUITY NATURAL
BOND 2000 BOND INDEX INCOME RESOURCES
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Contract Owner Units Outstanding (PVAL) 4,902,895.739 23,131,451.862 87,096,741.492 71,391,113.621 29,254,820.358
Unit Value (PVAL) ......................$ 2.42567 $ 2.37943 $ 4.41436 $ 4.17583 $ 2.65343
Contract Owner Equity (PVAL) ...........$ 11,892,807 $ 55,039,671 $ 384,476,371 $ 298,117,154 $ 77,625,618
-------------- -------------- --------------- --------------- ---------------
Contract Owner Units Outstanding
(PVAL $100,000+ face) ................ 3,381,649.249 15,535,412.038 54,360,075.140 34,647,590.548 20,416,285.555
Unit Value (PVAL $100,000+ face) .......$ 2.36248 $ 2.31834 $ 4.29923 $ 4.06648 $ 2.58476
-------------- -------------- --------------- --------------- ---------------
Contract Owner Equity (PVAL
$100,000+ face) ......................$ 7,989,079 $ 36,016,367 $ 233,706,466 $ 140,893,734 $ 52,771,198
-------------- -------------- --------------- --------------- ---------------
Contract Owner Units Outstanding (SVUL) N/A 448,976.859 2,430,022.226 1,208,375.161 228,815.978
Unit Value (SVUL) ...................... N/A $ 1.23162 $ 1.64168 $ 1.67031 $ 1.12041
-------------- -------------- --------------- --------------- ---------------
Contract Owner Equity (SVUL) ........... N/A $ 552,969 $ 3,989,319 $ 2,018,361 $ 256,368
-------------- -------------- --------------- --------------- ---------------
TOTAL CONTRACT OWNER EQUITY.............$ 19,881,886 $ 91,609,007 $ 622,172,156 $ 441,029,249 $ 130,653,184
============== ============== =============== =============== ===============
</TABLE>
<TABLE>
<CAPTION>
SUBACCOUNTS (CONTINUED)
--------------------------------------------------------------------------------
SMALL
GOVERNMENT ZERO COUPON PRUDENTIAL CAPITALIZATION
GLOBAL INCOME BOND 2005 JENNISON STOCK
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Contract Owner Units Outstanding (PVAL) 58,222,623.069 22,634,456.126 6,604,392.337 36,483,251.911 32,100,899.144
Unit Value (PVAL) ......................$ 1.41253 $ 1.98095 $ 2.36875 $ 1.86119 $ 1.76965
-------------- -------------- --------------- --------------- ---------------
Contract Owner Equity (PVAL) ...........$ 82,241,202 $ 44,837,726 $ 15,644,155 $ 67,902,264 $ 56,807,356
-------------- -------------- --------------- --------------- ---------------
Contract Owner Units Outstanding
(PVAL $100,000+ face) ................17,548,821.325 15,184,004.662 3,286,885.939 12,109,526.233 8,017,148.351
Unit Value (PVAL $100,000+ face) .......$ 1.39734 $ 1.93037 $ 2.30834 $ 1.84650 $ 1.75544
-------------- -------------- --------------- --------------- ---------------
Contract Owner Equity (PVAL
$100,000+ face) ......................$ 24,521,670 $ 29,310,747 $ 7,587,250 $ 22,360,240 $ 14,073,623
-------------- -------------- --------------- --------------- ---------------
Contract Owner Units Outstanding (SVUL). 1,346,309.879 102,952.236 15,939.847 726,406.872 2,848,385.082
Unit Value (SVUL) ......................$ 1.25444 $ 1.10751 $ 1.10267 $ 1.60875 $ 1.54601
-------------- -------------- --------------- --------------- ---------------
Contract Owner Equity (SVUL) ...........$ 1,688,865 $ 114,021 $ 17,576 $ 1,168,607 $ 4,403,632
-------------- -------------- --------------- --------------- ---------------
TOTAL CONTRACT OWNER EQUITY.............$ 108,451,737 $ 74,262,494 $ 23,248,981 $ 91,431,111 $ 75,284,611
============== ============== =============== =============== ===============
</TABLE>
NOTE 5: CHARGES AND EXPENSES
A. Mortality Risk and Expense Risk Charges
The mortality risk and expense risk charges at an effective
annual rate of 0.90% is applied daily against the net assets
representing equity of PVAL Contract owners held in each
subaccount. For Contract owners investing in PVAL with face
amounts of $100,000 or more the annual rate is 0.60%. For
Contract owners investing in SVUL the annual rate is 0.90%.
Mortality risk is that Contract owners may not live as long as
estimated and expense risk is that the cost of issuing and
administering the policies may exceed the estimated expenses. For
1997, the amount of these charges paid to Prudential was
$18,767,367 for PVAL Contracts, $18,002,915 for PVAL Contracts
with face amounts of $100,000 or more and $109,088 for SVUL
Contracts.
B. Deferred Sales Charge
Subsequent to Contract owner redemption, a deferred sales charge
is imposed upon surrenders of certain variable life insurance
Contracts to compensate 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. For
1997, the amount of these charges paid to Prudential was
$8,918,133.
C. Partial Withdrawal Charge
A charge is imposed by Prudential on partial withdrawals of the
cash surrender value. For 1997, the amount of these charges paid
to Prudential was $3,718,341.
A13
<PAGE>
D. Expense Reimbursement
PVAL Contracts are reimbursed by 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. For 1997, the amount of these reimbursements
totaled $126,331.
SVUL Contracts are reimbursed by Prudential, on a non-guaranteed
basis, for expenses incurred by the Series Fund in excess of the
effective rate of 0.40% of the average daily net assets of the
portfolio of each of the Zero Coupon Bond Portfolios. For 1997,
the amount of these reimbursements totaled $39.
E. Cost of Insurance Charges
Contract owners contributions to the Account are subject to the
following charges: transaction costs, premium taxes, sales
charges, monthly administration charges, and death benefit risk
charges prior to the investment in the Account. During 1997,
Prudential received a total of $18,592,697, $37,395,717,
$97,887,744, $63,196,365 and $13,745,360, respectively, for these
charges.
NOTE 6: TAXES
Prudential is taxed as a "life insurance company" as defined by the
Internal Revenue Code and the results of operations of the Account
form a part of Prudential's consolidated federal tax return. Under
current federal law, no federal income taxes are payable by the
Account. As such, no provision for tax liability has been recorded in
these financial statements.
NOTE 7: NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM PREMIUM PAYMENTS
AND OTHER OPERATING TRANSFERS
The following amounts represent Contract owner activity components
for the year ended December 31, 1997:
<TABLE>
<CAPTION>
SUBACCOUNTS
------------------------------------------------------------------------------
MONEY DIVERSIFIED FLEXIBLE CONSERVATIVE
MARKET BOND EQUITY MANAGED BALANCED
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Contract Owner Net Payments ...............$ 43,029,352 $ 27,918,752 $ 293,586,658 $ 230,098,301 $ 193,920,159
Policy Loans ..............................$ (2,616,136) $ (2,676,866) $ (36,815,052) $ (29,768,329) $ (21,017,180)
Policy Loan Repayments and Interest .......$ 1,685,370 $ 1,259,455 $ 15,156,086 $ 13,061,811 $ 10,130,000
Surrenders, Withdrawals, and Death $ (11,469,314) $ (7,179,534) $ (79,836,234) $ (69,955,243) $ (68,407,322)
Benefits....................................
Net Transfers From (To) Other
Subaccounts or Fixed Rate Options .......$ (27,263,357) $ (3,556,460) $ 281,061 $ (12,348,231) $ (19,240,097)
Administrative and Other Charges ..........$ (10,301,958) $ (11,908,704) $(137,177,962) $(115,580,696) $(100,869,775)
</TABLE>
<TABLE>
<CAPTION>
SUBACCOUNTS (CONTINUED)
------------------------------------------------------------------------------
ZERO HIGH
COUPON BOND YIELD STOCK EQUITY NATURAL
2000 BOND INDEX INCOME RESOURCES
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Contract Owner Net Payments ...............$ 4,066,622 $ 19,451,504 $ 126,688,004 $ 79,016,436 $ 35,927,519
Policy Loans ..............................$ (515,179) $ (2,378,667) $ (15,814,797) $ (9,558,454) $ (4,989,959)
Policy Loan Repayments and Interest .......$ 224,553 $ 1,433,405 $ 5,919,148 $ 3,893,428 $ 2,524,073
Surrenders, Withdrawals, and Death $ (1,236,692) $ (6,747,487) $ (32,499,126) $ (21,564,128) $ (10,791,367)
Benefits ...................................
Net Transfers From (To) Other Subaccounts
or Fixed Rate Options ...................$ (1,986,651) $ (2,355,030) $ 30,361,425 $ 21,482,832 $ (3,663,884)
Administrative and Other Charges ..........$ (1,957,807) $ (9,029,043) $ (56,128,875) $ (36,599,080) $ (16,073,256)
</TABLE>
A14
<PAGE>
<TABLE>
<CAPTION>
SUBACCOUNTS (CONTINUED)
---------------------------------------------------------------------------------
ZERO
COUPON
GOVERNMENT BOND PRUDENTIAL SMALL
GLOBAL INCOME 2005 JENNISON CAPITALIZATION
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Contract Owner Net Payments ............. $ 34,211,689 $ 15,732,416 $ 5,574,118 $ 34,294,641 $ 24,433,471
Policy Loans ............................ $ (2,628,076) $ (1,668,544) $ (467,791) $ (1,732,453) $ (1,222,173)
Policy Loan Repayments and Interest ..... $ 1,262,980 $ 767,258 $ 216,018 $ 744,576 $ 675,140
Surrenders, Withdrawals, and Death $ (7,075,480) $ (5,308,280) $ (1,546,854) $ (3,227,110) $ (2,326,066)
Benefits ................................
Net Transfers From (To) Other
Subaccounts or Fixed Rate Options .... $ 4,870,997 $ (6,634,816) $ (2,416,503) $ 16,630,147 $ 23,570,817
Administrative and Other Charges ........ $ (13,085,971)$ (7,709,072) $ (2,536,288) $ (11,791,465) $ (7,984,667)
</TABLE>
NOTE 8: NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM EQUITY TRANSFERS
The increase (decrease) in net assets resulting from equity transfers
represents the net contributions (withdrawals) of Prudential to
(from) the Account.
NOTE 9: UNIT ACTIVITY
Transactions in units (including transfers among subaccounts) for the
year ended December 31, 1997 were as follows:
<TABLE>
<CAPTION>
SUBACCOUNTS
-------------------------------------------------------------------------------------
MONEY DIVERSIFIED FLEXIBLE CONSERVATIVE
MARKET BOND EQUITY MANAGED BALANCED
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Contract Owner Contributions: 65,667,687.360 16,213,787.198 92,473,729.304 93,973,163.620 93,048,912.698
Contract Owner Redemptions: (69,425,851.286) (14,250,810.327) (76,628,697.286) (87,813,518.888) (94,880,956.345)
</TABLE>
<TABLE>
<CAPTION>
SUBACCOUNTS (CONTINUED)
------------------------------------------------------------------------------------
ZERO COUPON HIGH YIELD STOCK EQUITY NATURAL
BOND 2000 BOND INDEX INCOME RESOURCES
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Contract Owner Contributions: 1,934,757.028 17,186,033.239 50,408,149.325 34,569,865.840 18,586,440.230
Contract Owner Redemptions: (2,549,331.504) (16,878,089.505) (34,222,528.100) (24,004,754.496) (17,455,642.827)
</TABLE>
<TABLE>
<CAPTION>
SUBACCOUNTS (CONTINUED)
------------------------------------------------------------------------------------
SMALL
GOVERNMENT ZERO COUPON PRUDENTIAL CAPITALIZATION
GLOBAL INCOME BOND 2005 JENNISON STOCK
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Contract Owner Contributions: 37,198,996.863 10,260,444.855 2,986,424.105 36,782,725.213 38,237,386.459
Contract Owner Redemptions: (24,567,570.689) (12,866,478.243) (3,539,701.289) (16,099,947.069) (15,077,041.863)
</TABLE>
A15
<PAGE>
NOTE 10: PURCHASES AND SALES OF INVESTMENTS
The aggregate costs of purchases and proceeds from sales of
investments in the Series Fund were as follows:
<TABLE>
<CAPTION>
PORTFOLIOS
------------------------------------------------------------------------------------
MONEY DIVERSIFIED FLEXIBLE CONSERVATIVE
MARKET BOND EQUITY MANAGED BALANCED
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
For the year ended December 31,
1997
Purchases......................... $ 26,486,000 $ 6,759,000 $ 69,128,000 $ 24,560,000 $ 10,479,000
Sales............................. $ (34,231,000) $ (4,176,000) $(26,544,000) $ (19,748,000) $ (24,116,000)
</TABLE>
<TABLE>
<CAPTION>
PORTFOLIOS (CONTINUED)
------------------------------------------------------------------------------------
ZERO COUPON HIGH YIELD STOCK EQUITY NATURAL
BOND 2000 BOND INDEX INCOME RESOURCES
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
For the year ended December 31,
1997
Purchases......................... $ 315,000 $ 11,827,000 $ 60,645,000 $ 37,969,000 $ 8,642,000
Sales............................. $ (1,902,000) $ (12,181,000) $ (7,649,000) $ (4,614,000) $ (6,955,000)
</TABLE>
<TABLE>
<CAPTION>
PORTFOLIOS (CONTINUED)
------------------------------------------------------------------------------------
SMALL
GOVERNMENT ZERO COUPON PRUDENTIAL CAPITALIZATION
GLOBAL INCOME BOND 2005 JENNISON STOCK
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
For the year ended December 31,
1997
Purchases......................... $ 18,498,000 $ 648,000 $ 289,000 $ 36,454,000 $ 38,232,000
Sales............................. $ (1,946,000) $ (6,937,000) $ (2,235,000) $ (2,764,000) $ (1,557,000)
</TABLE>
NOTE 11: RELATED PARTY TRANSACTIONS
The Prudential has purchased multiple VAL Contracts insuring the
lives of certain employees. The Prudential is the owner and
beneficiary of the Contracts. There were no net premium payments for
the year ended December 31, 1997. Equity of Contract owners in the
Flexible Managed subaccount at December 31, 1997 includes
approximately $242.1 million owned by the Prudential.
A16
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Contract Owners of the
Prudential Variable Appreciable Account
and the Board of Directors of
The Prudential Insurance Company of America
In our opinion, the accompanying statements of net assets and the related
statements of operations and of changes in net assets present fairly, in all
material respects, the financial position of the subaccounts (Money Market,
Diversified Bond, Equity, Flexible Managed, Conservative Balanced, 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) of the Prudential Variable Appreciable Account at December
31, 1997, the results of each of their operations for the year then ended and
the changes in each of their net assets for each of the two years in the period
then ended, in conformity with generally accepted accounting principles. These
financial statements are the responsibility of The Prudential Insurance Company
of America's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
financial statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of shares owned in The Prudential Series Fund, Inc. at December 31,
1997, provide a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
New York, New York
March 20, 1998
A17
<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 changes in 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 2000, High Yield Bond,
Stock Index, Equity Income, Natural Resources, Global, Government Income, Zero
Coupon Bond 2005, Prudential Jennison, and Small Capitalization Stock
subaccounts) for the periods presented in the year 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 financial statements present fairly, in all material
respects, the changes in net assets of each of the respective subaccounts
constituting The Prudential Variable Appreciable Account for the respective
stated periods in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Parsippany, New Jersey
February 15, 1996
A18
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
---------------------------------
March 5, 1998
To the Board of Directors and Policyholders of
The Prudential Insurance Company of America
In our opinion, the accompanying consolidated statements of financial position
and the related consolidated statements of operations, of changes in equity and
of cash flows present fairly, in all material respects, the financial position
of The Prudential Insurance Company of America and its subsidiaries at December
31, 1997 and 1996, and the results of their operations and their cash flows for
the years then ended in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audit. We conducted our audits of these statements in
accordance with generally accepted auditing standards which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.
Price Waterhouse LLP
1
<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 operations, changes
in equity, and cash flows of The Prudential Insurance Company of America and
subsidiaries for the year ended December 31, 1995. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on the financial statements based on our audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, such consolidated statements of operations, changes in equity,
and cash flows present fairly, in all material respects, the results of
operations and cash flows of The Prudential Insurance Company of America and
subsidiaries for the year ended December 31, 1995 in conformity with generally
accepted accounting principles.
Deloitte & Touche LLP
June 4, 1997
2
<PAGE>
<TABLE>
<CAPTION>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
DECEMBER 31, 1997 AND 1996 (IN MILLIONS)
1997 1996
----------- -----------
<S> <C> <C>
ASSETS
Fixed maturities:
Available for sale, at fair value (amortized cost, 1997: $71,496; 1996: $64,545) .......... $ 75,270 $ 66,553
Held to maturity, at amortized cost (fair value, 1997: $19,894; 1996: $21,362) ............ 18,700 20,403
Trading account assets, at fair value........................................................ 6,044 4,219
Equity securities, available for sale, at fair value (cost, 1997: $2,376; 1996: $2,103) ..... 2,810 2,622
Mortgage loans on real estate ............................................................... 16,004 17,097
Investment real estate ...................................................................... 1,519 2,586
Policy loans ................................................................................ 6,827 6,692
Securities purchased under agreements to resell ............................................. 8,661 5,347
Cash collateral for borrowed securities ..................................................... 5,047 2,416
Short-term investments ...................................................................... 12,106 9,294
Other long-term investments ................................................................. 3,360 2,995
----------- -----------
Total investments ......................................................................... 156,348 140,224
Cash ........................................................................................ 3,636 2,091
Deferred policy acquisition costs ........................................................... 5,994 6,291
Accrued investment income ................................................................... 1,909 1,828
Receivables from broker-dealer clients ...................................................... 6,273 5,281
Other assets ................................................................................ 11,276 9,990
Separate Account assets ..................................................................... 74,046 63,358
----------- -----------
TOTAL ASSETS .................................................................................. $ 259,482 $ 229,063
=========== ===========
LIABILITIES AND EQUITY
LIABILITIES
Future policy benefits ...................................................................... $ 65,581 $ 63,955
Policyholders' account balances ............................................................. 32,941 36,009
Other policyholders' liabilities ............................................................ 6,659 6,043
Policyholders' dividends .................................................................... 1,269 714
Securities sold under agreements to repurchase .............................................. 12,347 7,503
Cash collateral for loaned securities ....................................................... 14,117 8,449
Short-term debt ............................................................................. 6,774 6,562
Long-term debt .............................................................................. 4,273 3,760
Income taxes payable ........................................................................ 500 1,544
Payables to broker-dealer clients ........................................................... 3,338 3,018
Securities sold but not yet purchased ....................................................... 3,533 1,900
Other liabilities ........................................................................... 14,774 8,238
Separate Account liabilities ................................................................ 73,658 62,845
----------- -----------
TOTAL LIABILITIES ......................................................................... 239,764 210,540
=========== ===========
COMMITMENTS AND CONTINGENCIES (SEE NOTES 12, 13 AND 14)
EQUITY
Retained earnings ........................................................................... 18,051 17,443
Net unrealized investment gains ............................................................. 1,752 1,136
Foreign currency translation adjustments .................................................... (85) (56)
----------- -----------
TOTAL EQUITY .............................................................................. 19,718 18,523
----------- -----------
TOTAL LIABILITIES AND EQUITY .................................................................. $ 259,482 $ 229,063
=========== ===========
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3
<PAGE>
<TABLE>
<CAPTION>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (IN MILLIONS)
1997 1996 1995
------------ ----------- -----------
<S> <C> <C> <C>
REVENUES
Premiums .................................................................... $ 18,534 $ 18,962 $ 19,783
Policy charges and fee income ............................................... 1,828 1,912 1,824
Net investment income ....................................................... 9,863 9,742 10,178
Realized investment gains, net .............................................. 2,187 1,138 1,503
Commissions and other income ................................................ 4,661 4,521 3,952
------------ ----------- -----------
Total revenues ............................................................ 37,073 36,275 37,240
------------ ----------- -----------
BENEFITS AND EXPENSES
Policyholders' benefits ..................................................... 18,208 19,306 19,470
Interest credited to policyholders' account balances ........................ 2,043 2,251 2,739
Dividends to policyholders .................................................. 2,429 2,339 2,317
General and administrative expenses ......................................... 11,926 10,875 10,345
Sales practice remediation costs ............................................ 1,640 410 --
------------ ----------- -----------
Total benefits and expenses ............................................... 36,246 35,181 34,871
------------ ----------- -----------
INCOME FROM OPERATIONS BEFORE INCOME TAXES .................................... 827 1,094 2,369
------------ ----------- -----------
Income taxes
Current ................................................................... (46) 406 1,293
Deferred .................................................................. 263 (390) (167)
------------ ----------- -----------
217 16 1,126
------------ ----------- -----------
NET INCOME .................................................................... $ 610 $ 1,078 $ 1,243
============ =========== ===========
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (IN MILLIONS)
<TABLE>
<CAPTION>
FOREIGN NET
CURRENCY UNREALIZED
RETAINED TRANSLATION INVESTMENT TOTAL
EARNINGS ADJUSTMENTS GAINS EQUITY
--------- ----------- ---------- ---------
<S> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1995 ........................ $ 15,126 $ (42) $ 16 $ 15,100
Net income .................................... 1,243 -- -- 1,243
Change in foreign currency translation
adjustments ................................. -- 18 -- 18
Change in net unrealized investment gains ..... -- -- 2,381 2,381
--------- --------- --------- ---------
BALANCE, DECEMBER 31, 1995 ...................... 16,369 (24) 2,397 18,742
Net income .................................... 1,078 -- -- 1,078
Change in foreign currency translation
adjustments ................................. -- (32) -- (32)
Change in net unrealized investment gains ..... -- -- (1,261) (1,261)
Additional pension liability adjustment ....... (4) -- -- (4)
--------- --------- --------- ---------
BALANCE, DECEMBER 31, 1996 ...................... 17,443 (56) 1,136 18,523
Net income .................................... 610 -- -- 610
Change in foreign currency translation
adjustments ................................. -- (29) -- (29)
Change in net unrealized investment gains ..... -- -- 616 616
Additional pension liability adjustment ....... (2) -- -- (2)
--------- --------- --------- ---------
BALANCE, DECEMBER 31, 1997 ...................... $ 18,051 $ (85) $ 1,752 $ 19,718
========= ========= ========= =========
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (IN MILLIONS)
<TABLE>
<CAPTION>
1997 1996 1995
---------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ..................................................... $ 610 $ 1,078 $ 1,243
Adjustments to reconcile net income to
net cash provided by operating activities:
Realized investment gains, net ............................... (2,187) (1,138) (1,503)
Policy charges and fee income ................................ (258) (208) (201)
Interest credited to policyholders' account balances ......... 2,043 2,128 2,616
Depreciation and amortization ................................ 258 266 398
Other, net ................................................... 4,681 (1,180) (2,628)
Loss (gain) on divestitures .................................. -- (116) 297
Change in:
Deferred policy acquisition costs .......................... 143 (122) (214)
Policy liabilities and insurance reserves .................. 2,477 2,471 2,382
Securities purchased under agreements to resell ............ (3,314) (217) 461
Trading account assets ..................................... (1,825) (433) 2,579
Income taxes receivable/payable ............................ (1,391) (937) 194
Cash collateral for borrowed securities .................... (2,631) (332) 25
Broker-dealer client receivables/payables .................. (672) (607) (420)
Securities sold but not yet purchased ...................... 1,633 251 (225)
Securities sold under agreements to repurchase ............. 4,844 (490) (712)
--------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES ...................... $ 4,411 $ 414 $ 4,292
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from the sale/maturity of:
Fixed maturities, available for sale .......................... $ 123,550 $ 123,368 $ 97,084
Fixed maturities, held to maturity ............................ 4,042 4,268 3,767
Equity securities, available for sale ......................... 2,572 2,162 2,370
Mortgage loans on real estate ................................. 4,299 5,731 5,553
Investment real estate ........................................ 1,842 615 435
Other long-term investments ................................... 5,081 3,203 3,385
Divestitures .................................................. -- 52 790
Payments for the purchase of:
Fixed maturities, available for sale .......................... (129,854) (125,093) (101,197)
Fixed maturities, held to maturity ............................ (2,317) (2,844) (6,803)
Equity securities, available for sale ......................... (2,461) (2,384) (1,391)
Mortgage loans on real estate ................................. (3,363) (1,906) (3,015)
Investment real estate ........................................ (241) (142) (387)
Other long-term investments ................................... (4,148) (2,060) (1,849)
Cash collateral for securities loaned (net) .................... 5,668 2,891 3,471
Short-term investments (net) ................................... (2,848) (1,915) 2,793
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES ...................... $ 1,822 $ 5,946 $ 5,006
--------- --------- ---------
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (IN MILLIONS)
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Policyholders' account deposits ................................ $ 5,020 $ 2,799 $ 2,724
Policyholders' account withdrawals ............................. (9,873) (8,099) (9,164)
Net increase(decrease) in short-term debt ...................... 305 583 (3,077)
Proceeds from the issuance of long-term debt ................... 324 93 763
Repayments of long-term debt ................................... (464) (1,306) (30)
--------- --------- ---------
CASH FLOWS USED IN FINANCING ACTIVITIES ................... (4,688) (5,930) (8,784)
--------- --------- ---------
NET INCREASE IN CASH ............................................. 1,545 430 514
CASH, BEGINNING OF YEAR .......................................... 2,091 1,661 1,147
--------- --------- ---------
CASH, END OF YEAR ................................................ $ 3,636 $ 2,091 $ 1,661
========= ========= =========
SUPPLEMENTAL CASH FLOW INFORMATION:
Income taxes paid ................................................ $ 968 $ 793 $ 430
--------- --------- ---------
Interest paid .................................................... $ 1,243 $ 1,404 $ 1,413
--------- --------- ---------
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS
The Prudential Insurance Company of America and its subsidiaries
(collectively, "the Company") provide insurance and financial services
throughout the United States and many locations worldwide. Principal
products and services provided include life and health insurance, annuities,
pension and retirement related investments and administration, managed
healthcare, property and casualty insurance, securities brokerage, asset
management, investment advisory services and real estate brokerage.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the Prudential
Insurance Company of America, a mutual life insurance company, and its
subsidiaries, and those partnerships and joint ventures in which the Company
has a controlling interest. The consolidated financial statements have been
prepared in accordance with generally accepted accounting principles
("GAAP"). All significant intercompany balances and transactions have been
eliminated.
USE OF ESTIMATES
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the period. Actual results could differ from
those estimates.
INVESTMENTS
FIXED MATURITIES classified as "available for sale" are carried at estimated
fair value. Fixed maturities that the Company has both the positive intent
and ability to hold to maturity are stated at amortized cost and classified
as "held to maturity." The amortized cost of fixed maturities are written
down to estimated fair value when considered impaired and the decline in
value is considered to be other than temporary. Unrealized gains and losses
on fixed maturities "available for sale," net of income tax, the effect on
deferred policy acquisition costs and participating annuity contracts that
would result from the realization of unrealized gains and losses, are
included in a separate component of equity, "Net unrealized investment
gains."
TRADING ACCOUNT ASSETS are carried at estimated fair value.
EQUITY SECURITIES, available for sale, comprised of common and
non-redeemable preferred stock, are carried at estimated fair value. The
associated unrealized gains and losses, net of income tax, the effect on
deferred policy acquisition costs and participating annuity contracts that
would result from the realization of unrealized gains and losses, are
included in a separate component of equity, "Net unrealized investment
gains."
MORTGAGE LOANS ON REAL ESTATE are stated primarily at unpaid principal
balances, net of unamortized discounts and allowance for losses on impaired
loans. Impaired loans are identified by management as loans in which a
probability exists that all amounts due according to the contractual terms
of the loan agreement will not be collected. Impaired loans are measured
based on the present value of expected future cash flows, discounted at the
loan's effective interest rate or the fair value of the collateral, if the
loan is collateral dependent. The Company's periodic evaluation of the
adequacy of the allowance for losses is based on a number of factors,
including past loan loss experience, known and inherent risks in the
portfolio, adverse situations that may affect the borrower's ability to
repay, the estimated value of the underlying collateral, composition of the
loan portfolio, current economic conditions and other relevant factors.
This evaluation is inherently subjective as it requires estimating the
amounts and timing of future cash flows expected to be received on impaired
loans.
Interest received on impaired loans, including loans that were previously
modified in a troubled debt restructuring, is either applied against the
principal or reported as revenue, according to management's judgment as to
the collectibility of principal. Management discontinues the accrual of
interest on impaired loans after the loans are 90 days delinquent as to
principal or interest or earlier when management has serious doubts about
collectibility. When a loan is recognized as
8
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
impaired, any accrued but unpaid interest previously recorded on such loan
is reversed against interest income of the current period. Generally, a loan
is restored to accrual status only after all delinquent interest and
principal are brought current and, in the case of loans where interest has
been interrupted for a substantial period, a regular payment performance has
been established.
INVESTMENT REAL ESTATE, which the Company has the intent to hold for the
production of income, is carried at depreciated cost less any write-downs to
fair value for impairment losses. Depreciation on real estate is computed
using the straight-line method over the estimated lives of the properties.
Real estate to be disposed of is carried at the lower of depreciated cost or
fair value less selling costs and is not depreciated once classified as
such.
POLICY LOANS are carried at unpaid principal balances.
SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL AND SECURITIES SOLD UNDER
AGREEMENTS TO REPURCHASE are carried at the amounts at which the securities
will be subsequently resold or reacquired, including accrued interest, as
specified in the respective agreements. The Company's policy is to take
possession of securities purchased under agreements to resell. The market
value of securities to be repurchased is monitored, and additional
collateral is requested, where appropriate, to protect against credit
exposure.
SECURITIES BORROWED AND SECURITIES LOANED are recorded at the amount of cash
advanced or received. With respect to securities loaned, the Company obtains
collateral in an amount equal to 102% and 105% of the fair value of the
domestic and foreign securities, respectively. The Company monitors the
market value of securities borrowed and loaned on a daily basis with
additional collateral obtained as necessary. Non-cash collateral received is
not reflected in the Consolidated Statements of Financial Position.
Substantially, all the Company's securities borrowed contracts are with
other brokers and dealers, commercial banks and institutional clients.
Substantially, all of the Company's securities loaned are with large
brokerage firms.
These transactions are used to generate net investment income and facilitate
trading activity. These instruments are short-term in nature (usually 30
days or less) and are collateralized principally by U.S. Government and
mortgage-backed securities. The carrying amounts of these instruments
approximate fair value because of the relatively short period of time
between the origination of the instruments and their expected realization.
SHORT-TERM INVESTMENTS, including highly liquid debt instruments purchased
with an original maturity of twelve months or less, are carried at amortized
cost, which approximates fair value.
OTHER LONG-TERM INVESTMENTS primarily represent the Company's investments
in joint ventures and partnerships in which the Company does not have
control and derivatives held for purposes other than trading. Joint venture
and partnership investments are recorded using the equity method of
accounting, reduced for other than temporary declines in value.
REALIZED INVESTMENT GAINS, NET are computed using the specific
identification method. Costs of fixed maturities and equity securities are
adjusted for impairments considered to be other than temporary. Allowances
for losses on mortgage loans on real estate are netted against asset
categories to which they apply and provisions for losses on investments are
included in "Realized investment gains, net." Unrealized gains and losses on
trading account assets are included in "Commissions and other income."
CASH
Cash includes cash on hand, amounts due from banks, and money market
instruments.
DEFERRED POLICY ACQUISITION COSTS
The costs which vary with and that are related primarily to the production
of new insurance business are deferred to the extent such costs are deemed
recoverable from future profits. Such costs include certain commissions,
costs of policy issuance and underwriting, and certain variable field office
expenses. Deferred policy acquisition costs are subject to recoverability
testing at the time of policy issue and loss recognition testing at the end
of each accounting period. Deferred policy acquisition costs are adjusted
for the impact of unrealized gains or losses on investments as if these
gains or losses had been realized, with corresponding credits or charges
included in equity.
9
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
For life insurance, deferred policy acquisition costs are amortized over the
expected life of the contracts (up to 45 years) in proportion to estimated
gross margins based on historical and anticipated future experience, which
is updated periodically. The effect of changes in estimated gross margins is
reflected in earnings in the period they are revised. Policy acquisition
costs related to interest-sensitive products and certain investment-type
products are deferred and amortized over the expected life of the contracts
(periods ranging from 15 to 30 years) in proportion to estimated gross
profits arising principally from investment results, mortality and expense
margins and surrender charges based on historical and anticipated future
experience, updated periodically. The effect of revisions to estimated gross
profits on unamortized deferred acquisition costs is reflected in earnings
in the period such estimated gross profits are revised.
For property and casualty contracts, deferred policy acquisition costs are
amortized over the period in which related premiums are earned. Future
investment income is considered in determining the recoverability of
deferred policy acquisition costs.
For disability insurance, health insurance, group life insurance and most
group annuities, acquisition costs are expensed as incurred.
POLICYHOLDERS' DIVIDENDS
The amount of the dividends to be paid to policyholders is determined
annually by the Company's Board of Directors. The aggregate amount of
policyholders' dividends is related to actual interest, mortality,
morbidity, persistency and expense experience for the year and judgment as
to the appropriate level of statutory surplus to be retained by the Company.
SEPARATE ACCOUNT ASSETS AND LIABILITIES
Separate Account assets and liabilities are reported at estimated fair value
and represent segregated funds which are invested for certain policyholders,
pension fund and other customers. The assets consist of common stocks, fixed
maturities, real estate related securities, real estate mortgage loans and
short-term investments. The assets of each account are legally
segregated and are not subject to claims that arise out of any other
business of the Company. Investment risks associated with market value
changes are generally borne by the customers, except to the extent of
minimum guarantees made by the Company with respect to certain accounts. The
investment income and gains or losses for Separate Accounts generally accrue
to the policyholders and are not included in the Consolidated Statement of
Operations. Mortality, policy administration and surrender charges on the
accounts are included in "Policy charges and fee income."
INSURANCE REVENUE AND EXPENSE RECOGNITION
Premiums from participating insurance policies are generally recognized when
due. Benefits are recorded as an expense when they are incurred. A liability
for future policy benefits is recorded using the net level premium method.
Premiums from non-participating group annuities with life contingencies are
generally recognized when due. For single premium immediate annuities and
structured settlements, premiums are recognized when due with any excess
profit deferred and recognized in a constant relationship to insurance
in-force or, for annuities, the amount of expected future benefit payments.
Amounts received as payment for interest sensitive investment contracts,
deferred annuities and participating group annuities are reported as
deposits to "Policyholders' account balances." Revenues from these contracts
are reflected in "Policy charges and fee income" and consist primarily of
fees assessed during the period against the policyholders' account balances
for mortality charges, policy administration charges, surrender charges and
interest earned from the investment of these account balances. Benefits and
expenses for these products include claims in excess of related account
balances, expenses of contract administration, interest credited and
amortization of deferred policy acquisition costs.
For disability insurance, group life insurance, health insurance and
property and casualty insurance, premiums are recognized over the period to
which the premiums relate in proportion to the amount of insurance
protection provided. Claim and claim adjustment expenses are recognized when
incurred.
10
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FOREIGN CURRENCY TRANSLATION ADJUSTMENTS
Assets and liabilities of foreign operations and subsidiaries reported in
other than U.S. dollars are translated at the exchange rate in effect at the
end of the period. Revenues, benefits and other expenses are translated at
the average rate prevailing during the period. Translation adjustments
arising from the use of differing exchange rates from period to period are
charged or credited directly to equity. The cumulative effect of changes in
foreign exchange rates are included in "Foreign currency translation
adjustments."
COMMISSIONS AND OTHER INCOME
Commissions and other income principally includes securities and
commodities, commission revenues, asset management fees, investment banking
revenue and realized and unrealized gains on trading account assets of the
Company's broker-dealer subsidiary.
DERIVATIVE FINANCIAL INSTRUMENTS
Derivatives include swaps, forwards, futures, options and loan commitments
subject to market risk, all of which are used by the Company in both trading
and other than trading activities. Income and expenses related to
derivatives used to hedge are recorded on the accrual basis as an adjustment
to the carrying amount or to the yield of the related assets or liabilities
over the periods covered by the derivative contracts. Gains and losses
relating to early terminations of interest rate swaps used to hedge are
deferred and amortized over the remaining period originally covered by the
swap. Gains and losses relating to derivatives used to hedge the risks
associated with anticipated transactions are deferred and utilized to adjust
the basis of the transaction once it has closed. If it is determined that
the transaction will not close, such gains and losses are included in
"Realized investment gains, net."
DERIVATIVES HELD FOR TRADING PURPOSES are used in the Company's securities
broker-dealer business and in a limited-purpose swap subsidiary to meet the
risk management needs of its customers by structuring transactions that
allow customers to manage their exposure to interest rates, foreign exchange
rates, indices or prices of securities and commodities and when possible,
matched trading positions are established to minimize risk to the Company.
Derivatives used for trading purposes are recorded at fair value as of the
reporting date. Realized and unrealized changes in fair values are included
in "Commissions and other income" in the period in which the changes occur.
DERIVATIVES HELD FOR PURPOSES OTHER THAN TRADING are primarily used to hedge
or reduce exposure to interest rate and foreign currency risks associated
with assets held or expected to be purchased or sold, and liabilities
incurred or expected to be incurred. Additionally, other than trading
derivatives are used to change the characteristics of the Company's
asset/liability mix consistent with the Company's risk management
activities.
INCOME TAXES
The Company and its domestic subsidiaries file a consolidated federal income
tax return. The Internal Revenue Code (the "Code") limits the amount of
non-life insurance losses that may offset life insurance company taxable
income. The Code also imposes an "equity tax" on mutual life insurance
companies which, in effect, imputes an additional tax to the Company based
on a formula that calculates the difference between stock and mutual
insurance companies' earnings. Income taxes include an estimate for changes
in the total equity tax to be paid for current and prior years. Subsidiaries
operating outside the United States are taxed under applicable foreign
statutes.
Deferred income taxes are generally recognized, based on enacted rates, when
assets and liabilities have different values for financial statement and tax
reporting purposes. A valuation allowance is recorded to reduce a deferred
tax asset to that portion which management believes is more likely than not
to be realized.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1996, the Financial Accounting Standards Board ("FASB") issued the
Statement of Financial Accounting Standards ("SFAS") No. 125, "Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities" ("SFAS
11
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
125"). The statement provides accounting and reporting standards for
transfers and servicing of financial assets and extinguishments of
liabilities and provides consistent standards for distinguishing transfers
of financial assets that are sales from transfers that are secured
borrowings. SFAS 125 became effective January 1, 1997 and is to be applied
prospectively. Subsequent to June 1996, FASB issued SFAS No. 127 "Deferral
of the Effective Date of Certain Provisions of SFAS 125" ("SFAS 127"). SFAS
127 delays the implementation of SFAS 125 for one year for certain
provisions, including repurchase agreements, dollar rolls, securities
lending and similar transactions. The Company will delay implementation
with respect to those affected provisions. Adoption of SFAS 125 has not and
will not have a material impact on the Company's results of operations,
financial condition and liquidity.
In June of 1997, FASB issued SFAS No. 130, "Reporting Comprehensive Income,"
which is effective for years beginning after December 15, 1997. This
statement defines comprehensive income as "the change in equity of a
business enterprise during a period from transactions and other events and
circumstances from non-owner sources, excluding investments by owners and
distributions to owners" and establishes standards for reporting and
displaying comprehensive income and its components in financial statements.
The statement requires that the Company classify items of other
comprehensive income by their nature and display the accumulated balance of
other comprehensive income separately from retained earnings in the equity
section of the Statement of Financial Position. In addition,
reclassification of financial statements for earlier periods must be
provided for comparative purposes.
RECLASSIFICATIONS
Certain amounts in the prior years have been reclassified to conform to
current year presentation.
12
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. INVESTMENTS
FIXED MATURITIES AND EQUITY SECURITIES
The following tables provide additional information relating to fixed
maturities and equity securities (excluding trading account assets) as of
December 31:
<TABLE>
<CAPTION>
1997
------------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
-------------- -------------- -------------- ------------
FIXED MATURITIES AVAILABLE FOR SALE (IN MILLIONS)
<S> <C> <C> <C> <C>
U.S. Treasury securities and obligations of
U.S. government corporations and agencies......... $ 9,755 $ 783 $ -- $ 10,538
Obligations of U.S. states and
their political subdivisions..................... 1,375 93 -- 1,468
Foreign government bonds............................ 3,177 218 17 3,378
Corporate securities................................ 49,997 2,601 144 52,454
Mortgage-backed securities.......................... 6,828 210 5 7,033
Other fixed maturities.............................. 364 35 -- 399
-------------- -------------- -------------- ------------
Total fixed maturities available for sale........... $ 71,496 $ 3,940 $ 166 $ 75,270
============== ============== ============== ============
EQUITY SECURITIES AVAILABLE FOR SALE................ $ 2,376 $ 680 $ 246 $ 2,810
============== ============== ============== ============
<CAPTION>
1997
------------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
-------------- -------------- -------------- ------------
FIXED MATURITIES HELD TO MATURITY (IN MILLIONS)
<S> <C> <C> <C> <C>
U.S. Treasury securities and obligations of
U.S. government corporations and agencies......... $ 88 $ - $ - $ 88
Obligations of U.S. states and
their political subdivisions...................... 152 4 1 155
Foreign government bonds............................ 33 5 - 38
Corporate securities................................ 18,282 1,212 34 19,460
Mortgage-backed securities.......................... 1 - - 1
Other fixed maturities.............................. 144 8 - 152
-------------- -------------- -------------- ------------
Total fixed maturities held to maturity............. $ 18,700 $ 1,229 $ 35 $ 19,894
============== ============== ============== ============
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. INVESTMENTS (CONTINUED)
1996
-------------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
--------------- -------------- -------------- ------------
FIXED MATURITIES AVAILABLE FOR SALE (IN MILLIONS)
<S> <C> <C> <C> <C>
U.S. Treasury securities and obligations of
U.S. government corporations and agencies......... $ 10,618 $ 361 $ 77 $ 10,902
Obligations of U.S. states and
their political subdivisions...................... 1,104 29 2 1,131
Foreign government bonds............................ 2,814 137 12 2,939
Corporate securities................................ 43,593 1,737 284 45,046
Mortgage-backed securities.......................... 6,377 140 21 6,496
Other fixed maturities.............................. 39 1 1 39
--------------- -------------- -------------- ------------
Total fixed maturities available for sale........... $ 64,545 $ 2,405 $ 397 $ 66,553
=============== ============== ============== ============
EQUITY SECURITIES AVAILABLE FOR SALE................ $ 2,103 $ 659 $ 140 $ 2,622
=============== ============== ============== ============
<CAPTION>
1996
-------------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
--------------- -------------- -------------- ------------
FIXED MATURITIES HELD TO MATURITY (IN MILLIONS)
<S> <C> <C> <C> <C>
U.S. Treasury securities and obligations of
U.S. government corporations and agencies......... $ 309 $ 3 $ 6 $ 306
Obligations of U.S. states and
their political subdivisions...................... 7 -- -- 7
Foreign government bonds............................ 162 11 -- 173
Corporate securities................................ 19,886 1,033 82 20,837
Mortgage-backed securities.......................... 26 -- -- 26
Other fixed maturities.............................. 13 -- -- 13
--------------- -------------- -------------- ------------
Total fixed maturities held to maturity............. $ 20,403 $ 1,047 $ 88 $ 21,362
=============== ============== ============== ============
</TABLE>
14
<PAGE>
INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. INVESTMENTS (CONTINUED)
The amortized cost and estimated fair value of fixed maturities by
contractual maturities at December 31, 1997, is shown below:
<TABLE>
<CAPTION>
AVAILABLE FOR SALE HELD TO MATURITY
-------------------------------- ------------------------------
ESTIMATED ESTIMATED
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
-------------- -------------- -------------- ------------
(IN MILLIONS) (IN MILLIONS)
<S> <C> <C> <C> <C>
Due in one year or less....................... $ 1,991 $ 2,011 $ 686 $ 695
Due after one year through five years......... 18,916 19,226 4,496 4,659
Due after five years through ten years........ 16,776 17,494 7,161 7,551
Due after ten years........................... 26,985 29,506 6,356 6,988
Mortgage-backed securities.................... 6,828 7,033 1 1
-------------- -------------- -------------- ------------
Total......................................... $ 71,496 $ 75,270 $ 18,700 $ 19,894
============== ============== ============== ============
</TABLE>
Actual maturities may differ from contractual maturities because issuers have
the right to call or prepay obligations
Proceeds from the repayment of held to maturity fixed maturities during 1997,
1996 and 1995 were $4,042 million, $4,268 million, and $3,767 million,
respectively. Gross gains of $62 million, $78 million, and $27 million, and
gross losses of $1 million, $7 million, and $0.2 million were realized on
prepayment of held to maturity fixed maturities during 1997, 1996 and 1995,
respectively.
Proceeds from the sale of available for sale fixed maturities during 1997,
1996 and 1995 were $120,604 million, $121,910 million and $96,134 million,
respectively. Proceeds from the maturity of available for sale fixed
maturities during 1997, 1996 and 1995 were $2,946 million, $1,458 million,
and $950 million, respectively. Gross gains of $1,310 million, $1,562
million, and $2,052 million and gross losses of $639 million, $1,026 million,
and $941 million were realized on sales and prepayments of available for sale
fixed maturities during 1997, 1996 and 1995, respectively.
Write downs for impairments of fixed maturities which were deemed to be other
than temporary were $13 million, $54 million and $100 million for the years
1997, 1996 and 1995, respectively.
During the year ended December 31, 1997, there were no securities classified
as held to maturity that were sold and two securities so classified were
transferred to the available for sale portfolio. These actions were taken as
a result of a significant deterioration in credit worthiness. The aggregate
amortized cost of the securities transferred was $26 million with gross
unrealized investment gains of $0.5 million charged to "Net unrealized
investment gains."
During the year ended December 31, 1996, one security classified as held to
maturity was sold and two securities so classified were transferred to the
available for sale portfolio. These actions were taken as a result of a
significant deterioration in credit worthiness. The amortized cost of the
security sold was $35 million with a related realized investment loss of $0.7
million; the aggregate amortized cost of the securities transferred was $26
million with gross unrealized investment losses of $6 million charged to "Net
unrealized investment gains."
15
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. INVESTMENTS (CONTINUED)
MORTGAGE LOANS ON REAL ESTATE
The Company's mortgage loans were collateralized by the following property
types at December 31:
<TABLE>
<CAPTION>
1997 1996
--------------------------------- --------------------------------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Office buildings............................... $ 4,692 28.5% $ 6,056 34.4%
Retail stores.................................. 3,078 18.7% 3,676 20.9%
Residential properties......................... 891 5.4% 961 5.4%
Apartment complexes............................ 3,551 21.6% 2,954 16.8%
Industrial buildings........................... 1,958 11.9% 1,807 10.3%
Agricultural properties........................ 1,666 10.1% 1,550 8.8%
Other.......................................... 618 3.8% 608 3.4%
--------------- --------- -------------- ------
Subtotal 16,454 100.0% 17,612 100.0%
========= ======
Allowance for losses........................... (450) (515)
--------------- --------------
Net carrying value............................. $ 16,004 $ 17,097
=============== ==============
</TABLE>
The mortgage loans are geographically dispersed throughout the United
States and Canada with the largest concentrations in California (25.3%) and
New York (8.3%) at December 31, 1997. Included in the above balances are
mortgage loans receivable from affiliated joint ventures of $225 million
and $461 million at December 31, 1997 and 1996, respectively.
Activity in the allowance for losses for all mortgage loans, for the years
ended December 31, is summarized as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---------------- ---------------- ---------------
(IN MILLIONS)
<S> <C> <C> <C>
Allowance for losses, beginning of year.............. $ 515 $ 862 $ 1,004
Additions charged to operations...................... 19 9 6
Release of allowance for losses...................... (60) (256) (32)
Charge-offs, net of recoveries....................... (24) (100) (116)
--------------- ---------------- ---------------
Allowance for losses, end of year.................... $ 450 $ 515 $ 862
================ ================ ===============
</TABLE>
The $60 million, $256 million and $32 million reduction of the mortgage
loan allowance for losses in 1997, 1996 and 1995, respectively, is
primarily attributable to the improved economic climate, changes in the
nature and mix of borrowers and underlying collateral and a significant
decrease in impaired loans consistent with a general decrease in the
mortgage loan portfolio due to prepayments, sales and foreclosures.
16
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. INVESTMENTS (CONTINUED)
Impaired mortgage loans and related allowance for losses at December 31,
are as follows:
<TABLE>
<CAPTION>
1997 1996
----------------- ------------------
(IN MILLIONS)
<S> <C> <C>
Impaired mortgage loans with allowance for losses ............. $ 330 $ 941
Impaired mortgage loans with no allowance for losses .......... 1,303 1,491
Allowance for losses .......................................... (97) (189)
----------------- ------------------
Net carrying value of impaired mortgage loans ................. $ 1,536 $ 2,243
================= ==================
</TABLE>
Impaired mortgage loans with no provision for losses are loans where the
fair value of the collateral or the net present value of the expected
future cash flows related to the loan equals or exceeds the recorded
investment. The average recorded investment in impaired loans before
allowance for losses was $2,102 million, $2,842 million and $4,146 million
during 1997, 1996 and 1995, respectively. Net investment income recognized
on these loans totaled $140 million, $265 million and $415 million for the
years ended December 31, 1997, 1996 and 1995, respectively.
INVESTMENT REAL ESTATE
The Company's "investment real estate" of $1,519 million and $2,586 million
at December 31, 1997 and 1996, respectively, is held through direct
ownership. Of the Company's real estate, $1,490 million and $406 million
consists of commercial and agricultural assets held for disposal at
December 31, 1997 and 1996, respectively. Impairment losses and the
valuation allowances aggregated $40 million, $38 million and $124 million
for the years ended December 31, 1997, 1996 and 1995, respectively, and are
included in "Realized investment gains, net."
RESTRICTED ASSETS AND SPECIAL DEPOSITS
Assets of $2,783 million and $2,453 million at December 31, 1997 and 1996,
respectively, were on deposit with governmental authorities or trustees as
required by certain insurance laws. Additionally, assets valued at $2,352
million at December 31, 1997, were held in voluntary trusts. Of this
amount, $1,801 million related to the multi-state policyholder settlement
as described in Note 14. The remainder relates to trusts established to
fund guaranteed dividends to certain policyholders. The terms of these
trusts provide that the assets are to be used for payment of the designated
settlement and dividend benefits, as the case may be. Assets valued at $741
million and $3,414 million at December 31, 1997 and 1996, respectively,
were maintained as compensating balances or pledged as collateral for bank
loans and other financing agreements. Restricted cash and securities of
$1,835 million and $1,614 million at December 31, 1997, and 1996,
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.
OTHER LONG-TERM INVESTMENTS
The Company's "Other long-term investments" of $3,360 million and $2,995
million as of December 31, 1997 and 1996, respectively, are composed of
$1,349 million and $832 million in real estate related interests and $2,011
million and $2,163 million of non-real estate related interests, including
a $149 million net investment in a leveraged lease entered into in 1997.
The Company's share of net income from such entities was $411 million, $245
million, and $326 million for 1997, 1996, and 1995, respectively, and is
reported in "Net investment income."
17
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. INVESTMENTS (CONTINUED)
INVESTMENT INCOME AND INVESTMENT GAINS AND LOSSES
NET INVESTMENT INCOME arose from the following sources for the years ended
December 31:
<TABLE>
<CAPTION>
1997 1996 1995
-------------- -------------- -----------
(IN MILLIONS)
<S> <C> <C> <C>
Fixed maturities-available for sale........................ $ 5,074 $ 4,871 $ 4,774
Fixed maturities-held to maturity.......................... 1,622 1,793 1,717
Trading account assets..................................... 504 444 588
Equity securities-available for sale ...................... 52 81 57
Mortgage loans on real estate.............................. 1,555 1,690 2,075
Real estate ............................................... 565 685 742
Policy loans............................................... 396 384 392
Securities purchased under agreements to resell............ 15 11 19
Receivables from broker-dealer clients..................... 706 579 678
Short-term investments..................................... 697 536 590
Other investment income.................................... 573 725 983
-------------- -------------- -------------
Gross investment income.................................... 11,759 11,799 12,615
Less investment expenses................................... (1,896) (2,057) (2,437)
-------------- -------------- -------------
Net investment income...................................... $ 9,863 $ 9,742 $ 10,178
============== ============== =============
</TABLE>
REALIZED INVESTMENT GAINS, NET, including changes in allowances for losses
and charges for other than temporary reductions in value, for the years
ended December 31, were from the following sources:
<TABLE>
<CAPTION>
1997 1996 1995
-------------- -------------- -----------
(IN MILLIONS)
<S> <C> <C> <C>
Fixed maturities....................................... $ 684 $ 513 $ 1,180
Mortgage loans on real estate ......................... 68 248 67
Investment real estate ................................ 700 76 (19)
Equity securities-available for sale .................. 363 267 400
Other gains (losses)................................... 372 34 (125)
-------------- -------------- -----------
Realized investment gains, net......................... $ 2,187 $ 1,138 $ 1,503
============== ============== ===========
</TABLE>
NET UNREALIZED INVESTMENT GAINS on securities available for sale are
included in the consolidated statement of financial position as a component
of equity, net of tax. Changes in these amounts for the years ended
December 31, are as follows:
<TABLE>
<CAPTION>
1997 1996
----------------- -----------------
(IN MILLIONS)
<S> <C> <C>
Balance, beginning of year................................. $ 1,136 $ 2,397
Changes in unrealized investment
gains(losses) attributable to:
Fixed maturities ....................................... 1,766 (2,892)
Equity securities....................................... (85) 254
Participating group annuity contracts................... (564) 479
Deferred policy acquisition costs....................... (154) 261
Deferred federal income taxes........................... (347) 637
----------------- -----------------
Sub-total............................................... 616 (1,261)
----------------- -----------------
Balance, end of year....................................... $ 1,752 $ 1,136
================= =================
</TABLE>
18
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. INVESTMENTS (CONTINUED)
Based on the carrying value, assets categorized as "non-income producing"
for the year ended December 31, 1997 included in fixed maturities available
for sale, mortgage loans on real estate and other long term investments
totaled $26 million, $93 million and $7 million, respectively.
4. DEFERRED POLICY ACQUISITION COSTS
The balances of and changes in deferred policy acquisition costs as of and
for the years ended December 31, are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
-------------- -------------- -----------
(IN MILLIONS)
<S> <C> <C> <C>
Balance, beginning of year ............................ $ 6,291 $ 6,088 $ 6,403
Capitalization of commissions, sales and issue expenses 1,049 931 919
Amortization and other adjustments..................... (1,192) (989) (783)
Change in unrealized investment gains ................. (154) 261 (451)
-------------- -------------- -----------
Balance, end of year .................................. $ 5,994 $ 6,291 $ 6,088
============== ============== ===========
</TABLE>
5. FUTURE POLICY BENEFITS AND OTHER POLICYHOLDERS' LIABILITIES
FUTURE POLICY BENEFITS at December 31 are as follows:
<TABLE>
<CAPTION>
1997 1996
----------------- -----------------
(IN MILLIONS)
<S> <C> <C>
Life insurance ............................................ $ 46,712 $ 44,118
Annuities ................................................. 15,469 14,828
Other contract liabilities ................................ 3,400 5,009
----------------- -----------------
Future policy benefits .................................... $ 65,581 $ 63,955
================= =================
</TABLE>
Life insurance liabilities include reserves for death and endowment policy
benefits, terminal dividends, premium deficiency reserves and certain health
benefits. Annuity liabilities include reserves for immediate annuities and
non-participating group annuities. Other contract liabilities primarily consist
of unearned premium and benefit reserves for group health products.
The following table highlights the key assumptions generally utilized in
calculating these reserves:
<TABLE>
<CAPTION>
PRODUCT MORTALITY INTEREST RATE ESTIMATION METHOD
- ------------------------- ------------------------ --------------- ------------------------
<S> <C> <C> <C>
Life insurance Generally rates 2.5% to 7.5% Net level premium
guaranteed in calculating based on non-forfeiture
cash surrender values interest rate
Individual immediate 1983 Individual 3.25% to 11.25% Present value of
annuities Annuity Mortality expected future payments
Table with certain based on historical
modifications experience
Group annuities in 1950 Group 3.75% to 17.35% Present value of
payout status Annuity Mortality expected future payments
Table with certain based on historical
modifications experience
Other contract liabilities -- 6.0% to 7.0% Present value of
expected future payments
based on historical
experience
</TABLE>
19
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. FUTURE POLICY BENEFITS AND OTHER POLICYHOLDERS' LIABILITIES (CONTINUED)
For the above categories, premium deficiency reserves are established, if
necessary, when the liability for future policy benefits plus the present
value of expected future gross premiums are insufficient to provide for
expected future policy benefits and expenses. A premium deficiency reserve
has been recorded for the group single premium annuity business, which
consists of limited-payment, long duration, traditional non-participating
annuities. A liability of $1,645 million and $1,320 million is included in
"Future policy benefits" with respect to this deficiency for the years
ended December 31, 1997 and 1996, respectively.
POLICYHOLDERS' ACCOUNT BALANCES at December 31, are as follows:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
(IN MILLIONS)
<S> <C> <C>
Individual annuities........................................ $ 5,695 $ 6,408
Group annuities & guaranteed investment contracts........... 19,053 21,706
Interest-sensitive life contracts........................... 3,160 2,888
Dividend accumulations...................................... 5,033 5,007
--------- ---------
Policyholders' account balances............................. $ 32,941 $ 36,009
========= =========
</TABLE>
Policyholders' account balances for interest-sensitive life and
investment-type contracts are equal to policy account values. The policy
account values represent an accumulation of gross premium payments plus
credited interest less withdrawals, expenses and mortality charges.
Certain contract provisions that determine the policyholder account
balances are as follows:
<TABLE>
<CAPTION>
WITHDRAWAL/
PRODUCT INTEREST RATE SURRENDER CHARGES
----------------------------------- ------------------------ -------------------------------------
<S> <C> <C>
Individual annuities 3.1% to 6.6% 0% to 8% for up to 8 years
Group annuities 5.0% to 12.7% Contractually limited or subject to
market value adjustments
Guaranteed investment contracts 3.9% to 14.34% Subject to market value withdrawal
provisions for any funds withdrawn
other than for benefit responsive and
contractual payments
Interest sensitive life contracts 4.0% to 6.5% Various up to 10 years
Dividend accumulations 3.0% to 4.0%
</TABLE>
20
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. FUTURE POLICY BENEFITS AND OTHER POLICYHOLDERS' LIABILITIES (CONTINUED)
OTHER POLICYHOLDERS' LIABILITIES. The following table provides a
reconciliation of the activity in the liability for unpaid claims and claim
adjustment expense for property and casualty and accident and health
insurance, which is included in "Other policyholder's liabilities" at
December 31:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
(IN MILLIONS)
<S> <C> <C> <C>
Balance at January 1......................................... $ 6,043 $ 5,933 $ 7,983
Less reinsurance recoverables.............................. 563 572 865
---------- ---------- ----------
Net balance at January 1..................................... 5,480 5,361 7,118
---------- ---------- ----------
Incurred related to:
Current year............................................... 10,691 10,281 10,534
Prior years................................................ 11 (91) 141
---------- ---------- ----------
Total incurred............................................... 10,702 10,190 10,675
---------- ---------- ----------
Paid related to:
Current year............................................... 7,415 7,497 7,116
Prior years................................................ 2,651 2,574 2,800
---------- ---------- ----------
Total paid................................................... 10,066 10,071 9,916
---------- ---------- ----------
Less Reinsurance
Segment.................................................... -- -- 2,516
---------- ---------- ----------
Net balance at December 31................................... 6,116 5,480 5,361
Plus reinsurance recoverables.............................. 543 563 572
---------- ---------- ----------
Balance at December 31....................................... $ 6,659 $ 6,043 $ 5,933
========== ========== ==========
</TABLE>
The changes in provision for claims and claim adjustment expenses related
to prior years of $11 million, $(91) million and $141 million in 1997, 1996
and 1995, respectively, are due to such factors as changes in claim cost
trends in healthcare, an accelerated decline in indemnity health business,
and lower than anticipated property and casualty unpaid claims and claim
adjustment expenses.
The other policyholders' liabilities presented above consist primarily of
unpaid claim liabilities which include estimates for liabilities associated
with reported claims and for incurred but not reported claims based, in
part, on the Company's experience. Changes in the estimated cost to settle
unpaid claims are charged or credited to the statement of operations
periodically as the estimates are revised. Accident and health unpaid
claims liabilities for 1997 and 1996 included above are discounted using
interest rates ranging from 6.0% to 7.5%.
21
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. SHORT-TERM AND LONG-TERM DEBT
Debt consists of the following at December 31:
SHORT-TERM DEBT
<TABLE>
<CAPTION>
1997 1996
-------------- --------------
(IN MILLIONS)
<S> <C> <C>
Commercial paper.......................................... $ 4,268 $ 4,511
Notes payable............................................. 2,151 1,614
Current portion of long-term debt......................... 355 437
-------------- --------------
Total short-term debt................................ $ 6,774 $ 6,562
============== ==============
</TABLE>
The weighted average interest rate on outstanding short-term debt was
approximately 6.0% and 5.6% at December 31, 1997 and 1996, respectively.
The Company issues commercial paper primarily to manage operating cash
flows and existing commitments, meet working capital needs and take
advantage of current investment opportunities. Commercial paper borrowings
are supported by various lines of credit.
LONG-TERM DEBT
<TABLE>
<CAPTION>
DESCRIPTION MATURITY DATES RATE 1997 1996
------------------------------------ ----------------- -------------- --------- ----------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Floating rate notes ("FRN") 1998 6.5% $ 40 $ 128
Long term notes 1998 - 2023 4% - 12% 1,194 1,023
Zero coupon notes 1998 - 1999 8.6% (a) 334 365
Australian dollar notes 1997 9% -- 55
Canadian dollar notes 1997 - 1998 7.0% - 9.125% 117 320
Japanese yen notes 1998 - 2000 0.5% - 4.6% 178 90
Swiss francs notes 1998 3.875% 120 103
Canadian dollar FRN 2003 5.89% 96 96
Surplus notes 2003 - 2025 6.875% - 8.3% 986 985
Commercial paper backed by long-term
credit agreements 1,500 1,000
Other notes payable 1998 - 2017 4% - 7.5% 63 32
---------- ----------
Sub-total............................................................................. 4,628 4,197
Less: current portion of long-term debt............................................ (355) (437)
---------- ----------
Total long-term debt.................................................................. $ 4,273 $ 3,760
========== ==========
</TABLE>
(a) The rate shown for zero coupon notes, which do not bear interest,
represents a level yield to maturity.
Payment of interest and principal on the surplus notes of $686 million
issued after 1993 may be made only with the prior approval of the
Commissioner of Insurance of the State of New Jersey.
In order to modify exposure to interest rate and currency exchange rate
movements, the Company utilizes derivative instruments, primarily interest
rate swaps, in conjunction with some of its debt issues. The effect of
these derivative instruments is included in the calculation of the interest
expense on the associated debt, and as a result, the effective interest
rates on the debt may differ from the rates reflected in the tables above.
Floating rates are determined by formulas and may be subject to certain
minimum or maximum rates.
Scheduled principal repayments of long-term debt as of December 31, 1997,
are as follows: $357 million in 1998, $808 million in 1999, $260 million in
2000, $32 million in 2001, $1,814 million in 2002 and $1,379 million
thereafter.
At December 31, 1997, the Company had $8,257 million in lines of credit
from numerous financial institutions of which $5,160 million were unused.
These lines of credit generally have terms ranging from 1 to 5 years.
22
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. EMPLOYEE BENEFIT PLANS
PENSION PLANS
The Company has one funded non-contributory defined benefit pension plan,
which covers substantially all of its employees. The Company also has
several non-contributory non-funded defined benefit plans covering certain
executives. Benefits are generally based on career average earnings and
credited length of service. The Company's funding policy is to contribute
annually an amount necessary to satisfy the Internal Revenue Service
contribution guidelines.
Prepaid and accrued pension costs are included in "Other assets" and "Other
liabilities," respectively, in the Company's consolidated statements of
financial position. The status of these plans as of September 30, adjusted
for fourth quarter activity related to funding activity and contractual
termination benefits is summarized below:
<TABLE>
<CAPTION>
1997 1996
--------------------------------- --------------------------------
ASSETS ACCUMULATED ASSETS ACCUMULATED
EXCEED BENEFITS EXCEED BENEFITS
ACCUMULATED EXCEED ACCUMULATED EXCEED
BENEFITS ASSETS BENEFITS ASSETS
--------------- -------------- -------------- -------------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Actuarial present value of
benefit obligation:
Vested benefit obligation.............. $ (4,129) $ (205) $ (3,826) $ (180)
============ ============ =========== =============
Accumulated benefit obligation......... $ (4,434) $ (226) $ (4,121) $ (198)
============ ============ =========== =============
Projected benefit obligation............. $ (5,238) $ (319) $ (4,873) $ (274)
Plan assets at fair value................ 8,489 -- 7,306 --
------------ ------------ ----------- -------------
Plan assets in excess of (less than)
projected benefit obligation........... 3,251 (319) 2,433 (274)
Unrecognized transition amount........... (662) 1 (769) 1
Unrecognized prior service cost.......... 317 10 356 11
Unrecognized net (gain) loss............. (1,689) 45 (916) 16
Additional minimum liability............. -- (11) -- (10)
Effect of fourth quarter activity........ (67) 4 (98) 4
------------ ------------ ----------- -------------
Prepaid (accrued) pension cost
at December 31......................... $ 1,150 $ (270) $ 1,006 $ (252)
============ ============ =========== =============
</TABLE>
Plan assets consist primarily of equity securities, bonds, real estate and
short-term investments, of which $6,022 million and $5,668 million are
included in Separate Account assets and liabilities at December 31, 1997
and 1996, respectively.
Effective December 31, 1996, The Prudential Securities Incorporated Cash
Balance Plan (the "PSI Plan") was merged into The Retirement System for
United States Employees and Special Agents of The Prudential Insurance
Company of America (the "Prudential Plan"). The name of the merged plan is
The Prudential Merged Retirement Plan ("Merged Retirement Plan"). All of
the assets of the Merged Retirement Plan are available to pay benefits to
participants and their beneficiaries who are covered by the Merged
Retirement Plan. The merger of the plans had no effect on the December 31,
1996 consolidated financial position or results of operations.
During 1996, the Prudential Plan was amended to provide cost of living
adjustments for retirees. The effect of this plan amendment increased
benefit obligations and unrecognized prior service cost by $170 million at
September 30, 1996. In addition, the Prudential Plan was amended to provide
contractual termination benefits to certain plan participants who were
notified between September 15, 1996 and December 31, 1997 that their
employment had been terminated. During 1997, the Prudential Retirement Plan
Document, a component of the Merged Retirement Plan was amended to extend
the contractual termination benefits to December 31, 1998. Costs related to
these amendments are reflected below in contractual termination benefits.
23
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. EMPLOYEE BENEFIT PLANS (CONTINUED)
Net periodic pension income included in "General and administrative
expenses" in the Company's consolidated statement of operations for the
years ended December 31, 1997, 1996 and 1995 include the following
components:
<TABLE>
<CAPTION>
1997 1996 1995
-------------- ------------- --------------
(IN MILLIONS)
<S> <C> <C> <C>
Service cost-benefits earned during the year......... $ 127 $ 140 $ 133
Interest cost on projected benefit obligation........ 376 354 392
Actual return on plan assets......................... (1,693) (748) (1,288)
Net amortization and deferral........................ 1,012 73 629
Contractual termination benefits..................... 30 63 --
-------------- ------------- --------------
Net periodic pension income.......................... $ (148) $ (118) $ (134)
============== ============= ==============
</TABLE>
The assumptions at September 30 used by the Company are to calculate the
projected benefit obligations as of that date and determine the pension
expense for the following fiscal year:
<TABLE>
<CAPTION>
1997 1996 1995
-------------- ------------- --------------
<S> <C> <C> <C>
Discount rate.......................................... 7.25% 7.75% 7.50%
Rate of increase in compensation levels................ 4.50% 4.50% 4.50%
Expected long-term rate of return on plan assets....... 9.50% 9.50% 9.00%
</TABLE>
OTHER POSTRETIREMENT BENEFITS
The Company provides certain life insurance and health care benefits for
its retired employees, their beneficiaries and covered dependents.
Substantially all of the Company's employees may become eligible to receive
benefits if they retire after age 55 with at least 10 years of service, or
under circumstances after age 50 with at least 20 years of continuous
service.
The Company has elected to amortize its transition obligation over 20
years. Post-retirement benefits are funded as considered necessary by
Company management. The Company's funding of its postretirement benefit
obligations totaled $43 million, $38 million and $94 million in 1997, 1996
and 1995, respectively.
In 1995 the Company modified the restrictions on certain post-retirement
plan assets to allow these assets to be used for benefits related to both
active and retired employees. Formerly, these benefits were available only
for retired employees. In connection with this modification, the Company
transferred $120 million from one of these plans in 1995. Of the $120
million transferred, $45 million went to Union Post-Retirement Benefits and
$75 million went to Union Medical Benefits.
24
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. EMPLOYEE BENEFIT PLANS (CONTINUED)
The status of the plan at September 30, adjusted for assets transferred to
the plan in the fourth quarter, is provided below. Accrued post-retirement
benefit costs are included in "Other liabilities" in the Company's
consolidated statement of financial position.
<TABLE>
<CAPTION>
1997 1996
---------- ----------
(IN MILLIONS)
<S> <C> <C>
Accumulated postretirement benefit obligation (APBO):
Retirees.......................................................... $ (1,516) $ (1,423)
Fully eligible active plan participants........................... (36) (35)
Other active plan participants.................................... (576) (544)
--------- ---------
Total APBO..................................................... (2,128) (2,002)
Plan assets at fair value............................................ 1,354 1,313
--------- ---------
Funded status........................................................ (774) (689)
Unrecognized transition amount....................................... 707 787
Unrecognized net gain ............................................... (364) (428)
Effects of fourth quarter activity................................... 33 28
--------- ---------
Accrued postretirement benefit cost at December 31................... $ (398) $ (302)
========= =========
</TABLE>
Plan assets with respect to this coverage consist of group and individual
variable life insurance policies, group life and health contracts, common
stocks, U.S. government securities and short-term investments. Plan assets
include $1,044 million and $1,003 million of Company insurance policies and
contracts at December 31, 1997 and 1996, respectively.
Net periodic postretirement benefit cost included in "General and
administrative expenses" for the years ended December 31, 1997, 1996 and
1995 includes the following components:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ----------- -----------
(IN MILLIONS)
<S> <C> <C> <C>
Service cost.............................................. $ 38 $ 45 $ 44
Interest cost............................................. 149 157 169
Actual return on plan assets.............................. (120) (105) (144)
Net amortization and deferral............................. 70 53 111
----------- ----------- -----------
Net periodic postretirement benefit cost.................. $ 137 $ 150 $ 180
=========== =========== ===========
</TABLE>
The following assumptions at September 30 are used to calculate the APBO as
of that date and determine postretirement benefit expense for the following
fiscal year:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Discount rate............................................. 7.25% 7.75% 7.50%
Rate of increase in compensation levels................... 4.5% 4.5% 4.5%
Expected long-term rate of return on plan assets.......... 9.0% 9.0% 8.0%
Health care cost trend rates.............................. 8.2-11.8% 8.5-12.5% 8.9-13.3%
Ultimate health care cost trend rate after gradual
decrease until 2006....................................... 5.0% 5.0% 5.0%
</TABLE>
25
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. EMPLOYEE BENEFIT PLANS (CONTINUED)
The effect of a 1% increase in health care cost trend rates for each future
year on the following costs at December 31, are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
(IN MILLIONS)
<S> <C> <C> <C>
Accumulated postretirement benefit obligation............ $ (218) $ (207) $ (217)
Service and interest costs............................... 24 25 27
</TABLE>
POSTEMPLOYMENT BENEFITS
The Company accrues postemployment benefits primarily for life and health
benefits provided to former or inactive employees who are not retirees. The
net accumulated liability for these benefits at December 31, 1997 and 1996
was $144 million and $156 million, respectively, and is included in "Other
liabilities."
OTHER EMPLOYEE BENEFITS
The Company sponsors voluntary savings plans for employees (401(k) plans).
The plans provide for salary reduction contributions by employees and
matching contributions by the Company of up to three percent of annual
salary, resulting in $63 million, $57 million, and $61 million of expenses
included in "General and administrative expenses" for 1997, 1996 and 1995,
respectively.
8. INCOME TAXES
The components of income tax expense for the years ended December 31, were
as follows:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
(IN MILLIONS)
<S> <C> <C> <C>
Current tax expense (benefit):
U.S...................................................... $ (158) $ 255 $ 1,189
State and Iocal.......................................... 48 103 38
Foreign.................................................. 64 48 66
--------- --------- ---------
Total.................................................... $ (46) $ 406 $ 1,293
========= ========= =========
Deferred tax expense (benefit):
U.S...................................................... $ 227 $ (442) $ (166)
State and Iocal.......................................... 3 (2) (10)
Foreign.................................................. 33 54 9
--------- --------- ---------
Total.................................................... $ 263 $ (390) $ (167)
========= ========= =========
Total income tax expense................................. $ 217 $ 16 $ 1,126
========= ========= =========
</TABLE>
26
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. INCOME TAXES (CONTINUED)
The Company's income tax expense for the years ended December 31, differs
from the amount computed by applying the expected federal income tax rate
of 35% to income from operations before income taxes for the following
reasons:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
(IN MILLIONS)
<S> <C> <C> <C>
Expected federal income tax expense.......................... $ 290 $ 382 $ 829
Equity tax................................................... (91) (365) 163
State and local income taxes................................. 51 100 28
Tax-exempt interest and dividend received deduction.......... (67) (50) (77)
Other........................................................ 34 (51) 183
-------- -------- --------
Total income tax expense..................................... $ 217 $ 16 $ 1,126
======== ======== ========
</TABLE>
Deferred tax assets and liabilities at December 31, resulted from the items
listed in the following table:
<TABLE>
<CAPTION>
1997 1996
------- --------
(IN MILLIONS)
<S> <C> <C>
Deferred tax assets
Insurance reserves.......................................... $ 1,482 $ 1,316
Policyholder dividends...................................... 250 257
Net operating loss carryforwards............................ 80 268
Depreciation................................................ -- 44
Litigation related reserves................................. 178 297
Employee benefits........................................... 42 10
Other....................................................... 360 329
-------- --------
Deferred tax assets before valuation allowance.............. 2,392 2,521
Valuation allowance......................................... (18) (36)
-------- --------
Deferred tax assets after valuation allowance............... 2,374 2,485
-------- --------
Deferred tax liabilities
Investments................................................. 1,867 1,183
Deferred acquisition costs.................................. 1,525 1,707
Depreciation................................................ 36 --
Other....................................................... 73 110
-------- --------
Deferred tax liabilities.................................... 3,501 3,000
-------- --------
Net deferred tax liability.................................... $ 1,127 $ 515
======== ========
</TABLE>
The Company's income taxes payable of $500 million and $1,544 million
includes a $627 million current income tax receivable at December 31, 1997
and a $1,029 million current income taxes payable at December 31, 1996.
27
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. INCOME TAXES (CONTINUED)
Management believes that based on its historical pattern of taxable income,
the Company will produce sufficient income in the future to realize its net
deferred tax asset after valuation allowance. Adjustments to the valuation
allowance will be made if there is a change in management's assessment of
the amount of the deferred tax asset that is realizable. At December 31,
1997, the Company had state non-life operating loss carryforwards for tax
purposes approximating $800 million.
The Internal Revenue Service (the "Service") has completed an examination
of the consolidated federal income tax return through 1989. The Service has
examined the years 1990 through 1992. Discussions are being held with the
Service with respect to proposed adjustments, however, management believes
there are adequate defenses against, or sufficient reserves to provide for,
such adjustments. The Service has begun their examination of the years 1993
through 1995.
9. EQUITY
RECONCILIATION OF STATUTORY SURPLUS AND NET INCOME
Accounting practices used to prepare statutory financial statements for
regulatory purposes differ in certain instances from GAAP. The following
table reconciles the Company's statutory net income and surplus as of and
for the years ended December 31, determined in accordance with accounting
practices prescribed or permitted by the New Jersey Department of Banking
and Insurance with net income and equity determined using GAAP:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
(IN MILLIONS)
<S> <C> <C> <C>
STATUTORY NET INCOME........................................... $ 1,471 $ 1,402 $ 478
Adjustments to reconcile to net income on a GAAP basis:
Insurance revenues and expenses.............................. 12 (478) (496)
Income taxes................................................. 601 439 (596)
Valuation of investments..................................... (62) 121 --
Realized investment gains.................................... 702 327 1,562
Litigation and other reserves................................ (1,975) (906) --
Other, net................................................... (139) 173 295
-------- -------- --------
GAAP NET INCOME................................................ $ 610 $ 1,078 $ 1,243
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
1997 1996
-------- --------
(IN MILLIONS)
<S> <C> <C>
STATUTORY SURPLUS.............................................. $ 9,242 $ 9,375
Adjustments to reconcile to equity on a GAAP basis:
Deferred policy acquisition costs............................ 5,994 6,291
Valuation of investments..................................... 8,067 5,624
Future policy benefits and policyholder account balances..... (2,906) (1,976)
Non-admitted assets.......................................... 1,643 1,285
Income taxes................................................. (1,070) (654)
Surplus notes................................................ (986) (985)
Other, net................................................... (266) (437)
-------- --------
GAAP EQUITY.................................................... $ 19,718 $ 18,523
======== ========
</TABLE>
28
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. EQUITY (CONTINUED)
The New York State Insurance Department ("Department") recognizes only
statutory accounting for determining and reporting the financial condition
of an insurance company, for determining its solvency under the New York
Insurance Law and for determining whether its financial condition warrants
the payment of a dividend to its policyholders. No consideration is given
by the Department to financial statements prepared in accordance with GAAP
in making such determinations.
10. OPERATING LEASES
The Company and its subsidiaries occupy leased office space in many
locations under various long-term leases and have entered into numerous
leases covering the long-term use of computers and other equipment. At
December 31, 1997, future minimum lease payments under non-cancelable
operating leases are estimated as follows:
(IN MILLIONS)
1998........................................ $ 313
1999........................................ 277
2000........................................ 230
2001........................................ 201
2002........................................ 171
Remaining years after 2002.................. 833
-----------
Total....................................... $ 2,025
===========
Rental expense incurred for the years ended December 31, 1997 and 1996 was
approximately $352 million and $343 million, respectively.
11. DIVESTITURES
In October 1995, the Company completed the sale of its reinsurance segment,
Prudential Reinsurance Holdings, Inc., through an initial public offering
of common stock. As a result of the sale, an after-tax loss of $297 million
was recorded in 1995.
On January 26, 1996, the Company entered into a definitive agreement to
sell substantially all the assets of Prudential Home Mortgage Company, Inc.
It has also liquidated certain mortgage-backed securities and extended
warehouse losses, asset write downs, and other costs directly related to
the planned sale. The Company recorded an after-tax loss in 1995 of $98
million which includes operating gains and losses, asset write downs and
other costs directly related with the planned sale. The net assets of the
mortgage banking segment at December 31, 1995 was $78 million, comprised of
$4,293 million in assets and $4,215 million in liabilities.
On July 31, 1996, the Company sold a substantial portion of its Canadian
Branch business to the London Life Insurance Company ("London Life"). This
transaction was structured as a reinsurance transaction whereby London Life
assumed total liabilities of the Canadian Branch equal to $3,291 million as
well as a related amount of assets equal to $3,205 million. This transfer
resulted in a reduction of policy liabilities of $3,257 million and a
corresponding reduction in invested assets. The Company recognized an
after-tax gain in 1996 of $116 million as a result of this transaction,
recorded in "Realized investment gains, net."
12. FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair values presented below have been determined using available
information and valuation methodologies. Considerable judgment is applied
in interpreting data to develop the estimates of fair value. Accordingly,
such estimates presented may not be realized in a current market exchange.
The use of different market assumptions and/or estimation methodologies
could have a material effect on the estimated fair values. The following
methods and assumptions were used in calculating the fair values (for all
other financial instruments presented in the table, the carrying value
approximates fair value).
29
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
FIXED MATURITIES AND EQUITY SECURITIES
Fair values for fixed maturities and equity securities, other than private
placement securities, are based on quoted market prices or estimates from
independent pricing services. Fair values for private placement securities
are estimated using a discounted cash flow model which considers the
current market spreads between the U.S. Treasury yield curve and corporate
bond yield curve, adjusted for the type of issue, its current credit
quality and its remaining average life. The estimated fair value of certain
non-performing private placement securities is based on amounts estimated
by management.
MORTGAGE LOANS ON REAL ESTATE
The fair value of the mortgage loan portfolio is primarily based upon the
present value of the scheduled future cash flows discounted at the
appropriate U.S. Treasury rate, adjusted for the current market spread for
a similar quality mortgage. For certain non-performing and other loans, the
fair value is based upon the present value of expected future cash flows
discounted at the appropriate U.S. Treasury rate adjusted for current
market spread for a similar quality mortgage.
POLICY LOANS
The estimated fair value of policy loans is calculated using a discounted
cash flow model based upon current U.S. Treasury rates and historical loan
repayments.
DERIVATIVE FINANCIAL INSTRUMENTS
The fair value of swap agreements is estimated based on the present value
of future cash flows under the agreements discounted at the applicable zero
coupon U.S. Treasury rate and swap spread. The fair value of forwards,
futures and options is estimated based on market quotes for a transaction
with similar terms. The fair value of loan commitments is derived by
comparing the contractual stream of fees with such fee streams adjusted to
reflect current market rates that would be applicable to instruments of
similar type, maturity, and credit standing.
POLICYHOLDERS' ACCOUNT BALANCES
Fair values of policyholders' account balances are estimated using
discounted projected cash flows, based on interest rates being offered for
similar contracts, with maturities consistent with those remaining for the
contracts being valued.
DEBT
The estimated fair value of short-term and long-term debt is derived by
using discount rates based on the borrowing rates currently available to
the Company for debt with similar terms and remaining maturities.
30
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
The following table discloses the carrying amounts and estimated fair
values of the Company's financial instruments at December 31:
<TABLE>
<CAPTION>
1997 1996
-------------------------- ------------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
------------ ----------- ------------ --------------
FINANCIAL ASSETS: (IN MILLIONS)
<S> <C> <C> <C> <C>
Other than trading:
- -------------------
Fixed maturities:
Available for sale....................... $ 75,270 $ 75,270 $ 66,553 $ 66,553
Held to maturity......................... 18,700 19,894 20,403 21,362
Equity securities........................... 2,810 2,810 2,622 2,622
Mortgage loans on real estate............... 16,004 17,153 17,097 17,963
Policy loans................................ 6,827 6,994 6,692 6,613
Securities purchased under
agreements to resell .................... 8,661 8,661 5,347 5,347
Cash collateral for borrowed securities..... 5,047 5,047 2,416 2,416
Short-term investments...................... 12,106 12,106 9,294 9,294
Cash ....................................... 3,636 3,636 2,091 2,091
Separate Accounts assets.................... 74,046 74,046 63,358 63,358
Derivative financial instruments............ 24 35 16 32
Trading:
- --------
Trading account assets...................... 6,044 6,044 4,219 4,219
Receivables from broker-dealer clients...... 6,273 6,273 5,281 5,281
Derivative financial instruments............ 979 979 904 904
FINANCIAL LIABILITIES:
Other than trading:
- -------------------
Policyholders' account balances............. 32,941 33,896 36,009 37,080
Securities sold under
agreements to repurchase................. 12,347 12,347 7,503 7,503
Cash collateral for loaned securities....... 14,117 14,117 8,449 8,449
Short-term and long-term debt............... 11,047 11,020 10,322 10,350
Securities sold but not yet purchased....... 3,533 3,533 1,900 1,900
Separate Accounts liabilities............... 73,658 73,658 62,845 62,845
Derivative financial instruments............ 32 47 32 45
Trading:
- --------
Payables to broker-dealer clients........... 3,338 3,338 3,018 3,018
Derivative financial instruments ........... 1,088 1,088 1,120 1,120
</TABLE>
31
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. DERIVATIVE AND OFF-BALANCE SHEET CREDIT-RELATED INSTRUMENTS
DERIVATIVE FINANCIAL INSTRUMENTS
The tables below summarize the Company's outstanding positions by
derivative instrument types as of December 31, 1997 and 1996. The amounts
presented are classified as either trading or other than trading, based on
management's intent at the time of contract inception and throughout the
life of the contract. The table includes the estimated fair values of
outstanding derivative positions only and does not include the changes in
fair values of associated financial and non-financial assets and
liabilities, which generally offset derivative notional amounts. The fair
value amounts presented also do not reflect the netting of amounts pursuant
to right of setoff, qualifying master netting agreements with
counterparties or collateral arrangements.
DERIVATIVE FINANCIAL INSTRUMENTS
DECEMBER 31, 1997
(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.............. $ 7,759 $ 394 $ 61 $ -- $ 7,820 $ 395 $ 394
Liabilities......... 6,754 489 13 3 6,767 493 491
Forwards:
Assets.............. 29,511 429 1,031 23 30,542 452 452
Liabilities......... 29,894 459 647 7 30,541 466 466
Futures:
Assets.............. 4,103 51 46 -- 4,149 51 51
Liabilities......... 3,064 50 3,320 21 6,384 71 71
Options:
Assets.............. 6,893 105 239 -- 7,132 105 105
Liabilities......... 4,165 90 5 -- 4,170 90 90
Loan Commitments:
Assets.............. -- -- 317 12 317 -- 12
Liabilities......... -- -- 524 16 524 -- 16
----------- ----------- ---------- ----------- ----------- ---------- -----------
Total:
Assets.............. $ 48,266 $ 979 $ 1,694 $ 35 $ 49,960 $ 1,003 $ 1,014
=========== =========== ========== =========== =========== ========== ===========
Liabilities......... $ 43,877 $ 1,088 $ 4,509 $ 47 $ 48,386 $ 1,120 $ 1,134
=========== =========== ========== =========== =========== ========== ===========
</TABLE>
32
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. DERIVATIVE AND OFF-BALANCE SHEET CREDIT-RELATED INSTRUMENTS (CONTINUED)
DERIVATIVE FINANCIAL INSTRUMENTS
DECEMBER 31, 1997
(IN MILLIONS)
<TABLE>
<CAPTION>
TRADING OTHER THAN TRADING TOTAL
------------------------ ----------------------- ------------------------------------
ESTIMATED ESTIMATED CARRYING ESTIMATED
NOTIONAL FAIR VALUE NOTIONAL FAIR VALUE NOTIONAL AMOUNT FAIR VALUE
----------- ----------- ---------- ----------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Swaps:
Assets.............. $ 8,080 $ 481 $ 398 $ 10 $ 8,478 $ 481 $ 491
Liabilities......... 8,316 756 139 17 8,455 771 773
Forwards:
Assets.............. 24,275 367 489 13 24,764 376 380
Liabilities......... 20,103 308 920 10 21,023 318 318
Futures:
Assets.............. 2,299 24 3 -- 2,302 24 24
Liabilities......... 2,573 30 1,087 6 3,660 36 36
Options:
Assets.............. 2,981 32 2,083 7 5,064 39 39
Liabilities......... 2,653 26 437 12 3,090 27 38
Loan Commitments:
Assets.............. -- -- 163 2 163 -- 2
Liabilities......... -- -- 445 -- 445 -- --
----------- ----------- ---------- ----------- ----------- ---------- -----------
Total:
Assets.............. $ 37,635 $ 904 $ 3,136 $ 32 $ 40,771 $ 920 $ 936
=========== =========== ========== =========== =========== ========== ===========
Liabilities......... $ 33,645 $ 1,120 $ 3,028 $ 45 $ 36,673 $ 1,152 $ 1,165
=========== =========== ========== =========== =========== ========== ===========
</TABLE>
CREDIT RISK
The current credit exposure of the Company's derivative contracts is
limited to the fair value at the reporting date. Credit risk is managed by
entering into transactions with creditworthy counterparties and obtaining
collateral where appropriate and customary. The Company also attempts to
minimize its exposure to credit risk through the use of various credit
monitoring techniques. Approximately 95% of the net credit exposure for the
Company from derivative contracts is with investment-grade counterparties.
Net trading revenues for the years ended December 31, 1997, 1996 and 1995
relating to forwards, futures and swaps were $54 million, $37 million, $(8)
million; $42 million, $32 million, $(11) million; and $110 million, $42
million, $3 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, 1997 and 1996 were $1,015 million and
$881 million, respectively, and for derivatives in a liability position
were $1,166 million and $1,038 million, respectively. Of those derivatives
held for trading purposes at December 31, 1997, 52% of the notional amount
consisted of interest rate derivatives, 40% consisted of foreign currency
derivatives, and 8% consisted of equity and commodity derivatives. Of those
derivatives held for purposes other than trading at December 31, 1997, 72%
of notional consisted of interest rate derivatives and 28% consisted of
foreign currency derivatives.
33
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. DERIVATIVE AND OFF-BALANCE SHEET CREDIT-RELATED INSTRUMENTS (CONTINUED)
OFF-BALANCE SHEET CREDIT-RELATED INSTRUMENTS
During the normal course of its business, the Company utilizes financial
instruments with off-balance sheet credit risk such as commitments,
financial guarantees, loans sold with recourse and letters of credit.
Commitments include commitments to purchase and sell mortgage loans, the
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 fair value of asset positions in these instruments, which represents
the Company's current exposure to credit loss from other parties'
non-performance, was $1,014 million and $936 million at December 31, 1997
and 1996, respectively.
14. CONTINGENCIES AND LITIGATION
FINANCIAL GUARANTEE AGREEMENT
In connection with the sale in 1995 of its wholly-owned subsidiary
Prudential Reinsurance Company ("Pru Re"), the Company's subsidiary,
Gibraltar Casualty Insurance Company ("Gibraltar") entered into a stop-loss
reinsurance agreement with Pru Re whereby Gibraltar has reinsured up to
$375 million of the first $400 million of aggregate adverse loss
development on reserves recorded by Pru Re at June 30, 1995. Gibraltar also
has entered into several quota share reinsurance arrangements with Pru Re
whereby certain medical malpractice, direct insurance and casualty
reinsurance pool risks previously underwritten by Pru Re prior to June 30,
1995 were ceded to Gibraltar. The Company has guaranteed Gibraltar's
obligations arising under each of these contracts subject to a limit of
$375 million for the stop-loss agreement and $400 million for the other
agreements. Through December 31, 1997, Gibraltar has incurred $285 million
in losses under the stop-loss agreement, including $45 million in 1997.
Gibraltar has paid $165 million to Pru Re under the stop-loss agreement.
The Company has not been required to fund losses arising under the other
arrangements.
ENVIRONMENTAL AND ASBESTOS-RELATED CLAIMS
Certain of the Company's subsidiaries received claims under expired
contracts which assert alleged injuries and/or damages relating to or
resulting from toxic torts, toxic waste and other hazardous substances. The
liabilities for such claims cannot be estimated by traditional reserving
techniques. As a result of judicial decisions and legislative actions, the
coverage afforded under these contracts may be expanded beyond their
original terms. Extensive litigation between insurers and insureds over
these issues continues and the outcome is not predictable. In establishing
the liability for unpaid claims for these losses, management considered the
available information. However, given the expansion of coverage and
liability by the courts and legislatures in the past, and potential for
other unfavorable trends in the future, the ultimate cost of these claims
could increase from the levels currently established.
MANAGED CARE REIMBURSEMENT
In 1997, the Company continued to review its obligations under certain
managed care arrangements for possible failure to comply with contractual
and regulatory requirements. The estimated cost to the Company for these
reimbursements increased by $115 million in 1997, bringing the total
provision to $265 million. As of December 31, 1997, $163 million has been
paid or credited to customers. It is the opinion of management that the
remaining reserves of $102 million at December 31, 1997 represent a
reasonable estimate of remaining reimbursements to customers and other
related costs.
LITIGATION
Various lawsuits against the Company have arisen in the course of the
Company's business. In certain of these matters, large and/or indeterminate
amounts are sought.
Three putative class actions and approximately 677 individual actions were
pending against the Company in the United States as of January 31, 1998
brought on behalf of those persons who purchased life insurance policies
allegedly because of deceptive sales practices engaged in by the Company
and its insurance agents in violation of state and federal laws. The
Company anticipates additional suits may be filed by individuals who opted
out of the class action settlement described below. The sales practices
alleged to have occurred are contrary to Company policy. Some of
34
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. CONTINGENCIES AND LITIGATION (CONTINUED)
these cases seek substantial damages while others seek unspecified
compensatory, punitive and treble damages. The Company intends to defend
these cases vigorously.
A Multi-State Life Insurance Task Force (the "Task Force"), comprised of
insurance regulators from 29 states and the District of Columbia, was
formed in April 1995 to conduct a review of sales and marketing practices
throughout the life insurance industry. As the largest life insurance
company in the United States, the Company was the initial focus of the Task
Force examination. On July 9, 1996, the Task Force released its report on
the Company's activities. The Task Force found that some sales of life
insurance policies by the Company had been improper. Based on the findings,
the Task Force recommended, and the Company agreed to, a series of fines
allocated to all 50 states and the District of Columbia. In addition, the
Task Force recommended a remediation program pursuant to which the Company
would offer relief to the policyowners who were misled when they purchased
permanent life insurance policies in the United States from 1982 to 1995.
On October 28, 1996, the Company entered into a Stipulation of Settlement
with attorneys for the plaintiffs in the consolidated class action lawsuit
pending in a Multi-District Litigation proceeding in the federal court in
New Jersey. The class action suit involved alleged improprieties in
connection with the Company's sale, servicing and operation of permanent
life insurance policies from 1982 through 1995. Pursuant to the settlement,
the Company agreed to provide certain enhancements and changes to the
remediation program previously accepted by the Task Force, including some
additional remedies. In addition, the Company agreed that it would incur a
minimum cost of $410 million in providing remedies to policyowners under
the program and, in specified circumstances, agreed to make certain other
payments and guarantees. Under the terms of the settlement, the Company
agreed to a minimum average cost per remedy of $2,364 for up to 330,000
claims remedied and also agreed to provide additional compensation to be
determined by formula that will range in aggregate amount from $50 million
to $300 million depending on the total number of claims remedied. At the
end of the remediation program's claim evaluation process, the Court will
determine how the additional compensation will be distributed.
The terms of the remediation program described above were enhanced again in
February 1997 pursuant to agreements reached with several states that had
not previously accepted the terms of the program. These changes were
incorporated as amendments to the above-described Stipulation of Settlement
and related settlement documents, and the amended Stipulation of Settlement
was approved as fair to class members by the United States District Court
for the District of New Jersey in March 1997. By that point in time, the
Company had entered into agreements with all 50 states and the District of
Columbia pursuant to which each jurisdiction had accepted the remediation
plan and the Company had agreed to pay approximately $65 million in fines,
penalties and related payments.
The decision of the U.S. District Court to certify a class in the
above-described litigation for settlement purposes only and to approve the
class action settlement as described in the amended Stipulation of
Settlement is presently on appeal to the U.S. Court of Appeals for the
Third Circuit. The appellants claim that the District Court erred in
certifying a class and in finding that the terms of the settlement are fair
to the class.
Pursuant to the state agreements and the amended Stipulation of Settlement,
as approved by the U.S. District Court, the Company initiated its
remediation program in 1997. The Company mailed packages and provided broad
class notice to the owners of approximately 10.7 million policies eligible
to participate in the remediation program, informing them of their rights.
Owners of approximately 21,800 policies elected to be excluded from the
class action settlement. Of those eligible to participate in the
settlement, policyowners who believed they were misled were invited to file
a claim through an Alternative Dispute Resolution ("ADR") process. The ADR
process was established to enable the company to discharge its liability to
the affected policyowners. Policyowners who did not wish to file a claim in
the ADR process were permitted to choose from options available under Basic
Claim Relief, such as preferred rate premium loans, or annuities, mutual
fund shares or life insurance policies that the Company will enhance.
The owners of approximately 1.16 million policies responded to these
notices by indicating an intent to file an ADR claim. All policyholders who
responded were provided an ADR claim form for completion and submission.
Approximately 635,000 claim forms were completed and returned as of January
31, 1998. Management does not believe the number of ADR claims that will be
completed and returned will increase significantly. In addition, the owners
of approximately 510,000 policies indicated an interest in a Basic Claim
Relief remedy. The ADR process requires that individual claim files be
reviewed by one or more independent claim evaluators. Management does not
believe costs associated with providing Basic Claim Relief will be material
to the Company's financial position or results of operations.
35
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. CONTINGENCIES AND LITIGATION (CONTINUED)
In 1996, the Company recorded in its Statement of Operations, the minimum
cost of $410 million as agreed to in the settlement. Management had no
better information available at that time upon which to make a reasonable
estimate of losses. Management now has additional information which allows
for computation of a reasonable estimate of losses associated with ADR
claims. Based on this additional information, in 1997, management had
increased the estimated liability for the cost of remedying policyholder
claims in the ADR process by $1.64 billion before taxes to approximately
$2.05 billion before taxes of which $1.80 billion has been funded in a
settlement trust as described in Note 3. While management believes these
are reasonable estimates based on information currently available, the
ultimate amount of the total cost of remedied policyholder claims is
dependent on complex and varying factors, including actual claims by
eligible policyholders, the relief options chosen and the dollar value of
those options. There are also additional elements of the ADR process which
cannot be fully evaluated at this time (e.g., claims which may be
successfully appealed) which could increase this estimate.
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 flow
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, after consideration of applicable reserves.
The Company and a number of other insurers ("the Consortium") entered into
a Reinsurance and Participation Agreement (the "Agreement") with MBL Life
Assurance Corporation ("MBLLAC") and others, under which the Company and
the other insurers agreed to reinsure certain payments to be made to
contract holders by MBLLAC in connection with the plan of rehabilitation of
Mutual Benefit Life Insurance Company. Under the agreement, the Consortium,
subject to certain terms and conditions, will indemnify MBLLAC for the
ultimate net loss sustained by MBLLAC on each contract subject to the
Agreement. The ultimate net loss represents the amount by which the
aggregate required payments exceed the fair market value of the assets
supporting the covered contracts at the time such payments are due. The
Company's share of any net loss is 30.55%. The Company has determined that
it does not expect to make any payments to MBLLAC under the agreement. The
Company concluded this after testing a wide range of potentially adverse
scenarios during the rehabilitation period for MBLLAC.
15. SUBSEQUENT EVENTS
On February 10, 1998, the Company's Board of Directors authorized
management to take the preliminary steps necessary to allow the Company to
demutualize and become a publicly-traded company. The Company has begun
discussions with the New Jersey Department of Banking and Insurance,
leaders in the New Jersey State Legislature, as well as other key
regulatory agencies around the country. The New Jersey State Legislature
must first pass a law permitting demutualization. The New Jersey Department
of Banking and Insurance, the Company's Board and a majority of
participating policyholders must ultimately approve the Company's plan for
demutualization.
* * * * *
36
<PAGE>
CUSTOM VAL(sm)
LIFE
INSURANCE
[LOGO] PRUDENTIAL
The Prudential Insurance Company of America
751 Broad Street, Newark, NJ 07102-3777
Telephone: (800) 437-4016
PCVAL-1 Ed. 5/98 CAT# 646677J
<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.
REPRESENTATION WITH RESPECT TO CHARGES
The Prudential Insurance Company of America represents that the fees and charges
deducted under the Custom VAL Contracts registered by this registration
statement, in the aggregate, are reasonable in relation to the services
rendered, the expenses expected to be incurred, and the risks assumed by
Prudential.
UNDERTAKING WITH RESPECT TO INDEMNIFICATION
The Registrant, in conjunction with certain affiliates, maintains insurance on
behalf of any person who is or was a trustee, director, officer, employee, or
agent of the Registrant, or who is or was serving at the request of the
Registrant as a trustee, director, officer, employee or agent of such other
affiliated trust or corporation, against any liability asserted against and
incurred by him or her arising out of his or her position with such trust or
corporation.
New Jersey, being the state of organization of Prudential Insurance Company of
America ("Prudential"), permits entities organized under its jurisdiction to
indemnify directors and officers with certain limitations. The relevant
provisions of New Jersey law permitting indemnification can be found in Section
14A:3-5 of the New Jersey Statutes Annotated. The text of Prudential's By-law
27, which relates to indemnification of officers and directors, is incorporated
by reference to Exhibit (8)(ii) of Post-Effective Amendment No. 12 for Form N-4,
Registration No. 33-25434, filed April 30, 1997, on behalf of the Prudential
Individual Variable Contract Account.
Insofar as indemnification for liabilities arising under the Securities Act of
1933 (the "Act") may be permitted to directors, officers and controlling persons
of the Registrant pursuant to the foregoing provisions or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
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 99 pages.
The undertaking to file reports.
The representation with respect to charges.
The undertaking with respect to indemnification.
The signatures.
Written consents of the following persons:
1. Deloitte & Touche LLP, independent auditors.
2. Price Waterhouse LLP, independent accountants.
3. Clifford E. Kirsch, Esq.
4. Pamela A. Schiz, 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 4)
(2) Not Applicable.
(3) Distributing Contracts:
(a) Distribution Agreement between Pruco Securities
Corporation and The Prudential Insurance Company of
America. (Note 2)
(b) Proposed form of Agreement between Pruco Securities
Corporation and independent brokers with respect to the
Sale of the Contracts. (Note 9)
(c) Schedules of Sales Commissions. (Note 9)
(4) Not Applicable.
(5) Custom VAL (previously named Adjustable Premium VAL) life
insurance contracts: (Note 2) (a) With fixed death benefit
for use in New Jersey and domicile approval states. (b) With
variable death benefit for use in New Jersey and domicile
approval states. (c) With fixed death benefit for use in
non-domicile approval states. (d) With variable death
benefit for use in non-domicile approval states.
(6) (a) Charter of The Prudential Insurance Company of America,
as amended November 14, 1995. (Note 5)
(b) By-laws of The Prudential Insurance Company of America,
as amended April 8, 1997. (Note 6)
(7) Not Applicable.
(8) Not Applicable.
(9) Not Applicable.
(10) (a) Application Form for Custom VAL (previously named
Adjustable Premium VAL) life insurance contract.
(Note 9)
(b) Supplement to the Application for Custom VAL
(previously named Adjustable Premium VAL) life
insurance contract. (Note 9)
(11) Form of Notice of Withdrawal Right. (Note 9)
(12) Memorandum describing 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 9)
(13) Available Contract Riders and Endorsements:
II-2
<PAGE>
(a) Rider for Insured's Waiver of Premium Benefit.
(Note 2)
(b) Rider for Applicant's Waiver of Premium Benefit.
(Note 2)
(c) Rider for Insured's Accidental Death Benefit. (Note 2)
(d) Rider for Level Term Insurance Benefit on Life of
Insured. (Note 2)
(e) Rider for Decreasing Term Insurance Benefit on Life
of Insured. (Note 3)
(f) Rider for Interim Term Insurance Benefit. (Note 2)
(g) Rider for Option to Purchase Additional Insurance on
Life of Insured. (Note 2)
(h) Rider for Decreasing Term Insurance Benefit on Life
of Insured Spouse. (Note 3)
(i) Rider for Level Term Insurance Benefit on Dependent
Children. (Note 2)
(j) Rider for Level Term Insurance Benefit on Dependent
Children--from Term Conversions. (Note 2)
(k) Rider for Level Term Insurance Benefit on Dependent
Children--from Term Conversions or Attained Age
Change. (Note 2)
(l) Endorsement defining Insured Spouse. (Note 2)
(m) Rider covering lack of Evidence of Insurability on
a Child. (Note 2)
(n) Rider modifying Waiver of Premium Benefit. (Note 2)
(o) Rider to terminate a Supplementary Benefit. (Note 2)
(p) Rider providing for election of Variable Reduced
Paid-up Insurance. (Note 2)
(q) Rider to provide for exclusion of Aviation Risk.
(Note 2)
(r) Rider to provide for exclusion of Military Aviation
Risk. (Note 2)
(s) Rider to provide for exclusion for War Risk. (Note 2)
(t) Rider to provide for Reduced Paid-up Insurance.
(Note 2)
(u) Rider providing for Option to Exchange Policy.
(Note 2)
(v) Endorsement defining Ownership and Control of the
Contract. (Note 2)
(w) Rider providing for Modification of Incontestability
and Suicide Provisions. (Note 2)
(x) Endorsement issued in connection with Non-Smoker
Qualified Contracts. (Note 2)
(y) Endorsement issued in connection with Smoker Qualified
Contracts. (Note 2)
(z) Home Office Endorsement. (Note 2)
(aa) Endorsement showing Basis of Computation for
Non-Smoker Contracts. (Note 2)
(bb) Endorsement showing Basis of Computation for Smoker
Contracts. (Note 2)
(cc) Rider for Term Insurance Benefit on Life of Insured
--Decreasing Amount After Three Years. (Note 2)
(dd) Rider for Renewable Term Insurance Benefit on Life of
Insured. (Note 2)
(ee) Rider for Level Term Insurance Benefit on Life of
Insured Spouse. (Note 2)
(ff) Living Needs Benefit Rider
(i) for use in Florida. (Note 2)
(ii) for use in all approved jurisdictions except
Florida and New York. (Note 2)
(iii) for use in New York. (Note 2)
(gg) Endorsement altering the Assignment provision.
(Note 8)
2. See Exhibit 1.A.(5).
3. Opinion and Consent of Clifford E. Kirsch, Esq., as to the legality of
the securities being registered. (Note 1)
4. None.
5. Not Applicable.
6. Opinion and Consent of Pamela A. Schiz, FSA, MAAA, as to actuarial
matters pertaining to the securities being registered. (Note 1)
7. Powers of Attorney. (Note 7)
27. Financial Data Schedule (Note 1)
(Note 1) Filed herewith.
(Note 2) Incorporated by reference to Post-Effective Amendment No. 19 to
Form S-6, Registration No. 33- 20000, filed April 28, 1997, on behalf
of The Prudential Variable Appreciable Account.
II-3
<PAGE>
(Note 3) Incorporated by reference to Post-Effective Amendment No. 18 to
Form S-6, Registration No. 33- 20000, filed December 26 1996, on
behalf of The Prudential Variable Appreciable Account.
(Note 4) Incorporated by reference to Post-Effective Amendment No. 15 to
Form S-6, Registration No. 33- 20000, filed May 1, 1995, on behalf of
The Prudential Variable Appreciable Account.
(Note 5) Incorporated by reference to Post-Effective Amendment No. 9 to
Form S-1, Registration No. 33- 20083, filed April 9, 1997 on behalf
of The Prudential Variable Contract Real Property Account.
(Note 6) Incorporated by reference to Post-Effective Amendment No. 12 to
Form N-4, Registration No. 33- 25434, filed April 30, 1997, on behalf
of The Prudential Individual Variable Contract Account.
(Note 7) Incorporated by reference to Post-Effective Amendment No. 10 to
Form S-1, Registration No. 33- 20083, filed April 9, 1998 on behalf
of The Prudential Variable Contract Real Property Account.
(Note 8) Incorporated by reference to Post-Effective Amendment No. 14 to
Form S-6, Registration No. 33- 20000, filed February 15, 1995 on
behalf of The Prudential Variable Appreciable Account.
(Note 9) Incorporated by reference to Post-Effective Amendment No. 14 to
this Registration Statement, filed April 29, 1997.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant,
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 Post-Effective Amendment to the Registration
Statement which included a prospectus and has caused this Registration Statement
to be signed on its behalf by the undersigned thereunto duly authorized, and its
seal hereunto affixed and attested, all in the city of Newark and the State of
New Jersey, on this 24th day of April, 1998.
(Seal)
THE PRUDENTIAL VARIABLE APPRECIABLE ACCOUNT
(Registrant)
By: THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
(Depositor)
Attest: /s/ THOMAS C. CASTANO By: /s/ ESTHER H. MILNES
----------------------------- ---------------------------------
Thomas C. Castano Esther H. Milnes
Assistant Secretary Vice President and Actuary
Pursuant to the requirements of the Securities Act of 1933, this Post-Effective
Amendment No. 15 to the Registration Statement has been signed below by the
following persons in the capacities indicated on this 24th day of April, 1998.
SIGNATURE AND TITLE
-------------------
/s/ *
- -----------------------------------
Arthur C. Ryan
Chairman of the Board, President
and Chief Executive Officer
/s/ *
- -----------------------------------
Martin A. Berkowitz
Senior Vice President and
Comptroller
/s/ * *By: /s/ THOMAS C. CASTANO
- ----------------------------------- -------------------------------
Richard J. Carbone Thomas C. Castano
Chief Financial Officer (Attorney-in-Fact)
/s/ *
- -----------------------------------
Franklin E. Agnew
Director
/s/ *
- -----------------------------------
Frederic K. Becker
Director
/s/*
- -----------------------------------
James G. Cullen
Director
/s/ *
- -----------------------------------
Carolyne K. Davis
Director
/s/ *
- -----------------------------------
Roger A. Enrico
Director
/s/ *
- -----------------------------------
Allan D. Gilmour
Director
II-5
<PAGE>
/s/ *
- -----------------------------------
William H. Gray, III
Director
/s/ *
- -----------------------------------
Jon F. Hanson
Director
/s/ *
- -----------------------------------
Glen H. Hiner, Jr.
Director
/s/ *
- -----------------------------------
Constance J. Horner
Director
/s/ * *By: /s/ THOMAS C. CASTANO
- ----------------------------------- -----------------------------------
Gaynor N. Kelley Thomas C. Castano
Director (Attorney-in-Fact)
/s/ *
- -----------------------------------
Burton G. Malkiel
Director
/s/ *
- -----------------------------------
Ida F.S. Schmertz
Director
/s/*
- -----------------------------------
Charles R. Sitter
Director
/s/*
- -----------------------------------
Donald L. Staheli
Director
/s/ *
- -----------------------------------
Richard M. Thomson
Director
/s/ *
- -----------------------------------
James A. Unruh
Director
/s/ *
- -----------------------------------
P. Roy Vagelos, M.D.
Director
/s/ *
- -----------------------------------
Stanley C. Van Ness
Director
/s/ *
- -----------------------------------
Paul A. Volcker
Director
/s/ *
- -----------------------------------
Joseph H. Williams
Director
II-6
<PAGE>
EXHIBIT INDEX
Consent of Deloitte & Touche LLP, independent auditors. Page II-8
Consent of Price Waterhouse LLP, independent accountants. Page II-9
3. Opinion and Consent of Clifford E. Kirsch, Esq., as to the
legality of the securities being registered. Page II-10
6. Opinion and Consent of Pam A. Schiz, FSA, MAAA, as to
actuarial matters pertaining to the securities being
registered. Page II-11
27. Financial Data Schedule. Page II-12
II-7
<PAGE>
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Post-Effective Amendment No. 15 to Registration
Statement No. 33-25372 on Form S-6 of The Prudential Variable Appreciable
Account of The Prudential Insurance Company of America (a) of our report dated
February 15, 1996, relating to the financial statements of The Prudential
Variable Appreciable Account, and (b) of our report dated June 4, 1997 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 (c) to the reference to us under the heading
"Experts" in such Prospectus.
/s/ Deloitte & Touche LLP
Parsippany, New Jersey
April 24, 1998
II-8
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Post-Effective Amendment No. 15 to the registration statement on Form S-6 (the
"Registration Statement") of our report dated March 20, 1998, relating to the
financial statements of the Prudential Variable Appreciable Account, which
appears in such Prospectus.
We also consent to the use in the Prospectus constituting part of this
Registration Statement of our report dated March 5, 1998, relating to the
consolidated financial statements of The Prudential Insurance Company of
America, which appears in such Prospectus.
We also consent to the reference to us under the heading "Experts" in the
Prospectus.
/s/ PRICE WATERHOUSE LLP
New York, New York
April 24, 1998
II-9
Exhibit 3
April 24, 1998
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 ("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 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. 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 Prudential may conduct.
4. The variable appreciable life insurance contracts are legal and
binding obligations of Prudential, in accordance with their terms.
In arriving at the foregoing opinion, I have made such examination of law and
examined such records and other documents as I judged to be necessary or
appropriate.
I hereby consent to the filing of this opinion as an exhibit to the Registration
Statement.
Very truly yours,
/s/
Clifford E. Kirsch
II-10
Exhibit 6
April 24, 1998
The Prudential Insurance Company
of America
Prudential Plaza
Newark, New Jersey 07102-3777
To Prudential:
This opinion is furnished in connection with the registration by The Prudential
Insurance Company of America of Custom VAL life insurance contracts (the
"Contracts") under the Securities Act of 1933. The prospectus included in
Post-Effective Amendment No. 15 to Registration Statement No. 33-25372 on Form
S-6 describes the Contracts. I have reviewed the two Contract forms 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", based on
the assumptions stated in the illustrations, are consistent with the
provisions of the respective forms of the Contracts. The rate
structure of the Contracts has not been designed so as to make the
relationship between premiums and benefits, as shown in the
illustrations, appear more favorable to a prospective purchaser of a
Contract issued on a male age 35 than to prospective purchasers of
Contracts on males of other ages or on females.
(2) The illustration of the effect of a Contract loan on the cash
surrender value included in the section of the prospectus entitled
"Contract Loans," based on the assumption stated in the illustration,
is consistent with the provisions of the Form A Contract.
(3) 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
projected 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,
/s/
Pamela A. Schiz, FSA, MAAA
Actuarial Director
The Prudential Insurance Company of America
II-11
<TABLE> <S> <C>
<ARTICLE> 6
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 4,831,144
<INVESTMENTS-AT-VALUE> 5,647,810
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<APPREC-INCREASE-CURRENT> 241,021
<NET-CHANGE-FROM-OPS> 868,334
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<DISTRIBUTIONS-OF-INCOME> 0
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<NUMBER-OF-SHARES-SOLD> 0
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<NET-CHANGE-IN-ASSETS> 1,104,446
<ACCUMULATED-NII-PRIOR> 0
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