<PAGE>
As filed with the SEC on _________________________. Registration No. 33-61079
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
POST-EFFECTIVE AMENDMENT NO. 3 TO
FORM S-6
FOR REGISTRATION UNDER THE SECURITIES ACT OF 1933
OF SECURITIES OF UNIT INVESTMENT TRUSTS REGISTERED
ON FORM N-8B-2
----------------------
THE PRUDENTIAL VARIABLE
APPRECIABLE ACCOUNT
(Exact Name of Trust)
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
(Name of Depositor)
751 BROAD STREET
NEWARK, NEW JERSEY 07102-3777
(800 ) 778-5510
(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
----------------------
It is proposed that this filing will become effective (check appropriate space):
/ / immediately upon filing pursuant to paragraph (b) of Rule 485
/x/ on May 1, 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"; Type of
Insurance Amount; Changing the Type of
Insurance Amount; Premiums; Contract Date;
Allocation of Premiums; Transfers; Charges and
Expenses; How a Contract's Cash Surrender
Value Will Vary; How a Fixed Insurance Amount
Contract's Death Benefit Will Vary; How a
Variable Insurance Amount Contract's Death
Benefit Will Vary; Surrender of a Contract;
Withdrawal of Excess Cash Surrender Value;
Decreases in Basic Insurance Amount; Lapse and
Reinstatement; When Proceeds are Paid; Options
on Lapse; Riders; Other General Contract
Provisions; Voting Rights; Substitution of
Series Fund Shares
11. Brief Description of the Contract; The
Prudential Variable Appreciable Account
12. Cover Page; Brief Description of the Contract;
The Prudential Series Fund, Inc.; Sale of the
Contract and Sales Commissions
13. Brief Description of the Contract; The
Prudential Series Fund, Inc.; Charges and
Expenses; Sale of the Contract and Sales
Commissions; Reduction of Charges for
Concurrent Sales to Several Individuals
14. Brief Description of the Contract;
Requirements for Issuance of a Contract
15. Brief Description of the Contract; Allocation
of Premiums; Transfers; The Fixed-Rate Option
16. Brief Description of the Contract; Detailed
Information for Prospective Contract Owners
17. When Proceeds are Paid
18. The Prudential Variable Appreciable Account
19. Reports to Contract Owners
<PAGE>
N-8B-2 Item Number Location
- ------------------ --------
20. Not Applicable
21. Contract Loans
22. Not Applicable
23. Not Applicable
24. Other General Contract Provisions
25. The Prudential Insurance Company of America
26. Brief Description of the Contract; The
Prudential Series Fund, Inc.; Charges and
Expenses
27. The Prudential Insurance Company of America;
The Prudential Series Fund, Inc.
28. The Prudential Insurance Company of America;
Directors and Officers
29. The Prudential Insurance Company of America
30. Not Applicable
31. Not Applicable
32. Not Applicable
33. Not Applicable
34. Not Applicable
35. The Prudential Insurance Company of America
36. Not Applicable
37. Not Applicable
38. Sale of the Contract and Sales Commissions
39. Sale of the Contract and Sales Commissions
40. Not Applicable
41. Sale of the Contract and Sales Commissions
42. Not Applicable
43. Not Applicable
44. Brief Description of the Contract; The
Prudential Series Fund, Inc.; How a Contract's
Cash Surrender Value Will Vary; How a Fixed
Insurance Amount Contract's Death Benefit Will
Vary; How a Variable Insurance Amount
Contract's Death Benefit Will Vary
45. Not Applicable
46. Brief Description of the Contract; The
Prudential Variable Appreciable Account; The
Prudential Series Fund, Inc.
47. The Prudential Variable Appreciable Account;
The Prudential Series Fund, Inc.
48. Not Applicable
49. Not Applicable
50. Not Applicable
<PAGE>
N-8B-2 Item Number Location
- ------------------ --------
51. Not Applicable
52. Substitution of Series Fund Shares
53. Tax Treatment of Contract Benefits
54. Not Applicable
55. Not Applicable
56. Not Applicable
57. Not Applicable
58. Not Applicable
59. Financial Statements; Financial Statements of
The Prudential Variable Appreciable Account;
Consolidated Financial Statements of The
Prudential Insurance Company of America and
Subsidiaries
<PAGE>
PART I
INFORMATION REQUIRED IN PROSPECTUS
<PAGE>
Survivorship Preferred(R)
Variable Universal Life Insurance
PROSPECTUS
May 1, 1998
The Prudential Variable Appreciable Account
Survivorship
[LOGO] PRUDENTIAL
<PAGE>
PROSPECTUS
MAY 1, 1998
THE PRUDENTIAL VARIABLE APPRECIABLE ACCOUNT
SURVIVORSHIP PREFERRED(R)
This prospectus describes a flexible premium survivorship variable universal
life insurance contract offered by The Prudential Insurance Company of America
under the name PRUDENTIAL SURVIVORSHIP PREFERRED(R) (the "Contract"). The
Contract provides life insurance coverage on two insureds with a death benefit
payable on the second death as long as the Contract is in force.
Purchasers have considerable flexibility as to when and in what amounts they pay
premiums. Subject to an initial premium, you can pay premium amounts as
desired, so long as sufficient money is in the Contract Fund to cover all
charges. If there is insufficient money in the Contract Fund, the Contract may
lapse without value.
There are two insurance amount types available. One type generally remains
fixed in the amount initially selected, the other will vary daily with the
investment performance of the investment options you select. For each type,
there are two premium levels which, if paid, provide death benefit guarantees.
A portion of the Contract's premiums and the earnings on those premiums will be
held in one or more of the following ways. They can be invested in one or more
of fifteen available subaccounts of The Prudential Variable Appreciable Account:
<TABLE>
<CAPTION>
<S> <C> <C>
. MONEY MARKET . CONSERVATIVE BALANCED . EQUITY
. DIVERSIFIED BOND . FLEXIBLE MANAGED . PRUDENTIAL JENNISON
. GOVERNMENT INCOME . HIGH YIELD BOND . SMALL CAPITALIZATION STOCK
. ZERO COUPON BOND 2000 . STOCK INDEX . GLOBAL
. ZERO COUPON BOND 2005 . EQUITY INCOME . NATURAL RESOURCES
</TABLE>
each of which invests in a corresponding portfolio of The Prudential Series
Fund, Inc. Or, they can be allocated to a FIXED-RATE OPTION. Other subaccounts
and portfolios may be added in the future. The attached prospectus for the
Series Fund, and the Series Fund's statement of additional information describe
the investment objectives of and the risks of investing in the portfolios.
Interest is credited daily upon any portion of the premium payment allocated to
the fixed-rate option at rates periodically declared by Prudential in its sole
discretion but never less than an effective annual rate of 4%. This prospectus
describes the Contract generally and The Prudential Variable Appreciable
Account.
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.
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) 778-5510
*PRUDENTIAL SURVIVORSHIP PREFERRED is a registered mark of Prudential.
<PAGE>
PROSPECTUS CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
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
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA......................................... 6
THE PRUDENTIAL VARIABLE APPRECIABLE ACCOUNT......................................... 6
THE PRUDENTIAL SERIES FUND, INC..................................................... 7
WHICH INVESTMENT OPTION SHOULD BE SELECTED?......................................... 7
DETAILED INFORMATION FOR PROSPECTIVE CONTRACT OWNERS................................. 8
REQUIREMENTS FOR ISSUANCE OF A CONTRACT............................................. 8
SHORT-TERM CANCELLATION RIGHT OR "FREE LOOK"........................................ 8
TYPE OF INSURANCE AMOUNT............................................................ 8
CHANGING THE TYPE OF INSURANCE AMOUNT...............................................11
PREMIUMS............................................................................11
DEATH BENEFIT GUARANTEE.............................................................12
CONTRACT DATE.......................................................................14
ALLOCATION OF PREMIUMS..............................................................14
TRANSFERS...........................................................................15
DOLLAR COST AVERAGING...............................................................16
AUTO-REBALANCING....................................................................16
CHARGES AND EXPENSES................................................................16
HOW A CONTRACT'S CASH SURRENDER VALUE WILL VARY.....................................20
HOW A FIXED INSURANCE AMOUNT CONTRACT'S DEATH BENEFIT WILL VARY.....................20
HOW A VARIABLE INSURANCE AMOUNT CONTRACT'S DEATH BENEFIT WILL VARY..................22
PARTICIPATION IN DIVISIBLE SURPLUS..................................................23
SURRENDER OF A CONTRACT.............................................................23
WITHDRAWALS.........................................................................23
DECREASES IN BASIC INSURANCE AMOUNT.................................................24
WHEN PROCEEDS ARE PAID..............................................................24
ILLUSTRATIONS OF CASH SURRENDER VALUES, DEATH BENEFITS, AND ACCUMULATED PREMIUMS....24
CONTRACT LOANS......................................................................27
SALE OF THE CONTRACT AND SALES COMMISSIONS..........................................28
TAX TREATMENT OF CONTRACT BENEFITS..................................................28
WITHHOLDING.........................................................................30
LAPSE AND REINSTATEMENT.............................................................31
LEGAL CONSIDERATIONS RELATING TO SEX-DISTINCT PREMIUMS AND BENEFITS.................31
OTHER GENERAL CONTRACT PROVISIONS...................................................32
RIDERS..............................................................................32
THE FIXED-RATE OPTION...............................................................33
VOTING RIGHTS.......................................................................34
SUBSTITUTION OF SERIES FUND SHARES..................................................35
REPORTS TO CONTRACT OWNERS..........................................................35
STATE REGULATION....................................................................35
EXPERTS.............................................................................35
LITIGATION..........................................................................36
YEAR 2000 COMPLIANCE................................................................37
ADDITIONAL INFORMATION..............................................................37
FINANCIAL STATEMENTS................................................................38
DIRECTORS AND OFFICERS OF PRUDENTIAL.................................................39
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PAGE
<S> <C>
FINANCIAL STATEMENTS OF THE PRUDENTIAL VARIABLE APPRECIABLE ACCOUNT................ A1
CONSOLIDATED FINANCIAL STATEMENTS OF THE PRUDENTIAL INSURANCE
COMPANY OF AMERICA AND SUBSIDIARIES............................................ B1
</TABLE>
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING IN ANY JURISDICTION IN WHICH
SUCH OFFERING MAY NOT LAWFULLY BE MADE. NO PERSON IS AUTHORIZED TO MAKE ANY
REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS AND THE PROSPECTUS AND STATEMENT OF ADDITIONAL INFORMATION FOR
THE PRUDENTIAL SERIES FUND, INC.
<PAGE>
DEFINITIONS OF SPECIAL TERMS
USED IN THIS PROSPECTUS
ACCUMULATED NET PAYMENTS--the actual premium payments you make accumulated at an
effective annual rate of 4% less any withdrawals you make accumulated at an
effective annual rate of 4%.
ATTAINED AGE--An insured's age on the Contract date plus the number of years
since then.
BASIC INSURANCE AMOUNT--The amount of life insurance as shown in the Contract.
Also known as the face amount.
CASH SURRENDER VALUE--The amount payable to the Contract owner upon surrender of
the Contract. It is equal to the Contract Fund minus any Contract debt.
CONTRACT--The Prudential Survivorship Preferred policy described in this
prospectus.
CONTRACT ANNIVERSARY--The same date as the Contract date in each later year.
CONTRACT DATE--The date the Contract is effective, as specified in the Contract.
CONTRACT DEBT--The principal amount of all outstanding loans plus any interest
accrued thereon.
CONTRACT FUND--The total amount credited to a specific Contract. On any date it
is equal to the sum of the amounts in all the subaccounts, the amount invested
under the fixed-rate option, and the principal amount of any Contract debt.
CONTRACT MONTH--A month that starts on the Monthly date.
CONTRACT OWNER--You. Unless a different owner is named in the application, the
owners of the Contract are the insureds jointly or the survivor of them. If the
Contract is owned jointly, the exercise of rights under the Contract must be
made by both jointly.
CONTRACT YEAR--A year that starts on the Contract date or on a Contract
anniversary.
DEATH BENEFIT--The amount payable to the beneficiary upon the second death of
two insureds.
FACE AMOUNT--See basic insurance amount.
FIXED-RATE OPTION--An investment option under which Prudential guarantees that
interest will be added to the amount invested at a rate declared periodically in
advance.
INSURANCE AMOUNT--the amount we will pay upon the second death of two insureds
before reduction by any Contract debt and amounts needed to pay charges through
the date of death.
ISSUE AGE--An insured's age as of the Contract date.
MONTHLY DATE--The Contract date and the same date in each subsequent month.
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA--Us, we, Prudential. The company
offering the Contract.
THE PRUDENTIAL SERIES FUND, INC. (THE "SERIES FUND")--A mutual fund with
separate portfolios, one or more of which may be chosen as an underlying
investment for the Contract.
THE PRUDENTIAL VARIABLE APPRECIABLE ACCOUNT (THE "ACCOUNT")--A separate account
of Prudential registered as a unit investment trust under the Investment Company
Act of 1940.
SUBACCOUNT--An investment division of the Account, the assets of which are
invested in the shares of the corresponding portfolio of the Series Fund.
VALUATION PERIOD--The period of time from one determination of the value of the
amount invested in a subaccount to the next. Such determinations are made when
the net asset values of the portfolios of the Series Fund are calculated, which
is generally at 4:15 p.m. New York City time on each day during which the New
York Stock Exchange is open.
WE-- The Prudential Insurance Company of America.
YOU--the
owner[s] of the Contract.
1
<PAGE>
BRIEF DESCRIPTION OF THE CONTRACT
This section provides only an overview of the more significant provisions of the
Contract. It omits details which are provided in the rest of this prospectus.
The PRUDENTIAL SURVIVORSHIP PREFERRED Contract (referred to from now on as the
"Contract") is a flexible premium variable universal life insurance policy. It
is issued and sold by The Prudential Insurance Company of America
("Prudential"). The Contract provides life insurance coverage, with a death
benefit payable upon the second death of two insureds. A significant element of
the Contract is the Contract Fund, the amount of which changes every business
day. That amount represents the value of your Contract on that day.
A broad objective of the Contract is to provide benefits that will increase in
value if favorable investment results are achieved. Prudential has established
a separate account, like a separate division within the Company, called The
Prudential Variable Appreciable Account (from now on, the "Account"). You may
choose to have premiums, after the deduction of certain charges (described
below), invested into any one or more of the fifteen available subaccounts of
the Account.
The money allocated to each subaccount is immediately invested in a
corresponding portfolio of The Prudential Series Fund, Inc. (the "Series Fund"),
a series mutual fund for which 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 two ZERO COUPON BOND PORTFOLIOS -- 2000 AND 2005 are invested primarily
in debt obligations of the United States Treasury and investment grade
corporations that have been issued without interest coupons or stripped of
their unmatured interest coupons, interest coupons that have been stripped
from such debt obligations, and receipts and certificates for such stripped
debt obligations and stripped coupons.
. 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.
2
<PAGE>
. 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.
. 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 7 and in the attached prospectus for the
Series Fund.
You have an additional option which is regulated differently from the other 15
because it is not an investment company registered under the Investment Company
Act of 1940. This is a FIXED-RATE OPTION that increases the portion of your
Contract Fund allocated to this option at a guaranteed rate of interest.
Thus your Contract Fund value changes every day depending upon the change in the
value of the particular portfolios (or fixed-rate option) that you have selected
for the investment of your Contract Fund.
Although the selection of any of the subaccounts offers the possibility that
your Contract Fund value will increase if there is favorable investment
performance, you are subject to the risk that investment performance will be
unfavorable and that the value of your Contract Fund will decrease. The risk
will be different, depending upon which investment options you choose. See
WHICH INVESTMENT OPTION SHOULD BE SELECTED?, page 7. If you select the fixed-
rate option, you are credited with a declared rate or rates of interest but you
assume the risk that the rate may change, although it will never be lower than
an effective annual rate of 4%.
3
<PAGE>
Prudential deducts certain charges from each premium payment and from the
amounts held in the designated investment options. These charges, which are
largely designed to cover insurance costs and risks as well as sales and
administrative expenses, are fully described under CHARGES AND EXPENSES, on page
16. In brief, and subject to that fuller description, the following diagram
outlines the maximum charges which may be made:
DEDUCTIONS FROM PREMIUM PAYMENTS
. A charge of up to 7.5% is deducted for any taxes
attributable to premiums. In Oregon this is called a
premium based administrative charge.
. A charge for sales expenses is deducted (this charge
depends upon the Contract year and the amount paid during
that year and disappears after the twentieth year).
DAILY CHARGES
. Management fees and expenses are deducted from the assets of the Series
Fund.
. A daily charge equivalent to an annual rate of up to 0.9% is deducted from
the assets of the variable investment options for mortality and expense
risks.
MONTHLY CHARGES
. The Contract Fund is reduced by a monthly administrative charge of up to
$7.50 per Contract and $0.07 per $1,000 of basic insurance amount in the
first Contract year; for Contract years after the first, the $0.07 per
$1,000 portion of the charge drops to $0.01 per $1,000 of basic insurance
amount.
. A cost of insurance ("COI") charge is deducted.
. The Contract Fund is reduced by a Death Benefit Guarantee risk charge of up
to $0.01 per $1,000 of the basic insurance amount.
. If the Contract includes riders, a deduction from the Contract Fund will be
made for charges applicable to those riders
. If the rating class of an insured results in an extra charge, that charge
will be deducted from the Contract Fund.
ADDITIONAL CHARGES
. An administrative processing charge of up to $25 is made in connection with
any withdrawals.
. Although no such charge is currently being made, we reserve the right to
charge up to $25 for each decrease in basic insurance amount.
. An administrative processing charge of up to $25 will be made for each
transfer exceeding twelve in any Contract year.
There are two types of death benefit available. You may choose a Contract with
a fixed insurance amount under which the cash surrender value varies daily with
investment experience, and the basic insurance amount chosen by you at the
outset does not change. However, the Contract Fund may grow to a point where
the insurance amount
4
<PAGE>
may increase and vary with investment experience. If you choose a Contract with
a variable insurance amount, the cash surrender value and the insurance amount
both vary with investment experience. For either type of insurance amount, as
long as the Contract is in force, the insurance amount will never be less than
the basic insurance amount shown in your Contract. See TYPE OF INSURANCE
AMOUNT, page 8.
The Contract is a flexible premium contract - there are no scheduled premiums.
Except for the minimum initial premium, and subject to a minimum of $25 per
subsequent payment, the timing and amount of premium payments is discretionary
and the Contract will remain in force provided that the Contract Fund is
sufficient to cover the charges. However, if the premiums you pay on an
accumulated basis are high enough, and Contract debt does not exceed the
Contract Fund, Prudential guarantees that your Contract will not lapse even if
investment experience is very unfavorable and the Contract Fund drops below
zero. There are two guarantees available, one that lasts for the lifetime of
the Contract and another that lasts for a stated, reasonably lengthy period.
The guarantee for the life of the Contract requires higher premium payments. See
PREMIUMS, page 11, DEATH BENEFIT GUARANTEE, page 12 and LAPSE AND REINSTATEMENT,
page 31.
While you decide when to make premium payments and, subject to a $25 minimum, in
what amounts, we do offer and suggest regular billing of premiums. When
applying for the Contract, you should discuss with your Prudential
representative if you would like to be billed, how frequently and for what
amount. See PREMIUMS, page 11.
For a limited time, a Contract may be returned for a refund in accordance with
the terms of its "free look" provision. See SHORT-TERM CANCELLATION RIGHT OR
"FREE LOOK," page 8.
This Summary provides only a brief overview of the more significant aspects of
the Contract. Further detail is provided in the subsequent sections of this
prospectus and in the Contract. The Contract, including the application
attached to it, constitutes the entire agreement between the owner and
Prudential and should be retained.
For the DEFINITIONS OF SPECIAL TERMS USED IN THIS PROSPECTUS, see page 1.
5
<PAGE>
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.
We are licensed to sell life insurance and annuities in the District of
Columbia, Guam, U.S. Virgin Islands, and in all states. These Contracts are not
offered in any state in which the necessary approvals have not yet been
obtained.
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 may be withdrawn by
Prudential.
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. The Account's financial statements begin on page A1.
Currently, you may invest in one or a combination of fifteen available
subaccounts within the Account, each of which invests in a single corresponding
portfolio of The Prudential Series Fund, Inc. Additional subaccounts may be
added in the future.
6
<PAGE>
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
subsidiary insurers that offer variable life insurance and variable annuity
contracts. The Account will purchase and redeem shares from the Series Fund at
net asset value. Shares will be redeemed to the extent necessary for 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. See DEDUCTIONS FROM
PORTFOLIOS, page 18.
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.
WHICH INVESTMENT OPTION SHOULD BE SELECTED?
Historically, for investments held over relatively long periods, the investment
performance of common stocks has generally been superior to that of short or
long-term debt securities, even though common stocks have been subject to much
more dramatic changes in value over short periods of time. Accordingly, the
Stock Index, Equity Income, Equity, Prudential Jennison, Small Capitalization
Stock, Global or Natural Resources Portfolios may be desirable options if
7
<PAGE>
you are willing to accept such volatility in your Contract values. Each of these
equity portfolios involves somewhat different policies and investment risks.
You may prefer the somewhat greater protection against loss of principal (and
reduced chance of high total return) provided by the Government Income or
Diversified Bond Portfolios. There may be times when you desire even greater
safety of principal and may then prefer the Money Market Portfolio or the fixed-
rate option, recognizing that the level of short-term rates may change rather
rapidly. Money invested in a Zero Coupon Bond Portfolio and held to its
liquidation date will realize a predictable return, although the portfolio's
value may fluctuate significantly with changes in interest rates prior to its
liquidation date. If you are willing to take risks and possibly achieve a
higher total return, you may prefer the High Yield Bond Portfolio, recognizing
that with higher yielding, lower quality bonds the risks are greater. You may
wish to divide your invested premium among two or more of the portfolios. You
may wish to obtain diversification by relying on Prudential's judgment for an
appropriate asset mix by choosing the Conservative Balanced or Flexible Managed
Portfolios.
You should make a choice that takes into account how willing you are to accept
investment risks, the manner in which your other assets are invested, and your
own predictions about what investment results are likely to be in the future.
Prudential does recommend AGAINST frequent transfers among the several
investment options as experience generally indicates that "market timing"
investing, particularly by non-professional investors, is likely to prove
unsuccessful.
DETAILED INFORMATION FOR
PROSPECTIVE CONTRACT OWNERS
REQUIREMENTS FOR ISSUANCE OF A CONTRACT
The minimum basic insurance amount that can be applied for is $250,000. The
Contract may be issued on two insureds each between the ages of 20 and 85.
Before issuing any Contract, Prudential requires evidence of insurability on
each insured which may include a medical examination. Non-smokers are offered
the most favorable cost of insurance rates. A higher cost of insurance rate
and/or additional charge is charged if an extra mortality risk is involved.
These are the current underwriting requirements. We reserve the right to change
them on a non-discriminatory basis.
SHORT-TERM CANCELLATION RIGHT OR "FREE LOOK"
Generally, you may return the Contract for a refund within 10 days after you
receive it. 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. You 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, if you exercise your short-term
cancellation right, you will receive a refund of all premium payments made, with
no adjustment for investment experience.
TYPE OF INSURANCE AMOUNT
You may select either a fixed or a variable insurance amount. Generally, a
Contract with a fixed insurance amount has an insurance amount equal to the
basic insurance amount. The death benefit of this type does not vary with the
investment performance of the investment options selected by you, except in
certain circumstances. See HOW A FIXED INSURANCE AMOUNT
8
<PAGE>
CONTRACT'S DEATH BENEFIT WILL VARY, page 20. Favorable investment results of the
variable investment options to which the assets related to the Contract are
allocated and payment of additional premiums will generally result in increases
in the cash surrender value. See HOW A CONTRACT'S CASH SURRENDER VALUE WILL
VARY, page 20.
A Contract with a variable insurance amount has an insurance amount which will
generally equal the basic insurance amount plus the Contract Fund. Since the
Contract Fund is a component of the insurance amount, favorable investment
performance and payment of additional premiums generally result in an increase
in the death benefit as well as in the cash surrender value. Over time,
however, the increase in the cash surrender value will be less than under a
Contract with a fixed insurance amount. This is because, given two Contracts
with the same basic insurance amount and equal Contract Funds, generally the
cost of insurance charge for a Contract with a variable insurance amount will be
greater. See HOW A CONTRACT'S CASH SURRENDER VALUE WILL VARY, page 20 and HOW A
VARIABLE INSURANCE AMOUNT CONTRACT'S DEATH BENEFIT WILL VARY, page 22.
Unfavorable investment performance will result in decreases in the insurance
amount and in the cash surrender value. But, as long as the Contract is not in
default and there is no Contract debt, the death benefit may not fall below the
basic insurance amount stated in the Contract.
In choosing an insurance amount type, you should also consider whether you
intend to use the withdrawal feature. Purchasers of Contracts with a fixed
insurance amount should note that any withdrawal may result in a reduction of
the basic insurance amount. In addition, we will not allow you to make a
withdrawal that will decrease the insurance amount below the minimum basic
insurance amount. See WITHDRAWALS, page 23.
Here are two examples of how the death benefit and cash surrender values may
vary for Contracts with fixed and variable insurance amounts. The graphs are
based on the same assumptions as the illustrations shown on pages T-1 through T-
4. Specifically, a Contract with a basic insurance amount of $1,000,000 has
been issued on the lives of a 55 year old male and a 50 year old female, both
non-smokers, with no extra risks or substandard ratings, and no extra benefit
riders added to the Contract. The first chart assumes that the target premium
amount (see PREMIUMS, page 11) is paid on each Contract anniversary, no loans
are taken, current charges will continue for the indefinite future, and there is
a uniform gross annual rate of return of 8%. The second chart makes the same
assumptions, except that it assumes that the maximum charges permitted by the
Contract are made.
9
<PAGE>
CURRENT CONTRACTUAL CHARGES, 8% GROSS INVESTMENT RETURN
VARIABLE SURVIVORSHIP CONTRACT
FIXED INSURANCE AMOUNT
MALE PREFERRED ISSUE AGE 55
FEMALE PREFERRED ISSUE AGE 50
$ 1,000,000 DEATH BENEFIT
$ 12,097.49 ANNUAL PREMIUM PAYMENT
USING CURRENT CONTRACTUAL CHARGES
<TABLE>
<CAPTION>
Death Benefit (1) Cash Surrender Value (1)
------------------------------------- -------------------------------------
Assuming Hypothetical Gross (and Net) Assuming Hypothetical Gross (and Net)
Annual Investment Return of Annual Investment Return of
End of ------------------------------------- -------------------------------------
Policy 8% Gross 8% Gross
Year ( 6.59% Net) ( 6.59% Net)
- ------ ------------------------------------- -------------------------------------
<S> <C> <C>
1 1000000 7475
2 1000000 19188
3 1000000 31639
4 1000000 44871
5 1000000 58924
6 1000000 73843
7 1000000 89671
8 1000000 106454
9 1000000 124239
10 1000000 143075
11 1000000 163011
12 1000000 184100
13 1000000 206394
14 1000000 229949
15 1000000 254824
16 1000000 281078
17 1000000 308778
18 1000000 337996
19 1000000 368811
20 1000000 401306
21 1000000 436544
22 1000000 473726
23 1000000 512975
24 1000000 554441
25 1040791 598156
26 1094401 643765
27 1140675 691318
28 1192536 740705
29 1266202 791376
30 1283700 844540
31 1348544 899029
32 1385684 955644
33 1439695 1013870
34 1502584 1073274
35 1543544 1134959
36 1594271 1198700
37 1655864 1264019
38 1729119 1330092
39 1764292 1400232
40 1826424 1472922
41 1889334 1548635
42 1953559 1627966
43 2034467 1709637
44 2101523 1796174
45 2171866 1888579
46 2217146 1962077
47 2280891 2073538
48 2352875 2198949
49 2473529 2333518
50 2582316 2482996
</TABLE>
VARIABLE SURVIVORSHIP CONTRACT
VARIABLE INSURANCE AMOUNT
MALE PREFERRED ISSUE AGE 55
FEMALE PREFERRED ISSUE AGE 50
$ 1,000,000 DEATH BENEFIT
$ 12,097.49 ANNUAL PREMIUM PAYMENT
USING CURRENT CONTRACTUAL CHARGES
<TABLE>
<CAPTION>
Death Benefit (1) Cash Surrender Value (1)
------------------------------------- -------------------------------------
Assuming Hypothetical Gross (and Net) Assuming Hypothetical Gross (and Net)
Annual Investment Return of Annual Investment Return of
End of ------------------------------------- -------------------------------------
Policy 8% Gross 8% Gross
Year ( 6.59% Net) ( 6.59% Net)
- ------ ------------------------------------- -------------------------------------
<S> <C> <C>
1 1007475 7475
2 1019187 19187
3 1031636 31636
4 1044862 44862
5 1058905 58905
6 1073805 73805
7 1089603 89603
8 1106338 106338
9 1124049 124049
10 1142774 142774
11 1162549 162549
12 1183409 183409
13 1205384 205384
14 1228498 228498
15 1252772 252772
16 1278217 278217
17 1304838 304838
18 1332630 332630
19 1361576 361576
20 1391635 391635
21 1423708 423708
22 1456793 456793
23 1490757 490757
24 1525424 525424
25 1560569 560569
26 1595906 595906
27 1631095 631095
28 1665728 665728
29 1699309 699309
30 1731270 731270
31 1760967 760967
32 1787705 787705
33 1810725 810725
34 1829233 829233
35 1842412 842412
36 1849430 849430
37 1849419 849419
38 1841493 841493
39 1824731 824731
40 1798196 798196
41 1760910 760910
42 1711870 711870
43 1650021 650021
44 1574271 574271
45 1483457 483457
46 1269279 269279
47 1145376 145376
48 1002645 2645
49 0 0
50 0 0
</TABLE>
MAXIMUM CONTRACTUAL CHARGES, 8% GROSS INVESTMENT RETURN
VARIABLE SURVIVORSHIP CONTRACT
FIXED INSURANCE AMOUNT
MALE PREFERRED ISSUE AGE 55
FEMALE PREFERRED ISSUE AGE 50
$ 1,000,000 DEATH BENEFIT
$ 12,097.49 ANNUAL PREMIUM PAYMENT
USING MAXIMUM CONTRACTUAL CHARGES
<TABLE>
<CAPTION>
Death Benefit (1) Cash Surrender Value (1)
------------------------------------- -------------------------------------
Assuming Hypothetical Gross (and Net) Assuming Hypothetical Gross (and Net)
Annual Investment Return of Annual Investment Return of
End of ------------------------------------- -------------------------------------
Policy 8% Gross 8% Gross
Year ( 6.59% Net) ( 6.59% Net)
------------------------------------- -------------------------------------
<S> <C> <C>
1 1000000 6936
2 1000000 17891
3 1000000 29465
4 1000000 41677
5 1000000 54544
6 1000000 68081
7 1000000 82301
8 1000000 97215
9 1000000 112831
10 1000000 129151
11 1000000 146169
12 1000000 163867
13 1000000 182215
14 1000000 211161
15 1000000 220651
16 1000000 240619
17 1000000 260995
18 1000000 281703
19 1000000 302661
20 1000000 323769
21 1000000 345887
22 1000000 367961
23 1000000 389807
24 1000000 411213
25 1000000 431949
26 1000000 451769
27 1000000 470435
28 1000000 487691
29 1000000 503252
30 1000000 516774
31 1000000 527803
32 1000000 535730
33 1000000 539742
34 1000000 538792
35 1000000 531502
36 1000000 516008
37 1000000 489709
38 1000000 448862
39 1000000 387932
40 1000000 298457
41 1000000 167270
42 0 0
43 0 0
44 0 0
45 0 0
46 0 0
47 0 0
48 0 0
49 0 0
50 0 0
</TABLE>
VARIABLE SURVIVORSHIP CONTRACT
VARIABLE INSURANCE AMOUNT
MALE PREFERRED ISSUE AGE 55
FEMALE PREFERRED ISSUE AGE 50
$ 1,000,000 DEATH BENEFIT
$ 12,097.49 ANNUAL PREMIUM PAYMENT
USING MAXIMUM CONTRACTUAL CHARGES
<TABLE>
<CAPTION>
Death Benefit (1) Cash Surrender Value (1)
--------------------------------------- --------------------------------------
Assuming Hypothetical Gross (and Net) Assuming Hypothetical Gross (and Net)
Annual Investment Return of Annual Investment Return of
End of --------------------------------------- --------------------------------------
Policy 8% Gross 8% Gross
Year ( 6.59% Net) ( 6.59% Net)
--------------------------------------- --------------------------------------
<S> <C> <C>
1 1006935 6935
2 1017888 17888
3 1029456 29456
4 1041653 41653
5 1054490 54490
6 1067975 67975
7 1082111 82111
8 1096894 96894
9 1112316 112316
10 1128352 128352
11 1144966 144966
12 1162099 162099
13 1179666 179666
14 1197545 197545
15 1215590 215590
16 1233626 233626
17 1251447 251447
18 1268813 268813
19 1285445 285445
20 1301006 301006
21 1316053 316053
22 1329166 329166
23 1339718 339718
24 1346970 346970
25 1350077 350077
26 1348098 348098
27 1340036 340036
28 1324813 324813
29 1301263 301263
30 1268091 268091
31 1223824 223824
32 1166778 166778
33 1095053 95053
34 1006650 6650
35 0 0
36 0 0
37 0 0
38 0 0
39 0 0
40 0 0
41 0 0
42 0 0
43 0 0
44 0 0
45 0 0
46 0 0
47 0 0
48 0 0
49 0 0
50 0 0
</TABLE>
The way in which the cash surrender values and death benefits will change
depends significantly upon the investment results that are actually
achieved.
10
<PAGE>
CHANGING THE TYPE OF INSURANCE AMOUNT
Subject to Prudential's approval, you may change the type of insurance amount.
We will increase or decrease the basic insurance amount so that the death
benefit immediately after the change matches the death benefit immediately
before the change. There may be times when a change from one type of insurance
amount to the other may be desirable. You should consult your Prudential
representative from time to time about the choices available to you under the
Contract.
If you are changing your Contract's type of insurance amount from fixed to
variable, we will reduce the basic insurance amount by the amount in your
Contract Fund on the date the change takes place. The basic amount after the
change may not be lower than the minimum basic insurance amount applicable to
the Contract. If you are changing from a variable to a fixed insurance amount,
we will increase the basic insurance amount by the amount in your Contract Fund
on the date the change takes place. This is illustrated in the following chart.
<TABLE>
<CAPTION>
CHANGING THE CHANGING THE
INSURANCE AMOUNT INSURANCE AMOUNT
FROM FROM
FIXED (RIGHT ARROW) VARIABLE VARIABLE (RIGHT ARROW) FIXED
BASIC INSURANCE
AMOUNT
<S> <C> <C>
$ 300,000 (RIGHT ARROW) $250,000 $ 300,000 (RIGHT ARROW) $350,000
CONTRACT FUND $ 50,000 = $ 50,000 $ 50,000 = $ 50,000
DEATH BENEFIT* $ 300,000 = $300,000 $ 350,000 = $350,000
</TABLE>
* assuming there is no Contract debt
To request a change, fill out an application for change which can be obtained
from your Prudential representative or any of our offices. If the change is
approved, we will recompute the Contract's charges and appropriate tables and
send you new Contract data pages. We may ask that you send us your Contract
before making the change.
PREMIUMS
The Contract is a flexible premium contract. The minimum initial premium is due
on or before the Contract date. Thereafter, you decide when you would like to
make premium payments and, subject to a $25 minimum, in what amounts. We
reserve the right to refuse to accept any payment that increases the insurance
amount by more than it increases the Contract Fund. See HOW A FIXED INSURANCE
AMOUNT CONTRACT'S DEATH BENEFIT WILL VARY, page 20 and HOW A VARIABLE INSURANCE
AMOUNT CONTRACT'S DEATH BENEFIT WILL VARY, page 22. There are circumstances
under which the payment of premiums in amounts that are too large may cause the
Contract to be characterized, under the Internal Revenue Code, as a Modified
Endowment Contract, which could be significantly disadvantageous. See TAX
TREATMENT OF CONTRACT BENEFITS, page 28.
Once the minimum initial premium payment is made, there are no required
premiums. However, there are several types of "premium" which may help you
understand how the Contract works.
MINIMUM INITIAL PREMIUM -- the premium needed to start the Contract. There is
no insurance under this Contract unless the minimum initial premium is paid.
11
<PAGE>
GUIDELINE PREMIUMS -- these are the premiums that, if paid at the beginning of
each Contract year, will keep the Contract in force during the lifetime of the
insureds regardless of investment performance, assuming no loans or withdrawals.
These guideline premiums will be higher for a Contract with a variable insurance
amount than for a Contract with a fixed insurance amount. For a Contract with
no riders or extra risk charges, these premiums will be level. If certain
riders are included, the guideline premium may increase each year. Payment of
guideline premiums at the beginning of each Contract year is one way to achieve
the Lifetime Death Benefit Guarantee Values shown on the Contract data pages.
See DEATH BENEFIT GUARANTEE, below. When you purchase a Contract, your
Prudential representative can tell you the amount[s] of the guideline premium.
TARGET PREMIUMS -- these are the premiums that, if paid at the beginning of each
Contract year, will keep the Contract in force during the Limited Death Benefit
Guarantee period assuming no loans or withdrawals. As is the case with the
guideline premium, for a Contract with no riders or extra risk charges, these
premiums will be level. If certain riders are included, the target premium may
increase each year. Payment of target premiums at the beginning of each
Contract year is one way to achieve the Limited Death Benefit Guarantee Values
shown on the Contract data pages. At the end of the Limited Death Benefit
Guarantee period, continuation of the Contract will depend on the Contract Fund
having sufficient money to cover all charges or meeting the conditions of the
Lifetime Death Benefit Guarantee. See DEATH BENEFIT GUARANTEE, below. When you
purchase a Contract, your Prudential representative can tell you the amount[s]
of the target premium.
TARGET LEVEL PREMIUM -- For any Contract this is generally the target premium
minus any premiums for single life riders or any premiums associated with
aviation, avocation, occupational or temporary extras. We use the target level
premium in calculating the sales load (as shown under ADJUSTMENTS TO PREMIUM
PAYMENTS on your Contract's data pages). See CHARGES AND EXPENSES, page 16 and
SALE OF THE CONTRACT AND SALES COMMISSIONS, page 28.
We can bill you for any amount you select annually, semi-annually, quarterly or
monthly. Because the Contract is a flexible premium contract, there are no
scheduled premium due dates. When you receive a premium notice, you are not
required to pay this amount. The Contract will remain in force if either the
Contract Fund is sufficient to pay all charges or if you have paid sufficient
premiums on an accumulated basis to meet the conditions of the Death Benefit
Guarantee and Contract debt is not equal to or greater than the Contract Fund.
You may also pay premiums automatically through pre-authorized transfers from a
bank checking account. If you elect to use this feature, you choose the day of
the month on which premiums will be paid and the amount of the premiums paid.
We will then draft from your account the same amount on the same date each
month.
When you apply for the Contract, you should discuss with your Prudential
representative how frequently you would like to be billed (if at all) and for
what amount.
DEATH BENEFIT GUARANTEE
Although you decide what premium amounts you wish to pay, payment of sufficient
premium, on an accumulated basis, will guarantee that your policy will not lapse
and a death benefit will be paid upon the second death of two insureds. This
will be true even if, because of unfavorable investment experience, your
Contract Fund value drops to zero. However, the guarantee is contingent upon
Contract debt never being equal to or greater than the Contract Fund. See
CONTRACT LOANS, page 27. You should consider the importance of the Death
Benefit Guarantee to you when deciding on what amounts of premiums to pay into
the Contract.
12
<PAGE>
For purposes of determining this guarantee, we calculate, and show in the
Contract data pages, two sets of amounts - the Lifetime Death Benefit Guarantee
Values and Limited Death Benefit Guarantee Values. These are not cash values
---
that you can realize by surrendering the Contract, nor are they death benefits
payable. They are values used solely to determine if a Death Benefit Guarantee
is in effect. The Lifetime Death Benefit Guarantee Values are shown for the
lifetime of the Contract. The Limited Death Benefit Guarantee Values are lower,
but only apply for the length of the Limited Death Benefit Guarantee period.
The length of the Limited Death Benefit Guarantee period is determined on a case
by case basis depending on things like the insureds' ages and extra rating
class, if any. The length of the Limited Death Benefit Guarantee period
applicable to your particular Contract is shown on the Contract data pages.
At the Contract date, and on each Monthly date, we calculate your Contract's
"Accumulated Net Payments" as of that date. Accumulated Net Payments equal the
premiums you paid, accumulated at an effective annual rate of 4%, less
withdrawals also accumulated at 4%.
At each Monthly date within the Limited Death Benefit Guarantee period, we will
compare your Accumulated Net Payments to the Limited Death Benefit Guarantee
Value as of that date. After the Limited Death Benefit Guarantee period, we will
compare your Accumulated Net Payments to the Lifetime Death Benefit Guarantee
Value as of that date. If your Accumulated Net Payments equal or exceed the
applicable (Lifetime or Limited) Death Benefit Guarantee Value and Contract debt
does not exceed the Contract Fund, then the Contract is kept in force,
regardless of the amount in the Contract Fund.
The Contract data pages show Lifetime Death Benefit Guarantee Values and Limited
Death Benefit Guarantee Values as of Contract anniversaries. Values for non-
anniversary Monthly dates will reflect the number of months elapsed between
Contract anniversaries.
Guideline and target premiums are premium levels that, if paid at the start of
each Contract year, correspond to the Lifetime and Limited Death Benefit
Guarantee Values, respectively (assuming no withdrawals or loans). See
PREMIUMS, page 11. They are one way of reaching the Death Benefit Guarantee
Values; they are certainly not the only way.
Here is a table of typical guideline and target premiums (to the nearest dollar)
along with corresponding Limited Death Benefit Guarantee periods. The examples
assume the insureds are a male and a female, both of the same age, both non-
smokers, with no extra risk or substandard ratings, and no extra benefit riders
added to the Contract.
13
<PAGE>
- -----------------------------------------------------------------------
BASIC INSURANCE AMOUNT -- $250,000
ILLUSTRATIVE ANNUAL PREMIUMS
- -----------------------------------------------------------------------
AGE OF TYPE OF GUIDELINE PREMIUM TARGET PREMIUM
BOTH THE INSURANCE CORRESPONDING TO CORRESPONDING TO THE
INSUREDS AMOUNT THE LIMITED DEATH BENEFIT
AT ISSUE CHOSEN LIFETIME DEATH GUARANTEE VALUES AND
BENEFIT GUARANTEE NUMBER OF YEARS OF
VALUES GUARANTEE
- -----------------------------------------------------------------------
45 Fixed $3,713 $2,218 for 39 years
45 Variable $13,906 $2,218 for 37 years
55 Fixed $5,581 $3,601 for 29 years
55 Variable $20,349 $3,601 for 27 years
65 Fixed $9,618 $7,212 for 22 years
65 Variable $30,787 $7,212 for 20 years
The Death Benefit Guarantee allows considerable flexibility as to the timing of
premium payments. Your Prudential representative can supply sample
illustrations of various premium amount and frequency combinations that
correspond to the Death Benefit Guarantee Values.
You should consider carefully the value of maintaining the guarantee. It may be
preferable for you to pay generally higher premiums in all years, rather than
trying to make such payments on an as needed basis if the death benefit
guarantee is desired for lifetime protection. For example, if you pay only
enough premium to meet the Limited Death Benefit Guarantee Values, a substantial
-----------
amount may be required to meet the Lifetime Death Benefit Guarantee Values in
order to continue the guarantee at the end of the Limited Death Benefit
Guarantee period. In addition, it is possible that the payment required to
continue the guarantee after the Limited Death Benefit Guarantee period could
exceed the premium payments allowed to be paid without causing the Contract to
become a Modified Endowment Contract. See TAX TREATMENT OF CONTRACT BENEFITS,
page 28.
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 the date on
which the first premium is paid and the Contract is delivered. Under certain
circumstances, we may allow the Contract to be back-dated for the purpose of
lowering one or both insureds' issue age[s], but only to a date not earlier than
six months prior to the date of the application. This may be advantageous for
some Contract owners as a lower issue age may result in lower current charges.
For a Contract that is back-dated, the minimum initial premium will be treated
as if it were received on the back-dated Contract date and the current death
benefit and cash surrender value under the Contract will be equal to what they
would have been had the Contract been issued on the Contract date and had all
Contract charges been made.
ALLOCATION OF PREMIUMS
On the Contract date, the charge for sales expenses and the charge for taxes
attributable to premiums (in Oregon this is called a premium based
administrative charge) are deducted from
14
<PAGE>
the initial premium. The remainder of the initial premium will be allocated on
the Contract date among the subaccounts and/or the fixed-rate option according
to your desired allocation as specified in the application form and the first
monthly deductions are made. 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. See CHARGES AND EXPENSES, page 16.
The charge for sales expenses and the charge for taxes attributable to premiums
(in Oregon this is called a premium based administrative charge) also apply to
all subsequent premium payments (there is no charge for sales expenses after the
twentieth Contract year); the remainder will be invested as of the end of the
valuation period when received at a Home Office in accordance with the
allocation you previously designated. Provided the Contract is not in default,
you may change the way in which subsequent premiums are allocated by giving
written notice to a Home Office or by telephoning that Home Office, provided you
are enrolled to use the Telephone Transfer System. There is no charge for
reallocating future premiums. All percentage allocations must be in whole
numbers. For example, 33% can be selected but 33__% cannot. Of course, the
total allocation to all selected investment options must equal 100%.
TRANSFERS
You may, up to twelve times in each Contract year, transfer amounts from one
subaccount to another subaccount or to the fixed-rate option without charge.
There is an administrative charge of up to $25 for each transfer made exceeding
twelve in any Contract year. However, we will waive this charge for all
contracts with a basic insurance amount of $10,000,000 or more. All or a
portion of the amount credited to a subaccount may be transferred.
Transfers among subaccounts will take effect as of the end of the valuation
period in which a proper transfer request is received at a Home Office. The
request may be in terms of dollars, such as a request to transfer $10,000 from
one subaccount to another, or may be in terms of a percentage reallocation among
subaccounts. In the latter case, as with premium reallocations, the percentages
must be in whole numbers. You may transfer amounts by proper written notice to
a Home Office or by telephone, provided you are enrolled to use the Telephone
Transfer System. You will automatically be enrolled to use the Telephone
Transfer System unless the Contract is jointly owned or you elect not to have
this privilege. Telephone transfers may not be available on policies that are
assigned (see ASSIGNMENT, page 32), depending on the terms of the assignment.
We will use reasonable procedures, such as asking you to provide certain
personal information provided on your application for insurance, to confirm that
instructions given by telephone are genuine. We will not be held liable for
following telephone instructions that we reasonably believe to be genuine.
Prudential cannot guarantee that you will be able to get through to complete a
telephone transfer during peak periods such as periods of drastic economic or
market change.
On the liquidation date of a Zero Coupon Bond Subaccount, all the shares held by
it in the corresponding portfolio of the Series Fund will be redeemed and the
proceeds of the redemption applicable to each Contract will be transferred to
the Money Market Subaccount unless the Contract owner directs that it be
transferred to another investment option[s].
Only one transfer from the fixed rate option will be permitted during the
Contract year and the maximum amount which may be transferred out of the fixed
rate option each year is the greater of (a) 25% of the amount in the fixed rate
option; and (b) $2,000. These limits are
15
<PAGE>
subject to change in the future. We may waive these restrictions for limited
periods of time in a non-discriminatory way, (e.g., when interest rates are
declining).
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.
DOLLAR COST AVERAGING
We offer a feature called Dollar Cost Averaging ("DCA"). Under this feature,
either fixed dollar amounts or a percentage of the amount designated for use
under the DCA option will be transferred periodically from the Money Market
Subaccount into other investment options available under the Contract, excluding
the fixed-rate option. You may choose to have periodic transfers made monthly,
quarterly, semi-annually or annually.
Each automatic transfer will take effect as of the end of the valuation period
on the date coinciding with the periodic timing you designated provided the New
York Stock Exchange is open on that date. If the New York Stock Exchange is not
open on that date, or if the date does not occur in that particular month, the
transfer will take effect as of the end of the valuation period which
immediately follows that date. Automatic transfers will continue until: (1)
$50 or less remains of the amount designated for Dollar Cost Averaging, at which
time the remaining amount will be transferred; or (2) you give us notification
of a change in DCA allocation or cancellation of the feature. Currently, there
is no charge for using the Dollar Cost Averaging feature. We reserve the right
to change the requirements or discontinue the feature.
AUTO-REBALANCING
As an administrative practice, we are currently offering a feature called Auto-
Rebalancing. This feature allows you to automatically rebalance subaccount
assets at specified intervals based on percentage allocations that you choose.
For example, suppose your initial investment allocation of variable investment
options X and Y is split 40% and 60%, respectively. Then, due to investment
results, that split changes. You may instruct that those assets be rebalanced
to your original or different allocation percentages.
Auto-Rebalancing can be performed on a monthly, quarterly, semi-annual or annual
basis. Each rebalance will take effect as of the end of the valuation period on
the date coinciding with the periodic timing you designate provided the New York
Stock Exchange is open on that date. If the New York Stock Exchange is not open
on that date, or if the date does not occur in that particular month, the
transfer will take effect as of the end of the valuation period which
immediately follows that date. The fixed-rate option cannot participate in this
administrative procedure. Currently, a transfer that occurs under the Auto-
Rebalancing feature is not counted towards the twelve free transfers permitted
each Contract year. We reserve the right to change this practice, modify the
requirements or discontinue the feature.
CHARGES AND EXPENSES
The total amount invested at any time under the Contract (the "Contract Fund")
consists of the sum of the amount credited to the subaccounts, the amount
allocated to the fixed-rate option, and the principal amount of any Contract
loan plus the amount of interest credited to
16
<PAGE>
the Contract upon that loan. See CONTRACT LOANS, page 27. Most charges, although
not all, are made by reducing the Contract Fund.
This section provides a detailed description of each charge that is described
briefly in the chart on page 4, and an explanation of the purpose of the charge.
In several instances we will use the terms "maximum charge" and "current
charge." The "maximum charge," in each instance, is the highest charge that
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.
DEDUCTIONS FROM PREMIUM PAYMENTS
(a) A charge of up to 7.5% is deducted from each premium for taxes attributable
to premiums (in Oregon this is called a premium based administrative
charge). 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. That charge is currently made up of two
parts. The first part is a charge for state and local premium-based taxes.
The current charge for this first part is 2.5% of the premium. This amount
may be more than Prudential actually pays. The second part is for federal
income taxes measured by premiums and it is currently equal to 1.25% of the
premium. 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 and 1996, Prudential deducted a total of approximately $847,000 and
$223,950, respectively, in taxes attributable to premiums.
(b) A charge for sales expenses will be deducted from premium payments made
during the first twenty Contract years. This charge, often called a sales
load, is deducted to compensate us for things like the costs Prudential
incurs in selling the Contracts, including commissions, advertising and the
printing and distribution of prospectuses and sales literature. The charge
is expressed as a percentage of premium. The charge is equal to 30% of
premiums paid in the first Contract year up to the amount of the target
level premium (see PREMIUMS, page 11) and 4% of premiums paid in excess of
the target level premium. For Contract years 2 through 20, the charge is
equal to 7.5% of the premiums paid in each Contract year up to the target
level premium and 4% of the premiums paid above the target level premium.
Generally, if the average age of the insureds is 59 years or more, these
charges may be reduced to comply with the requirements of certain provisions
of the Investment Company Act of 1940 and rules adopted by the Securities
and Exchange Commission. Depending upon state approval, this charge may be
reduced on a non-discriminatory basis in conjunction with the exchange of a
Prudential Survivorship Whole Life Contract for a PRUDENTIAL SURVIVORSHIP
PREFERRED Contract on or before June 30, 1997.
Paying less than the target level premium amount in the first Contract year
or paying more than the target level premium amount in any Contract year
could reduce your total sales load. For example, assume that a Contract has
a target level premium of $12,097.49 and the Contract owner would like to
pay ten target level premiums. If the Contract owner paid $24,194.98 (two
times the amount of the target level premium in every other policy year up
to the ninth year (i.e. in years 1, 3, 5, 7, 9), the sales load charge would
be
17
<PAGE>
$9,677.99. If however, the Contract owner paid $12,097.49 in each of the
first ten policy years, the total sales load would be $11,795.04.
Attempting to structure the timing and amount of premium payments to reduce
the potential sales load may increase the risk that your Contract will lapse
without value. Delaying the payment of target premium amounts to later years
will adversely affect the Death Benefit Guarantee if the accumulated premium
payments do not reach the accumulated values shown under your Contract's
Limited Death Benefit Guarantee Values. See DEATH BENEFIT GUARANTEE, page 12.
In addition, there are circumstances where payment of premiums that are too
large may cause the Contract to be characterized as a Modified Endowment
Contract, which could be significantly disadvantageous. See TAX TREATMENT OF
CONTRACT BENEFITS, page 28. During 1997 and 1996, Prudential received a
total of approximately $2,796,368 and $1,177,209, respectively, in sales
charges.
DEDUCTIONS FROM PORTFOLIOS
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:
<TABLE>
<CAPTION>
INVESTMENT OTHER EXPENSES TOTAL EXPENSES
PORTFOLIO ADVISORY (AFTER EXPENSE (AFTER EXPENSE
FEE REIMBURSEMENT)* REIMBURSEMENT)*
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
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%
</TABLE>
* For some of the portfolios, the actual expenses were higher than those shown
in the second and third columns. Prudential, on a non-guaranteed basis,
makes daily adjustments that will offset the effect on Contract owners of
some of these expenses to ensure that the portfolio expenses indirectly borne
by a Contract owner investing in the Zero Coupon Bond Portfolios will not
exceed the investment management fee. Without such adjustments the portfolio
expenses indirectly borne by a Contract owner, expressed as a percentage of
the average daily net assets by portfolio, would have been 0.66% for the Zero
Coupon Bond 2000 and 0.74% for the Zero Coupon Bond 2005 Portfolios
during
18
<PAGE>
1997. Prudential does not intend to discontinue these adjustments in the
future, although it retains the right to do so.
DAILY DEDUCTION FROM THE CONTRACT FUND
Each day a charge is deducted from the assets of each of the subaccounts (the
"variable investment options") in an amount equivalent to an effective annual
rate of 0.9%. This charge is intended to compensate Prudential for assuming
mortality and expense risks under the Contract. The mortality risk assumed is
that the insureds may live for shorter periods of time than 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. During 1997 and
1996, Prudential received a total of approximately $109,000 and $12,000,
respectively, in mortality and expense risk charges. This charge is not
assessed against amounts allocated to the fixed-rate option.
MONTHLY DEDUCTIONS FROM CONTRACT FUND
The following monthly charges are deducted proportionately from the dollar
amounts held in each of the chosen investment option[s].
a) An administrative charge based on the basic insurance amount is deducted.
The charge is intended to compensate us for things like processing claims,
keeping records and communicating with Contract owners. In the first year,
this charge consists of $5 per Contract plus $0.07 per $1,000 of basic
insurance amount. In all subsequent years, this charge will be $5 per
Contract. Prudential reserves the right, however, to increase these charges
to $7.50 per Contract plus $0.07 per $1,000 of basic insurance amount in the
first Contract year and $7.50 per Contract plus $0.01 per $1,000 of basic
insurance amount in later years.
For example, a Contract with a basic insurance amount of $250,000 would
currently have a charge equal to $5 plus $17.50 for a total of $22.50 per
month for the first Contract year and $5 per month in all later years. The
maximum charge for this same Contract would be $7.50 plus $17.50 for a total
of $25 per month during the first Contract year. In later years, the maximum
charge would be $7.50 plus $2.50 for a total of $10 per month. During 1997
and 1996, Prudential received a total of approximately $511,579 and $176,462,
respectively, in monthly administrative charges.
b) A cost of insurance ("COI") charge is deducted. Upon the second death of
two insureds, the amount payable to the beneficiary (assuming there is no
Contract debt) is larger than the Contract Fund -- significantly larger if
both insureds died in the early years of the Contract. The cost of insurance
charges collected from all Contract owners enables Prudential to pay this
larger death benefit. The maximum COI charge is determined by multiplying
the "net amount at risk" under a Contract (the amount by which the Contract's
insurance amount exceeds the Contract Fund) by maximum COI rates. The
maximum COI rates are based upon both insureds' current attained age, sex,
smoking status, and extra rating class, if any.
For current COI charges, we use rates that are generally lower than the
maximum if both insureds are 36 years of age or older.
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<PAGE>
c) A charge of $0.01 per $1,000 of basic insurance amount is made to compensate
Prudential for the risk we assume by providing the Death Benefit Guarantee
feature. See DEATH BENEFIT GUARANTEE, page 12. During 1997 and 1996,
Prudential received a total of approximately $95,155 and $24,457,
respectively, for this risk charge.
d) You may add one or more of several riders to the Contract. Some riders are
charged for separately. If you add such a rider to the basic Contract,
additional charges will be deducted.
e) If an insured is in a substandard risk classification (for example, a person
in a hazardous occupation), additional charges will be deducted.
TRANSACTION CHARGES
(a) We currently charge an administrative processing fee equal to the lesser of
$25 or 2% of the withdrawal amount in connection with each withdrawal.
b) No administrative processing charge is currently being made in connection
with a decrease in basic insurance amount. We reserve the right to make such
a charge in an amount of up to $25 for each decrease.
(c) An administrative processing charge of up to $25 will be made for each
transfer exceeding 12 in any Contract year.
HOW A CONTRACT'S CASH SURRENDER VALUE WILL VARY
You may surrender the Contract for its net cash value. The Contract's cash
surrender value on any date will be the Contract Fund, defined under CHARGES AND
EXPENSES on page 16, reduced by any Contract debt. See CONTRACT LOANS, page 27.
The Contract Fund value changes daily, reflecting increases or decreases in the
value of the Series Fund portfolios in which the assets of the subaccount[s]
have been invested, interest credited on any amounts allocated to the fixed-
rate option, interest credited on any loan, and by the daily asset charge for
mortality and expense risks assessed against the variable investment options.
The Contract Fund value also changes to reflect the receipt of premium payments
and the monthly deductions described under CHARGES AND EXPENSES, page 16. Upon
request, Prudential will tell you the cash surrender value of your Contract. It
is possible for the cash surrender value of a Contract to decline to zero
because of unfavorable investment performance.
The tables on pages T1 through T4 of this prospectus illustrate approximately
what the cash surrender values would be for representative Contracts paying
target premium amounts (see PREMIUMS, page 11), assuming hypothetical uniform
investment results in the Series Fund portfolios. Two of the tables assume
current charges will be made throughout the lifetime of the Contract and two
tables assume maximum charges will be made. See ILLUSTRATIONS OF CASH SURRENDER
VALUES, DEATH BENEFITS, AND ACCUMULATED PREMIUMS, page 24.
HOW A FIXED INSURANCE AMOUNT CONTRACT'S DEATH BENEFIT WILL VARY
As noted above, there are two types of the Contract, a fixed insurance amount
and a variable insurance amount. The death benefit under a Contract with a
variable insurance amount varies with investment performance while the death
benefit under a Contract with a fixed insurance amount does not, unless it must
be increased to comply with the Internal Revenue Code's definition of life
insurance.
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<PAGE>
Under a Contract with a fixed insurance amount, the death benefit is equal to
the basic insurance amount, reduced by any Contract debt. See CONTRACT LOANS,
page 27. If the Contract is kept in force for several years, depending on how
much premium you pay, and/or if investment performance is reasonably favorable,
the Contract Fund may grow to the point where Prudential will increase the
insurance amount in order to ensure that the Contract will satisfy the Internal
Revenue Code's definition of life insurance. Thus, assuming no Contract debt,
the death benefit under a Contract with a fixed insurance amount will always be
the greater of: (1) the basic insurance amount; and (2) the Contract Fund before
the deduction of any monthly charges due on that date, multiplied by the
attained age factor that applies. A listing of attained age factors can be
found on the data pages of your Contract. The latter provision ensures that
the Contract will always have an insurance amount large enough to be treated as
life insurance for tax purposes under current law.
The following table illustrates at different ages how the attained age factor
affects the death benefit for different Contract Fund amounts. The table
assumes a $1,000,000 fixed insurance amount Contract was issued when the younger
insured was age 35 and there is no Contract debt.
<TABLE>
<CAPTION>
FIXED INSURANCE AMOUNT
- -------------------------------------------------------------------------------------------
IF THEN
- -------------------------------------------------------------------------------------------
THE CONTRACT
THE THE FUND AND THE
YOUNGER AND THE ATTAINED MULTIPLIED BY DEATH
INSURED IS CONTRACT AGE FACTOR THE ATTAINED BENEFIT IS
AGE FUND IS IS AGE FACTOR IS
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
40 $100,000 5.7 570,000 $1,000,000
40 $200,000 5.7 1,140,000 $1,140,000*
40 $300,000 5.7 1,710,000 $1,710,000*
- -------------------------------------------------------------------------------------------
60 $300,000 2.8 840,000 $1,000,000
60 $400,000 2.8 1,120,000 $1,120,000*
60 $600,000 2.8 1,680,000 $1,680,000*
- -------------------------------------------------------------------------------------------
80 $600,000 1.5 900,000 $1,000,000
80 $700,000 1.5 1,050,000 $1,050,000*
80 $800,000 1.5 1,200,000 $1,200,000*
- -------------------------------------------------------------------------------------------
* Note that the death benefit has been increased to comply with the Internal Revenue
Code's definition of life insurance. At this point, any additional premium payment will
increase the insurance amount by more than it increases the Contract Fund.
- -------------------------------------------------------------------------------------------
</TABLE>
This means, for example, that if the younger insured has reached the age of 60,
and the Contract Fund is $400,000, the death benefit will be $1,120,000, even
though the original basic insurance amount was $1,000,000. In this situation,
for every $1 increase in the Contract Fund, the insurance amount (and therefore
the death benefit) will be increased by $2.80. We reserve the right to refuse
to accept any premium payment that increases the insurance amount by more than
it increases the Contract Fund. If we exercise this right, it may in certain
situations result in the loss of the death benefit guarantee.
21
<PAGE>
HOW A VARIABLE INSURANCE AMOUNT CONTRACT'S DEATH BENEFIT WILL VARY
Under a Contract with a variable insurance amount, while the Contract is in
force, the death benefit will never be less than the basic insurance amount
reduced by any Contract debt, but will also vary, immediately after it is
issued, with the investment results of the selected investment options. The
insurance amount may be further increased to ensure that the Contract will
satisfy the Internal Revenue Code's definition of life insurance. Thus,
assuming no Contract debt, the death benefit will always be the greater of: (1)
the basic insurance amount plus the Contract Fund; and (2) the Contract Fund
before the deduction of any monthly charges due on that date, multiplied by the
attained age factor that applies. A listing of attained age factors can be
found on the data pages of your Contract. The latter provision ensures that
the Contract will always have an insurance amount large enough to be treated as
life insurance for tax purposes under current law.
The following table illustrates various attained age factors and Contract Funds
and the corresponding death benefits. The table assumes a $1,000,000 variable
insurance amount Contract was issued when the younger insured was age 35 and
there is no Contract debt.
VARIABLE INSURANCE AMOUNT
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
IF THEN
- -------------------------------------------------------------------------------------------
THE CONTRACT
THE THE FUND AND THE
YOUNGER AND THE ATTAINED MULTIPLIED BY DEATH
INSURED IS CONTRACT AGE FACTOR THE ATTAINED BENEFIT IS
AGE FUND IS IS AGE FACTOR IS
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
40 $100,000 5.7 570,000 $1,100,000
40 $200,000 5.7 1,140,000 $1,200,000
40 $300,000 5.7 1,710,000 $1,710,000*
- -------------------------------------------------------------------------------------------
60 $300,000 2.8 840,000 $1,300,000
60 $400,000 2.8 1,120,000 $1,400,000
60 $600,000 2.8 1,680,000 $1,680,000*
- -------------------------------------------------------------------------------------------
80 $600,000 1.5 900,000 $1,600,000
80 $700,000 1.5 1,050,000 $1,700,000
80 $800,000 1.5 1,200,000 $1,800,000
- -------------------------------------------------------------------------------------------
* Note that the death benefit has been increased to comply with the Internal Revenue
Code's definition of life insurance. At this point, any additional premium payment will
increase the insurance amount by more than it increases the Contract Fund.
- -------------------------------------------------------------------------------------------
</TABLE>
This means, for example, that if the younger insured has reached the age of 60,
and the Contract Fund is $600,000, the death benefit will be $1,680,000, even
though the original basic insurance amount was $1,000,000. In this situation,
for every $1 increase in the Contract Fund, the insurance amount (and therefore
the death benefit) will be increased by $2.80. We reserve the right to refuse
to accept any premium payment that increases the insurance amount by more than
it increases the Contract Fund. If we exercise this right, it may in certain
situations result in the loss of the death benefit guarantee.
22
<PAGE>
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, we do not expect to pay any dividends
to Contract owners of the Contracts while they remain in force because favorable
investment performance will be reflected in Contract values and because we
intend, if experience indicates that current charges will be greater than needed
to cover expenses, to reduce those charges further so that there will be no
source of distributable surplus attributable to these Contracts.
SURRENDER OF A CONTRACT
A Contract may be surrendered for its cash surrender value while one or both of
the insureds is living. To surrender a Contract, you must deliver or mail it,
together with a written request in a form that meets our needs, to a Home
Office. The cash surrender value of a surrendered Contract will be determined
as of the end of the valuation period in which such a request is received in the
Home Office. Surrender of a Contract may have tax consequences. See TAX
TREATMENT OF CONTRACT BENEFITS, page 28.
WITHDRAWALS
Under certain circumstances, you may withdraw a portion of the Contract's cash
surrender value without surrendering the Contract. The amount that you may
withdraw is limited by the requirement that the cash surrender value after the
withdrawal may not be zero or less than zero after deducting the next monthly
charges. The amount withdrawn must be at least $500. There is an administrative
processing fee for each withdrawal equal to the lesser of $25 or 2% of the
withdrawal amount. An amount withdrawn may not be repaid except as a premium
subject to the applicable charges. Upon request, we will tell you how much you
may withdraw. Withdrawal of the cash surrender value may have tax consequences.
See TAX TREATMENT OF CONTRACT BENEFITS, page 28.
Whenever a withdrawal is made, the insurance amount and therefore the death
benefit payable will immediately be reduced by at least the amount of the
withdrawal. For a Contract with a variable insurance amount, this will not
change the basic insurance amount. However, under a Contract with a fixed
insurance amount, the resulting reduction in insurance amount usually requires a
reduction in the basic insurance amount. No withdrawal will be permitted under
a Contract with a fixed insurance amount if it would result in a basic insurance
amount of less than the minimum basic insurance amount. It is important to
note, however, that if the insurance amount is decreased at any time during the
life of the Contract, there is a possibility that the Contract might be
classified as a Modified Endowment Contract. See TAX TREATMENT OF CONTRACT
BENEFITS, page 28. Before making any withdrawal which causes a decrease in
insurance amount, you should consult with your Prudential representative.
When a withdrawal is made, the Contract Fund is reduced by the sum of the cash
withdrawn and the fee for the withdrawal. An amount equal to the reduction in
the Contract Fund will be withdrawn proportionally from the investment options
unless you direct otherwise.
Withdrawal of the cash surrender value increases the risk that the Contract Fund
may be insufficient to provide for benefits under the Contract. If such a
withdrawal is followed by unfavorable investment experience, the Contract may go
into default. Withdrawals may also affect whether a Contract is kept in force
under the Death Benefit Guarantee. This is because, for purposes of determining
whether a lapse has occurred, Prudential treats withdrawals as a return of
premium. Therefore, withdrawals decrease the accumulated net payments. See
DEATH BENEFIT GUARANTEE, page 12.
23
<PAGE>
DECREASES IN BASIC INSURANCE AMOUNT
As explained earlier, you may make a withdrawal (see WITHDRAWALS, page 23).
You also have the additional option of decreasing the basic insurance amount of
your Contract without withdrawing any cash surrender value. Contract owners
who conclude that, because of changed circumstances, the amount of insurance is
greater than needed will thus be able to decrease their amount of insurance
protection, and the monthly deductions for the cost of insurance, without
decreasing their current cash surrender value. The cash surrender value of the
Contract on the date of the decrease will not change, except that an
administrative processing fee of up to $25 may be deducted. If we ask you to,
you must send us your Contract to be endorsed. The Contract will be amended to
show the new basic insurance amount, charges, values in the appropriate tables
and the effective date of the decrease.
The minimum permissible decrease for your Contract is shown under CONTRACT
LIMITATIONS in the data pages of your Contract. The basic insurance amount
after the decrease may not be lower than the minimum basic insurance amount. No
reduction will be permitted if it would cause the Contract to fail to qualify as
"life insurance" for purposes of Section 7702 of the Internal Revenue Code.
It is important to note, however, that if the basic insurance amount is
decreased at any time during the life of the Contract, there is a possibility
that the Contract might be classified as a Modified Endowment Contract. See TAX
TREATMENT OF CONTRACT BENEFITS, page 28. Before requesting any decrease in
basic insurance amount, you should consult with your 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 the second 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, Prudential expects to pay the cash surrender value promptly upon
request. However, Prudential has the right to delay payment of such cash
surrender value for up to 6 months (or a shorter period if required by
applicable law). Prudential will pay interest of at least 3% a year if it
delays such a payment for more than 30 days (or a shorter period if required by
applicable law).
ILLUSTRATIONS OF CASH SURRENDER VALUES, DEATH BENEFITS, AND ACCUMULATED PREMIUMS
The four tables that follow show how the death benefit and cash surrender values
change with the investment experience of the Account. They are "hypothetical"
because they are based, in part, upon several assumptions, each of which is
described below. All four tables assume, first, that a Contract with a basic
insurance amount of $1,000,000 has been bought by a 55 year old male and a 50
year old female, both non-smokers, with no extra risks or substandard ratings,
and no extra benefit riders added to the Contract. It is assumed that the
target premium amount (see PREMIUMS, page 11) is paid on each Contract
anniversary and that no
24
<PAGE>
loans are taken. The first table (page T1) assumes that a fixed insurance amount
Contract has been purchased and the second table (page T2) assumes that a
variable insurance amount Contract has been purchased. Both assume that the
current charges will continue for the indefinite future. The third and fourth
tables (pages T3 and T4) are based upon the same assumptions except that it is
assumed that the maximum contractual charges have been made from the beginning.
See CHARGES AND EXPENSES, page 16.
Another assumption is that the Contract Fund has been invested in equal amounts
in each of the 15 available portfolios of the Series Fund and no portion of the
Contract Fund has been allocated to the fixed-rate option. Finally, there are
four assumptions, shown separately, about the average investment performance of
the portfolios. The first is that there will be a uniform 0% gross rate of
return, that is, that the average value of the Contract Fund will uniformly be
adversely affected by very unfavorable investment performance. The other three
assumptions are that investment performance will be at a uniform gross annual
rate of 4%, 8% and 12%. These, of course, are unrealistic assumptions since
actual returns will fluctuate from year to year. Nevertheless, these
assumptions help show how the Contract values will change with investment
experience.
The first column in the following tables shows the Contract year. The second
column, to provide context, shows what the aggregate amount would be if the
premiums had been invested in a savings account paying 4% compounded interest.
Of course, if that were done, there would be no life insurance protection. The
next four columns show the death benefit payable in each of the years shown for
the four different assumed investment returns. Note that a gross return (as
well as the net return) is shown at the top of each column. The gross return
represents the combined effect of income and capital appreciation of the
portfolios before any reduction is made for investment advisory fees or other
Series Fund expenses. The net return reflects an average total annual expenses
of the 15 portfolios of 0.51%, and the daily deduction from the Contract Fund of
0.9% per year. Thus, gross returns of 0%, 4%, 8% and 12% are the equivalent of
net returns -1.41%, 2.59%, 6.59% and 10.59% respectively. The death benefits and
cash surrender values shown reflect the deduction of all expenses and charges
both from the Series Fund and under the Contract.
Note that under the variable insurance amount Contract the death benefit changes
to reflect investment returns, while under the fixed insurance amount Contract
the death benefit increases only if the Contract Fund becomes sufficiently large
that an increase in the death benefit is necessary in order to ensure that the
Contract will satisfy the Internal Revenue Code's definition of life insurance.
See TYPE OF INSURANCE AMOUNT, page 8.
Following these illustrations are two pages (pages T5 and T6) showing internal
rates of return (commonly referred to as IRRs) associated with the cash values
and death benefits shown on the preceding four pages. IRRs are often employed
by insurance companies to provide some indication of the rate of return that may
be thought of as earned upon your "investment" in the Contract (the aggregate
premiums paid) if the Contract were surrendered or if the insureds were to die.
The IRR on the death benefit is equivalent to an interest rate (after taxes) at
which an amount equal to the premiums illustrated on the preceding pages could
have been invested to arrive at the death benefit of the Contract. The IRR on
the cash surrender value is equivalent to an interest rate (after taxes) at
which an amount equal to the illustrated premiums could have been invested to
arrive at the cash surrender value of the Contract. The IRRs on page T5 are
based on the Contract values shown on pages T1 and T2. The IRRs on page T6 are
based on the Contract values shown on pages T3 and T4.
25
<PAGE>
If you are considering the purchase of a variable life insurance contract from
another insurance company, you should not rely upon these tables for comparison
purposes. A comparison between two tables, each showing values for a 55 year
old man and a 50 year old woman, may be useful for a 55 year old man and a 50
year old woman but would be inaccurate if made for insureds of other ages or
sex. Your Prudential representative can provide you with a hypothetical
illustration for your own age, sex, and rating class. You can obtain an
illustration using premium amounts and payment patterns that you wish to follow.
You may use assumed gross returns different than those shown in the tables,
although currently they may not be higher than 10%.
26
<PAGE>
ILLUSTRATIONS
-------------
VARIABLE SURVIVORSHIP CONTRACT
FIXED INSURANCE AMOUNT
MALE PREFERRED ISSUE AGE 55
FEMALE PREFERRED ISSUE AGE 50
$ 1,000,000 DEATH BENEFIT
$ 12,097.49 ANNUAL PREMIUM PAYMENT
USING CURRENT CONTRACTUAL CHARGES
<TABLE>
<CAPTION>
DEATH BENEFIT (1) CASH SURRENDER VALUE (1)
------------------------------------------------------ ---------------------------------------------------
ASSUMING HYPOTHETICAL GROSS (AND NET) ASSUMING HYPOTHETICAL GROSS (AND NET)
PREMIUMS ANNUAL INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF
END OF ACCUMULATED ------------------------------------------------------ ---------------------------------------------------
POLICY AT 4% INTEREST 0% GROSS 4% GROSS 8% GROSS 12% GROSS 0% GROSS 4% GROSS 8% GROSS 12% GROSS
YEAR PER YEAR (-1.41% NET) (2.59% NET) (6.59% NET) (10.59% NET) (-1.41% NET) (2.59% NET) (6.59% NET) (10.59% NET)
- ------- -------------- ------------ ------------ ----------- ------------- ------------ ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 $ 12,581 $1,000,000 $1,000,000 $1,000,000 $ 1,000,000 $ 6,878 $ 7,177 $ 7,475 $ 7,774
2 $ 25,666 $1,000,000 $1,000,000 $1,000,000 $ 1,000,000 $ 17,152 $ 18,158 $ 19,188 $ 20,242
3 $ 39,274 $1,000,000 $1,000,000 $1,000,000 $ 1,000,000 $ 27,248 $ 29,391 $ 31,639 $ 33,997
4 $ 53,426 $1,000,000 $1,000,000 $1,000,000 $ 1,000,000 $ 37,163 $ 40,875 $ 44,871 $ 49,167
5 $ 68,145 $1,000,000 $1,000,000 $1,000,000 $ 1,000,000 $ 46,890 $ 52,607 $ 58,924 $ 65,894
6 $ 83,452 $1,000,000 $1,000,000 $1,000,000 $ 1,000,000 $ 56,419 $ 64,582 $ 73,843 $ 84,331
7 $ 99,372 $1,000,000 $1,000,000 $1,000,000 $ 1,000,000 $ 65,740 $ 76,793 $ 89,671 $ 104,647
8 $ 115,928 $1,000,000 $1,000,000 $1,000,000 $ 1,000,000 $ 74,840 $ 89,232 $ 106,454 $ 127,029
9 $ 133,146 $1,000,000 $1,000,000 $1,000,000 $ 1,000,000 $ 83,705 $101,887 $ 124,239 $ 151,680
10 $ 151,054 $1,000,000 $1,000,000 $1,000,000 $ 1,000,000 $ 92,317 $114,744 $ 143,075 $ 178,827
15 $ 251,925 $1,000,000 $1,000,000 $1,000,000 $ 1,000,000 $130,733 $181,337 $ 254,824 $ 361,763
20 $ 374,650 $1,000,000 $1,000,000 $1,000,000 $ 1,333,866 $157,874 $248,634 $ 401,306 $ 657,077
25 $ 523,963 $1,000,000 $1,000,000 $1,040,791 $ 1,959,013 $168,653 $313,328 $ 598,156 $ 1,125,869
30 $ 705,626 $1,000,000 $1,000,000 $1,283,700 $ 2,788,570 $134,816 $352,093 $ 844,540 $ 1,834,585
35 $ 926,647 $1,000,000 $1,000,000 $1,543,544 $ 3,897,419 $ 559 $323,524 $1,134,959 $ 2,865,749
40 $1,195,553 $ 0(2) $1,000,000 $1,826,424 $ 5,389,490 $ 0(2) $135,081 $1,472,922 $ 4,346,363
45 $1,522,718 $ 0 $ 0(2) $2,171,866 $ 7,522,853 $ 0 $ 0(2) $1,888,579 $ 6,541,611
50 $1,920,764 $ 0 $ 0 $2,582,316 $10,540,583 $ 0 $ 0 $2,482,996 $10,135,176
</TABLE>
(1) Assumes no Contract loan has been made.
(2) Based on a gross return of 0% the Contract would go into default in policy
year 36.
Based on a gross return of 4% the Contract would go into default in policy
year 42.
THE HYPOTHETICAL INVESTMENT RATES OF RETURN SHOWN ABOVE AND ELSEWHERE IN THIS
PROSPECTUS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF
PAST OR FUTURE INVESTMENT RATES OF RETURN. ACTUAL RATES OF RETURN MAY BE MORE
OR LESS THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS INCLUDING THE
INVESTMENT ALLOCATIONS MADE BY AN OWNER, PREVAILING INTEREST RATES, AND RATES
OF INFLATION. THE DEATH BENEFIT AND CASH SURRENDER VALUE FOR A CONTRACT WOULD
BE DIFFERENT FROM THOSE SHOWN IF THE ACTUAL RATES OF RETURN AVERAGED 0%, 4%,
8%, AND 12% OVER A PERIOD OF YEARS BUT ALSO FLUCTUATED ABOVE OR BELOW THOSE
AVERAGES FOR INDIVIDUAL CONTRACT YEARS. NO REPRESENTATIONS CAN BE MADE BY
PRUDENTIAL OR THE SERIES FUND THAT THESE HYPOTHETICAL RATES OF RETURN CAN BE
ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
T1
<PAGE>
VARIABLE SURVIVORSHIP CONTRACT
VARIABLE INSURANCE AMOUNT
MALE PREFERRED ISSUE AGE 55
FEMALE PREFERRED ISSUE AGE 50
$ 1,000,000 DEATH BENEFIT
$ 12,097.49 ANNUAL PREMIUM PAYMENT
USING CURRENT CONTRACTUAL CHARGES
<TABLE>
<CAPTION>
DEATH BENEFIT (1) CASH SURRENDER VALUE (1)
------------------------------------------------------ ---------------------------------------------------
ASSUMING HYPOTHETICAL GROSS (AND NET) ASSUMING HYPOTHETICAL GROSS (AND NET)
PREMIUMS ANNUAL INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF
END OF ACCUMULATED ------------------------------------------------------ ---------------------------------------------------
POLICY AT 4% INTEREST 0% GROSS 4% GROSS 8% GROSS 12% GROSS 0% GROSS 4% GROSS 8% GROSS 12% GROSS
YEAR PER YEAR (-1.41% NET) (2.59% NET) (6.59% NET) (10.59% NET) (-1.41% NET) (2.59% NET) (6.59% NET) (10.59% NET)
- ------- -------------- ------------ ------------ ----------- ------------- ------------ ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 $ 12,581 $1,006,878 $1,007,177 $1,007,475 $ 1,007,774 $ 6,878 $ 7,177 $ 7,475 $ 7,774
2 $ 25,666 $1,017,151 $1,018,157 $1,019,187 $ 1,020,241 $ 17,151 $ 18,157 $ 19,187 $ 20,241
3 $ 39,274 $1,027,246 $1,029,388 $1,031,636 $ 1,033,994 $ 27,246 $ 29,388 $ 31,636 $ 33,994
4 $ 53,426 $1,037,156 $1,040,867 $1,044,862 $ 1,049,158 $ 37,156 $ 40,867 $ 44,862 $ 49,158
5 $ 68,145 $1,046,875 $1,052,590 $1,058,905 $ 1,065,873 $ 46,875 $ 52,590 $ 58,905 $ 65,873
6 $ 83,452 $1,056,391 $1,064,550 $1,073,805 $ 1,084,288 $ 56,391 $ 64,550 $ 73,805 $ 84,288
7 $ 99,372 $1,065,692 $1,076,736 $1,089,603 $ 1,104,567 $ 65,692 $ 76,736 $ 89,603 $ 104,567
8 $ 115,928 $1,074,762 $1,089,137 $1,106,338 $ 1,126,887 $ 74,762 $ 89,137 $106,338 $ 126,887
9 $ 133,146 $1,083,583 $1,101,735 $1,124,049 $ 1,151,442 $ 83,583 $101,735 $124,049 $ 151,442
10 $ 151,054 $1,092,133 $1,114,509 $1,142,774 $ 1,178,442 $ 92,133 $114,509 $142,774 $ 178,442
15 $ 251,925 $1,129,757 $1,179,927 $1,252,772 $ 1,358,767 $129,757 $179,927 $252,772 $ 358,767
20 $ 374,650 $1,154,345 $1,242,838 $1,391,635 $ 1,643,432 $154,345 $242,838 $391,635 $ 643,432
25 $ 523,963 $1,158,409 $1,293,905 $1,560,569 $ 2,090,381 $158,409 $293,905 $560,569 $1,090,381
30 $ 705,626 $1,110,429 $1,295,371 $1,731,270 $ 2,762,498 $110,429 $295,371 $731,270 $1,762,498
35 $ 926,647 $ 0(2) $1,183,876 $1,842,412 $ 3,739,669 $ 0(2) $183,876 $842,412 $2,739,669
40 $1,195,553 $ 0 $ 0(2) $1,798,196 $ 5,140,535 $ 0 $ 0(2) $798,196 $4,140,535
45 $1,522,718 $ 0 $ 0 $1,483,457 $ 7,186,348 $ 0 $ 0 $483,457 $6,186,348
50 $1,920,764 $ 0 $ 0 $ 0(2) $10,138,798 $ 0 $ 0 $ 0(2) $9,138,798
</TABLE> v
(1) Assumes no Contract loan has been made.
(2) Based on a gross return of 0% the Contract would go into default in policy
year 35.
Based on a gross return of 4% the Contract would go into default in policy
year 39.
Based on a gross return of 8% the Contract would go into default in policy
year 49.
THE HYPOTHETICAL INVESTMENT RATES OF RETURN SHOWN ABOVE AND ELSEWHERE IN THIS
PROSPECTUS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF
PAST OR FUTURE INVESTMENT RATES OF RETURN. ACTUAL RATES OF RETURN MAY BE MORE
OR LESS THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS INCLUDING THE
INVESTMENT ALLOCATIONS MADE BY AN OWNER, PREVAILING INTEREST RATES, AND RATES
OF INFLATION. THE DEATH BENEFIT AND CASH SURRENDER VALUE FOR A CONTRACT WOULD
BE DIFFERENT FROM THOSE SHOWN IF THE ACTUAL RATES OF RETURN AVERAGED 0%, 4%,
8%, AND 12% OVER A PERIOD OF YEARS BUT ALSO FLUCTUATED ABOVE OR BELOW THOSE
AVERAGES FOR INDIVIDUAL CONTRACT YEARS. NO REPRESENTATIONS CAN BE MADE BY
PRUDENTIAL OR THE SERIES FUND THAT THESE HYPOTHETICAL RATES OF RETURN CAN BE
ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
T2
<PAGE>
VARIABLE SURVIVORSHIP CONTRACT
FIXED INSURANCE AMOUNT
MALE PREFERRED ISSUE AGE 55
FEMALE PREFERRED ISSUE AGE 50
$ 1,000,000 DEATH BENEFIT
$ 12,097.49 ANNUAL PREMIUM PAYMENT
USING MAXIMUM CONTRACTUAL CHARGES
<TABLE>
<CAPTION>
DEATH BENEFIT (1) CASH SURRENDER VALUE (1)
------------------------------------------------------ ---------------------------------------------------
ASSUMING HYPOTHETICAL GROSS (AND NET) ASSUMING HYPOTHETICAL GROSS (AND NET)
PREMIUMS ANNUAL INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF
END OF ACCUMULATED ------------------------------------------------------ ---------------------------------------------------
POLICY AT 4% INTEREST 0% GROSS 4% GROSS 8% GROSS 12% GROSS 0% GROSS 4% GROSS 8% GROSS 12% GROSS
YEAR PER YEAR (-1.41% NET) (2.59% NET) (6.59% NET) (10.59% NET) (-1.41% NET) (2.59% NET) (6.59% NET) (10.59% NET)
- ------- -------------- ------------ ------------ ----------- ------------- ------------ ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 $ 12,581 $1,000,000 $1,000,000 $1,000,000 $1,000,000 $ 6,377 $ 6,656 $ 6,936 $ 7,215
2 $ 25,666 $1,000,000 $1,000,000 $1,000,000 $1,000,000 $ 15,982 $ 16,925 $ 17,891 $ 18,879
3 $ 39,274 $1,000,000 $1,000,000 $1,000,000 $1,000,000 $ 25,352 $ 27,359 $ 29,465 $ 31,674
4 $ 53,426 $1,000,000 $1,000,000 $1,000,000 $1,000,000 $ 34,469 $ 37,940 $ 41,677 $ 45,697
5 $ 68,145 $1,000,000 $1,000,000 $1,000,000 $1,000,000 $ 43,311 $ 48,646 $ 54,544 $ 61,054
6 $ 83,452 $1,000,000 $1,000,000 $1,000,000 $1,000,000 $ 51,853 $ 59,453 $ 68,081 $ 77,858
7 $ 99,372 $1,000,000 $1,000,000 $1,000,000 $1,000,000 $ 60,066 $ 70,331 $ 82,301 $ 96,234
8 $ 115,928 $1,000,000 $1,000,000 $1,000,000 $1,000,000 $ 67,917 $ 81,245 $ 97,215 $ 116,318
9 $ 133,146 $1,000,000 $1,000,000 $1,000,000 $1,000,000 $ 75,370 $ 92,156 $112,831 $ 138,257
10 $ 151,054 $1,000,000 $1,000,000 $1,000,000 $1,000,000 $ 82,376 $ 103,014 $129,151 $ 162,210
15 $ 251,925 $1,000,000 $1,000,000 $1,000,000 $1,000,000 $108,122 $ 153,768 $220,651 $ 318,700
20 $ 374,650 $1,000,000 $1,000,000 $1,000,000 $1,136,204 $106,670 $ 186,275 $323,769 $ 559,706
25 $ 523,963 $1,000,000 $1,000,000 $1,000,000 $1,585,622 $ 51,975 $ 174,051 $431,949 $ 911,277
30 $ 705,626 $1,000,000 $1,000,000 $1,000,000 $2,083,981 $ 0 $ 31,393 $516,774 $1,371,040
35 $ 926,647 $ 0(2) $2,636,377 $ 0(2) $ 0(2) $531,502 $1,938,512 $ 0(2) $1,000,000
40 $1,195,553 $ 0 $ 0 $1,000,000 $3,264,057 $ 0 $ 0 $298,457 $2,632,304
45 $1,522,718 $ 0 $ 0 $ 0(2) $4,054,380 $ 0 $ 0 $ 0(2) $3,525,548
50 $1,920,764 $ 0 $ 0 $ 0 $5,045,392 $ 0 $ 0 $ 0 $4,851,339
</TABLE>
(1) Assumes no Contract loan has been made.
(2) Based on a gross return of 0% the Contract fund would go to zero in year
27, but because the Target Premium is being paid, the Contract is kept
inforce through the Limited Death Benefit Guarantee Period of 32 years. The
Contract would be in default at the beginning of year 33. Based on a gross
return of 4% the Contract fund would go to zero in year 31, but because the
Target Premium is being paid, the Contract is kept inforce through the
Limited Death Benefit Guarantee Period of 32 years. The Contract would be
in default at the beginning of year 33. Based on a gross return of 8% the
Contract would go into default in policy year 42.
THE HYPOTHETICAL INVESTMENT RATES OF RETURN SHOWN ABOVE AND ELSEWHERE IN THIS
PROSPECTUS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF
PAST OR FUTURE INVESTMENT RATES OF RETURN. ACTUAL RATES OF RETURN MAY BE MORE
OR LESS THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS INCLUDING THE
INVESTMENT ALLOCATIONS MADE BY AN OWNER, PREVAILING INTEREST RATES, AND RATES
OF INFLATION. THE DEATH BENEFIT AND CASH SURRENDER VALUE FOR A CONTRACT WOULD
BE DIFFERENT FROM THOSE SHOWN IF THE ACTUAL RATES OF RETURN AVERAGED 0%, 4%,
8%, AND 12% OVER A PERIOD OF YEARS BUT ALSO FLUCTUATED ABOVE OR BELOW THOSE
AVERAGES FOR INDIVIDUAL CONTRACT YEARS. NO REPRESENTATIONS CAN BE MADE BY
PRUDENTIAL OR THE SERIES FUND THAT THESE HYPOTHETICAL RATES OF RETURN CAN BE
ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
T3
<PAGE>
VARIABLE SURVIVORSHIP CONTRACT
VARIABLE INSURANCE AMOUNT
MALE PREFERRED ISSUE AGE 55
FEMALE PREFERRED ISSUE AGE 50
$ 1,000,000 DEATH BENEFIT
$ 12,097.49 ANNUAL PREMIUM PAYMENT
USING MAXIMUM CONTRACTUAL CHARGES
<TABLE>
<CAPTION>
DEATH BENEFIT (1) CASH SURRENDER VALUE (1)
------------------------------------------------------ ---------------------------------------------------
ASSUMING HYPOTHETICAL GROSS (AND NET) ASSUMING HYPOTHETICAL GROSS (AND NET)
PREMIUMS ANNUAL INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF
END OF ACCUMULATED ------------------------------------------------------ ---------------------------------------------------
POLICY AT 4% INTEREST 0% GROSS 4% GROSS 8% GROSS 12% GROSS 0% GROSS 4% GROSS 8% GROSS 12% GROSS
YEAR PER YEAR (-1.41% NET) (2.59% NET) (6.59% NET) (10.59% NET) (-1.41% NET) (2.59% NET) (6.59% NET) (10.59% NET)
- ------- -------------- ------------ ------------ ----------- ------------- ------------ ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 $ 12,581 $1,006,377 $1,006,656 $1,006,935 $1,007,215 $ 6,377 $ 6,656 $ 6,935 $ 7,215
2 $ 25,666 $1,015,980 $1,016,923 $1,017,888 $1,018,877 $ 15,980 $ 16,923 $ 17,888 $ 18,877
3 $ 39,274 $1,025,344 $1,027,350 $1,029,456 $1,031,664 $ 25,344 $ 27,350 $ 29,456 $ 31,664
4 $ 53,426 $1,034,449 $1,037,917 $1,041,653 $1,045,670 $ 34,449 $ 37,917 $ 41,653 $ 45,670
5 $ 68,145 $1,043,269 $1,048,599 $1,054,490 $1,060,993 $ 43,269 $ 48,599 $ 54,490 $ 60,993
6 $ 83,452 $1,051,775 $1,059,362 $1,067,975 $1,077,735 $ 51,775 $ 59,362 $ 67,975 $ 77,735
7 $ 99,372 $1,059,933 $1,070,171 $1,082,111 $1,096,008 $ 59,933 $ 70,171 $ 82,111 $ 96,008
8 $115,928 $1,067,703 $1,080,983 $1,096,894 $1,115,927 $ 67,703 $ 80,983 $ 96,894 $ 115,927
9 $133,146 $1,075,042 $1,091,745 $1,112,316 $1,137,612 $ 75,042 $ 91,745 $112,316 $ 137,612
10 $151,054 $1,081,892 $1,102,392 $1,128,352 $1,161,184 $ 81,892 $102,392 $128,352 $ 161,184
15 $251,925 $1,105,775 $1,150,329 $1,215,590 $1,311,234 $105,775 $150,329 $215,590 $ 311,234
20 $374,650 $1,099,012 $1,173,108 $1,301,006 $1,521,668 $ 99,012 $173,108 $301,006 $ 521,668
25 $523,963 $1,035,146 $1,136,195 $1,350,077 $1,795,236 $ 35,146 $136,195 $350,077 $ 795,236
30 $705,626 $1,000,000(2) $1,000,000(2) $1,268,091 $2,084,515 $ 0(2) $ 0(2)$268,091 $1,084,515
35 $926,647 $ 0 $ 0 $ 0(2)$2,283,845 $ 0 $ 0 $ 0(2) $1,283,845
40 $1,195,553 $ 0 $ 0 $ 0 $2,189,568 $ 0 $ 0 $ 0 $1,189,568
45 $1,522,718 $ 0 $ 0 $ 0 $1,412,747 $ 0 $ 0 $ 0 $ 412,747
50 $1,920,764 $ 0 $ 0 $ 0 $ 0(2) $ 0 $ 0 $ 0 $ 0(2)
</TABLE>
(1) Assumes no Contract loan has been made.
(2) Based on a gross return of 0% the Contract fund would go to zero in year
27, but because the Target Premium is being paid, the Contract is kept
inforce through the Limited Death Benefit Guarantee Period of 30 years. The
Contract would be in default at the beginning of year 31. Based on a gross
return of 4% the Contract fund would go to zero in year 30, but because the
Target Premium is being paid, the Contract is kept inforce through the
Limited Death Benefit Guarantee Period of 30 years. The Contract would be
in default at the beginning of year 31. Based on a gross return of 8% the
Contract would go into default in policy year 35. Based on a gross return
of 12% the Contract would go into default in policy year 47.
THE HYPOTHETICAL INVESTMENT RATES OF RETURN SHOWN ABOVE AND ELSEWHERE IN THIS
PROSPECTUS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF
PAST OR FUTURE INVESTMENT RATES OF RETURN. ACTUAL RATES OF RETURN MAY BE MORE
OR LESS THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS INCLUDING THE
INVESTMENT ALLOCATIONS MADE BY AN OWNER, PREVAILING INTEREST RATES, AND RATES
OF INFLATION. THE DEATH BENEFIT AND CASH SURRENDER VALUE FOR A CONTRACT WOULD
BE DIFFERENT FROM THOSE SHOWN IF THE ACTUAL RATES OF RETURN AVERAGED 0%, 4%,
8%, AND 12% OVER A PERIOD OF YEARS BUT ALSO FLUCTUATED ABOVE OR BELOW THOSE
AVERAGES FOR INDIVIDUAL CONTRACT YEARS. NO REPRESENTATIONS CAN BE MADE BY
PRUDENTIAL OR THE SERIES FUND THAT THESE HYPOTHETICAL RATES OF RETURN CAN BE
ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
T4
<PAGE>
INTERNAL RATES OF RETURN
------------------------
VARIABLE SURVIVORSHIP CONTRACT
MALE PREFERRED ISSUE AGE 55
FEMALE PREFERRED ISSUE AGE 50
$ 1,000,000 DEATH BENEFIT
$ 12,097.49 ANNUAL PREMIUM PAYMENT
USING CURRENT CONTRACTUAL CHARGES
FIXED INSURANCE AMOUNT
<TABLE>
<CAPTION>
INTERNAL RATES OF RETURN ON DEATH (1) INTERNAL RATES OF RETURN ON SURRENDER (1)
------------------------------------------------------ ----------------------------------------------------
ASSUMING HYPOTHETICAL GROSS (AND NET) ASSUMING HYPOTHETICAL GROSS (AND NET)
ANNUAL INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF
END OF ------------------------------------------------------ ----------------------------------------------------
POLICY 0% GROSS 4% GROSS 8% GROSS 12% GROSS 0% GROSS 4% GROSS 8% GROSS 12% GROSS
YEAR (-1.41% NET) (2.59% NET) (6.59% NET) (10.59% NET) (-1.41% NET) (2.59% NET) (6.59% NET) (10.59% NET)
------- ------------ ------------ ----------- ------------- ------------ ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
5 114.17% 114.17% 114.17% 114.17% -8.38% -4.62% -0.88% 2.86%
10 37.02% 37.02% 37.02% 37.02% -4.99% -0.97% 3.02% 6.99%
15 19.51% 19.51% 19.51% 19.51% -4.23% -0.01% 4.13% 8.22%
20 12.19% 12.19% 12.19% 14.47% -4.28% 0.25% 4.60% 8.78%
25 8.29% 8.29% 8.55% 12.49% -4.87% 0.27% 4.90% 9.05%
30 5.92% 5.92% 7.25% 11.21% -7.50% -0.20% 5.00% 9.10%
35 4.36% 4.36% 6.34% 10.32% -95.59% -1.56% 4.95% 9.03%
40 (2) 3.26% 5.68% 9.68% (2) -7.95% 4.83% 8.91%
45 (2) 5.23% 9.25% (2) 4.75% 8.81%
50 4.91% 8.94% 4.79% 8.83%
</TABLE>
(2) Based on a gross return of 0%, the Contract would go into default in policy
year 36.
Based on a gross return of 4%, the Contract would go into default in policy
year 42.
VARIABLE INSURANCE AMOUNT
<TABLE>
<CAPTION>
INTERNAL RATES OF RETURN ON DEATH (1) INTERNAL RATES OF RETURN ON SURRENDER (1)
------------------------------------------------------ ----------------------------------------------------
ASSUMING HYPOTHETICAL GROSS (AND NET) ASSUMING HYPOTHETICAL GROSS (AND NET)
ANNUAL INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF
END OF ------------------------------------------------------ ----------------------------------------------------
POLICY 0% GROSS 4% GROSS 8% GROSS 12% GROSS 0% GROSS 4% GROSS 8% GROSS 12% GROSS
YEAR (-1.41% NET) (2.59% NET) (6.59% NET) (10.59% NET) (-1.41% NET) (2.59% NET) (6.59% NET) (10.59% NET)
------- ------------ ------------ ----------- ------------- ------------ ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
5 116.50% 116.77% 117.08% 117.41% -8.39% -4.63% -0.89% 2.85%
10 38.58% 38.94% 39.39% 39.94% -5.02% -1.01% 2.99% 6.96%
15 20.83% 21.31% 21.96% 22.84% -4.33% -0.11% 4.04% 8.12%
20 13.33% 13.92% 14.81% 16.11% -4.52% 0.03% 4.38% 8.60%
25 9.23% 9.92% 11.09% 12.89% -5.44% -0.23% 4.46% 8.84%
30 6.48% 7.30% 8.80% 11.16% -9.42% -1.37% 4.20% 8.89%
35 (2) 5.14% 7.12% 10.15% (2) -5.31% 3.54% 8.84%
40 (2) 5.61% 9.51% (2) 2.30% 8.73%
45 3.90% 9.11% -0.53% 8.64%
50 (2) 8.83% (2) 8.55%
</TABLE>
(1) Assumes no Contract loan has been made.
(2) Based on a gross return of 0%, the Contract would go into default in policy
year 35.
Based on a gross return of 4%, the Contract would go into default in policy
year 39.
Based on a gross return of 8%, the Contract would go into default in policy
year 49.
THE HYPOTHETICAL INVESTMENT RATES OF RETURN SHOWN ABOVE AND ELSEWHERE IN THIS
PROSPECTUS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF
PAST OR FUTURE INVESTMENT RATES OF RETURN. ACTUAL RATES OF RETURN MAY BE MORE
OR LESS THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS INCLUDING THE
INVESTMENT ALLOCATIONS MADE BY AN OWNER, PREVAILING INTEREST RATES, AND RATES
OF INFLATION. THE DEATH BENEFIT AND CASH SURRENDER VALUE FOR A CONTRACT WOULD
BE DIFFERENT FROM THOSE SHOWN IF THE ACTUAL RATES OF RETURN AVERAGED 0%, 4%,
8%, AND 12% OVER A PERIOD OF YEARS BUT ALSO FLUCTUATED ABOVE OR BELOW THOSE
AVERAGES FOR INDIVIDUAL CONTRACT YEARS. NO REPRESENTATIONS CAN BE MADE BY
PRUDENTIAL OR THE SERIES FUND THAT THESE HYPOTHETICAL RATES OF RETURN CAN BE
ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
T5
<PAGE>
INTERNAL RATES OF RETURN
------------------------
VARIABLE SURVIVORSHIP CONTRACT
MALE PREFERRED ISSUE AGE 55
FEMALE PREFERRED ISSUE AGE 50
$ 1,000,000 DEATH BENEFIT
$ 12,097.49 ANNUAL PREMIUM PAYMENT
USING MAXIMUM CONTRACTUAL CHARGES
FIXED INSURANCE AMOUNT
<TABLE>
<CAPTION>
INTERNAL RATES OF RETURN ON DEATH (1) INTERNAL RATES OF RETURN ON SURRENDER (1)
------------------------------------------------------ ----------------------------------------------------
ASSUMING HYPOTHETICAL GROSS (AND NET) ASSUMING HYPOTHETICAL GROSS (AND NET)
ANNUAL INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF
END OF ------------------------------------------------------ ----------------------------------------------------
POLICY 0% GROSS 4% GROSS 8% GROSS 12% GROSS 0% GROSS 4% GROSS 8% GROSS 12% GROSS
YEAR (-1.41% NET) (2.59% NET) (6.59% NET) (10.59% NET) (-1.41% NET) (2.59% NET) (6.59% NET) (10.59% NET)
------- ------------ ------------ ----------- ------------- ------------ ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
5 114.17% 114.17% 114.17% 114.17% -10.94% -7.18% -3.43% 0.31%
10 37.02% 37.02% 37.02% 37.02% -7.13% -2.95% 1.18% 5.26%
15 19.51% 19.51% 19.51% 19.51% -6.81% -2.11% 2.40% 6.76%
20 12.19% 12.19% 12.19% 13.21% -8.67% -2.57% 2.69% 7.44%
25 8.29% 8.29% 8.29% 11.19% -18.80% -4.58% 2.64% 7.69%
30 5.92% 5.92% 5.92% 9.75% -100.00% -27.82% 2.19% 7.60%
35 (2) (2) 4.36% 8.67% (2) (2) 1.22% 7.35%
40 3.26% 7.86% -2.54% 7.06%
45 (2) 7.29% (2) 6.84%
50 6.87% 6.76%
</TABLE>
(2) Based on a gross return of 0%, the Contract would go into default in policy
year 33.
Based on a gross return of 4%, the Contract would go into default in policy
year 33.
Based on a gross return of 8%, the Contract would go into default in policy
year 42.
VARIABLE INSURANCE AMOUNT
<TABLE>
<CAPTION>
INTERNAL RATES OF RETURN ON DEATH (1) INTERNAL RATES OF RETURN ON SURRENDER (1)
------------------------------------------------------ ----------------------------------------------------
ASSUMING HYPOTHETICAL GROSS (AND NET) ASSUMING HYPOTHETICAL GROSS (AND NET)
ANNUAL INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF
END OF ------------------------------------------------------ ----------------------------------------------------
POLICY 0% GROSS 4% GROSS 8% GROSS 12% GROSS 0% GROSS 4% GROSS 8% GROSS 12% GROSS
YEAR (-1.41% NET) (2.59% NET) (6.59% NET) (10.59% NET) (-1.41% NET) (2.59% NET) (6.59% NET) (10.59% NET)
------- ------------ ------------ ----------- ------------- ------------ ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
5 116.32% 116.58% 116.87% 117.18% -10.97% -7.21% -3.47% 0.27%
10 38.42% 38.75% 39.16% 39.67% -7.25% -3.06% 1.07% 5.15%
15 20.60% 21.03% 21.63% 22.45% -7.11% -2.40% 2.12% 6.48%
20 12.94% 13.46% 14.28% 15.51% -9.58% -3.32% 2.03% 6.85%
25 8.51% 9.10% 10.19% 11.96% -25.60% -6.88% 1.10% 6.80%
30 5.92% 5.92% 7.19% 9.75% -100.00% -100.00% -2.04% 6.36%
35 (2) (2) (2) 8.06% (2) (2) (2) 5.51%
40 6.37% 3.97%
45 3.73% -1.26%
50 (2) (2)
</TABLE>
(1) Assumes no Contract loan has been made.
(2) Based on a gross return of 0%, the Contract would go into default in policy
year 31.
Based on a gross return of 4%, the Contract would go into default in policy
year 31.
Based on a gross return of 8%, the Contract would go into default in policy
year 35.
Based on a gross return of 12%, the Contract would go into default in
policy year 47.
THE HYPOTHETICAL INVESTMENT RATES OF RETURN SHOWN ABOVE AND ELSEWHERE IN THIS
PROSPECTUS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF
PAST OR FUTURE INVESTMENT RATES OF RETURN. ACTUAL RATES OF RETURN MAY BE MORE
OR LESS THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS INCLUDING THE
INVESTMENT ALLOCATIONS MADE BY AN OWNER, PREVAILING INTEREST RATES, AND RATES
OF INFLATION. THE DEATH BENEFIT AND CASH SURRENDER VALUE FOR A CONTRACT WOULD
BE DIFFERENT FROM THOSE SHOWN IF THE ACTUAL RATES OF RETURN AVERAGED 0%, 4%,
8%, AND 12% OVER A PERIOD OF YEARS BUT ALSO FLUCTUATED ABOVE OR BELOW THOSE
AVERAGES FOR INDIVIDUAL CONTRACT YEARS. NO REPRESENTATIONS CAN BE MADE BY
PRUDENTIAL OR THE SERIES FUND THAT THESE HYPOTHETICAL RATES OF RETURN CAN BE
ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
T6
<PAGE>
CONTRACT LOANS
You may borrow from Prudential an amount up to the current "loan value" of your
Contract less any existing Contract debt using the Contract as the only security
for the loan. The loan value at any time will equal 100% of the fixed-rate
option and 90% of the variable subaccounts provided the Contract is not in
default. A Contract in default has no loan value.
Interest charged on a loan accrues daily. Interest is due on each Contract
anniversary or when the loan is paid back, whichever comes first. If interest
is not paid when due, it becomes part of the loan and we will charge interest on
it, too. Except in the case of preferred loans, we charge interest at an
effective annual rate of 5%.
A portion of any amount you borrow on or after the tenth Contract anniversary
may be considered a preferred loan. The maximum preferred loan amount is the
total amount you may borrow minus the total net premiums paid (net premiums
equal premiums paid less total withdrawals, if any). If the net premium amount
is less than zero, we will, for purposes of this calculation, consider is to be
zero. Only new loans borrowed after the tenth Contract anniversary may be
considered preferred loans; standard loans will not automatically be converted
into preferred loans. Preferred loans are charged interest at an effective
annual rate of 4.5%.
The term "Contract debt" means the amount of all outstanding loans plus any
interest accrued but not yet due. If at any time the Contract debt equals or
exceeds the Contract Fund, the Contract will go into default. We will notify
you of a 61-day grace period, within which time you may repay all or enough of
the loan to obtain a positive cash surrender value and thus keep the Contract in
force for a limited time. If the Contract debt equals or exceeds the Contract
Fund and you fail to keep the Contract in force, the amount of unpaid Contract
debt will be treated as a distribution which may be taxable. See TAX TREATMENT
OF CONTRACT BENEFITS, page 28 and LAPSE AND REINSTATEMENT, page 31.
When a loan is made, an amount equal to the loan proceeds will be transferred
out of the Account and/or the fixed-rate option, as applicable. Unless you ask
us to take the loan amount from specific investment options and we agree, the
reduction will be made in the same proportions as the value in each subaccount
and the fixed-rate option bears to the total value of the Contract. While a
loan is outstanding, the amount that was so transferred will continue to be
treated as part of the Contract Fund. It will be credited with an effective
annual rate of return of 4%. Therefore, the net cost of a standard loan is 1%
and the net cost of a preferred loan is 1/2%.
As long as Contract debt does not equal or exceed the Contract Fund, a loan
will not affect the Death Benefit Guarantee. Should the death benefit become
payable while a loan is outstanding, or should the Contract be surrendered, any
Contract debt will be deducted from the insurance amount or Contract Fund to
calculate the death benefit or the cash surrender value, as applicable. Loans
from Modified Endowment Contracts may be treated for tax purposes as
distributions of income. See TAX TREATMENT OF CONTRACT BENEFITS, page 28.
As stated above, any Contract debt will directly reduce a Contract's cash
surrender value and will be subtracted from the insurance amount to determine
the death benefit payable. In addition, even if the loan is fully repaid, it
may have an effect on future death benefits, because the investment results of
the selected investment options will apply only to the amount remaining invested
under those options. The longer the loan is outstanding, the greater the effect
is likely to be. The effect could be favorable or unfavorable. If investment
results are greater than the rate being credited upon the amount of the loan
while the loan is
27
<PAGE>
outstanding, values under the Contract will not increase as rapidly as they
would have if no loan had been made. If investment results are below that rate,
Contract values will be higher than they would have been had no loan been made.
When you repay all or part of a loan, we will increase the portion of the
Contract Fund in the investment options by the amount of the loan you repay
using the investment allocation of your most recent premium payment, plus
interest credits accrued on the loan since the last transaction date. We will
not increase the portion of the Contract Fund allocated to the investment
options by loan interest that is paid before we make it part of the loan. We
reserve the right to change the manner in which we allocate loan repayments.
SALE OF THE CONTRACT AND SALES COMMISSIONS
Pruco Securities Corporation ("Prusec"), an indirect wholly-owned subsidiary of
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. Generally, representatives will receive a commission of
no more than 50% of the premiums received in the first year on premiums up to
the target level premium (see PREMIUMS, page 11), no more than 4% commission on
premiums received in the first year in excess of the target level premium, no
more than 4% of premiums received in years two through ten, and no more than 2%
of premiums received thereafter. Representatives with less than 4 years of
service may receive compensation on a different basis. Representatives who meet
certain productivity or persistency standards may be eligible for additional
compensation.
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.
28
<PAGE>
However, Section 7702 of the Code which defines life insurance for tax purposes
gives the Secretary of the Treasury authority to prescribe regulations to carry
out the purposes of the Section. In this regard, proposed regulations governing
mortality charges were issued in 1991. The mortality charges assumed for risks
under the Contract do not comply with the proposed regulations. In this regard,
the proposed regulations preclude the assumption of the industry's standard
mortality table for survivorship life insurance policies and do not provide for
the use of the substandard mortality risk assumptions used for the Contract.
Consequently, if such regulations were finalized in their current form, the
Contract may not qualify as life insurance for federal tax purposes or may be
classified as a Modified Endowment Contract. None of these proposed regulations
has yet been finalized. Additional regulations under Section 7702 may also be
promulgated in the future. Moreover, in connection with the issuance of
temporary regulations under Section 817(h), the Treasury Department announced
that such regulations do not provide guidance concerning the extent to which
Contract owners may direct their investments to particular divisions of a
separate account. Such guidance will be included in regulations or rulings
under Section 817(d) relating to the definition of a variable contract.
Prudential intends to comply with final regulations or rulings issued under
sections 7702 and 817. Therefore, it reserves the right to make such changes as
it deems necessary to assure that the Contract continues to qualify as life
insurance for tax purposes. Any such changes will apply uniformly to affected
Contract owners and will be made only after advance written notice to affected
Contract owners.
PRE-DEATH DISTRIBUTIONS. The taxation of pre-death distributions depends on
whether the Contract is classified as a Modified Endowment Contract. The
following discussion first deals with distributions under Contracts not so
classified, and then with Modified Endowment Contracts.
1. A surrender or lapse of the Contract may have tax consequences. Upon
surrender, the owner will not be taxed on the cash surrender value except
for the amount, if any, that exceeds the gross premiums paid less the
untaxed portion of any prior withdrawals. The amount of any unpaid Contract
debt will, upon surrender or lapse, be added to the cash surrender value
and treated, for this purpose, as if it had been received. Any loss
incurred upon surrender is generally not deductible. The tax consequences
of a surrender may differ if the proceeds are received under any income
payment settlement option.
A withdrawal generally is not taxable unless it exceeds total premiums paid
to the date of withdrawal less the untaxed portion of any prior
withdrawals. However, under certain limited circumstances, in the first 15
Contract years all or a portion of a withdrawal may be taxable if the
Contract Fund exceeds the total premiums paid less the untaxed portions of
any prior withdrawals, even if total withdrawals do not exceed total
premiums paid to date.
Extra premiums for optional benefits and riders generally do not count in
computing gross premiums paid, which in turn determines the extent to which
a withdrawal might be taxed.
Loans received under the Contract will ordinarily be treated as
indebtedness of the owner and will not be considered to be distributions
subject to tax. However, there is some risk the Internal Revenue Service
might assert the preferred loan should be treated as a distribution for tax
purposes because of the relatively low differential
29
<PAGE>
between the loan interest rate and Contract's crediting rate. Were the
Internal Revenue Service to take this position, Prudential would take
reasonable steps to avoid this result, including modifying the Contract's
loan provisions.
2. Some of the above rules are changed if the Contract is classified as a
Modified Endowment Contract under Section 7702A of the Code. It is possible
for this Contract to be classified as a Modified Endowment Contract under
at least two circumstances: premiums in excess of the 7-pay premiums
allowed under Section 7702A are paid or a decrease in the insurance amount
is made (or a rider removed). Moreover, the addition of a rider or the
increase in the basic insurance amount after the Contract date may have an
impact on the Contract's status as a Modified Endowment Contract. Contract
owners contemplating any of these steps, particularly a withdrawal that
would reduce the basic insurance amount, should first consult a qualified
tax advisor and their Prudential representative.
If the Contract is classified as a Modified Endowment Contract, then pre-
death distributions, including loans, assignment and pledges are includible
in income to the extent that the Contract Fund exceeds the gross premiums
paid for the Contract increased by the amount of any loans previously
includible in income and reduced by any untaxed amounts previously received
other than the amount of any loans excludible from income. These rules may
also apply to pre-death distributions, including loans, made during the two
year period prior to the Contract becoming a Modified Endowment Contract.
In addition, pre-death distributions from such Contracts (including full
surrenders) will be subject to a penalty of 10 per cent of the amount
includible in income unless the amount is distributed on or after age 59
1/2, on account of the taxpayer's disability or as a life annuity. It is
presently unclear how the penalty tax provisions apply to Contracts owned
by nonnatural persons such as corporations.
Under certain circumstances, multiple Modified Endowment Contracts issued
during any calendar year will be treated as a single contract for purposes
of applying the above rules.
WITHHOLDING
The taxable portion of any amounts received under the Contract will be subject
to withholding to meet federal income tax obligations, if the Contract owner
fails to elect that no taxes be withheld or in certain other circumstances.
Prudential will provide the Contract owner with forms and instructions
concerning the right to elect that no taxes be withheld from the taxable portion
of any payment. All recipients may be subject to penalties under the estimated
tax payment rules if withholding and estimated tax payments are not sufficient.
Contract owners who do not provide a social security number or other taxpayer
identification number will not be permitted to elect out of withholding.
Special withholding rules apply to payments to non-resident aliens.
OTHER TAX CONSIDERATIONS. Transfer of the Contract to a new owner or assignment
of the Contract may have gift, estate and/or income tax consequences depending
on the circumstances. In the case of a transfer of the Contract for valuable
consideration, the death benefit may be subject to federal 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.
30
<PAGE>
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 the
receipt of death benefits under business-owned life insurance policies under
certain circumstances by way of the corporate alternative minimum tax.
The individual situation of each Contract owner or beneficiary will determine
the federal estate taxes and the state and local estate, inheritance and other
taxes due if the owner or insured dies.
LAPSE AND REINSTATEMENT
On each Monthly date, we will determine the value of the Contract Fund. If the
Contract Fund is zero or less, the Contract is in default unless it remains in
force under the Death Benefit Guarantee. See DEATH BENEFIT GUARANTEE, page 12.
If the Contract debt ever grows to be equal to or more than the Contract Fund,
the Contract will be in default. Should this happen, Prudential will send you a
notice of default setting forth the payment which we estimate will keep the
Contract in force for three months from the date of default. 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 end and have no value. A Contract that
lapses and ends without value with an outstanding Contract loan may have tax
consequences. See TAX TREATMENT OF CONTRACT BENEFITS, page 28.
A Contract that ended in default may be reinstated within 5 years after the date
of default if the following conditions are met: (1) both insureds are alive or
if one insured is alive and the Contract ended without value after the death of
the other insured; (2) you must provide renewed evidence of insurability on any
insured who was living when the Contract went into default; and (3) submission
of certain payments sufficient to bring the Contract up to date and cover all
charges and deductions for the next three months. The date of reinstatement
will be the beginning of the Contract month that coincides with the or next
follows the date we approve your request. All required charges will be deducted
from your payment and the balance will be placed into your Contract Fund.
LEGAL CONSIDERATIONS RELATING TO SEX-DISTINCT PREMIUMS AND BENEFITS
The Contract generally employs mortality tables that distinguish between males
and females. Thus, premiums and benefits under Contracts issued on males and
females of the same age will generally differ. However, in those states that
have adopted regulations prohibiting sex-distinct insurance rates, premiums and
cost of insurance charges will be based on male rates whether the insureds are
male or female. In addition, employers and employee
31
<PAGE>
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 male mortality
rates to such prospective purchasers.
OTHER GENERAL CONTRACT PROVISIONS
ASSIGNMENT. This Contract may not be assigned if such assignment would violate
any federal, state or local law or regulation prohibiting sex distinct rates for
insurance. Generally, the Contract may not be assigned to an employee benefit
plan or program without Prudential's consent. Prudential assumes no
responsibility for the validity or sufficiency of any assignment, and we will
not be obligated to comply with any assignment unless we received a copy at one
of our Home Offices.
BENEFICIARY. The beneficiary is designated and named in the application by the
Contract owner. Thereafter, you may change the beneficiary, provided it is in
accordance with the terms of the Contract. Should the second insured to die do
so with no surviving beneficiary, that insured's estate will become the
beneficiary, unless someone other than the insureds owned the Contract. In that
case, we will make the Contract owner or the Contract owner's estate the
beneficiary.
INCONTESTABILITY. After the Contract has been in force during the lifetime of
both insureds for 2 years from the Contract date or, with respect to any change
in the Contract that requires Prudential's approval and could increase its
liability, after the change has been in effect during at least one insured's
lifetime for 2 years from the effective date of the change, assuming enough
premium has been paid to cover the required charges, Prudential will not contest
its liability under the Contract in accordance with its terms.
MISSTATEMENT OF AGE OR SEX. If an insured's stated age or sex or both are
incorrect in the Contract, Prudential will adjust each benefit and any amount to
be paid, as required by law, to reflect the correct age and sex. Any such
benefit will be based on what the most recent deductions from the Contract Fund
would have provided at that insured's correct age and sex.
SETTLEMENT OPTIONS. The Contract grants to most owners, or to the beneficiary,
a variety of optional ways of receiving Contract proceeds, other than in a lump
sum. Any Prudential representative authorized to sell this Contract can explain
these options upon request.
SIMULTANEOUS DEATH. If both insureds die while the Contract is in force and we
find there is lack of sufficient evidence that they died other than
simultaneously, we will assume that the older insured died first.
SUICIDE EXCLUSION. Generally, if either insured, whether sane or insane, dies by
suicide within 2 years from the Contract date, the Contract will end and
Prudential will return the premiums paid, less any Contract debt, and less any
withdrawals. If there is a surviving insured, Prudential will make a new
contract available to that insured. The amount of coverage, issue age, contract
date, and underwriting classification will be the same as when this Contract was
issued.
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"
32
<PAGE>
to the Contract. Charges applicable to the riders will be deducted from the
Contract Fund on each Monthly date.
One rider gives insureds the option to exchange the Contract for two new life
insurance contracts, one on the life of each insured, in the event of a divorce
or if certain changes in tax law occur. Exercise of this option may give rise
to taxable income. Another pays an additional amount if both insureds die
within a specified number of years. Another pays an additional amount if a
specified insured dies within a stated number of years. If the two insureds are
not family members (i.e. husband/wife or parent/child), charges for these single
life riders will be treated as pre-death distributions from the Contract. See
TAX TREATMENT OF CONTRACT BENEFITS, page 28. 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, you may elect to allocate, either initially or by
transfer, all or part of the amount credited under the Contract to a fixed-rate
option, and the amount so allocated or transferred becomes part of 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 first day of the same month in the following year.
At that time a new crediting rate will be declared that will remain in effect
for one year. Thereafter, a new crediting rate will be declared each year and
will remain in effect for the calendar year. Prudential reserves the right to
change this practice. Prudential is not obligated to credit interest at a
higher rate than an effective annual rate of 4%, although in our sole discretion
we may do so. Different crediting rates may be declared for different portions
of the Contract Fund allocated to the fixed-rate option. On request, you will
be advised of the interest rates that currently apply to your Contract.
Transfers from the fixed-rate option may be subject to strict limits. (See
TRANSFERS, page 15). The payment of any cash surrender value attributable to the
fixed-rate option may be delayed up to 6 months (see WHEN PROCEEDS ARE PAID,
page 24).
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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.
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.
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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 year you will be sent a statement that provides certain information
pertinent to your own Contract. This statement will detail values and
transactions made and specific Contract data that apply only to your particular
Contract. Currently we intend to provide three quarterly reports (in addition
to the year-end statement) which provide abbreviated information pertinent to
your own Contract.
You will also be sent 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 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
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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 Andy
Mirchuk, FSA, MAAA, Vice President and Actuary 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.
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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 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.
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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.
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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.
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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, 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.
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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.
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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.
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.
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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.
C. EDWARD CHAPLIN - Vice President and Treasurer since 1995; prior to 1995,
Managing Director and Assistant Treasurer. Age 41.
Prudential officers are elected annually.
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<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.
A13
<PAGE>
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.
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
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>
SURVIVORSHIP PREFERRED(R)
VARIABLE UNIVERSAL
LIFE INSURANCE
LOGO PRUDENTIAL
The Prudential Insurance Company of America
751 Broad Street, Newark, NJ 07102-3777
Telephone: 800 778-5510
SVUL-1 Ed. 5/98 CAT# 64M631J
<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 Survivorship Preferred Variable Appreciable Life Insurance
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 the depositor.
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 to Form N-4,
Registration No. 33-25434, filed April 30, 1997, on behalf of the Prudential
Individual Variable Contract Account.
Insofar as indemnification for liabilities arising under the Securities Act of
1933 (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 106 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
2. Price Waterhouse LLP
3. Clifford E. Kirsch, Esq.
4. Andy Mirchuk, FSA, MAAA
The following exhibits:
- -----------------------
1. The following exhibits correspond to those required by paragraph A of the
instructions as to exhibits in Form N-8B-2:
A. (1) Resolution of Board of Directors of The Prudential Insurance
Company of America establishing The Prudential Variable
Appreciable Account. (Note 2)
(2) Not Applicable.
(3) Distributing Contracts:
(a) Distribution Agreement between Pruco Securities Corporation
and The Prudential Insurance Company of America. (Note 3)
(b) Proposed form of Agreement between Pruco Securities
Corporation and independent brokers with respect to the
Sale of the Contracts. (Note 3) (c) Schedules of Sales
Commissions. (Note 4)
(4) Not Applicable.
(5) Survivorship Preferred Variable Appreciable Life Insurance
Contract: (Note 3)
(6) (a) Charter of The Prudential Insurance Company of America, as
amended November 14, 1995. (Note 7)
(b) By-laws of The Prudential Insurance Company of America, as
amended April 8, 1997. (Note 8)
(7) Not Applicable.
(8) Not Applicable.
(9) Not Applicable.
(10) (a) Application Form. (Note 6)
(b) Supplement to the Application. (Note 3)
(11) Form of Notice of Withdrawal Right. (Note 3)
(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 3)
(13) Available Contract Riders and Endorsements:
(a) Option to Exchange for Separate Contracts. (Note 3)
(b) Rider for Term Insurance Benefit on Life of Second Insured
to Die. (Note 3)
(c) Rider for Term Insurance Benefit. (Note 3)
2. See Exhibit 1.A.(4).
II-2
<PAGE>
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 Andy Mirchuk, FSA, MAAA, as to actuarial matters
pertaining to the securities being registered. (Note 1)
7. Powers of Attorney. (Note 5)
27. Financial Data Schedule. (Note 1)
(Note 1) Filed herewith.
(Note 2) Incorporated by reference to Post-Effective Amendment No. 15 to Form
S-6, Registration No. 33-20000, filed May 1, 1995.
(Note 3) Incorporated by reference to Registrant's Form S-6, filed July 17,
1995.
(Note 4) Incorporated by reference to Pre-Effective Amendment No. 1 to this
Registration Statement, filed December 26, 1995.
(Note 5) 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 6) Incorporated by reference to Form S-6, Registration No. 333-07451,
filed July 2, 1996 on behalf of the Pruco Life Variable Appreciable
Account.
(Note 7) 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 8) 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.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant, The
Prudential Variable Appreciable Account, certifies that this Amendment is filed
solely for one or more of the purposes specified in Rule 485(b)(1) under the
Securities Act of 1933 and that no material event requiring disclosure in the
prospectus, other than one listed in Rule 485(b)(1), has occurred since the
effective date of the most recent Effective Amendment to the Registration
Statement pursuant to Rule 485(b)(1) and has duly caused this Registration
Statement to be signed on its behalf by the undersigned thereunto duly
authorized, and its seal hereunto affixed and attested, all in the city of
Newark and the State of New Jersey, on this 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. 3 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 F. Ryan
Chairman of the Board, President, and
Chief Executive Officer
/s/ *
- --------------------------------------
Martin A. Berkowitz
Senior Vice President and Comptroller
/s/ *
- --------------------------------------
Richard J. Carbone
Chief Financial Officer By: /s/ Thomas C. Castano
----------------------------------
/s/ * Thomas C. Castano
- -------------------------------------- (Attorney-in-Fact)
Franklin E. Agnew
/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-4
<PAGE>
/s/ *
- ---------------------------------
William H. Gray, III
Director
/s/ *
- ---------------------------------
Jon F. Hanson
Director
/s/*
- ---------------------------------
Glen H. Hiner, Jr.
Director
/s/ *
- ---------------------------------
Constance J. Horner
Director
/s/ *
- ---------------------------------
Gaynor N. Kelley
Director
/s/ * *By: /s/ Thomas C. Castano
- --------------------------------- ---------------------------------
Burton G. Malkiel Thomas C. Castano
Director (Attorney-in-Fact)
/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-5
<PAGE>
EXHIBIT INDEX
Consent of Deloitte & Touche LLP, Page II-7
independent auditors.
Page II-8
Consent of Price Waterhouse LLP,
independent accountants.
3. Opinion and Consent of Page II-9
Clifford E. Kirsch, Esq. as to
the legality of the securities
being registered.
6. Opinion and Consent of Andy Page II-10
Mirchuk, FSA, MAAA, as to
actuarial matters pertaining to
the securities being registered.
27. Financial Data Schedule. Page II-11
II-6
<PAGE>
Exhibit 99.c1(a)
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Post Effective-Amendment No. 3 to Registration
Statement No. 33-61079 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 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-7
<PAGE>
Exhibit 99.c1(b)
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Post-Effective Amendment No. 3 to the registration statement of 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-8
<PAGE>
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-9
<PAGE>
Exhibit 6
April 24, 1998
The Prudential Insurance Company Of America
Prudential Plaza
Newark, New Jersey 07102-3277
Gentlemen:
This opinion is furnished in connection with the registration by The Prudential
Insurance Company of America of Prudential Survivorship Preferred Variable
Appreciable Life Insurance Contract ("Contract") under the Securities Act of
1933. The prospectus included in the Post-Effective Amendment No. 3 to
Registration No. 33-61079 on Form S-6 describes the Contract. I have reviewed
the Contract and I have participated in the preparation and review of the
Registration Statement and Exhibits thereto. In my opinion:
1. The illustrations of cash surrender values and death benefits included in
the section of the prospectus entitled "Illustrations of Cash Surrender
Values, Death Benefits, and Accumulated Premiums", based on the assumptions
stated in the illustrations are consistent with the provisions of the
Contract. The rate structure of the Contract has not been designed so as
to make the relationship between premiums and benefits, as shown in the
illustrations, appear more favorable to the prospective purchaser of a
Contract issued on a male age 55 and a female age 50, than to prospective
purchasers of Contracts of different combinations of age, sex, or smoking
status.
2. The graphs included in the section of the prospectus entitled "Type of
Insurance Amount", based on the assumptions stated in the illustrations,
are consistent with the provisions of the Contract.
3. The examples shown in the section of the prospectus entitled "Changing the
Type of Insurance Amount" are consistent with the provisions of the
Contract.
4. The charts included in the sections of the prospectus "How a Fixed
Insurance Amount Contract's Death Benefit Will Vary" and "How a Fixed
Insurance Amount Contract's Death Benefit Will Vary" are consistent with
the provisions of the Contract.
5. The deduction in an amount equal to 1.25% of each premium is a reasonable
charge in relation to the additional income tax burden imposed upon The
Prudential Insurance Company of America as the result of the enactment of
Section 848 of the internal Revenue Code. In reaching that conclusion, a
number of factors were taken into account that, in my opinion, were
appropriate and which resulted in a project after-tax rate of return that
is a reasonable rate to use in discounting the tax benefit of the
deductions allowed in Section 848 in taxable years subsequent to the year
in which the premiums are received.
I hereby consent to the use of this opinion as an exhibit to the Registration
Statement and to the reference to my name under the heading "Experts" in the
prospectus.
Very truly yours,
/s/
- ------------------------------------
Andy Mirchuk, FSA, MAAA
Vice President and Actuary
The Prudential Insurance Company of America
II-10
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<MULTIPLIER> 1000
<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
<RECEIVABLES> $5,983
<ASSETS-OTHER> $0
<OTHER-ITEMS-ASSETS> $0
<TOTAL-ASSETS> $5,653,793
<PAYABLE-FOR-SECURITIES> $0
<SENIOR-LONG-TERM-DEBT> $0
<OTHER-ITEMS-LIABILITIES> $0
<TOTAL-LIABILITIES> $0
<SENIOR-EQUITY> $0
<PAID-IN-CAPITAL-COMMON> $0
<SHARES-COMMON-STOCK> $277,290
<SHARES-COMMON-PRIOR> $0
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<NET-ASSETS> $5,653,793
<DIVIDEND-INCOME> $162,292
<INTEREST-INCOME> $0
<OTHER-INCOME> $475,211
<EXPENSES-NET> $36,753
<NET-INVESTMENT-INCOME> $125,539
<REALIZED-GAINS-CURRENT> $26,562
<APPREC-INCREASE-CURRENT> $241,021
<NET-CHANGE-FROM-OPS> $868,334
<EQUALIZATION> $0
<DISTRIBUTIONS-OF-INCOME> $0
<DISTRIBUTIONS-OF-GAINS> $0
<DISTRIBUTIONS-OTHER> $0
<NUMBER-OF-SHARES-SOLD> $0
<NUMBER-OF-SHARES-REDEEMED> $0
<SHARES-REINVESTED> $0
<NET-CHANGE-IN-ASSETS> $1,104,446
<ACCUMULATED-NII-PRIOR> $0
<ACCUMULATED-GAINS-PRIOR> $0
<OVERDISTRIB-NII-PRIOR> $0
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<PER-SHARE-NAV-BEGIN> $0
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