The
MEDLEY Program
[PHOTO]
Annual Report
to Participants
December 31, 1997
[LOGO] Prudential
The Prudential Insurance Company of America
30 Scranton Office Park
Scranton, PA 18507-1789
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Committed to providing superior
investment, administrative and
recordkeeping services to
institutional clients.
<PAGE>
Average Annual Total Returns
for Periods Ended December 31, 1997
<TABLE>
<CAPTION>
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Ten Year
or Since Inception
VCA-10 Capital Growth Account One Year Five Year Inception Date
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<S> <C> <C> <C> <C>
Without Sales Charge(1) 31.37% 20.43% 18.00% 8/82
With Maximum Sales Charge(2) 25.22% 20.17% 17.97% 8/82
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VCA-11 Money Market Account(3)
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Without Sales Charge(1) 4.81% 4.13% 5.27% 8/82
With Maximum Sales Charge(2) -1.25% 3.73% 5.23% 8/82
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VCA-24
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Without Sales Charge(1)
Diversified Bond Account 7.77% 7.03% 8.42% 5/83
Government Income Account 8.86% 6.61% 8.02%* 5/89
Conservative Balanced Account 12.61% 9.90% 10.36% 5/83
Flexible Managed Account 17.09% 12.39% 12.56% 5/83
Stock Index Account(5) 31.85% 18.94% 16.59% 10/87
Equity Account 23.74% 18.53% 16.65% 5/83
Global Account 5.77% 14.14% 9.11%* 9/88
With Maximum Sales Charge(2)
Diversified Bond Account 1.76% 6.71% 8.41% 5/83
Government Income Account 2.86% 6.30% 8.02%* 5/89
Conservative Balanced Account 6.57% 9.60% 10.34% 5/83
Flexible Managed Account 11.05% 12.12% 12.54% 5/83
Stock Index Account(5) 25.82% 18.72% 16.58% 10/87
Equity Account 17.61% 18.26% 16.62% 5/83
Global Account -0.24% 13.91% 9.10%* 9/88
</TABLE>
These returns represent past performance. Investment return and principal value
will fluctuate so that units, upon redemption, may be worth more or less than
their original cost.
*Performance is from the inception date as indicated:
Global Account September 19, 1988
Government Income Account May 1, 1989
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(1) The results shown are after the deduction of all expenses and contract
charges including investment management and administrative fees, but do not
include the effect of any deferred sales charges. All total returns are for
the periods indicated and are calculated based on changes in unit values.
Past performance cannot guarantee comparable future results.
(2) The results shown are calculated in the same manner as those shown above
and in addition reflect the deduction of the following maximum deferred
sales charges: "1 Year", 6%; "5 Year", 2%; and "10 Year or Since
Inception", 0%. The performance results also reflect the impact of the $30
annual contract fee under The MEDLEY Program. Past performance cannot
guarantee comparable future results.
(3) For current yields on the Money Market Account, please call 1-800-458-6333.
An investment in the Account is neither insured nor guaranteed by the U.S.
Government. There can be no assurance that the account will be able to
maintain a stable unit value.
(4) The Prudential Variable Contract Account-24 (VCA-24) was first offered on
May 1, 1987 (Stock Index Account on May 2, 1988, Government Income and
Global Accounts on May 1, 1991). However, the underlying investment
portfolios existed under other Prudential programs before they became part
of The MEDLEY Program. For purposes of comparison, the returns have been
recalculated to reflect a hypothetical return as if they were part of The
MEDLEY Program from each portfolio's inception, using charges applicable to
The MEDLEY Program.
(5) Standard & Poor's, S&P, Standard & Poor's 500, and 500 are trademarks of
McGraw-Hill, Inc. and have been licensed for use by The Prudential
Insurance Company of America and its affiliates and subsidiaries. The
Account is not sponsored, endorsed, sold or promoted by S&P and S&P makes
no representation regarding the advisability of investing in the Account.
<PAGE>
Our New Look.
You'll notice that we've made a few changes in your Annual Report this year.
We've redesigned and expanded the Report so we could more fully discuss the
performance, strategy and outlook of The MEDLEY Program. Our goal is to provide
you with a clear, concise and candid analysis of activity. We trust that you
will find this Report useful.
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Table of Contents
I Letter to MEDLEY Participants 2
Market Review 4
Investment Advisor's Outlook 8
II VCA-10 Capital Growth Account 10
Financial Statements 12
III VCA-11 Money Market Account 22
Financial Statements 24
IV VCA-24 The Prudential Series Fund, Inc. 33
V The Prudential Series Fund, Inc.
Diversified Bond Portfolio 34
Government Income Portfolio 36
Conservative Balanced Portfolio 38
Flexible Managed Portfolio 40
Stock Index Portfolio 42
Equity Portfolio 44
Global Portfolio 46
VI The Prudential Series Fund, Inc.
Financial Statements A1
Schedule of Investments B1
Notes to Financial Statements C1
Financial Highlights D1
Report of Independent Accountants E1
This report is not authorized for distribution to prospective investors unless
preceded or accompanied by a current prospectus for The MEDLEY program.
The report is for the information of persons participating in The Prudential
Variable Contract Account-10 (VCA-10), The Prudential Variable Contract
Account-11 (VCA-11), and The Prudential Variable Contract Account-24 (VCA-24),
The MEDLEY Program. VCA-10, VCA-11 and VCA-24 are distributed by Prudential
Investment Management Services LLC, a subsidiary of The Prudential Insurance
Company of America. VCA-10, VCA-11 and VCA-24 are group annuity insurance
products issued by The Prudential Insurance Company of America, Newark, NJ.
This Annual Report includes the financial statements of the VCA-10, Capital
Growth Account; VCA-11, Money Market Account and The Prudential Series Fund,
Inc.
This report does not include separate account financials for the VCA-24
Subaccounts. If you would like separate account financial statements as of
December 31, 1997, please call the telephone number on the back of this report.
<PAGE>
Year Ended December 31, 1997
Letter
To MEDLEY Participants
==================================
"We're quite pleased with the
return on stocks in the last three
years, but we don't think this
divergence from historical norms
can continue indefinitely."
Dear MEDLEY Participant:
We are pleased to provide our Annual Report to you on the investment performance
of The MEDLEY Program which includes VCA-10 Capital Growth Account, VCA-11 Money
Market Account and VCA-24, which offers seven portfolios of The Prudential
Series Fund, Inc.
It has been another exceptional year. For the third year in a row (and the first
time in history), stock prices have risen by more than 20%, driven by
unexpectedly high corporate profits and surprisingly low inflation. Bonds also
performed quite well, with total returns averaging just below 10%.
We live in remarkable times. The U.S. economy grew by almost 4% in 1997, yet
inflation fell to 1.7%, the lowest since oil prices collapsed 11 years ago.
Unemployment dipped below 5% for the first time since the 1970s. And consumer
confidence was the highest in 28 years. Yet, we live in a global economy. The
economic turmoil, stock market and currency declines in Asia impacted global
markets in the fourth quarter and the economic effects on the world's growth are
not yet clear.
How Did Our Portfolios Perform?
You'll be pleased to know that The MEDLEY Program investment options delivered
returns similar to those of the broader markets and consistent with the
strategies around which they were designed. Virtually all of our U.S. stock
portfolios posted double-digit returns, while our bond portfolios finished with
very healthy results.
Some of the MEDLEY Program portfolios performed above average, reaping unusually
high historical returns. The VCA-10 Capital Growth Account beat its competitors
and the S&P 500 over a five-year period. The VCA-11 Money Market Account's
seven-day yield was up, at 4.87%, from six-months prior. Additionally, in The
Prudential Series Fund, Inc., the Government Income and Stock Index Portfolios
finished the year with returns higher than average variable annuity contracts in
their respective categories.
It's Long-Term Performance That Counts.
Although in this Report we're focusing primarily on one year performance,
remember that it's long-term performance that counts. Review your Accounts' 1997
performance, but also be sure to examine its longer-term
2
<PAGE>
record as well. You'll note that over the past three, five and 10 years, a
number of our Accounts have delivered above-average performance, both on an
absolute basis and in comparison with funds having similar objectives.
Our goal is to achieve this kind of above-average investment performance over
time. Such consistency is important, because most people buy variable annuity
products to achieve long-term goals. However, when you consider how to allocate
either new or existing assets among your available options, we encourage you to
think about your horizon and risk tolerance and to consider future returns
rather than focusing on past performance. Past performance does not guarantee
future results.
What Goes Up Can Also Go Down.
While discussing the long-term, we think it's crucial to remind MEDLEY
participants that stocks have offered a 10.7% average annual return over the
last 70 years -- about half of what they have given us over the last three
years. And since 1980, corporate revenues have risen 4% a year, while earnings
have risen almost twice as fast, and stock prices four times as much.
Can this continue? We're quite pleased with the return on stocks in the last
three years, but we don't think this divergence from historical norms can
continue indefinitely. It's simply the law of averages. We must remember that
with return comes risk -- that stocks can and do go down, as well as up. If you
have benefited more than you expected in recent years, then at some point, you
will surely benefit less. The only question is: When? Given the very serious
economic crisis in Asia, it could be sooner, rather than later.
With this in mind, you may want to evaluate how you allocate your contract funds
among the available investment options. While stocks ought to remain a primary
focus for most investors looking for long-term wealth accumulation, now might be
a good time to consider diversifying a portion of your holdings. If you wish to,
contact your financial advisor/representative for assistance in structuring a
program to help meet your needs.
All of us at Prudential thank you for your business and look forward to helping
you plan for your future financial security.
/s/ Mendel A. Melzer
Mendel A. Melzer, CFA
Chairman
[PHOTO]
Mendel A. Melzer, CFA
Chairman
3
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1997
Market Review
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How the Markets Compared.(1)
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]
Average Return Over
Past 20 Years
1997 (Annualized)
---- ------------
Money Markets 4.9% 7.7%
Bonds 9.8% 9.7%
Foreign Stocks 16.2% 15.0%
U.S. Stocks 33.4% 16.7%
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This chart compares the 12-month return as of 12/31/97 for various categories of
investments with the average annual total return over 20 years for the same
investment. As you can see, stock and bond market returns can vary considerably
from year to year. Unlike stocks, bonds generally offer a fixed rate of return
and principal if held to maturity. An investment's past performance should never
be used to predict future results. There are different risks associated with
each investment sector, which should be carefully considered before investing.
(1) Source: Prudential. For purposes of comparison only. U.S. money markets as
measured by Lipper Money Market Average. Bonds as measured by the Lehman
Brothers Gov't. Corp. Index. Foreign stocks as measured by the Morgan
Stanley Capital International World Index. U.S. stocks as measured by the
S&P 500 Index.
U.S. Stocks
Nothing Short of Spectacular.
U.S. stocks rose more than 20% for the third straight year for the first time in
history -- measured by either the Dow Jones Industrial Average (the "Dow Jones")
or the Standard & Poor's 500 Composite Stock Price Index (the "S&P 500").
Unexpectedly high corporate profits and exceptionally low inflation, plus strong
economic growth and the lowest unemployment rate and highest consumer confidence
in 28 years, all combined to drive emotions in the stock market to euphoric
levels.
The numbers were impressive, considering that stocks have gained only 10.7% on
average over the last 70 years. In 1997, the S&P 500 gained 33%, after rising
23% in 1996 and 37% in 1995.
Only in October did a reality check set in, when the market fell briefly by 10%
in what market professionals called a correction. But stock prices quickly
rebounded, and many major indexes moved on to new highs.
Still, the momentum of the market had clearly slowed by year-end as investors
became increasingly concerned about the economic crisis in Asia and how severely
it might affect corporate earnings in 1998.
Large, Value Stocks Dominated.
Large company stocks continued to lead the market higher in 1997. For example,
the small company-oriented Russell 2000 Index rose 22.4% during calendar year
1997, nearly 12 percentage points behind the S&P 500.
Financial stocks rose 49% in 1997 as consolidation continued to sweep the
industry and long-term interest rates fell to their lowest levels since 1993.
Banks and stock brokerage firms are continuing to achieve economies of scale
through acquisitions.
4
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Financial Stocks On Top.
1997
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Finance 48.7%
Consumer Growth 36.9%
Consumer Cyclical 36.7%
Utilities 35.9%
Technology 27.1%
Energy 25.6%
Industrials 21.9%
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Source: Prudential.
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Large Stocks Outperformed Small Stocks.
20-Year
1997 Average
---- -------
S&P 500* 33.4% 16.7%
NASDAQ* 21.6% 14.5%
Russell 2000* 22.4% 15.9%
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* The Standard & Poor's 500, NASDAQ and Russell 2000 are unmanaged indexes
that are considered to be generally representative of U.S. stock markets.
Investors cannot invest directly in indexes or market averages. Past
performance is no guarantee of future results.
Consumer growth stocks finished second, narrowly nosing out consumer cyclical
stocks for the year. Media, drugs and leisure led the consumer growth stocks,
with Tele-Communications, Inc. (TCI) doubling, Comcast rising 78% and Gannett up
68%. Among the pharmaceuticals, Schering-Plough and Eli Lilly nearly doubled,
while Pfizer rose 82% during the same period. Retailers led the consumer
cyclical stocks, with Gap, Costco, Tandy and Home Depot each up about 77% for
the year.
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The Dow in the Past Twelve Months.
[GRAPHICAL REPRESENTATION OF MOUNTAIN CHART]
In March and July 16 Oct. 28
April, fears of The Dow passes The Dow surged
higher interest 8,000-point mark for 337 points, its
rates shook the the first time largest point gain
market. ever, rising
4.71%
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Daily close of the Dow Jones Industrial Average for the past twelve months.
Technology stocks fared well for much of the year but tumbled in the fourth
quarter on worries about Asia, losing 12%, bringing their return for the year to
27%. Utilities stocks led all other market sectors in the quarter, rising 19% in
the last three months of 1997 as long- term interest rates fell sharply and
investors sought companies with safe earnings streams. Interestingly, for the
year, utilities beat the S&P 500.
5
<PAGE>
1997
Market Review
continued
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30-Year U.S. Treasury Yields.
[GRAHICAL REPRESENTATION OF MOUNTAIN CHART]
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Monthly closing yields for the past twelve months. Source: Bloomberg, as of
12/31/97.
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High Yield Bonds Performed Best.
1997
----
High Yield Bonds 12.8%
Corporate Bonds 10.2%
Aggregate Index 9.7%
Government Bonds 9.6%
Mortgage Bonds 9.5%
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Source: Lehman Brothers, as of 12/31/97.
Bonds
Inflation Fell Sharply, Pushing Prices Higher.
Nineteen ninety-seven was a very good year for bonds, as inflation fell below 2%
for the first time in 11 years and long-term interest rates dipped to their
lowest level since 1993.
Bonds returned a healthy 9.65% for the year as measured by the Lehman Brothers
Aggregate Index, led by high yield bonds in the United States, which returned
12.76%.
A financial crisis in Asia late in the year set off a major rally in the U.S.
Treasury market, where the 30-year bond returned more than 15% in 1997 as the
yield fell by nearly three-quarters of a percentage point to 5.92% at year-end.
Worldwide, investors bought Treasuries after Southeast Asian currencies
collapsed under the weight of excesses in the financial sector and
overinvestment in real estate and infrastructure.
Fundamentally, economic conditions were nearly ideal for bond investors, as
inflation seemed to be slowly fading away. Prices at the wholesale level
actually fell by 1.7% as measured by the government's Producer Price Index, but
at the retail level prices continued to rise, even if only by 1.7%, as measured
by the Consumer Price Index. Still, that was the lowest increase in 11 years,
and nearly half of 1996's rate.
As interest rates fell, home mortgage refinancings rose, with 30-year rates
falling below 7%. Others, including noted investor Warren Buffett, were reported
to be investing in bonds, and cash flows into bond mutual funds quadrupled in
1997.
High yield corporate bonds led all other sectors of the U.S. bond market in 1997
as corporate profits climbed unexpectedly higher while economic growth surged.
The lowest-rated bonds performed the best. Nineteen ninety-seven was another
record-breaking year for newly issued high yield bonds. These bonds were in such
demand in 1997 that the interest rate premium they commanded over U.S.
Treasuries reached all-time lows in October.
6
<PAGE>
Foreign Stocks
A Plunge in the Pacific.
Asian stock markets plunged in 1997 as Southeast Asian currencies collapsed
under the weight of excesses in the financial sector and overinvestment in real
estate and infrastructure. Currencies in some countries fell by nearly 50%
against the U.S. dollar. Credit and cash became scarce and economies slowed. The
financial crisis eventually reached Japan, helping to halt a potential economic
recovery.
The Morgan Stanley Capital International Pacific Index fell 25% during the year
as stocks in Thailand dropped 77%, Indonesia 74% and Malaysia 68%, all in U.S.
dollar terms. Even older, larger, more developed Pacific Basin countries did not
escape unscathed. Economic malaise continued to linger in Japan, where stocks
dropped almost 24% in U.S. dollars for the year.
European Stocks Performed Well.
In Europe, stocks performed quite well during the year, rising over 24% for
U.S.-based investors despite a strong dollar. Developing countries were strong,
such as Portugal, up 48%, and older, more established stock exchanges also
posted excellent returns, with Switzerland rising 45%, Italy up 36% and Germany
ahead 25%, all measured by Morgan Stanley in U.S. dollars.
European stocks benefited as the movement toward a European economic union
fostered less government borrowing and thus lower interest rates, which
stimulated the sluggish economies of Germany and France and led to rapid growth
in smaller countries on the periphery, such as Ireland.
In addition, corporate restructuring continued to improve productivity, driving
double-digit earnings gains. Europe has also been the region least affected by
economic turmoil in Asia, its stock prices are less expensive than those in the
United States, and Europe is earlier in its economic growth cycle than the
United States, which is now in its seventh year of economic recovery.
================================================================================
Foreign Markets.
1997
----
MSCI Europe Index 24.2%
MSCI World Index 16.2%
MSCI EAFE Index 2.1%
MSCI Japan Index -23.6%
MSCI Pacific Index -25.3%
S&P 500 Index 33.4%
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Source: Morgan Stanley Capital International.
The Morgan Stanley Capital International (MSCI) World Index is a weighted,
unmanaged index of the performance of 1,472 securities listed on the stock
exchanges of the U.S., Europe, Canada, Australia, New Zealand and the Far East.
Investors cannot invest directly in an index.
Morgan Stanley country indexes [Europe, Asia, Far East (EAFE), Pacific and
Japan] are unmanaged indexes that include stocks making up the largest
two-thirds of each country's total stock market capitalization. This chart is
for illustrative purposes only and is not indicative of the past, present or
future performance of any specific investment. Investors cannot invest directly
in stock indexes.
The Standard & Poor's 500 is a weighted, unmanaged index comprised of 500
stocks, which provides a broad indicator of stock price movements.
7
<PAGE>
1998
Investment Advisor's Outlook
The Economy
Expect Slower Growth.
Our economists at Prudential forecast slower economic growth plus a slight
increase in inflation and unemployment in 1998. They are looking for the U.S.
economy to grow slower than 2%, less than half as fast as it grew in 1997. We
believe inflation will remain acceptable, but that the Consumer Price Index may
rise as much as 2.2%, somewhat faster than 1997's 1.7%. As demand for U.S.
exports slows in Asia, unemployment should rise toward 5.5%, up from December's
4.7%.
Prudential's economists expect short-term interest rates to fall by half a
percentage point in 1998, and long-term rates to end the year close to where
they began -- at around 6%. Our economists forecast that the Federal Reserve
Bank will lower interest rates by a quarter of a percentage point in the spring
and another quarter point in the summer, bringing the federal funds rate (or
overnight bank lending rate) down to 5%. As of this writing in early January,
interest rates on government bonds maturing in 10 years or less were priced to
yield below 5.50%, the official overnight lending rate.
U.S. Stocks
We're Looking for an Average Year.
We said it last year. And the year before. Each year we've said that surely the
U.S. stock market would not rise by 20% again in the following year. But the
market has done just that now for three years in a row -- for the first time in
history. Can this remarkable performance continue? Over the last 70 years, the
historical average return for stocks is only about 10.7%. This year, more than
ever, we expect that stocks will turn in a performance much closer to average.
We're cautious, conservative investors, so we build our portfolios one stock at
a time. This year, with continued economic growth and modest inflation expected,
we believe that earnings will be the key force driving stock market performance.
We'll be looking even more closely than usual at a company's ability to meet its
corporate earnings expectations, because investors have become very unforgiving
of even the slightest shortfall in earnings.
8
<PAGE>
In the United States, we are particularly interested in smaller company stocks,
because we believe they are very attractively priced, considering their earnings
expectations. These stocks have trailed large company stocks for several years
now, but small company stocks have historically fared better than larger company
stocks.
U.S. Bonds
Off to a Great Start.
The U.S. bond market performed well in the early days of 1998 as the interest
rates on the 30-year U.S. Treasury fell to their lowest level since the
government first started to sell them regularly in 1977.
Despite the rally, interest rates remain quite favorable when adjusted for
inflation. So if we experience slower economic growth and continued low
inflation, bond holders may yet enjoy more price appreciation in addition to
their coupon income.
We are firm believers in corporate bonds, which we expect will continue to
perform well as the economy grows and the effects of the Asian economic crisis
are more fully understood in the months ahead. Similarly, we expect certain
emerging markets bonds that have been badly beaten down by this crisis to return
to more realistic price levels.
Foreign Stocks
Watching Closely.
Overseas, we are watching the Asian situation closely, but believe it may be too
early to make a substantial commitment there. We are being selective, choosing
stocks rather than countries. In Europe, we expect strong economies and stock
markets in 1998 as companies there continue to restructure.
================================================================================
A Reality Check.
Stock prices in general have nearly doubled in the last three years. We're quite
pleased with the unusually high returns that stocks have provided for MEDLEY
participants over the past few years, and we are certain that you are, too.
Those types of returns bring you closer to your goals of financial security
faster than you might have expected.
Since 1927, the U.S. stock market's average return has been 10.7%, as measured
by the S&P 500. Yet, in recent years returns have been much higher, as the chart
below shows.
================================================================================
Returns of the U.S. Stock
Market.
Average
Annual
Return
------
Last 70 Years
1927-1997 10.7%
- --------------------------------------------------------------------------------
Source: Ibbotson Associates.
Last Three Years
1995 37.4%
1996 23.0%
1997 33.4%
- --------------------------------------------------------------------------------
Source: Lipper Analytical Services, Inc.
As much as we would like this tremendous performance to continue year after
year, we know it cannot. It's simply the law of averages.
9
<PAGE>
VCA-10 Capital Growth Account
Performance Summary.
Your Account returned 31.37% in 1997, almost three times the 10.70% historical
average for stocks.+ It was the third successive year of unusually high gains
for U.S. stocks. The return on your Account was six percentage points above the
average of the Variable Insurance Products (VIP) Growth category as reported by
Lipper Analytical Services, but general equities--including your
Account--trailed the overall stock market. However, over the five-year period,
your Account beat its competitors and the S&P 500.
================================================================================
Average Annual Returns Through December 31, 1997.
One Three Five Ten
Year Year Year Year
- --------------------------------------------------------------------------------
Capital Growth Account(1) 31.37% 27.76% 20.43% 18.00%
- --------------------------------------------------------------------------------
S&P 500(2) 33.35% 31.13% 20.25% 18.02%
- --------------------------------------------------------------------------------
Lipper (VIP) Growth Avg.(3) 25.36% 26.15% 17.27% 16.59%
- --------------------------------------------------------------------------------
Capital Growth Account inception date: 8/82.
================================================================================
$10,000 Invested Over Ten Years.
[GRAPHICAL REPRESENTATION OF MOUNTAIN CHART]
- --------------------------------------------------------------------------------
(1) The Account performance results are after the deduction of all expenses and
contract charges including investment management and administrative fees,
but do not include the effect of any sales charges. All total returns are
for the periods indicated and are calculated based on changes in unit
values. Past performance cannot guarantee comparable future results.
Investment return and principal value of the Account will fluctuate
resulting in a value which may at any time, including the time of the
withdrawal of the cash value, be more or less than the total principal
investment made.
(2) The S&P 500 is a capital-weighted index representing the aggregate market
value of the common equity of 500 stocks primarily traded on the New York
Stock Exchange. The S&P 500 is an unmanaged index and includes the
reinvestment of all dividends but does not reflect the payment of
transaction costs and advisory fees associated with an investment in the
Account. The securities that comprise the S&P 500 may differ substantially
from the securities in the Account. The S&P 500 is not the only index that
may be used to characterize performance of this Account, and other indices
may portray different comparative performance.
(3) The Lipper Variable Insurance Products (VIP) Growth Average is calculated
by Lipper Analytical Services, Inc., and reflects the investment return of
certain portfolios underlying variable life and annuity products. These
returns are net of investment fees and fund expenses but not product
charges.
+ Source: Ibbotson Associates.
================================================================================
Investment Goal
Long term growth of capital.
Types of Investments
Primarily stocks of a diversified group of companies in a variety of industries.
Investment Style
The Account uses a "value" investment approach to companies that are
attractively priced relative to book value, earnings, discretionary cash flow,
sales and other measures of value.
Performance Review.
Media companies did well. We had a focus on media companies, and they performed
extraordinarily well. We had substantial investments in Century Communications,
Comcast, TeleCom Liberty Media, U.S. West Media Group, and others. Overall, our
media stocks gained 67% in 1997.
Finance led the market. The financial sector was the best-performing sector in
1997. We had a larger proportion of financial stocks than the S&P 500 and our
holdings performed better, on average, lifting our return.
Bigger was better. The stock market was led by a select number of the largest,
most familiar companies, whose high valuations made them unattractive to our
value style of investing. The small and mid-size companies we held instead
trailed.
Industrials stayed modestly priced. The earnings of industrials are sensitive to
the rate of economic growth. Fear of an economic slowdown grew acute at the end
of 1997. Since 45% of our holdings were in inexpensively purchased industrials,
our return was held back.
10
<PAGE>
Strategy Session.
Industrials Offer the Best Value. After their decline at the end of 1997,
industrials represent even better value than before. We continue to have a focus
on them. Although we share the concerns of other investors that the Asian
situation may slow U.S. economic growth, we think the impact will be modest.
Current prices of industrial stocks appear to be based on a more dire
assumption. Hence, we expect the industrials to provide a better return than
other companies even in an economic slowdown. Their potential for price
appreciation should their earnings reaccelerate, however, is considerable.
Hidden Value Even among Financials. We still like the financial sector,
particularly insurance companies, which have not yet participated in the rising
market to the degree banks and financial service companies have. We've focused
on some smaller insurance companies, such as NAC RE Corp, Berkley WR Corp, the
Trenwick Group, and Financial Security Association Holdings. The industry is
consolidating to take advantage of productivity benefits from combinations. Both
acquirers and acquisition targets can be good buys.
Smaller Industrials as Well. We continue to hold some small and midsize
companies. S&P 500 stock prices have outpaced the prices of smaller companies;
we believe the latter should have faster earnings growth in the future. This
makes them a better value.
Outlook
PORTFOLIO MANAGER
Roger Ford
Industrial Firms Attractively Priced.
"Value investors often benefit when most investors overreact to swings in the
economy or to their expectations of economic change. When investors focus on the
short-term prospect of an economic slowdown, for example, cyclical stocks--whose
earnings vary with the business cycle--often are undervalued. Right now, the
best source of investment value is the cyclical industrial sector."
[PHOTO]
PORTFOLIO MANAGER
Roger Ford
================================================================================
Portfolio Composition.
12/31/97
--------
Industrial 45%
Consumer Growth 17%
Finance 17%
Consumer Cyclical 9%
Technology 7%
Energy 4%
Utility 1%
- --------------------------------------------------------------------------------
Source: Prudential. Holdings are subject to change.
================================================================================
Top Ten Holdings.
12/31/97
--------
Carbide/Graphite Group 1.9%
US West Media Group 1.7%
Texas Inds., Inc. 1.7%
NAC RE Corp. 1.6%
Norwest Corp. 1.5%
Beneficial Corp. 1.5%
Berkley WR Corp. 1.4%
Wolverine Tube Inc. 1.3%
Burlington Northern Santa Fe 1.3%
Borg Warner Auto Inc. 1.3%
- --------------------------------------------------------------------------------
Source: Prudential. Holdings are subject to change.
11
<PAGE>
Financial Highlights for VCA-10
Income and Capital Changes Per Accumulation Unit*
(For an Accumulation Unit outstanding throughout the year)
<TABLE>
<CAPTION>
Year Ended December 31,
- --------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
========================================================================================================
<S> <C> <C> <C> <C> <C>
Investment Income $ .0757 $ .0657 $ .0609 $ .0563 $ .0855
- --------------------------------------------------------------------------------------------------------
Expenses
For investment management fee .0154 .0118 .0094 .0083 .0077
For administrative expenses .0461 .0354 .0282 .0251 .0230
- --------------------------------------------------------------------------------------------------------
Net Investment Income .0142 .0185 .0233 .0229 .0548
- --------------------------------------------------------------------------------------------------------
Capital Changes
Net realized gain on investments 1.2761 .5085 .3850 .1947 .2763
Net unrealized appreciation (depreciation)
of investments .3841 .5682 .4744 (.2148) .2599
- --------------------------------------------------------------------------------------------------------
Net Increase in Unit Accumulation Value 1.6744 1.0952 .8827 .0028 .5910
- --------------------------------------------------------------------------------------------------------
Accumulation Unit Value
Beginning of year 5.3383 4.2431 3.3604 3.3576 2.7666
- --------------------------------------------------------------------------------------------------------
End of year $7.0127 $5.3383 $4.2431 $3.3604 $3.3576
- --------------------------------------------------------------------------------------------------------
Ratio of Expenses To
Average Net Assets** 1.00% 1.00% 1.00% 1.00% 1.00%
- --------------------------------------------------------------------------------------------------------
Ratio of Net Investment Income To
Average Net Assets** .24% .39% .61% .68% 1.78%
- --------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 47% 52% 45% 32% 45%
- --------------------------------------------------------------------------------------------------------
Average Commission Rate Paid Per Share $ .0531 $ .0538 N/A N/A N/A
- --------------------------------------------------------------------------------------------------------
Number of Units Outstanding
for Participants at end of year
(000's omitted) 83,261 91,532 81,817 79,189 73,569
- --------------------------------------------------------------------------------------------------------
</TABLE>
*Calculated by accumulating the actual per unit amounts daily.
**These calculations exclude Prudential's equity in VCA-10.
The above table does not reflect the annual administration charge, which does
not affect the Accumulation Unit Value. This charge is made by reducing
Participants' Accumulation Accounts by a number of Accumulation Units equal in
value to the charge.
See Notes to Financial Statements
12
<PAGE>
Financial Statements of VCA-10
Statement of Net Assets as of December 31, 1997
Common Stock Value
Investments Shares [Note 2A]
- --------------------------------------------------------------------------------
Aerospace/Defense -- 2.7
Doncasters PLC - ADR+
(United Kingdom) 136,400 $2,881,450
Gen Corp. 265,000 6,625,000
Litton Industries, Inc.+ 89,300 5,134,750
Primex Technologies, Inc. 44,700 1,508,625
------------
16,149,825
- --------------------------------------------------------------------------------
Autos & Trucks -- 2.1%
Borg-Warner Automotive, Inc. 142,500 7,410,000
Lear Corp.+ 60,400 2,869,000
Tower Automotive, Inc.+ 59,200 2,490,100
------------
12,769,100
- --------------------------------------------------------------------------------
Chemicals -- 7.4%
Agrium, Inc. 443,100 5,400,281
BOC Group PLC - ADR
(United Kingdom) 101,500 3,343,156
Chemfirst, Inc.+ 155,100 4,381,575
Cytec Industries, Inc.+ 89,500 4,200,906
Dow Chemical 41,300 4,191,950
Imperial Chemical Industries - ADR
(United Kingdom) 51,800 3,363,763
Mississippi Chemical Corp. 314,586 5,741,195
Olin Corp. 95,000 4,453,125
Solutia, Inc. 130,100 3,472,044
Spartech Corp. 135,000 2,041,875
Union Carbide 71,600 3,074,325
------------
43,664,195
- --------------------------------------------------------------------------------
Computer Related -- 0.3%
Digital Equipment+ 44,600 1,650,200
- --------------------------------------------------------------------------------
Consumer Services -- 4.0%
Archer - Daniels - Midland Co. 79,460 1,723,289
Darden Restaurants 522,000 6,525,000
Hilton Hotels Corp.+ 93,000 2,766,750
Ogden Corp. 118,200 3,331,762
RFS Hotel Investors, Inc.+ 151,200 3,014,550
360 Communications Co.+ 136,500 2,755,594
Whitman Corp. 136,500 3,557,531
------------
23,674,476
- --------------------------------------------------------------------------------
Containers and Packaging -- 2.6%
ACX Technologies, Inc.+ 93,700 2,289,794
Aptargroup, Inc. 67,000 3,718,500
Alltrista Corp.+ 170,200 4,829,425
U.S. Can Corp.+ 264,200 4,458,375
------------
15,296,094
- --------------------------------------------------------------------------------
Electrical Equipment -- 0.6%
Belden, Inc. 97,100 3,422,775
- --------------------------------------------------------------------------------
Electronics -- 3.5%
Anixter International+ 143,000 2,359,500
Dallas Semiconductor Corp. 129,200 5,264,900
Marshall Industries+ 162,700 4,881,000
Methode Electronics, Inc. 122,000 1,982,500
Pioneer Standard Electronics 390,800 5,959,700
------------
20,447,600
- --------------------------------------------------------------------------------
Engineering & Construction -- 4.4%
American Standard Cos.+ 83,600 3,202,925
Apogee Enterprises, Inc.+ 38,500 457,187
Cameron Ashley Building Products+ 127,400 2,133,950
Giant Cement Holding, Inc.+ 261,500 6,047,188
Gradall Industries, Inc.+ 243,200 4,012,800
Texas Industries, Inc. 218,000 9,810,000
------------
25,664,050
- --------------------------------------------------------------------------------
Exploration & Production -- 4.4%
Cabot Oil & Gas Corp. 150,800 2,931,175
Comstock Resources, Inc.+ 167,000 1,993,563
Occidental Petroleum Corp. 166,900 4,892,256
Oryx Energy Co.+ 241,100 6,148,050
Pioneer Natural Resources Co. 185,100 5,356,331
Seagull Energy Corp.+ 32,900 678,562
Vintage Petroleum, Inc. 193,800 3,682,200
------------
25,682,137
- --------------------------------------------------------------------------------
Financial Services -- 3.9%
Beneficial Corp. 102,500 8,520,312
Financial Security Assurance
Holdings Corp. 134,900 6,508,925
Morgan Stanley Dean Witter
Discover & Co. 9,700 573,512
Travelers Group, Inc. 130,899 7,052,184
------------
22,654,933
- --------------------------------------------------------------------------------
Healthcare -- 2.1%
Columbia HCA Healthcare Corp. 106,100 3,143,213
Mallinckrodt, Inc. 75,700 2,876,600
Tenet Healthcare+ 189,800 6,287,125
Wellpoint Health Networks+ 5,100 215,475
------------
12,522,413
- --------------------------------------------------------------------------------
See Notes to Financial Statements
13
<PAGE>
Financial Statements of VCA-10
Statement of Net Assets as of December 31, 1997
Common Stock Value
Investments Shares [Note 2A]
- --------------------------------------------------------------------------------
Housing Related -- 2.0%
Furniture Brands International,
Inc.+ 234,300 $4,803,150
Owens Corning Fiberglass Corp. 89,300 3,047,363
Triangle Pacific Corp.+ 110,200 3,733,025
------------
11,583,538
- --------------------------------------------------------------------------------
Insurance -- 8.3%
Allied Group, Inc. 163,950 4,693,069
Lincoln National Corp. 37,100 2,898,437
Loews Corp. 29,000 3,077,625
MMI Companies, Inc. 230,820 5,799,342
NAC Re Corp. 191,800 9,362,238
Reinsurance Group of America 121,950 5,190,497
Safeco Corp.+ 62,900 3,066,375
Trenwick Group, Inc. 180,150 6,778,144
W.R. Berkley Corp. 181,500 7,963,312
------------
48,829,039
- --------------------------------------------------------------------------------
Leisure -- 1.3%
Servico, Inc.+ 234,400 3,955,500
Sonic Corp.+ 129,200 3,633,750
------------
7,589,250
- --------------------------------------------------------------------------------
Machinery -- 5.5%
Allied Products Corp. 247,500 5,940,000
Applied Power Co.
(Class "A" Stock) 81,800 5,644,200
Columbus McKinnon Corp. 151,600 3,676,300
Denison International PLC - ADR+
(United Kingdom) 98,800 1,704,300
Hardinge, Inc. 131,400 4,894,650
Harnischfeger Industries 200,600 7,083,688
Ingersoll - Rand Co.+ 83,600 3,385,800
------------
32,328,938
- --------------------------------------------------------------------------------
Media -- 8.9%
Century Communications Corp.
(Class "A" Stock) 697,700 6,802,575
Comcast Corp.
(Class "A" Stock) 128,000 4,080,000
Comcast Corp.
(Class "A" Stock) Special 207,295 6,542,748
Cox Communication, Inc.
(Class "A" Stock)+ 108,213 4,335,283
Harcourt General, Inc. 83,100 4,549,725
Tele-Communications, Inc.
Liberty Media Group (Series A)+ 165,500 5,999,375
Time Warner, Inc. 87,800 5,443,600
U.S. West Media Group+ 351,700 10,155,338
Viacom, Inc.
(Class "B" Stock)+ 105,800 4,384,088
------------
52,292,732
- --------------------------------------------------------------------------------
Metals -- 3.9%
The Carbide/Graphite Group+ 326,500 11,019,375
Cleveland - Cliffs, Inc.+ 65,000 2,977,812
Reliance Steel & Aluminum 140,000 4,165,000
Ucar International, Inc.+ 115,800 4,624,763
------------
22,786,950
- --------------------------------------------------------------------------------
Miscellaneous-Industrial -- 11.1%
Clarcor, Inc. 148,300 4,393,388
Coltec Industries, Inc.+ 209,600 4,860,100
Crane Co. 99,400 4,311,475
Flowserve Corp. 166,491 4,651,342
Global Industrial
Technologies, Inc.+ 343,300 5,814,644
Harsco Corp. 80,400 3,467,250
Idex Corp. 79,500 2,772,563
Mark IV Industries, Inc. 215,110 4,705,531
Pentair, Inc. 89,600 3,220,000
PPG Industries, Inc. 83,800 4,787,075
Regal Beloit Corp. 128,700 3,804,694
United Dominion Industries 290,300 7,348,219
Varian Associates, Inc. 61,700 3,119,706
Wolverine Tube, Inc.+ 252,900 7,839,900
------------
65,095,887
- --------------------------------------------------------------------------------
Paper Products -- 1.3%
Boise Cascade Corp. 77,800 2,353,450
Georgia Pacific Corp. (GP Group)+ 5,000 303,750
Georgia Pacific Corp.
(Timber Group)+ 5,000 113,437
International Paper Co. 66,300 2,859,187
Louisiana - Pacific Corp. 110,000 2,090,000
------------
7,719,824
- --------------------------------------------------------------------------------
Railroads -- 3.7%
Burlington Northern Santa Fe 80,000 7,435,000
Greenbrier Companies, Inc. 170,100 2,944,856
Illinois Central Corp. 133,000 4,530,312
Union Pacific Corp. 46,400 2,897,100
Varlen Corp. 151,578 3,716,026
------------
21,523,294
- --------------------------------------------------------------------------------
See Notes to Financial Statements
14
<PAGE>
Financial Statements of VCA-10
Statement of Net Assets as of December 31, 1997
Common Stock Value
Investments Shares [Note 2A]
- --------------------------------------------------------------------------------
Regional Banks -- 3.4%
Banc One Corp. 51,500 $2,797,094
First Chicago NBD Corp. 62,772 5,241,462
First Commerce Corp. 4,700 316,075
Norwest Corp. 224,000 8,652,000
PNC Bank Corp. 51,000 2,910,187
------------
19,916,818
- --------------------------------------------------------------------------------
Retail -- 3.8%
BJ's Wholesale Club, Inc.+ 99,900 3,134,362
Food Lion, Inc.
(Class "A" Stock) 291,300 2,457,844
Food Lion, Inc.
(Class "B" Stock) 97,300 802,725
Haverty Furniture, Inc. 475,000 6,412,500
Limited, Inc. 155,700 3,970,350
Officemax, Inc.+ 152,100 2,167,425
Toys 'R' Us+ 113,000 3,552,437
------------
22,497,643
- --------------------------------------------------------------------------------
Specialty Chemicals -- 3.4%
Cambrex Corp. 104,600 4,811,600
Ferro Corp. 180,450 4,387,191
French Fragrances, Inc.+ 300,000 2,737,500
Great Lakes Chemical Corp. 59,600 2,674,550
Lilly Industries, Inc. 68,700 1,416,937
OM Group, Inc. 110,000 4,028,750
------------
20,056,528
- --------------------------------------------------------------------------------
Trucking/Shipping -- 0.8%
Interpool, Inc. 146,200 2,165,588
Pittston Burlington Group 91,500 2,401,875
------------
4,567,463
- --------------------------------------------------------------------------------
Total Common Stocks Investments -- 95.4%
(Cost: $411,629,035) $560,385,702
- --------------------------------------------------------------------------------
Short-Term Investment -- 4.5% Principal
Amount
Repurchase Agreement
J.P. Morgan Securities, Inc., 5.74%
12/31/97 - 01/02/98, Amount Due -
$26,165,341 (collateralized by
$26,748,475 U.S. Treasury Bonds,
11.625%, Due 11/15/02)
(Cost $26,157,000) $26,157 26,157,000
- --------------------------------------------------------------------------------
Total Investments -- 99.9%
(Cost $437,786,035) $586,542,702
- --------------------------------------------------------------------------------
Other Assets, Less Liabilities
Cash 987
Dividends and Interest Receivable 531,541
Receivable for Investments Sold 3,090,108
Payable for Pending Capital Transaction (890,928)
Payable for Investments Purchased (2,032,164)
- --------------------------------------------------------------------------------
Total Other Assets
Less Liabilities -- 0.1% 699,544
- --------------------------------------------------------------------------------
Net Assets -- 100% $587,242,246
- --------------------------------------------------------------------------------
Net Assets, representing:
Equity of Participants
83,261,331 Accumulation Units at an
Accumulation Unit Value of
$7.0127 583,886,236
Equity of Prudential Insurance
Company of America 3,356,010
------------
$587,242,246
================================================================================
The following abbreviations are used in portfolio descriptions.
ADR--American Depository Receipts
PLC--Public Limited Company
+ Non-income Producing
See Notes to Financial Statements
15
<PAGE>
Financial Statements of VCA-10
Statement of Operations
- --------------------------------------------------------------------------------
Year Ended December 31, 1997
- --------------------------------------------------------------------------------
Investment Income [Note 2B]
Dividends $ 5,466,987
Interest 1,209,153
- --------------------------------------------------------------------------------
Total Income 6,676,140
- --------------------------------------------------------------------------------
Expenses [Note 3]
Fees Charged to Participants for Investment Management Fee 1,347,076
Fees Charged to Participants for Administrative Expenses 4,041,227
- --------------------------------------------------------------------------------
Total Expenses 5,388,303
- --------------------------------------------------------------------------------
Investment Income - Net 1,287,837
- --------------------------------------------------------------------------------
Realized and Unrealized Gain on Investments - Net [Note 2B]
Realized Gain on Investments - Net 112,053,314
Increase in Unrealized Appreciation on Investments - Net 33,896,685
- --------------------------------------------------------------------------------
Net Gain on Investments 145,949,999
- --------------------------------------------------------------------------------
Net Increase In Net Assets Resulting from Operations $147,237,836
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
Year Ended December 31, 1997 December 31, 1996
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
Operations
Investment Income - Net $ 1,287,837 $ 1,676,477
Realized Gain on Investments - Net 112,053,314 44,992,957
Increase In Unrealized
Appreciation on Investments - Net 33,896,685 51,253,048
- -------------------------------------------------------------------------------------------------------
Net Increase in Net Assets
Resulting from Operations 147,237,836 97,922,482
- -------------------------------------------------------------------------------------------------------
Capital Transactions
Purchase Payments and Transfers In 130,555,810 99,698,241
Withdrawals and Transfers Out (181,876,818) (54,131,908)
Annual Account Charges Deducted from
Participants' Accounts [Note 3b] (125,689) (81,929)
Deferred Sales Charge [Note 3c] (18,599) (13,057)
- -------------------------------------------------------------------------------------------------------
Net Increase (Decrease) In Net Assets
Resulting from Capital Transactions (51,465,296) 45,471,347
- -------------------------------------------------------------------------------------------------------
Net Decrease In Net Assets
Resulting from Surplus Transfers [Note 6] (32,895) (980,047)
- -------------------------------------------------------------------------------------------------------
Total Increase in Net Assets 95,739,645 142,413,782
Net Assets
Beginning of Year 491,502,601 349,088,819
- -------------------------------------------------------------------------------------------------------
End of Year $ 587,242,246 $ 491,502,601
=======================================================================================================
</TABLE>
See Notes to Financial Statements
16
<PAGE>
Notes to Financial Statements of VCA-10
- --------------------------------------------------------------------------------
NOTE 1: General
The Prudential Variable Contract Account-10 (VCA-10 or the Account) was
established on March 1, 1982 by The Prudential Insurance Company of
America (Prudential) under the laws of the State of New Jersey and is
registered as an open-end, diversified management investment company
under the Investment Company Act of 1940, as amended. VCA-10 has been
designed for use by employers (Contract-holders) in connection with
retirement arrangements made available to their employees
(Participants). Its investments are composed primarily of common stocks.
All contractual and other obligations arising under contracts
participating in VCA-10 are general corporate obligations of Prudential,
although Participants' payments from the Account will depend upon the
investment experience of the Account.
NOTE 2: Summary of Significant Accounting Policies
A. Securities Valuation
Equity Securities
Securities for which the primary market is on an exchange are generally
valued at the last sale price on such exchanges as of the close of the
NYSE (which is currently 4:00 p.m. Eastern time) or, in the absence
of recorded sales, at the mean between the most recently quoted bid and
asked prices. Nasdaq National Market System equity securities are
valued at the last sale price or, if there was no sale on such day, at
the mean between the most recently quoted bid and asked prices. Other
over-the-counter equity securities are valued at the mean between the
most recently quoted bid and asked prices. Portfolio securities for
which market quotations are not readily available will be valued at
fair value as determined in good faith under the direction of the
Account's Committee.
Fixed Income Securities
Fixed income securities will be valued utilizing an independent
pricing service to determine valuations for normal institutional size
trading units of securities. The pricing service considers such factors
as security prices, yields, maturities, call features, ratings and
developments relating to specific securities in arriving at securities
valuations. Convertible debt securities that are actively traded in
the over-the-counter market, including listed securities for which the
primary market is believed to be over-the-counter, are valued at the
mean between the most recently quoted bid and asked prices provided by
an independent pricing service.
Short-Term Investments
Short-term investments having maturities of sixty days or less are
valued at amortized cost, which approximates market value. Amortized
cost is computed using the cost on the date of purchase, adjusted for
constant accrual of discount or amortization of premium to maturity.
17
<PAGE>
Notes to Financial Statements of VCA-10
- --------------------------------------------------------------------------------
B. Securities Transactions and Investment Income
Securities transactions are recorded on the trade date. Realized gains
and losses on sales of securities are calculated on the identified cost
basis. Dividend income is recorded on the ex-dividend date and interest
income is recorded on the accrual basis. Income and realized and
unrealized gains and losses are allocated to the Participants and
Prudential on a daily basis in proportion to their respective
ownership in VCA-10. Expenses are recorded on the accrual basis which
may require the use of certain estimates by management.
C. Repurchase Agreements
Repurchase agreements may be considered loans of money to the seller of
the underlying security. VCA-10 will not enter into repurchase
agreements unless the agreement is fully collateralized, i.e., the
value of the underlying collateral securities is, and during the
entire term of the agreement remains, at least equal to the amount of
the 'loan' including accrued interest. VCA-10's custodian will take
possession of the collateral and will value it daily to assure that
this condition is met. In the event that a seller defaults on a
repurchase agreement, VCA-10 may incur a loss in the market value of
the collateral as well as disposition costs; and, if a party with whom
VCA-10 had entered into a repurchase agreement becomes insolvent,
VCA-10's ability to realize on the collateral may be limited or
delayed and a loss may be incurred if the collateral securing the
repurchase agreement declines in value during the insolvency
proceedings.
D. Taxes
The operations of VCA-10 are part of, and are taxed with, the
operations of Prudential. Under the current provisions of the
Internal Revenue Code, Prudential does not expect to incur federal
income taxes on earnings of VCA-10 to the extent the earnings are
credited under the Contracts. As a result, the Unit Value of VCA-10
has not been reduced by federal income taxes.
18
<PAGE>
Notes to Financial Statements of VCA-10
- --------------------------------------------------------------------------------
NOTE 3: Charges
A. Prudential acts as investment manager for VCA-10 under an agreement
for Investment Management Services. A daily charge, at an effective
annual rate of 1.00% of the current value of the Participant's
equity in VCA-10, is paid to Prudential. Three quarters of this
charge (0.75%) is for administrative expenses not provided by the
annual account charge, and one quarter (0.25%) is for investment
management services.
B. An annual account charge of not more than $20 is deducted from the
account of each Participant, if applicable, at the time of
withdrawal of the value of all of the Participant's accounts or at
the end of the accounting year by canceling Units. The charge will
first be made against a Participant's account under a fixed dollar
annuity companion contract or fixed rate option of the nonqualified
combination contract. If the Participant has no account under a
companion contract or the fixed rate option, or if the amount under
the companion contract or the fixed rate option is too small to pay
the charge, the charge will be made against the Participant's
account in VCA-11. If the Participant has no VCA-11 account, or if
the amount under that account is too small to pay the charge, the
charge will then be made against the Participant's VCA-10 account.
If the Participant has no VCA-10 account, or if it is too small to
pay the charge, the charge will then be made against any one or
more of the Participant's accounts in VCA-24.
C. A deferred sales charge is imposed upon that portion of certain
withdrawals which represents a return of contributions. The charge
is designed to compensate Prudential for sales and other marketing
expenses. The maximum deferred sales charge is 7% on contributions
withdrawn from an account during the first year of participation.
After the first year of participation, the maximum deferred sales
charge declines by 1% in each subsequent year until it reaches 0%
after seven years. No deferred sales charge is imposed upon
contributions withdrawn for any reason after seven years of
participation in the Program. In addition, no deferred sales charge
is imposed upon contributions withdrawn to purchase an annuity under
a Contract, to provide a death benefit, pursuant to a systematic
withdrawal plan, to provide a minimum distribution payment, or in
cases of financial hardship or disability retirement as determined
pursuant to provisions of the employer's retirement arrangement.
Further, for all plans other than IRAs, no deferred sales charge is
imposed upon contributions withdrawn due to resignation or
retirement by the Participant or termination of the Participant by
the Contract-holder. Contributions transferred among VCA-10, VCA-11,
the Subaccounts of VCA-24, a companion contract, and the fixed rate
option of the nonqualified combination contract are considered to be
withdrawals from the Account or Subaccount from which the transfer
is made, but no deferred sales charge is imposed upon them. They
will however, be considered as contributions to the receiving
Account or Subaccount for purposes of calculating any deferred
sales charge imposed upon their subsequent withdrawal from it.
19
<PAGE>
Notes to Financial Statements of VCA-10
- --------------------------------------------------------------------------------
NOTE 4: Purchases and Sales of Portfolio Securities
For the year ended December 31, 1997, the aggregate cost of purchases
and the proceeds from sales of securities, excluding short-term
investments, were $254,241,763 and $294,770,635 respectively.
NOTE 5: Unit Transactions
The number of Accumulation Units issued and redeemed for the year
ended December 31, 1997 and 1996 is as follows:
1997 1996
-------------------------------------------------------
Units issued 22,249,667 21,434,824
-------------------------------------------------------
Units redeemed 30,520,771 11,719,339
-------------------------------------------------------
NOTE 6: Net Decrease In Net Assets Resulting from Surplus Transfers
The decrease in net assets resulting from surplus transfers represents
the net withdrawals from the equity of Prudential from VCA-10.
NOTE 7: Related Party Transactions
For the year ended December 31, 1997, Prudential Securities
Incorporated, an indirect, wholly owned subsidiary of Prudential,
earned $27,462 in brokerage commissions from portfolio transactions
executed on behalf of VCA-10. During the year ended December 31, 1997,
Prudential has advised the Account that it received $18,189 in loan
origination fees.
NOTE 8: Participant Loans
Loans are considered to be withdrawals from the Account from which the
loan amount was deducted; however no deferred sales charge is imposed
upon them. The principal portion of any loan repayment, however, will
be treated as a contribution to the receiving Account for purposes of
calculating any deferred sales charge imposed upon any subsequent
withdrawal. If the Participant defaults on the loan, for example by
failing to make required payments, the outstanding balance of the loan
will be treated as a withdrawal for purposes of the deferred sales
charge. The deferred sales charge will be withdrawn from the same
Accumulation Accounts, and in the same proportions, as the loan amount
was withdrawn. If sufficient funds do not remain in those Accumulation
Accounts, the deferred sales charge will be withdrawn from the
Participant's other Accumulation Accounts as well.
Withdrawals, transfers and loans from VCA-10 are considered to be
withdrawals of contributions until all of the Participant's
contributions to the Account have been withdrawn, transferred or
borrowed. No deferred sales charge is imposed upon withdrawals of any
amount in excess of contributions.
For the year ended December 31, 1997, $2,202,462 in participant loans
were withdrawn from VCA-10 and $1,507,302 of principal and interest
was repaid to VCA-10. For the year ended December 31, 1996, $1,531,937
in participant loans was withdrawn from VCA-10 and $327,958 of
principal and interest was repaid to VCA-10. Loan repayments are
invested in Participant's account(s) as chosen by the Participant,
which may not necessarily be VCA-10. The initial loan proceeds which
are being repaid may not necessarily have originated solely from
VCA-10.
20
<PAGE>
Report of Independent Accountants
To the Committee and Participants
of The Prudential Variable Contract Account - 10
of The Prudential Insurance Company of America
In our opinion, the accompanying statement of net assets, and the related
statements of operations and of changes in net assets and the financial
highlights present fairly, in all material respects, the financial position of
The Prudential Variable Contract Account - 10 of The Prudential Insurance
Company of America (the "Account") at December 31, 1997, the results of its
operations for the year then ended and the changes in its net assets and the
financial highlights for each of the two years in the period then ended, in
conformity with generally accepted accounting principles. These financial
statements and financial highlights (hereafter referred to as "financial
statements") are the responsibility of the Account's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with 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
securities at December 31, 1997 by correspondence with the custodian and
brokers and the application of alternative auditing procedures where
confirmations from brokers were not received, provide a reasonable basis for
the opinion expressed above. The financial highlights for each of the three
years in the period ended December 31, 1995 were audited by other independent
accountants whose report thereon dated February 15, 1996 expressed an
unqualified opinion on those financial highlights.
Price Waterhouse LLP
New York, New York
February 18, 1998
21
<PAGE>
VCA-11 Money Market Account
Performance Summary.
Yields on money market securities fluctuated sharply over the past 12 months as
investors frequently worried that the Federal Reserve would soon increase the
federal funds rate to rein in robust U.S. economic growth. We thrived under
these volatile market conditions by locking in higher yields when available. For
example, we purchased attractively priced three-month money market securities in
December as the usual year-end supply pressures pushed up yields. The Account
returned 4.81% compared to a 5.25% gain on the Salomon Brothers 3-Month Treasury
Bill Index. On Dec. 29, the Account's seven-day yield was 4.87%, up from 4.72%
on June 30.
================================================================================
Average Annual Returns Through December 31, 1997.
One Three Five Ten
Year Year Year Year
- --------------------------------------------------------------------------------
Money Market Account(1) 4.81% 4.92% 4.13% 5.27%
- --------------------------------------------------------------------------------
Salomon Brothers T-Bills(2) 5.25% 5.42% 4.71% 5.61%
- --------------------------------------------------------------------------------
Money Market Account inception date: 8/82.
================================================================================
Money Market Account One-Year Total Return For The Past Ten Years.
[GRAPHICAL REPRESENTATION OF BAR CHART]
- --------------------------------------------------------------------------------
(1) The Account performance results are after the deduction of all expenses and
contract charges including investment management and administrative fees,
but do not include the effect of any sales charges. All total returns are
for the periods indicated and are calculated based on changes in unit
values. Past performance cannot guarantee comparable future results.
Investment return and principal value of the Account will fluctuate
resulting in a value which may at any time, including the time of the
withdrawal of the cash value, be more or less than the total principal
investment made.
An investment in the Account is neither insured nor guaranteed by the U.S.
Government. There can be no assurance that the Account will be able to
maintain a stable share value of $1.00.
(2) The Salomon Brothers 3-Month Treasury Bill Index is an index whereby equal
dollar amounts of three-month Treasury bills are purchased at the beginning
of each of three consecutive months. As each bill matures, all proceeds are
rolled over or reinvested in a new three-month bill. The income used to
calculate the monthly return is derived by subtracting the original amount
invested from the maturity value.
================================================================================
Investment Goal
Current income, stability of capital and maintenance of liquidity.
Types of Investments
Short-term money market securities that generally mature in 13 months or less.
These securities primarily consist of Certificates of Deposit (CDs); Commercial
Paper and Bankers' Acceptances, U.S. Treasury bills (T-bills) and other
instruments issued by or guaranteed by the U.S. government or its agencies.
Performance Review.
Ready for the Fed. With the U.S. economy barreling ahead as 1997 began,
investors thought the Federal Reserve would soon increase the federal funds rate
to check strong economic growth and diffuse inflationary pressures. We shortened
the Account's weighted average maturity (WAM) in early March to be prepared to
purchase higher yielding money market securities that could become available
after a change in monetary policy. We did not have long to wait because U.S.
central bankers voted to raise the federal funds rate by a quarter percentage
point to 5.50% on March 25. As money market yields continued to climb, we
purchased attractively priced corporate debt securities that matured in a year
to lock in the generous yields.
22
<PAGE>
Strategy Session.
Longer Was Better.
For most of the year, we kept the Account's WAM longer than that of the average
comparable fund by purchasing money market securities during periods when
anticipation of a federal funds rate increase pushed up yields. After the
Federal Reserve raised the key short-term interest rate in March, yields edged
higher in April because many investors thought the central bank was poised to
move again. We purchased attractively priced, one-year corporate money market
securities in April as the one-year London Interbank Offered Rate, a global
barometer of short-term interest rates, surged to its highest level of the year
at 6.44%. We had no qualms about purchasing longer term money market securities
since we felt their generous yields adequately compensated the Account for the
risk of additional federal funds rate increases.
Further opportunities to lock in higher yields occurred during the summer and
towards the end of the year. Reports released in early August showed the
unemployment rate declined further as the economy continued to generate new jobs
at a rapid pace. Once again concern that another change in monetary policy was
imminent led investors to drive up money market yields, prompting us to purchase
one-year securities. As 1997 wound down, the usual surge in the supply of money
market securities forced yields higher as did the Asian economic turmoil. We
took advantage of this trend by purchasing securities maturing in three months
that provided generous yields.
Outlook
PORTFOLIO MANAGER
Robert Browne
A Lull Then a Rebound.
"U.S. economic growth may slow considerably in the summer if consumers in
struggling Asian countries purchase fewer U.S. exports, while consumers in the
United States buy cheaper products from Asia. But we expect any lull to be
followed by an economic rebound as current low interest rates in the United
States set the stage for faster growth later in the year. For example,
homeowners are rushing to refinance their mortgages at today's sharply lower
interest rates. Some of the cash freed up from monthly mortgage payments will
eventually be used to purchase big ticket items like cars or computers, giving
the economy a boost. Should the economy stumble, then recover as we expect, the
Federal Reserve will likely leave monetary policy unchanged for most of the
year, then increase the federal funds rate later in the year if the economic
expansion really picks up steam."
[PHOTO]
PORTFOLIO MANAGER
Robert Browne
================================================================================
Portfolio Composition.
12/31/97
--------
Floating/Adj. Rate 35%
Comm. Paper 22%
Foreign Bank Oblg. 22%
Other Corp. Oblg. 17%
U.S. Bank Oblg. 2%
Yankee Comm. Paper 2%
- --------------------------------------------------------------------------------
Source: Prudential. Holdings are subject to change.
23
<PAGE>
Financial Highlights for VCA-11
Income and Capital Changes Accumulation Per Unit*
(For a Unit outstanding throughout the period)
<TABLE>
<CAPTION>
Year Ended December 31,
- ------------------------------------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Investment Income .................................. $.1353 $.1281 $.1313 $.0912 $.0682
- ------------------------------------------------------------------------------------------------------------------------------------
Expenses
For investment management fee .................... .0059 .0056 .0054 .0052 .0050
For administrative expenses not covered
by the annual account charge .................... .0178 .0170 .0160 .0154 .0150
- ------------------------------------------------------------------------------------------------------------------------------------
Net Increase in Unit Value ......................... .1116 .1055 .1099 .0706 .0482
- ------------------------------------------------------------------------------------------------------------------------------------
Unit Value
Beginning of year ................................ 2.3210 2.2155 2.1056 2.0350 1.9868
- ------------------------------------------------------------------------------------------------------------------------------------
End of year ...................................... $2.4326 $2.3210 $2.2155 $2.1056 $2.0350
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio Of Expenses To Average Net Assets** .......... .98% .98% .99% 1.00% 1.00%
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio Of Net Investment Income To
Average Net Assets** ............................. 4.73% 4.57% 5.08% 3.42% 2.40%
- ------------------------------------------------------------------------------------------------------------------------------------
Number of Units Outstanding
For Participants at end of year
(000's omitted) .................................. 35,757 38,315 34,136 35,448 29,421
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
*Calculated by accumulating the actual per unit amounts daily.
**These calculations exclude Prudential's equity in VCA-11.
The above table does not reflect the annual account charge, which does not
affect the Unit Value of VCA-11.
This charge is made by reducing Participants' accounts by a number of Units
equal in value to the charge.
See Notes to Financial Statements
24
<PAGE>
Financial Statements of VCA-11
Statement of Net Assets as of December 31, 1997
Short-Term Principal
Investments [Note 2] Amount Value
- --------------------------------------------------------------------------------
Commercial Paper -- 38.3%
American Home
Products Corp., 5.78%
Due 2/26/98 $851,000 $843,212
Aon Corp., 5.79%
Due 3/30/98 1,100,000 1,078,947
Associates Corp. of
North America., 5.87%
Due 1/23/98 3,000,000 2,980,923
Barton Capital Corp., 5.95%
Due 2/9/98 1,000,000 993,390
Corestates Capital Corp.,
5.93% Due 8/28/98# 1,000,000 1,000,000
Duke Capital Corp., 5.90%
Due 1/23/98 1,000,000 992,953
General Signal Corp., 5.80%
Due 1/26/98 420,000 418,241
Johnson Controls, 5.90%
Due 2/27/98 1,000,000 989,019
Liquid Asset Backed
Securities Trust Series, 5.97%#
Due 12/22/98 1,000,000 1,000,000
Mont Blanc Capital Corp, 5.88%
Due 1/28/98 1,000,000 992,160
Morgan Stanley
Dean Witter Discover & Co.,
6.07% Due 11/16/98# 2,000,000 2,000,000
Old Line Funding Corp., 5.88%
Due 1/30/98 1,000,000 991,351
Safeco Corp, 5.70%
Due 1/23/98 3,000,000 2,963,425
Short Term Card
Account Trust, 6.00%#
Due 1/15/98 4,000,000 4,000,000
Short Term Repackaged
Asset Trust, 6.00%#
Due 12/15/98 1,000,000 1,000,000
Smith Barney
Shearson Inc., 5.62%
Due 1/21/98 2,000,000 1,975,959
SMM Trust Notes, 6.00%#
Due 12/14/98 2,000,000 2,000,000
Special Purpose Account
Receivable Coop Corp., 5.82%
Due 2/27/98 2,000,000 1,975,103
Strategic Money
Market Trust, 5.91%#
Due 12/16/98 1,000,000 1,000,000
Travelers Property
Casualty Co., 6.15%
Due 1/20/98 $1,000,000 995,217
WCP Funding, Inc., 5.80%
Due 2/2/98 1,000,000 989,367
Bank of Montreal, 5.68%
Due 2/17/98 3,000,000 2,957,872
-----------
34,137,139
- --------------------------------------------------------------------------------
Other Corporate Debt -- U.S. - 31.9%
(Medium Term Notes, Corporate Bonds)
American General Finance,
7.25% Corporate Bond,
Due 3/1/98 3,000,000 3,006,849
Associates Corp. of North America,
8.38% Corporate Bond,
Due 1/15/98 500,000 500,501
Associates Corp. of North America,
8.80% Corporate Bond,
Due 8/1/98 470,000 477,350
BellSouth Telecommunications Inc.
9.25% Corporate Bond,
Due 1/15/98 150,000 150,187
Beneficial Corp.,
9.13% Medium Term Note,
Due 2/15/98 2,000,000 2,007,016
Beneficial Corp.,
9.13% Corporate Bond,
Due 2/15/98 765,000 768,009
Ford Motor Credit,
5.85%
Due 3/26/98 500,000 499,755
Ford Motor Credit,
9.00%
Due 3/25/98 525,000 528,726
General Electric Capital Corp.,
13.50% Medium Term Note,
Due 1/20/98 4,000,000 4,015,068
General Motors Acceptance Corp.,
7.30% Medium Term Note,
Due 2/2/98 440,000 440,485
General Motors Acceptance Corp.,
6.90% Medium Term Note,
Due 2/19/98 515,000 515,637
General Motors Acceptance Corp.,
5.86% Medium Term Note,
Due 2/23/98 1,250,000 1,249,922
General Motors Acceptance Corp.,
6.25% Medium Term Note,
Due 5/15/98 2,600,000 2,599,687
See Notes to Financial Statements
25
<PAGE>
Financial Statements of VCA-11
Statement of Net Assets as of December 31, 1997
Short-Term Principal
Investments [Note 2] Amount Value
- --------------------------------------------------------------------------------
Goldman Sachs Group LP
6.00% Medium Term Note,
Due 12/17/98# $ 3,800,000 $ 3,800,000
Household Finance Corp.
5.90% Medium Term Note,
Due 1/13/98# 1,250,000 1,250,069
Merrill Lynch & Co.,
9.00% Corporate Bond,
Due 5/1/98 1,000,000 1,008,896
Merrill Lynch & Co.,
5.96% Medium Term Note,
Due 10/8/98# 3,000,000 2,999,774
Morgan Stanley Dean Witter
Discover & Co., 6.34%
Medium Term Note,
Due 3/9/98# 550,000 550,338
NBD Bank
5.00% Bank Note,
Due 1/30/98 1,000,000 999,168
NationBank Corp.,
6.63% Corporate Bond,
Due 1/15/98 100,000 100,028
Pitney Bowes Credit Corp.,
6.25% Corporate Bond,
Due 6/1/98 1,000,000 1,000,925
-----------
28,468,390
- --------------------------------------------------------------------------------
Other Bank Related Instruments -- U.S. - 6.1%
(Bank Notes)
American Express Centurion Bank,
5.57% Bank Note,
Due 8/21/98# 1,500,000 1,500,942
5.94% Bank Note,
Due 3/3/98# 1,000,000 1,000,026
FCC National Bank,
5.85% Bank Note,
Due 7/2/98# 975,000 974,622
US Bank, NA.,
5.86% Bank Note,
Due 12/4/98# 2,000,000 1,999,091
-----------
5,474,681
- --------------------------------------------------------------------------------
Certificates of Deposit -- Foreign - 5.4%
Canadian Imperial
Bank of Commerce, 5.95%
Due 6/29/98, 5.95% 300,000 299,901
Due 10/6/98, 5.79% 2,500,000 2,496,949
Royal Bank of Canada, 6.16%
Due 4/15/98 2,000,000 2,000,276
-----------
4,797,126
- --------------------------------------------------------------------------------
Commercial Paper -- Yankee - 2.2%
ING America Insurance
Holdings Inc., 5.74%
Due 4/3/98 1,000,000 985,012
Svenska Handelsbanken,
Inc., 5.72%
Due 3/16/98 1,000,000 985,700
-----------
1,970,712
- --------------------------------------------------------------------------------
Certificate of Deposit -- Yankee - 13.5%
Abbey National Treasury
Services, 5.81%
Due 3/3/98 2,000,000 2,000,000
Credit Agricole
Indosuez, 5.95%
Due 10/21/98 1,000,000 999,617
ING Bank, 5.81%
Due 3/5/98 2,000,000 1,999,917
Landesbank Hessen -
Thuringren Giroz, 5.94%
Due 6/19/98 1,000,000 999,735
Morgan Guaranty
Trust Co., 5.79%
Due 3/16/98 1,000,000 1,000,053
National Westminster
Bank PLC., 5.80%
Due 1/7/98 1,000,000 1,000,003
Societe Generale, 5.77%
Due 1/9/98 2,000,000 1,999,985
Swiss Bank Corp., 5.77%
Due 1/30/98 2,000,000 1,999,752
-----------
11,999,062
- --------------------------------------------------------------------------------
Total Short-Term Investments -- 97.4%
(Cost: $86,847,110) 86,847,110
- --------------------------------------------------------------------------------
Other Assets, Less Liabilities
Cash 463
Receivable for Pending Capital Transaction 1,096,094
Interest Receivable 1,227,046
- --------------------------------------------------------------------------------
Total Other Assets, Less Liabilities -- 2.6%
2,323,603
- --------------------------------------------------------------------------------
Net Assets -- 100% 89,170,713
- --------------------------------------------------------------------------------
Net Assets, representing:
Equity of Participants
35,756,915 Accumulation Units at an
Accumulation Unit Value of
$2.4326 86,981,127
Equity of Prudential Insurance
Company of America 2,189,586
-----------
$89,170,713
================================================================================
#Indicates a variable rate security. Rate shown is rate in effect at December
31, 1997.
See Notes to Financial Statements
26
<PAGE>
Financial Statements of VCA-11
Statement of Operations
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
Year Ended December 31, 1997
- ------------------------------------------------------------------------------------------------------
<S> <C>
Investment Income [Note 2]
Interest $5,208,873
- ------------------------------------------------------------------------------------------------------
Expenses [Note 3]
Fees Charged to Participants for Investment Management Services 223,246
Fees Charged to Participants for Administrative Expenses 669,737
- ------------------------------------------------------------------------------------------------------
Total Expenses 892,983
- ------------------------------------------------------------------------------------------------------
Net Investment Income and Net Increase In Net Assets Resulting from Operations $4,315,890
======================================================================================================
</TABLE>
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
Year Ended December 31, 1997 December 31, 1996
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net Increase in Net Assets Resulting from Operations $ 4,315,890 $ 3,872,593
- ------------------------------------------------------------------------------------------------------
Capital Transactions
Purchase Payments and Transfers In [Note 6 and 7] 151,277,326 97,217,613
Withdrawals and Transfers Out [Note 6 and 7] (157,195,054) (87,648,372)
Annual Account Charges Deducted from
Participants' Accounts [Note 4] (58,601) (40,724)
Deferred Sales Charge [Note 5] (8,370) (8,659)
- ------------------------------------------------------------------------------------------------------
Net Increase/(Decrease) In Net Assets
Resulting from Capital Transactions (5,984,699) 9,519,858
- ------------------------------------------------------------------------------------------------------
Net Decrease In Net Assets Resulting from
Surplus Transfers [Note 8] -- (89,828)
- ------------------------------------------------------------------------------------------------------
Total Increase in Net Assets (1,668,809) 13,302,623
Net Assets
Beginning of Year 90,839,522 77,536,899
- ------------------------------------------------------------------------------------------------------
End of Year $ 89,170,713 $ 90,839,522
======================================================================================================
</TABLE>
See Notes to Financial Statements
27
<PAGE>
Notes to Financial Statements of VCA-11
- --------------------------------------------------------------------------------
NOTE 1: General
The Prudential Variable Contract Account-11 (VCA-11 or the Account) was
established on March 1, 1982 by The Prudential Insurance Company of
America (Prudential) under the laws of the State of New Jersey and is
registered as an open-end, diversified management investment company
under the Investment Company Act of 1940, as amended. VCA-11 has been
designed for use by employers (Contract-holders) in making retirement
arrangements on behalf of their employees (Participants). Its
investments are primarily composed of short-term securities. All
contractual and other obligations arising under contracts participating
in VCA-11 (the "Contracts") are general corporate obligations of
Prudential, although Participants' payments from the Account will
depend upon the investment experience of the Account.
NOTE 2: Summary of Significant Accounting Policies
A. Valuation of Short-Term Investments
Pursuant to an exemptive order from the Securities and Exchange
Commission, securities having a remaining maturity of one year or less
are valued at amortized cost which approximates market value. Amortized
cost is computed using the cost on the date of purchase adjusted for
constant accretion of discount or amortization of premium to maturity.
The rate displayed is the effective yield from the date of purchase to
the date of maturity.
B. Income Recognition
Security transactions are recorded on trade date. Interest income is
accrued daily. Income on investments is allocated to the Participants
and Prudential on a daily basis in proportion to their respective
equities in VCA-11. Expenses are recorded on the accrual basis which
may require the use of certain estimates by management.
C. Taxes
The operations of VCA-11 are part of, and are taxed with, the
operations of Prudential. Under the current provisions of the Internal
Revenue Code, Prudential does not expect to incur federal income taxes
on earnings of VCA-11 to the extent the earnings are credited under the
contracts. As a result, the Unit Value of VCA-11 has not been reduced
by federal income taxes.
NOTE 3: Expenses
Prudential acts as investment manager for VCA-11 under an agreement for
Investment Management Services. A daily charge, at an effective annual
rate of 1.00% of the current value of the Participants' equity in
VCA-11, is paid to Prudential. Three quarters of this charge (0.75%)
is for administrative expenses not provided by the annual account
charge, and one quarter (0.25%) is for investment management services.
28
<PAGE>
Notes to Financial Statements of VCA-11
- --------------------------------------------------------------------------------
NOTE 4: Annual Account Charge
An annual account charge of not more than $20 annually is deducted
from the account of each Participant, if applicable, at the time of
withdrawal of the value of all of the Participant's accounts or at the
end of the accounting year by canceling Units. The charge will first
be made against a Participant's account under a fixed dollar annuity
companion contract or fixed rate option of the nonqualified combination
contract. If the Participant has no account under a companion contract
or the fixed rate option, or if the amount under the companion contract
or the fixed rate option is too small to pay the charge, the charge
will be made against the Participant's account in VCA-11. If the
Participant has no VCA-11 account, or if the amount under that account
is too small to pay the charge, the charge will then be made against
the Participant's VCA-10 account. If the Participant has no VCA-10
account, or if it is too small to pay the charge, the charge will then
be made against any one or more of the Participant's accounts in
VCA-24.
NOTE 5: Deferred Sales Charge
A deferred sales charge is imposed upon that portion of certain
withdrawals which represents a return of contributions. The charge is
designed to compensate Prudential for sales and other marketing
expenses. The maximum deferred sales charge is 7% on contributions
withdrawn from an account during the first year of participation. After
the first year of participation, the maximum deferred sales charge
declines by 1% in each subsequent year until it reaches 0% after seven
years. No deferred sales charge is imposed upon contributions
withdrawn for any reason after seven years of participation in the
Program. In addition, no deferred sales charge is imposed upon
contributions withdrawn to purchase an annuity under a Contract, to
provide a death benefit, pursuant to a systematic withdrawal plan, to
provide a minimum distribution payment, or in cases of financial
hardship or disability retirement as determined pursuant to provisions
of the employer's retirement arrangement. Further, for all plans other
than IRAs, no deferred sales charge is imposed upon contributions
withdrawn due to resignation or retirement by the Participant or
termination of the Participant by the Contract-holder. Contributions
transferred among VCA-10, VCA-11, the Subaccounts of VCA-24, a
companion contract, and the fixed rate option of the nonqualified
combination contract are considered to be withdrawals from the Account
or Subaccount from which the transfer is made, but no deferred sales
charge is imposed upon them. They will, however, be considered as
contributions to the receiving Account or Subaccount for purposes of
calculating any deferred sales charge imposed upon their subsequent
withdrawal from it.
NOTE 6: Unit Transactions
The number of Units issued and redeemed for the years ended December
31, 1997 and 1996 is as follows:
1997 1996
-------------------------------------------------------
Units issued 63,669,685 42,970,959
-------------------------------------------------------
Units redeemed 66,228,235 38,791,430
-------------------------------------------------------
29
<PAGE>
Notes to Financial Statements of VCA-11
- --------------------------------------------------------------------------------
NOTE 7: Participant Loans
Loans are considered to be withdrawals from the Account from which the
loan amount was deducted, though they are not considered a withdrawal
from the Program. Therefore, no deferred sales charge is imposed upon
them. The principal portion of any loan repayment, however, will be
treated as a contribution to the receiving Account for purposes of
calculating any deferred sales charge imposed upon any subsequent
withdrawal. If the Participant defaults on the loan, for example, by
failing to make required payments, the outstanding balance of the loan
will be treated as a withdrawal for purposes of the deferred sales
charge. The deferred sales charge will be withdrawn from the same
Accumulation Accounts, and in the same proportions, as the loan amount
was withdrawn. If sufficient funds do not remain in those Accumulation
Accounts, the deferred sales charge will be withdrawn from the
Participant's other Accumulation Accounts as well.
Withdrawals, transfers and loans from VCA-11 are considered to be
withdrawals of contributions until all of the Participant's
contributions to the Account have been withdrawn, transferred or
borrowed. No deferred sales charge is imposed upon withdrawals of any
amount in excess of contributions.
For the year ended December 31, 1997, $553,894 in participant loans was
withdrawn from VCA-11 and $330,318 of principal and interest was
repaid to VCA-11. For the year ended December 31, 1996, $648,000 in
participant loans were withdrawn from VCA-11 and $105,290 of principal
and interest was repaid. Loan repayments are invested in Participant's
account(s) as chosen by the Participant, which may not necessarily be
VCA-11. The initial loan proceeds which are being repaid may not
necessarily have originated solely from VCA-11. During the year ended
December 31, 1997, Prudential has advised the Account that it received
$5,456 in loan origination fees.
NOTE 8: Net Decrease In Net Assets Resulting From Surplus Transfers
The decrease in net assets from surplus for the year ended December
31, 1996 represents the net withdrawals from the Equity of Prudential
to VCA-11.
30
<PAGE>
Report of Independent Accountants
To the Committee and Participants
of The Prudential Variable Contract Account - 11
of The Prudential Insurance Company of America
In our opinion, the accompanying statement of net assets, and the related
statements of operations and of changes in net assets and the financial
highlights present fairly, in all material respects, the financial position of
The Prudential Variable Contract Account - 11 of The Prudential Insurance
Company of America (the "Account") at December 31, 1997, the results of its
operations for the year then ended and the changes in its net assets and the
financial highlights for each of the two years in the period then ended, in
conformity with generally accepted accounting principles. These financial
statements and financial highlights (hereafter referred to as "financial
statements") are the responsibility of the Account's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with 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
securities at December 31, 1997 by correspondence with the custodian, provide a
reasonable basis for the opinion expressed above. The financial highlights for
each of the three years in the period ended December 31, 1995 were audited by
other independent accountants whose report thereon dated February 15, 1996
expressed an unqualified opinion on those financial highlights.
Price Waterhouse LLP
New York, New York
February 18, 1998
31
<PAGE>
(This page intentionally left blank)
<PAGE>
The Prudential Series Fund, Inc.
The following pages represent information on The Prudential Series Fund, Inc.
Portfolios. Returns are at the Portfolio level, not at the Subaccount level.
VCA-24 Subaccount returns are located on the inside front cover of this report.
Each Subaccount of VCA-24 will invest in the corresponding portfolio of The
Prudential Series Fund, Inc. (the "Fund"). Of the portfolios comprising the
Fund, seven portfolios are presently available to The MEDLEY Program. The
Diversified Bond Subaccount invests in the Diversified Bond Portfolio, the
Government Income Subaccount in the Government Income Portfolio, the
Conservative Balanced Subaccount in the Conservative Balanced Portfolio, the
Flexible Managed Subaccount in the Flexible Managed Portfolio, the Stock Index
Subaccount in the Stock Index Portfolio, the Equity Subaccount invests in the
Equity Portfolio, and the Global Subaccount in the Global Portfolio.
There is no assurance that the investment objective of the portfolios will be
attained, nor is there any guarantee that the amount available to a Participant
will equal or exceed the total contributions made on that Participant's behalf.
The value of the investments held in each account may fluctuate daily and is
subject to the risks of both changing economic conditions and the selection of
investments necessary to meet the Subaccounts' or Portfolios' objectives.
Important Note
This information supplements the financial statements and other information
included in this Report to Participants in The MEDLEY Program. It highlights the
investment performance of the seven portfolios of The Prudential Series Fund,
Inc., which are available through the Prudential Variable Contract Account-24.
The rates of return quoted on the following pages reflect deduction of
investment management fees and portfolio expenses, but not product charges. They
reflect the reinvestment of dividend and capital gains distributions. They are
not an estimate or a guarantee of future performance.
Contract unit values increase or decrease based on the performance of the
portfolio and when redeemed, may be worth more or less than original cost.
Changes in contract values depend not only on the investment performance of the
Portfolio but also on the insurance, administrative charges and applicable sales
charges, if any, under a contract. These contract charges effectively reduce the
dollar amount of any net gains and increase the dollar amount of any net losses.
33
<PAGE>
Prudential
Diversified Bond Portfolio
Performance Summary.
Economic upheaval in Asia sparked a sell-off in stocks and emerging market debt
securities late in the year, but demand increased for U.S. Treasuries and
government agency bonds, which investors viewed as a safe haven from overseas
turmoil. Your Portfolio's total return of 8.57% lagged the 10.01% gain of the
Lipper (VIP) Corporate BBB Average because of its stake in emerging market bonds
of countries such as Russia and Thailand. Our foreign holdings, denominated in
U.S. dollars, are the same type of bonds that have helped your Portfolio achieve
above benchmark returns in other time periods.
By contrast, a sizable investment in bonds of U.S. media/cable and financial
services firms strengthened your Portfolio's performance as a wave of
consolidation and fresh investments improved the financial health of several
companies in both industries.
The Portfolio may invest in foreign securities. Foreign investments are subject
to the risk of currency fluctuation and the impact of social, political and
economic change.
================================================================================
Average Annual Returns Through December 31, 1997.
One Three Five Ten
Year Year Year Year
- --------------------------------------------------------------------------------
Diversified Bond Portfolio(1) 8.57% 11.02% 7.84% 9.24%
- --------------------------------------------------------------------------------
Lipper (VIP) Corp. BBB Avg.(2) 10.01% 10.95% 7.89% 8.90%
- --------------------------------------------------------------------------------
Lehman Aggregate Index3 9.65% 10.42% 7.48% 9.18%
- --------------------------------------------------------------------------------
Diversified Bond Portfolio inception date: 5/13/83.
================================================================================
$10,000 Invested Over Ten Years.
[GRAPHICAL REPRESENTATION OF MOUNTAIN CHART]
- --------------------------------------------------------------------------------
(1) Past performance is not predictive of future performance. Portfolio
performance is net of investment fees and fund expenses but not product
charges.
(2) The Lipper Variable Insurance Products (VIP) Corporate BBB Average is
calculated by Lipper Analytical Services, Inc., and reflects the investment
returns of certain portfolios underlying variable life and annuity products.
These returns are net of investment fees and fund expenses but not product
charges.
(3) The Lehman Aggregate Index (LAI) is comprised of over 5,000 government and
corporate bonds. The LAI is an unmanaged index and includes the reinvestment
of all interest but does not reflect the payment of transaction costs and
advisory fees associated with an investment in the Portfolio. The securities
that comprise the LAI may differ substantially from the securities in the
Portfolio. The LAI is not the only index that may be used to characterize
performance of income funds, and other indexes may portray different
comparative performance.
[THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.]
Low Risk FIXED INCOME
Balanced
High Yield Bond
Diversified Stock
High Risk Specialized
Investment Goal
High level of income over the long term while providing reasonable safety of
capital.
Types of Investments
U.S. government securities, mortgage backed bonds, both investment-grade and
high yield ("junk bond") corporate debt, and foreign securities (dollar and
non-dollar denominated).
Investment Style
This Portfolio seeks the highest yield while maintaining safety of capital, by
strategically allocating Portfolio assets among the above classes of bonds.
Performance Review.
Asian Whirlwind. The federal funds rate was raised by a quarter percentage
point, to 5.50%, in March to prevent the economy from racing ahead and
increasing inflation, which would erode the value of a bond's fixed interest and
principal payments. By mid-April, however, investors began to drive bond prices
higher (and yields lower), because inflationary pressures remained unusually
subdued.
The bond rally stayed on track during the summer, but an economic whirlwind out
of Asia shook global financial markets in October. Prices of U.S. Treasurys and
government agency debt securities surged, while emerging market bond prices
tumbled as investors feared other developing nations might suffer the same fate
as countries like Thailand and Indonesia.
34
<PAGE>
Strategy Session.
Trouble on Distant Shores. Our holdings in emerging markets bonds of Latin
American and Asian countries initially aided your Portfolio's performance.
Reduced inflation estimates for some Latin American nations encouraged
investors, as did plans for tax reform legislation in Russia. Nevertheless,
negative developments in countries such as Indonesia and Thailand took center
stage, igniting a broad sell-off in emerging markets bonds.
The deepening economic crisis in Asia sent cash flowing into U.S. government
securities as investors sold stocks and emerging markets bonds. Asian economic
problems had been brewing for some time, but the full extent of the crisis came
to light only in October, when investors feared that countries such as South
Korea could have been teetering on the brink of economic collapse, partly
because of imprudent lending practices of Asian banks.
On Solid Ground at Home. While some U.S. corporate bond prices declined, gains
were recorded in other sectors such as financial services and media/cable. For
example, Salomon Inc. bonds rallied following the announcement that it would
soon be acquired by financial services giant Travelers Group, and our holdings
in Time Warner and Tele-Communications Inc., also posted impressive gains as
their financial positions improved.
Outlook
PORTFOLIO MANAGER
Barbara Kenworthy
Bond Yields Could Drift Lower.
"We expect prices on U.S. Treasury securities to trade in a fairly tight range,
with the yield on the 30-year benchmark bond varying between 5.50% and 6.50%.
Continued low inflation and a possible government surplus should support bond
prices. In addition, competition from cheaper Asian imports will probably help
keep inflation in check in the United States. Bond yields could drift still
lower, but it's quite possible that most of the good news has already been
factored into prices of U.S. Treasuries.
"Last year's sell-off in emerging markets bonds seems to have been too severe.
We are seeing new buying interest in 1998 as investors hope for economic
stability as a result of reforms initiated in some countries. Meanwhile,
issuance of new U.S. corporate bonds has increased as companies rush to take
advantage of lower borrowing costs. Investors, however, are hunting for value in
the market, and generally like what they see in corporate profits. The
incremental yield over Treasuries provided by corporate bonds should attract
investors."
[PHOTO]
PORTFOLIO MANAGER
Barbara Kenworthy
================================================================================
Portfolio Composition.
as of 12/31/97
--------------
U.S. Corporates 64%
Foreign (US$) 22%
Cash 5%
Mortgages 3%
Asset-backed 3%
U.S. Treasuries 2%
U.S. Gov't. Agencies 1%
- --------------------------------------------------------------------------------
Source: Prudential. Holdings are subject to change.
================================================================================
Credit Quality.
as of 12/31/97
--------------
U.S. Gov't. Agencies 3%
AAA 5%
AA 3%
A 22%
BBB 51%
BB 10%
B 1%
Cash 5%
Avg. Credit Quality BBB
Duration 5.46 Years
Avg. Maturity 15.64 Years
- --------------------------------------------------------------------------------
Source: Prudential. Holdings are subject to change.
35
<PAGE>
Prudential
Government Income Portfolio
Performance Summary.
Your Portfolio returned 9.67% for the year, surpassing the 8.78% gain of the
Lipper (VIP) General U.S. Government Average, by heavily investing in debt
securities of the U.S. government and its agencies, particularly during the
latter part of the year when investors sought refuge from Asian economic
turmoil.
The Portfolio also benefited from holding mortgage backed securities and asset
backed securities, which, along with government agency bonds, provided
incremental yield over U.S. Treasuries.
The guarantee on U.S. government securities applies only to the underlying
securities of the Portfolio and not to the value of the Portfolio's shares.
Mortgage backed bonds entail additional prepayment and extension risk.
The Portfolio may invest in foreign securities. Foreign investments are subject
to the risk of currency fluctuation and the impact of social, political and
economic change.
<TABLE>
<CAPTION>
========================================================================================
Average Annual Returns Through December 31, 1997.
One Three Five Since
Year Year Year Inception*
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Government Income Portfolio(1) 9.67% 10.23% 7.41% 8.85%
- ----------------------------------------------------------------------------------------
Lipper (VIP) Gen. U.S. Gov't. Avg.(2) 8.78% 9.36% 6.72% 8.61%
- ----------------------------------------------------------------------------------------
Lehman Gov't. Index(3) 9.59% 10.05% 7.34% 9.06%
- ----------------------------------------------------------------------------------------
Government Income Portfolio inception date: 5/1/89.
</TABLE>
================================================================================
$10,000 Invested Since Inception.*
[GRAPHICAL REPRESENTATION OF MOUNTAIN CHART]
- --------------------------------------------------------------------------------
* Lipper provides data on a monthly basis, so for comparative purposes the
Lipper Average and Lehman Index since inception returns reflect the
Portfolio's closest calendar month-end performance of 4/30/89.
(1) Past performance is not predictive of future performance. Portfolio
performance is net of investment fees and fund expenses but not product
charges.
(2) The Lipper Variable Insurance Products (VIP) General U.S. Government Average
is calculated by Lipper Analytical Services, Inc., and reflects the
investment returns of certain portfolios underlying variable life and
annuity products. These returns are net of investment fees and fund expenses
but not product charges.
(3) The Lehman Government Index (LGI) is a weighted index comprised of
securities issued or backed by the U.S. government, its agencies and
instrumentalities with a remaining maturity of one to 30 years. The LGI is
an unmanaged index that includes the reinvestment of all interest, but does
not reflect the payment of transaction costs and advisory fees associated
with an investment in the Portfolio. The securities that comprise the LGI
may differ substantially from the securities in the Portfolio. The LGI is
not the only index that may be used to characterize performance of income
funds, and other indexes may portray different comparative performance.
================================================================================
[THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.]
Low Risk FIXED INCOME
Balanced
High Yield Bond
Diversified Stock
High Risk Specialized
Investment Goal
High level of income over the long term consistent with the preservation of
capital.
Types of Investments
Primarily intermediate and longer-term U.S. government bonds, including U.S.
Treasuries and agencies and mortgage-backed securities such as GNMA, FNMA and
FHLMC bonds and foreign government securities.
Investment Style
This Portfolio seeks high current return by selecting bonds that offer an
attractive combination of current income and price appreciation. The Portfolio
Manager's goal is to select bonds believed to offer the best value in a given
market climate.
Performance Review.
The Right Stuff. The Federal Reserve raised the federal funds rate in March to
cool off the U.S. economy. At first, investors who expected a second change in
monetary policy continued to push bond prices lower (and yields higher) until it
became clear that inflationary pressures remained tame. Then bonds began to
rally in the spring.
Gains on U.S. government securities accelerated in autumn as concern about an
Asian economic crisis increased demand for Treasuries and government agency
bonds, which are considered to be among the most creditworthy debt securities.
We owned the right stuff, as your Portfolio held substantial positions in both.
36
<PAGE>
Strategy Session.
Flight to Quality. During the early months of 1997, our strategy centered on
earning incremental yield over Treasuries by investing in mortgage backed
securities, asset backed securities and government agency bonds such as those of
the Small Business Administration. Holding mortgage backed securities worked
especially well earlier in the year because bond prices remained in a range. As
a result, there was less risk that mortgage backed securities would be retired
early because of a sharp drop in long-term interest rates prompting consumers to
pay off their home loans ahead of schedule.
During the latter part of the year, the market changed. The deepening economic
crisis in Asia sent cash flowing into safer U.S. government securities as
investors sold stocks and emerging markets debt bonds. Asian economic problems
had been developing for some time, but the full extent of the crisis did not
come to light until October, when investors learned that countries such as South
Korea were nearing economic collapse, partly because of imprudent lending
practices of Asian banks.
The Dow Jones Industrial Average plunged a record 554 points on October 27.
Meanwhile, prices of Treasuries continued to soar so that the 30-year benchmark
bond yield tumbled to 5.87% on December 23, its lowest level of the year. We
were advantageously positioned, because Treasuries and U.S. government agency
debt securities accounted for a combined 60% of the Portfolio's total
investments during the final three months of the year.
Outlook
PORTFOLIO MANAGER
Barbara Kenworthy
Yields Volatile, but Within a Range.
"We expect prices on U.S. Treasury securities to trade in a fairly tight range,
with the yield on the 30-year benchmark bond varying between 5.50% and 6.50%.
Continued low inflation and a possible government surplus should support bond
prices. In addition, competition from cheaper Asian imports will probably help
keep inflation in check in the United States. Bond prices could drift still
lower, but it's quite possible that most of the good news has already been
factored into prices of U.S. Treasuries.
"One major factor influencing Treasury prices this year will be the Asian
economic crisis. Should the news worsen, look for bond prices to rise as
investors move their assets into these safer securities. But as the outlook for
the Asian economies inevitably improves, we expect bond prices will work their
way somewhat lower. In mid-January, it appeared that most of the good news was
priced in Treasuries.
"Finally, mortgage backed securities may not perform as well as in 1997 if
consumers take advantage of lower absolute interest rates by rushing to
refinance home loans."
[PHOTO]
PORTFOLIO MANAGER
Barbara Kenworthy
================================================================================
Portfolio Composition.
as of 12/31/97
--------------
U.S. Treasuries 33%
U.S. Gov't. Agencies 28%
Mortgages 25%
Asset-backed 6%
Cash 4%
CMOs 2%
Corporates 2%
- --------------------------------------------------------------------------------
Source: Prudential. Holdings are subject to change.
================================================================================
Credit Quality.
as of 12/31/97
--------------
U.S. Gov't. Agencies 62%
AAA 32%
AA 2%
Cash 4%
Avg. Credit Quality AAA
Duration 4.96 Years
Avg. Maturity 8.40 Years
- --------------------------------------------------------------------------------
Source: Prudential. Holdings are subject to change.
37
<PAGE>
Prudential
Conservative Balanced Portfolio
Performance Summary.
It was the third consecutive extraordinary year for both stocks and bonds. Your
Portfolio -- which invests in a conservative mix of bonds, stocks and money
market securities -- gained 13.45%. It trailed the 18.95% return of the Lipper
(VIP) Balanced Fund Average, because the Portfolio's conservative mandate
requires a smaller proportion of equities in the asset allocation than typical
balanced portfolios. In addition, a financial crisis in Asia led U.S. investors
to turn to stocks of the most familiar, and larger, companies and to U.S.
Treasury bonds. This move produced a sharp reversal in the fourth quarter of the
relative strength of the smaller and mid-sized stocks that had provided an extra
lift to our earnings earlier in the year. It also severely limited the gains on
our bond holdings.
The Portfolio may invest in foreign securities. Foreign investments are subject
to the risk of currency fluctuation and the impact of social, political and
economic change.
================================================================================
Average Annual Returns Through December 31, 1997.
One Three Five Ten
Year Year Year Year
- --------------------------------------------------------------------------------
Conservative BalancedPortfolio(1) 13.45% 14.43% 10.74% 11.15%
- --------------------------------------------------------------------------------
Lipper (VIP) Balanced Avg.(2) 18.95% 18.16% 12.34% 12.31%
- --------------------------------------------------------------------------------
S&P 500(3) 33.35% 31.13% 20.25% 18.02%
- --------------------------------------------------------------------------------
Lehman Gov't./Corp. Bond Index(4) 9.76% 10.43% 7.61% 9.14%
- --------------------------------------------------------------------------------
Conservative Balanced Portfolio inception date: 5/13/83.
================================================================================
$10,000 Invested Over Ten Years.
[GRAPHICAL REPRESENTATION OF MOUNTAIN CHART]
- --------------------------------------------------------------------------------
(1) Past performance is not predictive of future performance. Portfolio
performance is net of investment fees and fund expenses but not product
charges.
(2) The Lipper Variable Insurance Products (VIP) Balanced Average is calculated
by Lipper Analytical Services, Inc., and reflects the investment return of
certain portfolios underlying variable life and annuity products. These
returns are net of investment fees and fund expenses but not product
charges.
(3) The S&P 500 is a capital-weighted index representing the aggregate market
value of the common equity of 500 stocks primarily traded on the New York
Stock Exchange. The S&P 500 is an unmanaged index that includes the
reinvestment of all dividends but does not reflect the payment of
transaction costs and advisory fees associated with an investment in the
Portfolio. The securities that comprise the S&P 500 may differ substantially
from the securities in the Portfolio. The S&P 500 is not the only index that
may be used to characterize performance of this Portfolio, and other indexes
may portray different comparative performance.
(4) The Lehman Government/Corporate Bond Index is comprised of government and
corporate bonds. The Index is an unmanaged index that includes the
reinvestment of all interest but does not reflect the payment of transaction
costs and advisory fees associated with an investment in the Portfolio. The
securities that comprise the Index may differ substantially from the
securities in the Portfolio. The Lehman Gov't./Corp. Bond Index is not the
only index that may be used to characterize performance of income funds, and
other indexes may portray different comparative performance.
================================================================================
[THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.]
Low Risk Fixed Income
BALANCED
High Yield Bond
Diversified Stock
High Risk Specialized
Investment Goal
Favorable total return consistent with a more conservatively managed diversified
portfolio.
Types of Investments
Money market instruments, bonds and common stocks of both established and
smaller companies.
Investment Style
The Portfolio management team holds a baseline allocation of 35% stocks, 35%
bonds and 30% money market instruments.
Performance Review.
We Thought 1997 Would Be a Good Year for Bonds. So we reallocated about 25% of
our assets from lower yielding money market instrument to intermediate bonds.
They performed well in 1997 and provided a return approaching that of our
long-term bonds. Our bonds included some southeastern Asian debt, which reduced
our returns in the fourth quarter.
In our stock portfolio, we increased diversification at mid-year to reduce
volatility. To our value stocks (stocks trading at low prices compared to their
underlying business strength), we added growth stocks (stocks with particularly
strong earnings prospects). However, we held more smaller and mid-sized
companies than the S&P 500, and this year's disappointing returns for stocks of
smaller companies caused our stock portfolio to lag the broader market.
38
<PAGE>
Strategy Session.
The Impact of the Asian Crisis. Economic and financial market conditions in Asia
had a large impact on global security markets in the latter part of 1997, and we
are making decisions to protect your Portfolio in 1998. We believe the turmoil
in Southeast Asia will have a detrimental impact on the profits of U.S.
companies. However, we believe this Portfolio's conservative guidelines do not
require lower exposure to stocks except in severe bear markets, which we do not
expect in 1998. Unless we see a prospect of rising interest rates, we will
continue our present allocation of intermediate bonds.
On Stocks. In our stock portion of the Portfolio, our growth stock purchases are
focusing on industries that are relatively protected from a slowing economy,
such as health care and food and drug retailers. We also believe investors
overreacted to the impact of the Asian economic crisis on technology stocks, so
we took advantage of lower prices in the fourth quarter of 1997 to add to our
holdings. One of the focuses of our value stocks was industrials. The earnings
of industrial companies tend to vary with the rate of economic growth, so their
stock prices suffered in the last quarter of 1997. However, these companies have
improved their profitability since the beginning of this economic cycle and we
believe they are better positioned to withstand a downturn than previously. They
were inexpensive when we bought them and now are the best-priced sector of the
market. We think their earnings will beat expectations and stock prices will
rise.
And on Bonds. Although we expect emerging markets bonds to recover somewhat, we
do not expect enough bounce to warrant an increased exposure. We are reducing
our holdings as we see a return to fair value. We also expect to reduce our
holdings of corporate bonds, as they no longer provide enough return advantage
over Treasuries to warrant a significant over-weighting.
Outlook
PORTFOLIO MANAGER
Mark Stumpp
Value and Growth.
"Nineteen ninety-seven marked the third consecutive year of outstanding stock
market returns. Investors tend to extrapolate the recent past into the future:
many market participants are convinced that the rally can proceed indefinitely.
For example, analysts currently project that corporate earnings will grow at an
annual rate of nearly 14% over the next five years. When adjusted for today's
low rate of inflation, that's the highest rate of growth on record. (Earnings
grew only 7.8% a year between 1982 and 1996, and have averaged 7.6% a year over
the past 75 years.) With the expanding recessions in Asia, and most of the gains
from corporate cost-cutting already achieved, we believe that earnings will tend
to disappoint in 1998. We do not foresee a bear market but do expect continued
volatility and performance more consistent with the historical norm."
PORTFOLIO MANAGERS
[PHOTO]
Mark Stumpp
[PHOTO] [PHOTO]
Warren E. Spitz Patricia A. Bannan
[PHOTO]
Tony Rodriguez
================================================================================
Portfolio Composition.
as of 12/31/97
--------------
Bonds 59%
Stocks 34%
Money Market 7%
================================================================================
Top Sectors - Stocks.
as of 12/31/97
--------------
Consumer Growth 32.8%
Technology 16.4%
Industrials 15.8%
Finance 12.4%
Consumer Cyclical 11.7%
Energy 8.4%
Utilities 2.5%
Top Sectors - Bonds.
as of 12/31/97
--------------
Industrials 44.5%
Foreign (US$) 21.1%
Financial 20.8%
Other 8.6%
U.S. Treasuries 5.0%
- --------------------------------------------------------------------------------
Source: Prudential. Holdings are subject to change.
39
<PAGE>
Prudential
Flexible Managed Portfolio
Performance Summary.
It was the third consecutive extraordinary year for both stocks and bonds. Your
Portfolio -- which invests in a mix of stocks, bonds and money market securities
- -- gained 17.96%, an excellent return for a balanced portfolio. However, it
slightly trailed the 18.92% return of the Lipper (VIP) Flexible Average, because
a financial crisis in Asia led U.S. investors to turn to stocks of the most
familiar, and larger, companies and to U.S. Treasury bonds. This move produced a
sharp reversal in the fourth quarter of the relative strength of the smaller and
mid-sized stocks that had provided an extra lift to our earnings earlier in the
year. It also severely limited the gains on our bond holdings.
The Portfolio may invest in foreign securities. Foreign investments are subject
to the risk of currency fluctuation and the impact of social, political and
economic change.
================================================================================
Average Annual Returns Through December 31, 1997.
One Three Five Ten
Year Year Year Year
- --------------------------------------------------------------------------------
Flexible Managed Portfolio(1) 17.96% 18.49% 13.25% 13.41%
- --------------------------------------------------------------------------------
Lipper (VIP) Flexible Avg.(2) 18.92% 18.75% 13.00% 12.87%
- --------------------------------------------------------------------------------
S&P 500(3) 33.35% 31.13% 20.25% 18.02%
- --------------------------------------------------------------------------------
Lehman Gov't./Corp. Bond Index(4) 9.76% 10.43% 7.61% 9.14%
- --------------------------------------------------------------------------------
Flexible Managed Portfolio inception date: 5/13/83.
================================================================================
$10,000 Invested Over Ten Years.
[GRAPHICAL REPRESENTATION OF MOUNTAIN CHART]
- --------------------------------------------------------------------------------
(1) Past performance is not predictive of future performance. Portfolio
performance is net of investment fees and fund expenses but not product
charges.
(2) The Lipper Variable Insurance Products (VIP) Flexible Average is calculated
by Lipper Analytical Services, Inc., and reflects the investment return of
certain portfolios underlying variable life and annuity products. These
returns are net of investment fees and fund expenses but not product
charges.
(3) The S&P 500 is a capital-weighted index representing the aggregate market
value of the common equity of 500 stocks primarily traded on the New York
Stock Exchange. The S&P 500 is an unmanaged index that includes the
reinvestment of all dividends but does not reflect the payment of
transaction costs and advisory fees associated with an investment in the
Portfolio. The securities that comprise the S&P 500 may differ substantially
from the securities in the Portfolio. The S&P 500 is not the only index that
may be used to characterize performance of this Portfolio, and other indexes
may portray different comparative performance.
(4) The Lehman Government/Corporate Bond Index is comprised of government and
corporate bonds. The Index is an unmanaged index that includes the
reinvestment of all interest but does not reflect the payment of transaction
costs and advisory fees associated with an investment in the Portfolio. The
securities that comprise the Index may differ substantially from the
securities in the Portfolio. The Lehman Gov't./Corp. Bond Index is not the
only index that may be used to characterize performance of income funds, and
other indexes may portray different comparative performance.
================================================================================
[THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.]
Low Risk Fixed Income
BALANCED
High Yield Bond
Diversified Stock
High Risk Specialized
Investment Goal
High total return consistent with a more aggressively managed diversified
portfolio.
Types of Investments
Money market instruments, bonds and common stocks of both established and
smaller companies.
Investment Style
The Portfolio management team holds a baseline allocation of 60% stocks and 40%
bonds.
Performance Review.
We Stuck with Stocks. Despite the pessimistic outlook our decision proved to be
right. In the bond portfolio we favored higher-yielding corporate securities
over lower-yielding Treasury bonds.
There were some disappointments, however. Although our bond portfolio outpaced
the Lehman Aggregate Bond Index, exposure to southeastern Asian debt erased some
of our early gains. In mid-year, we diversified our stock portfolio to reduce
overall volatility. To our growth stocks (stocks with particularly strong
earnings prospects), we added value stocks (stocks trading at low prices
compared to their underlying business strength). However, we held more smaller
and mid-sized companies than the S&P 500, and this year's disappointing returns
for stocks of smaller companies caused our stock portfolio to lag.
40
<PAGE>
Strategy Session.
The Impact of the Asian Crisis. Economic and financial market conditions in Asia
had a large impact on global security markets in the latter part of 1997, and we
are making decisions to protect your Portfolio in 1998. We believe the turmoil
in southeast Asia will have a detrimental impact on the profits of U.S.
companies. With stock prices high even on the assumption that profits will
continue to grow rapidly, we have slightly reduced our allocation to stocks and
shifted some assets into bonds. We will become more defensive if earnings trail
expectations over the course of the year.
On Stocks. In our stock portion of the Portfolio, one focus of our value stocks
was industrials. The earnings of industrial companies tend to vary with the rate
of economic growth, so their stock prices suffered in the last quarter of 1997.
However, these companies have improved their profitability since the beginning
of this economic cycle, and we believe they are better positioned to withstand a
downturn than previously. They already were inexpensive when we bought them, and
they now are the best-priced sector of the market. We think their earnings will
beat expectations and stock prices will rise. Our growth stock purchases are
focusing on industries that are relatively protected from a slowing economy,
such as health care and food and drug retailers.
And on Bonds. Although we expect emerging markets bonds to recover somewhat, we
do not expect enough bounce to warrant an increased exposure. We are reducing
our holdings as we see a return to fair value. We also expect to reduce our
holdings of corporate bonds, as they no longer provide enough return over
Treasuries to warrant a significant over-weighting.
Outlook
PORTFOLIO MANAGER
Mark Stumpp
Value and Growth.
"Nineteen ninety-seven marked the third consecutive year of outstanding stock
market returns. Investors tend to extrapolate the recent past into the future:
many market participants are convinced that the rally can proceed indefinitely.
For example, analysts currently project that corporate earnings will grow at an
annual rate of nearly 14% over the next five years. When adjusted for today's
low rate of inflation, that's the highest rate of growth on record. (Earnings
grew only 7.8% a year between 1982 and 1996, and have averaged 7.6% a year over
the past 75 years.) With the expanding recessions in Asia, and most of the gains
from corporate cost-cutting already achieved, we believe that earnings will tend
to disappoint in 1998. We do not foresee a bear market but do expect continued
volatility and performance more consistent with the historical norm."
PORTFOLIO MANAGERS
[PHOTO]
Mark Stumpp
[PHOTO] [PHOTO]
Patricia A. Bannan Warren E. Spitz
[PHOTO]
Tony Rodriguez
================================================================================
Portfolio Composition.
as of 12/31/97
--------------
Stocks 58%
Bonds 36%
Money Market 6%
================================================================================
Top Sectors - Stocks.
as of 12/31/97
--------------
Consumer Growth 25.8%
Industrials 21.2%
Finance 14.3%
Consumer Cyclical 14.1%
Technology 12.6%
Energy 10.0%
Utilities 2.0%
Top Sectors - Bonds.
as of 12/31/97
--------------
Industrials 45.7%
Foreign (US$) 26.5%
Financial 19.2%
Other 7.1%
Utilities 1.5%
- --------------------------------------------------------------------------------
Source: Prudential. Holdings are subject to change.
41
<PAGE>
Prudential
Stock Index Portfolio
Performance Summary.
Your Portfolio finished 1997 with a return of 32.83%, culminating an
unprecedented three-year run of above-20% returns.
Stock prices recovered from each of three significant drops during the year: one
in the spring sparked by rising interest rates and two in August and October
driven primarily by concern that today's high corporate earnings could not be
sustained. But the U.S. economy proved surprisingly resilient and continued to
grow at a moderate rate, with extraordinarily low inflation and unemployment.
Nonetheless, we think investors should not expect a continuation of the
exceptional returns of the past three years.
Standard & Poor's neither sponsors nor endorses the Stock Index Portfolio.
Investors cannot directly invest in any index, including the S&P 500.
================================================================================
Average Annual Returns Through December 31, 1997.
One Three Five Ten
Year Year Year Year
- --------------------------------------------------------------------------------
Stock Index Portfolio(1) 32.83% 30.67% 19.84% 17.47%
- --------------------------------------------------------------------------------
Lipper (VIP) S&P 500 Index Avg.(2) 32.55% 30.57% 19.81% 17.52%
- --------------------------------------------------------------------------------
S&P 500(3) 33.35% 31.13% 20.25% 18.02%
- --------------------------------------------------------------------------------
Stock Index Portfolio inception date: 10/19/87.
================================================================================
$10,000 Invested Over Ten Years.
[GRAPHICAL REPRESENTATION OF MOUNTAIN CHART]
- --------------------------------------------------------------------------------
(1) Past performance is not predictive of future performance. Portfolio
performance is net of investment fees and fund expenses but not product
charges.
(2) The Lipper Variable Insurance Products (VIP) S&P 500 Index Average is
calculated by Lipper Analytical Services, Inc., and reflects the investment
return of certain portfolios underlying variable life and annuity products.
These returns are net of investment fees and fund expenses but not product
charges.
(3) The S&P 500 is a capital-weighted index representing the aggregate market
value of the common equity of 500 stocks primarily traded on the New York
Stock Exchange. The S&P 500 is an unmanaged index that includes the
reinvestment of all dividends but does not reflect the payment of
transaction costs and advisory fees associated with an investment in the
Portfolio. The S&P 500 is not the only index that may be used to
characterize performance of this Portfolio, and other indexes may portray
different comparative performance.
================================================================================
[THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.]
Low Risk Fixed Income
Balanced
High Yield Bond
DIVERSIFIED STOCK
High Risk Specialized
Investment Goal
Seeks results that correspond to the price and yield performance of the S&P 500
Index.(3)
Types of Investments
Primarily stocks in the S&P 500 Index.
Investment Style
This Portfolio attempts to hold the same stocks as the S&P 500 Index in
approximately the same proportions. This Portfolio thus tends to reflect the
general trends of the overall U.S. equity market.
================================================================================
S&P 500 Index -- Total Return by Sector.
1997
----
Finance 48.7%
Consumer Growth/Staples 36.9%
Consumer Cyclical 36.7%
Utilities 35.9%
Technology 27.1%
Energy 25.6%
Industrials 21.9%
S&P 500 Index 33.4%
- --------------------------------------------------------------------------------
Source: Prudential.
42
<PAGE>
Performance Review.
The Stock Index Portfolio attempts to hold all 500 stocks included in the S&P
500 Index and attempts to duplicate its performance. Portfolio Manager John W.
Moschberger manages the Portfolio by investing funds received while trying to
minimize commissions and transaction costs.
Financial Services the Clear Leader. While technology stocks had an erratic
year, financial stocks played the tortoise to their hare, finishing the year
with a 49% gain. Savings and loans and integrated financial services/brokerages
led the pack. Ahmanson and Great West both doubled in price while Merrill Lynch,
Morgan Stanley Dean Witter, and Travelers each gained 80%. The Finance sector
- --which comprises about 17% of the S&P 500 -- rose relatively steadily
throughout the year.
The consumer sectors, both cyclicals and growth/staple stocks, produced almost a
37% return. Together they represent more than a third of the S&P 500 value.
Utilities finished the year in the same neighborhood -- a 36% gain -- after
accelerating toward the end of the year when investors sought companies that
would be relatively unaffected by events in Asia.
Industrials and Energy Trail. Industrials were the trailing sector, although in
this exceptional year even the low end represented a 22% gain. The energy
sector, only 8% of the S&P 500, rose 26% this year.
Technology Erratic. Technology stocks, the sometime high-flyers, had a very
volatile year. At times they led the market. However, the weak aerospace/
defense industry and a fear of the impact of economic turmoil in Asia that
dominated the fourth quarter combined to produce a 27% return for the year that
was in the middle of the pack.
Outlook
PORTFOLIO MANAGER
John W. Moschberger
Stocks, Best Long-Term.
"Although stocks have historically provided the best long-term return of the
major asset classes, their history also has included both up and down years.
This is the first three-year run with returns above 20%. Good long-term
investing practice should be based on realistic expectations, neither
excessively high nor too fearful to ride out the inevitable rough spots."
[PHOTO]
PORTFOLIO MANAGER
John W. Moschberger
================================================================================
S&P 500 Index Composition.
as of 12/31/97
--------------
Consumer Growth/Staples 29%
Finance 17%
Technology 15%
Industrials 15%
Utilities 9%
Energy 8%
Consumer Cyclical 7%
- --------------------------------------------------------------------------------
Source: Prudential. Holdings are subject to change.
================================================================================
Top Ten Holdings.
as of 12/31/97
--------------
General Electric Co. 3.1%
Coca-Cola Co. 2.1%
Microsoft Corp. 2.0%
Exxon Corp. 1.9%
Merck & Co. 1.6%
Royal Dutch Petroleum 1.5%
Intel Corp. 1.5%
Philip Morris Co. 1.4%
Procter & Gamble Co. 1.4%
IBM Inc. 1.3%
- --------------------------------------------------------------------------------
Source: Prudential. Holdings are subject to change.
43
<PAGE>
Prudential
Equity Portfolio
Performance Summary.
Your Portfolio returned 24.66% in 1997, close behind the Lipper (VIP) Growth
Average of 25.36% for the period. This was the third successive year of gains
above 20%.
While your Portfolio participated in this year's stock market gains, it was held
back by its large cash holding. In an investing climate not friendly to your
Portfolio's value investing style, its return was close to the average because
it had a strong focus on financial stocks that performed very well in 1997.
The Portfolio may invest in foreign securities. Foreign investments are subject
to the risk of currency fluctuation and the impact of social, political and
economic change.
================================================================================
Average Annual Returns Through December 31, 1997.
One Three Five Ten
Year Year Year Year
- --------------------------------------------------------------------------------
Equity Portfolio(1) 24.66% 24.71% 19.43% 17.53%
- --------------------------------------------------------------------------------
Lipper (VIP) Growth Avg.(2) 25.36% 26.15% 17.27% 16.59%
- --------------------------------------------------------------------------------
S&P 500(3) 33.35% 31.13% 20.25% 18.02%
- --------------------------------------------------------------------------------
Equity Portfolio inception date: 5/13/83.
================================================================================
$10,000 Invested Over Ten Years.
[GRAPHICAL REPRESENTATION OF MOUNTAIN CHART]
- --------------------------------------------------------------------------------
(1) Past performance is not predictive of future performance. Portfolio
performance is net of investment fees and fund expenses but not product
charges.
(2) The Lipper Variable Insurance Products (VIP) Growth Average is calculated by
Lipper Analytical Services, Inc., and reflects the investment return of
certain portfolios underlying variable life and annuity products. These
returns are net of investment fees and fund expenses but not product
charges.
(3) The S&P 500 is a capital-weighted index representing the aggregate market
value of the common equity of 500 stocks primarily traded on the New York
Stock Exchange. The S&P 500 is an unmanaged index that includes the
reinvestment of all dividends but does not reflect the payment of
transaction costs and advisory fees associated with an investment in the
Portfolio. The securities that comprise the S&P 500 may differ substantially
from the securities in the Portfolio. The S&P 500 is not the only index that
may be used to characterize performance of this Portfolio, and other indexes
may portray different comparative performance.
================================================================================
[THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.]
Low Risk Fixed Income
Balanced
High Yield Bond
DIVERSIFIED STOCK
High Risk Specialized
Investment Goal
Capital appreciation.
Types of Investments
Primarily stocks of major, established companies.
Investment Style
This Portfolio uses a "deep value" investment approach to invest in stocks
believed to be temporarily undervalued relative to the companies' sales,
earnings, book value and cash flow.
Performance Review.
Cash Again Held Us Back. By far the greatest drag on your Port-folio's
performance was its large cash holding -- about 25% through most of 1997. There
was a scarcity of inexpensive stocks for much of the year, and the average stock
was selling for a very high price considering its potential earnings growth. In
this context, the cash is both a buffer against a market decline and a reserve
for rapid action should better investment opportunities appear. In the fourth
quarter, when many investors feared that events in Asia would slow the U.S.
economy, more stocks were driven to bargain prices compared with the average
stock. We reduced our cash holdings to about 17% at December 31.
Financial Services Pushed Us On. We had a focus on financial service companies.
The strong stock market and consolidation in the industry both buoyed stock
prices.
44
<PAGE>
Strategy Session.
We Still Like Financial Companies. We had a focus on financial companies, but
their performance in 1997 was mixed. Our investment banks/securities brokers and
our savings and loans performed very well in 1997. Our large, money center banks
- -- BankAmerica, Chase Manhattan and J. P. Morgan, kept up with the strongly
rising market despite a turn against them in the fourth quarter when turmoil in
Asia made investors uncertain about their future earnings. We believe that when
the uncertainty is resolved their stocks should resume their growth, because
their core businesses are sound.
Health Care Has Been Beaten Down. We look for companies with excellent
businesses in the long term, but ones whose stocks are inexpensive because
investors are reacting to short-term problems. Right now, HMOs are in trouble
because competition and government reimbursement pressure have capped prices,
while costs are rising. The troubles here are industry wide, not poor management
of any one company. It's in no one's interest to allow the industry as a whole
to fail, so we expect these companies to have more pricing power in 1998.
Currently, they are priced as if they didn't have the tremendous growth
potential that they have.
Paper Makers Have Bottomed. For some time now, paper companies have been good
value. Paper prices and company earnings had begun to rebound until the Asian
economic crisis set them back. Asia accounts for a third of world paper
consumption. Nonetheless, the industry is restructuring and paper demand will
grow faster than new capacity. We think we've seen the bottom of their earnings
cycle, and stock prices still are very low. The industry provides one of the
better value opportunities available.
Outlook
PORTFOLIO MANAGER
Thomas R. Jackson
There Are More Values Now.
"The uncertainty in Asia has raised questions about the rate of economic growth
in the United States. There is pressure on the stocks of companies whose
earnings vary with economic growth (cyclicals). Investors have been moving
toward industries with more predictable earnings growth. This means there are
more value opportunities in the cyclical industries than there had been -- so
our cash holdings are down."
[PHOTO]
PORTFOLIO MANAGER
Thomas R. Jackson
================================================================================
Portfolio Composition.
as of 12/31/97
--------------
Finance 28%
Cash 17%
Industrials 14%
Consumer Cyclical 13%
Consumer Growth 10%
Utilities 8%
Energy 6%
Technology 4%
- --------------------------------------------------------------------------------
Source: Prudential. Holdings are subject to change.
================================================================================
Top Ten Holdings.
as of 12/31/97
--------------
Morgan Stanley, Dean Witter,
Discover & Co. 3.1%
Loews Corp. 3.1%
Chubb Corp. 2.8%
Travelers Group 2.7%
Elf Aquitane S.A. 2.4%
AT&T Corp. 2.0%
Dillard's Inc. 1.9%
RJR Nabisco 1.9%
SAFECO Corp. 1.9%
Digital Equipment Corp. 1.9%
- --------------------------------------------------------------------------------
Source: Prudential. Holdings are subject to change.
45
<PAGE>
Prudential
Global Portfolio
Performance Summary.
Your Portfolio returned 6.98% in 1997, trailing the 13.24% gain of the Lipper
(VIP) Global Average.
In 1997, the strongest stock market in the world was the U.S. market, and we
were underrepresented there, because we thought U.S. stocks were expensive. A
midyear halt to the Japanese economic recovery also hurt our return. So did the
economic turmoil in Southeast Asia, which led investors to avoid the technology,
telecommunications and general manufacturing companies that we owned, because
they feared that an Asian slowdown would squeeze earnings.
The Portfolio may invest in foreign securities. Foreign investments are subject
to the risk of currency fluctuation and the impact of social, political and
economic change.
================================================================================
Average Annual Returns Through December 31, 1997.
One Three Five Since
Year Year Year Inception*
- --------------------------------------------------------------------------------
Global Portfolio(1) 6.98% 14.05% 15.10% 10.10%
- --------------------------------------------------------------------------------
Lipper (VIP) Global Avg.(2) 13.24% 15.32% 14.38% 11.10%
- --------------------------------------------------------------------------------
Morgan Stanley World Index(3) 16.23% 17.14% 15.88% 10.81%
- --------------------------------------------------------------------------------
Global Portfolio inception date: 9/19/88.
================================================================================
$10,000 Invested Since Inception.*
[GRAPHICAL REPRESENTATION OF MOUNTAIN CHART]
- --------------------------------------------------------------------------------
* Lipper provides data on a monthly basis, so for comparative purposes the
Lipper Average and Index since inception returns reflect the Portfolio's
closest calendar month-end performance of 9/30/88.
(1) Past performance is not predictive of future performance. Portfolio
performance is net of investment fees and fund expenses but not product
charges.
(2) The Lipper Variable Insurance Products (VIP) Global Average is calculated by
Lipper Analytical Services, Inc., and reflects the investment return of
certain portfolios underlying variable life and annuity products. These
returns are net of investment fees and fund expenses but not product
charges.
(3) The Morgan Stanley World Index is a weighted index comprised of
approximately 1,500 companies listed on the stock exchanges of the U.S.A.,
Europe, Canada, Australia, New Zealand and the Far East. The combined market
capitalization of these companies represents approximately 60% of the
aggregate market value of the stock exchanges in the countries comprising
the World Index. The World Index is an unmanaged index that includes the
reinvestment of all dividends but does not reflect the payment of
transaction costs and advisory fees associated with an investment in the
Portfolio. The securities that comprise the World Index may differ
substantially from the securities in the Portfolio. The World Index is not
the only index that may be used to characterize performance of global funds,
and other indexes may portray different comparative performance.
================================================================================
[THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.]
Low Risk Fixed Income
Balanced
High Yield Bond
DIVERSIFIED STOCK
High Risk Specialized
Investment Goal
Long-term growth of capital.
Types of Investments
Primarily common stock and common stock equivalents of U.S. and foreign
corporations.
Investment Style
This Portfolio uses a "growth" investment approach, coupled with a
theme-oriented view of the markets, to identify companies that seem best
positioned to take advantage of global changes.
Performance Review.
Location, Location, Location. This year, where you owned stocks was more
important than which stocks you owned. In southeast Asia, economies became
overheated. The Japanese economy was emerging from the doldrums. Europe
continued its slow progress into an expansion, and the mature U.S. economic
cycle was in extended cruising mode. Our performance suffered because we held
too much in Japan and too little in the U.S.
Asia Was in Crisis. We were wrong on the direction of the Japanese economy. Most
investors continued to favor the most well known Japanese stocks: exporters such
as Toyota. The downturn in Japan and the surprising spread of the problems of
Thailand and Malaysia had consequences in unexpected places.
We were focused on Europe. We thought Continental Europe was the place to be and
we benefited from our holdings there.
46
<PAGE>
Strategy Session.
A Turning Point in Asia. We thought that Japan was going to emerge from its
prolonged economic lethargy and accordingly invested in companies that would
benefit from greater domestic spending. However, in April the Japanese
government increased its consumption tax, destroying consumer confidence and
stalling Japan's economic recovery.
To make things worse, credit and currency problems in Thailand and Malaysia
became acute, prompting a widespread investor flight from emerging market
countries and reducing the market for Japanese export goods. We generally have
avoided the most overheated economies in Southeast Asia and are likely to stay
out until conditions stabilize. We also are reducing our holdings in Japan and
are less focused on companies that would benefit from an economic recovery
there.
And in Europe. The prospect of European economic union and the example of U.S.
firms have produced widespread restructuring of European companies to improve
their productivity. Several industries are being transformed by new levels of
entrepreneurialism. For example, we benefited from owning Telecom Italia Mobile
- -- a partly state-owned, but well-managed, mobile telephone company in Italy --
and Hennes & Mauritz -- a multinational specialty retailer, Sweden's largest.
The latter is expanding rapidly in Germany, where its small stores with stylish
merchandise compete with large, sluggish department stores.
The U.S. Economy Is Still Attractive. We have increased our holdings in the
United States because its economy and stock market are more stable than
elsewhere. We are focusing on companies that will not face competition from
southeast Asian products, where currency devaluations have created formidable
rivals. We added retailers and health care to our existing focuses on technology
and leisure companies. We believe current stock prices for our technology
holdings are very low and they will rise when the true, modest, magnitude of the
impact of Asian problems on their earnings becomes more widely appreciated.
Outlook
PORTFOLIO MANAGER
Daniel J. Duane
Different Paths for Japan and Europe.
"Europe is in an accelerating stage of its economic cycle and large companies
are reaping the productivity benefits of reorganizations. We expect the kind of
well-managed companies we have been buying to continue their growth in the year
ahead. Europe does less trade with Asia than either the U.S. or Japan, so the
impact of an Asian slowdown should be smaller. Low interest rates and the
benefits of a unified monetary system and market also bode well for European
growth companies."
[PHOTO]
PORTFOLIO MANAGER
Daniel J. Duane
================================================================================
Geographic Allocation.
as of 12/31/97
--------------
United States 39%
Continental Europe 28%
United Kingdom 15%
Cash 7%
Japan 5%
Pacific Basin 3%
Australia 3%
- --------------------------------------------------------------------------------
Source: Prudential. Holdings are subject to change.
================================================================================
Top Ten Holdings.
as of 12/31/97
--------------
Telecom Italia Mobile 3.1%
Vodafone Group 3.1%
Bank of Ireland 2.7%
Cisco Systems Inc. 2.3%
Mobil Corp. 2.1%
Nokia 2.0%
Banco Central Hisp. 2.0%
Brambles Inds. Ltd. 1.9%
Wells Fargo & Co. 1.9%
Time Warner Inc. 1.9%
- --------------------------------------------------------------------------------
Source: Prudential. Holdings are subject to change.
47
<PAGE>
FINANCIAL STATEMENTS OF
THE PRUDENTIAL SERIES FUND, INC.
DIVERSIFIED BOND PORTFOLIO
<TABLE>
<CAPTION>
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1997
<S> <C>
ASSETS
Investments, at value (cost:
$790,639,568)............................ $ 803,286,169
Cash....................................... 880
Interest receivable........................ 14,128,219
Receivable for capital stock sold.......... 430,653
--------------
Total Assets............................. 817,845,921
--------------
LIABILITIES
Payable to investment adviser.............. 797,254
Due to broker -- variation margin.......... 214,531
Accrued expenses........................... 127,405
--------------
Total Liabilities........................ 1,139,190
--------------
NET ASSETS................................... $ 816,706,731
--------------
--------------
Net assets were comprised of:
Common stock, at $0.01 par value......... $ 740,989
Paid-in capital, in excess of par........ 800,244,621
--------------
800,985,610
Undistributed net investment income........ 229,159
Accumulated net realized gain on
investments.............................. 3,308,830
Net unrealized appreciation on
investments.............................. 12,183,132
--------------
Net assets, December 31, 1997.............. $ 816,706,731
--------------
--------------
Net asset value and redemption price per
share, 74,098,859 outstanding shares of
common stock (authorized 150,000,000
shares).................................. $ 11.02
--------------
--------------
</TABLE>
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS
Year Ended December 31, 1997
<S> <C> <C>
INVESTMENT INCOME
Interest................................... $ 56,691,387
---------------
EXPENSES
Investment advisory fee.................... 2,981,884
Accounting fees............................ 107,000
Custodian expense.......................... 79,500
Shareholders' reports...................... 20,000
Audit fees................................. 11,000
Directors' fees............................ 2,800
Legal fees................................. 1,000
Miscellaneous expenses..................... 1,222
---------------
Total Expenses........................... 3,204,406
Less: Custodian fee credit................. (44,514)
---------------
Net Expenses............................. 3,159,892
---------------
NET INVESTMENT INCOME........................ 53,531,495
---------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS
Net realized gain (loss) on:
Investments.............................. 13,721,305
Futures contracts........................ (4,526,384)
---------------
9,194,921
---------------
Net change in unrealized appreciation on:
Investments.............................. (1,767,311)
Futures contracts........................ (463,469)
---------------
(2,230,780)
---------------
NET GAIN ON INVESTMENTS...................... 6,964,141
---------------
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS................................... $ 60,495,636
---------------
---------------
</TABLE>
<TABLE>
<CAPTION>
STATEMENTS OF CHANGES IN NET ASSETS
YEARS ENDED DECEMBER 31,
---------------------------------------
1997 1996
------------------ -------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net investment income.................................................................. $ 53,531,495 $ 46,726,825
Net realized gain on investments....................................................... 9,194,921 3,227,785
Net change in unrealized appreciation on investments................................... (2,230,780) (18,849,028)
------------------ -------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS................................... 60,495,636 31,105,582
------------------ -------------------
DIVIDENDS AND DISTRIBUTIONS:
Dividends from net investment income................................................... (55,359,529) (44,766,756)
Distributions from net realized capital gains.......................................... (9,016,752) --
------------------ -------------------
TOTAL DIVIDENDS AND DISTRIBUTIONS...................................................... (64,376,281) (44,766,756)
------------------ -------------------
CAPITAL TRANSACTIONS:
Capital stock sold [11,468,488 and 7,068,417 shares, respectively]..................... 127,691,138 78,594,183
Capital stock issued in reinvestment of dividends and distributions [5,812,573 and
4,117,675 shares, respectively]....................................................... 64,376,281 44,766,756
Capital stock repurchased [(8,269,292) and (4,070,327) shares, respectively]........... (91,696,624) (45,319,610)
------------------ -------------------
NET INCREASE IN NET ASSETS RESULTING FROM CAPITAL TRANSACTIONS......................... 100,370,795 78,041,329
------------------ -------------------
TOTAL INCREASE IN NET ASSETS............................................................. 96,490,150 64,380,155
NET ASSETS:
Beginning of year...................................................................... 720,216,581 655,836,426
------------------ -------------------
End of year............................................................................ $ 816,706,731 $ 720,216,581
------------------ -------------------
------------------ -------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
A1
<PAGE>
FINANCIAL STATEMENTS OF
THE PRUDENTIAL SERIES FUND, INC.
GOVERNMENT INCOME PORTFOLIO
<TABLE>
<CAPTION>
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1997
<S> <C>
ASSETS
Investments, at value (cost:
$411,381,627)............................ $ 424,649,985
Cash....................................... 1,091
Interest receivable........................ 5,592,164
--------------
Total Assets............................. 430,243,240
--------------
LIABILITIES
Payable to investment adviser.............. 456,426
Accrued expenses........................... 82,691
Due to broker -- variation margin.......... 38,438
Payable for capital stock repurchased...... 22,626
--------------
Total Liabilities........................ 600,181
--------------
NET ASSETS................................... $ 429,643,059
--------------
--------------
Net assets were comprised of:
Common stock, at $0.01 par value......... $ 372,861
Paid-in capital, in excess of par........ 423,192,132
--------------
423,564,993
Undistributed net investment income........ 77,253
Accumulated net realized loss on
investments.............................. (7,194,513)
Net unrealized appreciation on investments
and futures contracts.................... 13,195,326
--------------
Net assets, December 31, 1997.............. $ 429,643,059
--------------
--------------
Net asset value and redemption price per
share, 37,286,113 outstanding shares of
common stock (authorized 90,000,000
shares).................................. $ 11.52
--------------
--------------
</TABLE>
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS
Year Ended December 31, 1997
<S> <C> <C>
INVESTMENT INCOME
Interest................................... $ 30,059,962
---------------
EXPENSES
Investment advisory fee.................... 1,758,870
Accounting fees............................ 106,000
Custodian expense.......................... 49,000
Shareholders' reports...................... 6,000
Audit fee.................................. 6,000
Directors' fees............................ 3,000
Legal fees................................. 300
Miscellaneous expenses..................... 1,825
---------------
Total Expenses........................... 1,930,995
Less: Custodian fee credit................. (13,345)
---------------
Net Expenses............................. 1,917,650
---------------
NET INVESTMENT INCOME........................ 28,142,312
---------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS
Net realized gain (loss) on:
Investments.............................. 1,472,562
Futures contracts........................ (759,159)
Short sales.............................. 9,375
---------------
722,778
---------------
Net change in unrealized appreciation
(depreciation) on:
Investments.............................. 10,916,448
Futures contracts........................ (73,032)
---------------
10,843,416
---------------
NET GAIN ON INVESTMENTS...................... 11,566,194
---------------
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS................................... $ 39,708,506
---------------
---------------
</TABLE>
<TABLE>
<CAPTION>
STATEMENTS OF CHANGES IN NET ASSETS
YEARS ENDED DECEMBER 31,
---------------------------------------
1997 1996
------------------ -------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net investment income.................................................................. $ 28,142,312 $ 31,242,011
Net realized gain on investments....................................................... 722,778 14,328,542
Net change in unrealized appreciation (depreciation) on investments.................... 10,843,416 (35,068,717)
------------------ -------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS................................... 39,708,506 10,501,836
------------------ -------------------
DIVIDENDS:
Dividends from net investment income................................................... (28,098,226) (30,988,878)
------------------ -------------------
CAPITAL TRANSACTIONS:
Capital stock sold [550,602 and 778,426 shares, respectively].......................... 6,261,175 8,926,475
Capital stock issued in reinvestment of dividends and distributions [2,484,757 and
2,790,002 shares, respectively]....................................................... 28,098,226 30,988,878
Capital stock repurchased [(8,707,219) and (3,428,037) shares, respectively]........... (98,362,062) (39,168,176)
------------------ -------------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM CAPITAL TRANSACTIONS.............. (64,002,661) 747,177
------------------ -------------------
TOTAL DECREASE IN NET ASSETS............................................................. (52,392,381) (19,739,865)
NET ASSETS:
Beginning of year...................................................................... 482,035,440 501,775,305
------------------ -------------------
End of year............................................................................ $ 429,643,059 $ 482,035,440
------------------ -------------------
------------------ -------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
A2
<PAGE>
FINANCIAL STATEMENTS OF
THE PRUDENTIAL SERIES FUND, INC.
CONSERVATIVE BALANCED PORTFOLIO
<TABLE>
<CAPTION>
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1997
<S> <C>
ASSETS
Investments, at value (cost:
$4,491,825,742).......................... $4,696,024,117
Cash....................................... 2,749
Interest and dividends receivable.......... 60,006,370
--------------
Total Assets............................. 4,756,033,236
--------------
LIABILITIES
Payable to investment adviser.............. 6,725,610
Payable for investments purchased.......... 3,573,515
Due to broker -- variation margin.......... 653,438
Accrued expenses........................... 546,540
Payable for capital stock repurchased...... 302,094
--------------
Total Liabilities........................ 11,801,197
--------------
NET ASSETS................................... $4,744,232,039
--------------
--------------
Net assets were comprised of:
Common stock, at $0.01 par value......... $ 3,169,112
Paid-in capital, in excess of par........ 4,500,747,938
--------------
4,503,917,050
Undistributed net investment income........ 949,046
Accumulated net realized gain on
investments.............................. 36,942,793
Net unrealized appreciation on
investments.............................. 202,423,150
--------------
Net assets, December 31, 1997.............. $4,744,232,039
--------------
--------------
Net asset value and redemption price per
share, 316,911,160 outstanding shares of
common stock (authorized 350,000,000
shares).................................. $ 14.97
--------------
--------------
</TABLE>
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS
Year Ended December 31, 1997
<S> <C> <C>
INVESTMENT INCOME
Dividends (net of $187,480 foreign
withholding tax)......................... $ 19,377,627
Interest................................... 216,743,419
---------------
236,121,046
---------------
EXPENSES
Investment advisory fee.................... 25,757,735
Custodian expense.......................... 281,000
Shareholders' reports...................... 169,000
Accounting fees............................ 101,000
Audit fees................................. 67,000
Legal fees................................. 3,000
Directors' fees............................ 3,000
Miscellaneous expenses..................... 923
---------------
Total Expenses........................... 26,382,658
Less: Custodian fee credit................. (166,162)
---------------
Net Expenses............................. 26,216,496
---------------
NET INVESTMENT INCOME........................ 209,904,550
---------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS
Net realized gain (loss) on:
Investments.............................. 546,046,706
Futures contracts........................ (20,841,176)
Short sales.............................. (30,344)
---------------
525,175,186
---------------
Net change in unrealized appreciation on:
Investments.............................. (145,915,485)
Futures contracts........................ (1,775,225)
Short sales.............................. (1,139,560)
---------------
(148,830,270)
---------------
NET GAIN ON INVESTMENTS...................... 376,344,916
---------------
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS................................... $ 586,249,466
---------------
---------------
</TABLE>
<TABLE>
<CAPTION>
STATEMENTS OF CHANGES IN NET ASSETS
YEARS ENDED DECEMBER 31,
---------------------------------------
1997 1996
------------------ -------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net investment income.................................................................. $ 209,904,550 $ 173,283,574
Net realized gain on investments....................................................... 525,175,186 270,107,246
Net change in unrealized appreciation on investments................................... (148,830,270) 61,403,321
------------------ -------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS................................... 586,249,466 504,794,141
------------------ -------------------
DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment income................................................... (209,004,256) (174,034,704)
Dividends in excess of net investment income........................................... -- (41,632)
Distributions from net realized capital gains.......................................... (518,358,296) (273,551,593)
------------------ -------------------
TOTAL DIVIDENDS AND DISTRIBUTIONS...................................................... (727,362,552) (447,627,929)
------------------ -------------------
CAPITAL TRANSACTIONS:
Capital stock sold [4,585,160 and 10,561,256 shares, respectively]..................... 74,015,405 167,668,924
Capital stock issued in reinvestment of dividends and distributions [47,801,252 and
29,086,855 shares, respectively]...................................................... 727,362,552 447,627,929
Capital stock repurchased [(24,112,955) and (8,429,995) shares, respectively].......... (394,841,365) (134,428,797)
------------------ -------------------
NET INCREASE IN NET ASSETS RESULTING FROM CAPITAL TRANSACTIONS......................... 406,536,592 480,868,056
------------------ -------------------
TOTAL INCREASE IN NET ASSETS............................................................. 265,423,506 538,034,268
NET ASSETS:
Beginning of year...................................................................... 4,478,808,533 3,940,774,265
------------------ -------------------
End of year............................................................................ $ 4,744,232,039 $ 4,478,808,533
------------------ -------------------
------------------ -------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
A3
<PAGE>
FINANCIAL STATEMENTS OF
THE PRUDENTIAL SERIES FUND, INC.
FLEXIBLE MANAGED PORTFOLIO
<TABLE>
<CAPTION>
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1997
<S> <C>
ASSETS
Investments, at value (cost:
$5,050,966,053).......................... $5,471,387,547
Cash....................................... 15,631
Interest and dividends receivable.......... 40,850,547
Receivable for investments sold............ 294
--------------
Total Assets............................. 5,512,254,019
--------------
LIABILITIES
Payable for investments purchased.......... 12,760,562
Payable to investment adviser.............. 8,471,572
Accrued expenses........................... 654,878
Due to broker -- variation margin.......... 203,828
Payable for capital stock repurchased...... 21,085
--------------
Total Liabilities........................ 22,111,925
--------------
NET ASSETS................................... $5,490,142,094
--------------
--------------
Net assets were comprised of:
Common stock, at $0.01 par value......... $ 3,177,111
Paid-in capital, in excess of par........ 4,984,889,353
--------------
4,988,066,464
Undistributed net investment income........ 768,864
Accumulated net realized gain on
investments.............................. 82,447,694
Net unrealized appreciation on
investments.............................. 418,859,072
--------------
Net assets, December 31, 1997.............. $5,490,142,094
--------------
--------------
Net asset value and redemption price per
share, 317,711,061 outstanding shares of
common stock (authorized 350,000,000
shares).................................. $ 17.28
--------------
--------------
</TABLE>
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS
Year Ended December 31, 1997
<S> <C> <C>
INVESTMENT INCOME
Dividends (net of $810,090 foreign
withholding tax)......................... $ 35,833,891
Interest................................... 156,549,837
---------------
192,383,728
---------------
EXPENSES
Investment advisory fee.................... 31,740,440
Custodian expense.......................... 477,000
Shareholders' reports...................... 212,000
Accounting fees............................ 94,000
Audit fees................................. 72,000
Legal fees................................. 4,000
Directors' fees............................ 3,000
Miscellaneous expenses..................... 1,971
---------------
Total Expenses........................... 32,604,411
Less: Custodian fee credit................. (284,638)
---------------
Net Expenses............................. 32,319,773
---------------
NET INVESTMENT INCOME........................ 160,063,955
---------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS
Net realized gain (loss) on:
Investments.............................. 867,141,418
Futures contracts........................ (499,159)
Short sales.............................. 1,049,655
---------------
867,691,914
---------------
Net change in unrealized appreciation on:
Investments.............................. (160,872,103)
Futures contracts........................ (1,562,422)
Short sales.............................. (1,168,571)
---------------
(163,603,096)
---------------
NET GAIN ON INVESTMENTS...................... 704,088,818
---------------
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS................................... $ 864,152,773
---------------
---------------
</TABLE>
<TABLE>
<CAPTION>
STATEMENTS OF CHANGES IN NET ASSETS
YEARS ENDED DECEMBER 31,
---------------------------------------
1997 1996
------------------ -------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net investment income.................................................................. $ 160,063,955 $ 139,211,865
Net realized gain on investments....................................................... 867,691,914 408,046,131
Net change in unrealized appreciation on investments................................... (163,603,096) 41,728,823
------------------ -------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS................................... 864,152,773 588,986,819
------------------ -------------------
DIVIDENDS AND DISTRIBUTIONS:
Dividends from net investment income................................................... (159,343,911) (142,089,785)
Distributions from net realized capital gains.......................................... (823,214,223) (458,909,559)
------------------ -------------------
TOTAL DIVIDENDS AND DISTRIBUTIONS...................................................... (982,558,134) (600,999,344)
------------------ -------------------
CAPITAL TRANSACTIONS:
Capital stock sold [4,859,580 and 8,998,637 shares, respectively]...................... 92,765,042 166,455,957
Capital stock issued in reinvestment of dividends and distributions [56,453,647 and
34,012,173 shares, respectively]...................................................... 982,558,134 600,999,344
Capital stock repurchased [(18,791,325) and (6,420,074) shares, respectively].......... (363,698,408) (119,724,926)
------------------ -------------------
NET INCREASE IN NET ASSETS RESULTING FROM CAPITAL TRANSACTIONS......................... 711,624,768 647,730,375
------------------ -------------------
TOTAL INCREASE IN NET ASSETS............................................................. 593,219,407 635,717,850
NET ASSETS:
Beginning of year...................................................................... 4,896,922,687 4,261,204,837
------------------ -------------------
End of year............................................................................ $ 5,490,142,094 $ 4,896,922,687
------------------ -------------------
------------------ -------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
A4
<PAGE>
FINANCIAL STATEMENTS OF
THE PRUDENTIAL SERIES FUND, INC.
STOCK INDEX PORTFOLIO
<TABLE>
<CAPTION>
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1997
<S> <C>
ASSETS
Investments, at value (cost:
$1,467,986,080).......................... $2,452,933,864
Interest and dividends receivable.......... 3,244,896
Receivable for capital stock sold.......... 486,793
--------------
Total Assets............................. 2,456,665,553
--------------
LIABILITIES
Payable for investments purchased.......... 6,152,798
Payable to investment adviser.............. 2,079,794
Accrued expenses........................... 222,585
Due to broker -- variation margin.......... 19,150
--------------
Total Liabilities........................ 8,474,327
--------------
NET ASSETS................................... $2,448,191,226
--------------
--------------
Net assets were comprised of:
Common stock, at $0.01 par value......... $ 810,134
Paid-in capital, in excess of par........ 1,455,746,577
--------------
1,456,556,711
Undistributed net investment income........ 304,262
Accumulated net realized gain on
investments.............................. 5,874,119
Net unrealized appreciation on
investments.............................. 985,456,134
--------------
Net assets, December 31, 1997.............. $2,448,191,226
--------------
--------------
Net asset value and redemption price per
share, 81,013,397 outstanding shares of
common stock (authorized 100,000,000
shares).................................. $ 30.22
--------------
--------------
</TABLE>
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS
Year Ended December 31, 1997
<S> <C> <C>
INVESTMENT INCOME
Dividends (net of $243,027 foreign
withholding tax)......................... $ 34,578,154
Interest................................... 4,314,396
---------------
38,892,550
---------------
EXPENSES
Investment advisory fee.................... 7,121,699
Shareholders' reports...................... 126,000
Accounting fees............................ 115,000
Custodian expense.......................... 47,000
Audit fees................................. 26,000
Directors' fees............................ 3,000
Legal fees................................. 1,000
Miscellaneous expenses..................... 1,448
---------------
Total Expenses........................... 7,441,147
Less: Custodian fee credit................. (8,173)
---------------
Net Expenses............................. 7,432,974
---------------
NET INVESTMENT INCOME........................ 31,459,576
---------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS
Net realized gain on:
Investments.............................. 57,018,822
Futures contracts........................ 17,002,563
---------------
74,021,385
---------------
Net change in unrealized appreciation on:
Investments.............................. 451,770,825
Futures contracts........................ (207,850)
---------------
451,562,975
---------------
NET GAIN ON INVESTMENTS...................... 525,584,360
---------------
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS................................... $ 557,043,936
---------------
---------------
</TABLE>
<TABLE>
<CAPTION>
STATEMENTS OF CHANGES IN NET ASSETS
YEARS ENDED DECEMBER 31,
---------------------------------------
1997 1996
------------------ -------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net investment income.................................................................. $ 31,459,576 $ 24,969,455
Net realized gain on investments....................................................... 74,021,385 12,465,185
Net change in unrealized appreciation on investments................................... 451,562,975 226,522,837
------------------ -------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS................................... 557,043,936 263,957,477
------------------ -------------------
DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment income................................................... (31,155,314) (25,100,782)
Distributions from net realized capital gains.......................................... (67,389,823) (17,273,757)
Distributions in excess of net realized capital gains.................................. -- (196,333)
------------------ -------------------
TOTAL DIVIDENDS AND DISTRIBUTIONS...................................................... (98,545,137) (42,570,872)
------------------ -------------------
CAPITAL TRANSACTIONS:
Capital stock sold [17,248,797 and 14,156,009 shares, respectively].................... 484,303,403 310,087,550
Capital stock issued in reinvestment of dividends and distributions [3,309,920 and
1,875,670 shares, respectively]....................................................... 98,545,137 42,570,872
Capital stock repurchased [(6,144,732) and (1,109,676) shares, respectively]........... (174,536,420) (23,942,788)
------------------ -------------------
NET INCREASE IN NET ASSETS RESULTING FROM CAPITAL TRANSACTIONS......................... 408,312,120 328,715,634
------------------ -------------------
TOTAL INCREASE IN NET ASSETS............................................................. 866,810,919 550,102,239
NET ASSETS:
Beginning of year...................................................................... 1,581,380,307 1,031,278,068
------------------ -------------------
End of year............................................................................ $ 2,448,191,226 $ 1,581,380,307
------------------ -------------------
------------------ -------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
A5
<PAGE>
FINANCIAL STATEMENTS OF
THE PRUDENTIAL SERIES FUND, INC.
EQUITY PORTFOLIO
<TABLE>
<CAPTION>
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1997
<S> <C>
ASSETS
Investments, at value (cost:
$4,198,636,403).......................... $6,025,444,474
Cash....................................... 77,594
Interest and dividends receivable.......... 14,912,488
Receivable for investments sold............ 2,093,331
Receivable for capital stock sold.......... 486,261
--------------
Total Assets............................. 6,043,014,148
--------------
LIABILITIES
Payable for investments purchased.......... 11,649,933
Payable to investment adviser.............. 6,897,764
Accrued expenses........................... 486,420
--------------
Total Liabilities........................ 19,034,117
--------------
NET ASSETS................................... $6,023,980,031
--------------
--------------
Net assets were comprised of:
Common stock, at $0.01 par value......... $ 1,938,894
Paid-in capital, in excess of par........ 4,163,259,125
--------------
4,165,198,019
Undistributed net investment income........ 919,002
Accumulated net realized gain on
investments.............................. 31,068,956
Net unrealized appreciation on investments
and foreign currencies................... 1,826,794,054
--------------
Net assets, December 31, 1997.............. $6,023,980,031
--------------
--------------
Net asset value and redemption price per
share, 193,889,401 outstanding shares of
common stock (authorized 250,000,000
shares).................................. $ 31.07
--------------
--------------
</TABLE>
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS
Year Ended December 31, 1997
<S> <C> <C>
INVESTMENT INCOME
Dividends (net of $1,062,630 foreign
withholding tax)......................... $ 80,559,590
Interest................................... 70,049,162
---------------
150,608,752
---------------
EXPENSES
Investment advisory fee.................... 24,840,379
Shareholders' reports...................... 249,000
Custodian expense.......................... 122,000
Accounting fees............................ 83,000
Audit fees................................. 75,000
Legal fees................................. 4,000
Directors' fees............................ 2,800
Miscellaneous expenses..................... 1,561
---------------
Total Expenses........................... 25,377,740
Less: Custodian fee credit................. (95,183)
---------------
Net Expenses............................. 25,282,557
---------------
NET INVESTMENT INCOME........................ 125,326,195
---------------
NET REALIZED AND UNREALIZED GAIN ON
INVESTMENTS AND FOREIGN CURRENCIES
Net realized gain on:
Investments.............................. 320,710,878
Foreign currencies....................... 247,917
---------------
320,958,795
---------------
Net change in unrealized appreciation on:
Investments.............................. 744,802,907
Foreign currencies....................... (14,018)
---------------
744,788,889
---------------
NET GAIN ON INVESTMENTS AND FOREIGN
CURRENCIES................................... 1,065,747,684
---------------
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS................................... $ 1,191,073,879
---------------
---------------
</TABLE>
<TABLE>
<CAPTION>
STATEMENTS OF CHANGES IN NET ASSETS
YEARS ENDED DECEMBER 31,
---------------------------------------
1997 1996
------------------ -------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net investment income.................................................................. $ 125,326,195 $ 108,378,560
Net realized gain on investments and foreign currencies................................ 320,958,795 344,149,867
Net change in unrealized appreciation on investments and foreign currencies............ 744,788,889 282,410,872
------------------ -------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS................................... 1,191,073,879 734,939,299
------------------ -------------------
DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment income................................................... (127,895,464) (107,745,221)
Distributions from net realized capital gains.......................................... (322,171,256) (422,203,368)
------------------ -------------------
TOTAL DIVIDENDS AND DISTRIBUTIONS...................................................... (450,066,720) (529,948,589)
------------------ -------------------
CAPITAL TRANSACTIONS:
Capital stock sold [12,471,611 and 13,547,538 shares, respectively].................... 381,942,219 368,210,773
Capital stock issued in reinvestment of dividends and distributions [14,665,432 and
20,011,095 shares, respectively]...................................................... 450,066,720 529,948,589
Capital stock repurchased [(11,774,942) and (3,776,507) shares, respectively].......... (363,005,143) (102,985,123)
------------------ -------------------
NET INCREASE IN NET ASSETS RESULTING FROM CAPITAL TRANSACTIONS......................... 469,003,796 795,174,239
------------------ -------------------
TOTAL INCREASE IN NET ASSETS............................................................. 1,210,010,955 1,000,164,949
NET ASSETS:
Beginning of year...................................................................... 4,813,969,076 3,813,804,127
------------------ -------------------
End of year............................................................................ $ 6,023,980,031 $ 4,813,969,076
------------------ -------------------
------------------ -------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
A6
<PAGE>
FINANCIAL STATEMENTS OF
THE PRUDENTIAL SERIES FUND, INC.
GLOBAL PORTFOLIO
<TABLE>
<CAPTION>
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1997
<S> <C>
ASSETS
Investments, at value (cost:
$501,984,495)............................ $ 618,110,214
Cash....................................... 881
Foreign currency, at value (cost:
$18,305,955)............................. 18,046,890
Receivable for investments sold............ 6,732,972
Dividends and interest receivable.......... 825,037
Forward currency contracts -- amount
receivable from counterparties........... 553,788
Receivable for capital stock sold.......... 63,725
--------------
Total Assets............................. 644,333,507
--------------
LIABILITIES
Payable for investments purchased.......... 4,413,779
Payable to investment adviser.............. 1,247,805
Accrued expenses and other liabilities..... 190,075
Forward currency contracts -- amount
payable to counterparties................ 80,496
--------------
Total Liabilities........................ 5,932,155
--------------
NET ASSETS................................... $ 638,401,352
--------------
--------------
Net assets were comprised of:
Common stock, at $0.01 par value......... $ 356,200
Paid-in capital, in excess of par........ 523,066,882
--------------
523,423,082
Undistributed net investment income........ 3,515,798
Accumulated net realized gain on
investments.............................. (4,868,770)
Net unrealized appreciation on investments
and foreign currencies................... 116,331,242
--------------
Net assets, December 31, 1997.............. $ 638,401,352
--------------
--------------
Net asset value and redemption price per
share, 35,619,965 outstanding shares of
common stock (authorized 100,000,000
shares).................................. $ 17.92
--------------
--------------
</TABLE>
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS
December 31, 1997
<S> <C> <C>
INVESTMENT INCOME
Dividends (net of $704,849 foreign
withholding tax)......................... $ 7,940,250
Interest................................... 622,794
---------------
8,563,044
---------------
EXPENSES
Investment advisory fee.................... 4,836,302
Custodian expense.......................... 368,000
Accounting fees............................ 223,000
Shareholders' reports...................... 55,000
Audit fees................................. 3,500
Directors' fees............................ 3,000
Miscellaneous expenses..................... 13,625
---------------
5,502,427
---------------
NET INVESTMENT INCOME........................ 3,060,617
---------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS AND FOREIGN CURRENCIES
Net realized gain on:
Investments.............................. 29,811,023
Foreign currencies....................... 1,216,034
---------------
31,027,057
---------------
Net change in unrealized appreciation on:
Investments.............................. 5,516,053
Foreign currencies....................... (408,410)
---------------
5,107,643
---------------
NET GAIN ON INVESTMENTS AND FOREIGN
CURRENCIES................................... 36,134,700
---------------
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS................................... $ 39,195,317
---------------
---------------
</TABLE>
<TABLE>
<CAPTION>
STATEMENTS OF CHANGES IN NET ASSETS
YEARS ENDED DECEMBER 31,
---------------------------------------
1997 1996
------------------ -------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net investment income.................................................................. $ 3,060,617 $ 3,109,922
Net realized gain on investments and foreign currencies................................ 31,027,057 19,772,496
Net change in unrealized appreciation on investments and foreign currencies............ 5,107,643 65,301,446
------------------ -------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS................................... 39,195,317 88,183,864
------------------ -------------------
DIVIDENDS AND DISTRIBUTIONS:
Dividends from net investment income................................................... (4,377,947) (3,109,922)
Distributions in excess of net investment income....................................... (3,434,778) --
Distributions from net realized capital gains.......................................... (30,337,530) (19,019,488)
------------------ -------------------
TOTAL DIVIDENDS AND DISTRIBUTIONS...................................................... (38,150,255) (22,129,410)
------------------ -------------------
CAPITAL TRANSACTIONS:
Capital stock sold [5,853,862 and 7,307,979 shares, respectively]...................... 111,692,563 123,508,873
Capital stock issued in reinvestment of dividends and distributions [2,115,902 and
1,310,966 shares, respectively]....................................................... 38,150,255 22,129,410
Capital stock repurchased [(4,869,453) and (1,820,909) shares, respectively]........... (93,116,567) (30,587,232)
Initial capitalization repurchased by The Prudential [-0- and (36,088) shares,
respectively]......................................................................... -- (575,000)
------------------ -------------------
NET INCREASE IN NET ASSETS RESULTING FROM CAPITAL TRANSACTIONS......................... 56,726,251 114,476,051
------------------ -------------------
TOTAL INCREASE IN NET ASSETS............................................................. 57,771,313 180,530,505
NET ASSETS:
Beginning of year...................................................................... 580,630,039 400,099,534
------------------ -------------------
End of year............................................................................ $ 638,401,352 $ 580,630,039
------------------ -------------------
------------------ -------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
A7
<PAGE>
DIVERSIFIED BOND PORTFOLIO
DECEMBER 31, 1997
<TABLE>
<CAPTION>
MOODY'S PRINCIPAL
LONG-TERM INVESTMENTS -- 92.8%
<S> <C> <C> <C> <C> <C>
RATING INTEREST MATURITY AMOUNT VALUE
(UNAUDITED) RATE DATE (000) (NOTE 2)
LONG-TERM BONDS
<CAPTION>
------------ ------ -------- --------- --------------
<S> <C> <C> <C> <C> <C>
AGRICULTURAL PRODUCTS & SERVICES -- 1.1%
Agco Corp.,..................................... Ba1 8.50% 03/15/06 $ 600 $ 637,500
Archer Daniels Midland Co.,..................... Aa3 6.95% 12/15/2097 8,400 8,509,536
--------------
9,147,036
--------------
AIRLINES -- 4.7%
Boeing Co., (a)................................. Aa3 8.75% 08/15/21 6,250 7,831,500
Delta Air Lines, Inc., M.T.N.................... Baa3 7.79% 12/01/98 1,000 1,013,930
Delta Air Lines, Inc., M.T.N.................... Baa3 8.38% 06/12/98 2,000 2,018,960
Delta Air Lines, Inc.,.......................... Baa3 9.875% 05/15/00 6,000 6,464,520
United Airlines, Inc.,.......................... Baa3 9.75% 08/15/21 4,500 5,758,515
United Airlines, Inc.,.......................... Baa3 10.67% 05/01/04 7,000 8,390,060
United Airlines, Inc.,.......................... Baa3 11.21% 05/01/14 5,000 7,011,550
--------------
38,489,035
--------------
BANKS AND SAVINGS & LOANS -- 6.4%
Banco Ganadero, M.T.N. SA, (Colombia)........... Baa3 9.75% 08/26/99 4,100 4,212,750
Bangkok Bank, (Thailand) (b).................... Ba1 8.375% 01/15/27 12,000 7,032,120
Banque Cent De Tunisie, (Tunisia)............... Baa3 7.50% 09/19/07 3,000 2,805,000
Capital One Bank,............................... Baa3 7.08% 10/30/01 5,000 5,116,100
Chase Manhattan Corp., (a)...................... A1 8.00% 06/15/99 2,000 2,050,880
Chemical Bank, (a).............................. Aa3 6.625% 08/15/05 2,000 2,016,600
Compass Trust Bank,............................. A3 8.23% 01/15/27 4,500 4,882,500
International Bank for Reconstruction and
Development, (Supranational).................. Aaa 12.375% 10/15/02 750 946,125
Kansallis-Osake Pankki, (Finland)............... A3 8.65% 12/29/49 5,000 5,100,000
Kansallis-Osake Pankki, (Finland) (a)........... A3 10.00% 05/01/02 5,000 5,681,950
National Australia Bank, (Australia)............ A1 6.40% 12/10/07 3,700 3,700,000
Skandinaviska Enskilda Bank, (Sweden)........... Baa1 7.50% 03/29/49 5,000 5,093,750
Svenska Handelsbank, (Sweden)................... A1 7.125% 03/29/49 3,500 3,526,250
--------------
52,164,025
--------------
CABLE -- 1.5%
Rogers Cablesystems, Inc., (Canada)............. Ba3 10.00% 03/15/05 4,000 4,400,000
Videotron Holdings, PLC, Zero Coupon (until
7/1/99)....................................... Baa3 11.125% 07/01/04 8,000 7,619,840
--------------
12,019,840
--------------
CABLE & PAY TELEVISION SYSTEMS -- 0.4%
Grupo Televisa SA, (Mexico)..................... Ba3 11.875% 05/15/06 2,500 2,825,000
--------------
COMPUTER SERVICES -- 0.6%
Seagate Technology, Inc.,....................... Baa3 7.45% 03/01/37 5,000 5,135,100
--------------
COMPUTERS -- 1.4%
International Business Machines Corp., (a)...... A1 7.125% 12/01/2096 10,900 11,276,704
--------------
FINANCIAL SERVICES -- 20.5%
Advanta Corp., M.T.N............................ Ba3 7.25% 08/16/99 10,000 9,859,700
Advanta Mortgage Loan Trust, Series 1994-3
(a)........................................... Aaa 8.49% 01/25/26 8,500 8,925,000
American General Finance, Inc., (a)............. A1 8.125% 03/15/46 12,000 13,311,600
Aristar, Inc., (a).............................. A3 5.75% 07/15/98 2,000 1,999,820
Aristar, Inc.,.................................. Baa1 7.50% 07/01/99 2,000 2,037,120
Arkwright Corp.,................................ Baa3 9.625% 08/15/26 5,000 5,919,750
Chrysler Financial Corp., (a)................... A3 9.50% 12/15/99 5,000 5,309,800
Conseco, Inc.,.................................. Ba2 8.70% 11/15/26 1,600 1,788,880
Conseco, Inc., (b).............................. Ba2 8.796% 04/01/27 15,500 17,300,635
Enterprise Rent-A-Car USA Finance Co., M.T.N.... Baa3 7.00% 06/15/00 9,000 9,179,640
Enterprise Rent-A-Car USA Finance Co., M.T.N.... Baa2 7.875% 03/15/98 5,000 5,018,600
Enterprise Rent-A-Car USA Finance Co., M.T.N.... Baa2 8.75% 12/15/99 3,000 3,147,000
Felcor Suite Hotels, Inc.,...................... Ba1 7.625% 10/01/07 7,900 7,906,320
Ford Motor Credit Co., (a)...................... A1 5.75% 01/25/01 4,000 3,944,680
Ford Motor Credit Co., (a)...................... A1 6.25% 02/26/98 3,000 3,000,780
General Motors Acceptance Corp., (a)............ A3 8.40% 10/15/99 3,700 3,836,937
Green Tree Financial Corp.,..................... NR 7.90% 03/15/28 7,694 7,946,940
Industrial Financial Corp.,..................... Ba1 7.875% 08/04/02 4,000 3,800,000
Lumbermens Mutual Casualty Co.,................. Baa1 8.30% 12/01/37 12,850 13,621,000
Nationwide CSN Trust,........................... A1 9.875% 02/15/25 5,000 5,896,950
Polysindo Int'l. Finance Co., (Indonesia)....... Ba3 11.375% 06/15/06 3,000 2,430,000
Polysindo Int'l. Finance Co., (Indonesia)....... Ba3 13.00% 06/15/01 2,500 2,275,000
PT Alatief Freeport Financial Co.,
(Netherlands)................................. Ba1 9.75% 04/15/01 5,750 5,807,500
Reliastar Financial Corp., (a).................. A3 6.625% 09/15/03 5,000 5,007,500
Union Planters Corp.,........................... Baa1 8.20% 12/15/26 5,000 5,251,550
Vesta Insurance Group,.......................... Baa3 8.525% 01/15/27 12,000 13,231,200
--------------
167,753,902
--------------
FOOD & BEVERAGE -- 1.4%
RJR Nabisco, Inc.,.............................. Baa3 8.25% 07/01/04 11,000 11,563,750
--------------
FOREST PRODUCTS -- 0.8%
Westvaco Corp., (a)............................. A1 9.75% 06/15/20 5,000 6,673,550
--------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
B1
<PAGE>
DIVERSIFIED BOND PORTFOLIO (CONTINUED)
DECEMBER 31, 1997
<TABLE>
<CAPTION>
MOODY'S PRINCIPAL
RATING INTEREST MATURITY AMOUNT VALUE
LONG-TERM BONDS (CONTINUED) (UNAUDITED) RATE DATE (000) (NOTE 2)
------------ ------ -------- --------- --------------
<S> <C> <C> <C> <C> <C>
INDUSTRIAL -- 0.4%
Compania Sud Americana de Vapores, SA,
(Chile)....................................... NR 7.375% 12/08/03 $ 3,000 $ 2,962,500
--------------
INVESTMENT BANKERS -- 7.4%
Lehman Brothers Holdings, Inc., M.T.N........... Baa1 6.40% 08/30/00 23,250 23,220,938
Salomon Inc.,................................... Baa1 6.25% 10/01/99 8,000 8,009,280
Salomon Inc.,................................... A2 6.50% 03/01/00 10,000 10,052,400
Salomon Inc., M.T.N............................. A2 6.59% 02/21/01 10,000 10,083,200
Salomon Inc.,................................... A2 6.65% 07/15/01 7,000 7,059,080
Salomon Inc.,................................... A2 7.25% 05/01/01 2,250 2,309,220
--------------
60,734,118
--------------
LEISURE & TOURISM -- 2.7%
Royal Caribbean Cruises Ltd.,................... Baa3 7.00% 10/15/07 8,000 8,058,640
Royal Caribbean Cruises Ltd.,................... Baa3 7.25% 08/15/06 5,000 5,146,400
Royal Caribbean Cruises Ltd.,................... Baa3 7.50% 10/15/27 8,500 8,655,890
--------------
21,860,930
--------------
MEDIA -- 6.0%
News America Holdings, Inc., (a)................ Baa3 7.50% 03/01/00 6,000 6,134,760
Paramount Communications, Inc.,................. Ba2 7.50% 01/15/02 5,000 5,122,600
Time Warner, Inc.,.............................. Ba1 8.18% 08/15/07 2,500 2,721,150
Time Warner, Inc.,.............................. Ba1 7.75% 06/15/05 7,800 8,226,972
Time Warner, Inc.,.............................. Ba1 9.125% 01/15/13 6,000 7,144,620
Turner Broadcasting System, Inc.,............... Ba1 8.375% 07/01/13 2,000 2,244,040
Turner Broadcasting System, Inc.,............... Ba1 7.40% 02/01/04 13,500 14,023,125
Viacom, Inc.,................................... Ba2 7.75% 06/01/05 3,000 3,051,270
--------------
48,668,537
--------------
MISCELLANEOUS CONSUMER GROWTH -- 0.4%
Whitman Corp.,.................................. Baa2 7.50% 08/15/01 3,000 3,107,220
--------------
MORTGAGE PASS-THROUGHS -- 3.0%
02/15/08
-
Government National Mortgage Association,....... 7.50% 02/15/26 3,675 3,783,890
05/20/02
-
Government National Mortgage Association,....... 7.50% 01/15/26 20,159 20,745,779
Government National Mortgage Association,....... 7.50% 02/15/09 133 137,714
--------------
24,667,383
--------------
OIL & GAS -- 4.8%
Apache Corp.,................................... Baa1 7.95% 04/15/26 1,300 1,456,910
B.J. Services Co.,.............................. Baa2 7.00% 02/01/06 5,000 5,118,750
Gulf Canada Resources Ltd., (Canada)............ Ba1 8.25% 03/15/17 6,600 7,342,566
Occidental Petroleum Corp.,..................... Baa2 10.125% 11/15/01 5,000 5,641,200
Occidental Petroleum Corp.,..................... Baa2 11.125% 08/01/10 5,000 6,810,700
Parker & Parsley Petroleum Co.,................. Baa3 8.25% 08/15/07 4,000 4,405,760
Seagull Energy Corp.,........................... Ba1 7.50% 09/15/27 8,325 8,622,119
--------------
39,398,005
--------------
PAPER & FOREST -- 0.8%
UPM-Kymmene Oyj,................................ Baa1 7.45% 11/26/27 6,000 6,157,500
--------------
RAILROADS -- 1.8%
CSX Corp.,...................................... Baa2 7.95% 05/01/27 3,000 3,391,080
Norfolk Southern Corp., (a)..................... Baa1 7.80% 05/15/27 10,000 11,287,500
--------------
14,678,580
--------------
RESTAURANTS -- 1.2%
Darden Restaurants, Inc., (a)................... Baa1 7.125% 02/01/16 10,000 9,606,500
--------------
RETAIL -- 2.8%
Federated Department Stores, Inc.,.............. Baa2 8.50% 06/15/03 10,200 11,127,180
Federated Department Stores, Inc.,.............. Baa2 8.125% 10/15/02 5,250 5,612,250
Kmart Corp., M.T.N.............................. Ba3 9.80% 06/15/98 2,000 2,020,000
Rite Aid Corp., (a)............................. Baa1 6.70% 12/15/01 4,000 4,065,000
--------------
22,824,430
--------------
TELECOMMUNICATIONS -- 5.4%
Impast Corp.,................................... B2 12.125% 07/15/03 3,000 3,045,000
McLeod USA Inc.,................................ B3 9.25% 07/15/07 2,000 2,100,000
McLeod USA, Inc., Zero Coupon (until 3/1/02).... B3 10.50% 03/01/07 5,000 3,637,500
Tele-Communications, Inc.,...................... Ba1 7.875% 08/01/13 5,800 6,238,306
Tele-Communications, Inc.,...................... Ba1 6.875% 02/15/06 10,000 10,036,800
Tele-Communications, Inc.,...................... Ba1 10.125% 04/15/22 6,300 8,383,851
Total Access Communications Public Company Ltd.,
(Thailand).................................... Ba2 8.375% 11/04/06 15,000 7,200,000
WorldCom, Inc.,................................. Ba1 7.75% 04/01/07 3,500 3,758,615
--------------
44,400,072
--------------
UTILITIES -- 6.4%
Arkla, Inc., M.T.N.............................. Baa3 9.32% 12/18/00 2,000 2,140,300
Avon Energy Partners Holdings,.................. NR 7.05% 12/11/07 5,000 5,081,250
California Infrastructure PG&E, Series
1997-1,....................................... Aaa 6.32% 09/25/05 4,000 3,993,750
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
B2
<PAGE>
DIVERSIFIED BOND PORTFOLIO (CONTINUED)
DECEMBER 31, 1997
<TABLE>
<CAPTION>
MOODY'S PRINCIPAL
RATING INTEREST MATURITY AMOUNT VALUE
LONG-TERM BONDS (CONTINUED) (UNAUDITED) RATE DATE (000) (NOTE 2)
------------ ------ -------- --------- --------------
<S> <C> <C> <C> <C> <C>
Cleveland Electric Illumination,................ Ba1 7.88% 11/01/17 $ 5,700 $ 6,017,490
Commonwealth Edison Co.,........................ Baa3 7.625% 01/15/07 7,525 7,941,735
El Paso Electric Company,....................... Ba3 9.40% 05/01/11 4,000 4,522,280
Hyder PLC,...................................... Baa1 7.25% 12/15/17 12,000 12,125,400
Niagara Mohawk Power,........................... Ba3 6.875% 04/01/03 4,000 3,988,440
Niagara Mohawk Power,........................... Ba3 8.00% 06/01/04 5,000 5,297,900
Pennsylvania Power & Light Co., (a)............. A3 9.375% 07/01/21 1,150 1,284,113
--------------
52,392,658
--------------
U.S. GOVERNMENT & AGENCY OBLIGATIONS -- 2.7%
Federal Farm Credit Bank,....................... 8.65% 10/01/99 150 156,891
Resolution Funding Corp.,....................... 8.125% 10/15/19 700 861,875
Resolution Funding Corp., (a)................... Zero 10/15/15 17,100 5,768,514
Resolution Funding Corp.,....................... 8.625% 01/15/21 200 258,812
United States Treasury Notes, (b)............... 7.875% 08/15/01 4,000 4,276,240
United States Treasury Notes,................... 5.875% 09/30/02 4,950 4,977,077
United States Treasury Notes,................... 6.00% 07/31/02 1,000 1,010,470
United States Treasury Notes,................... 6.125% 07/31/00 3,000 3,030,930
United States Treasury Notes,................... 6.25% 02/15/03 1,800 1,840,788
United States Treasury Notes,................... 6.625% 07/31/01 200 205,624
--------------
22,387,221
--------------
U.S. GOVERNMENT MORTGAGE BACKED SECURITIES -- 0.1%
Federal National Mortgage Association,.......... 9.00% 10/01/16 305 323,942
Federal National Mortgage Association,.......... 9.00% 05/01/17 211 225,908
Federal National Mortgage Association,.......... 9.00% 09/01/21 6 6,628
--------------
556,478
--------------
FOREIGN GOVERNMENT BONDS -- 8.1%
Banco de Commercio Exterior de Colombia, SA,
M.T.N., (Colombia)............................ Baa3 8.625% 06/02/00 2,000 2,045,000
City of Moscow, (Russia)........................ Ba2 9.50% 05/31/00 5,000 4,725,000
City of Moscow, (Russia)........................ Ba2 9.50% 05/31/00 2,000 1,890,000
City of St. Petersburg, (Russia)................ NR 9.50% 06/18/02 5,000 4,500,000
Republic of Colombia, (Colombia)................ Baa3 7.625% 02/15/07 12,500 11,672,125
Republic of Colombia, (Colombia)................ Baa3 8.00% 06/14/01 1,600 1,605,600
Republic of Colombia, (Colombia)................ Baa3 8.75% 10/06/99 3,500 3,604,370
Republic of Panama, (Panama).................... Ba1 7.875% 02/13/02 8,000 7,990,000
Republic of Philippines, (Philippines).......... Ba1 8.60% 06/15/27 1,000 820,000
Republic of South Africa, (South Africa)........ Baa3 8.50% 06/23/17 17,000 16,235,000
Rio De Janeiro, (Brazil)........................ B1 10.375% 07/12/99 5,000 4,956,250
Russian Ministry of Finance, (Russia)........... Ba2 10.00% 06/26/07 2,500 2,316,250
United Mexican States, (Mexico)................. Ba2 11.50% 05/15/26 3,500 4,147,500
--------------
66,507,095
--------------
TOTAL LONG-TERM INVESTMENTS
(cost $745,310,568)......................................................................... 757,957,169
--------------
SHORT-TERM INVESTMENT -- 5.5%
REPURCHASE AGREEMENT
Joint Repurchase Agreement Account
(cost $45,329,000; Note 5).................... 6.53% 01/02/98 45,329 45,329,000
--------------
TOTAL INVESTMENTS -- 98.3%
(cost $790,639,568; Note 6)................................................................. 803,286,169
--------------
VARIATION MARGIN ON OPEN FUTURES CONTRACTS (C) -- (0.0%)...................................... (214,531)
OTHER ASSETS IN EXCESS OF OTHER LIABILITIES -- 1.7%........................................... 13,635,093
--------------
TOTAL NET ASSETS -- 100.0%.................................................................... $ 816,706,731
--------------
--------------
</TABLE>
The following abbreviations are used in portfolio descriptions:
M.T.N. Medium Term Note
SA Sociedad Anonima (Spanish Corporation) or Societe Anonyme (French
Corporation)
(a) Security segregated as collateral for futures contracts.
(b) Portion of security segregated as collateral for future contracts. The
aggregate cost of the segregated securities is $26,272,861. The aggregated
value is $23,624,600.
(c) Open futures contracts as of December 31, 1997 are as follows:
<TABLE>
<CAPTION>
VALUE AT
NUMBER OF EXPIRATION VALUE AT DECEMBER 31,
CONTRACTS TYPE DATE TRADE DATE 1997 DEPRECIATION
<S> <C> <C> <C> <C> <C>
Short Positions:
411 U.S. Treasury Notes Mar 98 $45,852,188 $46,096,219 $ (244,031)
145 U.S. Treasury Bond Mar 98 $17,248,531 $17,467,969 $ (219,438)
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
B3
<PAGE>
GOVERNMENT INCOME PORTFOLIO
DECEMBER 31, 1997
<TABLE>
<CAPTION>
PRINCIPAL
LONG-TERM INVESTMENTS -- 95.7%
<S> <C> <C> <C> <C>
INTEREST MATURITY AMOUNT VALUE
RATE DATE (000) (NOTE 2)
LONG-TERM BONDS -- 95.7%
<CAPTION>
------ -------- --------- --------------
<S> <C> <C> <C> <C>
ASSET-BACKED SECURITIES -- 5.6%
Chase Manhattan Credit Card Master Trust, Series
1995-2 (a)(b)................................. 6.110% 08/15/01 $ 12,500 $ 12,503,875
Equicon Home Equity Loan Trust, Series 1994-2... 7.850% 03/18/14 1,029 1,034,799
Team Financing Corp., Series 1997-1 Class A..... 7.350% 05/15/03 10,000 10,368,700
--------------
23,907,374
--------------
COLLATERALIZED MORTGAGE OBLIGATION -- 2.3%
Main Place Funding (a).......................... 6.179% 07/17/98 10,000 10,018,750
--------------
CORPORATE -- 1.9%
Merck & Co...................................... 5.760% 05/03/37 8,000 8,232,880
--------------
MORTGAGE PASS-THROUGHS -- 36.0%
Federal Home Loan Mortgage Corp., ARM........... 7.932% 06/01/25 7,450 7,652,695
Federal National Mortgage Association........... 6.560% 08/27/04 25,000 25,218,750
05/01/10
-
Federal National Mortgage Association........... 7.500% 12/01/12 20,920 21,488,806
03/01/22
-
Federal National Mortgage Association........... 8.000% 05/01/26 1,913 1,985,086
05/01/24
-
Federal National Mortgage Association........... 8.500% 04/01/25 24,639 25,836,437
02/01/25
-
Federal National Mortgage Association........... 9.000% 04/01/25 10,179 10,851,475
04/08/07
-
Federal National Mortgage Association Strips.... Zero 10/08/09 43,480 22,792,572
12/15/25
-
Government National Mortgage Association........ 7.500% 02/15/26 18,260 18,719,986
09/15/23
-
Government National Mortgage Association........ 8.000% 10/15/25 19,511 20,249,250
--------------
154,795,057
--------------
U.S. GOVERNMENT & AGENCY OBLIGATIONS -- 49.9%
Israel AID...................................... Zero 03/15/06 18,272 11,233,991
Israel AID...................................... Zero 08/15/09 20,000 10,000,000
Resolution Funding Corp......................... 8.125% 10/15/19 4,200 5,171,250
Small Business Administration Participation
Certificate................................... 7.150% 01/01/17 19,125 19,966,691
Small Business Administration Participation
Certificate................................... 7.200% 10/01/16 19,338 20,178,133
Small Business Adminstration Participation
Certificate................................... 6.850% 07/01/17 5,000 5,166,050
United States Treasury Bond (b)................. 6.625% 02/15/27 25,000 27,140,500
United States Treasury Bond (b)................. 8.125% 08/15/19 28,000 35,035,000
United States Treasury Bond (b)................. 12.000% 08/15/13 24,100 35,509,904
United States Treasury Note..................... 6.000% 08/15/00 5,000 5,035,950
United States Treasury Note..................... 6.250% 10/31/01 3,500 3,559,605
United States Treasury Note (b)................. 7.750% 12/31/99 35,000 36,361,850
--------------
214,358,924
--------------
TOTAL LONG-TERM INVESTMENTS
(cost $398,044,627)........................................................... 411,312,985
--------------
SHORT-TERM INVESTMENT -- 3.1%
REPURCHASE AGREEMENT
Joint Repurchase Agreement Account
(cost $13,337,000; Note 5).................... 6.53% 01/02/98 13,337 13,337,000
--------------
TOTAL INVESTMENTS -- 98.8%
(cost $411,381,627; Note 6)................................................... 424,649,985
--------------
VARIATION MARGIN ON OPEN FUTURES CONTRACTS -- (C)............................... (38,438)
OTHER ASSETS IN EXCESS OF OTHER LIABILITIES -- 1.2%............................. 5,031,512
--------------
TOTAL NET ASSETS -- 100.0%...................................................... $ 429,643,059
--------------
--------------
</TABLE>
(a) The interest rate shown reflects the current rate of the variable rate
instrument.
(b) Pledged as initial margin on financial future contracts.
(c) Open futures contracts as of December 31, 1997 are as follows:
<TABLE>
<CAPTION>
NUMBER OF EXPIRATION VALUE AT VALUE AT
CONTRACTS TYPE DATE TRADE DATE DECEMBER 31, 1997 DEPRECIATION
<C> <S> <C> <C> <C> <C>
Short Position:
123 U.S. Treasury Note Mar 98 $ 13,722,187 $ 13,795,219 ($ 73,032)
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
B4
<PAGE>
CONSERVATIVE BALANCED PORTFOLIO
DECEMBER 31, 1997
<TABLE>
<CAPTION>
LONG-TERM INVESTMENTS -- 91.8%
<S> <C> <C> <C>
MOODY'S PRINCIPAL
RATING AMOUNT
(UNAUDITED) (000) VALUE
LONG-TERM BONDS -- 58.6% (NOTE 2)
<CAPTION>
------------ --------- --------------
<S> <C> <C> <C>
AGRICULTURAL PRODUCTS & SERVICES -- 0.1%
Agco Corp.,
8.50%, 03/15/06............................... Ba1 $ 2,875 $ 3,054,687
--------------
AIRLINES -- 4.2%
Delta Airlines, Inc.,
10.125%, 05/15/10............................. Baa3 20,000 25,218,200
10.375%, 02/01/11 (a)......................... Ba1 56,905 73,306,108
United Airlines, Inc.,
6.126%, 03/02/04.............................. Aa2 8,000 7,988,000
9.75%, 08/15/21............................... Baa3 10,125 12,956,659
10.67%, 05/01/04.............................. Baa3 46,665 55,931,736
11.21%, 05/01/14.............................. Baa3 18,433 25,848,780
--------------
201,249,483
--------------
ASSET-BACKED SECURITIES -- 1.6%
California Infrastructure,
6.14%, 03/25/02............................... Aaa 5,500 5,511,000
6.17%, 03/25/03............................... Aaa 6,000 6,018,600
6.28%, 09/25/05............................... Aaa 7,000 7,042,000
6.38%, 09/25/08............................... Aaa 21,000 21,172,200
6.42%, 12/26/09............................... Aaa 10,000 10,110,000
6.48%, 11/26/09............................... Aaa 10,000 10,115,625
Standard Credit Card Master Trust,
5.95%, 10/07/04 (a)........................... Aaa 4,650 4,602,012
Team Financing Corp,
7.35%, 05/15/03............................... Aa2 11,000 11,405,570
--------------
75,977,007
--------------
BANKS AND SAVINGS & LOANS -- 5.9%
Banco Ganadero, M.T.N. SA (Colombia),
9.75%, 08/26/99............................... Baa3 7,300 7,500,750
Bangkok Bank, (Thailand),
7.25%, 09/15/05............................... Ba1 10,000 7,452,800
8.25%, 03/15/16............................... Ba1 7,500 5,250,000
8.375%, 01/15/27 Sr. Note..................... Ba1 40,000 23,440,400
Bank Nova Scotia,
6.50%, 07/15/07............................... A1 7,200 7,218,000
Bank of Boston N.A.,
5.973%, 01/25/99.............................. A2 2,500 2,507,600
Bankers Trust New York Corp.,
5.813%, 08/06/00.............................. A2 7,500 7,485,000
Banque Cent De Tunisie, (Tunisia),
7.50%, 09/19/07............................... Baa3 17,950 16,783,250
Capital One Bank,
6.97%, 02/04/02............................... Baa3 25,000 25,362,750
7.08%, 10/30/01............................... Baa3 35,100 35,915,022
7.35%, 06/20/00............................... Baa3 8,100 8,293,266
8.125%, 03/01/00.............................. Baa3 13,150 13,630,501
Chase, Inc.
6.075%, 02/28/00.............................. Aa3 4,000 4,006,160
Kansallis-Osake Pankki, (Finland),
8.65%, 12/29/49............................... A3 10,000 10,200,000
National Australia Bank, (Australia),
6.40%, 12/10/07............................... A1 14,000 14,000,000
Nationsbank Corp.,
6.076%, 06/19/02.............................. A1 5,000 5,005,850
North Fork Bancorporation, Inc.,
8.00%, 12/15/27............................... Baa3 4,000 4,068,800
</TABLE>
DECEMBER 31, 1997
<TABLE>
<CAPTION>
MOODY'S PRINCIPAL
RATING AMOUNT VALUE
LONG-TERM BONDS (CONTINUED) (UNAUDITED) (000) (NOTE 2)
------------ --------- --------------
<S> <C> <C> <C>
Okobank, (Finland),
7.20%, 10/29/49............................... A3 $ 9,000 $ 9,101,250
7.20%, 10/29/49............................... A3 3,500 3,539,375
7.312%, 09/27/49.............................. A3 18,750 19,031,250
Royal Bank of Canada, (Canada),
6.75%, 10/24/11 (a)........................... Aa3 17,400 17,513,448
Siam Commercila, (Thailand),
7.50%, 03/15/06............................... A3 14,500 9,425,000
Svenska Handelsbank, (Sweden),
7.125%, 03/29/49.............................. A1 10,000 10,075,000
Thai Farmers Bank, (Thailand),
8.25%, 08/21/16 (a)........................... Ba1 20,000 12,000,000
--------------
278,805,472
--------------
CABLE & PAY TELEVISION SYSTEMS -- 2.0%
Continental Cablevision, Inc.,
8.50%, 09/15/01............................... Baa3 5,545 5,889,455
Tele-Communications, Inc.,
6.875%, 02/15/06.............................. Ba1 10,000 10,036,800
7.375%, 02/15/00.............................. Ba1 27,000 27,521,100
7.875%, 08/01/13.............................. Ba1 19,350 20,812,279
8.25%, 01/15/03............................... Ba1 2,000 2,135,780
9.25%, 04/15/02............................... Ba1 9,500 10,427,865
9.875%, 06/15/22.............................. Ba1 12,900 16,811,667
--------------
93,634,946
--------------
CONSULTING -- 0.7%
Comdisco, Inc., M.T.N.,
6.11%, 08/04/99............................... Baa1 12,500 12,513,250
6.375%, 11/30/01.............................. Baa1 21,500 21,500,000
--------------
34,013,250
--------------
CONSUMER SERVICES -- 0.1%
Service Corp. International,
7.00%, 06/01/15............................... Baa1 2,500 2,557,875
--------------
ENERGY -- 0.1%
Baltimore Gas & Electric,
5.886%, 03/15/99.............................. A2 3,500 3,503,570
--------------
FINANCIAL SERVICES -- 15.4%
Advanta Corp.,
6.99%, 10/18/99............................... Ba3 15,000 14,400,000
7.25%, 08/16/99............................... Ba3 3,000 2,957,910
7.50%, 08/28/00............................... Ba3 35,000 34,053,250
American General Finance, Inc.,
7.57%, 12/01/45............................... A2 5,000 5,178,500
Arkwright Corp.,
9.625%, 08/15/26.............................. Baa3 8,000 9,471,600
Avco Financial Services,
5.915%, 11/17/99.............................. NR 3,500 3,498,950
Bear Stearns & Co.,
6.50%, 07/05/00............................... A2 20,000 20,120,800
Central Hispano Financial Services, (Portugal),
6.25%, 04/28/05............................... A3 10,000 10,000,000
Conseco, Inc.,
8.70%, 11/15/26 (a)........................... Ba2 32,313 36,126,991
8.796%, 04/01/27 (a).......................... Ba2 23,900 26,676,463
Donaldson Lufkin, & Jenrette Inc.,
5.625%, 02/15/16.............................. Baa1 5,480 5,395,827
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
B5
<PAGE>
CONSERVATIVE BALANCED PORTFOLIO (CONTINUED)
DECEMBER 31, 1997
<TABLE>
<CAPTION>
MOODY'S PRINCIPAL
RATING AMOUNT VALUE
LONG-TERM BONDS (CONTINUED) (UNAUDITED) (000) (NOTE 2)
------------ --------- --------------
<S> <C> <C> <C>
Enterprise Rent-A-Car USA Finance Co., M.T.N.,
6.35%, 01/15/01............................... Baa2 $ 11,500 $ 11,554,050
6.95%, 03/01/04............................... Baa2 27,500 28,050,000
7.00%, 06/15/00............................... Baa2 30,000 30,598,800
7.50%, 06/15/03............................... Baa2 5,000 5,261,900
8.75%, 12/15/99............................... Baa2 5,000 5,245,000
First Chicago NBD Corp.,
5.819%, 09/23/02.............................. A1 8,000 7,976,000
First Union Corp.,
9.45%, 06/15/99............................... A2 4,000 4,177,920
Great Western Financial,
8.206%, 02/01/27 (a).......................... A3 19,300 20,469,966
Industrial Finance Corp.,
7.75%, 08/04/07............................... Ba1 5,000 4,750,000
7.875%, 08/04/02.............................. Ba1 6,000 5,700,000
Lehman Brothers Holdings, Inc.,
6.206%, 09/03/02.............................. Baa1 8,000 7,950,000
6.33%, 08/01/00............................... Baa1 30,000 30,039,600
6.40%, 08/30/00............................... Baa1 79,000 78,901,250
6.71%, 10/12/99............................... Baa1 6,000 6,056,640
6.89%, 10/10/00............................... Baa1 10,545 10,701,804
7.125%, 07/15/02.............................. Baa1 16,000 16,359,680
Lumbermens Mutual Casualty Co.,
8.30%, 12/01/37............................... Baa1 21,750 23,055,000
9.15%, 07/01/26............................... Baa1 7,500 8,728,125
Merita Bank, Ltd.,
7.50%, 12/29/49............................... A3 15,000 15,390,000
Merrill Lynch Pierce, Fenner & Smith,
5.935%, 11/14/00.............................. Aa3 10,000 9,966,250
Paine Webber Group, Inc.,
7.625%, 10/15/08 Sr. Note..................... Baa1 5,000 5,352,700
PT Alatief Freeport Financial Co., Sr. Notes,
(Netherlands),
9.75%, 04/15/01............................... Ba1 8,950 9,039,500
Salomon, Inc.,
6.25%, 10/01/99............................... A2 32,800 32,838,048
6.50%, 03/01/00 (a)........................... A2 38,500 38,701,740
6.59%, 02/21/01 (a)........................... A2 30,750 31,005,840
6.75%, 02/15/03............................... A2 5,000 5,057,850
7.25%, 05/01/01............................... A2 8,625 8,852,010
Sears Roebuck Acceptance Corp., M.T.N.,
6.38%, 02/16/99............................... A2 25,000 25,125,000
SunAmerica, Inc.,
6.20%, 10/31/99............................... Baa1 9,000 9,008,100
Textron Financial Corp.,
6.05%, 03/16/09............................... Aaa 46,440 46,354,771
Union Planters Corp., Gtd. Notes,
8.20%, 12/15/26............................... Baa1 20,750 21,793,932
--------------
731,941,767
--------------
FOOD & BEVERAGE -- 0.5%
Archer-Daniels-Midland Co.,
6.75%, 12/15/27............................... Aa3 5,000 5,008,650
6.95%, 12/15/2097............................. Aa3 18,800 19,045,152
--------------
24,053,802
--------------
INDUSTRIAL -- 0.8%
Compania Sud Americana de Vapores, SA (Chile),
7.375%, 12/08/03.............................. NR 7,600 7,505,000
</TABLE>
DECEMBER 31, 1997
<TABLE>
<CAPTION>
MOODY'S PRINCIPAL
RATING AMOUNT VALUE
LONG-TERM BONDS (CONTINUED) (UNAUDITED) (000) (NOTE 2)
------------ --------- --------------
<S> <C> <C> <C>
Reliance Industries Ltd.,
8.125%, 09/27/05.............................. Baa3 $ 15,000 $ 14,025,000
8.25%, 01/15/27............................... Baa3 19,000 17,005,000
--------------
38,535,000
--------------
LEISURE & TOURISM -- 0.1%
Royal Carribean Cruises Ltd.,
7.50%, 10/15/27............................... Baa3 5,750 5,855,455
--------------
MEDIA -- 5.7%
Paramount Communications, Inc., Sr. Notes,
7.50%, 01/15/02............................... Ba2 6,425 6,582,541
Time Warner, Inc.,
6.10%, 12/30/01............................... Ba1 27,650 27,016,815
8.11%, 08/15/06............................... Ba1 7,250 7,848,850
8.18%, 08/15/07............................... Ba1 24,915 27,118,981
9.125%, 01/15/13.............................. Ba1 41,270 49,143,078
Turner Broadcasting Co.,
8.375%, 07/01/13.............................. Ba1 17,325 19,438,997
Viacom, Inc.,
6.75%, 01/15/03............................... Ba2 71,325 70,082,518
7.75%, 06/01/05............................... Ba2 60,025 61,050,827
--------------
268,282,607
--------------
OIL & GAS -- 1.6%
Apache Corp.,
7.95%, 04/15/26............................... Baa1 2,900 3,250,030
B.J. Services Co.,
7.00%, 02/01/06............................... Baa2 4,000 4,095,000
Gulf Canada Resources, Ltd., (Canada),
8.25%, 03/15/17............................... Ba1 4,500 5,006,295
Parker & Parsley Petroleum Co.,
8.25%, 08/15/07............................... Baa3 3,000 3,304,320
Petroliam Nasional, (Malaysia),
6.625%, 10/18/01.............................. A2 12,000 11,662,680
Seagull Energy Corp.,
7.50%, 09/15/27............................... Ba1 17,000 17,606,730
Talisman Energy Inc.,
7.25%, 10/15/27............................... Baa1 30,000 30,829,800
--------------
75,754,855
--------------
PAPER & FOREST -- 0.5%
UPM-Kymmene Oyj,
7.45%, 11/26/27............................... Baa1 22,800 23,398,500
--------------
RAILROADS -- 0.5%
Norfolk Southern Corp.,
7.05%, 05/01/37............................... Baa1 25,000 26,218,750
--------------
REAL ESTATE INVESTMENT TRUST -- 0.2%
Falcor Suite Hotels, Inc.,
7.625%, 10/1/07............................... Ba1 8,000 8,006,400
--------------
RETAIL -- 2.8%
Federated Department Stores, Inc.,
8.125%, 10/15/02 Sr. Note (a)................. Baa2 41,030 43,861,070
8.50%, 06/15/03 (a)........................... Baa2 32,400 35,345,160
10.00%, 02/15/01 (a).......................... Baa2 46,115 50,791,061
Rite Aid Corp.,
6.70%, 12/15/01............................... Baa1 5,000 5,081,250
--------------
135,078,541
--------------
TELECOMMUNICATIONS -- 3.6%
McLeod USA Inc., Sr. Notes,
9.25%, 07/15/07............................... B3 3,000 3,150,000
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
B6
<PAGE>
CONSERVATIVE BALANCED PORTFOLIO (CONTINUED)
DECEMBER 31, 1997
<TABLE>
<CAPTION>
MOODY'S PRINCIPAL
RATING AMOUNT VALUE
LONG-TERM BONDS (CONTINUED) (UNAUDITED) (000) (NOTE 2)
------------ --------- --------------
<S> <C> <C> <C>
Total Access Communications Public Company Ltd.,
(Thailand),
8.375%, 11/04/06.............................. Ba2 $ 33,000 $ 15,840,000
WorldCom, Inc.,
7.55%, 04/01/04............................... Ba1 80,000 83,775,200
7.75%, 04/01/07............................... Ba1 25,000 26,847,250
7.75%, 04/01/27............................... Ba1 4,500 4,944,420
8.875%, 01/15/06.............................. Ba1 32,000 34,429,440
--------------
168,986,310
--------------
TOBACCO -- 3.0%
Philip Morris Co. Inc.,
6.375%, 02/01/06.............................. A2 17,675 17,359,501
7.20%, 02/01/07............................... A2 31,915 32,932,769
RJR Nabisco, Inc.,
7.625%, 09/15/03.............................. Baa3 10,500 10,732,260
8.25%, 07/01/04............................... Baa3 8,000 8,410,000
8.50%, 07/01/07............................... Baa3 11,000 11,726,550
8.75%, 04/15/04............................... Baa3 23,090 24,719,000
8.75%, 08/15/05............................... Baa3 19,000 20,499,670
9.25%, 08/15/13............................... Baa3 13,571 15,227,341
--------------
141,607,091
--------------
TRANSPORTATION/TRUCKING/SHIPPING -- 0.0%
Federal Express Corp., M.T.N.,
10.05%, 06/15/99.............................. Baa2 500 527,645
--------------
UTILITIES -- 1.9%
Commonwealth Edison Co.,
7.375%, 01/15/04.............................. Baa3 14,000 14,523,880
7.625%, 01/15/07.............................. Baa3 21,000 22,162,980
Hyder PLC, (United Kingdom),
6.75%, 12/15/04............................... Baa1 25,000 25,093,750
6.875%, 12/15/17.............................. Baa1 25,000 25,438,750
Hydro-Quebec, (Canada),
5.938%, 09/29/49.............................. A+ 5,000 4,415,625
--------------
91,634,985
--------------
U.S. GOVERNMENT & AGENCY OBLIGATIONS -- 3.1%
United States Treasury Bond,
6.125%, 08/15/07.............................. 7,500 7,707,450
United States Treasury Notes,
5.875%, 01/31/99 (a).......................... 20,000 20,046,800
5.875%, 09/30/02.............................. 28,550 28,706,169
5.875%, 02/15/04.............................. 16,750 16,896,563
6.25%, 10/31/01............................... 9,500 9,661,785
6.375%, 03/31/01 (a).......................... 4,600 4,686,250
6.375%, 08/15/27.............................. 57,325 60,460,104
--------------
148,165,121
--------------
FOREIGN GOVERNMENT BONDS -- 4.2%
Abbey National Treasury, (United Kingdom),
5.875%, 03/08/99.............................. Aa2 5,500 5,492,850
Banco de Commercio Exterior de Colombia, S.A.,
M.T.N. (Colombia),
8.625%, 06/02/00.............................. Baa3 5,500 5,623,750
City of Moscow, (Russia),
9.50%, 05/31/00............................... Ba2 16,500 15,592,500
City of St. Petersburg, (Russia),
9.50%, 06/18/02............................... NR 25,000 22,500,000
</TABLE>
DECEMBER 31, 1997
<TABLE>
<CAPTION>
MOODY'S PRINCIPAL
RATING AMOUNT VALUE
LONG-TERM BONDS (CONTINUED) (UNAUDITED) (000) (NOTE 2)
------------ --------- --------------
<S> <C> <C> <C>
Province of Quebec, (Canada),
6.238%, 06/15/99.............................. A2 $ 3,000 $ 3,007,969
Republic of Colombia, (Colombia),
7.625%, 02/15/07 (a).......................... Baa3 85,000 79,370,450
8.00%, 06/14/01............................... Baa3 2,250 2,257,875
8.75%, 10/06/99............................... Baa3 12,325 12,692,532
Republic of South Africa, (South Africa),
8.50%, 06/23/17............................... Baa3 37,950 36,242,250
Russian Ministry of Finance, (Russia),
10.00%, 06/26/07.............................. Ba2 7,800 7,226,700
United Mexican States, (Mexico),
11.50%, 05/15/26.............................. Ba2 6,900 8,176,500
--------------
198,183,376
--------------
TOTAL LONG-TERM BONDS
(cost $2,787,932,280).................................................... 2,779,026,495
--------------
COMMON STOCKS -- 32.5% SHARES
-------------
AEROSPACE -- 0.8%
AlliedSignal, Inc............................... 196,400 7,647,325
GenCorp, Inc.................................... 100,000 2,500,000
Litton Industries, Inc. (b)..................... 78,900 4,536,750
Lockheed Martin Corp............................ 193,000 19,010,500
Parker-Hannifin Corp. (b)....................... 43,925 2,015,059
Raytheon Co. (Class "A" Stock) (b).............. 7,295 359,749
--------------
36,069,383
--------------
AIRLINES -- 0.4%
AMR Corp. (b)................................... 84,700 10,883,950
US Airways Group, Inc. (b)...................... 114,900 7,181,250
--------------
18,065,200
--------------
APPAREL -- 0.0%
Phillips-Van Heusen Corp........................ 96,300 1,372,275
--------------
AUTOS - CARS & TRUCKS -- 0.4%
Chrysler Corp................................... 147,800 5,200,712
Ford Motor Co................................... 95,600 4,654,525
General Motors Corp............................. 111,000 6,729,375
Mascotech, Inc.................................. 96,000 1,764,000
Titan International, Inc........................ 102,950 2,065,434
--------------
20,414,046
--------------
BANKS AND SAVINGS & LOANS -- 1.4%
BankAmerica Corp................................ 172,000 12,556,000
Barnett Banks, Inc.............................. 179,600 12,908,750
Chase Manhattan Corp............................ 213,800 23,411,100
Citicorp........................................ 56,800 7,181,650
Fleet Financial Group, Inc...................... 166,100 12,447,119
--------------
68,504,619
--------------
CHEMICALS -- 0.2%
Ferro Corp...................................... 137,100 3,333,244
Millennium Chemicals, Inc....................... 148,927 3,509,092
OM Group, Inc................................... 64,400 2,358,650
--------------
9,200,986
--------------
COMMERCIAL SERVICES -- 0.3%
Cendant Corp. (b)............................... 373,700 12,845,937
--------------
COMPUTER SERVICES -- 1.5%
Autodesk, Inc................................... 671,600 24,849,200
BMC Software, Inc. (b).......................... 296,400 19,451,250
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
B7
<PAGE>
CONSERVATIVE BALANCED PORTFOLIO (CONTINUED)
DECEMBER 31, 1997
<TABLE>
<CAPTION>
VALUE
COMMON STOCKS (CONTINUED) SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
Cadence Design Systems, Inc. (b)................ 693,800 $ 16,998,100
Microsoft Corp. (a)............................. 67,900 8,776,075
--------------
70,074,625
--------------
COMPUTERS -- 2.1%
3Com Corp. (b).................................. 519,600 18,153,525
Cisco Systems, Inc. (b)......................... 436,050 24,309,787
Compaq Computer Corp............................ 245,300 13,844,119
Digital Equipment Corp. (b)..................... 99,200 3,670,400
International Business Machines Corp............ 179,800 18,800,337
Sun Microsystems, Inc. (b)...................... 552,900 22,046,887
--------------
100,825,055
--------------
CONSTRUCTION -- 0.2%
Oakwood Homes Corp.............................. 141,600 4,699,350
Standard Pacific Corp........................... 156,600 2,466,450
Webb Corp....................................... 142,600 3,707,600
--------------
10,873,400
--------------
CONSUMER-APPLIANCES -- 0.3%
Sunbeam Corp.,.................................. 293,000 12,342,625
--------------
CONTAINERS -- 0.0%
Owens-Illinois, Inc. (b)........................ 58,300 2,211,756
--------------
COSMETICS & SOAPS -- 0.5%
Avon Products, Inc.............................. 425,600 26,121,200
--------------
DIVERSIFIED OPERATIONS -- 1.0%
Cognizant Corp.................................. 289,800 12,914,212
General Electric Co............................. 408,600 29,981,025
Whitman Corp.................................... 135,000 3,518,437
--------------
46,413,674
--------------
DRUGS AND MEDICAL SUPPLIES -- 3.8%
American Home Products Corp.,................... 315,500 24,135,750
Biogen, Inc. (b)................................ 532,500 19,369,687
Bristol-Myers Squibb Co......................... 308,700 29,210,737
Cardinal Health, Inc............................ 300,300 22,560,037
Guidant Corp.................................... 202,400 12,599,400
Medtronic, Inc.................................. 398,500 20,846,531
Novartis Corp., AG, ADR (Switzerland)........... 84,100 6,833,125
Pfizer, Inc..................................... 253,800 18,923,962
Warner-Lambert Co............................... 190,400 23,609,600
--------------
178,088,829
--------------
ELECTRICAL EQUIPMENT -- 0.0%
Belden, Inc..................................... 68,200 2,404,050
--------------
ELECTRONICS -- 0.5%
Intel Corp...................................... 79,600 5,591,900
National Semiconductor Corp. (b)................ 738,400 19,152,250
--------------
24,744,150
--------------
ENGINEERING & CONSTRUCTION -- 0.0%
Giant Cement Holdings, Inc. (b)................. 59,100 1,366,687
--------------
ENVIRONMENTAL SERVICES -- 0.5%
U.S.A. Waste Services, Inc. (b)................. 651,100 25,555,675
--------------
EXPLORATION & PRODUCTION -- 0.0%
Apex Silver Mines Ltd. (b)...................... 83,600 1,065,900
--------------
FINANCIAL SERVICES -- 1.6%
Fannie Mae...................................... 24,900 1,420,856
Lehman Brothers Holdings, Inc................... 254,000 12,954,000
Merrill Lynch & Co., Inc........................ 59,200 4,317,900
Morgan Stanley, Dean Witter, Discover & Co.,.... 334,090 19,753,071
Schwab (Charles) Corp........................... 417,600 17,513,100
Travelers Group, Inc............................ 357,967 19,285,472
--------------
75,244,399
--------------
</TABLE>
DECEMBER 31, 1997
<TABLE>
<CAPTION>
VALUE
COMMON STOCKS (CONTINUED) SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
FOOD & BEVERAGES -- 1.3%
PepsiCo, Inc.................................... 740,500 $ 26,981,969
Quaker Oats Co.................................. 317,300 16,737,575
Ralston-Ralston Purina Group.................... 205,600 19,107,950
--------------
62,827,494
--------------
FOREST PRODUCTS -- 0.3%
Boise Cascade Corp.,............................ 145,600 4,404,400
Champion International Corp..................... 96,200 4,359,062
Louisiana-Pacific Corp.......................... 100,400 1,907,600
Mead Corp....................................... 96,500 2,702,000
Willamette Industries, Inc...................... 70,300 2,262,781
--------------
15,635,843
--------------
HEALTHCARE -- 0.1%
A.O. Smith Corp................................. 71,500 3,020,875
--------------
HOSPITALS/ HOSPITAL MANAGEMENT -- 0.6%
Columbia/HCA Healthcare Corp.,.................. 203,800 6,037,575
Healthsouth Corp. (b)........................... 779,300 21,625,575
--------------
27,663,150
--------------
HOUSEHOLD PRODUCTS -- 0.0%
Leggett & Platt, Inc............................ 58,300 2,441,312
--------------
HOUSING RELATED -- 0.2%
Hanson, PLC, ADR (United Kingdom)............... 260,962 6,018,436
Owens Corning................................... 100,100 3,415,912
--------------
9,434,348
--------------
INSURANCE -- 1.2%
Allstate Corp................................... 150,000 13,631,250
Berkley (WR) Corp............................... 43,100 1,891,012
Financial Security Assurance Holdings Ltd.,..... 34,600 1,669,450
Loews Corp...................................... 29,500 3,130,687
PennCorp Financial Group, Inc................... 81,600 2,912,100
Provident Companies, Inc........................ 54,300 2,097,337
Reinsurance Group of America, Inc............... 117,450 4,998,966
TIG Holdings, Inc............................... 86,900 2,883,994
Trenwick Group, Inc............................. 65,950 2,481,369
United Healthcare Corp.......................... 377,000 18,732,187
Western National Corp........................... 134,500 3,984,562
--------------
58,412,914
--------------
INSTRUMENTS-CONTROLS -- 0.0%
Flowserve Corp.................................. 40,186 1,122,696
--------------
LEISURE -- 0.5%
Carnival Corp. (Class "A" Stock)................ 398,800 22,083,550
--------------
MACHINERY -- 0.2%
Case Corp....................................... 88,400 5,342,675
DT Industries, Inc.............................. 36,400 1,237,600
Global Industrial
Technologies, Inc. (b)........................ 62,400 1,056,900
Paxar Corp. (b)................................. 233,725 3,462,052
--------------
11,099,227
--------------
MANUFACTURING -- 1.0%
Illinois Tool Works, Inc. (b)................... 181,300 10,900,663
Tyco International, Ltd......................... 802,800 36,176,175
--------------
47,076,838
--------------
MEDIA -- 0.2%
Central Newspapers, Inc. (Class "A" Stock)...... 50,800 3,756,025
Houghton Mifflin Co............................. 59,700 2,290,988
Knight-Ridder, Inc.............................. 59,200 3,078,400
Lee Enterprises, Inc............................ 51,700 1,528,381
--------------
10,653,794
--------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
B8
<PAGE>
CONSERVATIVE BALANCED PORTFOLIO (CONTINUED)
DECEMBER 31, 1997
<TABLE>
<CAPTION>
VALUE
COMMON STOCKS (CONTINUED) SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
MEDICAL INSTRUMENTS -- 0.3%
Arterial Vascular Engineering, Inc., (b)........ 198,200 $ 12,883,000
--------------
METALS-FERROUS -- 0.2%
Bethlehem Steel Corp. (b)....................... 225,200 1,942,350
LTV Corp........................................ 208,300 2,030,925
Material Sciences Corp. (b)..................... 98,500 1,200,469
National Steel Corp. (Class "B" Stock) (b)...... 42,900 496,031
USX-U.S. Steel Group............................ 61,800 1,931,250
--------------
7,601,025
--------------
METALS-NON FERROUS -- 0.2%
Aluminum Company of America..................... 147,600 10,387,350
--------------
MISCELLANEOUS - BASIC INDUSTRY -- 0.3%
Coltec Industries, Inc. (b)..................... 44,400 1,029,525
Donaldson, Co................................... 55,500 2,500,969
IDEX Corp....................................... 61,100 2,130,863
Mark IV Industries, Inc......................... 87,942 1,923,731
Trinity Industries, Inc......................... 53,100 2,369,588
Wolverine Tube, Inc. (b)........................ 37,600 1,165,600
York International Corp......................... 27,400 1,084,013
--------------
12,204,289
--------------
MISCELLANEOUS - CONSUMER GROWTH/STABLE -- 0.3%
Eastman Kodak Co................................ 29,200 1,775,725
Unilever N.V., ADR (United Kingdom)............. 237,000 14,797,688
--------------
16,573,413
--------------
MISCELLANEOUS - INDUSTRIAL -- 0.2%
CBS Corp........................................ 207,400 6,105,338
Energy Group, PLC, ADR (United Kingdom)......... 49,862 2,225,092
--------------
8,330,430
--------------
OIL & GAS -- 1.3%
Basin Exploration, Inc. (b)..................... 17,700 314,175
Cabot Oil & Gas Corp. (Class "A" Stock)......... 90,100 1,751,319
Cross Timbers Oil Co............................ 296,300 7,388,981
Elf Aquitaine SA, ADR (France).................. 126,900 7,439,513
Enron Oil & Gas Co.............................. 49,200 1,042,425
Murphy Oil Corp................................. 28,100 1,522,669
Noble Affiliates, Inc.,......................... 196,700 6,933,675
Pioneer Natural Resources Co.................... 325,044 9,405,961
Seagull Energy Corp. (b)........................ 63,700 1,313,813
Total SA (Class "B" Stock) (France)............. 126,800 7,037,400
Unocal Corp..................................... 389,700 15,125,231
Western Gas Resources, Inc.,.................... 104,700 2,316,488
--------------
61,591,650
--------------
OIL & GAS SERVICES -- 1.5%
Apache Corp..................................... 498,500 17,478,656
Halliburton Co.................................. 595,200 30,913,200
J. Ray McDermott, SA (b)........................ 166,500 7,159,500
McDermott International, Inc.................... 307,700 11,269,513
Oryx Energy Co. (b)............................. 125,500 3,200,250
--------------
70,021,119
--------------
REAL ESTATE DEVELOPMENT -- 0.2%
Crescent Operating, Inc. (b).................... 17,360 425,320
Crescent Real Estate Equities, Inc.............. 166,300 6,548,063
Equity Residential Properties Trust............. 14,600 738,213
--------------
7,711,596
--------------
RETAIL -- 4.2%
Bombay Company, Inc. (b)........................ 141,500 654,438
Borders Group, Inc. (b)......................... 656,000 20,541,000
</TABLE>
DECEMBER 31, 1997
<TABLE>
<CAPTION>
VALUE
COMMON STOCKS (CONTINUED) SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
Charming Shoppes, Inc. (b)...................... 824,800 $ 3,866,250
Consolidated Stores Corp. (b)................... 466,900 20,514,419
Costco Companies, Inc. (b)...................... 373,200 16,654,050
CVS Corp........................................ 157,900 10,115,469
Designs, Inc. (b)............................... 52,800 158,400
Dillards, Inc. (Class "A" Stock)................ 32,200 1,135,050
Federated Department Stores, Inc. (b)........... 242,700 10,451,269
Home Depot, Inc................................. 276,050 16,252,444
Jan Bell Marketing, Inc. (b).................... 153,800 384,500
Kmart Corp. (b)................................. 619,600 7,164,125
Kroger Co. (b).................................. 407,400 15,048,338
Liz Claiborne, Inc.............................. 276,600 11,565,338
Rite Aid Corp................................... 241,700 14,184,769
Safeway, Inc. (b)............................... 407,800 25,793,350
Tandy Corp...................................... 47,500 1,831,719
The Limited, Inc................................ 215,300 5,490,150
The TJX Companies, Inc.......................... 449,600 15,455,000
Toys 'R' Us, Inc. (b)........................... 88,700 2,788,506
--------------
200,048,584
--------------
RUBBER -- 0.1%
Goodyear Tire & Rubber Co....................... 39,800 2,532,275
--------------
TELECOMMUNICATIONS -- 1.2%
Alcatel Alsthom, ADR (France)................... 127,000 3,214,688
Deutsche Telekom, ADR (Germany)................. 45,800 853,025
Nextel Communications, Inc. (Class "A" Stock)
(b)........................................... 871,500 22,659,000
Tellabs, Inc. (b)............................... 299,000 15,809,625
WorldCom, Inc................................... 410,800 12,426,700
--------------
54,963,038
--------------
TEXTILES -- 0.1%
Fruit of the Loom, Inc. (Class "A" Stock) (b)... 73,800 1,891,125
Pillowtex Corp.................................. 18,830 656,696
Tultex Corp. (b)................................ 89,800 364,813
--------------
2,912,634
--------------
TOBACCO -- 0.8%
Bat Industries, PLC, ADR (United Kingdom)....... 107,100 2,008,125
Phillip Morris Co. Inc.......................... 646,700 29,303,594
RJR Nabisco Holdings Corp....................... 125,800 4,717,500
--------------
36,029,219
--------------
TOYS -- 0.4%
Mattel, Inc..................................... 475,751 17,721,725
--------------
TRUCKING/SHIPPING -- 0.0%
Yellow Corp. (b)................................ 44,300 1,113,038
--------------
WASTE MANAGEMENT -- 0.1%
Waste Management, Inc........................... 208,000 5,720,000
--------------
TOTAL COMMON STOCKS
(cost $1,331,959,806).......................................... 1,543,620,897
--------------
PREFERRED STOCKS -- 0.7%
FINANCIAL SERVICES -- 0.7%
Central Hispano Capital Corp.,.................. 225,900 6,254,606
Central Hispano Corp.,.......................... 1,000,000 26,000,000
--------------
32,254,606
--------------
TOTAL PREFERRED STOCKS
(cost $31,236,594)............................................. 32,254,606
--------------
TOTAL LONG-TERM INVESTMENTS
(cost $4,151,360,152).......................................... 4,354,901,998
--------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
B9
<PAGE>
CONSERVATIVE BALANCED PORTFOLIO (CONTINUED)
DECEMBER 31, 1997
<TABLE>
<CAPTION>
MOODY'S PRINCIPAL
RATING AMOUNT VALUE
SHORT-TERM INVESTMENTS -- 7.2% (UNAUDITED) (000) (NOTE 2)
------------ --------- --------------
<S> <C> <C> <C>
ASSET-BACKED SECURITIES -- 0.3%
Centric Capital Corp.,
5.92%, 02/23/98............................... P1 $ 1,000 $ 991,449
Corporate Asset Funding Co., Inc.,
5.78%, 02/24/98............................... P1 4,600 4,560,857
Falcon Asset Securitization Corp.,
5.90%, 01/21/98............................... P1 1,000 996,886
Restructured Asset Securities Enhanced Return,
5.95875%, 08/28/98............................ P1 4,000 4,000,000
Strategic Money Market Trust,
5.91%, 12/16/98............................... P1 2,000 2,000,000
Variable Funding Capital Corp.,
5.81%, 02/20/98............................... P1 2,000 1,984,184
Wood Street Funding Corp.,
5.83%, 02/13/98............................... P1 1,000 993,198
--------------
15,526,574
--------------
BANK NOTES -- 0.2%
American Express Centurion Bank,
5.929%, 09/22/98.............................. P1 5,000 5,000,000
NBD Bank--Michigan,
5.00%, 01/30/98............................... P1 2,000 1,998,356
US Bank, N.A.,
5.83094%, 10/21/98............................ P1 1,000 999,358
--------------
7,997,714
--------------
CERTIFICATES OF DEPOSIT-EURO -- 0.2%
Morgan Guaranty Trust Co.,
5.79%, 03/16/98............................... P1 4,000 4,000,209
Westdeutsche Landesbank Girozentral, (Germany),
5.83%, 08/03/98............................... P1 6,000 5,997,462
--------------
9,997,671
--------------
CERTIFICATES OF DEPOSIT-YANKEE -- 1.1%
Canadian Imperial Bank of Commerce, (Canada),
5.95%, 06/29/98............................... P1 900 899,706
Corestates Bank, NA,
5.7825%, 01/23/98............................. P1 1,000 1,000,000
Credit Agricole Indosuez,
5.75%, 02/10/98............................... P1 5,000 5,000,000
Dresdner Bank, AG, (Germany),
5.95%, 10/20/98............................... P1 7,000 6,998,241
Empresa Colombia de Petroleos, (Colombia),
7.25%, 07/08/98............................... BBB- 8,250 8,280,937
Kansallis-Osake Pankki, N.Y., (Finland),
6.125%, 05/15/98.............................. A3 6,160 6,160,000
9.75%, 12/15/98............................... Baa1 16,950 17,472,908
Republic of Colombia, (Colombia),
7.125%, 05/11/98.............................. Ba1 2,775 2,802,750
Royal Bank of Canada, (Canada),
5.91%, 06/17/98............................... P1 3,000 2,999,217
Swiss Bank Corp.,
5.77%, 01/30/98............................... P1 2,000 1,999,421
--------------
53,613,180
--------------
</TABLE>
DECEMBER 31, 1997
<TABLE>
<CAPTION>
MOODY'S PRINCIPAL
RATING AMOUNT VALUE
SHORT-TERM INVESTMENTS (CONT'D) (UNAUDITED) (000) (NOTE 2)
------------ --------- --------------
<S> <C> <C> <C>
COMMERCIAL PAPER -- 3.4%
Aon Corp.,
5.79%, 03/12/98............................... P2 $ 880 $ 870,234
Barton Capital Corp.,
5.95%, 02/09/98............................... P1 1,000 993,719
Bell Atlantic Financial Services, Inc.,
6.08%, 01/09/98............................... P1 6,000 5,992,907
BP America,
6.90%, 01/02/98............................... P1 6,500 6,500,000
Capital One Bank,
6.66%, 08/17/98............................... Baa3 10,050 10,088,291
Coca-Cola Enterprises,
5.65%, 03/12/98............................... P2 3,000 2,967,512
Comdisco, Inc., M.T.N.,
5.54%, 01/26/98............................... Baa1 12,500 12,498,000
6.09%, 11/09/98............................... Baa1 34,000 34,009,860
6.29%, 10/22/98............................... Baa1 5,000 5,009,900
6.689%, 05/22/98.............................. Baa1 9,000 9,024,300
Duke Capital Corp.,
5.90%, 01/23/98............................... P2 1,000 996,558
Enterprise Rent-A-Car USA Finance Co., M.T.N.,
7.875%, 03/15/98 (b).......................... Baa2 9,925 9,961,921
Federal Express Corp., M.T.N.,
10.00%, 06/01/98.............................. Baa3 3,000 3,045,750
Finova Capital Corp.,
5.75%, 02/04/98............................... P2 3,400 3,382,079
First USA Bank,
8.20%, 02/15/98............................... Baa3 11,500 11,521,275
General Electric Capital Services, Inc.,
5.70%, 01/12/98............................... P1 5,000 4,992,083
Honeywell Inc.,
6.75%, 01/02/98............................... P1 4,250 4,250,000
ING America Insurance Holdings, Inc.,
5.74%, 04/03/98............................... P1 2,000 1,970,981
5.74%, 04/28/98............................... P1 1,600 1,570,407
Mont Blanc Capital Corp.,
5.82%, 02/13/98............................... P1 2,000 1,986,420
Newell Co.,
6.80%, 01/02/98............................... P1 6,500 6,500,000
Old Line Funding Corp.,
5.90%, 01/21/98............................... A1+ 1,000 996,886
PHH Corp.,
6.75%, 01/02/98............................... P1 6,500 6,500,000
Safeco Corp.,
5.76%, 03/17/98............................... P2 2,000 1,976,320
Special Purpose Account Receivables Cooperative
Corp.,
5.80%, 03/26/98............................... P1 1,000 986,628
Textron Financial Corp.,
6.125%, 02/23/98.............................. A3 1,000 1,000,220
Xerox Capital (Europe) PLC
5.75%, 02/05/98............................... P1 3,000 2,983,708
5.79%, 02/12/98............................... P1 875 869,230
6.85%, 01/02/98............................... P1 2,610 2,610,000
--------------
156,055,189
--------------
MEDIUM TERM NOTES -- 0.2%
Ford Motor Credit Corp.,
9.00%, 03/25/98............................... P1 1,200 1,208,318
General Motors Acceptance Corp.,
5.76825%, 09/21/98............................ P1 3,000 2,997,564
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
B10
<PAGE>
CONSERVATIVE BALANCED PORTFOLIO (CONTINUED)
DECEMBER 31, 1997
<TABLE>
<CAPTION>
MOODY'S PRINCIPAL
RATING AMOUNT VALUE
SHORT-TERM INVESTMENTS (CONT'D) (UNAUDITED) (000) (NOTE 2)
------------ --------- --------------
<S> <C> <C> <C>
IBM Credit Corp.,
5.65%, 02/27/98............................... P1 $ 4,000 $ 3,998,626
Morgan Stanley Group, Inc.,
6.34%, 03/09/98............................... P1 1,000 1,000,606
Suntrust Banks, Inc.,
8.875%, 02/01/98.............................. P1 805 806,820
--------------
10,011,934
--------------
OTHER CORPORATE OBLIGATIONS -- 0.1%
Association Corp. of America,
6.125%, 02/01/98.............................. P1 2,040 2,039,976
Beneficial Corp.,
9.125%, 02/15/98.............................. P1 2,700 2,709,664
--------------
4,749,640
--------------
U. S. GOVERNMENT & AGENCY OBLIGATIONS -- 0.0%
United States Treasury Bills,
5.045%, 03/19/98 (a).......................... 700 692,545
5.165%, 01/22/98 (a).......................... 300 299,139
5.29%, 03/19/98 (a)........................... 400 395,533
--------------
1,387,217
--------------
REPURCHASE AGREEMENT -- 1.7%
Joint Repurchase Agreement Account,
6.53%, 01/02/98 (Note 5)...................... 81,783 81,783,000
--------------
TOTAL SHORT-TERM INVESTMENTS
(cost $340,697,062)...................................................... 341,122,119
--------------
TOTAL INVESTMENTS -- 99.0%
(cost $4,491,825,742; Note 6)............................................ 4,696,024,117
--------------
VARIATION MARGIN ON OPEN FUTURES CONTRACTS (C) -- (0.0%)...................
(653,438)
OTHER ASSETS IN EXCESS OF LIABILITIES -- 1.0%..............................
48,861,360
--------------
TOTAL NET ASSETS -- 100.0%................................................. $4,744,232,039
--------------
--------------
</TABLE>
The following abbreviations are used in portfolio descriptions:
ADR American Depository Receipt
AG Aktiengesellschaft (German Stock Company)
M.T.N. Medium Term Note
PLC Public Limited Company (British Corporation)
SA Sociedad Anonima (Spanish Corporation) or Societe Anonyme (French
Corporation)
(a) Security segregated as collateral for futures contracts.
(b) Non-income producing security.
(c) Open futures contracts as of December 31, 1997 are as follows:
<TABLE>
<CAPTION>
NUMBER OF EXPIRATION VALUE AT VALUE AT APPRECIATION/
CONTRACTS TYPE DATE TRADE DATE DECEMBER 31, 1997 DEPRECIATION
<C> <S> <C> <C> <C> <C>
Long Position:
61 S&P 500 Index Mar 98 15,095,625 14,931,275 (164,350)
318 U.S. Treasury 5 Yr. Mar 98 34,423,500 34,542,750 119,250
166 U.S. Treasury 5 Yr. Mar 98 19,931,438 19,997,813 66,375
Short Position:
637 U.S. Treasury 5 Yr. Mar 98 75,803,000 76,738,594 (935,594)
365 U.S. Treasury 5 Yr. Mar 98 39,488,438 39,648,125 (159,687)
1181 U.S. Treasury 10 Yr. Mar 98 131,755,312 132,456,531 (701,219)
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
B11
<PAGE>
FLEXIBLE MANAGED PORTFOLIO
DECEMBER 31, 1997
<TABLE>
<CAPTION>
LONG-TERM INVESTMENTS -- 93.8%
VALUE
COMMON STOCKS -- 57.6% SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
AEROSPACE -- 1.3%
AlliedSignal, Inc............................... 289,300 $ 11,264,619
GenCorp, Inc.................................... 428,200 10,705,000
Litton Industries, Inc. (a)..................... 324,400 18,653,000
Lockheed Martin Corp............................ 272,900 26,880,650
Raytheon Co. (Class "A" Stock).................. 30,252 1,491,826
--------------
68,995,095
--------------
AIRLINES -- 1.4%
AMR Corp. (a)................................... 346,000 44,461,000
USAir Group, Inc. (a)........................... 491,700 30,731,250
--------------
75,192,250
--------------
AUTOS - CARS & TRUCKS -- 1.5%
Chrysler Corp................................... 632,700 22,263,131
Ford Motor Co................................... 301,300 14,669,544
General Motors Corp............................. 474,400 28,760,500
Mascotech, Inc.................................. 411,300 7,557,637
Titan International, Inc........................ 440,700 8,841,544
--------------
82,092,356
--------------
BANKS AND SAVINGS & LOANS -- 1.8%
BankAmerica Corp................................ 243,900 17,804,700
Barnett Banks, Inc.............................. 254,200 18,270,625
Chase Manhattan Corp............................ 302,100 33,079,950
Citicorp........................................ 80,500 10,178,219
Fleet Financial Group, Inc...................... 235,100 17,617,806
--------------
96,951,300
--------------
CHEMICALS -- 0.7%
Ferro Corp...................................... 586,950 14,270,222
Millennium Chemicals, Inc....................... 637,700 15,025,806
OM Group, Inc................................... 275,900 10,104,837
--------------
39,400,865
--------------
COMMERCIAL SERVICES -- 0.3%
Cendant Corp. (a)............................... 529,500 18,201,562
--------------
COMPUTERS -- 2.2%
3Com Corp. (a).................................. 737,000 25,748,937
Compaq Computer Corp............................ 346,700 19,566,881
Digital Equipment Corp. (a)..................... 424,700 15,713,900
International Business Machines Corp............ 254,400 26,600,700
Sun Microsystems, Inc. (a)...................... 781,100 31,146,362
--------------
118,776,780
--------------
COMPUTER SERVICES -- 2.4%
Autodesk, Inc................................... 951,300 35,198,100
BMC Software, Inc. (a).......................... 419,800 27,549,375
Cadence Design Systems, Inc. (a)................ 979,500 23,997,750
Cisco Systems, Inc. (a)......................... 617,100 34,403,325
Microsoft Corp.................................. 95,800 12,382,150
--------------
133,530,700
--------------
CONSTRUCTION -- 0.8%
Oakwood Homes Corp.............................. 606,400 20,124,900
Standard Pacific Corp........................... 670,400 10,558,800
Webb Corp....................................... 611,100 15,888,600
--------------
46,572,300
--------------
CONTAINERS -- 0.2%
Owens-Illinois, Inc. (a)........................ 250,000 9,484,375
--------------
COSMETICS & SOAPS -- 0.7%
Avon Products, Inc.............................. 595,600 36,554,950
--------------
</TABLE>
DECEMBER 31, 1997
<TABLE>
<CAPTION>
VALUE
COMMON STOCKS (CONTINUED) SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
DIVERSIFIED OPERATIONS -- 1.7%
Cognizant Corp.................................. 410,000 $ 18,270,625
General Electric Co............................. 577,200 42,352,050
Loews Corp...................................... 175,000 18,571,875
Whitman Corp.................................... 578,000 15,064,125
--------------
94,258,675
--------------
DRUGS AND MEDICAL SUPPLIES -- 4.6%
American Home Products Corp..................... 446,600 34,164,900
Biogen, Inc. (a)................................ 752,300 27,364,912
Bristol-Myers Squibb Co......................... 453,400 42,902,975
Cardinal Health, Inc............................ 425,100 31,935,637
Guidant Corp.................................... 284,900 17,735,025
Medtronic, Inc.................................. 564,000 29,504,250
Novartis Corp., AG, ADR (Switzerland)........... 114,200 9,278,750
Pfizer, Inc..................................... 359,600 26,812,675
Warner-Lambert Co............................... 269,000 33,356,000
--------------
253,055,124
--------------
ELECTRICAL EQUIPMENT -- 0.2%
Baldor Electric Co.............................. 1 29
Belden, Inc..................................... 292,200 10,300,050
--------------
10,300,079
--------------
ELECTRONICS -- 0.6%
Intel Corp...................................... 112,500 7,903,125
National Semiconductor Corp. (a)................ 1,029,600 26,705,250
--------------
34,608,375
--------------
ENERGY -- 0.2%
Energy Group, PLC, ADR (United Kingdom)......... 218,900 9,768,413
--------------
ENGINEERING & CONSTRUCTION -- 0.1%
Giant Cement Holdings, Inc. (a)................. 259,600 6,003,250
--------------
ENVIRONMENTAL SERVICES -- 1.1%
U.S.A. Waste Services, Inc. (a)................. 920,200 36,117,850
Waste Management, Inc........................... 872,300 23,988,250
--------------
60,106,100
--------------
FINANCIAL SERVICES -- 3.3%
Federal National Mortgage Association........... 35,100 2,002,894
Lehman Brothers Holdings, Inc................... 1,087,300 55,452,300
Merrill Lynch & Co., Inc........................ 253,100 18,460,481
Morgan Stanley, Dean Witter, Discover & Co...... 632,195 37,378,529
Schwab (Charles) Corp........................... 589,900 24,738,931
Travelers Group, Inc............................ 763,266 41,120,956
--------------
179,154,091
--------------
FOOD & BEVERAGES -- 2.0%
PepsiCo, Inc.................................... 1,047,900 38,182,856
Quaker Oats Co.................................. 448,500 23,658,375
Ralston-Ralston Purina Group.................... 291,000 27,044,812
RJR Nabisco Holdings Corp....................... 538,700 20,201,250
--------------
109,087,293
--------------
FOREST PRODUCTS -- 1.3%
Boise Cascade Corp.............................. 700,000 21,175,000
Champion International Corp..................... 412,200 18,677,812
Louisiana-Pacific Corp.......................... 412,200 7,831,800
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
B12
<PAGE>
FLEXIBLE MANAGED PORTFOLIO (CONTINUED)
DECEMBER 31, 1997
<TABLE>
<CAPTION>
VALUE
COMMON STOCKS (CONTINUED) SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
Mead Corp....................................... 413,200 $ 11,569,600
Willamette Industries, Inc...................... 301,600 9,707,750
--------------
68,961,962
--------------
HOSPITALS/ HOSPITAL MANAGEMENT -- 1.0%
Columbia/HCA Healthcare Corp.................... 855,000 25,329,375
Healthsouth Corp. (a)........................... 1,101,400 30,563,850
--------------
55,893,225
--------------
HOUSEHOLD PRODUCTS -- 0.5%
Leggett & Platt, Inc............................ 249,500 10,447,812
Sunbeam Corp.................................... 415,000 17,481,875
--------------
27,929,687
--------------
HOUSING RELATED -- 0.7%
Hanson, PLC, ADR (United Kingdom)............... 1,046,700 24,139,519
Owens Corning................................... 429,000 14,639,625
--------------
38,779,144
--------------
INSTRUMENTS-CONTROLS -- 0.2%
Parker-Hannifin Corp............................ 187,500 8,601,563
--------------
INSURANCE -- 2.6%
Allstate Corp................................... 212,000 19,265,500
Berkley (WR) Corp............................... 186,450 8,180,494
Financial Security Assurance Holdings Ltd....... 148,500 7,165,125
PennCorp Financial Group, Inc................... 349,600 12,476,350
Provident Companies, Inc........................ 232,600 8,984,175
Reinsurance Group of America, Inc............... 503,100 21,413,194
TIG Holdings, Inc............................... 372,300 12,355,706
Trenwick Group, Inc............................. 289,700 10,899,962
United Healthcare Corp.......................... 532,700 26,468,531
Western National Corp........................... 575,900 17,061,037
--------------
144,270,074
--------------
LEISURE -- 0.5%
Carnival Corp. (Class "A" Stock)................ 563,300 31,192,737
--------------
MACHINERY -- 0.9%
Case Corp....................................... 378,500 22,875,594
DT Industries, Inc.............................. 155,600 5,290,400
Global Industrial Technologies, Inc. (a)........ 273,600 4,634,100
Paxar Corp. (a)................................. 1,011,875 14,988,398
--------------
47,788,492
--------------
MANUFACTURING -- 1.6%
A.O. Smith Corp................................. 306,300 12,941,175
Flowserve Corp.................................. 171,691 4,796,617
Illinois Tool Works, Inc........................ 256,100 15,398,012
Tyco International, Ltd......................... 1,134,202 51,109,978
--------------
84,245,782
--------------
MEDIA -- 0.8%
Central Newspapers, Inc. (Class "A" Stock)...... 217,600 16,088,800
Houghton Mifflin Co............................. 255,200 9,793,300
Knight-Ridder, Inc.............................. 253,000 13,156,000
Lee Enterprises, Inc............................ 221,400 6,545,137
--------------
45,583,237
--------------
MEDICAL INSTRUMENTS -- 0.3%
Arterial Vascular Engineering, Inc. (a)......... 280,000 18,200,000
--------------
</TABLE>
DECEMBER 31, 1997
<TABLE>
<CAPTION>
VALUE
COMMON STOCKS (CONTINUED) SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
METALS-FERROUS -- 0.6%
Bethlehem Steel Corp. (a)....................... 958,000 $ 8,262,750
LTV Corp........................................ 892,000 8,697,000
Material Sciences Corp. (a)..................... 421,800 5,140,687
National Steel Corp. (Class "B" Stock) (a)...... 183,200 2,118,250
USX-U.S. Steel Group............................ 265,100 8,284,375
--------------
32,503,062
--------------
METALS-NON FERROUS -- 0.8%
Aluminum Company of America..................... 632,400 44,505,150
--------------
MISCELLANEOUS - BASIC INDUSTRY -- 0.9%
Coltec Industries, Inc. (a)..................... 190,000 4,405,625
Donaldson, Co................................... 237,800 10,715,862
IDEX Corp....................................... 261,500 9,119,813
Mark IV Industries, Inc......................... 376,900 8,244,688
Trinity Industries, Inc......................... 227,000 10,129,875
Wolverine Tube, Inc. (a)........................ 164,600 5,102,600
York International Corp......................... 117,200 4,636,725
--------------
52,355,188
--------------
MISCELLANEOUS - CONSUMER GROWTH/STABLE -- 0.5%
Eastman Kodak Co................................ 120,000 7,297,500
Unilever N.V., ADR (United Kingdom)............. 334,000 20,854,125
--------------
28,151,625
--------------
MISCELLANEOUS - INDUSTRIAL -- 0.5%
CBS Corp........................................ 892,600 26,275,913
--------------
OIL & GAS -- 3.0%
Basin Exploration, Inc. (a)..................... 75,700 1,343,675
Cabot Oil & Gas Corp. (Class "A" Stock)......... 385,700 7,497,044
Cross Timbers Oil Co............................ 417,400 10,408,913
Elf Aquitaine SA, ADR (France).................. 544,200 31,903,725
Enron Oil & Gas Co.............................. 210,600 4,462,088
Murphy Oil Corp................................. 120,900 6,551,269
Noble Affiliates, Inc........................... 426,300 15,027,075
Pioneer Natural Resources Co.................... 1,426,731 41,286,028
Seagull Energy Corp. (a)........................ 260,200 5,366,625
Total SA (Class "B" Stock) (France)............. 179,200 9,945,600
Unocal Corp..................................... 550,500 21,366,281
Western Gas Resources, Inc...................... 448,500 9,923,063
--------------
165,081,386
--------------
OIL & GAS SERVICES -- 3.0%
Apache Corp..................................... 704,200 24,691,013
Halliburton Co.................................. 844,100 43,840,444
J. Ray McDermott, SA (a)........................ 713,300 30,671,900
McDermott International, Inc.................... 1,345,700 49,286,263
Oryx Energy Co. (a)............................. 537,500 13,706,250
--------------
162,195,870
--------------
PRECIOUS METALS -- 0.1%
Apex Silver Mines Ltd. (a)...................... 360,900 4,601,475
--------------
REAL ESTATE DEVELOPMENT -- 0.7%
Crescent Operating, Inc. (a).................... 71,240 1,745,380
Crescent Real Estate Equities, Inc.............. 712,400 28,050,750
Equity Residential Properties Trust............. 160,000 8,090,000
--------------
37,886,130
--------------
RETAIL -- 6.4%
Bombay Company, Inc. (a)........................ 605,900 2,802,288
Borders Group, Inc. (a)......................... 927,500 29,042,344
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
B13
<PAGE>
FLEXIBLE MANAGED PORTFOLIO (CONTINUED)
DECEMBER 31, 1997
<TABLE>
<CAPTION>
VALUE
COMMON STOCKS (CONTINUED) SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
Charming Shoppes, Inc. (a)...................... 3,532,600 $ 16,559,063
Consolidated Stores Corp. (a)................... 661,800 29,077,838
Costco Companies, Inc. (a)...................... 526,000 23,472,750
CVS Corp........................................ 223,000 14,285,938
Designs, Inc. (a)............................... 216,200 648,600
Dillards, Inc. (Class "A" Stock)................ 138,100 4,868,025
Federated Department Stores, Inc. (a)........... 342,800 14,761,825
Home Depot, Inc................................. 390,000 22,961,250
Jan Bell Marketing, Inc. (a).................... 658,700 1,646,750
K mart Corp. (a)................................ 2,646,900 30,604,781
Kroger Co. (a).................................. 575,200 21,246,450
Liz Claiborne, Inc.............................. 391,300 16,361,231
Phillips-Van Heusen Corp........................ 412,600 5,879,550
Rite Aid Corp................................... 341,400 20,035,913
Safeway, Inc. (a)............................... 576,300 36,450,975
Tandy Corp...................................... 203,800 7,859,038
The Limited, Inc................................ 837,400 21,353,700
The TJX Companies, Inc.......................... 637,200 21,903,750
Toys 'R' Us, Inc. (a)........................... 379,600 11,933,675
--------------
353,755,734
--------------
RUBBER -- 0.2%
Goodyear Tire & Rubber Co....................... 170,800 10,867,150
--------------
TELECOMMUNICATIONS -- 1.6%
Alcatel Alsthom, ADR (France)................... 543,800 13,764,938
Deutsche Telekom, ADR (Germany)................. 196,100 3,652,363
Nextel Communications, Inc. (Class "A"
Stock) (a).................................... 1,242,000 32,292,000
Tellabs, Inc. (a)............................... 422,500 22,339,688
WorldCom, Inc................................... 579,500 17,529,875
--------------
89,578,864
--------------
TEXTILES -- 0.2%
Fruit of the Loom, Inc. (Class "A" Stock) (a)... 316,400 8,107,750
Pillowtex Corp.................................. 78,333 2,731,856
Tultex Corp. (a)................................ 384,400 1,561,625
--------------
12,401,231
--------------
TOBACCO -- 1.0%
Bat Industries, PLC, ADR (United Kingdom)....... 458,600 8,598,750
Phillip Morris Co. Inc.......................... 1,034,900 46,893,906
--------------
55,492,656
--------------
TOYS -- 0.5%
Mattel, Inc..................................... 672,700 25,058,075
--------------
TRUCKING/SHIPPING -- 0.1%
Yellow Corp. (a)................................ 189,400 4,758,675
--------------
TOTAL COMMON STOCKS
(cost $2,741,915,742).......................................... 3,159,008,020
--------------
PREFERRED STOCKS -- 0.5%
FINANCIAL SERVICES -- 0.5%
Central Hispano Corp............................ 1,000,000 26,000,000
--------------
(cost $25,440,000)
</TABLE>
DECEMBER 31, 1997
<TABLE>
<CAPTION>
MOODY'S PRINCIPAL
RATING AMOUNT VALUE
LONG-TERM BONDS -- 35.8% (UNAUDITED) (000) (NOTE 2)
------------ --------- --------------
<S> <C> <C> <C>
AGRICULTURAL PRODUCTS & SERVICES -- 0.1%
Agco Corp.,
8.50%, 03/15/06............................... Ba1 $ 2,875 $ 3,054,687
--------------
AIRLINES -- 2.3%
Delta Airlines, Inc.,
10.125%, 05/15/10............................. Baa3 19,335 24,379,695
10.375%, 02/01/11 (c)......................... Ba1 25,750 33,388,737
United Airlines, Inc.,
6.126%, 03/02/04.............................. Aa2 8,000 7,988,000
9.75%, 08/15/21............................... Baa3 10,125 12,956,659
10.67%, 05/01/04.............................. Baa3 19,500 23,372,310
11.21%, 05/01/14.............................. Baa3 17,500 24,540,425
--------------
126,625,826
--------------
APPAREL MANUFACTURING -- 0.4%
Nine West Group, Inc.,
8.375%, 08/15/05.............................. Ba2 25,000 23,937,500
--------------
ASSET-BACKED SECURITIES -- 0.4%
California Infrastructure,
6.17%, 03/25/03............................... Aaa 4,000 4,012,400
MBNA Master Credit Card Trust,
5.976%, 11/15/02.............................. Aaa 1,000 1,000,312
Standard Credit Card Master Trust,
5.95%, 10/07/04 (b)........................... Aaa 4,500 4,453,560
--------------
9,466,272
--------------
BANKS AND SAVINGS & LOANS -- 5.5%
Abbey National Treasury, (United Kingdom),
5.875%, 03/08/99.............................. Aa2 5,500 5,492,850
Banc One Corp.,
5.876%, 09/30/99.............................. Aa3 5,000 5,010,400
Banco Ganadero, SA, (Colombia),
9.75%, 08/26/99............................... Baa3 7,300 7,500,750
Bangkok Bank, (Thailand),
7.25%, 09/15/05 (b)........................... Ba1 10,000 7,452,800
8.25%, 03/15/16............................... Ba1 7,500 5,250,000
8.375%, 01/15/27 (b).......................... Ba1 43,000 25,198,430
Bank of Nova Scotia,
6.50%, 07/15/07............................... A1 5,400 5,413,500
Bank of Boston N.A.,
5.973%, 01/25/99.............................. A2 2,500 2,507,600
Bankers Trust New York Corp.,
5.813%, 08/06/00.............................. A2 2,500 2,495,000
BT Securities Corp.,
6.125%, 02/24/00.............................. A3 5,000 4,955,000
Capital One Bank,
6.844%, 06/13/00.............................. Baa3 23,900 24,225,757
Central Hispano Financial Services, (Portugal),
6.25%, 04/28/05............................... A3 5,000 5,000,000
Chemical Banking,
6.075%, 02/28/00.............................. Aa3 6,000 6,009,240
Citicorp, M.T.N.,
6.045%, 05/15/00.............................. Aa3 10,000 10,031,800
First Chicago NBD Corp.,
5.986%, 06/10/02.............................. A1 10,000 9,989,600
Great Western Financial,
8.206%, 02/01/27.............................. Baa2 14,200 15,060,804
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
B14
<PAGE>
FLEXIBLE MANAGED PORTFOLIO (CONTINUED)
DECEMBER 31, 1997
<TABLE>
<CAPTION>
MOODY'S PRINCIPAL
RATING AMOUNT VALUE
LONG-TERM BONDS (CONTINUED) (UNAUDITED) (000) (NOTE 2)
------------ --------- --------------
<S> <C> <C> <C>
Kansallis-Osake Pankki, (Finland),
8.65%, 12/01/49 (b)........................... A3 $ 9,000 $ 9,180,000
Key Bank N.A.
5.875%, 08/29/00.............................. Aa3 7,000 6,950,020
MBNA America Bank N.A.,
5.973%, 07/18/01.............................. Baa1 5,000 4,965,500
MBNA Corp.,
6.288%, 09/08/00.............................. Baa2 3,000 2,991,000
Merita Bank, Ltd.,
7.50%, 12/29/49 (b)........................... NR 12,000 12,312,000
National Australia Bank, (Australia),
6.40%, 12/10/07............................... A1 8,700 8,700,000
6.60%, 12/10/07............................... A1 5,000 5,000,000
Nationsbank Corp.,
6.076%, 06/19/02.............................. A1 5,000 5,005,850
North Fork Bancorporation, Inc.,
8.00%, 12/15/27............................... Baa3 4,000 4,068,800
Norwest Corp.,
5.863%, 11/13/01.............................. Aa3 6,450 6,446,130
Okobank, (Finland),
7.20%, 10/29/49 (c)........................... A3 12,500 12,640,625
7.312%, 09/27/49 (b).......................... A3 18,750 19,031,250
Royal Bank of Canada, (Canada),
6.75%, 10/24/11 (b)........................... Aa3 5,000 5,032,600
Siam Commercila, (Thailand),
7.50%, 03/15/06 (b)........................... Ba1 14,500 9,425,000
Suntrust Bank, Inc.,
5.889%, 04/22/02.............................. A1 10,000 9,979,000
Svenska Handelsbank, (Sweden),
7.125%, 03/29/49 (b).......................... A1 5,000 5,037,500
Thai Farmers Bank, (Thailand),
8.25%, 08/21/16 (b)........................... Ba1 20,000 12,000,000
Union Planters Corp.,
8.20%, 12/15/26............................... Baa1 20,750 21,793,932
--------------
302,152,738
--------------
CABLE & PAY TELEVISION SYSTEMS -- 1.6%
Roger Cablesystems, Inc., (Canada)
10.00%, 03/15/05.............................. Ba3 2,000 2,200,000
Tele-Communications, Inc.,
6.656%, 12/20/00.............................. Ba1 5,000 5,012,500
7.375%, 02/15/00.............................. Ba1 6,000 6,115,800
7.875%, 08/01/13.............................. Ba1 43,750 47,056,187
8.25%, 01/15/03............................... Ba1 8,000 8,543,120
9.875%, 06/15/22.............................. Ba1 12,878 16,782,996
--------------
85,710,603
--------------
CHEMICALS -- 0.2%
Reliance Industries Ltd., (India),
9.375%, 06/24/26.............................. Baa3 12,000 12,045,000
--------------
</TABLE>
DECEMBER 31, 1997
<TABLE>
<CAPTION>
MOODY'S PRINCIPAL
RATING AMOUNT VALUE
LONG-TERM BONDS (CONTINUED) (UNAUDITED) (000) (NOTE 2)
------------ --------- --------------
<S> <C> <C> <C>
CONSULTING -- 0.3%
Comdisco, Inc., M.T.N.,
6.11%, 08/04/99............................... Baa1 $ 12,500 $ 12,513,250
6.375%, 11/30/01.............................. Baa1 2,700 2,700,000
--------------
15,213,250
--------------
CONSUMER SERVICES
Service Corp. International,
7.00%, 06/01/15............................... Baa1 2,500 2,557,875
--------------
ENERGY -- 0.1%
Baltimore Gas & Electric,
5.886%, 03/15/99.............................. A2 4,000 4,004,080
--------------
FINANCIAL SERVICES -- 5.3%
Advanta Corp.,
6.99%, 10/18/99............................... Ba3 10,000 9,600,000
American General Finance, Inc.,
7.57%, 12/01/45............................... A2 5,000 5,178,500
Avco Financial Services,
5.915%, 11/17/99.............................. NR 3,500 3,498,950
Caterpillar Financial Services,
5.829%, 04/10/00.............................. A2 5,000 5,011,850
Conseco, Inc.,
8.70%, 11/15/26 (c)........................... Baa3 32,538 36,378,552
8.796%, 04/01/27.............................. Ba2 29,000 32,368,930
Enterprise Rent-A-Car USA Finance Co., M.T.N.,
6.35%, 01/15/01............................... Baa3 20,700 20,797,290
6.95%, 03/01/04............................... Baa2 7,500 7,650,000
7.00%, 06/15/00............................... Baa3 13,500 13,769,460
Ford Credit Europe PLC,
6.086%, 12/20/99.............................. A1 10,000 10,010,000
General Motors Acceptance Corp., M.T.N.,
5.813%, 10/30/00.............................. A3 10,000 9,941,250
Lehman Brothers Holdings, Inc.,
6.206%, 09/03/02.............................. Baa1 10,000 9,937,500
6.40%, 08/30/00 (c)........................... Baa1 93,250 93,133,437
Lumbermens Mutual Casualty Co.,
8.30%, 12/01/37............................... Baa1 23,100 24,486,000
9.15%, 07/01/26............................... Baa1 7,500 8,728,125
--------------
290,489,844
--------------
FOOD & BEVERAGE -- 0.5%
Archer Daniels,
6.95%, 12/15/2097............................. Aa3 19,700 19,956,888
Archer-Daniels-Midland Co.,
6.75%, 12/15/27............................... Aa3 5,000 5,008,650
--------------
24,965,538
--------------
FOREST PRODUCTS -- 0.4%
UPM-Kymmene Corp.,
7.45%, 11/26/27............................... Baa1 23,400 24,014,250
--------------
INVESTMENT BANKING -- 1.9%
Merrill Lynch Pierce, Fenner & Smith, Inc.,
5.935%, 11/14/00.............................. A3 10,000 9,966,250
Morgan Stanley Group, Inc.,
5.869%, 12/19/01.............................. A1 5,000 4,987,500
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
B15
<PAGE>
FLEXIBLE MANAGED PORTFOLIO (CONTINUED)
DECEMBER 31, 1997
<TABLE>
<CAPTION>
MOODY'S PRINCIPAL
RATING AMOUNT VALUE
LONG-TERM BONDS (CONTINUED) (UNAUDITED) (000) (NOTE 2)
------------ --------- --------------
<S> <C> <C> <C>
PaineWebber Group, Inc.,
6.206%, 06/03/99.............................. Baa1 $ 5,000 $ 5,004,000
Salomon, Inc.,
6.25%, 10/01/99............................... Baa1 26,400 26,430,624
6.50%, 03/01/00............................... A2 19,000 19,099,560
6.59%, 02/21/01............................... A2 23,250 23,443,440
6.75%, 08/15/03............................... Baa1 5,000 5,059,400
7.25%, 05/01/01............................... A2 8,625 8,852,010
--------------
102,842,784
--------------
LEISURE & TOURISM -- 0.1%
Royal Carribean Cruises Ltd.,
7.50%, 10/15/27............................... Baa3 5,815 5,921,647
--------------
MEDIA -- 3.4%
Paramount Communications, Inc.,
7.50%, 01/15/02............................... Ba2 9,100 9,323,132
Time Warner, Inc.,
8.11%, 08/15/06............................... Ba1 9,250 10,014,050
8.18%, 08/15/07............................... Ba1 8,000 8,707,680
9.125%, 01/15/13.............................. Ba1 39,690 47,261,661
Turner Broadcasting Co.,
8.375%, 07/01/13.............................. Ba1 18,275 20,504,916
Viacom, Inc.,
6.75%, 01/15/03............................... Ba2 23,350 22,943,243
7.75%, 06/01/05............................... Ba2 68,800 69,975,792
--------------
188,730,474
--------------
METALS & MINING -- 0.1%
PT Alatief Freeport Financial Co.,
(Netherlands),
9.75%, 04/15/01............................... Ba1 7,600 7,676,000
--------------
OIL & GAS -- 1.2%
Apache Corp.,
7.95%, 04/15/26............................... Baa1 3,000 3,362,100
B.J. Services Co.,
7.00%, 02/01/06............................... Ba1 4,000 4,095,000
Gulf Canada Resources, Ltd., (Canada),
8.25%, 03/15/17............................... Ba1 20,990 23,351,585
Parker & Parsley Petroleum Co.,
8.25%, 08/15/07............................... Baa3 3,000 3,304,320
Talisman Energy Inc.,
7.25%, 10/15/27............................... Baa1 33,250 34,169,695
--------------
68,282,700
--------------
REAL ESTATE INVESTMENT TRUST -- 0.5%
Felcor Suites, L.P.,
7.375%, 10/01/04.............................. Ba1 25,000 24,937,500
--------------
RETAIL -- 1.3%
Federated Department Stores, Inc.,
8.125%, 10/15/02.............................. Ba1 3,600 3,848,400
8.50%, 06/15/03 (b)........................... Baa2 54,890 59,879,501
10.00%, 02/15/01.............................. Ba1 8,000 8,811,200
--------------
72,539,101
--------------
SHIPPING -- 0.1%
Compania Sud Americana de Vapores, SA (Chile),
7.375%, 12/08/03.............................. Baa1 5,650 5,579,375
--------------
</TABLE>
DECEMBER 31, 1997
<TABLE>
<CAPTION>
MOODY'S PRINCIPAL
RATING AMOUNT VALUE
LONG-TERM BONDS (CONTINUED) (UNAUDITED) (000) (NOTE 2)
------------ --------- --------------
<S> <C> <C> <C>
TELECOMMUNICATIONS -- 1.9%
Total Access Communications Public Company Ltd.,
(Thailand),
8.375%, 11/04/06.............................. Ba2 $ 4,000 $ 1,920,000
WorldCom, Inc.,
7.55%, 04/01/04............................... Ba1 57,000 59,689,830
7.75%, 04/01/07............................... Ba1 20,000 21,477,800
7.75%, 04/01/27............................... Ba1 6,000 6,592,560
8.875%, 01/15/06.............................. Ba1 16,000 17,214,720
--------------
106,894,910
--------------
TOBACCO -- 2.4%
Philip Morris Co. Inc.,
7.20%, 02/01/07............................... A2 10,000 10,318,900
7.50%, 04/01/04............................... A2 50,000 52,363,500
RJR Nabisco, Inc.,
8.50%, 07/01/07............................... Baa3 12,750 13,592,138
8.75%, 04/15/04............................... Baa3 5,000 5,352,750
8.75%, 08/15/05............................... Baa3 12,500 13,486,625
8.75%, 07/15/07............................... Baa3 25,000 27,110,750
9.25%, 08/15/13............................... Baa3 7,000 7,854,350
--------------
130,079,013
--------------
UTILITIES -- 1.4%
Cleveland Electric Illumination,
7.88%, 11/01/17............................... Ba1 27,000 28,503,900
Consolidated Edison,
5.998%, 06/15/02.............................. A1 7,000 7,014,420
Hyder PLC, (United Kingdom),
6.75%, 12/15/17............................... Baa1 5,000 5,018,750
6.875%, 12/15/07.............................. Baa1 25,000 25,438,750
Hydro-Quebec, (Canada),
5.938%, 09/29/49.............................. A+ 6,250 5,519,531
Southern California Edison Co.,
6.38%, 09/25/08............................... Aaa 7,000 7,057,400
--------------
78,552,751
--------------
U.S. GOVERNMENT & AGENCY OBLIGATIONS -- 1.2%
Federal National Mortgage Association,
Zero Coupon, 10/09/19 (b)..................... 11,800 3,071,658
United States Treasury Bonds,
6.125%, 08/15/07.............................. 10,450 10,739,047
United States Treasury Notes,
5.875%, 09/30/02 (c).......................... 7,650 7,691,846
6.00%, 08/15/00............................... 2,750 2,769,773
6.375%, 08/15/27.............................. 37,910 39,983,298
--------------
64,255,622
--------------
FOREIGN GOVERNMENT BONDS -- 3.4%
Banco de Commercio Exterior de Colombia, S.A.,
M.T.N. (Colombia),
8.625%, 06/02/00.............................. Baa3 5,500 5,623,750
Banque Cent De Tunisie, (Tunisia),
7.50%, 09/19/07............................... Baa3 13,600 12,716,000
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
B16
<PAGE>
FLEXIBLE MANAGED PORTFOLIO (CONTINUED)
DECEMBER 31, 1997
<TABLE>
<CAPTION>
MOODY'S PRINCIPAL
RATING AMOUNT VALUE
LONG-TERM BONDS (CONTINUED) (UNAUDITED) (000) (NOTE 2)
------------ --------- --------------
<S> <C> <C> <C>
City of Moscow, (Russia),
9.50%, 05/31/00............................... Ba2 $ 12,500 $ 11,812,500
City of St. Petersburg, (Russia),
9.50%, 06/18/02............................... NR 35,000 31,500,000
Province of Quebec, (Canada),
6.238%, 06/15/99.............................. A2 2,000 2,005,313
Republic of Argentina, (Argentina),
6.687%, 03/31/05.............................. B1 1,949 1,744,176
Republic of Colombia, (Colombia),
7.625%, 02/15/07 (b).......................... Baa3 25,000 23,344,250
8.00%, 06/14/01............................... Baa3 2,150 2,157,525
8.75%, 10/06/99............................... Baa3 12,300 12,666,786
Republic of Philippines, (The Philippines),
8.60%, 06/15/27 (b)........................... Ba1 8,000 6,560,000
Republic of South Africa, (South Africa),
8.50%, 06/23/17............................... Baa3 25,600 24,448,000
Russian Ministry of Finance, (Russia),
9.25%, 11/27/01............................... Ba2 35,000 33,337,500
10.00%, 06/26/07.............................. Ba2 5,600 5,188,400
United Mexican States, (Mexico),
11.50%, 05/15/26.............................. Ba2 11,200 13,272,000
--------------
186,376,200
--------------
TOTAL LONG-TERM BONDS
(cost $1,964,292,103).................................................... 1,966,905,540
--------------
TOTAL LONG-TERM INVESTMENTS
(cost $4,731,647,845).................................................... 5,151,913,560
--------------
SHORT-TERM INVESTMENTS -- 5.8%
ASSET-BACKED SECURITIES -- 0.4%
Barton Capital Corp.,
5.95%, 02/09/98............................... P1 1,100 1,093,091
Centric Capital Corp.,
5.92%, 02/23/98............................... P1 1,000 991,449
Corporate Asset Funding Co., Inc.,
5.78%, 02/24/98............................... P1 5,400 5,354,049
Mont Blanc Capital Corp.,
5.82%, 02/13/98............................... P1 2,000 1,986,420
Restructured Asset Securities Enhanced Return,
5.958%, 08/28/98.............................. P1 4,000 4,000,000
Special Purpose Account Receivables Cooperative
Corp.,
5.80%, 03/26/98............................... P1 1,000 986,628
Strategic Money Market Trust,
5.91%, 12/16/98............................... P1 5,000 5,000,000
</TABLE>
DECEMBER 31, 1997
<TABLE>
<CAPTION>
MOODY'S PRINCIPAL
RATING AMOUNT VALUE
SHORT-TERM INVESTMENTS (CONT'D) (UNAUDITED) (000) (NOTE 2)
------------ --------- --------------
<S> <C> <C> <C>
Variable Funding Capital Corp.,
5.81%, 02/20/98............................... P1 $ 2,135 $ 2,118,116
5.88%, 01/29/98............................... P1 1,000 995,590
5.98%, 01/21/98............................... P1 1,225 1,221,134
--------------
23,746,477
--------------
BANK ACCEPTANCE -- 0.1%
Bank of Montreal, (Canada),
5.68%, 02/17/98............................... P1 4,000 3,970,969
--------------
BANK NOTES -- 0.2%
American Express Centurion Bank,
5.929%, 09/22/98.............................. P1 5,000 5,000,000
NBD Bank Michigan,
5.00%, 01/30/98............................... P1 3,000 2,997,534
US Bank, N.A.,
5.830%, 10/21/98.............................. P1 3,000 2,998,073
--------------
10,995,607
--------------
CERTIFICATES OF DEPOSIT-DOMESTIC -- 0.1%
Taubman Realty Group,
6.519%, 07/27/98.............................. P1 5,500 5,517,710
--------------
CERTIFICATES OF DEPOSIT-EURODOLLAR -- 0.1%
Morgan Guaranty Trust Co.,
5.79%, 03/16/98............................... P1 3,000 3,000,157
Westdeutsche Landesbank Girozentral, (Germany),
5.82%, 08/03/98............................... P1 2,000 1,999,096
5.83%, 08/03/98............................... P1 3,000 2,998,731
--------------
7,997,984
--------------
CERTIFICATES OF DEPOSIT-YANKEE -- 0.4%
Canadian Imperial Bank of Commerce, (Canada),
5.80%, 03/02/98............................... P1 1,000 999,485
5.95%, 06/29/98............................... P1 3,500 3,498,858
Credit Agricole Indosuez, (France),
5.75%, 02/10/98............................... P1 5,000 5,000,000
Dresdner Bank, AG, (Germany),
5.95%, 10/20/98............................... P1 5,000 4,998,743
Royal Bank of Canada, (Canada),
5.91%, 06/17/98............................... P1 3,000 2,999,217
Societe Generale, (France),
6.19%, 05/06/98............................... P1 4,000 3,999,194
--------------
21,495,497
--------------
COMMERCIAL PAPER -- 1.4%
American General Finance Corp.,
5.72%, 03/13/98............................... P1 2,000 1,977,756
Aon Corp.,
5.79%, 03/13/98............................... P2 1,000 988,742
5.79%, 03/18/98............................... P2 1,048 1,035,358
Associates First Capital Corp.,
5.79%, 02/04/98............................... P1 1,000 994,692
Bank of New York,
5.75%, 02/06/98............................... P1 2,285 2,272,226
Barnett Bank, Inc.,
6.00%, 01/28/98............................... P1 3,000 2,987,000
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
B17
<PAGE>
FLEXIBLE MANAGED PORTFOLIO (CONTINUED)
DECEMBER 31, 1997
<TABLE>
<CAPTION>
MOODY'S PRINCIPAL
RATING AMOUNT VALUE
SHORT-TERM INVESTMENTS (CONT'D) (UNAUDITED) (000) (NOTE 2)
------------ --------- --------------
<S> <C> <C> <C>
BBL North America,
6.73%, 01/02/98............................... P1 $ 2,393 $ 2,393,000
Bell Atlantic Financial Services, Inc.,
6.08%, 01/09/98............................... P1 8,000 7,990,542
BP America, Inc.,
6.90%, 01/02/98............................... P1 8,000 8,000,000
Carnival Corp.,
5.83%, 01/30/98............................... P1 1,000 995,466
Duke Capital Corp.,
5.90%, 01/21/98............................... P2 1,900 1,894,084
First Chicago Financial Corp.,
5.73%, 02/26/98............................... P1 2,000 1,982,492
General Electric Capital Services, Inc.,
5.70%, 01/12/98............................... P1 5,000 4,992,083
General Motors Acceptance Corp.,
5.76%, 02/09/98............................... P1 4,000 3,975,680
ING America Insurance Holdings, Inc.,
5.74%, 04/03/98............................... P1 3,000 2,956,472
5.74%, 04/28/98............................... P1 2,000 1,963,009
Newell Co.,
6.80%, 01/02/98............................... P1 8,000 8,000,000
PHH Corp.,
6.75%, 01/02/98............................... P2 8,000 8,000,000
Safeco Corp.,
5.76%, 03/17/98............................... P2 3,000 2,964,480
Xerox Capital PLC,
5.75%, 02/05/98............................... P1 3,221 3,203,508
6.85%, 01/02/98............................... P1 3,804 3,804,000
Xerox Overseas Holdings PLC,
5.79%, 02/10/98............................... P1 996 989,753
--------------
74,360,343
--------------
FOREIGN GOVERNMENT OBLIGATIONS
Republic of Colombia, (Colombia),
7.125%, 05/11/98.............................. Ba1 2,700 2,727,000
--------------
OTHER CORPORATE OBLIGATIONS -- 0.5%
Beneficial Corp.,
9.125%, 02/15/98.............................. P1 2,715 2,724,705
Empresa Colombia de Petroleos, (Colombia),
7.25%, 07/08/98............................... BBB- 8,250 8,280,937
General Electric Capital Corp.,
13.50%, 01/20/98.............................. P1 3,000 3,010,899
General Motors Acceptance Corp.,
6.00%, 07/13/98............................... P1 1,000 1,000,400
5.786%, 09/21/98.............................. P1 3,500 3,497,158
IBM Credit Corp.,
5.65%, 02/27/98............................... P1 3,500 3,498,798
</TABLE>
DECEMBER 31, 1997
<TABLE>
<CAPTION>
MOODY'S PRINCIPAL
RATING AMOUNT VALUE
SHORT-TERM INVESTMENTS (CONT'D) (UNAUDITED) (000) (NOTE 2)
------------ --------- --------------
<S> <C> <C> <C>
Morgan Stanley, Dean Witter, Discover & Co.,
6.34%, 03/09/98............................... P1 $ 1,000 $ 1,000,606
Textron Financial Corp.,
6.125%, 02/23/98.............................. A3 1,000 1,000,220
--------------
24,013,723
--------------
U. S. GOVERNMENT & AGENCY OBLIGATIONS -- 0.1%
United States Treasury Bills,
4.95%, 01/15/98 (b)........................... 1,140 1,137,962
5.135%, 01/22/98 (b).......................... 3,000 2,991,442
5.19%, 01/22/98 (b)........................... 1,500 1,495,675
5.195%, 03/19/98 (c).......................... 370 365,942
5.275%, 01/22/98 (b).......................... 800 797,656
--------------
6,788,677
--------------
REPURCHASE AGREEMENT -- 2.5%
Joint Repurchase Agreement Account,
6.53%, 01/02/98
(Note 5).................................... 137,860 137,860,000
--------------
TOTAL SHORT-TERM INVESTMENTS
(cost $319,318,208)...................................................... 319,473,987
--------------
TOTAL INVESTMENTS -- 99.7%
(cost $5,050,966,053; Note 6)............................................ 5,471,387,547
--------------
VARIATION MARGIN ON OPEN FUTURES CONTRACTS (D).............................
(203,828)
OTHER ASSETS IN EXCESS OF OTHER LIABILITIES -- 0.3%........................
18,958,375
--------------
TOTAL NET ASSETS -- 100.0%................................................. $5,490,142,094
--------------
--------------
</TABLE>
The following abbreviations are used in portfolio descriptions:
ADR American Depository Receipt
AG Aktiengesellschaft (German Stock Company)
L.P. Limited Partnership
PLC Public Limited Company (British Corporation)
SA Sociedad Anonima (Spanish Corporation) or Societe Anonyme (French
Corporation)
(a) Non-income producing security.
(b) Security segregated as collateral for futures contracts.
(c) Portion of security segregated as collateral for futures contracts.
Aggregate value of segregated securities -- $100,311,229.
(d) Open futures contracts as of December 31, 1997 are as follows:
<TABLE>
<C> <S> <C> <C> <C> <C>
NUMBER OF EXPIRATION VALUE AT VALUE AT APPRECIATION/
CONTRACTS TYPE DATE TRADE DATE DECEMBER 31, 1997 DEPRECIATION
Long positions:
627 U.S. 5 yr T-Note Mar 98 $67,867,922 $68,107,875 $239,953
865 U.S. T-Bond Mar 98 $103,945,625 $104,205,469 $259,844
Short Position:
1,779 U.S. T-Bond Mar 98 $205,927,125 $207,989,344 $(2,062,219)
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
B18
<PAGE>
STOCK INDEX PORTFOLIO
DECEMBER 31, 1997
<TABLE>
<CAPTION>
LONG-TERM INVESTMENTS -- 96.0%
VALUE
COMMON STOCKS SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
AEROSPACE -- 1.8%
Aeroquip-Vickers, Inc........................... 8,300 $ 407,219
AlliedSignal, Inc............................... 175,600 6,837,425
Boeing Co....................................... 311,336 15,236,005
General Dynamics Corp........................... 19,400 1,676,887
Lockheed Martin Corp............................ 60,149 5,924,676
Northrop Grumman Corp........................... 20,600 2,369,000
Parker-Hannifin Corp............................ 35,225 1,615,947
Raytheon Co. (Class "A" Stock).................. 14,418 711,007
Raytheon Co. (Class "B" Stock).................. 72,900 3,681,450
United Technologies Corp........................ 73,000 5,315,312
--------------
43,774,928
--------------
AIRLINES -- 0.4%
AMR Corp. (a)................................... 28,500 3,662,250
Delta Air Lines, Inc............................ 23,000 2,737,000
Southwest Airlines Co........................... 68,100 1,676,962
USAir Group, Inc. (a)........................... 29,000 1,812,500
--------------
9,888,712
--------------
AUTOS - CARS & TRUCKS -- 2.0%
Chrysler Corp................................... 208,500 7,336,594
Cummins Engine Co., Inc......................... 12,200 720,562
Dana Corp....................................... 33,400 1,586,500
Echlin, Inc..................................... 18,700 676,706
Ford Motor Co................................... 372,700 18,145,831
General Motors Corp............................. 226,100 13,707,312
Genuine Parts Co................................ 54,425 1,847,048
Johnson Controls, Inc........................... 26,400 1,260,600
Navistar International Corp. (a)................ 23,400 580,612
PACCAR, Inc..................................... 23,960 1,257,900
Safety Kleen Corp............................... 17,350 476,041
TRW, Inc........................................ 38,600 2,060,275
--------------
49,655,981
--------------
BANKS AND SAVINGS & LOANS -- 8.1%
Banc One Corp................................... 180,694 9,813,943
Bank of New York Co., Inc....................... 117,300 6,781,406
BankAmerica Corp................................ 216,096 15,775,008
BankBoston Corp................................. 44,800 4,208,400
Bankers Trust NY Corp........................... 30,900 3,474,319
Barnett Banks, Inc.............................. 61,600 4,427,500
BB&T Corp....................................... 41,900 2,684,219
Chase Manhattan Corp............................ 131,247 14,371,546
Citicorp........................................ 142,100 17,966,769
Comerica, Inc................................... 32,900 2,969,225
CoreStates Financial Corp....................... 65,000 5,204,062
First Chicago NBD Corp.......................... 92,015 7,683,252
First Union Corp................................ 194,550 9,970,687
Fleet Financial Group, Inc...................... 77,600 5,815,150
Golden West Financial Corp...................... 17,600 1,721,500
H.F. Ahmanson & Co.............................. 30,700 2,054,981
Huntington Bancshares, Inc...................... 58,600 2,109,600
KeyCorp......................................... 67,400 4,772,762
Mellon Bank Corp................................ 78,200 4,740,875
Morgan (J.P.) & Co., Inc........................ 55,450 6,258,919
National City Corp.............................. 66,600 4,378,950
NationsBank Corp................................ 220,526 13,410,737
Norwest Corp.................................... 233,600 9,022,800
PNC Bank Corp................................... 95,500 5,449,469
Providian Financial Corp........................ 29,300 1,323,994
Republic New York Corp.......................... 17,100 1,952,606
Suntrust Banks, Inc............................. 65,800 4,696,475
Synovus Financial Corp.......................... 53,700 1,758,675
</TABLE>
DECEMBER 31, 1997
<TABLE>
<CAPTION>
VALUE
COMMON STOCKS (CONTINUED) SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
U.S. Bancorp.................................... 75,642 $ 8,467,176
Wachovia Corp................................... 63,400 5,143,325
Wells Fargo & Co................................ 27,166 9,221,159
--------------
197,629,489
--------------
BUSINESS SERVICES -- 0.1%
Equifax, Inc.................................... 45,900 1,626,581
Omnicom Group, Inc.............................. 30,000 1,271,250
--------------
2,897,831
--------------
CHEMICALS -- 2.0%
Air Products & Chemicals, Inc................... 33,700 2,771,825
Dow Chemical Co................................. 70,300 7,135,450
E.I. du Pont de Nemours & Co.................... 352,100 21,148,006
Eastman Chemical Co............................. 23,600 1,405,675
FMC Corp. (a)................................... 11,200 753,900
Hercules, Inc................................... 30,400 1,521,900
Monsanto Co..................................... 183,700 7,715,400
Nalco Chemical Co............................... 20,900 826,856
Rohm & Haas Co.................................. 18,700 1,790,525
Sigma-Aldrich Corp.............................. 31,400 1,248,150
Union Carbide Corp.............................. 38,200 1,640,212
--------------
47,957,899
--------------
CHEMICALS - SPECIALTY -- 0.3%
Engelhard Corp.................................. 46,975 816,191
Great Lakes Chemical Corp....................... 17,700 794,287
Morton International, Inc....................... 42,400 1,457,500
Praxair, Inc.................................... 48,500 2,182,500
Raychem Corp.................................... 26,800 1,154,075
W.R. Grace & Co................................. 24,300 1,954,631
--------------
8,359,184
--------------
COMMERCIAL SERVICES -- 0.4%
Cendant Corp. (a)............................... 245,719 8,446,582
Deluxe Corp..................................... 24,800 855,600
John H. Harland Co.............................. 7,400 155,400
Moore Corp., Ltd................................ 25,900 391,737
--------------
9,849,319
--------------
COMPUTER SERVICES -- 4.5%
3Com Corp. (a).................................. 110,000 3,843,125
Adobe Systems, Inc.............................. 21,700 895,125
Autodesk, Inc................................... 14,300 529,100
Automatic Data Processing, Inc.................. 91,100 5,591,262
Bay Networks, Inc. (a).......................... 63,900 1,633,444
Cabletron Systems, Inc. (a)..................... 47,900 718,500
Ceridian Corp. (a).............................. 24,800 1,136,150
Cisco Systems, Inc. (a)......................... 313,100 17,455,325
Computer Associates International, Inc.......... 169,643 8,969,874
Computer Sciences Corp. (a)..................... 24,200 2,020,700
EMC Corp. (a)................................... 154,000 4,225,375
First Data Corp................................. 138,300 4,045,275
Microsoft Corp.................................. 375,200 48,494,600
Novell, Inc. (a)................................ 104,900 786,750
Oracle Corp. (a)................................ 303,587 6,773,785
Parametric Technology Corp. (a)................. 39,700 1,880,787
Siebel Systems, Inc. (a)........................ 72 3,010
Silicon Graphics, Inc. (a)...................... 53,600 666,650
--------------
109,668,837
--------------
COMPUTERS -- 3.4%
Apple Computer, Inc. (a)........................ 37,700 494,812
Compaq Computer Corp............................ 235,285 13,278,897
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
B19
<PAGE>
STOCK INDEX PORTFOLIO (CONTINUED)
DECEMBER 31, 1997
<TABLE>
<CAPTION>
VALUE
COMMON STOCKS (CONTINUED) SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
Dell Computer Corp. (a)......................... 102,700 $ 8,626,800
Digital Equipment Corp. (a)..................... 47,900 1,772,300
Hewlett-Packard Co.............................. 323,800 20,237,500
International Business Machines Corp............ 304,400 31,828,825
Seagate Technology, Inc. (a).................... 76,000 1,463,000
Sun Microsystems, Inc. (a)...................... 115,000 4,585,625
--------------
82,287,759
--------------
CONSTRUCTION -- 0.1%
Fluor Corp...................................... 26,600 994,175
Foster Wheeler Corp............................. 12,000 324,750
Kaufman & Broad Home Corp....................... 11,866 266,243
Pulte Corp...................................... 6,400 267,600
--------------
1,852,768
--------------
CONSTRUCTION & HOUSING -- 0.0%
Centex Corp..................................... 8,800 553,850
--------------
CONTAINERS -- 0.2%
Ball Corp....................................... 9,100 321,344
Bemis Co., Inc.................................. 17,200 757,875
Crown Cork & Seal Co., Inc...................... 39,600 1,984,950
Owens-Illinois, Inc. (a)........................ 44,100 1,673,044
Stone Container Corp. (a)....................... 31,266 326,339
--------------
5,063,552
--------------
COSMETICS & SOAPS -- 1.8%
Alberto Culver Co. (Class "B" Stock)............ 17,400 557,887
Avon Products, Inc.............................. 41,300 2,534,787
Colgate Palmolive Co............................ 92,000 6,762,000
International Flavors & Fragrances, Inc......... 33,200 1,709,800
Procter & Gamble Co............................. 418,404 33,393,869
--------------
44,958,343
--------------
DIVERSIFIED OFFICE EQUIPMENT -- 0.6%
Avery Dennison Corp............................. 31,700 1,418,575
Pitney Bowes, Inc............................... 44,700 4,020,206
Unisys Corp. (a)................................ 53,500 742,312
Xerox Corp...................................... 100,646 7,428,933
--------------
13,610,026
--------------
DIVERSIFIED OPERATIONS -- 3.3%
Cognizant Corp.................................. 51,160 2,279,817
Fortune Brands, Inc............................. 53,600 1,986,550
General Electric Co............................. 1,018,000 74,695,750
Whitman Corp.................................... 29,500 768,844
--------------
79,730,961
--------------
DRUGS AND MEDICAL SUPPLIES -- 10.0%
Abbott Laboratories............................. 238,600 15,643,212
Allergan, Inc................................... 19,900 667,894
ALZA Corp. (a).................................. 26,400 839,850
American Home Products Corp..................... 202,200 15,468,300
Amgen, Inc. (a)................................. 82,000 4,438,250
Bausch & Lomb, Inc.............................. 17,400 689,475
Baxter International, Inc....................... 86,800 4,377,975
Becton, Dickinson & Co.......................... 38,500 1,925,000
Biomet, Inc..................................... 33,600 861,000
Boston Scientific Corp. (a)..................... 60,600 2,780,025
Bristol-Myers Squibb Co......................... 309,280 29,265,620
C.R. Bard, Inc.................................. 18,600 582,412
Cardinal Health, Inc............................ 33,700 2,531,712
</TABLE>
DECEMBER 31, 1997
<TABLE>
<CAPTION>
VALUE
COMMON STOCKS (CONTINUED) SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
Eli Lilly & Co.................................. 344,600 $ 23,992,775
Guidant Corp.................................... 45,900 2,857,275
Johnson & Johnson............................... 418,000 27,535,750
Mallinckrodt, Inc............................... 22,300 847,400
Medtronic, Inc.................................. 145,900 7,632,394
Merck & Co., Inc................................ 374,550 39,795,937
Pfizer, Inc..................................... 402,000 29,974,125
Pharmacia & Upjohn, Inc......................... 158,025 5,787,666
PharMerica, Inc. (a)............................ 15,063 156,279
Schering-Plough Corp............................ 227,700 14,145,862
St. Jude Medical, Inc. (a)...................... 27,800 847,900
United States Surgical Corp..................... 22,600 662,462
Warner-Lambert Co............................... 84,400 10,465,600
--------------
244,772,150
--------------
ELECTRICAL EQUIPMENT -- 0.1%
W.W. Grainger, Inc.............................. 15,800 1,535,562
--------------
ELECTRONICS -- 3.3%
Advanced Micro Devices, Inc. (a)................ 43,200 774,900
AMP, Inc........................................ 69,044 2,899,848
Applied Materials, Inc. (a)..................... 113,400 3,416,175
Data General Corp. (a).......................... 15,500 270,281
EG&G, Inc....................................... 12,900 268,481
Emerson Electric Co............................. 138,100 7,794,019
Harris Corp..................................... 24,800 1,137,700
Honeywell, Inc.................................. 39,000 2,671,500
Intel Corp...................................... 508,800 35,743,200
KLA-Tencor Corp. (a)............................ 26,900 1,039,012
LSI Logic Corp. (a)............................. 43,300 855,175
Micron Technology, Inc. (a)..................... 65,900 1,713,400
Motorola, Inc................................... 186,000 10,613,625
National Semiconductor Corp. (a)................ 50,300 1,304,656
Perkin-Elmer Corp............................... 14,000 994,875
Rockwell International Corp..................... 64,500 3,370,125
Tektronix, Inc.................................. 15,600 619,125
Texas Instruments, Inc.......................... 121,200 5,454,000
Thomas & Betts Corp............................. 17,600 831,600
--------------
81,771,697
--------------
FINANCIAL SERVICES -- 3.8%
American Express Co............................. 144,900 12,932,325
Beneficial Corp................................. 16,100 1,338,312
Countrywide Credit Industries, Inc.............. 33,100 1,419,162
Federal Home Loan Mortgage Corp................. 215,700 9,045,919
Federal National Mortgage Association........... 330,200 18,842,037
Fifth Third Bancorp............................. 47,600 3,891,300
Green Tree Financial Corp....................... 42,100 1,102,494
H & R Block, Inc................................ 32,300 1,447,444
Household International, Inc.................... 33,200 4,235,075
MBNA Corp....................................... 155,212 4,239,228
Merrill Lynch & Co., Inc........................ 103,700 7,563,619
Morgan Stanley, Dean Witter, Discover & Co...... 184,005 10,879,296
Schwab (Charles) Corp........................... 81,400 3,413,712
State Street Corp............................... 49,300 2,868,644
Sunamerica, Inc................................. 60,700 2,594,925
Transamerica Corp............................... 19,800 2,108,700
Washington Mutual Inc........................... 79,920 5,099,895
--------------
93,022,087
--------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
B20
<PAGE>
STOCK INDEX PORTFOLIO (CONTINUED)
DECEMBER 31, 1997
<TABLE>
<CAPTION>
VALUE
COMMON STOCKS (CONTINUED) SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
FOOD & BEVERAGES -- 5.8%
Adolph Coors Co. (Class "B" Stock).............. 11,600 $ 385,700
Anheuser-Busch Companies, Inc................... 153,400 6,749,600
Archer-Daniels-Midland Co....................... 173,537 3,763,584
Brown-Forman Corp. (Class "B" Stock)............ 21,300 1,176,825
Campbell Soup Co................................ 142,000 8,253,750
Coca-Cola Co.................................... 769,100 51,241,287
ConAgra, Inc.................................... 145,800 4,784,062
Corn Products International, Inc................ 11,075 330,173
CPC International, Inc.......................... 44,300 4,773,325
General Mills, Inc.............................. 49,200 3,523,950
Giant Food, Inc. (Class "A" Stock).............. 18,000 606,375
H.J. Heinz & Co................................. 113,450 5,764,678
Hershey Foods Corp.............................. 43,700 2,706,669
Kellogg Co...................................... 127,600 6,332,150
PepsiCo, Inc.................................... 474,400 17,285,950
Pioneer Hi-Bred International, Inc.............. 23,700 2,541,825
Quaker Oats Co.................................. 42,200 2,226,050
Ralston-Ralston Purina Group.................... 33,040 3,070,655
Sara Lee Corp................................... 148,200 8,345,512
Seagram Co., Ltd................................ 115,300 3,725,631
Sysco Corp...................................... 53,600 2,442,150
W. M. Wrigley, Jr. Co........................... 35,900 2,856,294
--------------
142,886,195
--------------
FOREST PRODUCTS -- 0.8%
Boise Cascade Corp.............................. 17,286 522,901
Champion International Corp..................... 29,300 1,327,656
Fort James Corp................................. 65,200 2,493,900
Georgia-Pacific Corp............................ 28,500 1,731,375
Georgia-Pacific Corp. (Timber Group) (a)........ 28,500 646,594
International Paper Co.......................... 93,734 4,042,279
Louisiana-Pacific Corp.......................... 34,200 649,800
Mead Corp....................................... 31,800 890,400
Potlatch Corp................................... 9,000 387,000
Temple-Inland Inc............................... 17,600 920,700
Union Camp Corp................................. 21,700 1,165,019
Westvaco Corp................................... 32,700 1,028,006
Weyerhaeuser Co................................. 61,800 3,032,062
Willamette Industries, Inc...................... 33,800 1,087,937
--------------
19,925,629
--------------
GAS PIPELINES -- 0.5%
Columbia Gas System, Inc........................ 17,300 1,359,131
Consolidated Natural Gas Co..................... 29,100 1,760,550
Enron Corp...................................... 98,700 4,102,219
Peoples Energy Corp............................. 10,200 401,625
Sonat, Inc...................................... 26,600 1,216,950
Williams Companies, Inc......................... 99,600 2,826,150
--------------
11,666,625
--------------
HOSPITALS/ HOSPITAL MANAGEMENT -- 0.7%
Columbia/HCA Healthcare Corp.................... 202,798 6,007,891
Healthsouth Corp. (a)........................... 122,400 3,396,600
Humana, Inc. (a)................................ 51,700 1,072,775
Manor Care, Inc................................. 19,050 666,750
Service Corp. International..................... 77,900 2,877,431
Shared Medical Systems Corp..................... 7,400 488,400
Tenet Healthcare Corp. (a)...................... 94,800 3,140,250
--------------
17,650,097
--------------
</TABLE>
DECEMBER 31, 1997
<TABLE>
<CAPTION>
VALUE
COMMON STOCKS (CONTINUED) SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
HOUSEHOLD PRODUCTS & PERSONAL CARE -- 1.2%
Clorox Co....................................... 32,100 $ 2,537,906
Gillette Co..................................... 173,800 17,456,037
Kimberly-Clark Corp............................. 173,188 8,540,333
--------------
28,534,276
--------------
HOUSING RELATED -- 0.5%
Armstrong World Industries, Inc................. 13,100 979,225
Fleetwood Enterprises, Inc...................... 10,900 462,569
Lowe's Companies, Inc........................... 54,400 2,594,200
Masco Corp...................................... 51,300 2,609,887
Maytag Corp..................................... 30,700 1,145,494
Owens Corning................................... 16,900 576,712
Stanley Works................................... 27,800 1,311,812
Tupperware Corp................................. 18,900 526,837
Whirlpool Corp.................................. 23,100 1,270,500
--------------
11,477,236
--------------
INSURANCE -- 4.8%
Aetna, Inc...................................... 46,512 3,282,003
Allstate Corp................................... 134,794 12,249,405
American General Corp........................... 76,986 4,162,056
American International Group, Inc............... 217,855 23,691,731
Aon Corp........................................ 51,350 3,010,394
Chubb Corp...................................... 53,400 4,038,375
CIGNA Corp...................................... 23,000 3,980,437
Cincinnati Financial Corp....................... 17,000 2,392,750
Conseco, Inc.................................... 57,500 2,612,656
General Re Corp................................. 24,550 5,204,600
Hartford Financial Services Group, Inc.......... 36,600 3,424,387
Jefferson-Pilot Corp............................ 21,975 1,711,303
Lincoln National Corp........................... 31,600 2,468,750
Loews Corp...................................... 35,700 3,788,662
Marsh & McLennan Companies, Inc................. 52,400 3,907,075
MBIA, Inc....................................... 27,400 1,830,662
MGIC Investment Corp............................ 35,500 2,360,750
Progressive Corp................................ 22,300 2,673,212
SAFECO Corp..................................... 43,500 2,120,625
St. Paul Companies, Inc......................... 26,300 2,158,244
Torchmark Corp.................................. 42,700 1,796,069
Travelers Group, Inc............................ 356,409 19,201,535
United Healthcare Corp.......................... 57,700 2,866,969
UNUM Corp....................................... 43,200 2,349,000
USF&G Corp...................................... 33,200 732,475
--------------
118,014,125
--------------
LEISURE -- 1.1%
Brunswick Corp.................................. 30,800 933,625
Harrah's Entertainment, Inc. (a)................ 31,150 587,956
Hilton Hotels Corp.............................. 77,100 2,293,725
King World Productions, Inc..................... 11,050 638,137
Mirage Resorts, Inc. (a)........................ 56,200 1,278,550
Walt Disney Co.................................. 210,067 20,809,762
--------------
26,541,755
--------------
LODGING -- 0.2%
ITT Corp. (a)................................... 36,400 3,016,650
Marriott International, Inc..................... 39,700 2,749,225
--------------
5,765,875
--------------
MACHINERY -- 0.9%
Briggs & Stratton Corp.......................... 7,600 369,075
Case Corp....................................... 23,800 1,438,412
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
B21
<PAGE>
STOCK INDEX PORTFOLIO (CONTINUED)
DECEMBER 31, 1997
<TABLE>
<CAPTION>
VALUE
COMMON STOCKS (CONTINUED) SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
Caterpillar, Inc................................ 116,600 $ 5,662,387
Cincinnati Milacron, Inc........................ 12,300 319,031
Cooper Industries, Inc.......................... 37,800 1,852,200
Deere & Co...................................... 78,400 4,571,700
Dover Corp...................................... 68,800 2,485,400
Eaton Corp...................................... 23,700 2,115,225
Harnischfeger Industries, Inc................... 15,000 529,688
Ingersoll-Rand Co............................... 51,850 2,099,925
Snap-On, Inc.................................... 18,700 815,788
Timken Co....................................... 19,200 660,000
--------------
22,918,831
--------------
MANUFACTURING -- 0.5%
Illinois Tool Works, Inc........................ 77,600 4,665,700
Tyco International, Ltd......................... 165,600 7,462,350
--------------
12,128,050
--------------
MEDIA -- 2.6%
CBS Corp........................................ 218,300 6,426,206
Clear Channel Communications, Inc. (a).......... 30,100 2,391,069
Comcast Corp. (Special Class "A" Stock)......... 107,100 3,380,344
Dow Jones & Co., Inc............................ 29,700 1,594,519
Dun & Bradstreet Corp........................... 53,460 1,653,919
Gannett Co., Inc................................ 87,500 5,408,594
HBO & Co........................................ 61,600 2,956,800
Interpublic Group of Companies, Inc............. 38,400 1,912,800
Knight-Ridder, Inc.............................. 27,100 1,409,200
McGraw-Hill, Inc................................ 30,700 2,271,800
Meredith Corp................................... 16,600 592,413
New York Times Co. (Class "A" Stock)............ 29,600 1,957,300
R. R. Donnelley & Sons Co....................... 44,500 1,657,625
Tele-Communications, Inc. (Series "A"
Stock) (a).................................... 162,900 4,551,019
Time Warner, Inc................................ 173,940 10,784,280
Times Mirror Co. (Class "A" Stock).............. 29,100 1,789,650
Tribune Co...................................... 38,400 2,390,400
US West Media Group (a)......................... 188,600 5,445,825
Viacom, Inc. (Class "B" Stock) (a).............. 109,567 4,540,183
--------------
63,113,946
--------------
METALS - FERROUS -- 0.2%
Allegheny Teledyne, Inc......................... 55,580 1,438,133
Armco, Inc. (a)................................. 26,700 131,831
Bethlehem Steel Corp. (a)....................... 33,500 288,938
Inland Steel Industries, Inc.................... 15,300 262,013
Nucor Corp...................................... 27,600 1,333,425
USX-U.S. Steel Group............................ 27,340 854,375
Worthington Industries, Inc..................... 29,400 485,100
--------------
4,793,815
--------------
METALS - NON FERROUS -- 0.3%
Alcan Aluminum, Ltd............................. 70,250 1,940,656
Aluminum Company of America..................... 53,900 3,793,213
Cyprus Minerals Co.............................. 28,100 432,038
Inco Ltd........................................ 51,100 868,700
Reynolds Metals Co.............................. 23,400 1,404,000
--------------
8,438,607
--------------
MINERAL RESOURCES -- 0.2%
ASARCO, Inc..................................... 12,500 280,469
Burlington Resources, Inc....................... 54,617 2,447,524
</TABLE>
DECEMBER 31, 1997
<TABLE>
<CAPTION>
VALUE
COMMON STOCKS (CONTINUED) SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
Echo Bay Mines, Ltd............................. 39,900 $ 97,256
Homestake Mining Co............................. 45,300 402,038
Phelps Dodge Corp............................... 18,900 1,176,525
--------------
4,403,812
--------------
MISCELLANEOUS - BASIC INDUSTRY -- 0.7%
Browning-Ferris Industries, Inc................. 65,000 2,405,000
Crane Co........................................ 14,150 613,756
Ecolab, Inc..................................... 19,700 1,092,119
General Signal Corp............................. 15,362 648,084
ITT Industries, Inc............................. 36,400 1,142,050
Laidlaw, Inc.................................... 101,500 1,382,938
Millipore Corp.................................. 13,200 447,975
NACCO Industries, Inc. (Class "A" Stock)........ 2,500 267,969
Pall Corp....................................... 39,200 810,950
PPG Industries Inc.............................. 55,500 3,170,438
Textron, Inc.................................... 51,300 3,206,250
Thermo Electron Corp. (a)....................... 46,700 2,078,150
--------------
17,265,679
--------------
MISCELLANEOUS - CONSUMER GROWTH/STABLE -- 1.5%
American Greetings Corp. (Class "A" Stock)...... 24,300 950,738
Black & Decker Corp............................. 29,900 1,167,969
Corning, Inc.................................... 71,800 2,665,575
Eastman Kodak Co................................ 101,100 6,148,144
Jostens, Inc.................................... 12,200 281,363
Minnesota Mining & Manufacturing Co............. 128,600 10,553,238
Polaroid Corp................................... 15,100 735,181
Rubbermaid, Inc................................. 46,000 1,150,000
Unilever N.V.................................... 198,800 12,412,575
--------------
36,064,783
--------------
MISCELLANEOUS - INDUSTRIAL -- 0.1%
Tenneco, Inc.................................... 53,600 2,117,200
--------------
OIL & GAS -- 7.0%
Amerada Hess Corp............................... 28,100 1,541,988
Amoco Corp...................................... 152,230 12,958,579
Anadarko Petroleum Corp......................... 18,400 1,116,650
Ashland, Inc.................................... 23,500 1,261,656
Atlantic Richfield Co........................... 99,470 7,970,034
Chevron Corp.................................... 204,000 15,708,000
Coastal Corp.................................... 32,600 2,019,163
Eastern Enterprises............................. 6,400 288,000
Exxon Corp...................................... 767,200 46,943,050
Kerr-McGee Corp................................. 14,800 937,025
Mobil Corp...................................... 243,500 17,577,656
NICOR, Inc...................................... 14,400 607,500
Occidental Petroleum Corp....................... 105,400 3,089,538
Pennzoil Co..................................... 15,000 1,002,188
Phillips Petroleum Co........................... 82,500 4,011,563
Royal Dutch Petroleum Co........................ 666,500 36,115,969
Sun Co., Inc.................................... 22,500 946,406
Texaco, Inc..................................... 174,382 9,482,021
Union Pacific Resources Group, Inc.............. 79,256 1,921,958
Unocal Corp..................................... 77,000 2,988,563
USX-Marathon Group.............................. 89,600 3,024,000
--------------
171,511,507
--------------
OIL & GAS SERVICES -- 1.1%
Apache Corporation.............................. 28,600 1,002,788
Baker Hughes, Inc............................... 51,900 2,264,138
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
B22
<PAGE>
STOCK INDEX PORTFOLIO (CONTINUED)
DECEMBER 31, 1997
<TABLE>
<CAPTION>
VALUE
COMMON STOCKS (CONTINUED) SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
Dresser Industries, Inc......................... 55,000 $ 2,306,563
Halliburton Co.................................. 81,300 4,222,519
Helmerich & Payne, Inc.......................... 7,900 536,213
McDermott International, Inc.................... 16,900 618,963
ONEOK, Inc...................................... 9,800 395,675
Oryx Energy Co. (a)............................. 32,700 833,850
Rowan Companies, Inc. (a)....................... 26,200 799,100
Schlumberger, Ltd............................... 154,100 12,405,050
Western Atlas, Inc. (a)......................... 17,100 1,265,400
--------------
26,650,259
--------------
PRECIOUS METALS -- 0.2%
Barrick Gold Corp............................... 115,100 2,143,738
Battle Mountain Gold Corp....................... 71,500 420,063
Freeport-McMoRan Copper & Gold, Inc. (Class "B"
Stock)........................................ 63,000 992,250
Newmont Mining Corp............................. 48,103 1,413,026
Placer Dome, Inc................................ 75,600 959,175
--------------
5,928,252
--------------
RAILROADS -- 0.7%
Burlington Northern, Inc........................ 48,442 4,502,078
CSX Corp........................................ 68,112 3,678,048
Norfolk Southern Corp........................... 116,800 3,598,900
Union Pacific Corp.............................. 76,900 4,801,444
--------------
16,580,470
--------------
REMARKET/LEASING OFFICE EQUIPMENT -- 0.0%
IKON Office Solutions, Inc...................... 41,376 1,163,700
--------------
RESTAURANTS -- 0.5%
Darden Restaurants, Inc......................... 45,900 573,750
McDonald's Corp................................. 213,900 10,213,725
Tricon Global Restaurants, Inc. (a)............. 47,750 1,387,734
Wendy's International, Inc...................... 40,600 976,938
--------------
13,152,147
--------------
RETAIL -- 4.9%
Albertson's, Inc................................ 75,900 3,595,763
American Stores Co.............................. 84,000 1,727,250
AutoZone, Inc. (a).............................. 48,000 1,392,000
Charming Shoppes, Inc. (a)...................... 23,300 109,219
Circuit City Stores, Inc........................ 30,100 1,070,431
Costco Companies, Inc. (a)...................... 66,366 2,961,583
CVS Corp........................................ 54,000 3,459,375
Dayton-Hudson Corp.............................. 68,242 4,606,335
Dillards, Inc. (Class "A" Stock)................ 35,450 1,249,613
Federated Department Stores, Inc. (a)........... 64,900 2,794,756
Great Atlantic & Pacific Tea Co., Inc........... 11,200 332,500
Harcourt General, Inc........................... 21,906 1,199,354
Home Depot, Inc................................. 228,123 13,430,742
J.C. Penney Co., Inc............................ 77,800 4,692,313
Kmart Corp. (a)................................. 150,300 1,737,844
Kroger Co. (a).................................. 78,700 2,906,981
Limited, Inc.................................... 84,248 2,148,324
Liz Claiborne, Inc.............................. 21,600 903,150
Longs Drug Stores, Inc.......................... 11,700 375,863
May Department Stores Co........................ 72,000 3,793,500
Mercantile Stores Co., Inc...................... 11,200 681,800
Newell Co....................................... 49,600 2,108,000
Nike, Inc. (Class "B" Stock).................... 89,900 3,528,575
Nordstrom, Inc.................................. 24,100 1,455,038
Pep Boys-Manny, Moe & Jack...................... 19,300 460,788
</TABLE>
DECEMBER 31, 1997
<TABLE>
<CAPTION>
VALUE
COMMON STOCKS (CONTINUED) SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
Reebok International, Ltd. (a).................. 17,300 $ 498,456
Rite Aid Corp................................... 39,300 2,306,419
Sears, Roebuck & Co............................. 121,900 5,515,975
Sherwin-Williams Co............................. 53,600 1,487,400
Supervalu, Inc.................................. 20,000 837,500
Tandy Corp...................................... 32,330 1,246,726
The Gap, Inc.................................... 124,650 4,417,284
TJX Companies, Inc.............................. 50,000 1,718,750
Toys 'R' Us, Inc. (a)........................... 89,550 2,815,228
Wal-Mart Stores, Inc............................ 701,900 27,681,181
Walgreen Co..................................... 153,200 4,806,650
Winn Dixie Stores, Inc.......................... 45,900 2,005,256
Woolworth Corp. (a)............................. 42,400 863,900
--------------
118,921,822
--------------
RUBBER -- 0.2%
B.F. Goodrich Co................................ 22,300 924,056
Cooper Tire & Rubber Co......................... 24,600 599,625
Goodyear Tire & Rubber Co....................... 49,300 3,136,713
--------------
4,660,394
--------------
TELECOMMUNICATIONS -- 7.8%
Airtouch Communications, Inc. (a)............... 157,200 6,533,625
Alltel Corp..................................... 57,700 2,369,306
Ameritech Corp.................................. 170,400 13,717,200
Andrew Corp. (a)................................ 27,312 655,488
AT&T Corp....................................... 505,273 30,947,971
Bell Atlantic Corp.............................. 241,895 22,012,445
BellSouth Corp.................................. 308,100 17,349,881
DSC Communications Corp. (a).................... 36,100 866,400
Frontier Corp................................... 51,100 1,229,594
GTE Corp........................................ 297,820 15,561,095
Lucent Technologies, Inc........................ 200,060 15,979,793
MCI Communications Corp......................... 216,600 9,273,188
NextLevel Systems, Inc. (a)..................... 44,500 795,438
Northern Telecom, Ltd........................... 81,600 7,262,400
SBC Communications, Inc......................... 284,893 20,868,412
Scientific-Atlanta, Inc......................... 24,800 415,400
Sprint Corp..................................... 133,800 7,844,025
Tellabs, Inc. (a)............................... 56,100 2,966,288
US West Communications, Inc..................... 150,700 6,800,338
WorldCom, Inc................................... 280,800 8,494,200
--------------
191,942,487
--------------
TEXTILES -- 0.1%
Fruit of the Loom, Inc. (Class "A" Stock) (a)... 24,700 632,938
National Service Industries, Inc................ 13,500 669,094
Russell Corp.................................... 11,500 305,469
Springs Industries, Inc......................... 6,100 317,200
V.F. Corp....................................... 38,836 1,784,029
--------------
3,708,730
--------------
TOBACCO -- 1.5%
Phillip Morris Co., Inc......................... 753,800 34,156,563
UST, Inc........................................ 56,800 2,098,050
--------------
36,254,613
--------------
TOYS -- 0.2%
Hasbro, Inc..................................... 39,500 1,244,250
Mattel, Inc..................................... 91,281 3,400,217
--------------
4,644,467
--------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
B23
<PAGE>
STOCK INDEX PORTFOLIO (CONTINUED)
DECEMBER 31, 1997
<TABLE>
<CAPTION>
VALUE
COMMON STOCKS (CONTINUED) SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
TRUCKING/SHIPPING -- 0.1%
Caliber System, Inc............................. 11,900 $ 579,381
Federal Express Corp. (a)....................... 35,900 2,192,144
Ryder System, Inc............................... 25,300 828,575
--------------
3,600,100
--------------
UTILITY - ELECTRIC -- 2.7%
American Electric Power Co., Inc................ 58,900 3,040,713
Baltimore Gas & Electric Co..................... 46,350 1,578,797
Carolina Power & Light Co....................... 46,200 1,960,613
Central & South West Corp....................... 66,500 1,799,656
CINergy Corp.................................... 48,239 1,848,157
Consolidated Edison Co. of NY, Inc.............. 72,300 2,964,300
Dominion Resources, Inc......................... 57,750 2,457,984
DTE Energy Company.............................. 44,800 1,554,000
Duke Power Co................................... 112,231 6,214,792
Edison International............................ 123,100 3,346,781
Entergy Corp.................................... 75,000 2,245,313
First Energy Corp. (a).......................... 70,800 2,053,200
FPL Group, Inc.................................. 56,600 3,350,013
GPU, Inc........................................ 37,900 1,596,538
Houston Industries, Inc......................... 97,510 2,602,298
Niagara Mohawk Power Corp. (a).................. 43,300 454,650
Northern States Power Co........................ 23,300 1,357,225
P P & L Resources, Inc.......................... 51,100 1,223,206
Pacific Enterprises............................. 25,900 974,488
Pacific Gas & Electric, Co...................... 136,200 4,145,588
PacifiCorp...................................... 92,600 2,529,138
PECO Energy Co.................................. 68,000 1,649,000
Public Service Enterprise Group, Inc............ 71,100 2,252,981
Southern Co..................................... 213,200 5,516,550
Texas Utilities Co.............................. 76,306 3,171,468
Unicom Corp..................................... 66,900 2,057,175
Union Electric Company.......................... 31,000 1,340,750
--------------
65,285,374
--------------
WASTE MANAGEMENT -- 0.2%
Waste Management, Inc........................... 140,000 3,850,000
--------------
TOTAL LONG-TERM INVESTMENTS
(cost $1,365,454,009).......................................... 2,350,401,793
--------------
</TABLE>
DECEMBER 31, 1997
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
SHORT-TERM INVESTMENTS -- 4.2% (000) (NOTE 2)
------------- --------------
<S> <C> <C>
REPURCHASE AGREEMENT -- 4.0%
Joint Repurchase Agreement Account,
6.53%, 01/02/98 (Note 5)...................... $ 98,176 $ 98,176,000
--------------
U. S. GOVERNMENT & AGENCY OBLIGATIONS -- 0.2%
United States Treasury Bills,
5.065%, 03/19/98 (b).......................... 4,000 3,957,229
5.21%, 01/22/98 (b)........................... 400 398,842
--------------
4,356,071
--------------
TOTAL SHORT-TERM INVESTMENTS
(cost $102,532,071)............................................ 102,532,071
--------------
TOTAL INVESTMENTS -- 100.2%
(cost $1,467,986,080; Note 6).................................. 2,452,933,864
--------------
VARIATION MARGIN ON OPEN
FUTURES CONTRACTS -- (0.0%).................................... (19,150)
OTHER LIABILITIES IN EXCESS OF
OTHER ASSETS -- (0.2%)......................................... (4,723,488)
--------------
TOTAL NET ASSETS -- 100.0%....................................... $2,448,191,226
--------------
--------------
</TABLE>
The following abbreviations are used in portfolio descriptions:
ADR American Depository Receipt
(a) Non-income producing security.
(b) Security segregated as collateral for futures contracts.
(c) Open futures contracts as of December 31, 1997 are as follows:
<TABLE>
<CAPTION>
NUMBER OF EXPIRATION VALUE AT VALUE AT
CONTRACTS TYPE DATE TRADE DATE DECEMBER 31, 1997 APPRECIATION
<C> <S> <C> <C> <C> <C>
Long Position:
383 S&P 500 Index Mar 98 $ 93,240,475 $ 93,748,825 $ 508,350
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
B24
<PAGE>
EQUITY PORTFOLIO
DECEMBER 31, 1997
<TABLE>
<CAPTION>
LONG-TERM INVESTMENTS -- 83.3%
VALUE
COMMON STOCKS SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
AEROSPACE -- 0.0%
Raytheon Co............................................... 44,639 $ 2,201,261
--------------
AUTOS - CARS & TRUCKS -- 4.3%
Chrysler Corp............................................. 2,627,820 92,466,416
General Motors Corp....................................... 700,000 42,437,500
LucasVarity PLC (United Kingdom).......................... 19,000,000 67,472,027
Navistar International Corp. (a).......................... 395,200 9,805,900
PACCAR, Inc............................................... 279,400 14,668,500
TRW, Inc.................................................. 634,600 33,871,775
--------------
260,722,118
--------------
BANKS AND SAVINGS & LOANS -- 6.2%
Bank of New York Co., Inc................................. 1,200,000 69,375,000
BankAmerica Corp.......................................... 750,000 54,750,000
Chase Manhattan Corp...................................... 475,600 52,078,200
First America Bank Corp................................... 280,500 21,633,562
Mellon Bank Corp.......................................... 270,100 16,374,812
Mercantile Bankshares Corp................................ 419,400 16,409,025
Morgan (J.P.) & Co., Inc.................................. 395,400 44,630,775
NationsBank Corp.......................................... 800,000 48,650,000
Republic New York Corp.................................... 225,000 25,692,187
Washington Mutual, Inc.................................... 429,060 27,379,391
--------------
376,972,952
--------------
CHEMICALS -- 3.3%
BOC Group, PLC ADR (United Kingdom)....................... 800,000 26,350,000
Dow Chemical Co........................................... 556,300 56,464,450
Eastman Chemical Co....................................... 941,550 56,081,072
Potash Corp. of Saskatchewan, Inc......................... 380,000 31,540,000
Wellman, Inc.............................................. 798,200 15,564,900
Witco Corp................................................ 268,800 10,970,400
--------------
196,970,822
--------------
COMPUTERS -- 3.3%
Digital Equipment Corp. (a)............................... 3,050,000 112,850,000
International Business Machines Corp...................... 600,000 62,737,500
NCR Corp.................................................. 100,000 2,781,250
Seagate Technology, Inc. (a).............................. 950,000 18,287,500
--------------
196,656,250
--------------
CONSTRUCTION & HOUSING -- 1.3%
American Standard Co., Inc. (a)........................... 1,050,000 40,228,125
Centex Corp............................................... 600,000 37,762,500
--------------
77,990,625
--------------
DIVERSIFIED CONSUMER PRODUCTS -- 5.3%
Gibson Greeting Inc. (a).................................. 750,000 16,406,250
Loews Corp................................................ 1,775,000 188,371,875
RJR Nabisco Holdings Corp................................. 3,100,000 116,250,000
--------------
321,028,125
--------------
ELECTRONICS -- 0.6%
Harris Corp............................................... 600,000 27,525,000
Gerber Scientific, Inc.................................... 419,800 8,343,525
--------------
35,868,525
--------------
FINANCIAL SERVICES -- 7.7%
American Express Co....................................... 700,000 62,475,000
Lehman Brothers Holdings, Inc............................. 900,000 45,900,000
Morgan Stanley, Dean Witter, Discover & Co................ 3,200,000 189,200,000
Travelers Group, Inc...................................... 3,061,500 164,938,312
--------------
462,513,312
--------------
FOOD & BEVERAGES -- 0.5%
Diageo PLC (United Kingdom)............................... 3,000,000 27,599,940
--------------
</TABLE>
DECEMBER 31, 1997
<TABLE>
<CAPTION>
VALUE
COMMON STOCKS (CONTINUED) SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
FOREST PRODUCTS -- 7.9%
Fort James Corp........................................... 560,000 $ 21,420,000
Georgia-Pacific Corp...................................... 1,158,000 70,348,500
Georgia-Pacific Corp. (a)................................. 1,158,000 26,272,125
International Paper Co.................................... 1,638,000 70,638,750
Mead Corp................................................. 1,800,000 50,400,000
Rayonier Inc.............................................. 830,400 35,343,900
Temple-Inland Inc......................................... 892,500 46,688,906
Weyerhaeuser Co........................................... 1,522,500 74,697,656
Willamette Industries, Inc................................ 2,500,000 80,468,750
--------------
476,278,587
--------------
HOSPITALS/ HOSPITAL MANAGEMENT -- 5.0%
Columbia/HCA Healthcare Corp.............................. 2,383,500 70,611,187
Foundation Health Corp. (a)............................... 2,044,210 45,739,199
PacifiCare Health Systems, Inc. (a)....................... 291,500 15,267,312
Tenet Healthcare Corp. (a)................................ 3,237,832 107,253,185
Wellpoint Health Networks Inc............................. 1,508,300 63,725,675
--------------
302,596,558
--------------
INSURANCE -- 10.9%
American Financial Group, Inc............................. 552,700 22,280,719
American General Corp..................................... 1,000,000 54,062,500
Chubb Corp................................................ 2,206,400 166,859,000
Citizens Corp............................................. 700,000 20,125,000
Equitable Companies, Inc.................................. 1,800,000 89,550,000
Old Republic International Corp........................... 1,950,885 72,548,536
SAFECO Corp............................................... 2,327,000 113,441,250
St. Paul Companies, Inc................................... 826,900 67,857,481
Western National Corp..................................... 1,624,300 48,119,888
--------------
654,844,374
--------------
METALS-FERROUS -- 0.6%
Bethlehem Steel Corp. (a)................................. 500,000 4,312,500
Birmingham Steel Corp..................................... 1,527,400 24,056,550
Carpenter Technology Corp................................. 100,000 4,806,250
--------------
33,175,300
--------------
METALS-NON FERROUS -- 1.1%
Aluminum Company of America............................... 600,000 42,225,000
Cyprus Amax Minerals Co................................... 1,533,200 23,572,950
Nord Resources Corp. (a).................................. 130,500 236,531
--------------
66,034,481
--------------
MISCELLANEOUS - CONSUMER GROWTH/STABLE -- 0.5%
Eastman Kodak Co.......................................... 475,000 28,885,938
--------------
OIL & GAS -- 2.4%
Amerada Hess Corp......................................... 325,000 17,834,375
Atlantic Richfield Co..................................... 1,081,700 86,671,213
Total SA, ADR (France).................................... 738,365 40,979,258
--------------
145,484,846
--------------
OIL & GAS EXPLORATION/PRODUCTION -- 3.7%
Elf Aquitaine SA, ADR (France)............................ 2,424,433 142,132,385
Occidental Petroleum Corp................................. 1,100,000 32,243,750
Oryx Energy Co. (a)....................................... 1,600,000 40,800,000
Union Texas Petroleum Holdings, Inc....................... 504,500 10,499,906
--------------
225,676,041
--------------
PRECIOUS METALS -- 0.4%
AMAX Gold Inc. (a)........................................ 131,342 303,728
Newmont Mining Corp....................................... 883,900 25,964,563
--------------
26,268,291
--------------
RESTAURANTS -- 1.6%
Darden Restaurants, Inc................................... 7,922,700 99,033,750
--------------
RETAIL -- 8.0%
BJ'S Wholesale Club, Inc. (a)............................. 1,300,000 40,787,500
Dayton-Hudson Corp........................................ 358,800 24,219,000
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
B25
<PAGE>
EQUITY PORTFOLIO (CONTINUED)
DECEMBER 31, 1997
<TABLE>
<CAPTION>
VALUE
COMMON STOCKS (CONTINUED) SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
Dillard's, Inc............................................ 3,300,000 $ 116,325,000
Homebase, Inc. (a)........................................ 1,300,000 10,237,500
Kmart Corp. (a)........................................... 6,500,000 75,156,250
Nine West Group, Inc. (a)................................. 715,800 18,566,063
Petrie Stores Corp. (a)................................... 540,000 1,651,050
Sears, Roebuck and Co..................................... 690,000 31,222,500
Tandy Corp................................................ 2,765,800 106,656,163
Toys 'R' Us, Inc. (a)..................................... 1,800,000 56,587,500
--------------
481,408,526
--------------
TELECOMMUNICATIONS -- 5.4%
360 Communication Co. (a)................................. 1,696,066 34,239,332
AT&T Corp................................................. 1,950,000 119,437,500
Loral Corp................................................ 1,800,000 38,587,500
Portugal Telecom SA, ADR (Portugal)....................... 1,262,500 59,337,500
Telefonica de Espana, SA, ADR (Spain)..................... 800,000 72,850,000
--------------
324,451,832
--------------
TEXTILES -- 0.0%
Worldtex, Inc. (a)........................................ 107,199 850,892
--------------
TRANSPORTATION -- 0.4%
OMI Corp. (a)............................................. 1,000,000 9,187,500
Overseas Shipholding Group, Inc........................... 600,000 13,087,500
--------------
22,275,000
--------------
UTILITY - ELECTRIC -- 2.3%
American Electric Power, Inc.............................. 180,000 9,292,500
GPU, Inc.................................................. 500,000 21,062,500
Houston Industries, Inc................................... 974,519 26,007,476
Long Island Lighting Co................................... 1,541,400 46,434,675
Unicom Corp............................................... 1,112,900 34,221,675
--------------
137,018,826
--------------
UTILITY - WATER -- 0.1%
American Water Works Co., Inc............................. 270,000 7,374,375
--------------
WASTE MANAGEMENT -- 0.5%
Waste Management, Inc..................................... 1,100,000 30,250,000
--------------
TOTAL LONG-TERM INVESTMENTS
(cost $3,193,641,271).................................................... 5,020,431,547
--------------
PRINCIPAL
MOODY'S AMOUNT
SHORT-TERM INVESTMENTS -- 16.7% RATING (000)
------------ ---------
CERTIFICATES OF DEPOSIT-YANKEE -- 2.3%
Bank of Montreal, (Canada),
5.90%, 01/16/98............................... P1 $ 27,000 27,000,000
Barclays Bank PLC, (United Kingdom)
5.64%, 01/20/98............................... P1 21,000 20,997,178
Bayerische LandesBank, (Federal Republic of
Germany)
5.69%, 01/28/98............................... P1 20,000 19,997,165
Bayerische VereinBank, (Federal Republic of
Germany)
5.69%, 01/23/98............................... P1 13,000 12,998,349
Canadian Imperial Bank, (Canada)
5.80%, 02/13/98............................... P1 59,000 59,000,000
--------------
139,992,692
--------------
</TABLE>
DECEMBER 31, 1997
<TABLE>
<CAPTION>
PRINCIPAL
MOODY'S AMOUNT VALUE
SHORT-TERM INVESTMENTS (CONT'D) RATING (000) (NOTE 2)
------------ --------- --------------
<S> <C> <C> <C>
COMMERCIAL PAPER -- 4.6%
Associates Corp. of North America,
5.70%, 01/15/98............................... P1 $ 17,000 $ 16,965,008
5.70%, 01/16/98............................... P1 24,000 23,946,800
Associates First Capital Corp.,
5.75%, 01/30/98............................... P1 19,000 18,915,028
Bell Atlantic Financial,
5.80%, 01/14/98............................... P1 9,000 8,982,600
Beneficial Corp.,
5.74%, 02/12/98............................... P1 59,000 58,614,304
General Electric Capital Corp.,
5.71%, 01/23/98............................... P1 27,000 26,910,067
5.80%, 01/14/98............................... P1 34,000 33,934,267
Morgan (J.P.) & Co., Inc.,
5.77%, 02/10/98............................... P1 8,030 7,979,806
Norwest Financial, Inc.,
5.70%, 01/16/98............................... P1 48,384 48,276,749
Smith Barney, Inc.,
5.82%, 01/15/98............................... P1 10,000 9,978,983
Xerox Corp.,
5.75%, 02/10/98............................... P1 20,000 19,875,417
--------------
274,379,029
--------------
REPURCHASE AGREEMENT -- 8.1%
Joint Repurchase Agreement Account,
6.53%, 01/02/98
(Note 5).................................... 490,528 490,528,000
--------------
U. S. GOVERNMENT & AGENCY OBLIGATIONS -- 1.7%
Federal Home Loan Mortgage Corp.,
5.61%, 03/10/98............................... 7,000 6,929,020
Federal National Mortgage Association,
5.40%, 02/05/98............................... 10,000 9,946,200
5.63%, 08/14/98............................... 8,000 7,991,760
5.71%, 09/09/98............................... 15,000 14,983,650
5.89%, 05/21/98............................... 12,200 12,209,516
United States Treasury Notes,
5.125%, 02/28/98.............................. 20,000 19,984,400
5.875%, 04/30/98.............................. 10,000 10,012,500
6.125%, 08/31/98.............................. 18,000 18,056,160
--------------
100,113,206
--------------
TOTAL SHORT-TERM INVESTMENTS
(cost $1,004,995,132).................................................... 1,005,012,927
--------------
TOTAL INVESTMENTS -- 100.0%
(cost $4,198,636,403; Note 6)............................................ 6,025,444,474
--------------
LIABILITIES IN EXCESS OF
OTHER ASSETS -- (0.0%)................................................... (1,464,443)
--------------
TOTAL NET ASSETS -- 100.0%................................................. $6,023,980,031
--------------
--------------
</TABLE>
<TABLE>
<S> <C>
The following abbreviations are used in portfolio descriptions:
-- American Depository Receipt.
ADR
-- Public Limited Company (British Corporation).
PLC
SA -- Sociedad Anonima (Spanish Corporation) or Societe
Anonyme (French Corporation).
</TABLE>
(a) Non-Income producing security.
SEE NOTES TO FINANCIAL STATEMENTS.
B26
<PAGE>
GLOBAL PORTFOLIO
DECEMBER 31, 1997
<TABLE>
<CAPTION>
LONG-TERM INVESTMENTS -- 93.1%
VALUE
COMMON STOCKS -- 92.1% SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
AUSTRALIA -- 2.6%
Brambles Industries, Ltd. (Diversified
Operations)................................... 615,200 $ 12,204,445
FXF Trust (Media) (a)........................... 224,600 38,045
Publishing and Broadcasting, Ltd. (Media)....... 224,600 1,011,704
Woolworths, Ltd. (Retail)....................... 1,056,356 3,530,548
--------------
16,784,742
--------------
FEDERAL REPUBLIC OF GERMANY -- 4.0%
Linde, AG (Machinery)........................... 12,040 7,350,730
SAP, AG (Computer Services)..................... 39,100 11,881,426
Volkswagen, AG (Autos - Cars & Trucks).......... 11,700 6,583,669
--------------
25,815,825
--------------
FINLAND -- 2.0%
Nokia Corp. (Class "A" Stock)
(Telecommunications).......................... 177,300 12,587,555
--------------
FRANCE -- 5.1%
Carrefour Supermarche, SA (Retail).............. 10,300 5,375,551
France Telecom, SA (Telecommunications) (a)..... 50,000 1,814,178
Legrand, SA (Electrical Equipment).............. 42,500 8,469,625
Total, SA (Class "B" Stock) (Petroleum)......... 69,400 7,555,389
Valeo, SA (Autos - Cars & Trucks)............... 144,685 9,816,408
--------------
33,031,151
--------------
HONG KONG -- 2.0%
Hutchison Whampoa, Ltd. (Diversified
Operations)................................... 1,349,000 8,444,308
New World Development Co., Ltd. (Real Estate
Development).................................. 1,179,000 4,078,110
--------------
12,522,418
--------------
IRELAND -- 2.7%
Bank Of Ireland (Banks and Savings & Loans)..... 1,105,100 17,066,660
--------------
ITALY -- 4.7%
Credito Italiano (Financial Services) (a)....... 3,307,500 10,200,510
Telecom Italia Mobile SpA
(Telecommunications).......................... 4,263,000 19,678,808
--------------
29,879,318
--------------
JAPAN -- 5.2%
Aoyama Trading Co., Ltd. (Retail)............... 214,000 3,823,333
Daibiru Corp. (Real Estate Development)......... 1,070,000 7,835,372
Daito Trust Construction Co. (Construction)..... 541,000 3,306,192
NAMCO, Ltd. (Leisure)........................... 70,500 2,048,806
Nomura Securities Co., Ltd (Financial
Services)..................................... 709,000 9,459,495
Okumura Corp. (Construction).................... 1,275,000 3,030,710
Senshukai Co., Ltd. (Retail).................... 163,000 612,430
Shiseido Co., Ltd. (Cosmetics & Soaps).......... 116,000 1,583,253
Xebio Co., Ltd. (Retail)........................ 146,900 1,171,460
Yamamura Glass Co., Ltd. (Household Products)... 95,000 105,624
--------------
32,976,675
--------------
</TABLE>
DECEMBER 31, 1997
<TABLE>
<CAPTION>
VALUE
COMMON STOCKS (CONTINUED) SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
NETHERLANDS -- 2.6%
Nutricia Verenigde Bedrijven (Food &
Beverages).................................... 200,000 $ 6,067,713
Royal Dutch Petroleum Co. (Oil Services)........ 186,100 10,217,895
SGS-Thomson Microelectronics, N.V.
(Electronics) (a)............................. 5,440 332,180
--------------
16,617,788
--------------
PHILIPPINES -- 1.0%
Philippine Long Distance Telephone,
ADR (Telecommunications)...................... 276,400 6,219,000
--------------
SINGAPORE -- 0.2%
Sembawang Maritime, Ltd. (Trucking/Shipping).... 883,500 1,302,276
--------------
SPAIN -- 3.2%
Banco Central Hispanoamericano, SA (Banks &
Financial Services) (a)....................... 514,212 12,520,792
Telefonica De Espana (Telecommunications)....... 285,300 8,145,293
--------------
20,666,085
--------------
SWEDEN -- 3.9%
Allgon Corp. (Electronics)...................... 48,000 648,381
Hennes & Mauritz, AB (Retail)................... 261,300 11,545,492
Mo Och Domsjo, AB (Series "B" Free) (Forest
Products)..................................... 124,800 3,229,784
Nordbanken Holding, AB (Banks & Financial
Services) (a)................................. 1,697,000 9,619,072
--------------
25,042,729
--------------
SWITZERLAND -- 1.5%
Novartis, AG (Drugs and Medical Supplies)....... 5,900 9,564,295
--------------
UNITED KINGDOM -- 11.9%
Barclays, PLC (Banks and Savings & Loans)....... 353,200 9,455,372
Dixons Group, PLC (Retail)...................... 886,200 8,943,430
Guest Kean & Nettlefolds, PLC (Autos - Cars &
Trucks)....................................... 339,840 6,999,582
Hays, PLC (Commercial Services)................. 584,400 7,823,669
Johnson Matthey, PLC (Precious Metals).......... 723,400 6,511,877
Royal & Sun Alliance Insurance Group, PLC
(Insurance)................................... 701,400 7,101,620
Siebe, PLC (Machinery).......................... 482,240 9,518,364
Vodafone Group, PLC (Telecommunications)........ 2,692,600 19,568,417
--------------
75,922,331
--------------
UNITED STATES -- 39.5%
3Com Corp. (Computers) (a)...................... 152,200 5,317,487
Adaptec, Inc. (Computer Services) (a)........... 276,400 10,261,350
Adobe Systems, Inc. (Computer Services)......... 199,500 8,229,375
Baker Hughes, Inc. (Oil & Gas Services)......... 184,300 8,040,087
Circus Circus Enterprises, Inc. (Leisure) (a)... 346,300 7,099,150
Cisco Systems, Inc. (Computers) (a)............. 260,700 14,534,025
Consolidated Stores Corp. (Retail) (a).......... 215,400 9,464,137
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
B27
<PAGE>
GLOBAL PORTFOLIO (CONTINUED)
DECEMBER 31, 1997
<TABLE>
<CAPTION>
VALUE
COMMON STOCKS (CONTINUED) SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
Electronic Arts, Inc. (Computer Services) (a)... 264,000 $ 9,982,500
Intel Corp. (Electronics)....................... 113,600 7,980,400
Mattel, Inc. (Toys)............................. 323,658 12,056,260
Microsoft Corp. (Computer Services) (a)......... 91,200 11,787,600
Mirage Resorts, Inc. (Leisure) (a).............. 342,800 7,798,700
Mobil Corp. (Oil & Gas)......................... 182,700 13,188,656
Oracle Corp. (Computer Services) (a)............ 190,500 4,250,531
PMC-Sierra, Inc. (Electronics) (a).............. 287,500 8,912,500
Proffitt's, Inc. (Retail) (a)................... 170,400 4,845,750
Progressive Corp. (Insurance)................... 49,800 5,969,775
Quorum Health Group, Inc. (Hospitals) (a)....... 228,400 5,966,950
Safeway, Inc. (Retail) (a)...................... 166,600 10,537,450
Tenet Healthcare Corp. (Hospitals/ Hospital
Management) (a)............................... 242,000 8,016,250
Texas Instruments, Inc. (Electronics)........... 248,800 11,196,000
The Limited, Inc. (Retail)...................... 383,200 9,771,600
Tiffany & Co. (Retail).......................... 180,000 6,491,250
Time Warner, Inc. (Media)....................... 195,000 12,090,000
Transocean Offshore, Inc. (Petroleum
Services)..................................... 179,500 8,649,656
U.S.A. Waste Services, Inc. (Environmental
Services) (a)................................. 185,300 7,273,025
Walt Disney Co. (Leisure)....................... 103,900 10,292,594
Wells Fargo & Co. (Banks and Savings & Loans)... 35,700 12,117,919
--------------
252,120,977
--------------
TOTAL COMMON STOCKS
(cost $472,116,637)............................................ 588,119,825
--------------
PREFERRED STOCKS -- 1.0%
FEDERAL REPUBLIC OF GERMANY -- 1.0%
Wella, AG (Cosmetics & Soaps)
(cost $6,328,858)............................. 8,500 6,451,389
--------------
TOTAL LONG-TERM INVESTMENTS
(cost $478,445,495)............................................ 594,571,214
--------------
PRINCIPAL
AMOUNT
SHORT-TERM INVESTMENT -- 3.7% (000)
-------------
REPURCHASE AGREEMENT
UNITED STATES
Merrill Lynch, Pierce, Fenner & Smith, Inc.,
6.25%, 01/02/98 (cost $23,539,000) (b)........ $ 23,539 23,539,000
--------------
TOTAL INVESTMENTS -- 96.8%
(cost $501,984,495; Note 6).................................... 618,110,214
FORWARD CURRENCY CONTRACTS --
NET AMOUNT RECEIVABLE FROM
COUNTERPARTIES (C) -- 0.1%..................................... 473,292
OTHER ASSETS IN EXCESS OF LIABILITIES -- 3.1%....................
19,817,846
--------------
TOTAL NET ASSETS -- 100.0%....................................... $ 638,401,352
--------------
--------------
</TABLE>
DECEMBER 31, 1997
<TABLE>
<S> <C> <C>
The following abbreviations are used in portfolio descriptions:
AB Aktiebolag (Swedish Stock Company)
AG Aktiengesellschaft (German Stock Company)
N.V. Naamloze Vennootschap (Dutch Corporation)
PLC Public Limited Company (British Corporation)
SA Sociedad Anonima (Spanish Corporation) or Societe Anonyme (French
Corporation)
(a) Non-income producing security.
(b) Merrill Lynch, Pierce, Fenner & Smith, Inc., repurchase price $23,547,664
due 1/2/98. The value of the collateral was $24,008,143.
(c) Outstanding forward currency contracts at December 31, 1997 were as
follows:
</TABLE>
<TABLE>
<CAPTION>
VALUE AT
FOREIGN CURRENCY SETTLEMENT CURRENT APPRECIATION
CONTRACTS DATE VALUE (DEPRECIATION)
- ---------------------------- ------------- ------------- ---------------
<S> <C> <C> <C>
Sale:
Hong Kong Dollar,
expiring 04/27/98.... $ 2,122,100 $ 2,202,596 $ (80,496)
Japanese Yen,
expiring 05/21/98.... $ 16,000,000 $ 15,446,212 $ 553,788
</TABLE>
The industry classification of portfolio holdings and other assets in excess of
liabilities shown as a percentage of net assets as of December 31, 1997 were as
follows:
<TABLE>
<S> <C>
Commercial Banks 12.6%
Computer Services 11.9%
Retail 11.9%
Telecommunications 10.6%
Oil & Gas Services 7.4%
Electronics 5.9%
Leisure 4.3%
Automobiles 3.7%
Diversified Operations 3.2%
Machinery 2.6%
Hospitals 2.2%
Media 2.1%
Insurance 2.1%
Toys 1.9%
Real Estate Development 1.9%
Drugs & Medical Supplies 1.5%
Cosmetics & Soaps 1.3%
Commercial Services 1.2%
Environmental Services 1.1%
Precious Metals 1.0%
Construction 1.0%
Food & Beverage 1.0%
Forest Products 0.5%
Trucking & Shipping 0.2%
Repurchase Agreement 3.7%
---------
96.8%
---------
Forward currency contracts 0.1%
Other assets in excess of liabilities 3.1%
---------
100.0%
---------
---------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
B28
<PAGE>
NOTES TO THE FINANCIAL STATEMENTS OF
CERTAIN PORTFOLIOS OF
THE PRUDENTIAL SERIES FUND, INC.
NOTE 1: GENERAL
The Prudential Series Fund, Inc. ("Series Fund"), a Maryland corporation,
organized on November 15, 1982, is a diversified open-end management investment
company registered under the Investment Company Act of 1940, as amended. The
Series Fund is composed of fifteen Portfolios ("Portfolio" or "Portfolios"),
each with a separate series of capital stock. The information presented in thse
financial statements pertains to only the seven Portfolios available for
investment by VCA-24: Diversified Bond Portfolio, Government Income Portfolio,
Conservative Balanced Portfolio, Flexible Managed Portfolio, Stock Index
Portfolio, Equity Portfolio and Global Portfolio. Shares in the Series Fund are
currently sold only to certain separate accounts of The Prudential Insurance
Company of America ("The Prudential"), Pruco Life Insurance Company and Pruco
Life Insurance Company of New Jersey (together referred to as the "Companies")
to fund benefits under certain variable life insurance and variable annuity
contracts ("contracts") issued by the Companies. The accounts invest in shares
of the Series Fund through subaccounts that correspond to the Portfolios. The
accounts will redeem shares of the Series Fund to the extent necessary to
provide benefits under the contracts or for such other purposes as may be
consistent with the contracts.
NOTE 2: ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Series Fund in preparation of its financial statements.
SECURITIES VALUATION: Securities traded on an exchange (whether domestic or
foreign) are valued at the last reported sales price on the primary exchange on
which they are traded. Securities traded in the over-the-counter market
(including securities listed on exchanges for which a last sales price is not
available) are valued at the average of the last reported bid and asked prices.
Convertible debt securities are valued at the mean between the most recently
quoted bid and asked prices provided by principal market makers. High yield
bonds are valued either by quotes received from principal market makers or by an
independent pricing service which determine prices by analysis of quality,
coupon, maturity and other factors. Any security for which a reliable market
quotation is unavailable is valued at fair value as determined in good faith by
or under the direction of the Series Fund's Board of Directors.
Conservative Balanced and Flexible Managed Portfolios use amortized cost to
value short-term securities. Short-term securities that are held in the other
Portfolios which mature in more than 60 days are valued at current market
quotations and those short-term securities which mature in 60 days or less are
valued at amortized cost.
REPURCHASE AGREEMENTS: In connection with transactions in repurchase agreements
with U.S. financial institutions, it is the Series Fund's policy that its
custodian or designated subcustodians, as the case may be under triparty
repurchase agreements, take possession of the underlying collateral securities,
the value of which exceeds the principal amount of the repurchase transaction
including accrued interest. If the seller defaults and the value of the
collateral declines or if bankruptcy proceedings are commenced with respect to
the seller of the security, realization of the collateral by the Series Fund may
by delayed or limited. (See Note 5).
FOREIGN CURRENCY TRANSLATION: The books and records of the Series Fund are
maintained in U.S. dollars. Foreign currency amounts are translated into U.S.
dollars on the following basis:
(i) market value of investments securities, other assets and liabilities - at
the current rates of exchange.
(ii) purchases and sales of investment securities, income and expenses - at the
rate of exchange prevailing on the respective dates of such transactions.
Although the net assets of the Series Fund are presented at the foreign exchange
rates and market values at the close of the fiscal year, the Series Fund does
not isolate that portion of the results of operations arising as a result of
changes in the foreign exchange rates from the fluctuations arising from changes
in the market prices of securities held at the end of the fiscal year.
Similarly, the Series Fund does not isolate the effect of changes in foreign
exchange rates from the fluctuations arising from changes in the market prices
of long-term portfolio
C1
<PAGE>
securities sold during the fiscal year. Accordingly, these realized and
unrealized foreign currency gains (losses) are included in the reported net
realized gains (losses) on investment transactions.
Net realized gains (losses) on foreign currency transactions represent net
foreign exchange gains or losses from holdings of foreign currencies, currency
gains or losses realized between the trade and settlement dates on security
transactions, and the difference between the amounts of dividends, interest and
foreign taxes recorded on the Series Fund's books and the U.S. dollar equivalent
amounts actually received or paid. Net unrealized currency gains or losses from
valuing foreign currency denominated assets and liabilities (other than
investments) at fiscal year end exchange rates are reflected as a component of
net unrealized appreciation (depreciation) on investments and foreign
currencies.
Foreign security and currency transactions may involve certain considerations
and risks not typically associated with those of domestic origin as a result of,
among other factors, the possibility of political and economic instability and
the level of governmental supervision and regulation of foreign securities
markets.
SHORT SALES: Certain portfolios of the Series Fund may sell a security it does
not own in anticipation of a decline in the market value of that security (short
sale). When the Portfolio makes a short sale, it must borrow the security sold
short and deliver it to the buyer. The proceeds of the short sale will be
retained by the broker-dealer through which it made the short sale as collateral
for its obligation to deliver the security upon conclusion of the sale. The
Portfolio may have to pay a fee to borrow the particular security and may be
obligated to remit any interest or dividends received on such borrowed
securities. A gain, limited to the price at which the Portfolio sold the
security short, or a loss, unlimited in magnitude, will be recognized upon the
termination of a short sale if the market price at termination is less than or
greater than, respectively, the proceeds originally received.
OPTIONS: The Series Fund may either purchase or write options in order to hedge
against adverse market movements or fluctuations in value with respect to
securities which the Series Fund currently owns or intends to purchase. The
Series Fund's principal reason for writing options is to realize, through
receipts of premiums, a greater current return than would be realized on the
underlying security alone. When the Series Fund purchases an option, it pays a
premium and an amount equal to that premium is recorded as an investment. When
the Series Fund writes an option, it receives a premium and an amount equal to
that premium is recorded as a liability. The investment or liability is adjusted
daily to reflect the current market value of the option. If an option expires
unexercised, the Series Fund realizes a gain or loss to the extent of the
premium received or paid. If an option is exercised, the premium received or
paid is an adjustment to the proceeds from the sales or the cost of the purchase
in determining whether the Series Fund has realized a gain or loss. The
difference between the premium and the amount received or paid on effecting a
closing purchase or sale transaction is also treated as a realized gain or loss.
Gain or loss on purchased options is included in net realized gain (loss) on
investment transactions. Gain or loss on written options is presented separately
as net realized gain (loss) on written option transactions.
The Series Fund, as writer of an option, may have no control over whether the
underlying securities may be sold (called) or purchased (put). As a result, the
Series Fund bears the market risk of an unfavorable change in the price of the
security underlying the written option. The Series Fund, as purchaser of an
option, bears the risk of the potential inability of the counterparties to meet
the terms of their contracts.
FINANCIAL FUTURES CONTRACTS: A financial futures contract is an agreement to
purchase (long) or sell (short) an agreed amount of securities at a set price
for delivery on a future date. Upon entering into a financial futures contract,
the Series Fund is required to pledge to the broker an amount of cash and/or
other assets equal to a certain percentage of the contract amount. This amount
is known as the "initial margin". Subsequent payments, known as "variation
margin", are made or received by the Series Fund each day, depending on the
daily fluctuations in the value of the underlying security. Such variation
margin is recorded for financial statement purposes on a daily basis as
unrealized gain or loss. When the contract expires or is closed, the gain or
loss is realized and is presented in the statement of operations as net realized
gain (loss) on financial futures contracts.
The Series Fund invests in financial futures contracts in order to hedge its
existing portfolio securities or securities the Series Fund intends to purchase,
against fluctuations in value. Under a variety of circumstances, the Series Fund
may not achieve the anticipated benefits of the financial futures contracts and
may realize a loss. The use of futures transactions involves the risk of
imperfect correlation in movements in the price of futures contracts and the
underlying assets.
SECURITIES TRANSACTIONS AND INVESTMENT INCOME: Securities transactions are
recorded on the trade date. Realized gains and losses on sales of securities are
calculated on the identified cost basis. Dividend income is
C2
<PAGE>
recorded on the ex-dividend date; interest income, which is comprised of four
elements: stated coupon, original issue discount, market discount and market
premium is recorded on the accrual basis. Certain portfolios own shares of real
estate investment trusts ("REITs") which report information on the source of
their distributions annually. A portion of distributions received from REITs
during the period is estimated to be a return of capital and is recorded as a
reduction of their costs. During the year ended December 31, 1997, certain
Portfolios purchased securities from and sold securities to other Portfolios of
the Series Fund or other funds or accounts managed by The Prudential or its
affiliates in accordance with the provisions of Rule 17a-7 of the Investment
Company Act of 1940. Expenses are recorded on the accrual basis which may
require the use of certain estimates by management. The Series Fund expenses are
allocated to the respective Portfolios on the basis of relative net assets
except for expenses that are charged directly at a Portfolio level.
CUSTODY FEE CREDITS: The Series Fund, exclusive of the Global Portfolio, has an
arrangement with its custodian bank, whereby uninvested monies earn credits
which reduce the fees charged by the custodian. Such custody fee credits are
presented as a reduction of gross expenses in the accompanying Statement of
Operations.
TAXES: For federal income tax purposes, each portfolio in the Series Fund is
treated as a separate taxpaying entity. It is the intent of the Series Fund to
continue to meet the requirements of the Internal Revenue Code applicable to
regulated investment companies and to distribute all of its net income to
shareholders. Therefore, no federal income tax provision is required.
Withholding taxes on foreign dividends, interest and capital gains have been
provided for in accordance with the Series Fund's understanding of the
applicable country's tax rules and regulations.
DIVIDENDS AND DISTRIBUTIONS: Dividends and distributions of each Portfolio are
declared in cash and automatically reinvested in additional shares of the Fund.
Each Portfolio will declare and distribute dividends from net investment income,
if any, quarterly and net capital gains, if any, at least annually. Dividends
and distributions are recorded on the ex-dividend date.
Income distributions and capital gain distributions are determined in accordance
with income tax regulations which may differ from generally accepted accounting
principles.
RECLASSIFICATION OF CAPITAL ACCOUNTS: The Series Fund accounts for and reports
distributions to shareholders in accordance with the American Institute of
Certified Public Accountants' Statement of Position 93-2: Determination,
Disclosure, and Financial Statement Presentation of Income, Capital Gains, and
Return of Capital Distributions by Investment Companies. As a result of this
statement, the Series Fund changed the classification of distributions to
shareholders to disclose the amounts of undistributed net investment income and
accumulated net realized gain (loss) on investments available for distributions
determined in accordance with income tax regulations. For the fiscal year ended
December 31, 1997, the application of this statement increased (decreased)
paid-in capital in excess of par ("PC"), undistributed net investment income
("UNI") and accumulated net realized gains (losses) on investments ("GL") by the
following amounts:
<TABLE>
<CAPTION>
PC UNI G/L
---------- ----------- ------------
<S> <C> <C> <C>
Conservative Balanced Portfolio........ $ 33,509 $ 48,752 $ (82,261)
Flexible Managed Portfolio............. -- 625,749 (625,749)
Equity Portfolio....................... -- 247,917 (247,917)
Global Portfolio....................... (903,000) 6,950,576 (6,047,576)
</TABLE>
Net investment income, net realized gains and net assets were not affected by
these reclassifications.
NOTE 3: AGREEMENTS
The Series Fund has an investment advisory agreement with The Prudential.
Pursuant to this agreement The Prudential has responsibility for all investment
advisory services and supervises the subadvisers' performance of such services.
The Prudential has entered into a service agreement with The Prudential
Investment Corporation ("PIC"), which provides that PIC will furnish to The
Prudential such services as The Prudential may require in connection with the
performance of its obligations under the investment advisory agreement with the
Series Fund. The Prudential pays for the cost of PIC's services, compensation of
officers of the Series Fund, occupancy and certain clerical and administrative
expenses of the Series Fund. The Series Fund bears all other costs and expenses.
C3
<PAGE>
The investment advisory fee paid The Prudential is computed daily and payable
quarterly, at the annual rates specified below of the value of each of the
Portfolio's average daily net assets:
<TABLE>
<CAPTION>
Fund Investment Advisory Fee
- --------------------------------------- ------------------------
<S> <C>
Diversified Bond Portfolio............. 0.40%
Government Income Portfolio............ 0.40
Conservative Balanced Portfolio........ 0.55
Flexible Managed Portfolio............. 0.60
Stock Index Portfolio.................. 0.35
Equity Portfolio....................... 0.45
Global Portfolio....................... 0.75
</TABLE>
The Prudential has agreed to refund to a Portfolio (other than the Global
Portfolio), the portion of the investment advisory fee for that Portfolio equal
to the amount that the aggregate annual ordinary operating expenses (excluding
interest, taxes and brokerage commissions) exceeds 0.75% of the Portfolio's
average daily net assets. No refund was required for the fiscal year ended
December 31, 1997.
PIC is an indirect, wholly-owned subsidiaries of The Prudential.
The Series Fund entered into a credit agreement (the "Agreement") on October 28,
1997 with an unaffiliated lender. The maximum commitment under the Agreement is
$250,000,000. The Agreement expires on December 18, 1998. Interest on any such
borrowings will be at market rates. The purpose of the Agreement is to serve as
an alternative source of funding for capital share redemptions. The Series Fund
has not borrowed any amounts pursuant to the Agreement as of December 31, 1997.
The Series Fund pays a commitment fee at an annual rate of .055 of 1% on the
unused portion of the credit facility. The commitment fee is accrued and paid
quarterly by the Series Fund.
NOTE 4: OTHER TRANSACTIONS WITH AFFILIATES
For the fiscal year ended December 31, 1997, Prudential Securities Incorporated,
an indirect, wholly-owned subsidiary of The Prudential, earned $881,879 in
brokerage commissions from transactions executed on behalf of the following
Portfolios:
<TABLE>
<CAPTION>
Fund Commission
- --------------------------------------- -----------
<S> <C>
Conservative Balanced Portfolio........ $ 256,752
Flexible Managed Portfolio............. 428,008
Equity Portfolio....................... 189,498
Global Portfolio....................... 7,621
-----------
$ 881,879
</TABLE>
NOTE 5: JOINT REPURCHASE AGREEMENT ACCOUNT
The Portfolios of the Series Fund (excluding Global Portfolio) may transfer
uninvested cash balances into a single joint repurchase agreement account, the
daily aggregate balance of which is invested in one or more repurchase
agreements collateralized by U.S. Government obligations. The Series Fund's
undivided interest in the joint repurchase agreement account represented
$1,038,519,000 as of December 31, 1997. The Portfolios of the Series Fund with
cash invested in the joint accounts had the following principal amounts and
percentage participation in the account:
<TABLE>
<CAPTION>
Principal Percentage
Amount Interest
--------------- ----------
<S> <C> <C>
Diversified Bond Portfolio............. $ 45,329,000 4.37%
Government Income Portfolio............ 13,337,000 1.28
Conservative Balanced Portfolio........ 81,783,000 7.88
Flexible Managed Portfolio............. 137,860,000 13.28
Stock Index Portfolio.................. 98,176,000 9.45
Equity Portfolio....................... 490,528,000 47.23
All other portfolios (currently not
available to VCA-24)................. 171,506,000 16.51
$ 1,038,519,000 100.00%
</TABLE>
C4
<PAGE>
As of such date, each repurchase agreement in the joint account and the
collateral therefor were as follows:
CIBC Oppenheimer, 6.10%, in the principal amount of $138,519,000, repurchase
price $138,566,045, due 1/2/98. The value of the collateral including accrued
interest was $141,862,492.
Salomon Smith Barney Inc., 6.75%, in the principal amount of $300,000,000,
repurchase price $300,112,500, due 1/2/98. The value of the collateral including
accrued interest was $306,560,575.
SBC Warburg Dillon Read Inc., 6.50%, in the principal amount of $300,000,000,
repurchase price $300,108,333, due 1/2/98. The value of the collateral including
accrued interest was $306,557,797.
UBS Securities Corp., 6.55%, in the principal amount of $300,000,000, repurchase
price $300,109,167, due 1/2/98. The value of the collateral including accrued
interest was $306,001,638.
NOTE 6: PORTFOLIO SECURITIES
The aggregate cost of purchases and the proceeds from the sales of securities
(excluding short-term issues) for the fiscal year ended December 31, 1997 were
as follows:
Cost of Purchases:
<TABLE>
<CAPTION>
DIVERSIFIED GOVERNMENT CONSERVATIVE FLEXIBLE STOCK
BOND INCOME BALANCED MANAGED INDEX EQUITY GLOBAL
------------- ------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Non-Government...... $ 945,035,546 $ 32,595,904 $7,826,155,071 $8,194,217,051 $ 403,642,905 $ 867,315,279 $ 444,118,554
Government.......... $ 698,725,477 $ 339,764,606 $5,017,442,019 $3,054,412,991 0 0 0
</TABLE>
Proceeds from Sales:
<TABLE>
<CAPTION>
DIVERSIFIED GOVERNMENT CONSERVATIVE FLEXIBLE STOCK
BOND INCOME BALANCED MANAGED INDEX EQUITY GLOBAL
------------ ------------ ------------- ------------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Non-Government...... $874,682,352 $ 45,532,205 $7,823,232,061 $8,576,103,609 $93,393,476 $566,041,815 $430,051,852
Government.......... $748,008,571 $378,144,111 $5,106,797,609 $3,018,431,969 0 0 0
</TABLE>
The federal income tax basis and unrealized appreciation (depreciation) of the
Portfolios' investments as of December 31, 1997 were as follows:
<TABLE>
<CAPTION>
DIVERSIFIED GOVERNMENT CONSERVATIVE FLEXIBLE STOCK
BOND INCOME BALANCED MANAGED INDEX EQUITY GLOBAL
------------- ------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Gross Unrealized
Appreciation...... $ 30,167,647 $ 13,268,358 $ 311,261,405 $ 565,581,079 $1,004,558,128 $1,911,479,018 $ 144,895,851
Gross Unrealized
Depreciation...... 17,570,453 -- 111,299,483 149,894,627 20,055,024 84,670,946 28,770,132
Total Net
Unrealized........ 12,597,194 13,268,358 199,961,922 415,686,452 984,503,104 1,826,808,072 116,125,719
Tax Basis........... 790,688,975 411,381,627 4,496,062,195 5,055,701,095 1,468,430,760 4,198,636,403 501,984,495
</TABLE>
For federal income tax purposes, the following Portfolio had a capital loss
carryforward as of December 31, 1997. Accordingly, no capital gain distributions
are expected to be paid to shareholders until net gains have been realized in
excess of such amount:
<TABLE>
<CAPTION>
CAPITAL LOSSES CAPITAL LOSSES
CARRYFORWARDS CARRYFORWARDS
UTILIZED IN 1997 AVAILABLE EXPIRATION DATE
---------------- -------------- ----------------
<S> <C> <C> <C>
Government Income Portfolio............ $ 649,746 $ 7,267,545 12/31/2003
</TABLE>
C5
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
DIVERSIFIED BOND
------------------------------------------------
Year ended
December 31,
------------------------------------------------
1997 1996 1995(a) 1994(a) 1993(a)
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net Asset Value, beginning of year................ $ 11.07 $ 11.31 $ 10.04 $ 11.10 $ 10.83
-------- -------- -------- -------- --------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income............................. 0.80 0.76 0.76 0.68 0.68
Net realized and unrealized gains (losses) on
investments..................................... 0.11 (0.27) 1.29 (1.04) 0.40
-------- -------- -------- -------- --------
Total from investment operations.............. 0.91 0.49 2.05 (0.36) 1.08
-------- -------- -------- -------- --------
LESS DISTRIBUTIONS:
Dividends from net investment income.............. (0.83) (0.73) (0.75) (0.68) (0.66)
Distributions from net realized gains............. (0.13) -- (0.03) (0.02) (0.15)
-------- -------- -------- -------- --------
Total distributions........................... (0.96) (0.73) (0.78) (0.70) (0.81)
-------- -------- -------- -------- --------
Net Asset Value, end of year...................... $ 11.02 $ 11.07 $ 11.31 $ 10.04 $ 11.10
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
TOTAL INVESTMENT RETURN:(b)....................... 8.57% 4.40% 20.73% (3.23)% 10.13%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (in millions)............. $816.7 $720.2 $655.8 $541.6 $576.2
Ratios to average net assets:
Expenses........................................ 0.43% 0.45% 0.44% 0.45% 0.46%
Net investment income........................... 7.18% 6.89% 7.00% 6.41% 6.05%
Portfolio turnover rate........................... 224% 210% 199% 32% 41%
FINANCIAL HIGHLIGHTS
</TABLE>
<TABLE>
<CAPTION>
GOVERNMENT INCOME
------------------------------------------------
Year ended
December 31,
------------------------------------------------
1997 1996 1995(a) 1994(a) 1993(a)
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net Asset Value, beginning of year................ $ 11.22 $ 11.72 $ 10.46 $ 11.78 $ 11.09
-------- -------- -------- -------- --------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income............................. 0.75 0.75 0.74 0.70 0.70
Net realized and unrealized gains (losses) on
investments..................................... 0.30 (0.51) 1.28 (1.31) 0.68
-------- -------- -------- -------- --------
Total from investment operations.............. 1.05 0.24 2.02 (0.61) 1.38
-------- -------- -------- -------- --------
LESS DISTRIBUTIONS:
Dividends from net investment income.............. (0.75) (0.74) (0.76) (0.71) (0.64)
Dividends in excess of net investment income...... -- -- -- -- (0.05)
-------- -------- -------- -------- --------
Total distributions........................... (0.75) (0.74) (0.76) (0.71) (0.69)
-------- -------- -------- -------- --------
Net Asset Value, end of year...................... $ 11.52 $ 11.22 $ 11.72 $ 10.46 $ 11.78
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
TOTAL INVESTMENT RETURN:(b)....................... 9.67% 2.22% 19.48% (5.16)% 12.56%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (in millions)............. $429.6 $482.0 $501.8 $487.6 $540.1
Ratios to average net assets:
Expenses........................................ 0.44% 0.46% 0.45% 0.45% 0.46%
Net investment income........................... 6.40% 6.38% 6.55% 6.30% 5.91%
Portfolio turnover rate........................... 88% 95% 195% 34% 19%
</TABLE>
(a) Calculations are based on average month-end shares outstanding.
(b) Total investment return is calculated assuming a purchase of shares on the
first day and a sale on the last day of each year reported and includes
reinvestment of dividends and distributions.
SEE NOTES TO FINANCIAL STATEMENTS.
D1
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
CONSERVATIVE BALANCED
-----------------------------------------------------
Year ended
December 31,
-----------------------------------------------------
1997 1996 1995(a) 1994(a) 1993(a)
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net Asset Value, beginning of year................ $ 15.52 $ 15.31 $ 14.10 $ 14.91 $ 14.24
--------- --------- --------- --------- ---------
INCOME FROM INVESTMENT OPERATIONS
Net investment income............................. 0.76 0.66 0.63 0.53 0.49
Net realized and unrealized gains (losses) on
investments..................................... 1.26 1.24 1.78 (0.68) 1.23
--------- --------- --------- --------- ---------
Total from investment operations.............. 2.02 1.90 2.41 (0.15) 1.72
--------- --------- --------- --------- ---------
LESS DISTRIBUTIONS:
Dividends from net investment income.............. (0.76) (0.66) (0.64) (0.51) (0.47)
Dividends in excess of net investment income...... -- (1.03) (0.56) (0.15) (0.58)
Distributions from net realized gains............. (1.81) -- -- -- --
--------- --------- --------- --------- ---------
Total distributions........................... (2.57) (1.69) (1.20) (0.66) (1.05)
--------- --------- --------- --------- ---------
Net Asset Value, end of year...................... $ 14.97 $ 15.52 $ 15.31 $ 14.10 $ 14.91
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
TOTAL INVESTMENT RETURN:(b)....................... 13.45% 12.63% 17.27% (0.97)% 12.20%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (in millions)............. $4,744.2 $4,478.8 $3,940.8 $3,501.1 $3,103.2
Ratios to average net assets:
Expenses........................................ 0.56% 0.59% 0.58% 0.61% 0.60%
Net investment income........................... 4.48% 4.13% 4.19% 3.61% 3.22%
Portfolio turnover rate........................... 295% 295% 201% 125% 79%
Average commission rate paid per share............ $0.0563 $0.0554 N/A N/A N/A
</TABLE>
<TABLE>
<CAPTION>
FLEXIBLE MANAGED
-----------------------------------------------------
Year ended
December 31,
-----------------------------------------------------
1997 1996 1995(a) 1994(a) 1993(a)
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net Asset Value, beginning of year................ $ 17.79 $ 17.86 $ 15.50 $ 16.96 $ 16.01
--------- --------- --------- --------- ---------
INCOME FROM INVESTMENT OPERATIONS
Net investment income............................. 0.59 0.57 0.56 0.47 0.57
Net realized and unrealized gains (losses) on
investments..................................... 2.52 1.79 3.15 (1.02) 1.88
--------- --------- --------- --------- ---------
Total from investment operations.............. 3.11 2.36 3.71 (0.55) 2.45
--------- --------- --------- --------- ---------
LESS DISTRIBUTIONS:
Dividends from net investment income.............. (0.58) (0.58) (0.56) (0.45) (0.57)
Dividends in excess of net investment income...... -- (1.85) (0.79) (0.46) (0.93)
Distributions from net realized gains............. (3.04) -- -- -- --
--------- --------- --------- --------- ---------
Total distributions........................... (3.62) (2.43) (1.35) (0.91) (1.50)
--------- --------- --------- --------- ---------
Net Asset Value, end of year...................... $ 17.28 $ 17.79 $ 17.86 $ 15.50 $ 16.96
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
TOTAL INVESTMENT RETURN:(b)....................... 17.96% 13.64% 24.13% (3.16)% 15.58%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (in millions)............. $5,490.1 $4,896.9 $4,261.2 $3,481.5 $3,292.2
Ratios to average net assets:
Expenses........................................ 0.62% 0.64% 0.63% 0.66% 0.66%
Net investment income........................... 3.02% 3.07% 3.30% 2.90% 3.30%
Portfolio turnover rate........................... 227% 233% 173% 124% 63%
Average commission rate paid per share............ $0.0569 $0.0563 N/A N/A N/A
</TABLE>
(a) Calculations are based on average month-end shares outstanding.
(b) Total investment return is calculated assuming a purchase of shares on the
first day and a sale on the last day of each year reported and includes
reinvestment of dividends and distributions.
SEE NOTES TO FINANCIAL STATEMENTS.
D2
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
STOCK INDEX
---------------------------------------------------
Year Ended
December 31,
---------------------------------------------------
1997 1996 1995(a) 1994(a) 1993(a)
--------- --------- --------- -------- --------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net Asset Value, beginning of year................ $ 23.74 $ 19.96 $ 14.96 $ 15.20 $ 14.22
--------- --------- --------- -------- --------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income............................. 0.43 0.40 0.40 0.38 0.36
Net realized and unrealized gains (losses) on
investments..................................... 7.34 4.06 5.13 (0.23) 1.00
--------- --------- --------- -------- --------
Total from investment operations.............. 7.77 4.46 5.53 0.15 1.36
--------- --------- --------- -------- --------
LESS DISTRIBUTIONS:
Dividends from net investment income.............. (0.42) (0.40) (0.38) (0.37) (0.35)
Distributions from net realized gains............. (0.87) (0.28) (0.15) (0.02) (0.03)
--------- --------- --------- -------- --------
Total distributions........................... (1.29) (0.68) (0.53) (0.39) (0.38)
--------- --------- --------- -------- --------
Net Asset Value, end of year...................... $ 30.22 $ 23.74 $ 19.96 $ 14.96 $ 15.20
--------- --------- --------- -------- --------
--------- --------- --------- -------- --------
TOTAL INVESTMENT RETURN:(b)....................... 32.83% 22.57% 37.06% 1.01% 9.66%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (in millions)............. $2,448.2 $1,581.4 $1,031.3 $664.5 $615.1
Ratios to average net assets:
Expenses........................................ 0.37% 0.40% 0.38% 0.42% 0.42%
Net investment income........................... 1.55% 1.95% 2.27% 2.50% 2.43%
Portfolio turnover rate........................... 5% 1% 1% 2% 1%
Average commission rate paid per share............ $0.0235 $0.0250 N/A N/A N/A
</TABLE>
<TABLE>
<CAPTION>
EQUITY
-----------------------------------------------------
Year ended
December 31,
-----------------------------------------------------
1997 1996 1995(a) 1994(a) 1993(a)
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net Asset Value, beginning of year................ $ 26.96 $ 25.64 $ 20.66 $ 21.49 $ 18.90
--------- --------- --------- --------- ---------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income............................. 0.69 0.71 0.55 0.51 0.42
Net realized and unrealized gains on
investments..................................... 5.88 3.88 5.89 0.05 3.67
--------- --------- --------- --------- ---------
Total from investment operations.............. 6.57 4.59 6.44 0.56 4.09
--------- --------- --------- --------- ---------
LESS DISTRIBUTIONS:
Dividends from net investment income.............. (0.70) (0.67) (0.52) (0.49) (0.40)
Distribution from net realized gains.............. (1.76) (2.60) (0.94) (0.90) (1.10)
--------- --------- --------- --------- ---------
Total distributions........................... (2.46) (3.27) (1.46) (1.39) (1.50)
--------- --------- --------- --------- ---------
Net Asset Value, end of year...................... $ 31.07 $ 26.96 $ 25.64 $ 20.66 $ 21.49
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
TOTAL INVESTMENT RETURN:(b)....................... 24.66% 18.52% 31.29% 2.78% 21.87%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (in millions)............. $6,024.0 $4,814.0 $3,813.8 $2,617.8 $2,186.5
Ratios to average net assets:
Expenses........................................ 0.46% 0.50% 0.48% 0.55% 0.53%
Net investment income........................... 2.27% 2.54% 2.28% 2.39% 1.99%
Portfolio turnover rate........................... 13% 20% 18% 7% 13%
Average commission rate paid per share............ $0.0336 $0.0524 N/A N/A N/A
</TABLE>
(a) Calculations are based on average month-end shares outstanding.
(b) Total investment return is calculated assuming a purchase of shares on the
first day and a sale on the last day of each year reported and includes
reinvestment of dividends and distributions.
SEE NOTES TO FINANCIAL STATEMENTS.
D3
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
GLOBAL
------------------------------------------------
Year Ended
December 31,
------------------------------------------------
1997 1996 1995(a) 1994(a) 1993(a)
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net Asset Value, beginning of year................ $ 17.85 $ 15.53 $ 13.88 $ 14.64 $ 10.37
-------- -------- -------- -------- --------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income............................. 0.09 0.11 0.06 0.02 0.02
Net realized and unrealized gains (losses) on
investments..................................... 1.11 2.94 2.14 (0.74) 4.44
-------- -------- -------- -------- --------
Total from investment operations.............. 1.20 3.05 2.20 (0.72) 4.46
-------- -------- -------- -------- --------
LESS DISTRIBUTIONS:
Dividends from net investment income.............. (0.13) (0.11) (0.24) (0.02) (0.08)
Dividends in excess of net investment income...... (0.10) -- -- -- --
Distributions from net realized gains............. (0.90) (0.62) (0.31) (0.02) (0.11)
-------- -------- -------- -------- --------
Total distributions........................... (1.13) (0.73) (0.55) (0.04) (0.19)
-------- -------- -------- -------- --------
Net Asset Value, end of year...................... $ 17.92 $ 17.85 $ 15.53 $ 13.88 $ 14.64
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
TOTAL INVESTMENT RETURN:(b)....................... 6.98% 19.97% 15.88% (4.89)% 43.14%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (in millions)............. $638.4 $580.6 $400.1 $345.7 $129.1
Ratios to average net assets:
Expenses........................................ 0.85% 0.92% 1.06% 1.23% 1.44%
Net investment income........................... 0.47% 0.64% 0.44% 0.20% 0.18%
Portfolio turnover rate........................... 70% 41% 59% 37% 55%
Average commission rate paid per share............ $0.0247 $0.0358 N/A N/A N/A
</TABLE>
(a) Calculations are based on average month-end shares outstanding.
(b) Total investment return is calculated assuming a purchase of shares on the
first day and a sale on the last day of each year reported and includes
reinvestment of dividends and distributions.
SEE NOTES TO FINANCIAL STATEMENTS.
D4
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF THE PRUDENTIAL SERIES FUND, INC.:
In our opinion, the accompanying statements of assets and liabilities, including
the schedules of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of the Diversified Bond, Government
Income, Conservative Balanced, Flexible Managed, Stock Index, Equity and Global
Portfolios (seven of the fifteen portfolios that constitute The Prudential
Series Fund, Inc.; the "Portfolios") 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 and the financial highlights for each of the two years in the period then
ended, in conformity with generally accepted accounting principles. These
financial statements and financial highlights (hereafter referred to as
'financial statements') are the responsibility of the Portfolios' 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 securities at
December 31, 1997 by correspondence with the custodian and brokers and the
application of alternative auditing procedures where confirmations from brokers
were not received, provide a reasonable basis for the opinion expressed above.
The financial highlights for each of the three years in the period ended
December 31, 1995 for each of the Portfolios were audited by other independent
accountants whose report thereon dated February 15, 1996 expressed an
unqualified opinion on those financial highlights.
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, NY 10036
February 13, 1998
E1
<PAGE>
TAX INFORMATION
Although we understand that the vast majority, if not all, of the
shareholders/contract holders of the Series Fund currently maintain a tax
deferred status, we are nevertheless required by the Internal Revenue Code to
advise you within 60 days of the Series Fund's fiscal year end (December 31,
1997) as to the federal tax status of dividends paid by the Fund during such
fiscal year. Accordingly, we are advising you that in 1997, the Fund paid
dividends as follows:
<TABLE>
<CAPTION>
ORDINARY DIVIDENDS
- -------------------------------------------------------------------------------------------------
LONG-TERM CAPITAL GAINS
-------------------------------- TOTAL
INCOME TAXED @ 28% TAXED @ 20% DIVIDENDS
----------- --------------- --------------- -----------
SHORT-TERM
CAPITAL GAINS
---------------
<S> <C> <C> <C> <C> <C>
Diversified Bond Portfolio....... $ 0.827 $ 0.079 $ 0.053 -- $ 0.959
Government Income Portfolio...... 0.750 -- -- -- 0.750
Conservative Balanced Portfolio.. 0.759 0.585 0.356 $ 0.874 2.574
Flexible Managed Portfolio....... 0.585 0.856 1.016 1.168 3.625
Stock Index Portfolio............ 0.422 0.068 0.024 0.771 1.285
Equity Portfolio................. 0.704 0.150 0.682 0.930 2.466
Global Portfolio................. 0.230 -- 0.301 0.595 1.126
</TABLE>
E2
<PAGE>
BOARD OF
DIRECTORS The Prudential Series Fund, Inc.
MENDEL A. MELZER, CFA W. SCOTT McDONALD, JR., Ph.D. E. MICHAEL CAULFIELD
Chairman, Principal, CEO,
The Prudential Kaludis Consulting Group Prudential Investments
Series Fund, Inc. President, The
Prudential Series
Fund, Inc.
SAUL K. FENSTER, Ph.D. JOSEPH WEBER, Ph.D.
President, New Jersey Vice President,
Institute of Technology Interclass (international
corporate learning)
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