THE
MEDLEY PROGRAM
ANNUAL REPORT
AND PROSPECTUS
SUPPLEMENT TO
PARTICIPANTS
DECEMBER 31, 1998
[LOGO] PRUDENTIAL
The prudential Insurance Company of America
30 Scranton Office Park
Scranton, PA 18507-1789
COMMITTED TO PROVIDING SUPERIOR
INVESTMENT, ADMINISTRATIVE AND
RECORDKEEPING SERVICES TO
INSTITUTIONAL CLIENTS.
<PAGE>
<TABLE>
AVERAGE ANNUAL TOTAL RETURNS
FOR PERIODS ENDED DECEMBER 31, 1998
<CAPTION>
=====================================================================================================
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) -3.10% 15.13% 15.49% 8/82
With Maximum Sales Charge(2) -9.35% 14.76% 15.43% 8/82
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VCA-11 MONEY MARKET ACCOUNT(3)
- -----------------------------------------------------------------------------------------------------
Without Sales Charge(1) -4.78% 4.60% 5.05% 8/82
With Maximum Sales Charge(2) -1.33% 4.17% 4.98% 8/82
The current seven-day yield on Dec. 31, 1998 was 5.36%
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VCA-24(4)
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WITHOUT SALES CHARGE(1)
Diversified Bond Account 6.36% 6.44% 8.31% 5/83
Government Income Account 8.28% 5.94% 8.05%* 5/89
Conservative Balanced Account 10.91% 9.81% 10.47% 5/83
Flexible Managed Account 9.42% 11.34% 12.30% 5/83
Stock Index Account(5) 24.47% 22.75% 17.83% 10/87
Equity Account 8.53% 15.99% 15.86% 5/83
Global Account 23.67% 11.02% 9.87% 9/88
WITH MAXIMUM SALES CHARGE(2)
Diversified Bond Account 0.35% 6.12% 8.30% 5/83
Government Income Account 2.27% 5.62% 8.04% 5/89
Conservative Balanced Account 4.86% 9.51% 10.45% 5/83
Flexible Managed Account 3.36% 11.04% 12.28% 5/83
Stock Index Account(5) 21.41% 22.55% 17.81% 10/87
Equity Account 2.37% 15.68% 15.81% 5/83
Global Account 17.66% 10.75% 9.87% 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:
Government 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 DEFERRAL 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. SOURCE:
PRUDENTIAL
(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 NOT INSURED OR GUARANTEED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY. THERE CAN BE
NO ASSURANCE THAT THE ACCOUNT WILL BE ABLE TO MAINTAIN A STABLE UNIT VALUE.
IT IS POSSIBLE TO LOSE MONEY BY INVESTING IN THE ACCOUNT.
(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, 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>
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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 VCA-24 32
V THE PRUDENTIAL SERIES FUND, INC.
Diversified Bond Portfolio 33
Government Income Portfolio 35
Conservative Balanced Portfolio 37
Flexible Managed Portfolio 39
Stock Index Portfolio 41
Equity Portfolio 43
Global Portfolio 45
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
VII PROSPECTUS SUPPLEMENT F1
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 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, 1998, please call the telephone number on the back of this report.
<PAGE>
YEAR ENDED DECEMBER 31, 1998
Letter
TO MEDLEY PARTICIPANTS
DEAR MEDLEY PARTICIPANT:
This Annual Report presents 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.
Last year, the stock market registered double-digit returns for an unprecedented
fourth consecutive year. However, the global financial crisis drove many
investors to focus on only the largest and most marketable securities. As a
result, companies with the most predictable earnings and largest market
capitalization generated the lion's share of the stock market gains while
small-company and value stocks lagged dramatically. This flight to quality also
drove the yield on the 30-year Treasury bond to 4.71%, its lowest level since
April 1967.
The turning point for the financial markets came in the fall when a round of
interest rate cuts by central banks around the world, including the U.S. Federal
Reserve, fueled investor confidence and prompted investors to move money back
into riskier investments with higher potential total returns. (Total return is
interest and dividends plus capital appreciation.) Forecasts that there would be
a huge rise in on-line business also helped the bull market regain its footing
by sparking a fourth-quarter rally in technology stocks.
HOW DID OUR PORTFOLIOS PERFORM?
Consistent with the market, our stock index account posted a solid high return
of 27.47% for the year. On the other hand, our value-oriented Equity and Capital
Growth Portfolios lagged the growth-oriented average, with the Capital Growth
Portfolio actually down a disappointing 3.10% for the year. Many of our other
accounts finished with solid results, particularly our Global Portfolio which
outperformed its benchmark, the Lipper (VIP) Global Average, by seven percentage
points to return 23.67%.
KEEP THE MARKETS IN PERSPECTIVE
As we begin the new year, the U.S. stock market is at historic highs in terms of
the price placed on companies' earning powers. We expect markets eventually to
bring prices in line with earnings performance.
2
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[PHOTO]
MENDEL A. MELZER, CFA
CHAIRMAN
We have already begun to see fixed-income investors shift money back into
investment-grade and high-yield corporate bonds, as well as into emerging
market, mortgage-backed and asset-backed securities. Furthermore, growth and
value styles of investing tend to alternate in superior performance, often
making it unwise to chase last year's market winners.
We continue to believe that diversification and a long-term perspective are the
keys to a successful investment strategy. Diversification can help you receive
more consistent returns over time. It is also a good practice to rebalance your
holding when necessary to keep your asset allocation consistent with your
objectives and risk tolerance.
IT'S LONG-TERM PERFORMANCE THAT COUNTS.
Although this Report focuses primarily on one-year returns, remember that it's
long-term performance that counts. Review your account's 1998 performance, but
also examine its longer-term record as well. You'll note that over the past
three, five and ten years, many of the portfolios have delivered excellent
returns, both on an absolute basis and in comparison with funds having similar
objectives as reported by Lipper, Inc.
Since most people buy variable life and variable annuity products to finance
long-term goals, our objective for these portfolios is to achieve above-average
investment performance over time. Therefore, when you consider how to allocate
either new or existing assets among our available investment options, we
encourage you to think about your time horizon and risk tolerance. As always,
remember that past performance is not necessarily indicative of future results.
Your Prudential professional will be happy to help you review and structure a
program to meet your long-term financial 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, CFA
Chairman
January 29, 1999
3
<PAGE>
1998
MARKET COMMENTARY
MARKET OVERVIEW
o The Asian economic and financial crises, which culminated in the Russian
default, drove down the price of stocks throughout that region and then
throughout the world in the third quarter.
o Despite this volatility, most stock markets around the world posted
double-digit gains for the year. Interest rate cuts by the U.S. Federal
Reserve in September, October and November restored investor-confidence in
the markets.
o However, the performance of the average stock was below historical levels.
In the U.S., most of the gains were driven by the largest stocks with the
strongest franchises. Substantial performance disparities developed between
large-capitalization companies and small-capitalization companies and
between value and growth stocks.
o The prospect that the Internet will transform society led to an almost
unbelievable speculation in Internet-related stocks.
o Investor uncertainty also manifested itself in the bond markets. Pursuit of
the safest government bonds resulted in a significant rise in the yields of
riskier bonds.
================================================================================
[GRAPHICAL REPRESENTATION OF CHART]
HOW THE MARKETS COMPARED(1)
4.8% 7.6% 9.5% 10.2% 24.8% 15.3% 28.6% 17.8%
Money Markets Bonds Foreign Stocks U.S. Stocks
[__] 1998 [__] Average Return Over
Past 20 Years (Annualized)
- --------------------------------------------------------------------------------
THIS CHART COMPARES THE 12-MONTH RETURN AS OF 12/31/98 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: LIPPER ANALYTICAL SERVICES, INC. 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 COMPOSITE STOCK PRICE INDEX.
U.S. STOCKS
DIVERGING MARKETS
Normally, the way to make money is to buy low and sell high. But looking at last
year's performance of stocks and bonds, it appears that the strategy that worked
best in 1998 was "momentum investing"--buying more of the most popular, most
expensive securities. Companies with the most predictable earnings and largest
market capitalization, which already were expensive at the beginning of 1998,
generated most of the year's stock market gains while small-company and value
stocks lagged dramatically.
Why did investors decide to buy high? The trouble began when the government of
Thailand devalued the baht in 1997. The currencies of several neighboring
countries also weakened and investors grew increasingly concerned about the
impact of an Asian economic slowdown.
This prompted many investors to focus on a few large, well-known companies,
which were expected to have more predictable earnings and marketable stocks.
When the Russian turmoil erupted last August, the focus on security intensified.
Since investors were willing to pay a premium for these well-known companies,
they boosted the return of these few firms above all others. Conversely, small-
company stocks, which generally are more vulnerable to negative financial and
economic news than large-company stocks, had a sharp price-drop in 1998.
THE VIEWS EXPRESSED ARE AS OF 1/22/99 AND ARE SUBJECT TO CHANGE BASED ON MARKET
AND OTHER CONDITIONS.
4
<PAGE>
In addition, value stocks--those that are inexpensive in terms of price-to-cash
flow, earnings and book value--also lagged large growth stocks dramatically.
This divergence in the market is reflected in the year-end returns of the major
equity indexes.
The Standard & Poor's 500 Composite Stock Price Index (the S&P 500 Index), which
represents the broad market to many investors, plunged in the third quarter but
ended 1998 with a total return of 28.6%. The stocks of companies with the
largest capitalization, measured by the Russell Top 200 Index (published by the
Frank Russell Company), gained a substantial 33.4% over the year.
However, the small-cap Russell 2000 Index actually fell by 2.6%. (Market
capitalization, frequently referred to as market cap or market value, is the
price that the stock market puts on an entire enterprise. It is calculated by
multiplying the current market price by the number of shares outstanding.)
As for the performances of growth and value stocks in the S&P 500, the S&P/Barra
Growth Index returned 42.1% for the year, versus the S&P/Barra Value Index, up
only 14.7%--an unusually wide 27-percentage-point difference.
In many cases, however, the earnings of the most popular companies did not rise
as much as their share prices. Investors paid more and more for each dollar of
these firms' profits in 1998. Many of the market leaders' stocks reached prices
60 to 70 times their annual earnings, compared with historical average
price-to-earnings (P/E) ratios of less than 20 times earnings.
================================================================================
[GRAPHICAL REPRESENTATION OF CHART]
TECHNOLOGY LED THE MARKET IN 1998
67.4% 45.0% 39.7% 27.4% 12.6% 11.4% 0.94%
Tech. Cons. Utilities Cons. Indust. Finance Energy
Cycl. Growth
- --------------------------------------------------------------------------------
SOURCE: STANDARD & POOR'S AS OF 12/31/98.
PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS.
1998 WINNERS AND LOSERS
TECHNOLOGY STOCKS BIG WINNERS IN 1998
The TECHNOLOGY sector, driven by new low-cost computers and the prospect that
Internet commerce will transform the way we do business, led the market in 1998
with a 67.4% growth. Dell Computer was a large contributor to the sector's
performance, up 249%. Software giants Microsoft and Apple were other major
contributors, rising 118% and 212%, respectively. The return of co-founder Steve
Jobs and the introduction of new low-priced iMac computers helped Apple come
back after languishing among the worst performers on the S&P 500 Index just one
year ago. It was the second-best performing stock in the Index. EMC Corp., the
world's largest maker of data-storage devices, claimed the #3 spot on the "S&P
500 Index Top 10" list, up 210% for the year. Inspired by expectations more than
by current earnings, the prices of companies of Internet-related stocks shot up
to unprecedented levels.
CONSUMER CYCLICALS FINISHED SECOND
The CONSUMER CYCLICALS sector came in a distant second for the year, but still
averaged an impressive 45.0% gain. Gap Inc. was the best name in the sector by
far, up 138%. Gap was the 10th best-performing company in the S&P 500 Index in
1998 as its line of khaki pants and casual clothes rode the trend toward less
formal work attire. Lowes Corp., up 115%, Home Depot, up 108%, and Wal-Mart, up
108%, were the other companies in the sector that doubled their prices for the
year.
5
<PAGE>
1998 MARKET COMMENTARY continued
INDUSTRIALS LAGGED
In our view, the INDUSTRIAL sector of the U.S. economy suffered a brief
recession in mid 1998, due to the consequences of Asia's economic contraction.
The Far East is a major user of industrial products, such as machinery and
metals. Overbuilding and the declining cost of production in that region were
largely responsible for the sector's poor showing in the stock market. Within
the industrial sector of the S&P 500, machinery and nonferrous metals companies
were among the worst performers, losing 20% and 28%, respectively. Stronger
performances by office equipment and supplies companies and commercial services
helped the sector as a whole return just under 13%.
================================================================================
[GRAPHICAL REPRESENTATION OF CHART]
GLOBAL STOCK MARKET PERFORMANCE(1) (U.S. $) IN 1998
28.9% 24.8% 20.3% 5.3%
[___] [___] [___] [___] [___]
-5.1%
MSCI MSCI MSCI MSCI MSCI
Europe World EAFE Japan Pacific
Index Free Free Index (Ex-Japan)
Index Index Free Index
- --------------------------------------------------------------------------------
(1) SOURCE: MORGAN STANLEY CAPITAL INTERNATIONAL AS OF 12/31/98.
THE MORGAN STANLEY CAPITAL INTERNATIONAL (MSCI) WORLD FREE 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.
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 INDEXES.
ENERGY DEMAND WAS LOW
The ENERGY sector, plagued by low demand throughout 1998 and a steep decline in
oil prices toward the end of the year, eked out a return of only 0.9%. Rowan,
down 68%, was among the worst performers in the sector. This oil service company
suffered as major oil producers reduced exploration and drilling operations and
crude oil prices plunged to 12-year lows. Baker Hughes, the fourth-largest U.S.
oil field services and equipment company, was down 59% for the year. It has
announced plans to eliminate 2,000 jobs.
THE WORLD
A TUMULTUOUS TWELVE MONTHS
In 1998, the European stock markets took investors on a tumultuous
roller-coaster ride. They staged an incredible rally in the first half of the
year, returning 27%, as measured by the Morgan Stanley Capital International
(MSCI) Europe Index in U.S. dollars. But investor anxiety hit Europe hard in
August. Double-digit declines were almost universal and many of the stock
markets gave up almost half of the gains made earlier in the year.
The decline was partly in reaction to the falling U.S. market, but it also
reflected fears of exposure to economic turmoil in Russia. Then in the last
quarter of the year, as central banks around the world lowered interest rates
and enthusiasm built in Europe for the year-end monetary union, the MSCI Europe
Index regained momentum and recouped what it had lost over the summer to end the
year up 29%.
Finland's stock market alone returned 123% in 1998, thanks in part to its strong
telecommunications and electronics industries. The worst market in Europe was
Norway. Hammered by sagging oil prices, the Oslo Stock Exchange fell 30%.
Asian returns were dominated by the contraction of the region's economy.
Japanese stocks had a positive return to U.S. investors only because the yen
appreciated against the dollar.
The weakening dollar, aided by signs of economic stabilization, also pushed
Thailand into positive territory. Only the Australian, Korean and Philippine
markets rose in their own currencies.
6
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GLOBAL BONDS DELIVER ATTRACTIVE RETURNS IN 1998
Global (U.S. dollar) 15.3%
U.S. Treasuries 10.0%
Aggregate Index 8.7%
Corporates 8.6%
Mortgages 7.0%
High Yield 1.6%
Emerging Markets -11.6%
- --------------------------------------------------------------------------------
SOURCE: LEHMAN BROTHERS, AS OF 12/31/98.
PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS.
BONDS
FLIGHT-TO-QUALITY INVESTING BREEDS ILLIQUIDITY
What did fixed-income investors want most in 1998? In two words, Quality and
Liquidity. During the volatile market conditions that characterized much of the
year, they fled to the highest-quality government securities--U.S.
Treasuries--even if it meant paying more and receiving lower returns.
The U.S. Treasury is the world's largest issuer of debt. Moreover, that debt is
backed by the full faith and credit of the federal government. Treasuries were
therefore an ideal "safe haven" investment. Major European government bond
markets were another safe port amid last year's global financial storm.
As a result of this "flight to quality," bond markets in late summer and early
October were plagued by illiquidity, or difficulty buying and selling all but
the most sought-after Treasuries. Growing demand for Treasuries fueled such a
strong rally that the yield on the 30-year Treasury bond fell to 4.71% on
October 5, its lowest level since April 1967. (Bond yields move in the opposite
direction of prices.) Yields on Treasury notes and bills also sank as a huge
inflow of cash into money market funds prompted portfolio managers to buy
short-term government securities.
These sharp drops meant that the spread, or difference in yield, between
Treasuries and other debt securities, such as investment-grade corporate bonds,
widened significantly, indicating investors were less willing to take a chance
on the relatively more risky bonds.
An even more dramatic indication of illiquidity was investors' strong preference
for "on the run," or the most recently auctioned, Treasuries versus "off the
run," or older, less-frequently traded issues. Both offer the same credit
quality. Yet the spread between yields of "on the run" and "off the run"
Treasuries, which might normally be a few basis points, rose to as much as 40
basis points in some cases. (A basis point is 1/100th of a percentage point.)
This wide gap reflected investors' willingness to pay more and accept lower
returns for greater liquidity.
This stampede away from both risky and safe bonds was one of the major factors
that spurred the Federal Reserve to action. Had the trend been allowed to
continue, it might have threatened the U.S. economic expansion. The Federal
Reserve cut the Federal funds rate (what banks charge each other to borrow
overnight) by a quarter percentage point on September 29, October 15 and
November 17. The reductions left the key short-term rate at 4.75%. The
mid-October move did the most to restore liquidity to the bond markets, as this
marked the first time in four and a half years that monetary policy was changed
between the central bank's regularly scheduled meetings. The unusual timing of
this move encouraged investors and spurred lenders to provide businesses with
money and should help foster U.S. economic growth in the future.
By the end of the year, the battered bond markets had staged a respectable
recovery. Investors had begun to shift money out of Treasuries back into
investment-grade and high yield corporate bonds as well as emerging market,
mortgage-backed and asset-backed securities.
7
<PAGE>
1999 INVESTMENT OUTLOOK
================================================================================
A REALITY CHECK
Since 1925, the U.S. stock market's average return has been 11.2% as measured by
the S&P 500 Index. Yet in recent years, returns have been much higher, as the
chart below shows.
================================================================================
RETURNS OF THE U.S. STOCK MARKET
Average
Annual
Return
---------
1925 -1998 11.2%
- --------------------------------------------------------------------------------
SOURCE: IBBOTSON ASSOCIATES.
LAST FOUR YEARS
1995 37.5%
1996 23.0%
1997 33.4%
1998 28.6%
- --------------------------------------------------------------------------------
SOURCE: LIPPER ANALYTICAL SERVICES, INC.
With the highest valuation levels in history at a time when corporate profits
are slowing, we believe it is prudent to remember that recent rates of return
are unlikely to continue.
ECONOMIC OUTLOOK
SLOW GROWTH AND TAME INFLATION
Our economists at Prudential expect the economy to slow to a 2% pace in the
first half of 1999, but they do not expect the deceleration to be sharp. First,
the U.S. economy has more momentum than expected. This growth has come from
solid sources such as consumer expenditures, not from short-term factors such as
fluctuations in inventories. Second, a sharp increase in bank lending, narrowing
credit spreads and a rebound in the stock market have for the most part silenced
talk of a severe credit crunch. Lastly, recent employment reports and vehicle
sales indicate that above-trend growth still continues. Our economists are also
calling for growth to increase to 3% in the second half of the year as
businesses stock up on inventories in anticipation of Year 2000 computer
problems.
We believe inflation will remain tame in 1999. Inflation, as measured by the
Consumer Price Index, is expected to level out at 2.25%. The Consumer Price
Index, which climbed 2% in the second half of 1998, is expected to rise by 2.4%
in the first half of 1999 and settle at 2.2% in the latter half. Oil prices
remain the biggest wild card in our inflation forecast. According to our
economists and most Wall Street firms, as Asia recovers and more seasonable
colder weather descends upon the United States and Japan, oil prices should
rise.
These projections imply that the Federal Reserve is not likely to tinker with
U.S. monetary policy in 1999 through further cuts in interest rates.
STOCK MARKET OUTLOOK
RECONSIDER EXPECTATIONS
Markets generally bring prices in line with earnings performance sooner or
later. Although the market may rise in 1999, the likelihood that it will match
the phenomenal gains of the last four years is not very high. Since the stock
market leaders have become very expensive relative to their earnings prospects,
investors may want to consider directing some assets to the underpriced sectors
of the market.
TIME TO REBALANCE
The disparity in returns (and valuations) among market sectors, investment
styles and capitalization groupings reminds us of the importance of
diversification and a long-term view. Rarely does the top-performing sector of
the market remain the same over time.
Investors interested in rebalancing should consider value stocks, which in
general are selling at significant discounts to the market, as well as small-
and mid-cap growth stocks. Many of these companies have strong pricing power. In
addition, given their strong performance in the fourth quarter of last year,
emerging markets and Asia may be starting their recovery at very inexpensive
levels. One place we believe investors should stay put is Europe, where the bull
market has yet to run its course. The advent of the new currency, the Euro, is
expected to lead to a large-scale restructuring of investment portfolios, which
may favor the larger, more familiar European companies.
8
<PAGE>
U.S. BOND MARKETS
GUARDED OPTIMISM
While last summer's wariness will not easily be forgotten, many investors are
once again embracing fixed-income markets with guarded optimism. Much will
depend on how the U.S. economy fares. The manufacturing arm is coming out of a
recession and service-sector growth could continue at a brisk, if somewhat
slower, pace than last year. Some Asian economies have begun to improve,
pointing toward stronger demand for American-made machinery and other industrial
goods.
These and other signs indicate that the U.S. economy is on course to make a soft
landing in 1999. In other words, the economy should grow at a slower pace but
avoid sliding into a recession. The three Federal funds rate cuts enacted late
last year could act as a safety net, encouraging economic growth through lower
borrowing costs. But it usually takes between nine months and a year for an
interest rate cut to work its way through the economy. This leaves plenty of
time for the economy to lose steam.
By some measures, the average spread, or difference in yield, between junk bonds
and Treasuries was just over 600 basis points at year-end (according to the
Chase High Yield Index). Although this spread is down from the more than 700
basis points of last summer, it is still much higher than the 400 to 500 basis
points that would be expected with the junk bond default rate currently at its
historical average of 3.0%. In short, we believe junk bonds are somewhat
undervalued right now considering the level of risk involved.
If the economy behaves as expected, the yield on the 30-year U.S. Treasury bond
should fluctuate in a fairly narrow range between 4.75% and 5.75% this year.
Investment-grade and high yield corporate bonds should perform better than
federal government securities as investors seek securities that provide
incremental yield over Treasuries. In fact, demand for junk bonds and
investment-grade corporate bonds has already increased in the new year because
they are viewed as beneficial additions to a portfolio in the low-rate
environment.
Prices of investment-grade corporate bonds have recovered roughly half of their
losses from last year, depending on which sector of the market is considered.
For example, financial services bonds bounced back solidly, but energy bonds
have gained only modestly amid continued concern about the impact of low oil
prices. Overall, corporate balance sheets are still in good shape as debt as a
percentage of equity is still at manageable levels.
Bargain hunters should also look to the municipal bond market, where the average
insured, triple-A-rated bond maturing in 30 years was yielding approximately 95%
as much as comparable Treasuries at year-end. Historically, these bonds have
yielded roughly 87% of what Treasuries yield, because their interest income is
exempt from federal income taxes and, in some cases, state and local taxes as
well.
9
<PAGE>
VCA-10 CAPITAL GROWTH ACCOUNT
PERFORMANCE SUMMARY.
Your Fund declined 3.10% in 1998, while the average (VIP) growth fund gained
24.94%, as reported by Lipper Analytical Services. This disappointing
performance was due to an investment environment that was exceptionally hostile
to your Fund's value style -- growth stocks beat value by 27 percentage points,
the widest gap since 1975. Moreover, a portion of your Fund was invested in
smaller companies, while stock performance this year was concentrated in a few
of the largest companies. Historically, value and growth styles alternate in
periods of superior performance, although this year represents an extreme
domination. Over the long run, however, value investing has produced superior
results.
================================================================================
AVERAGE ANNUAL RETURNS THROUGH DECEMBER 31, 1998
ONE THREE FIVE TEN
YEAR YEAR YEAR YEAR
- --------------------------------------------------------------------------------
CAPITAL GROWTH ACCOUNT(1) -3.10% 16.98% 15.13% 15.49%
- --------------------------------------------------------------------------------
S&P 500(2) 28.60% 28.23% 24.05% 19.19%
- --------------------------------------------------------------------------------
LIPPER (VIP) GROWTH AVG.(3) 24.94% 23.77% 20.25% 17.83%
- --------------------------------------------------------------------------------
CAPITAL GROWTH ACCOUNT INCEPTION DATE: 8/82.
================================================================================
[GRAPHICAL REPRESENTATION OF LINE CHART]
$10,000 INVESTED OVER TEN YEARS
$55000
$50000 [___] $57,863 S&P 500(2)
$45000 [___] $42,248 Capital Growth Account(1)
$40000 [___] $52,463 Lipper (VIP) Growth Avg.(3)
$35000
$30000
$25000
$20000
$15000
$10000
88 89 90 91 92 93 94 95 96 97 98
- --------------------------------------------------------------------------------
(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.
SOURCE: PRUDENTIAL.
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. INVESTORS CANNOT INVEST
DIRECTLY IN AN INDEX.
(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.
INVESTMENT GOAL
Long term growth of capital.
TYPES OF INVESTMENTS
Primarily stocks of a diversified group of major established 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.
GAINS WERE FOCUSED. Until 1997, the S&P 500 had never seen even a three-year run
of returns above 20%. In this unprecedented fourth year of such returns, gains
were concentrated in a few large growth stocks that had already become expensive
when the year began. Our value discipline steered us away from such stocks, but
over the year they moved from expensive to even more expensive, augmenting the
returns of investors who followed the crowd. The average return of all stocks in
the S&P 500 Index was only 11% in 1998. The gap between the Index and average
return -- a measure of the concentration of high returns in a few stocks --
hasn't been so wide in 40 years of data. INDUSTRIALS STAYED MODESTLY PRICED. The
earnings of industrials are sensitive to the rate of economic growth. Fear of an
economic slowdown remained a problem in 1998. Since almost 45% of our holdings
were in inexpensively purchased industrials, our return was hurt when investors
continued to avoid this sector.
TECHNOLOGY GAINED. Our comparative return suffered because we had less than a
full share, and none of the expensive market leaders, such as Microsoft, Lucent,
and Cisco Systems.
10
<PAGE>
[PHOTO]
PORTFOLIO MANAGER
Roger Ford
STRATEGY SESSION.
SIZE AND STYLE PREFERENCE CREATE VALUE. We continue to feel that the market's
preference for the largest growth stocks has gone too far. A return to a more
normal environment may bring a huge rebound in the laggards, since there are
many good companies with good prospects that have been punished excessively only
because of their small size.
INDUSTRIALS STILL ARE BARGAINS. We're still overweighted in industrial stocks.
We held these stocks because we thought the Asian problems would cause a
slowdown in economic growth but not a full-fledged recession. While we were
correct, industrial earnings have still been hurt more than we expected.
However, economically sensitive stocks are now priced at levels that appear to
discount a more dire scenario, so we continue to hold them.
FINANCIALS OFFER OPPORTUNITY. We also still like financial companies,
particularly insurance companies. Again, we think that prices more than reflect
the competitive conditions in the property and casualty business. In addition,
we think the insurance industry is ripe for consolidation.
================================================================================
PORTFOLIO COMPOSITION
12/31/98
--------
Industrials 35.1%
Consumer Growth 23.5%
Finance 21.3%
Technology 7.6%
Consumer Cyclicals 6.6%
Energy 4.2%
Utilities 1.7%
- --------------------------------------------------------------------------------
SOURCE: PRUDENTIAL. HOLDINGS ARE SUBJECT TO CHANGE.
================================================================================
TOP TEN HOLDINGS
12/31/98
--------
MediaOne Group, Inc. 2.6%
Banc One Corp. 2.2%
Comcast Corp. Special Cl. A 2.2%
Tele-Communications, Inc.
Liberty Media Group 2.1%
Borg-Warner Automotive, Inc. 2.0%
NAC Re Corp. 1.9%
Reynolds & Reynolds Cl. A 1.8%
Berkley (W.R.) Corp. 1.7%
ALLTEL Corp. 1.7%
Giant Cement Holding, Inc. 1.6%
- --------------------------------------------------------------------------------
SOURCE: PRUDENTIAL. HOLDINGS ARE SUBJECT TO CHANGE.
OUTLOOK
PORTFOLIO MANAGER
ROGER FORD
MODEST MARKET GAINS FORECAST.
"The divergence of stock performance over the past year was unprecedented. As a
result, the current pricing differences are extreme. On the one hand,
industrial firms have been priced as if we were heading into a severe global
recession. On the other, some technology firms are priced as if they could
increase their earnings by 25% or more a year indefinitely. Neither of these
assumptions are likely to come to pass. As investors realize this and survey
the extraordinary range of values, we suspect that the deep-rooted human
dislike for paying too much will come to the fore. If it does, we own the good
companies that have bargain-priced stocks."
After a long and accomplished career with Prudential, Roger Ford retired on
January 29, 1999. Jay Kaplan, who has more than 10 years of investment
experience, has assumed responsibility for managing the VCA-10 Capital Growth
Account.
11
<PAGE>
<TABLE>
FINANCIAL HIGHLIGHTS FOR VCA-10
INCOME AND CAPITAL CHANGES PER ACCUMULATION UNIT*
(FOR AN ACCUMULATION UNIT OUTSTANDING THROUGHOUT THE YEAR)
<CAPTION>
YEAR ENDED DECEMBER 31,
- ---------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME $ .0956 $ .0757 $ .0657 $ .0609 $ .0563
EXPENSES
For investment management fee (.0177) (.0154) (.0118) (.0094) (.0083)
For administrative expenses (.0530) (.0461) (.0354) (.0282) (.0251)
- ---------------------------------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME .0249 .0142 .0185 .0233 .0229
CAPITAL CHANGES
Net realized gain on investments .8002 1.2761 .5085 .3850 .1947
Net unrealized appreciation (depreciation)
on investments (1.0426) .3841 .5682 .4744 (.2148)
- ---------------------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN UNIT
ACCUMULATION VALUE (0.2175) 1.6744 1.0952 .8827 .0028
- ---------------------------------------------------------------------------------------------------------------------------------
ACCUMULATION UNIT VALUE
Beginning of year 7.0127 5.3383 4.2431 3.3604 3.3576
- ----------------------------------------------------------------------------------------------------------------------------------
End of year $6.7952 $7.0127 $5.3383 $4.2431 $3.3604
- ----------------------------------------------------------------------------------------------------------------------------------
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** .36% .24% .39% .61% .68%
- ----------------------------------------------------------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE 49% 47% 52% 45% 32%
- ---------------------------------------------------------------------------------------------------------------------------------
NUMBER OF UNITS OUTSTANDING
for Participants at end of year
(000's omitted) 80,431 83,261 91,532 81,817 79,189
- ---------------------------------------------------------------------------------------------------------------------------------
</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, 1998
COMMON STOCK VALUE
INVESTMENTS SHARES [NOTE 2A]
- --------------------------------------------------------------------------------
AEROSPACE/DEFENSE -- 3.0%
Doncasters PLC-ADR+
(United Kingdom) 146,400 $2,369,850
Gen Corp. 333,700 8,321,644
Litton Industries, Inc.+ 88,800 5,794,200
-----------
16,485,694
- --------------------------------------------------------------------------------
AUTOS & TRUCKS -- 3.3%
Borg-Warner Automotive, Inc. 195,300 10,900,181
Lear Corp.+ 90,200 3,472,700
Tower Automotive, Inc.+ 156,300 3,897,731
-----------
18,270,612
- --------------------------------------------------------------------------------
CHEMICALS -- 3.8%
Agrium, Inc. 481,100 4,179,556
Cytec Industries, Inc.+ 341,300 7,252,625
Dow Chemical Co. 51,000 4,637,812
Mississippi Chemical Corp. 324,086 4,537,204
----------
20,607,197
- --------------------------------------------------------------------------------
COMPUTER RELATED -- 0.6%
Electronic Data Systems Corp. 64,800 3,256,200
- --------------------------------------------------------------------------------
CONSUMER SERVICES -- 7.4%
Darden Restaurants, Inc. 438,100 7,885,800
Hilton Hotels Corp.+ 280,400 5,362,650
Innkeepers USA Trust 337,900 3,991,444
Lodgian, Inc. 389,600 1,899,300
Ogden Corp. 115,800 2,902,238
Reynolds & Reynolds
(Class "A" Stock) 435,200 9,982,400
RFS Hotel Investors, Inc.+ 255,800 3,133,550
Station Casinos, Inc.+ 641,000 5,248,187
-----------
40,405,569
- --------------------------------------------------------------------------------
CONTAINERS AND PACKAGING -- 1.7%
Alltrista Corp.+ 192,300 4,615,200
Crown Cork & Seal Co., Inc. 63,700 1,962,756
U.S. Can Corp.+ 151,900 2,715,213
---------
9,293,169
- --------------------------------------------------------------------------------
ELECTRICAL EQUIPMENT -- 1.4%
Emcor Group, Inc.+ 252,600 4,073,175
Hussmann International, Inc. 182,900 3,543,687
---------
7,616,862
- --------------------------------------------------------------------------------
ELECTRONICS -- 2.4%
Marshall Industries+ 161,800 3,964,100
National Semiconductor Corp.+ 162,000 2,187,000
Pioneer Standard Electronics 388,600 3,643,125
VLSI Technology, Inc.+ 311,100 3,402,656
-----------
13,196,881
COMMON STOCK VALUE
INVESTMENTS SHARES [NOTE 2A]
- --------------------------------------------------------------------------------
ENGINEERING & CONSTRUCTION -- 3.7%
Apogee Enterprises, Inc. 228,400 $2,569,500
Cameron Ashley
Building Products+ 126,700 1,655,019
Giant Cement Holding, Inc.+ 362,400 8,969,400
Gradall Industries, Inc.+ 300,800 4,324,000
Texas Industries, Inc. 102,900 2,771,869
-----------
20,289,788
- --------------------------------------------------------------------------------
EXPLORATION & PRODUCTION -- 3.9%
Atlantic Richfield Co. 83,700 5,461,425
Cabot Oil & Gas Corp. 234,300 3,514,500
Chesapeake Energy Corp. 355,500 311,062
Comstock Resources, Inc.+ 349,700 1,070,956
Occidental Petroleum Corp. 166,000 2,801,250
Oryx Energy Co.+ 239,800 3,222,313
Pioneer Natural Resources Co. 325,200 2,845,500
Vintage Petroleum, Inc. 270,600 2,333,925
-----------
21,560,931
- --------------------------------------------------------------------------------
FINANCIAL SERVICES -- 6.7%
The CIT Group, Inc.
(Class "A" Stock) 199,200 6,337,050
Citigroup, Inc. 126,999 6,286,450
Financial Security Assurance
Holdings Corp. 134,100 7,274,925
Heller Financial, Inc.+ 198,200 5,822,125
Morgan (J.P.) & Co., Inc. 32,900 3,456,556
The PMI Group, Inc. 115,000 5,678,125
Waddell & Reed Financial, Inc.
(Class "A" Stock) 16,459 389,873
Waddell & Reed Financial, Inc.
(Class "B" Stock) 65,855 1,531,129
-----------
36,776,233
- --------------------------------------------------------------------------------
Healthcare -- 3.9%
Columbia/HCA Healthcare Corp. 140,500 3,477,375
Mallinckrodt, Inc. 125,200 3,857,725
Tenet Healthcare Corp.+ 207,800 5,454,750
United HealthCare Corp. 102,600 4,418,212
Wellpoint Health Networks, Inc.+ 46,900 4,080,300
----------
21,288,362
- --------------------------------------------------------------------------------
SEE NOTES TO FINANCIAL STATEMENTS
13
<PAGE>
FINANCIAL STATEMENTS OF VCA-10
STATEMENT OF NET ASSETS AS OF DECEMBER 31, 1998
COMMON STOCK VALUE
INVESTMENTS SHARES [NOTE 2A]
- --------------------------------------------------------------------------------
HOUSING RELATED -- 0.8%
Furniture Brands
International, Inc.+ 159,800 $4,354,550
- --------------------------------------------------------------------------------
INSURANCE -- 10.0%
Allied Group, Inc. 246,100 1,553,506
Berkley (W.R.) Corp. 278,200 9,476,188
MMI Companies, Inc. 316,019 5,293,318
NAC Re Corp. 218,400 10,251,150
Old Republic International Corp. 227,150 5,110,875
Reinsurance Group of America, Inc. 70,650 4,945,500
Torchmark Corp. 180,300 6,366,844
Travelers Property Casualty
(Class "A" Stock) 121,100 3,754,100
Trenwick Group, Inc. 252,350 8,232,919
-----------
54,984,400
- --------------------------------------------------------------------------------
MACHINERY -- 3.2%
Applied Power Co.
(Class "A" Stock) 128,900 4,865,975
Columbus McKinnon Corp. 179,000 3,222,000
Denison International
PLC-ADR+
(United Kingdom) 144,800 1,810,000
Hardinge, Inc. 229,475 4,230,945
New Holland N.V. 230,400 3,153,600
-----------
17,282,520
- --------------------------------------------------------------------------------
MEDIA -- 13.4%
Belo (A.H.) Corp.
(Class "A" Stock) 173,900 3,467,131
CBS Corp.+ 138,800 4,545,700
Century Communications Corp.
(Class "A" Stock) 228,000 7,231,886
Comcast Corp.
(Class "A" Stock) 127,300 7,311,794
Comcast Corp.
(Class "A" Stock) Special 205,195 12,042,382
Cox Communication, Inc.
(Class "A" Stock)+ 40,613 2,807,374
MediaOne Group, Inc.+ 302,900 14,236,300
Tele-Communications, Inc.
Liberty Media Group
(Series A)+ 250,750 11,550,172
Time Warner, Inc. 77,400 4,803,637
Viacom, Inc.
(Class "B" Stock)+ 74,600 5,520,400
----------
73,516,776
- --------------------------------------------------------------------------------
COMMON STOCK VALUE
INVESTMENTS SHARES [NOTE 2A]
- --------------------------------------------------------------------------------
METALS -- 2.9%
Alcoa, Inc. 52,300 $3,899,619
The Carbide/Graphite Group+ 372,100 5,488,475
Cleveland-Cliffs, Inc. 104,400 4,208,625
UCAR International, Inc.+ 114,900 2,046,656
-----------
15,643,375
- --------------------------------------------------------------------------------
MISCELLANEOUS--INDUSTRIAL -- 9.3%
Crane Co. 247,650 7,475,934
Dexter Corp. 172,600 5,426,112
Global Industrial
Technologies, Inc.+ 348,000 3,719,250
Harsco Corp. 143,500 4,367,781
Pentair, Inc. 80,300 3,196,944
PPG Industries, Inc. 83,300 4,852,225
Regal Beloit Corp. 128,000 2,944,000
United Dominion Industries 291,700 5,943,388
Varian Associates, Inc. 197,700 7,487,888
Wolverine Tube, Inc.+ 278,600 5,850,600
-----------
51,264,122
- --------------------------------------------------------------------------------
PAPER PRODUCTS -- 2.6%
Boise Cascade Corp. 101,100 3,134,100
Ennis Business Forms 282,900 2,811,319
Georgia Pacific Corp.
(GP Group)+ 62,500 3,660,156
Georgia Pacific Corp.
(Timber Group)+ 102,800 2,447,925
Mead Corp. 74,400 2,180,850
-----------
14,234,350
- --------------------------------------------------------------------------------
RAILROADS -- 2.0%
Burlington Northern Santa
Fe Corp. 189,300 6,388,875
Varlen Corp. 188,472 4,346,636
----------
10,735,511
- --------------------------------------------------------------------------------
REGIONAL BANKS -- 3.0%
Banc One Corp. 237,954 12,150,526
PNC Bank Corp. 80,100 4,335,413
-----------
16,485,939
- --------------------------------------------------------------------------------
RETAIL -- 2.9%
Food Lion, Inc.
(Class "A" Stock) 396,600 4,213,875
Food Lion, Inc.
(Class "B" Stock) 96,200 968,013
Haverty Furniture, Inc. 303,200 6,367,200
Limited, Inc. 154,000 4,485,250
-----------
16,034,338
- --------------------------------------------------------------------------------
SEE NOTES TO FINANCIAL STATEMENTS
14
<PAGE>
FINANCIAL STATEMENTS OF VCA-10
STATEMENT OF NET ASSETS AS OF DECEMBER 31, 1998
COMMON STOCK VALUE
INVESTMENTS SHARES [NOTE 2A]
- --------------------------------------------------------------------------------
SPECIALTY CHEMICALS -- 3.7%
Cambrex Corp. 142,400 $3,417,600
Crompton & Knowles Corp. 253,900 5,252,556
Ferro Corp. 191,350 4,975,100
French Fragrances, Inc.+ 282,400 2,047,400
IMC Global, Inc. 215,600 4,608,450
-----------
20,301,106
- --------------------------------------------------------------------------------
TELECOMMUNICATIONS -- 1.7%
ALLTEL Corp. 154,678 9,251,678
- --------------------------------------------------------------------------------
TOTAL COMMON STOCKS INVESTMENTS -- 97.3%
(Cost: $473,405,124) 533,136,163
- --------------------------------------------------------------------------------
PREFERRED STOCKS INVESTMENT -- 0.1%
Chesapeake Energy Corp.
(Cum. Conv.), 7.00%, Series 144A
(Cost: $3,332,119) 67,200 705,600
- --------------------------------------------------------------------------------
TOTAL LONG--TERM INVESTMENT -- 97.4%
(Cost: $476,737,243) 533,841,763
- --------------------------------------------------------------------------------
SHORT--TERM INVESTMENT -- 2.6% PRINCIPAL
AMOUNT
(000)
---------
COMMERCIAL PAPER
Federal Home Loan Bank
4.50%, 01/04/99
(cost $14,217,888) $14,225 14,217,888
- --------------------------------------------------------------------------------
TOTAL INVESTMENTS -- 100%
(Cost $490,955,131) 548,059,651
- --------------------------------------------------------------------------------
COMMON STOCK VALUE
INVESTMENTS SHARES [NOTE 2A]
- --------------------------------------------------------------------------------
OTHER ASSETS, LESS LIABILITIES
Cash $ 866
Dividends and Interest Receivable 704,213
Receivable for Investments Sold 250,433
Payable for Pending Capital Transactions (800,810)
- --------------------------------------------------------------------------------
TOTAL OTHER ASSETS
LESS LIABILITIES -- 0.0% 154,702
- --------------------------------------------------------------------------------
NET ASSETS--100% $548,214,353
- --------------------------------------------------------------------------------
Net Assets, representing:
Equity of Participants
80,431,256 Accumulation Units at an
Accumulation Unit Value of
$6.7952 546,543,895
Equity of Prudential Insurance
Company of America 1,670,458
------------
$548,214,353
- --------------------------------------------------------------------------------
The following abbreviations are used in portfolio descriptions:
ADR - American Depository Receipts
N.V. - Naamloze VennootSchap (Dutch Corporation)
PLC - Public Limited Company
+ Non-income producing security.
- --------------------------------------------------------------------------------
SEE NOTES TO FINANCIAL STATEMENTS
15
<PAGE>
FINANCIAL STATEMENTS OF VCA-10
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1998
- ---------------------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME [NOTE 2B]
Dividends $ 6,940,317
Interest 1,093,432
- ---------------------------------------------------------------------------------------------
TOTAL INCOME 8,033,749
- ---------------------------------------------------------------------------------------------
EXPENSES [NOTE 3]
Fees Charged to Participants for Investment Management Fee 1,472,518
Fees Charged to Participants for Administrative Expenses 4,417,553
- ---------------------------------------------------------------------------------------------
Total Expenses 5,890,071
- ---------------------------------------------------------------------------------------------
INVESTMENT INCOME -- NET 2,143,678
- ---------------------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS -- NET [NOTE 2B]
Realized Gain on Investments-- Net 67,764,851
Decrease in Unrealized Appreciation on Investments-- Net (91,652,147)
- ---------------------------------------------------------------------------------------------
NET LOSS ON INVESTMENTS (23,887,296)
- ---------------------------------------------------------------------------------------------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $(21,743,618)
=============================================================================================
STATEMENTS OF CHANGES IN NET ASSETS
<CAPTION>
- ----------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1998 DECEMBER 31, 1997
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATIONS
Investment Income-- Net $ 2,143,678 $ 1,287,837
Realized Gain on Investments-- Net 67,764,851 112,053,314
Increase (Decrease) In Unrealized
Appreciation on Investments-- Net (91,652,147) 33,896,685
- ----------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS (21,743,618) 147,237,836
- ----------------------------------------------------------------------------------------------
CAPITAL TRANSACTIONS
Purchase Payments and Transfers In 118,653,634 130,555,810
Withdrawals and Transfers Out (134,406,195) (181,895,417)
Annual Account Charges Deducted from
Participants' Accounts [Note 3b] (106,534) (125,689)
- ----------------------------------------------------------------------------------------------
NET DECREASE IN NET ASSETS
RESULTING FROM CAPITAL TRANSACTIONS (15,859,095) (51,465,296)
- ----------------------------------------------------------------------------------------------
NET DECREASE IN NET ASSETS
RESULTING FROM SURPLUS TRANSFERS [NOTE 6] (1,425,180) (32,895)
- ----------------------------------------------------------------------------------------------
TOTAL INCREASE (DECREASE) IN NET ASSETS (39,027,893) 95,739,645
NET ASSETS
Beginning of Year 587,242,246 491,502,601
- ----------------------------------------------------------------------------------------------
End of Year Year $548,214,353 $587,242,246
==============================================================================================
</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). The Account's 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 performance 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. For the years ended
December 31, 1998 and December 31, 1997, Prudential has advised the
Account that they received deferred sales charges of $9,116 and
$18,599 respectively.
19
<PAGE>
NOTES TO FINANCIAL STATEMENTS OF VCA-10
- --------------------------------------------------------------------------------
NOTE 4: PURCHASES AND SALES OF PORTFOLIO SECURITIES
For the year ended December 31, 1998, the aggregate cost of purchases
and the proceeds from sales of securities, excluding short-term
investments, were $282,511,151 and $285,168,751, respectively.
NOTE 5: UNIT TRANSACTIONS
The number of Accumulation Units issued and redeemed for the year ended
December 31, 1998 and 1997 is as follows:
1998 1997
-----------------------------------------------------------
Units issued 17,443,446 22,249,667
-----------------------------------------------------------
Units redeemed 20,273,521 30,520,771
-----------------------------------------------------------
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, 1998, Prudential Securities
Incorporated, an indirect, wholly owned subsidiary of Prudential, earned
$8,801 in brokerage commissions from portfolio transactions executed on
behalf of VCA-10. During the year ended December 31, 1998, Prudential
has advised the Account that it received $16,668 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, 1998, $2,651,758 in participant loans
were withdrawn from VCA-10 and $1,908,945 of principal and interest was
repaid to VCA-10. For the year ended December 31, 1997, $2,202,462 in
participant loans was withdrawn from VCA-10 and $1,507,302 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, 1998, the results of its
operations for the year then ended, the changes in its net assets for each of
the two years in the period then ended and the financial highlights for each of
the three 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, 1998 by correspondence with the
custodian, provide a reasonable basis for the opinion expressed above. The
accompanying financial highlights for each of the two years in the period ended
December 31, 1995 were audited by other independent accountants, whose opinion
dated February 15, 1996 was unqualified.
PricewaterhouseCoopers LLP
New York, New York
February 25, 1999
21
<PAGE>
VCA-11 MONEY MARKET ACCOUNT
PERFORMANCE SUMMARY.
The Account returned 4.78% for the year ending December 31, 1998, trailing the
5.11% gain on the Salomon Brothers Three-Month Treasury Bill Index. The current
seven-day yield on December 31, 1998, was 5.36%. The Account provided attractive
interest income as we locked in higher yields available in the first half of the
year and took advantage of several good buying opportunities that arose in the
second half. Among money market securities, Treasury bills rallied dramatically
because many investors fleeing a worsening global financial crisis temporarily
took refuge in securities backed by the full faith and credit of the federal
government.
- --------------------------------------------------------------------------------
INVESTMENT GOAL
Current income consistent with preservation of capital and 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.
- --------------------------------------------------------------------------------
AVERAGE ANNUAL RETURNS THROUGH DECEMBER 31, 1998
ONE THREE FIVE TEN
YEAR YEAR YEAR YEAR
- --------------------------------------------------------------------------------
MONEY MARKET ACCOUNT1 4.78% 4.78% 4.60% 5.05%
- --------------------------------------------------------------------------------
SALOMON BROTHERS T-BILLS2 5.11% 5.19% 5.11% 5.44%
- --------------------------------------------------------------------------------
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. SOURCE:
PRUDENTIAL.
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.
FOR CURRENT YIELDS ON THE MONEY MARKET ACCOUNT, PLEASE CALL 1-800-458-6333.
AN INVESTMENT IN THE ACCOUNT IS NOT INSURED OR GUARANTEED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY. THERE CAN BE
NO ASSURANCE THAT THE ACCOUNT WILL BE ABLE TO MAINTAIN A STABLE SHARE VALUE
OF $10.00. IT IS POSSIBLE TO LOSE MONEY BY INVESTING IN THE ACCOUNT.
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.
PERFORMANCE REVIEW.
INTEREST RATES FELL. Money market rates, which held fairly steady in the first
half of 1998, began to tumble in August as the financial crisis spread from Asia
to Russia and Latin America. Concerned investors bought "safe haven" securities
such as U.S. Treasury bills and sold assets that carried greater credit risk.
Indeed, prices of three-month Treasury bills soared so high that their yields
sank to 3.61% in mid-October.
We continued to purchase high-quality corporate money market securities because
we believed they offered better value than the unattractively low yields
available on Treasury bills. Furthermore, Treasury bills were very volatile.
Investors repeatedly shifted money in and out of the securities amid changing
views about how much the global financial turmoil would hurt the U.S. economy.
22
<PAGE>
[PHOTO]
PORTFOLIO MANAGER
Robert Browne
STRATEGY SESSION.
ASIAN CRISIS CLOUDS U.S. ECONOMIC OUTLOOK.
The outlook for U.S. monetary policy changed several times during 1998 as
investors revised their predictions about how much the Asian financial crisis
would hurt U.S. economic growth. Investors initially thought the economy would
slow enough to require a reduction in the Federal funds rate (the rate banks
charge each other for overnight loans) to stimulate growth. Instead, the economy
grew so rapidly in the first three months of 1998 that many investors wondered
whether a short-term rate increase was necessary to curb the expansion. This
view faded in the spring, however, amid renewed fears that Asian financial
troubles would sap U.S. economic vigor.
FLIGHT TO QUALITY.
These concerns deepened in August as the Asian financial contagion infected
Russia and Latin America. Investors took refuge in U.S. Treasuries and sold
assets that carried more credit risk. As a result, Treasuries became overvalued
relative to both investment-grade and lower-quality debt securities. For
example, federal government agency securities yielded substantially more than
comparable Treasury bills in early autumn. We took advantage of this anomaly by
purchasing three- and six-month federal agency securities with unusually high
yields.
The Federal Reserve responded to the volatile market conditions by cutting the
Federal funds rate on September 29, October 15 and November 17, leaving the key
rate at 4.75%. These moves helped calm financial markets and restored confidence
in the U.S. economy. Although the reductions in the Federal funds rate had
pushed money market yields sharply lower, companies anxious to borrow money over
year-end still paid handsomely to do so in early December. We moved quickly to
lock in the higher yields by purchasing top-quality money market securities of
banks and corporations.
- --------------------------------------------------------------------------------
PORTFOLIO COMPOSITION
12/31/98
- --------------------------------------------------------------------------------
Comm. Paper 57.4%
Yankee Certificate of Deposit 15.2%
U.S. Bank Oblg. 10.4%
Other Corp. Oblg. 7.5%
Yankee Comm. Paper 5.1%
Foreign Bank Oblg. 4.4%
- --------------------------------------------------------------------------------
SOURCE: PRUDENTIAL. HOLDINGS ARE SUBJECT TO CHANGE.
OUTLOOK
PORTFOLIO MANAGER
Robert Browne
FED SEEN ON HOLD.
"We believe the Fed will hold monetary policy steady for now because the U.S.
economy remains quite strong and inflation is under control. In addition,
Brazilian economic woes have, thus far, inflicted far less damage on global
financial markets than was originally expected. Therefore, investors are not in
need of further near-term reassurance from the Fed in the form of another
short-term rate cut."
23
<PAGE>
FINANCIAL HIGHLIGHTS FOR VCA-11
INCOME AND CAPITAL CHANGES ACCUMULATION PER UNIT*
(FOR AN ACCUMULATION UNIT OUTSTANDING THROUGHOUT THE PERIOD)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
- --------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME ............................ $ .1411 $ .1353 $ .1281 $ .1313 $ .0912
EXPENSES
For investment management fee ............. (.0062) (.0059) (.0056) (.0054) (.0052)
For administrative expenses not covered
by the annual account charge ........... (.0186) (.0178) (.0170) (.0160) (.0154)
- --------------------------------------------------------------------------------------------------------------------
NET INCREASE IN UNIT VALUE ................... .1163 .1116 .1055 .1099 .0706
UNIT VALUE
Beginning of year ......................... 2.4326 2.3210 2.2155 2.1056 2.0350
- --------------------------------------------------------------------------------------------------------------------
End of year ............................... $2.5489 $2.4326 $2.3210 $2.2155 $2.1056
- --------------------------------------------------------------------------------------------------------------------
RATIO OF EXPENSES TO AVERAGE NET ASSETS** .... .99% .98% .98% .99% 1.00%
- --------------------------------------------------------------------------------------------------------------------
RATIO OF NET INVESTMENT INCOME TO
AVERAGE NET ASSETS** ...................... 4.78% 4.73% 4.57% 5.08% 3.42%
- --------------------------------------------------------------------------------------------------------------------
NUMBER OF UNITS OUTSTANDING
For Participants at end of year
(000s omitted) .......................... 34,882 35,757 38,315 34,136 35,448
- --------------------------------------------------------------------------------------------------------------------
</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, 1998
SHORT-TERM PRINCIPAL
INVESTMENTS [NOTE 2] AMOUNT VALUE
- --------------------------------------------------------------------------------
COMMERCIAL PAPER - 59.0%
Aristar Inc., 5.25%
Due 2/5/99 $2,200,000 $2,188,450
Associates Corp. of
North America., 5.05%
Due 2/8/99 3,600,000 3,547,985
Baker Hughes, 5.70%
Due 1/29/99 1,000,000 1,000,000
Centric Capital Corp., 5.20%
Due 3/3/99 2,000,000 1,974,289
Centric Capital Corp., 5.25%
Due 2/26/99 1,200,000 1,189,850
Chrysler Financial Corp., 5.09%
Due 1/29/99 639,000 629,514
Chase Manhattan Corp., 5.22%
Due 2/22/99 1,200,000 1,182,426
Coca-Cola
Enterprises, Inc., 5.20%
Due 2/16/99 2,000,000 1,980,356
Countrywide
Home Loan, Inc., 5.40%
Due 1/4/99 2,215,000 2,213,671
Countrywide
Home Loan, Inc., 5.22%
Due 3/12/99 1,000,000 986,225
Enterprise Funding Corp., 5.30%
Due 2/19/99 2,526,000 2,494,762
Falcon Asset
Securitization Corp., 5.45%
Due 2/1/99 1,380,000 1,367,047
Falcon Asset
Securitization Corp., 5.43%
Due 2/11/99 1,000,000 987,330
First Chicago
Financial Corp., 5.13%
Due 3/12/99 300,000 295,682
Ford Motor Credit Co., 5.10%
Due 1/8/99 2,000,000 1,997,733
Ford Motor Credit Co., 5.40%
Due 1/14/99 1,000,000 1,000,000
General Electric
Capital Corp., 5.25%
Due 2/16/99 1,000,000 988,625
General Electric
Capital Corp., 5.11%
Due 3/10/99 1,700,000 1,676,352
General Motors
Acceptance Corp., 5.23%
Due 2/17/99 4,450,000 4,391,817
Goldman Sachs
Group LP., 5.24%
Due 6/4/01 3,800,000 3,800,000
Ing America Insurance
Holdings Inc., 5.25%
Due 2/3/99 1,400,000 1,384,075
Liquid Asset Backed
Securites Trust Series, 5.62%#
Due 2/26/99 619,237 619,237
Monte Rosa Cap Corp., 5.75%
Due 2/10/99 650,000 645,743
Monte Rosa Cap Corp., 5.43%
Due 2/17/99 1,000,000 986,274
PNC Funding Corp., 5.50%
Due 1/25/99 600,000 595,050
Restructuring Asset
Security, 5.63%
Due 3/31/99 1,000,000 1,000,000
Restructuring Asset
Security, 5.61%
Due 9/2/99 2,000,000 2,000,000
Restructuring Asset
Security, 5.67%
Due 1/21/00 2,000,000 2,000,000
Salomon Smith Barney, 5.31%
Due 2/10/99 1,200,000 1,184,247
Sears Roebuck
Acceptance Corp., 5.25%
Due 2/25/99 1,500,000 1,478,563
Strategic Money Market
Trust, 5.32%#
Due 12/15/99 2,000,000 2,000,000
Strategic Money Market
Trust, 5.59%#
Due 3/5/99 1,000,000 1,000,000
Short Term Repackaged
Asset Trust, 5.65%#
Due 8/18/99 1,000,000 1,000,000
Thunder Bay Funding, 5.35%
Due 2/12/99 1,000,000 991,083
------------
52,776,386
- --------------------------------------------------------------------------------
OTHER CORPORATE DEBT - U.S. - 7.7%
(MEDIUM TERM NOTES, CORPORATE BONDS)
CIT Group Holdings,
6.20% Medium Term Note,
Due 6/17/99 328,000 328,568
Ford Motor Credit,
5.63% Corporate Bond,
Due 1/15/99 1,000,000 999,992
SEE NOTES TO FINANCIAL STATEMENTS
25
<PAGE>
FINANCIAL STATEMENTS OF VCA-11
STATEMENT OF NET ASSETS AS OF DECEMBER 31, 1998
SHORT-TERM PRINCIPAL
INVESTMENTS [NOTE 2] AMOUNT VALUE
- --------------------------------------------------------------------------------
Ford Motor Credit,
8.15% Medium Term Note,
Due 3/16/99 $ 150,000 $ 150,649
General Electric Capital Corp.
8.13% Medium Term Note,
Due 2/1/99 1,400,000 1,402,892
International Lease Finance Corp.
7.50% Corporate Bond,
Due 3/1/99 500,000 501,367
International Lease Finance Corp.
5.99% Medium Term Note,
Due 1/15/99 1,500,000 1,500,213
Toyota Motor Credit,
5.73% Medium Term Note,
Due 3/10/99 2,000,000 2,002,494
----------
6,886,175
- --------------------------------------------------------------------------------
OTHER BANK RELATED INSTRUMENTS - U.S. - 10.7%
(BANK NOTES, CERTIFICATES OF DEPOSIT)
Bank of New York,
5.75% Bank Note,
Due 5/14/99 2,000,000 2,000,201
FCC National Bank.,
5.19% Bank Note,
Due 1/15/99 1,000,000 1,000,000
First National Bank.,
5.19% Bank Note,
Due 1/14/99 1,000,000 1,000,000
First Union National Bank,
5.42% Bank Note,
Due 11/17/99 2,200,000 2,200,000
KeyBank National Association.,
5.33% Bank Note,
Due 1/13/99 1,000,000 1,000,018
US Bank, N.A.
5.50% Bank Note,
Due 10/8/99 2,000,000 1,999,699
US Bank, N.A.
5.52% Bank Note,
Due 8/18/99 400,000 399,839
----------
9,599,757
- --------------------------------------------------------------------------------
CERTIFICATES OF DEPOSIT - FOREIGN - 4.5%
Canadian Imperial
Bank of Commerce., 5.55%
Due 2/10/99 1,000,000 999,947
National Bank of Canada., 5.23%
Due 3/2/99 1,000,000 1,000,000
Royal Bank of Canada., 5.47
Due 8/6/99 2,000,000 1,999,188
----------
3,999,135
- --------------------------------------------------------------------------------
COMMERCIAL PAPER - YANKEE - 5.2%
American Honda
Finance Corp., 5.32%
Due 2/11/99 750,000 745,345
Canadian Wheat Board, 5.05%
Due 4/1/99 1,000,000 981,203
Dailmler-Chrysler
North America, 5.25%
Due 2/22/99 3,000,000 2,957,125
----------
4,683,673
- --------------------------------------------------------------------------------
CERTIFICATE OF DEPOSIT - YANKEE - 15.6%
Abbey National
Treasury Services, 5.25%
Due 1/20/99 4,000,000 4,000,000
Barclays Bank PLC, 5.49%
Due 6/2/99 2,000,000 1,999,342
Bayerische Landesbank
Girozentrale, 5.49%
Due 6/30/99 2,000,000 1,999,211
Bishop's Gate
Residential, 5.75%
Due 11/22/99 1,000,000 1,000,000
Deutsche Bank, 5.66%
Due 3/3/99 1,000,000 999,920
Deutsche Bank, 5.63%
Due 2/26/99 2,000,000 1,999,735
Swiss Bank Corp, 5.74%
Due 6/11/99 2,000,000 1,999,493
-----------
13,997,701
- --------------------------------------------------------------------------------
TOTAL SHORT-TERM INVESTMENTS - 102.7%
(Cost: $91,942,827) 91,942,827
- --------------------------------------------------------------------------------
OTHER ASSETS, LESS LIABILITIES
Cash 4,604
Payable for Pending Capital Transaction (1,235,521)
Interest Receivable 842,639
Payable for Investments Purchased (2,038,784)
- --------------------------------------------------------------------------------
TOTAL OTHER ASSETS
LESS LIABILITIES - (2.7)% (2,427,062)
- --------------------------------------------------------------------------------
NET ASSETS - 100% 89,515,765
- --------------------------------------------------------------------------------
NET ASSETS, REPRESENTING:
Equity of Participants
34,881,978 Accumulation Units at an
Accumulation Unit Value of $2.5489 88,911,719
Equity of Prudential Insurance
Company of America 604,046
-----------
$89,515,765
- --------------------------------------------------------------------------------
#Indicates a variable rate security. Rate shown is rate in effect at December
31, 1998.
SEE NOTES TO FINANCIAL STATEMENTS
26
<PAGE>
FINANCIAL STATEMENTS OF VCA-11
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1998
- -------------------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME [NOTE 2]
Interest $5,595,451
- -------------------------------------------------------------------------------------------
EXPENSES [NOTE 3]
Fees Charged to Participants for Investment Management Services 240,963
Fees Charged to Participants for Administrative Expenses 722,889
- -------------------------------------------------------------------------------------------
TOTAL EXPENSES 963,852
- -------------------------------------------------------------------------------------------
NET INVESTMENT INCOME AND NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $4,631,599
===========================================================================================
</TABLE>
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1998 DECEMBER 31, 1997
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 4,631,599 $ 4,315,890
- -------------------------------------------------------------------------------------------------------------
CAPITAL TRANSACTIONS
Purchase Payments and Transfers In [Note 6 and 7] 168,192,543 151,277,326
Withdrawals and Transfers Out [Note 6 and 7] (170,842,905) (157,203,424)
Annual Account Charges Deducted from
Participants' Accounts [Note 4] (47,451) (58,601)
- -------------------------------------------------------------------------------------------------------------
NET DECREASE IN NET ASSETS
RESULTING FROM CAPITAL TRANSACTIONS (2,697,813) (5,984,699)
- -------------------------------------------------------------------------------------------------------------
NET DECREASE IN NET ASSETS
RESULTING FROM SURPLUS TRANSFER (1,588,734) --
- -------------------------------------------------------------------------------------------------------------
TOTAL INCREASE/(DECREASE) IN NET ASSETS 345,052 (1,668,809)
NET ASSETS
Beginning of Year 89,170,713 90,839,522
- -------------------------------------------------------------------------------------------------------------
End of Year $ 89,515,765 $ 89,170,713
=============================================================================================================
</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 performance 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 $30 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. For the years ended
December 31, 1998 and December 31, 1997, Prudential has advised the
Account that they received deferred sales charges of $2,389 and $8,370
respectively.
NOTE 6: UNIT TRANSACTIONS
The number of Units issued and redeemed for the years ended December
31, 1998 and 1997 is as follows:
---------------------------------------------------------
1998 1997
---------------------------------------------------------
Units issued 67,777,991 63,669,685
---------------------------------------------------------
Units redeemed 68,652,928 66,228,235
---------------------------------------------------------
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, 1998, $850,931 in participant loans
were withdrawn from VCA-11 and $299,809 of principal and interest was
repaid to VCA-11. For the year ended December 31, 1997, $553,894 in
participant loans were withdrawn from VCA-11 and $330,318 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. For the year ended December 31,1998,
Prudential has advised the account that it received $7,662 in loan
origination fees.
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, 1998, the results of its
operations for the year then ended, the changes in its net assets for each of
the two years in the period then ended and the financial highlights for each of
the three 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 assuarance
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 statments, 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, 1998 by correspondence with the
custodian and brokers, provide a reasonable basis for the opinion expressed
above. The accompanying financial highlights for each of the two years in the
period ended in December 31, 1995 were audited by other independent accountants,
whose opinion dated February 15, 1996 was unqualified.
PricewaterhouseCoopers LLP
New York, New York
February 25, 1999
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.
32
<PAGE>
PRUDENTIAL
DIVERSIFIED BOND PORTFOLIO
PERFORMANCE SUMMARY.
Corporate bonds performed better than U.S. Treasuries early in the year as U.S.
economic conditions remained favorable and financial turmoil in Asia appeared to
have eased. However, the Asian financial crisis deepened and spread to other
regions, prompting investors to buy Treasuries for their relative safety and
sell other debt securities. Treasuries therefore gained more than corporate
bonds and emerging market debt securities in 1998.
While your Portfolio's exposure to Treasuries increased, its corporate debt
holdings included energy sector bonds that declined in value as well as Conti
Financial Corp. bonds that hurt the Portfolio's relative performance. As a
result, the Portfolio's 7.15% annual return trailed the 7.44% return on the
Lipper (VIP) Corporate Debt BBB Average.
<TABLE>
<CAPTION>
===================================================================================================
AVERAGE ANNUAL RETURNS THROUGH DECEMBER 31, 1998
SIX ONE THREE FIVE TEN
MONTHS YEAR YEARS YEARS YEARS
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
DIVERSIFIED BOND PORTFOLIO (1) 2.60% 7.15% 6.70% 7.25% 9.14%
- ---------------------------------------------------------------------------------------------------
LIPPER (VIP) CORP. DEBT BBB AVG.(2) 3.26% 7.44% 7.11% 7.13% 8.97%
- ---------------------------------------------------------------------------------------------------
LEHMAN AGGREGATE INDEX(3) 4.58% 8.69% 7.29% 7.27% 9.26%
- ---------------------------------------------------------------------------------------------------
Diversified Bond Portfolio inception date: 5/13/83.
</TABLE>
================================================================================
$10,000 INVESTED OVER TEN YEARS
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
$30,000 [___] $24,240 LEHMAN AGGREGATE INDEX(3)
[___] $23,975 DIVERSIFIED BOND PORTFOLIO(1)
$25,000 [___] $23,672 LIPPER (VIP) CORP. DEBT BBB AVG.(2)
$20,000
$15,000
$10,000
88 89 90 91 92 93 94 95 96 97 98
- --------------------------------------------------------------------------------
The Portfolio may invest in foreign securities. Foreign investments are subject
to the risks of currency fluctuation and the impact of social, political and
economic change.
(1) Past performance is not predictive of future performance. Portfolio
performance is net of investment fees and fund expenses but not product
charges. Source: Prudential. Six-month returns not annualized.
(2) The Lipper Variable Insurance Products (VIP) Corporate Debt 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 more than 5,000 government
and corporate bonds. The LAI 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 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.
- -------------------------------
LOW RISK
FIXED INCOME
Balanced
High Yield Bond
Diversified Stock
Specialized
HIGH RISK
- -------------------------------
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.
WHAT A RALLY! The Portfolio's performance benefited as U.S. Treasuries comprised
roughly 30% of its total investments when the rally in Treasuries peaked in
early October.
At that time, prices of Treasuries soared so high that the 30-year Treasury bond
yield, which falls as prices rise, slid to its lowest level in more than 30
years.
Disappointment over a modest change in U.S. monetary policy on September 29 had
boosted demand for "safe haven" securities such as Treasuries relative to stocks
and corporate bonds.
This trend fueled strong gains in the prices of Treasuries during the first week
of October.
33
<PAGE>
STRATEGY SESSION.
A CONFIDENT BEGINNING. Early in the year, a nearly ideal combination of subdued
inflation, solid U.S. economic growth and low interest rates enhanced the appeal
of securities such as corporate bonds that offered incremental yield over U.S.
Treasuries. Belief that some Asian nations were making progress toward resolving
their financial difficulties also heightened investor confidence. Thus,
investment-grade corporate bonds performed better than Treasuries during the
first five months of the year, based on Lehman Brothers indexes.
This trend reversed as the Asian financial contagion deepened and infected
Russia and Latin America in August. To make matters worse, the Federal Reserve
had to arrange a rescue of hedge fund Long-Term Capital Management, which nearly
collapsed in September. Investors responded by purchasing Treasuries and dumping
assets that carried greater risk. We were in this camp, increasing Treasuries to
30% of the Portfolio's total investments as of September 30, 1998, up from 2.0%
from December 31, 1997.
The global financial crisis posed a potential threat to the U.S. economy because
many investors were reluctant to buy the stocks and bonds of corporations. The
Federal Reserve came to the rescue again, protecting the economy with a series
of three quarter-percentage-point cuts in the Federal funds rate (what banks
charge each other for overnight loans). The first reduction on September 29 left
the rate at 5.25%. Investors expressed their dissatisfaction with this modest
change by purchasing Treasuries, which pushed down the 30-year Treasury bond
yield to 4.71% in early October, its lowest level since April 1967.
The Federal funds rate was lowered again to 5.00% on October 15 and 4.75% on
November 17. The unusual timing of the second move, which occurred between the
Federal Reserve's regularly scheduled meetings, seemed to indicate that monetary
policy would be eased as often as needed to aid U.S. economic growth. Reassured,
investors began to reverse the "flight to quality" trend.
As prices of our U.S. dollar-denominated bonds of the cities of Moscow and St.
Petersburg, Russia, edged higher, we sold them at a loss on the view that
difficult economic and financial conditions would continue in Russia. The
Portfolio's performance was also hurt because its energy bonds sold off amid
concern that low oil prices would continue to hurt corporate balance sheets. In
addition, we owned Conti Financial Corp. bonds that performed poorly as major
U.S. credit rating agencies down-graded their ratings.
OUTLOOK
PORTFOLIO MANAGER
BARBARA KENWORTHY
ECONOMY EXPECTED TO MODERATE.
"We believe the U.S. economic expansion could moderate in 1999. In other words,
the economy could grow at a slower pace but not slide into a recession. If the
economy behaves as expected, the 30-year Treasury bond yield could fluctuate
this year in a range of 4.75% to 5.75%. Therefore, debt securities that offer
incremental yield over Treasuries stand a good chance of performing better than
federal government securities in 1999."
[PHOTO]
PORTFOLIO MANAGER
BARBARA KENWORTHY
================================================================================
PORTFOLIO COMPOSITION
AS OF 12/31/98
--------------
Corporate Bonds 81.1%
U.S. Treasuries 12.0%
Other/Cash 4.1%
Asset-Backed 1.2%
U.S. Government & Agencies 0.9%
Mortgages 0.7%
- --------------------------------------------------------------------------------
Source: Prudential. Holdings are subject to change.
================================================================================
CREDIT QUALITY
AS OF 12/31/98
--------------
U.S. Government 14.3%
AAA 2.9%
AA 6.0%
A 17.0%
BBB 41.6%
BB 14.0%
B 1.3%
Short-Term/Cash 2.9%
Average Credit Quality A
Duration 5.70 years
Average Maturity 10.56 years
- --------------------------------------------------------------------------------
Source: Prudential. Holdings are subject to change.
34
<PAGE>
PRUDENTIAL
GOVERNMENT INCOME PORTFOLIO
PERFORMANCE SUMMARY.
A financial crisis spread from Asia to other regions in 1998, prompting
investors to purchase "safe haven" securities such as U.S. Treasuries and sell
bonds that carry greater credit risk. As a result, Treasuries rallied strongly.
For the year, your Portfolio returned 9.09% and surpassed the 8.14% returned by
the Lipper (VIP) General U.S. Government Average. The Portfolio beat the Lipper
average because we increased its exposure to Treasuries and generally maintained
a longer duration, which is a measure of sensitivity to interest rate
fluctuations.
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 securities entail additional prepayment and extension risks.
<TABLE>
<CAPTION>
======================================================================================================
AVERAGE ANNUAL RETURNS THROUGH DECEMBER 31, 1998
SIX ONE THREE FIVE SINCE
MONTHS YEAR YEARS YEARS INCEPTION*
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
GOVERNMENT INCOME PORTFOLIO(1) 4.95% 9.09% 6.94% 6.74% 8.87%
- ------------------------------------------------------------------------------------------------------
LIPPER (VIP) GEN. U.S. GOV'T. AVG.(2) 4.33% 8.14% 6.45% 6.36% 8.66%
- ------------------------------------------------------------------------------------------------------
LEHMAN GOV'T. INDEX(3) 5.44% 9.85% 7.35% 7.18% 9.14%
- ------------------------------------------------------------------------------------------------------
Government Income Portfolio inception date: 5/1/89.
</TABLE>
================================================================================
$10,000 Invested Since Inception*
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
$30,000 [___] $23,286 LEHMAN GOV'T INDEX(3)
[___] $22,745 GOVERNMENT INCOME PORTFOLIO(1)
$25,000 [___] $22,383 LIPPER (VIP) GENERAL U.S. AVG.(2)
$20,000
$15,000
$10,000
5/89 90 91 92 93 94 95 96 97 98
- --------------------------------------------------------------------------------
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.
* 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 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. Source: Prudential. Six-month returns not annualized.
(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.
- -------------------------------
LOW RISK
FIXED INCOME
Balanced
High Yield Bond
Diversified Stock
Specialized
HIGH RISK
- -------------------------------
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
The 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.
U.S. TREASURIES SOARED.
The Prudential Series Fund Government Income Portfolio benefited from the sharp
rally in U.S. Treasuries.
As the turmoil in global financial markets deepened in early October, many
investors fled to the most recently issued or "on the run" Treasuries. As a
result, prices of Treasuries rose so strongly that the 30-year Treasury bond
yield, which falls as prices rise, sank to its lowest level in more than 30
years.
However, this trend began to subside later in the month after the Federal
Reserve reassured investors by easing monetary policy between its regularly
scheduled meetings.
35
<PAGE>
STRATEGY SESSION.
SAFETY MATTERED. The U.S. Treasury Department is the largest single issuer of
debt in the world. Treasuries are considered to be very safe, because they are
backed by the full faith and credit of the federal government. Treasuries can
also be easily bought and sold, because of the huge volume of securities. These
characteristics mattered greatly as the financial contagion spread from Asia to
Russia and Latin America in the summer.
At first, the global financial crisis had seemed to ease in early spring. South
Korea had taken steps to strengthen its economy and address a critical debt
problem. But in August, market sentiment shifted dramatically. The Russian
government devalued the ruble and defaulted on some of its ruble-denominated
bonds. To make matters worse, Long-Term Capital Management would have collapsed
in September if the Federal Reserve had not arranged a rescue for the giant
hedge fund.
Investors responded to the volatile market conditions by purchasing recently
issued Treasuries and selling bonds that carried greater credit risk. We had
begun earlier in the year to increase the Portfolio's exposure to Treasuries and
reduce mortgage-backed securities. By September 30, 1998, Treasuries accounted
for 45% of the Portfolio's total investments, up from 34% as of December 31,
1997. This change in asset allocation helped, because Treasuries returned 10.03%
for the year compared with 6.96% for mortgage-backed securities, based on Lehman
Brothers indexes.
As the "flight to quality" continued, finding buyers for riskier bonds became
increasingly difficult. To prevent this trend from endangering the U.S. economic
expansion, the Federal Reserve cut the Federal funds rate (what banks charge
each other for overnight loans) by a quarter percentage point to 5.25% on
September 29. But disappointment over this modest change in monetary policy
fueled even greater demand for Treasuries, which drove down the 30-year Treasury
bond yield to 4.71% on October 5, its lowest level since April 1967.
In mid October, a second reduction lowered the Federal funds rate to 5.00%. The
unusual timing of this move, which occurred between the central bank's regularly
scheduled meetings, seemed to indicate monetary policy would be eased as often
as needed to prevent financial market disruptions from derailing U.S. economic
growth. Reassured, investors began to shift money out of Treasuries into riskier
assets. A third reduction in the Federal funds rate occurred on November 17,
leaving it at 4.75%.
OUTLOOK
PORTFOLIO MANAGER
BARBARA KENWORTHY
ECONOMY EXPECTED TO MODERATE.
"We believe the U.S. economic expansion could moderate in 1999. In other words,
the economy could grow at a slower pace but not slide into a recession. If the
economy behaves as expected, the 30-year Treasury bond yield should fluctuate in
a range of 4.75% to 5.75% this year."
[PHOTO]
PORTFOLIO MANAGER
BARBARA KENWORTHY
================================================================================
PORTFOLIO COMPOSITION
AS OF 12/31/98
--------------
U.S. Treasuries 42.8%
Mortgages 32.0%
U.S. Government & Agencies 20.6%
Asset-Backed 2.3%
U.S. Corporates 1.9%
Short-Term/Cash 0.4%
- --------------------------------------------------------------------------------
Source: Prudential. Holdings are subject to change.
================================================================================
CREDIT QUALITY
AS OF 12/31/98
--------------
U.S. Government 82.7%
AAA 14.5%
AA 2.4%
Short-Term/Cash 0.4%
Average Credit Quality AAA
Duration 5.92 years
Average Maturity 8.90 years
- --------------------------------------------------------------------------------
Source: Prudential. Holdings are subject to change.
36
<PAGE>
PRUDENTIAL
CONSERVATIVE BALANCED PORTFOLIO
PERFORMANCE SUMMARY.
Your Portfolio--which invests in a conservative mix of bonds, stocks and money
market securities--returned 11.74%, for the year ended December 31, 1998, well
above the average bond return. However, it trailed the 14.79% return of the
Lipper (VIP) Balanced Fund Average because the Portfolio's conservative mandate
requires a smaller proportion of stocks in the asset allocation than the typical
balanced portfolio. Active management of our asset allocation added to the
Portfolio's performance, but both our bonds and the portion of our stocks that
are actively managed trailed their benchmarks.
<TABLE>
<CAPTION>
=====================================================================================================
AVERAGE ANNUAL RETURNS THROUGH DECEMBER 31, 1998
SIX ONE THREE FIVE TEN
MONTHS YEAR YEARS YEARS YEARS
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CONSERVATIVE BALANCED PORTFOLIO(1) 3.44% 11.74% 12.61% 10.65% 11.31%
- -----------------------------------------------------------------------------------------------------
LIPPER (VIP) BALANCED AVG.(2) 4.66% 14.79% 15.40% 13.73% 12.21%
- -----------------------------------------------------------------------------------------------------
S&P 500 INDEX(3) 9.24% 28.60% 28.23% 24.05% 19.19%
- -----------------------------------------------------------------------------------------------------
LEHMAN GOV'T./CORP. BOND INDEX(4) 5.09% 9.47% 7.33% 7.30% 9.33%
- -----------------------------------------------------------------------------------------------------
Conservative Balanced Portfolio inception date: 5/13/83.
</TABLE>
================================================================================
$10,000 Invested Over Ten Years
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
$60,000 [___] $57,864 S&P 500 INDEX(3)
$55,000 [___] $31,739 LIPPER (VIP) BALANCE AVG.(2)
$50,000 [___] $29,177 CONSERVATIVE BALANCED PORTFOLIO(1)
$45,000 [___] $24,409 LEHMAN GOV'T./CORP. BOND INDEX(4)
$40,000
$35,000
$30,000
$25,000
$20,000
$15,000
$10,000
88 89 90 91 92 93 94 95 96 97 98
- --------------------------------------------------------------------------------
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.
(1) Past performance is not predictive of future performance. Portfolio
performance is net of investment fees and fund expenses but not product
charges. Source: Prudential. Six-month returns not annualized.
(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 Index 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.
(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.
- -------------------------------
LOW RISK
Fixed Income
BALANCED
High Yield Bond
Diversified Stock
Specialized
HIGH RISK
- -------------------------------
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 ADDED VALUE WITH ACTIVE ASSET ALLOCATION. We kept our money market allocation
considerably below our benchmark, shifting the allocation to intermediate-term
bonds. By year's end, we also held nearly 40% of the Portfolio's assets in
stocks. We invested 80% of the stocks in a strategy designed to match the risk
and return characteristics of the S&P 500 Index. That strategy paid off in 1998,
as the S&P 500 Index outpaced most active equity managers.
A POOR YEAR FOR VALUE STOCKS. The actively managed portion of our stock
allocation favors companies trading at attractive prices for their earning
potentials. These stocks did not participate in the stock market rally.
BOND MARKETS BECAME VERY FOCUSED. After Russia defaulted on some debt, bond
investors focused on U.S. Treasury bonds. Although we had reduced our exposure
to corporate and foreign issuers early in the year, a few remaining holdings
performed poorly.
37
<PAGE>
STRATEGY SESSION.
ACTIVE ASSET ALLOCATION. We use a mathematical model to compare the expected
return on the entire stock market (determined primarily by prices and estimated
earnings) to long-term interest rates. We try to increase the proportion of the
asset class (e.g., stocks, bonds or money market instruments) that offers the
best value at any time. We believe asset class has a greater impact on returns
over the long term than selection of individual securities. Therefore, these
shifts in allocation may affect your return significantly. However, because of
the Portfolio's conservative mandate, active asset allocation plays a smaller
role than it does in the Flexible Managed Portfolio. Your equity allocation is
shared between a portion managed to mirror the behavior of the S&P 500 Index and
a portion actively managed in a value style.
VALUE INVESTING. Research has shown that a value style has beaten growth over
the long run, particularly because it holds up better in falling markets. This
wasn't true over the past 12 months, because investors behaved in an unusual way
this year. They tended to favor stocks that already were expensive, instead of
emphasizing better values. We believe this was a panic reaction, not typical of
normal investor behavior. In addition, our value style has led us away from
stocks of the largest firms. The market-leading stocks reached record levels of
price-to-earnings ratios--60 to 70 times annual earnings per share and more. We
don't believe those ratios, many times higher than historical levels, can be
sustained over the long term.
MID-SIZED AND SMALL COMPANIES. Historically, stocks of firms with small market
capitalization (the total value of all outstanding stock) have tended to
outperform stocks of their larger counterparts. Unfortunately, the opposite
occurred in 1998, with small-company stocks trailing larger by the widest margin
since 1929. While the reason for this underperformance remains elusive, lower
earnings growth, low inflation and the global financial crisis probably all
contributed to the underperformance. Over the long term, we believe these
smaller stocks should outpace larger and more expensive stocks.
BOND MARKETS CALMER. In mid-1998, a Russian default led bond investors to focus
on only the very safest securities. The bonds of even the strongest corporations
became much less expensive than Treasury bonds of similar maturity.
Fortunately, we had reduced our exposure to these bonds before the bond market
fell in late summer. We believe the price differences between corporate and
Treasury bonds should narrow somewhat in 1999 and are maintaining our emphasis
on corporate bonds.
OUTLOOK
PORTFOLIO MANAGER
MARK STUMPP
FINDING MISVALUATIONS.
"We expect a better investing environment in 1999. The continued volatility in
stock and bond markets can make opportunities for our portfolio managers by
creating misvaluations between stock and bond prices that our active asset
allocation may exploit. Nineteen ninety-eight was the fifth consecutive year of
underperformance by both mid-sized company and value-oriented stocks. We do not
expect this performance discrepancy to persist. If the past is any guide, these
stocks may go through a period of superior performance in the near future."
PORTFOLIO MANAGERS
[PHOTO] [PHOTO]
MARK STUMPP JOHN W. MOSCHBERGER
[PHOTO] [PHOTO]
WARREN E. SPITZ TONY RODRIGUEZ
================================================================================
PORTFOLIO COMPOSITION
AS OF 12/31/98
--------------
Bonds 55.2%
Stocks 39.4%
Money Market 5.4%
- --------------------------------------------------------------------------------
Source: Prudential. Holdings are subject to change.
================================================================================
TOP SECTORS - STOCK
12/31/98
--------
Consumer Growth & Staples 11.6%
Technology 6.8%
Finance 6.2%
Industrials 5.2%
Utilities 3.4%
Energy 2.9%
Consumer Cyclicals 2.8%
TOP SECTORS - BOND
12/31/98
--------
Industrial 22.4%
Financial 19.4%
Other 5.1%
Utility 4.9%
U.S. Treasuries 3.4%
- --------------------------------------------------------------------------------
Source: Prudential. Holdings are subject to change.
38
<PAGE>
PRUDENTIAL
FLEXIBLE MANAGED PORTFOLIO
PERFORMANCE SUMMARY.
Your Portfolio--which invests in an actively managed mix of stocks, bonds and
money market securities had a disappointing year in 1998. Although the overall
return of 10.24% was good, it could have been better in a year that saw the
Lipper (VIP) Flexible Fund Average rise by 13.50%. The portion of your stocks
that is actively managed in a value style substantially trailed the S&P 500
Index.
<TABLE>
<CAPTION>
====================================================================================================
AVERAGE ANNUAL RETURNS THROUGH DECEMBER 31, 1998
SIX ONE THREE FIVE TEN
MONTHS YEAR YEARS YEARS YEARS
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
FLEXIBLE MANAGED PORTFOLIO(1) 0.59% 10.24% 13.90% 12.19% 13.15%
- ----------------------------------------------------------------------------------------------------
LIPPER (VIP) FLEXIBLE AVG.(2) 3.43% 13.50% 15.49% 13.64% 14.00%
- ----------------------------------------------------------------------------------------------------
S&P 500 INDEX(3) 9.24% 28.60% 28.23% 24.05% 19.19%
- ----------------------------------------------------------------------------------------------------
LEHMAN GOV'T./CORP. BOND INDEX(4) 5.09% 9.47% 7.33% 7.30% 9.33%
- ----------------------------------------------------------------------------------------------------
Flexible Managed Portfolio inception date: 5/13/83.
</TABLE>
================================================================================
$10,000 Invested Over Ten Years
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
$60,000 [___] $57,864 S&P 500 INDEX(3)
$55,000 [___] $38,003 LIPPER (VIP) FLEXIBLE AVG.(2)
$50,000 [___] $34,837 FLEXIBLE MANAGED PORTFOLIO(1)
$45,000 [___] $24,410 LEHMAN GOV'T./CORP. BOND INDEX(4)
$40,000
$35,000
$30,000
$25,000
$20,000
$15,000
$10,000
88 89 90 91 92 93 94 95 96 97 98
- --------------------------------------------------------------------------------
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.
(1) Past performance is not predictive of future performance. Portfolio
performance is net of investment fees and fund expenses but not product
charges. Source: Prudential. Six-month returns not annualized.
(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 Index 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.
(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.
- -------------------------------
LOW RISK
Fixed Income
BALANCED
High Yield Bond
Diversified Stock
Specialized
HIGH RISK
- -------------------------------
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.
A GOOD YEAR FOR INDEXING. Early in the year we invested about one-half of the
Portfolio's stocks in a style designed to mirror the risk and return of the S&P
500 Index. The overall stock market was dominated by the performance of a few
stocks contained in the Index. These few stocks rose so much that the Index
outperformed most active stock managers.
WE ADDED VALUE WITH ACTIVE ASSET ALLOCATION. We kept cash levels to a minimum
and over the year we actively shifted assets between stocks and bonds.
A POOR YEAR FOR VALUE STOCKS. Half of our stocks are managed with an active
style that has a significant exposure to stocks of mid-sized companies with
strong earning potential trading at attractive values. These stocks did not
participate in the stock market rally.
39
<PAGE>
STRATEGY SESSION.
ACTIVE ASSET ALLOCATION. We use a mathematical model to compare the expected
return on the entire stock market (determined primarily by prices and estimated
earnings) to long-term interest rates. We try to increase the proportion of the
asset class (e.g., stocks or bonds) that offers the best value at any time. We
believe asset class has a greater impact on returns over the long term than
selection of individual securities. Therefore, these shifts in allocation may
affect your return significantly. Your equity allocation is shared between a
portion managed to mirror the behavior of the S&P 500 Index and a portion
actively managed in a value style.
VALUE INVESTING. Research has shown that a value style has beaten growth over
the long run, particularly because it holds up better in falling markets. This
wasn't true over the past 12 months, because investors behaved in an unusual way
this year. They tended to favor stocks that already were expensive, instead of
emphasizing better values. We believe this was a panic reaction, not typical of
normal investor behavior. In addition, our value style has led us away from
stocks of the largest firms. The market-leading stocks reached record levels of
price-to-earnings ratios--60 to 70 times annual earnings per share and more. We
don't believe those ratios, many times higher than historical levels, can be
sustained over the long term.
MID-SIZED AND SMALL COMPANIES. Historically, stocks of firms with small market
capitalization (the total value of all outstanding stock) have tended to
outperform stocks of their larger counterparts. Unfortunately, the opposite
occurred in 1998, with small-company stocks trailing larger by the widest
mar-gin since 1929. While the reason for this underperformance remains elusive,
lower earnings growth, low inflation and the global financial crisis probably
all contributed to the underperformance. Over the long term, we believe these
smaller stocks should outpace larger and more expensive stocks.
BOND MARKETS CALMER. In mid-1998, a Russian default led bond investors to focus
on only the very safest securities. The bonds of even the strongest corporations
became much less expensive than Treasury bonds of similar maturity. Fortunately,
we had reduced our exposure to these bonds before the bond market fell in late
summer. We believe the price differences between corporate and Treasury bonds
should narrow somewhat in 1999 and are maintaining our emphasis on corporate
bonds.
OUTLOOK
PORTFOLIO MANAGER
MARK STUMPP
FINDING MISVALUATIONS.
"We expect a better investing environment in 1999. The continued volatility in
stock and bond markets can make opportunities for our portfolio managers by
creating misvaluations between stock and bond prices that our active asset
allocation may exploit. Nineteen ninety-eight was the fifth consecutive year of
underperformance by both mid-sized company and value-oriented stocks. We do not
expect this performance discrepancy to persist. If the past is any guide, these
stocks may go through a period of superior performance in the near future."
PORTFOLIO MANAGERS
[PHOTO] [PHOTO]
MARK STUMPP JOHN W. MOSCHBERGER
[PHOTO] [PHOTO]
WARREN E. SPITZ TONY RODRIGUEZ
================================================================================
PORTFOLIO COMPOSITION
AS OF 12/31/98
--------------
Stocks 53.6%
Bonds 35.2%
Money Market 11.2%
- --------------------------------------------------------------------------------
Source: Prudential. Holdings are subject to change.
================================================================================
TOP SECTORS - STOCK
12/31/98
--------
Consumer Growth & Staples 13.0%
Industrials 10.2%
Finance 8.8%
Technology 6.8%
Consumer Cyclicals 6.6%
Energy 4.4%
Utilities 3.5%
TOP SECTORS - BOND
12/31/98
--------
Industrial 15.3%
Financial 9.3%
Utility 4.4%
Other 3.3%
U.S. Treasuries 2.9%
- --------------------------------------------------------------------------------
Source: Prudential. Holdings are subject to change.
40
<PAGE>
PRUDENTIAL
STOCK INDEX PORTFOLIO
PERFORMANCE SUMMARY.
Your Portfolio returned 9.32% for the second half of 1998 and gained 28.42% over
the course of the year. Despite a 19% drop early in the second half, the
Portfolio rebounded sharply in the latter part of the year. Last year, we
reported that the three-year run of above 20% returns was unprecedented. Now we
have added a fourth year to the run.
The global financial crisis, triggered by events in Asia and Russia, led to the
initial drop in the market when investors became uneasy with the financial
situation in emerging markets. However, the growing U.S. economy and subsiding
fears of a global financial meltdown, led investors to feel more confident. In
turn, the S&P 500 Index's return was well above historical standards.
Standard & Poor's neither sponsors nor endorses the Stock Index Portfolio.
Investors cannot directly invest in any index, including the S&P 500 Index.
<TABLE>
<CAPTION>
=====================================================================================================
AVERAGE ANNUAL RETURNS THROUGH DECEMBER 31, 1998
SIX ONE THREE FIVE TEN
MONTHS YEAR YEARS YEARS YEARS
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
STOCK INDEX PORTFOLIO(1) 9.32% 28.42% 27.89% 23.70% 18.74%
- -----------------------------------------------------------------------------------------------------
LIPPER (VIP) S&P 500 INDEX AVG.(2) 9.24% 28.25% 27.81% 23.58% 18.62%
- -----------------------------------------------------------------------------------------------------
S&P 500 INDEX(3) 9.24% 28.60% 28.23% 24.05% 19.19%
- -----------------------------------------------------------------------------------------------------
Stock Index Portfolio inception date: 10/19/87.
</TABLE>
================================================================================
$10,000 Invested Over Ten Years
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
$60,000 [___] $57,864 S&P 500 INDEX(3)
$55,000 [___] $55,665 STOCK INDEX PORTFOLIO(1)
$50,000 [___] $55,145 LIPPER (VIP) S&P 500 INDEX AVG.(2)
$45,000
$40,000
$35,000
$30,000
$25,000
$20,000
$15,000
$10,000
88 89 90 91 92 93 94 95 96 97 98
- --------------------------------------------------------------------------------
(1) Past performance is not predictive of future performance. Portfolio
performance is net of investment fees and fund expenses but not product
charges. Source: Prudential. Six-month returns not annualized.
(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 Index 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.
- -------------------------------
LOW RISK
Fixed Income
Balanced
High Yield Bond
DIVERSIFIED STOCK
Specialized
HIGH RISK
- -------------------------------
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
The Portfolio attempts to hold the same stocks as the S&P 500 Index, in
approximately the same proportions. The Portfolio thus tends to reflect the
general trends of the overall U.S. equity market.
================================================================================
S&P 500 INDEX--TOTAL RETURN BY SECTOR
AS OF 12/31/98
--------------
Technology 72.9%
Communication Services 52.3%
Health Care 44.2%
Consumer Cyclicals 36.3%
Consumer Staples 22.2%
Utilities 14.7%
Capital Goods 14.1%
Financials 11.4%
Energy 0.5%
Transportation -1.9%
Basic Materials -6.1%
S&P 500 Index 28.6%
- --------------------------------------------------------------------------------
Source: Standard & Poor's
41
<PAGE>
PERFORMANCE REVIEW.
The Stock Index Portfolio attempts to hold all 500 stocks included in the S&P
500 Index and to duplicate its performance. Portfolio manager John W.
Moschberger manages the Portfolio by investing funds received while trying to
minimize commissions and transaction costs.
TECHNOLOGY LED THE WAY. The Index was led by the technology sector, which
returned almost 73% for the year. Stock prices of companies on or associated
with the Internet rose to unparalleled highs in the latter half of 1998. The
demand for computer systems and software was strong, driving prices of these
stocks higher as well. Communications services, wireless, long distance and
local telephone service had the second-highest return for the year at about 52%.
The Internet explosion propelled returns in both the technology and
communications services sectors.
HEALTH CARE AND CONSUMER CYCLICALS HAD A STRONG YEAR. The S&P 500 Index's health
care stocks returned 44% for the year. Stocks of drug retailers and drug
companies were the best-performing areas of the health care sector. Con-sumer
cyclicals, companies that perform better when an economy is growing, produced a
36% return. Furthermore, consumer staple stocks, such as restaurants and
pharmaceuticals, achieved a 22% gain.
Moreover, the Index's heavily weighted financial sector, rebounding from
investor fears about emerging markets, returned 11%. The utility sector also
bounced back from a slow end to the first half of the year to post an overall
15% return.
ENERGY STOCKS WERE WEAK AGAIN. The energy sector, hurt by oil prices dropping to
a 12-year low, returned only 0.5%. However, this was not the Index's
worst-performing sector. Basic material stocks were pulled down by commodity
prices at a 10-year low--copper prices dropped to their lowest average of the
century. This sector was down more than 6% for the year.
OUTLOOK
PORTFOLIO MANAGER
JOHN W. MOSCHBERGER
KEEP YOUR EXPECTATIONS REALISTIC.
"For the fourth successive year the S&P 500 Index exceeded a 20% return. Last
year, we warned that a third year was unprecedented. The year was very unusual
in another way: the Index did not reflect the performance of most stocks listed
on it. The S&P 500 Index is weighted by market capitalization--the largest
companies count for more. This year, the largest 10% of companies in the Index
accounted for much of its performance. An equally weighted index would have
gained only 11% instead of 29%. Typically, the gap is only a few percentage
points. It has not been this large in 40 years. Because of this, most
actively-managed mutual funds trailed our fund. These are unusual times, and it
is particularly important to keep in mind that past performance is no guarantee
of future behavior."
[PHOTO]
PORTFOLIO MANAGER
JOHN W. MOSCHBERGER
================================================================================
S&P 500 INDEX COMPOSITION
AS OF 12/31/98
--------------
Technology 18.5%
Financials 15.4%
Consumer Staples 14.9%
Health Care 12.1%
Consumer Cyclicals 9.2%
Communication Services 8.4%
Capital Goods 8.1%
Energy 6.2%
Basic Materials 3.2%
Utilities 3.1%
Transportation 0.9%
- --------------------------------------------------------------------------------
Source: Standard & Poor's. Holdings are subject to change.
================================================================================
TOP TEN HOLDINGS
AS OF 12/31/98
- --------------------------------------------------------------------------------
Microsoft Corp. 3.4%
General Electric Co. 3.2%
Intel Corp. 2.0%
Wal-Mart Stores, Inc. 1.8%
Exxon Corp. 1.7%
Merck & Co., Inc. 1.7%
International Business
Machines Corp. 1.7%
Coca-Cola Co. 1.6%
Pfizer, Inc. 1.6%
Lucent Technologies, Inc. 1.4%
- --------------------------------------------------------------------------------
Source: Prudential. Holdings are subject to change.
42
<PAGE>
PRUDENTIAL
EQUITY PORTFOLIO
PERFORMANCE SUMMARY.
Your Portfolio returned 9.34% in 1998, trailing the Lipper (VIP) Growth Fund
Average of 24.94% for the period. In this fourth year of S&P 500 Index returns
above 20%, gains were particularly concentrated in a few large growth stocks
that had already become expensive when the year began. Our value discipline
steered us away from such stocks.
Our return also was held back by poor returns on our retailers, by our
substantial cash holding over the year, and by our relatively small
participation in the high-performing technology sector.
Despite our defensive cash holdings and a market that was unfavorable to our
investment style, our return was near the historical average for the S&P 500
Index.
<TABLE>
<CAPTION>
=====================================================================================================
AVERAGE ANNUAL RETURNS THROUGH DECEMBER 31, 1998
SIX ONE THREE FIVE TEN
MONTHS YEAR YEARS YEARS YEARS
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
EQUITY PORTFOLIO(1) -2.78% 9.34% 17.35% 16.88% 16.74%
- -----------------------------------------------------------------------------------------------------
LIPPER (VIP) GROWTH FUND AVG.(2) 6.90% 24.94% 23.77% 20.25% 17.83%
- -----------------------------------------------------------------------------------------------------
S&P 500 INDEX(3) 9.24% 28.60% 28.23% 24.05% 19.19%
- -----------------------------------------------------------------------------------------------------
Equity Portfolio inception date: 5/13/83.
</TABLE>
================================================================================
$10,000 Invested Over Ten Years
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
$60,000 [___] $57,864 S&P 500 INDEX(3)
$55,000 [___] $52,463 LIPPER (VIP) GROWTH FUND AVG.(2)
$50,000 [___] $47,000 EQUITY PORTFOLIO(1)
$45,000
$40,000
$35,000
$30,000
$25,000
$20,000
$15,000
$10,000
88 89 90 91 92 93 94 95 96 97 98
- --------------------------------------------------------------------------------
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.
(1) Past performance is not predictive of future performance. Portfolio
performance is net of investment fees and fund expenses but not product
charges. Source: Prudential. Six-month returns not annualized.
(2) The Lipper Variable Insurance Products (VIP) Growth Fund 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 Index 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.
- -------------------------------
LOW RISK
Fixed Income
Balanced
High Yield Bond
DIVERSIFIED STOCK
Specialized
HIGH RISK
- -------------------------------
INVESTMENT GOAL
Capital appreciation.
TYPES OF INVESTMENTS
Primarily stocks of major, established companies.
INVESTMENT STYLE
The 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.
SIZE COUNTED. Concerned about the impact of the Asian recession, investors
focused strongly on the largest growth companies. We avoided these stocks,
because they have been expensive for some time.
RETAILERS WERE MIXED. In the retail industry, we held inexpensive stocks, such
as Dillards, Tandy and Toys R Us. They performed poorly, while popular stocks
such as Wal-Mart and Home Depot rose even farther.
NOT ENOUGH TECH. When Compaq bought Digital Equipment, we benefited both from
the sale and afterward from the return on the Compaq stock we acquired.
Nonetheless, our relatively small holdings in the technology sector constrained
our performance.
AND TOO MUCH CASH. Our average cash balance of about 14% held back our return.
However, we reduced our cash sharply over the year, acquiring some
bargain-priced stock after the market fell.
43
<PAGE>
STRATEGY SESSION.
WE ARE DISCIPLINED DEEP VALUE INVESTORS. The S&P 500 Index has had an
unprecedented four successive years of gains above 20%. This year, these gains
were particularly concentrated in a few large growth stocks that had already
become expensive when the year began, but our value discipline steered us away
from such stocks--we avoid stocks that are priced well above the market average
for comparable earnings.
Over the long run, value stocks have performed quite well. However, there have
been other multi-year periods that favored growth stocks. The two investment
styles have alternated in superior performance, so we believe investors should
have exposure to both.
WE STILL LIKE FINANCIAL COMPANIES. Morgan Stanley Dean Witter was among the
largest contributors to last year's return. We also liked financial firms that
were less favorably treated last year, as investors worried about emerging
market exposure and natural disaster damage claims. Loews, Chubb, Safeco and
Citigroup are among our larger holdings. Financial companies have been leaders
in applying technology to drive down costs and improve services while
consolidating to increase productivity.
CONSUMERS STILL GOING STRONG. Consumer spending has kept the U.S. economy strong
recently, when exports and investment flagged. Chrysler made a substantial
contribution to our 1998 return. We continue to have a focus on retailers and
housing-related firms.
OUTLOOK
PORTFOLIO MANAGER
THOMAS R. JACKSON
STAYING THE COURSE.
"Value and growth investing styles historically have alternated in periods of
superior performance. The growth style has had the advantage for several years
now, bringing the differences in stock value to extraordinary levels. In 1998,
S&P 500 Index growth stocks rose more than 27 percentage points above the return
on S&P 500 value stocks. The entire Index, pulled up by large growth stocks,
returned 16 percentage points more than the average stock. That is the largest
discrepancy in 40 years. Chasing the strategy that worked last year is a
well-known investing fallacy. Portfolio managers do best over the long run when
they stick to one investment style. That's what we're doing--consistent value
investing so when the current imbalances correct themselves, we'll be there to
reap the rewards."
[PHOTO]
PORTFOLIO MANAGER
THOMAS R. JACKSON
================================================================================
PORTFOLIO COMPOSITION
AS OF 12/31/98
--------------
Financial Services 24.0%
Consumer Growth & Staples 18.0%
Industrial 16.4%
Consumer Cyclicals 11.5%
Technology 11.1%
Utilities 6.0%
Energy 4.8%
Cash 8.2%
- --------------------------------------------------------------------------------
Source: Prudential. Holdings are subject to change.
================================================================================
TOP TEN HOLDINGS
AS OF 12/31/98
--------------
Wellpoint Health 2.9%
Loews Corp. 2.8%
Morgan Stanley, Dean
Witter & Co. 2.7%
Compaq Computer 2.5%
Columbia HCA Healthcare 2.3%
Chubb Corp. 2.3%
Darden Restaurants 2.3%
Elf Aquitaine ADR 2.2%
Tenet Healthcare 2.1%
SAFECO Corp. 2.0%
- --------------------------------------------------------------------------------
Source: Prudential. Holdings are subject to change.
44
<PAGE>
PRUDENTIAL
GLOBAL PORTFOLIO
PERFORMANCE SUMMARY.
Your Portfolio returned 25.08% in 1998, almost nine percentage points above the
16.19% gain of the Lipper (VIP) Global Average. We had a substantial focus on
continental Europe, the best-performing region over our reporting period, and
our stocks there performed well.
We benefited from having very little invested in emerging markets, such as
eastern Europe, and relatively little in any Asian market. Our
large-capitalization U.S. growth stocks had above-average returns.
The Portfolio may invest in foreign securities. Foreign investments are subject
to the risks of currency fluctuation, political and social risks and
illiquidity.
<TABLE>
<CAPTION>
=====================================================================================================
AVERAGE ANNUAL RETURNS THROUGH DECEMBER 31, 1998
SIX ONE THREE FIVE TEN
MONTHS YEAR YEARS YEARS YEARS
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
GLOBAL PORTFOLIO(1) 4.81% 25.08% 17.01% 12.04% 10.90%
- -----------------------------------------------------------------------------------------------------
LIPPER (VIP) GLOBAL AVG.(2) 0.60% 16.19% 15.50% 12.31% 11.04%
- -----------------------------------------------------------------------------------------------------
MORGAN STANLEY WORLD INDEX(3) 6.80% 24.80% 18.25% 16.19% 11.21%
- -----------------------------------------------------------------------------------------------------
Global Portfolio inception date: 9/19/88.
</TABLE>
================================================================================
$10,000 Invested Over Ten Years
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
$30,000 [___] $28,940 LIPPER (VIP) GLOBAL AVG.(2)
[___] $28,938 MORGAN STANLEY WORLD INDEX(3)
$25,000 [___] $28,128 GLOBAL PORTFOLIO(1)
$20,000
$15,000
$10,000
88 89 90 91 92 93 94 95 96 97 98
- --------------------------------------------------------------------------------
(1) Past performance is not predictive of future performance. Portfolio
performance is net of investment fees and fund expenses but not product
charges. Source: Prudential. Six month returns not annualized.
(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.
- -------------------------------
LOW RISK
Fixed Income
Balanced
High Yield Bond
DIVERSIFIED STOCK
Specialized
HIGH RISK
- -------------------------------
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
The 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.
EUROPE AND THE U.S. We had a substantial focus on continental Europe, and this
region was the best-performing region in 1998. Except for about 7% of our assets
invested in Asia, our assets were invested in Europe and the United States,
where economies were growing the fastest.
CONTINENTAL BANKS. Our largest industry is banking. An Italian bank, Credito
Italiano, bounced back strongly and had an excellent annual return.
TECHNOLOGY. Our focus was on technology stocks, particularly telecommunications
services and equipment companies--such as Nokia, and Cisco Systems.
These companies served us well over the past year. Software companies, notably
the global giant Microsoft, also made large contributions to our strong annual
performance.
45
<PAGE>
STRATEGY SESSION.
LOCATION: EUROPE. We have allocated almost half of our assets to Europe and more
than a third to the United States. We believe currency unification in Europe
will boost their markets. In addition to introducing a strong incentive to
improve productivity and growth, it should reduce trade and financing costs. It
also is improving consumer morale.
Europe is seeing many private companies restructure to improve their
productivity and governments selling businesses they own. Simultaneously, low
interest rates and new bank-managed mutual funds are attracting savings to the
stock market. As in the U.S. a decade ago, these trends are good for stock
prices.
The global economic picture is too uncertain to give us confidence in the growth
prospects of companies based in emerging markets. We are waiting for more
stability before we increase our investments there.
INDUSTRIES: For some time, we have liked the telecommunications
industry--including Nokia and Vodafone--and the financial services industry in
Europe. European bank stocks were hurt during the summer panic about exposure to
the debt of emerging market countries, including Russia. Most of our bank
holdings had little or no exposure, but even these stocks declined. They bounced
back as investors recovered their perspective.
THE UNITED STATES. In recent years, our Portfolio has had significantly less
U.S. investment than the size of the U.S. stock market would warrant, because
large growth stocks in the U.S. stock market have been relatively expensive.
Since the economic crisis in emerging markets, however, we own more in the U.S.
than we usually would because economic growth is most secure at home. Our
domestic stocks include Safeway, Microsoft, Time Warner and PMC--Sierra, all of
which have been performing well.
OUTLOOK
PORTFOLIO MANAGERS
DANIEL J. DUANE, INGRID HOLM, MICHELLE PICKER
STILL CAUTIOUS.
"Investors' reaction to Brazil's devaluation shows that they are still reacting
strongly to any threat to economic growth. Stocks whose earnings depend on
expanding economies (cyclicals) or to emerging markets tended to drop sharply.
We prefer companies that have great growth prospects within Europe or the United
States. Certain basic services, such as communications and banking, are changing
dramatically, whatever happens to the global economy. We try to benefit from
those trends."
PORTFOLIO MANAGERS
[PHOTO]
DANIEL J. DUANE
[PHOTO] [PHOTO]
INGRID HOLM MICHELLE PICKER
================================================================================
GEOGRAPHIC ALLOCATION
AS OF 12/31/98
--------------
United States 39.0%
Continental Europe 37.2%
United Kingdom 10.4%
Japan 5.2%
Australia 1.4%
Cash 6.8%
- --------------------------------------------------------------------------------
Source: Prudential. Holdings are subject to change.
================================================================================
TOP TEN HOLDINGS
AS OF 12/31/98
--------------
Vodafone Group, PLC 3.5%
Nokia Corp. 3.4%
Safeway, Inc. 3.4%
Credito Italiano 3.4%
Time Warner, Inc. 3.1%
Bank of Ireland 2.4%
Telefonica de Espana 2.4%
Texas Instruments, Inc. 2.2%
Microsoft Corp. 2.2%
PMC--Sierra, Inc. 2.2%
- --------------------------------------------------------------------------------
Source: Prudential. Holdings are subject to change.
46
<PAGE>
FINANCIAL STATEMENTS OF
THE PRUDENTIAL SERIES FUND, INC.
DIVERSIFIED BOND PORTFOLIO
<TABLE>
<CAPTION>
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1998
<S> <C>
ASSETS
Investments, at value (cost:
$1,093,359,976).......................... $1,107,781,086
Cash....................................... 384
Interest receivable........................ 15,816,923
Receivable for capital stock sold.......... 556,662
--------------
Total Assets............................. 1,124,155,055
--------------
LIABILITIES
Payable to investment adviser.............. 1,074,849
Payable for capital stock sold............. 398,036
Accrued expenses........................... 108,467
--------------
Total Liabilities........................ 1,581,352
--------------
NET ASSETS................................... $1,122,573,703
--------------
--------------
Net assets were comprised of:
Common stock, at $0.01 par value......... $ 1,015,413
Paid-in capital, in excess of par........ 1,105,810,493
--------------
1,106,825,906
Accumulated net realized gains on
investments.............................. 1,326,687
Net unrealized appreciation on
investments.............................. 14,421,110
--------------
Net assets, December 31, 1998.............. $1,122,573,703
--------------
--------------
Net asset value and redemption price per
share, 101,541,324 outstanding shares of
common stock (authorized 150,000,000
shares).................................. $ 11.06
--------------
--------------
</TABLE>
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS
Year Ended December 31, 1998
<S> <C>
INVESTMENT INCOME
Interest................................... $ 64,715,464
---------------
EXPENSES
Investment advisory fee.................... 3,782,116
Accounting fees............................ 86,000
Shareholders' reports...................... 85,000
Custodian expense.......................... 38,000
Audit fees................................. 12,000
Legal fees and expenses.................... 4,000
Directors' fees............................ 3,000
Miscellaneous expenses..................... 5,700
---------------
Total expenses........................... 4,015,816
Less custodian fee credit.................. (11,022)
---------------
Net expenses............................. 4,004,794
---------------
NET INVESTMENT INCOME........................ 60,710,670
---------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS
Net realized gain (loss) on:
Investments.............................. 2,828,534
Futures.................................. (1,344,416)
---------------
1,484,118
---------------
Net change in unrealized appreciation on:
Investments.............................. 1,774,509
Futures contracts........................ 463,469
---------------
2,237,978
---------------
NET GAIN ON INVESTMENTS...................... 3,722,096
---------------
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS................................... $ 64,432,766
---------------
---------------
</TABLE>
<TABLE>
<CAPTION>
STATEMENTS OF CHANGES IN NET ASSETS
YEARS ENDED DECEMBER 31,
---------------------------------------
1998 1997
------------------ -------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net investment income.................................................................. $ 60,710,670 $ 53,531,495
Net realized gain on investments....................................................... 1,484,118 9,194,921
Net change in unrealized appreciation (depreciation) on investments.................... 2,237,978 (2,230,780)
------------------ -------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS................................... 64,432,766 60,495,636
------------------ -------------------
DIVIDENDS AND DISTRIBUTIONS:
Dividends from net investment income................................................... (60,939,829) (55,359,529)
Distributions from net realized capital gains.......................................... (3,466,261) (9,016,752)
------------------ -------------------
TOTAL DIVIDENDS AND DISTRIBUTIONS...................................................... (64,406,090) (64,376,281)
------------------ -------------------
CAPITAL STOCK TRANSACTIONS:
Capital stock sold [29,994,210 and 11,468,488 shares, respectively].................... 334,707,738 127,691,138
Capital stock issued in investment of dividends and distributions [5,809,428 and
5,812,573 shares, respectively]....................................................... 64,406,090 64,376,281
Capital stock repurchased [(8,361,173) and (8,269,292) shares, respectively]........... (93,273,532) (91,696,624)
------------------ -------------------
NET INCREASE IN NET ASSETS RESULTING FROM CAPITAL STOCK TRANSACTIONS..................... 305,840,296 100,370,795
------------------ -------------------
TOTAL INCREASE IN NET ASSETS............................................................. 305,866,972 96,490,150
NET ASSETS:
Beginning of year...................................................................... 816,706,731 720,216,581
------------------ -------------------
End of year(a)......................................................................... $ 1,122,573,703 $ 816,706,731
------------------ -------------------
------------------ -------------------
(a) Includes undistributed net investment income of:................................... $ -- $ 229,159
------------------ -------------------
</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, 1998
<S> <C>
ASSETS
Investments, at value (cost:
$418,498,213)............................ $ 437,087,379
Cash....................................... 189
Interest receivable........................ 6,848,403
Receivable for capital stock sold.......... 45,399
--------------
Total Assets............................. 443,981,370
--------------
LIABILITIES
Payable to investment adviser.............. 454,208
Payable for capital stock repurchased...... 255,294
Accrued expenses........................... 59,914
--------------
Total Liabilities........................ 769,416
--------------
NET ASSETS................................... $ 443,211,954
--------------
--------------
Net assets were comprised of:
Common stock, at $0.01 par value......... $ 373,542
Paid-in capital, in excess of par........ 424,306,767
--------------
424,680,309
Accumulated net realized loss on
investments.............................. (57,521)
Net unrealized appreciation on
investments.............................. 18,589,166
--------------
Net assets, December 31, 1998.............. $ 443,211,954
--------------
--------------
Net asset value and redemption price per
share, 37,354,161 outstanding shares of
common stock (authorized 70,000,000
shares).................................. $ 11.87
--------------
--------------
</TABLE>
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS
Year Ended December 31, 1998
<S> <C>
INVESTMENT INCOME
Interest................................... $ 26,712,834
---------------
EXPENSES
Investment advisory fee.................... 1,735,370
Accounting fees............................ 88,000
Shareholders' reports...................... 17,000
Custodian expense.......................... 10,000
Audit fees and expenses.................... 4,000
Directors' fees............................ 3,000
Legal fees................................. 1,000
Miscellaneous expenses..................... 5,101
---------------
Total expenses........................... 1,863,471
Less: custodian fee credit................. (1,207)
---------------
Net expenses............................. 1,862,264
---------------
NET INVESTMENT INCOME........................ 24,850,570
---------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS
Net realized gain (loss) on:
Investments.............................. 7,423,525
Futures contracts........................ (296,471)
Short sales.............................. 9,938
---------------
7,136,992
---------------
Net change in unrealized appreciation
(depreciation) on:
Investments.............................. 5,320,808
Futures contracts........................ 73,032
---------------
5,393,840
---------------
NET GAIN ON INVESTMENTS...................... 12,530,832
---------------
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS................................... $ 37,381,402
---------------
---------------
</TABLE>
<TABLE>
<CAPTION>
STATEMENTS OF CHANGES IN NET ASSETS
YEARS ENDED DECEMBER 31,
---------------------------------------
1998 1997
------------------ -------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net investment income.................................................................. $ 24,850,570 $ 28,142,312
Net realized gain on investments....................................................... 7,136,992 722,778
Net change in unrealized appreciation on investments................................... 5,393,840 10,843,416
------------------ -------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS................................... 37,381,402 39,708,506
------------------ -------------------
DIVIDENDS AND DISTRIBUTIONS:
Dividends from net investment income................................................... (24,927,823) (28,098,226)
Distributions in excess of net investment income....................................... (64,303) --
------------------ -------------------
TOTAL DIVIDENDS AND DISTRIBUTIONS...................................................... (24,992,126) (28,098,226)
------------------ -------------------
CAPITAL TRANSACTIONS:
Capital stock sold [3,555,442 and 550,602 shares, respectively]........................ 42,216,640 6,261,175
Capital stock issued in reinvestment of dividends and distributions [2,122,659 and
2,484,757 shares, respectively]....................................................... 24,992,126 28,098,226
Capital stock repurchased [(5,610,053) and (8,707,219) shares, respectively]........... (66,029,147) (98,362,062)
------------------ -------------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM CAPITAL TRANSACTIONS.............. 1,179,619 (64,002,661)
------------------ -------------------
TOTAL INCREASE (DECREASE) IN NET ASSETS.................................................. 13,568,895 (52,392,381)
NET ASSETS:
Beginning of year...................................................................... 429,643,059 482,035,440
------------------ -------------------
End of year(a)......................................................................... $ 443,211,954 $ 429,643,059
------------------ -------------------
------------------ -------------------
(a) Includes undistributed net investment income of:................................... $ -- $ 77,253
------------------ -------------------
</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, 1998
<S> <C>
ASSETS
Investments, at value (cost:
$4,496,058,447).......................... $4,762,474,785
Cash....................................... 845,314
Interest and dividends receivable.......... 42,070,945
Receivable for investments sold............ 324,115
Due from broker -- variation margin........ 85,990
Receivable for capital stock sold.......... 263,037
--------------
Total Assets............................. 4,806,064,186
--------------
LIABILITIES
Payable to investment adviser.............. 6,472,779
Payable for capital stock repurchased...... 1,730,453
Payable for investments purchased.......... 1,518,060
Accrued expenses........................... 383,124
--------------
Total Liabilities........................ 10,104,416
--------------
NET ASSETS................................... $4,795,959,770
--------------
--------------
Net assets were comprised of:
Common stock, at $0.01 par value......... $ 3,181,043
Paid-in capital, in excess of par........ 4,507,920,747
--------------
4,511,101,790
Accumulated net realized gains on
investments.............................. 15,961,929
Net unrealized appreciation on
investments.............................. 268,896,051
--------------
Net assets, December 31, 1998.............. $4,795,959,770
--------------
--------------
Net asset value and redemption price per
share, 318,104,322 outstanding shares of
common stock (authorized 350,000,000
shares).................................. $ 15.08
--------------
--------------
</TABLE>
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS
Year Ended December 31, 1998
<S> <C>
INVESTMENT INCOME
Dividends (net of $227,089 foreign
withholding tax)......................... $ 24,862,659
Interest................................... 202,415,229
---------------
227,277,888
---------------
EXPENSES
Investment advisory fee.................... 26,224,569
Shareholders' reports...................... 335,000
Accounting fees............................ 270,000
Custodian expense.......................... 210,000
Audit fees................................. 45,000
Legal fees................................. 4,000
Directors' fees............................ 3,000
Miscellaneous expenses..................... 22,800
---------------
Total expenses........................... 27,114,369
Less: Custodian fee credit................. (37,735)
---------------
Net expenses............................. 27,076,634
---------------
NET INVESTMENT INCOME........................ 200,201,254
---------------
NET REALIZED AND UNREALIZED GAIN ON
INVESTMENTS
Net realized gain on:
Investments.............................. 252,074,816
Futures contracts........................ 11,004,301
---------------
263,079,117
---------------
Net change in unrealized appreciation on:
Investments.............................. 62,217,963
Futures contracts........................ 4,254,938
---------------
66,472,901
---------------
NET GAIN ON INVESTMENTS...................... 329,552,018
---------------
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS................................... $ 529,753,272
---------------
---------------
</TABLE>
<TABLE>
<CAPTION>
STATEMENTS OF CHANGES IN NET ASSETS
YEARS ENDED DECEMBER 31,
---------------------------------------
1998 1997
------------------ -------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net investment income.................................................................. $ 200,201,254 $ 209,904,550
Net realized gain on investments....................................................... 263,079,117 525,175,186
Net change in unrealized appreciation (depreciation) on investments.................... 66,472,901 (148,830,270)
------------------ -------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS................................... 529,753,272 586,249,466
------------------ -------------------
DIVIDENDS AND DISTRIBUTIONS:
Dividends from net investment income................................................... (201,150,300) (209,004,256)
Distributions from net realized capital gains.......................................... (284,059,981) (518,358,296)
------------------ -------------------
TOTAL DIVIDENDS AND DISTRIBUTIONS...................................................... (485,210,281) (727,362,552)
------------------ -------------------
CAPITAL TRANSACTIONS:
Capital stock sold [4,155,780 and 4,585,160 shares, respectively]...................... 64,306,807 74,015,405
Capital stock issued in reinvestment of dividends and distributions [32,017,520 and
47,801,252 shares, respectively]...................................................... 485,210,281 727,362,552
Capital stock repurchased [(34,980,138) and (24,112,955) shares, respectively]......... (542,332,348) (394,841,365)
------------------ -------------------
NET INCREASE IN NET ASSETS RESULTING FROM CAPITAL TRANSACTIONS......................... 7,184,740 406,536,592
------------------ -------------------
TOTAL INCREASE IN NET ASSETS............................................................. 51,727,731 265,423,506
NET ASSETS:
Beginning of year...................................................................... 4,744,232,039 4,478,808,533
------------------ -------------------
End of year (a)........................................................................ $ 4,795,959,770 $ 4,744,232,039
------------------ -------------------
------------------ -------------------
(a) Includes undistributed net investment income of:................................... $ -- $ 949,046
------------------ -------------------
</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, 1998
<S> <C>
ASSETS
Investments, at value (cost:
$5,149,958,034).......................... $5,386,550,009
Cash....................................... 1,341
Interest and dividends receivable.......... 33,290,998
Due from broker -- variation margin........ 809,059
Receivable for investments sold............ 619,824
Receivable for capital stock sold.......... 232,095
--------------
Total Assets............................. 5,421,503,326
--------------
LIABILITIES
Payable to investment adviser.............. 7,882,895
Payable for capital stock repurchased...... 1,607,590
Payable for investments purchased.......... 1,595,867
Accrued expenses........................... 435,586
--------------
Total Liabilities........................ 11,521,938
--------------
NET ASSETS................................... $5,409,981,388
--------------
--------------
Net assets were comprised of:
Common stock, at $0.01 par value......... $ 3,267,182
Paid-in capital, in excess of par........ 5,110,844,004
--------------
5,114,111,186
Undistributed net investment income........ 170,556
Accumulated net realized gains on
investments.............................. 43,985,733
Net unrealized appreciation on
investments.............................. 251,713,913
--------------
Net assets, December 31, 1998.............. $5,409,981,388
--------------
--------------
Net asset value and redemption price per
share, 326,718,180 outstanding shares of
common stock (authorized 350,000,000
shares).................................. $ 16.56
--------------
--------------
</TABLE>
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS
Year Ended December 31, 1998
<S> <C>
INVESTMENT INCOME
Dividends (net of $614,599 foreign
withholding tax)......................... $ 41,517,034
Interest................................... 170,024,349
---------------
211,541,383
---------------
EXPENSES
Investment advisory fee.................... 33,049,940
Shareholders' reports...................... 415,000
Accounting fees............................ 242,000
Custodian expense.......................... 234,000
Audit fees and expenses.................... 57,000
Directors' fees............................ 3,000
Miscellaneous expenses..................... 26,800
---------------
Total expenses........................... 34,027,740
Less: custodian fee credit................. (74,445)
---------------
Net expenses............................. 33,953,295
---------------
NET INVESTMENT INCOME........................ 177,588,088
---------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS
Net realized gain on:
Investments.............................. 471,749,472
Futures contracts........................ 42,134,442
---------------
513,883,914
---------------
Net change in unrealized appreciation on:
Investments.............................. (183,829,519)
Futures contracts........................ 16,684,360
---------------
(167,145,159)
---------------
NET GAIN ON INVESTMENTS...................... 346,738,755
---------------
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS................................... $ 524,326,843
---------------
---------------
</TABLE>
<TABLE>
<CAPTION>
STATEMENTS OF CHANGES IN NET ASSETS
YEARS ENDED DECEMBER 31,
---------------------------------------
1998 1997
------------------ -------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net investment income.................................................................. $ 177,588,088 $ 160,063,955
Net realized gain on investments....................................................... 513,883,914 867,691,914
Net change in unrealized appreciation on investments................................... (167,145,159) (163,603,096)
------------------ -------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS................................... 524,326,843 864,152,773
------------------ -------------------
DIVIDENDS AND DISTRIBUTIONS:
Dividends from net investment income................................................... (178,186,396) (159,343,911)
Distributions from net realized capital gains.......................................... (552,345,875) (823,214,223)
------------------ -------------------
TOTAL DIVIDENDS AND DISTRIBUTIONS...................................................... (730,532,271) (982,558,134)
------------------ -------------------
CAPITAL TRANSACTIONS:
Capital stock sold [4,188,120 and 4,859,580 shares, respectively]...................... 74,668,669 92,765,042
Capital stock issued in reinvestment of dividends and distributions [43,615,212 and
56,453,647 shares, respectively]...................................................... 730,532,271 982,558,134
Capital stock repurchased [(38,796,213) and (18,791,325) shares, respectively]......... (679,156,218) (363,698,408)
------------------ -------------------
NET INCREASE IN NET ASSETS RESULTING FROM CAPITAL TRANSACTIONS......................... 126,044,722 711,624,768
------------------ -------------------
TOTAL INCREASE (DECREASE) IN NET ASSETS.................................................. (80,160,706) 593,219,407
NET ASSETS:
Beginning of year...................................................................... 5,490,142,094 4,896,922,687
------------------ -------------------
End of year (a)........................................................................ $ 5,409,981,388 $ 5,490,142,094
------------------ -------------------
------------------ -------------------
(a) Includes undistributed net investment income of:................................... $ 170,556 $ 768,864
------------------ -------------------
</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, 1998
<S> <C>
ASSETS
Investments, at value (cost:
$1,918,971,738).......................... $3,544,514,168
Cash....................................... 509
Receivable for capital stock sold.......... 6,715,386
Interest and dividends receivable.......... 3,677,152
Receivable for investments sold............ 551,105
Due from broker -- variation margin........ 246,890
--------------
Total Assets............................. 3,555,705,210
--------------
LIABILITIES
Payable for investments purchased.......... 3,914,541
Payable to investment adviser.............. 2,807,611
Payable for capital stock repurchased...... 630,555
Accrued expenses........................... 263,513
--------------
Total Liabilities........................ 7,616,220
--------------
NET ASSETS................................... $3,548,088,990
--------------
--------------
Net assets were comprised of:
Common stock, at $0.01 par value......... $ 940,173
Paid-in capital, in excess of par........ 1,907,227,882
--------------
1,908,168,055
Accumulated net realized gain on
investments.............................. 9,773,130
Net unrealized appreciation on
investments.............................. 1,630,147,805
--------------
Net assets, December 31, 1998.............. $3,548,088,990
--------------
--------------
Net asset value and redemption price per
share, 94,017,271 outstanding shares of
common stock (authorized 125,000,000
shares).................................. $ 37.74
--------------
--------------
</TABLE>
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS
Year Ended December 31, 1998
<S> <C>
INVESTMENT INCOME
Dividends (net of $250,942 foreign
withholding tax)......................... $ 42,313,155
Interest................................... 5,376,488
---------------
47,689,643
---------------
EXPENSES
Investment advisory fee.................... 10,279,903
Shareholders' reports...................... 335,000
Custodian expense.......................... 142,000
Accounting fees............................ 107,000
Audit fees and expenses.................... 40,000
Directors' fees............................ 3,000
Miscellaneous expenses..................... 14,000
---------------
Total expenses........................... 10,920,903
Less: custodian fee credit................. (2,914)
---------------
Net expenses............................. 10,917,989
---------------
NET INVESTMENT INCOME........................ 36,771,654
---------------
NET REALIZED AND UNREALIZED GAIN ON
INVESTMENTS
Net realized gain on:
Investments.............................. 52,786,455
Futures contracts........................ 4,678,758
---------------
57,465,213
---------------
Net change in unrealized appreciation on:
Investments.............................. 640,594,646
Futures contracts........................ 4,097,025
---------------
644,691,671
---------------
NET GAIN ON INVESTMENTS...................... 702,156,884
---------------
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS................................... $ 738,928,538
---------------
---------------
</TABLE>
<TABLE>
<CAPTION>
STATEMENTS OF CHANGES IN NET ASSETS
YEARS ENDED DECEMBER 31,
---------------------------------------
1998 1997
------------------ -------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net investment income.................................................................. $ 36,771,654 $ 31,459,576
Net realized gain on investments....................................................... 57,465,213 74,021,385
Net change in unrealized appreciation on investments................................... 644,691,671 451,562,975
------------------ -------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS................................... 738,928,538 557,043,936
------------------ -------------------
DIVIDENDS AND DISTRIBUTIONS:
Dividends from net investment income................................................... (37,075,916) (31,155,314)
Distributions from net realized capital gains.......................................... (53,566,202) (67,389,823)
------------------ -------------------
TOTAL DIVIDENDS AND DISTRIBUTIONS...................................................... (90,642,118) (98,545,137)
------------------ -------------------
CAPITAL TRANSACTIONS:
Capital stock sold [21,945,962 and 17,248,797 shares, respectively].................... 739,810,425 484,303,403
Capital stock issued in reinvestment of dividends and distributions [2,541,175 and
3,309,920 shares, respectively]....................................................... 90,642,118 98,545,137
Capital stock repurchased [(11,483,263) and (6,144,732) shares, respectively].......... (378,841,199) (174,536,420)
------------------ -------------------
NET INCREASE IN NET ASSETS RESULTING FROM CAPITAL TRANSACTIONS......................... 451,611,344 408,312,120
------------------ -------------------
TOTAL INCREASE IN NET ASSETS............................................................. 1,099,897,764 866,810,919
NET ASSETS:
Beginning of year...................................................................... 2,448,191,226 1,581,380,307
------------------ -------------------
End of year (a)........................................................................ $ 3,548,088,990 $ 2,448,191,226
------------------ -------------------
------------------ -------------------
(a) Includes undistributed net investment income of:................................... $ -- $ 304,262
------------------ -------------------
</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, 1998
<S> <C>
ASSETS
Investments, at value (cost:
$4,767,976,521).......................... $6,250,695,797
Interest and dividends receivable.......... 12,414,416
Receivable for capital stock sold.......... 128,574
--------------
Total Assets............................. 6,263,238,787
--------------
LIABILITIES
Bank overdraft............................. 319
Payable for capital stock repurchased...... 8,881,940
Payable to investment adviser.............. 6,806,202
Accrued expenses........................... 503,692
--------------
Total Liabilities........................ 16,192,153
--------------
NET ASSETS................................... $6,247,046,634
--------------
--------------
Net assets were comprised of:
Common stock, at $0.01 par value......... $ 2,107,865
Paid-in capital, in excess of par........ 4,649,464,292
--------------
4,651,572,157
Undistributed net investment income........ 109,952
Accumulated net realized gains on
investments.............................. 112,645,380
Net unrealized appreciation on investments
and foreign currencies................... 1,482,719,145
--------------
Net assets, December 31, 1998.............. $6,247,046,634
--------------
--------------
Net asset value and redemption price per
share, 210,786,528 outstanding shares of
common stock (authorized 250,000,000
shares).................................. $ 29.64
--------------
--------------
</TABLE>
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS
Year Ended December 31, 1998
<S> <C>
INVESTMENT INCOME
Dividends (net of $1,413,190 foreign
withholding tax)......................... $ 92,432,542
Interest................................... 51,526,104
---------------
143,958,646
---------------
EXPENSES
Investment advisory fee.................... 28,389,539
Shareholders' reports...................... 492,000
Custodian expense.......................... 380,000
Accounting fees............................ 122,000
Audit fees and expenses.................... 85,000
Directors' fees............................ 3,000
Miscellaneous expenses..................... 30,800
---------------
Total expenses........................... 29,502,339
Less: custodian fee credit................. (23,575)
---------------
Net expenses............................. 29,478,764
---------------
NET INVESTMENT INCOME........................ 114,479,882
---------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS AND FOREIGN CURRENCIES
Net realized gain on:
Investments.............................. 766,376,440
Foreign currencies....................... 105,151
---------------
766,481,591
---------------
Net change in unrealized appreciation
(depreciation) on:
Investments.............................. (344,088,795)
Foreign currencies....................... 13,886
---------------
(344,074,909)
---------------
NET GAIN ON INVESTMENTS AND FOREIGN
CURRENCIES................................... 422,406,682
---------------
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS................................... $ 536,886,564
---------------
---------------
</TABLE>
<TABLE>
<CAPTION>
STATEMENTS OF CHANGES IN NET ASSETS
YEARS ENDED DECEMBER 31,
---------------------------------------
1998 1997
------------------ -------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net investment income.................................................................. $ 114,479,882 $ 125,326,195
Net realized gain on investments and foreign currencies................................ 766,481,591 320,958,795
Net change in unrealized appreciation (depreciation) on investments and foreign
currencies............................................................................ (344,074,909) 744,788,889
------------------ -------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS................................... 536,886,564 1,191,073,879
------------------ -------------------
DIVIDENDS AND DISTRIBUTIONS:
Dividends from net investment income................................................... (115,394,083) (127,895,464)
Distributions from net realized capital gains.......................................... (684,800,016) (322,171,256)
------------------ -------------------
TOTAL DIVIDENDS AND DISTRIBUTIONS...................................................... (800,194,099) (450,066,720)
------------------ -------------------
CAPITAL STOCK TRANSACTIONS:
Capital stock sold [12,676,785 and 12,471,611 shares, respectively].................... 418,548,498 381,942,219
Capital stock issued in reinvestment of dividends and distributions [27,106,415 and
14,665,432 shares, respectively]...................................................... 800,194,099 450,066,720
Capital stock repurchased [(22,886,073) and (11,771,942) shares, respectively]......... (732,368,459) (363,005,143)
------------------ -------------------
NET INCREASE IN NET ASSETS RESULTING FROM CAPITAL STOCK TRANSACTIONS................... 486,374,138 469,003,796
------------------ -------------------
TOTAL INCREASE IN NET ASSETS............................................................. 223,066,603 1,210,010,955
NET ASSETS:
Beginning of year...................................................................... 6,023,980,031 4,813,969,076
------------------ -------------------
End of year (a)........................................................................ $ 6,247,046,634 $ 6,023,980,031
------------------ -------------------
------------------ -------------------
(a) Includes undistributed net investment income of:................................... $ 109,952 $ 919,002
------------------ -------------------
</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, 1998
<S> <C>
ASSETS
Investments, at value (cost:
$589,592,454)............................ $ 831,023,491
Foreign currency, at value (cost:
$17,499,873)............................. 17,371,833
Receivable for investments sold............ 4,254,046
Dividends and interest receivable.......... 552,684
Receivable for capital stock sold.......... 40,732
--------------
Total Assets............................. 853,242,786
--------------
LIABILITIES
Forward currency contracts -- amount
payable to counterparties................ 3,828,254
Payable for investments purchased.......... 2,897,332
Payable to investment adviser.............. 1,418,703
Payable for capital stock repurchased...... 327,774
Accrued expenses and other liabilities..... 226,668
Bank overdraft............................. 2,096
--------------
Total Liabilities........................ 8,700,827
--------------
NET ASSETS................................... $ 844,541,959
--------------
--------------
Net assets were comprised of:
Common stock, at $0.01 par value......... $ 399,149
Paid-in capital, in excess of par........ 610,100,715
--------------
610,499,864
Distributions in excess of net investment
income................................... (8,644,128)
Accumulated net realized gains on
investments.............................. 5,209,641
Net unrealized appreciation on investments
and foreign currencies................... 237,476,582
--------------
Net assets, December 31, 1998.............. $ 844,541,959
--------------
--------------
Net asset value and redemption price per
share of 39,914,867 outstanding shares of
common stock (authorized 75,000,000
shares).................................. $ 21.16
--------------
--------------
</TABLE>
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS
December 31, 1998
<S> <C>
INVESTMENT INCOME
Dividends (net of $541,282 foreign
withholding tax)......................... $ 6,673,826
Interest................................... 1,452,097
---------------
8,125,923
---------------
EXPENSES
Investment advisory fee.................... 5,342,945
Custodian expense.......................... 446,000
Accounting fees............................ 244,000
Shareholders' reports...................... 37,000
Audit fees and expenses.................... 6,000
Directors' fees............................ 3,000
Miscellaneous expenses..................... 3,761
---------------
Total expenses........................... 6,082,706
---------------
NET INVESTMENT INCOME........................ 2,043,217
---------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS AND FOREIGN CURRENCIES
Net realized gain on:......................
Investments.............................. 40,877,802
Foreign currencies....................... 219,287
---------------
41,097,089
---------------
Net change in unrealized appreciation
(depreciation) on:
Investments.............................. 125,305,318
Foreign currencies....................... (4,159,978)
---------------
121,145,340
---------------
NET GAIN ON INVESTMENTS AND FOREIGN
CURRENCIES................................... 162,242,429
---------------
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS................................... $ 164,285,646
---------------
---------------
</TABLE>
<TABLE>
<CAPTION>
STATEMENTS OF CHANGES IN NET ASSETS
YEARS ENDED DECEMBER 31,
---------------------------------------
1998 1997
------------------ -------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net investment income.................................................................. $ 2,043,217 $ 3,060,617
Net realized gain on investments and foreign currencies................................ 41,097,089 31,027,057
Net change in unrealized appreciation on investments and foreign currencies............ 121,145,340 5,107,643
------------------ -------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS................................... 164,285,646 39,195,317
------------------ -------------------
DIVIDENDS AND DISTRIBUTIONS:
Dividends from net investment income................................................... (5,559,015) (4,377,947)
Distributions in excess of net investment income....................................... (4,481,373) (3,434,778)
Distributions from net realized capital gains.......................................... (35,181,433) (30,337,530)
------------------ -------------------
TOTAL DIVIDENDS AND DISTRIBUTIONS...................................................... (45,221,821) (38,150,255)
------------------ -------------------
CAPITAL TRANSACTIONS:
Capital stock sold [9,626,530 and 5,853,862 shares, respectively]...................... 191,039,953 111,692,563
Capital stock issued in reinvestment of dividends and distributions [2,231,010 and
2,115,902 shares, respectively]....................................................... 45,221,821 38,150,255
Capital stock repurchased [(7,562,638) and (4,869,453) shares, respectively]........... (149,184,992) (93,116,567)
------------------ -------------------
NET INCREASE IN NET ASSETS RESULTING FROM CAPITAL TRANSACTIONS......................... 87,076,782 56,726,251
------------------ -------------------
TOTAL INCREASE IN NET ASSETS............................................................. 206,140,607 57,771,313
NET ASSETS:
Beginning of year...................................................................... 638,401,352 580,630,039
------------------ -------------------
End of year (a)........................................................................ $ 844,541,959 $ 638,401,352
------------------ -------------------
------------------ -------------------
(a) Includes undistributed net investment income of:................................... $ -- $ 3,515,798
------------------ -------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
A7
<PAGE>
DIVERSIFIED BOND PORTFOLIO
DECEMBER 31, 1998
<TABLE>
<CAPTION>
LONG-TERM INVESTMENTS -- 95.9% MOODY'S PRINCIPAL
RATING INTEREST MATURITY AMOUNT VALUE
LONG-TERM BONDS -- 95.0% (UNAUDITED) RATE DATE (000) (NOTE 2)
------------ ------ ----------------- --------- --------------
<S> <C> <C> <C> <C> <C>
AEROSPACE -- 2.5%
Boeing Co.,..................................... Aa3 8.75% 08/15/21 $ 6,250 $ 7,910,250
Raytheon Co.,................................... Baa1 5.95% 03/15/01 6,500 6,557,070
Raytheon Co.,................................... Baa1 6.40% 12/15/18 9,500 9,428,750
Raytheon Co.,................................... Baa1 7.00% 11/01/28 3,550 3,737,511
--------------
27,633,581
--------------
AIRLINES -- 2.6%
Continental Airlines, Inc.,..................... Ba2 8.00% 12/15/05 8,000 7,904,800
Delta Air Lines, Inc.,.......................... Ba1 9.875% 05/15/00 6,000 6,298,320
United Airlines, Inc.,.......................... Baa3 10.67% 05/01/04 7,000 8,282,400
United Airlines, Inc.,.......................... Baa3 11.21% 05/01/14 5,000 6,566,000
--------------
29,051,520
--------------
ASSET-BACKED SECURITIES -- 1.7%
Advanta Mortgage Loan Trust, Series 1994-3,..... Aaa 8.49% 01/25/26 8,500 8,728,091
Airplanes Pass Through Trust,................... Ba2 10.875% 03/15/19 6,000 6,300,000
California Infrastructure PG&E, Series
1997-1,....................................... NR 6.32% 09/25/05 4,000 4,117,500
--------------
19,145,591
--------------
AUTO-CARS & TRUCKS -- 0.7%
Navistar International Corp.,................... Ba1 7.00% 02/01/03 3,500 3,500,547
Navistar International Corp.,................... Ba3 8.00% 02/01/08 4,500 4,578,750
--------------
8,079,297
--------------
BANKS AND SAVINGS & LOANS -- 4.5%
Banco de Commercio Exterior de Columbia, SA,
M.T.N., (Colombia)............................ NR 8.625% 06/02/00 2,000 1,960,000
Banco Ganadero, SA, M.T.N., (Colombia).......... NR 9.75% 08/26/99 4,100 4,079,500
Bayerische Landesbank Girozentrale, (Germany)... Aaa 5.875% 12/01/08 10,000 10,224,000
Capital One Bank,............................... Baa3 7.08% 10/30/01 5,000 5,027,850
Chase Manhattan Corp.,.......................... A2 8.00% 06/15/99 2,000 2,023,940
Chase Manhattan Corp............................ A2 6.625% 08/15/05 2,000 2,083,040
Compass Trust Bank,............................. A3 8.23% 01/15/27 4,500 4,820,625
International Bank for Reconstruction and
Development, (Supranational).................. Aaa 12.375% 10/15/02 750 938,527
Kansallis-Osake Pankki, (Finland)............... Baa1 8.65% 01/01/49 5,000 5,073,600
Kansallis-Osake Pankki, (Finland)............... Baa1 10.00% 05/01/02 5,000 5,621,000
National Australia Bank, (Australia)............ A1 6.40% 12/10/07 3,700 3,774,000
Skandinaviska Enskilda Bank, (Sweden)........... Baa1 7.50% 03/29/49 5,000 4,941,400
--------------
50,567,482
--------------
CABLE & PAY TELEVISION SYSTEMS -- 2.4%
Cable & Wire Communications PLC (United
Kingdom)...................................... Baa1 6.75% 12/01/08 6,400 6,524,160
Rogers Cablesystems, Inc., (Canada)............. Ba3 10.00% 03/15/05 4,000 4,480,000
Tele-Communications, Inc.,...................... Ba1 6.34% 02/01/02 3,500 3,584,875
Tele-Communications, Inc.,...................... Ba1 6.375% 09/15/99 2,750 2,769,332
Tele-Communications, Inc.,...................... Baa3 10.125% 04/15/22 6,300 9,114,021
--------------
26,472,388
--------------
COMPUTER SOFTWARE & SERVICES -- 0.5%
Computer Associates International, Inc.,........ Baa1 6.375% 04/15/05 5,300 5,245,092
--------------
DIVERSIFIED CONSUMER PRODUCT -- 1.3%
Owens-Illinois, Inc.,........................... Ba1 7.50% 05/15/10 5,000 5,095,100
Philip Morris Cos., Inc.,....................... A2 6.15% 03/15/10 10,000 10,083,000
--------------
15,178,100
--------------
DRUGS & MEDICAL SUPPLIES -- 0.3%
Mallinckrodt, Inc............................... Baa2 6.30% 03/15/11 3,500 3,445,969
--------------
FINANCIAL SERVICES -- 14.3%
Advanta Corp., M.T.N............................ Ba2 7.25% 08/16/99 10,000 9,920,500
Aristar, Inc.,.................................. Baa1 7.50% 07/01/99 2,000 2,021,040
Arkwright Corp.,................................ Baa3 9.625% 08/15/26 5,000 5,980,500
Associates Corp.,............................... Aa3 6.95% 11/01/18 8,000 8,524,640
AT&T Capital Corp,.............................. Baa3 7.50% 11/15/00 10,000 10,122,400
Calair Capital Corp.,........................... Ba2 8.125% 04/01/08 3,000 2,933,850
Chrysler Financial Corp.,....................... A3 9.50% 12/15/99 5,000 5,196,100
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
B1
<PAGE>
DIVERSIFIED BOND PORTFOLIO (CONTINUED)
DECEMBER 31, 1998
<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>
FINANCIAL SERVICES (CONT'D.)
Comdisco Inc.,.................................. Baa1 6.32% 11/27/00 10,000 $ 10,046,600
Conseco Inc.,................................... Baa2 6.40% 06/15/01 10,000 9,589,000
Conseco, Inc.,.................................. Ba2 8.70% 11/15/26 1,600 1,461,808
Conseco, Inc.,.................................. Ba2 8.796% 04/01/27 8,350 7,634,405
ContiFinancial Corp.,........................... Ba1 7.50% 03/15/02 12,900 9,030,000
ContiFinancial Corp.,........................... Ba1 8.125% 04/01/08 1,800 1,224,000
Enterprise Rent-A-Car USA Finance Co., M.T.N.... Baa3 7.00% 06/15/00 9,000 9,038,430
Enterprise Rent-A-Car USA Finance Co., M.T.N.... Baa3 8.75% 12/15/99 3,000 3,072,210
Ford Motor Credit Co.,.......................... A1 5.75% 01/25/01 4,000 4,034,640
General Motors Acceptance Corp.,................ A2 5.75% 11/10/03 10,000 10,077,600
General Motors Acceptance Corp.,................ Baa1 8.40% 10/15/99 3,700 3,790,613
Household Finance,.............................. A2 6.50% 11/15/08 23,000 23,805,000
Interpool Capital Trust,........................ Ba2 9.875% 02/15/27 7,000 5,740,000
Nationwide CSN Trust,........................... Aa3 9.875% 02/15/25 5,000 6,267,200
PT Alatief Freeport Financial Co.,
(Netherlands)................................. Ba2 9.75% 04/15/01 5,750 4,140,000
Reliastar Financial Corp.,...................... A3 6.625% 09/15/03 5,000 5,031,000
Tokai Pfd Capital,.............................. Baa3 9.98% 12/29/49 2,300 1,932,000
--------------
160,613,536
--------------
FOOD & BEVERAGE -- 0.3%
Whitman Corp.,.................................. Baa2 7.50% 08/15/01 3,000 3,133,320
--------------
FOREST PRODUCTS -- 2.4%
Fort James Corp.,............................... Baa3 6.234% 03/15/01 5,000 5,047,050
Scotia Pacific Co.,............................. NR 7.11% 01/20/14 4,100 3,902,216
Scotia Pacific Co.,............................. NR 7.71% 01/20/14 12,200 10,929,736
Westvaco Corp.,................................. A1 9.75% 06/15/20 5,000 6,703,950
--------------
26,582,952
--------------
HOUSING RELATED -- 0.6%
American Standard Cos. Inc.,.................... Ba3 7.375% 04/15/05 2,100 2,069,319
Owens Corning,.................................. Baa3 7.50% 05/01/05 5,000 5,111,050
--------------
7,180,369
--------------
INDUSTRIAL -- 1.6%
Cendant Corp.,.................................. Baa1 7.75% 12/01/03 15,000 15,160,050
Compania Sud Americana de Vapores, SA,
(Chile)....................................... NR 7.375% 12/08/03 3,000 2,692,500
--------------
17,852,550
--------------
INVESTMENT BANKERS -- 5.3%
Lehman Brothers Holdings, Inc.,................. Baa1 6.40% 08/30/00 6,450 6,451,612
Merrill Lynch, Pierce, Fenner & Smith, Inc.,.... NR 5.40% 06/24/03 15,000 14,850,000
Merrill Lynch, Pierce, Fenner & Smith, Inc.,.... Aa3 6.875% 11/15/18 9,800 10,159,170
Morgan Stanley, Dean Witter Discover & Co.,
M.T.N......................................... A1 6.09% 03/09/11 6,500 6,586,775
Salomon, Inc.,.................................. Baa1 6.25% 10/01/99 8,000 8,054,320
Salomon, Inc.,.................................. NR 6.65% 07/15/01 7,000 7,166,320
Salomon, Inc., M.T.N............................ Baa1 6.59% 02/21/01 3,500 3,567,200
Salomon, Inc.,.................................. Baa1 7.25% 05/01/01 2,250 2,330,460
--------------
59,165,857
--------------
LEISURE & TOURISM -- 1.2%
Royal Caribbean Cruises Ltd.,................... Baa3 7.00% 10/15/07 8,000 8,011,120
Royal Caribbean Cruises Ltd.,................... Baa3 7.25% 08/15/06 5,000 5,081,900
--------------
13,093,020
--------------
LODGING -- 1.2%
ITT Corp.,...................................... Baa2 6.25% 11/15/00 7,000 6,753,180
ITT Corp.,...................................... Baa2 6.75% 11/15/03 7,000 6,445,810
--------------
13,198,990
--------------
MEDIA -- 7.7%
News America Holdings, Inc.,.................... Baa3 6.703% 05/21/04 36,000 36,697,320
Paramount Communications, Inc.,................. Ba2 7.50% 01/15/02 5,000 5,217,650
Time Warner, Inc.,.............................. Baa3 6.625% 05/15/29 19,000 19,331,740
Time Warner, Inc.,.............................. Ba1 8.11% 08/15/06 7,800 8,892,390
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
B2
<PAGE>
DIVERSIFIED BOND PORTFOLIO (CONTINUED)
DECEMBER 31, 1998
<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>
MEDIA (CONT'D.)
Turner Broadcasting System, Inc.,............... Ba1 7.40% 02/01/04 13,500 $ 14,477,130
Viacom, Inc.,................................... Ba2 7.75% 06/01/05 1,450 1,573,004
--------------
86,189,234
--------------
OIL & GAS -- 1.5%
B.J. Services Co.,.............................. Ba1 7.00% 02/01/06 5,000 5,174,850
Occidental Petroleum Corp.,..................... Baa3 10.125% 11/15/01 5,000 5,466,800
Occidental Petroleum Corp.,..................... Baa3 11.125% 08/01/10 5,000 6,526,550
--------------
17,168,200
--------------
OIL & GAS SERVICES -- 3.0%
K N Energy, Inc.,............................... Baa2 6.30% 03/01/21 15,000 15,042,150
R&B Falcon Corp.,............................... Ba1 6.50% 04/15/03 8,600 7,811,552
R&B Falcon Corp.,............................... Ba1 6.75% 04/15/05 7,300 6,278,000
R&B Falcon Corp.,............................... Ba1 7.375% 04/15/18 5,750 4,435,493
--------------
33,567,195
--------------
REAL ESTATE INVESTMENT TRUST -- 3.1%
Camden Property Trust,.......................... Baa2 7.23% 10/30/00 5,000 5,012,000
Colonial Realty,................................ Baa3 7.00% 07/14/07 1,350 1,294,529
Equity Residentia,.............................. A3 6.15% 09/15/00 15,000 14,901,000
ERP Operating, L.P.,............................ A3 6.63% 04/13/05 6,500 6,413,940
Felcor Suite Hotels, Inc.,...................... Ba1 7.625% 10/01/07 7,900 7,524,750
--------------
35,146,219
--------------
RESTAURANTS -- 0.8%
Darden Restaurants, Inc.,....................... A3 7.125% 02/01/16 10,000 9,465,300
--------------
RETAIL -- 7.2%
Federated Department Stores, Inc.,.............. Ba1 8.125% 10/15/02 5,250 5,659,133
Federated Department Stores, Inc.,.............. Ba1 8.50% 06/15/03 10,200 11,250,396
Kmart Corp.,.................................... Ba2 9.35% 01/02/20 2,000 2,080,000
Kmart Corp.,.................................... Ba2 9.78% 01/05/20 3,850 4,210,476
Kroger Co., (The)............................... Baa3 6.375% 03/01/08 6,600 6,710,220
Meyer, (Fred) Inc.,............................. Ba2 7.15% 03/01/03 550 572,209
Meyer, (Fred) Inc.,............................. Ba2 7.375% 03/01/05 5,000 5,289,200
Rite Aid Corp.,................................. A3 6.70% 12/15/01 4,000 4,102,400
Saks Inc.,...................................... Baa3 7.25% 12/01/04 11,600 11,641,180
Saks Inc.,...................................... Baa3 7.50% 12/01/10 8,000 7,999,440
Saks Inc.,...................................... Baa3 8.25% 11/15/08 11,200 11,872,000
Sears Roebuk & Co.,............................. A2 6.50% 12/01/28 10,000 9,815,300
--------------
81,201,954
--------------
TELECOMMUNICATIONS -- 4.5%
LCI International, Inc.,........................ Ba1 7.25% 06/15/07 10,125 10,251,765
Qwest Communications International Inc.,........ Ba1 7.50% 11/01/08 5,000 5,200,000
Sprint Corp.,................................... Baa1 5.70% 11/15/03 17,000 17,060,690
Sprint Corp.,................................... Baa1 6.875% 11/15/28 14,000 14,550,200
Worldcom Inc,................................... Baa2 6.125% 08/15/01 3,300 3,352,734
--------------
50,415,389
--------------
UTILITIES -- 8.1%
Arkla, Inc., M.T.N.,............................ Ba2 9.32% 12/18/00 2,000 2,136,000
Calenergy Co., Inc.,............................ Ba1 6.96% 09/15/03 8,000 8,142,640
Calenergy Co., Inc.,............................ BA1 7.23% 09/15/05 5,000 5,151,300
Calenergy Co., Inc.,............................ Ba1 8.48% 09/15/28 10,000 11,055,300
Cogentrix Energy, Inc.,......................... Ba1 8.75% 10/15/08 10,000 10,625,000
Commonwealth Edison Co.,........................ Baa3 7.625% 01/15/07 7,525 8,313,846
Connecticut Light & Power Company,.............. Ba2 7.75% 06/01/02 5,685 5,897,164
El Paso Electric Company,....................... Ba2 7.75% 05/01/01 5,850 6,070,487
El Paso Electric Company,....................... Ba3 9.40% 05/01/11 4,000 4,588,240
Niagara Mohawk Power,........................... Ba3 6.875% 04/01/03 4,000 4,138,800
Niagara Mohawk Power,........................... Ba2 7.375% 08/01/03 8,000 8,455,280
Niagara Mohawk Power,........................... Baa2 8.00% 06/01/04 5,000 5,459,300
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
B3
<PAGE>
DIVERSIFIED BOND PORTFOLIO (CONTINUED)
DECEMBER 31, 1998
<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>
UTILITIES (CONT'D.)
Pennsylvania Power & Light Co.,................. A2 9.375% 07/01/21 $ 1,150 $ 1,286,781
Texas Utilities,................................ Baa3 5.94% 10/15/01 10,000 10,058,300
--------------
91,378,438
--------------
WASTE MANAGEMENT -- 0.2%
USA Waste Service,.............................. Baa3 6.125% 07/15/01 2,000 2,012,400
--------------
U.S. GOVERNMENT & AGENCY OBLIGATIONS -- 14.1%
Federal Farm Credit Bank,....................... 8.65% 10/01/99 150 154,008
Resolution Funding Corp.,....................... Zero 10/15/15 17,100 6,621,120
Resolution Funding Corp.,....................... 8.125% 10/15/19 700 914,263
Resolution Funding Corp.,....................... 8.625% 01/15/21 200 275,718
Small Business Administration Participation
Certicates,................................... 6.00% 09/01/18 15,000 15,305,550
United States Treasury Bond,.................... 5.375% 07/31/00 5,200 5,256,888
United States Treasury Note,.................... 4.75% 11/15/08 1,500 1,511,715
United States Treasury Note,.................... 5.375% 02/15/01 3,200 3,248,992
United States Treasury Note,.................... 5.50% 08/15/28 2,000 2,093,440
United States Treasury Note,.................... 5.75% 08/15/03 4,000 4,176,880
United States Treasury Note,.................... 5.875% 11/15/05 5,400 5,760,288
United States Treasury Note,.................... 6.00% 08/15/00 6,600 6,736,092
United States Treasury Note,.................... 6.50% 05/15/05 3,600 3,945,384
United States Treasury Note,.................... 6.50% 11/15/26 80,000 93,024,800
United States Treasury Note,.................... 6.625% 07/31/01 4,200 4,400,802
United States Treasury Note,.................... 7.125% 09/30/99 3,500 3,562,335
United States Treasury Note,.................... 7.50% 02/15/05 1,300 1,488,500
--------------
158,476,775
--------------
U.S. GOVERNMENT MORTGAGE- BACKED SECURITIES -- 0.7%
Federal National Mortgage Association,.......... 9.00% 10/01/16-09/01/21 388 410,024
Government National Mortgage Association,....... 7.50% 05/20/02-02/15/26 7,091 7,308,344
--------------
7,718,368
--------------
FOREIGN GOVERNMENT BONDS -- 0.7%
Republic of Panama, (Panama).................... NR 7.875% 02/13/02 8,000 7,720,000
--------------
TOTAL LONG-TERM BONDS (COST $1,052,032,111)............................................................ 1,066,099,086
--------------
<CAPTION>
SHARES
---------
<S> <C> <C> <C> <C> <C>
PREFERRED STOCK -- 0.9%
Centaur Funding (cost $10,022,865)........................................................ 75,000 10,377,000
--------------
TOTAL LONG-TERM INVESTMENTS
(cost $1,062,054,976)................................................................................ 1,076,476,086
--------------
PRINCIPAL
AMOUNT
SHORT-TERM INVESTMENTS -- 2.8% (000)
---------
REPURCHASE AGREEMENT
Joint Repurchase Agreement Account
(cost $31,305,000; Note 5).................... 4.693% 01/04/99 31,305 31,305,000
--------------
TOTAL INVESTMENTS -- 98.7%
(cost $1,093,359,976; Note 6)........................................................................ 1,107,781,086
OTHER ASSETS IN EXCESS OF LIABILITIES -- 1.3%.......................................................... 14,792,617
--------------
NET ASSETS -- 100.0%................................................................................... $1,122,573,703
--------------
--------------
</TABLE>
The following abbreviations are used in portfolio descriptions:
L.P. Limited Partnership
M.T.N. Medium Term Note
PLC Public Limited Company (British Corporation)
SA Sociedad Anonima (Spanish Coporation) or Societe Anonyme (French
Corporation)
NR Not Rated by Moody's or Standard & Poors
SEE NOTES TO FINANCIAL STATEMENTS.
B4
<PAGE>
GOVERNMENT INCOME PORTFOLIO
DECEMBER 31, 1998
<TABLE>
<CAPTION>
LONG-TERM INVESTMENTS -- 92.7% PRINCIPAL
INTEREST MATURITY AMOUNT VALUE
LONG-TERM BONDS RATE DATE (000) (NOTE 2)
------ -------------------- --------- --------------
<S> <C> <C> <C> <C>
ASSET-BACKED SECURITIES -- 2.3%
Team Fleet Financing Corp....................... 7.350% 05/15/03 $ 10,000 $ 10,276,563
--------------
COLLATERALIZED MORTGAGE OBLIGATIONS -- 1.4%
Westpac Securitisation Trust, Ser. 1998-1G
(Australia)................................... 5.483% 07/19/29 6,280(a) 6,229,427
--------------
CORPORATE -- 1.9%
Merck & Co., Inc................................ 5.760% 05/03/37 8,000 8,340,000
--------------
MORTGAGE PASS-THROUGHS -- 11.1%
Federal Home Loan Mortgage Corp., ARM........... 7.629% 06/01/25 3,468 3,489,476
Federal National Mortgage Association........... 7.500% 02/01/02 - 05/01/10 15,810 16,249,210
Federal National Mortgage Association........... 8.000% 03/01/22 - 05/01/26 1,110 1,150,114
Federal National Mortgage Association........... 9.000% 02/01/25 - 04/01/25 5,877 6,219,881
Government National Mortgage Association........ 7.500% 12/15/25 - 02/15/26 14,756 15,213,981
Government National Mortgage Association........ 8.000% 09/15/23 - 12/15/24 6,633 6,899,974
--------------
49,222,636
--------------
U.S. GOVERNMENT & AGENCY OBLIGATIONS -- 76.0%
Federal Farm Credit Bank........................ 5.900% 01/10/05 5,000 5,147,650
Federal Home Loan Bank.......................... 5.750% 10/15/07 15,000 15,810,000
Federal Home Loan Mortgage Corp.,............... 7.360% 06/05/07 15,000 15,796,800
Federal National Mortgage Association........... Zero 10/08/24 - 10/08/27 45,779 9,640,633
Federal National Mortgage Association........... 5.860% 08/20/03 12,374 12,534,491
Federal National Mortgage Association........... 6.060% 05/21/03 30,000 30,515,700
Israel AID...................................... Zero 03/15/06 18,272 12,803,190
Israel AID...................................... Zero 08/15/09 20,000 11,530,800
Resolution Funding Corp......................... 8.125% 10/15/19 4,200 5,485,578
Small Business Administration Participation
Certificates.................................. 6.000% 09/01/18 8,000 8,162,960
Small Business Administration Participation
Certificates.................................. 7.200% 10/01/16 18,387 19,673,778
Small Business Administration Participation
Certificates.................................. 6.850% 07/01/17 4,784 5,035,297
Small Business Administration Participation
Certificates.................................. 7.150% 01/01/17 18,034 19,309,360
United States Treasury Bonds.................... 8.125% 08/15/19 61,100 81,597,217
United States Treasury Bonds.................... 8.125% 08/15/21 4,000 5,405,000
United States Treasury Bonds.................... 11.750% 02/15/10 37,000 50,273,750
United States Treasury Notes.................... 4.250% 11/15/03 17,200 16,979,668
United States Treasury Notes.................... 4.750% 11/15/08 3,000 3,023,430
United States Treasury Notes.................... 5.250% 08/15/03 4,300 4,409,521
United States Treasury Notes.................... 7.875% 11/15/04 3,000 3,475,770
--------------
336,610,593
--------------
TOTAL LONG-TERM INVESTMENTS
(cost $392,763,629)....................................................................... 410,679,219
--------------
SHORT-TERM INVESTMENTS -- 5.9%
REPURCHASE AGREEMENT -- 0.4%
Joint Repurchase Agreement Account (Note 5)..... 4.693% 01/04/99 1,692 1,692,000
--------------
U. S. GOVERNMENT & AGENCY OBLIGATIONS -- 5.5%
United States Treasury Notes.................... 7.750% 12/31/99 24,000 24,716,160
--------------
TOTAL SHORT-TERM INVESTMENTS
(cost $25,734,584)........................................................................ 26,408,160
--------------
TOTAL INVESTMENTS -- 98.6%
(cost $418,498,213; Note 6)............................................................... 437,087,379
OTHER ASSETS IN EXCESS OF LIABILITIES -- 1.4%............................................... 6,124,575
--------------
NET ASSETS -- 100.0%........................................................................ $ 443,211,954
--------------
--------------
</TABLE>
The following abbreviations are used in portfolio descriptions:
AID Agency for International Development
ARM Adjustable Rate Mortgage
(a) US$ Denominated Foreign Bonds
SEE NOTES TO FINANCIAL STATEMENTS.
B5
<PAGE>
CONSERVATIVE BALANCED PORTFOLIO
December 31, 1998
<TABLE>
<CAPTION>
LONG-TERM INVESTMENTS -- 94.3%
<S> <C> <C> <C>
MOODY'S PRINCIPAL
LONG-TERM RATING AMOUNT VALUE
BONDS -- 54.9% (UNAUDITED) (000) (NOTE 2)
------------ --------- --------------
AEROSPACE -- 1.3%
Raytheon Co.,
5.95%, 03/15/01............................... Baa1 $ 16,400 $ 16,543,992
6.00%, 12/15/10............................... Baa1 20,000 20,000,000
6.40%, 12/15/18............................... Baa1 25,000 24,812,500
--------------
61,356,492
--------------
AIRLINES -- 3.3%
Continental Airlines, Inc.,
8.00%, 12/15/05............................... Ba2 5,000 4,940,500
Delta Airlines, Inc.,
10.125%, 05/15/10............................. Baa3 20,000 25,019,000
10.375%, 02/01/11............................. Ba1 37,905 48,392,555
United Airlines, Inc.,
10.67%, 05/01/04.............................. Baa3 46,865 55,450,668
11.21%, 05/01/14.............................. Baa3 18,433 24,206,216
--------------
158,008,939
--------------
ASSET-BACKED SECURITIES -- 0.7%
California Infrastructure,
6.14%, 03/25/02............................... Aaa 5,500 5,517,930
6.17%, 03/25/03............................... Aaa 6,000 6,073,560
6.28%, 09/25/05............................... Aaa 7,000 7,167,160
Standard Credit Card Master Trust,
5.95%, 10/07/04............................... Aaa 4,650 4,718,262
Team Financing Corp.,
7.35%, 05/15/03............................... Aa2 11,000 11,304,219
--------------
34,781,131
--------------
BANKS AND SAVINGS & LOANS -- 3.3%
Bank of Nova Scotia,
6.50%, 07/15/07............................... A1 7,200 7,250,256
Bayerische Landesbank Girozentrale,
5.875%, 12/01/08.............................. Aaa 22,000 22,492,800
Capital One Bank,
6.97%, 02/04/02............................... Baa3 25,000 25,007,250
7.08%, 10/30/01............................... Baa3 35,100 35,295,507
7.35%, 06/20/00............................... Baa3 8,100 8,162,208
8.125%, 03/01/00.............................. Baa3 13,150 13,341,069
Citigroup,
6.375%, 11/15/08.............................. A1 17,500 18,094,475
Kansallis-Osake-Pankki, (Finland),
8.65%, 01/01/49............................... Baa1 10,000 10,147,200
National Australia Bank, (Australia),
6.40%, 12/10/07............................... A1 14,000 14,280,000
Okobank, (Finland),
6.75%, 09/27/49............................... A3 6,250 6,243,750
--------------
160,314,515
--------------
CABLE & PAY TELEVISION SYSTEMS -- 2.3%
Cable & Wire Communications, Inc.,
6.75%, 12/01/08............................... Baa1 17,000 17,329,800
Continental Cablevision, Inc.,
8.50%, 09/15/01............................... Ba2 5,545 5,881,914
<CAPTION>
MOODY'S PRINCIPAL
LONG-TERM RATING AMOUNT VALUE
BONDS (CONTINUED) (UNAUDITED) (000) (NOTE 2)
------------ --------- --------------
CABLE & PAY TELEVISION SYSTEMS (CONT'D.)
<S> <C> <C> <C>
Tele-Communications, Inc.,
6.34%, 02/01/02............................... Ba1 $ 12,000 $ 12,291,000
7.375%, 02/15/00.............................. Ba1 40,700 41,585,225
8.25%, 01/15/03............................... Baa3 2,000 2,194,800
9.25%, 04/15/02............................... Baa3 9,500 10,563,525
9.875%, 06/15/22.............................. Baa3 12,900 18,288,975
--------------
108,135,239
--------------
COMMERCIAL SERVICES -- 0.8%
Cendant Corp.,
7.75%, 12/01/03............................... Baa1 39,000 39,416,130
--------------
COMPUTERS SOFTWARE & SERVICES -- 0.6%
Computer Associates International, Inc.,
6.375%, 04/15/05.............................. Baa1 14,300 14,151,852
Qwest Comm,
7.25%, 11/01/08............................... Ba1 8,000 8,180,000
Worldcom Inc,
6.125%, 08/15/01.............................. Baa2 6,700 6,807,066
--------------
29,138,918
--------------
CONSULTING -- 2.6%
Comdisco Inc., M.T.N.,
5.94%, 04/13/00............................... Baa1 12,500 12,468,750
6.32%, 11/27/00............................... Baa1 37,750 37,925,915
6.375%, 11/30/01.............................. Baa1 21,500 21,593,095
6.65%, 11/13/01............................... Baa1 50,000 50,385,000
--------------
122,372,760
--------------
CONSUMER SERVICES -- 0.3%
Loewen Group, Inc.,
7.20%, 06/01/03............................... Ba3 10,000 8,400,000
7.60%, 06/01/08............................... Ba3 3,400 2,686,000
Service Corp. International,
7.00%, 06/01/15............................... Baa1 2,500 2,588,375
--------------
13,674,375
--------------
CONTAINERS -- 0.6%
Owens-Illinois, Inc.,
7.15%, 05/15/05............................... Ba1 30,000 30,066,300
7.50%, 05/15/10............................... Ba1 800 815,216
--------------
30,881,516
--------------
DRUGS & MEDICAL SUPPLIES -- 0.5%
Mallinckrodt, Inc.,
6.30%, 03/15/11(a)............................ Baa2 16,780 16,520,958
Merck & Co Inc.,
5.95%, 12/01/28............................... Aaa 10,000 9,982,500
--------------
26,503,458
--------------
ELECTRICAL -- 0.3%
Enersis Sa,
6.90%, 12/01/06............................... Baa1 10,000 9,182,000
7.40%, 12/01/16............................... Baa1 6,400 5,267,200
--------------
14,449,200
--------------
FINANCIAL SERVICES -- 13.2%
Advanta Corp., M.T.N.,
7.50%, 08/28/00............................... Ba2 35,000 32,866,400
Arkwright Corp.,
9.625%, 08/15/26.............................. Baa3 8,000 9,568,800
Associates Corp.,
6.25%, 11/01/08............................... Aa3 21,000 21,745,920
6.95%, 11/01/18............................... Aa3 24,000 25,573,920
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
B6
<PAGE>
CONSERVATIVE BALANCED PORTFOLIO (CONTINUED)
DECEMBER 31, 1998
<TABLE>
<CAPTION>
MOODY'S PRINCIPAL
LONG-TERM RATING AMOUNT VALUE
BONDS (CONTINUED) (UNAUDITED) (000) (NOTE 2)
------------ --------- --------------
FINANCIAL SERVICES (CONT'D.)
<S> <C> <C> <C>
AT&T Capital Corp, M.T.N.,
6.25%, 05/15/01............................... Baa3 $ 35,500 $ 35,016,845
7.50%, 11/15/00............................... Baa3 47,000 47,575,280
BCH Financial Services
5.72%, 04/28/05............................... A3 10,000 9,933,200
Bear Stearns & Co,
6.50%, 07/05/00............................... A2 20,000 20,203,400
Conseco Inc.,
6.80%, 06/15/05............................... Baa3 13,000 11,801,400
8.70%, 11/15/26............................... Ba2 29,813 27,237,594
8.796%, 04/01/27.............................. Ba2 7,500 6,857,250
ContiFinancial Corp.,
7.50%, 03/15/02............................... Ba1 31,300 21,910,000
8.375%, 08/15/03.............................. Ba1 16,085 11,259,500
Donaldson Lufkin, & Jenrette Inc.,
5.625%, 02/15/16.............................. Baa1 5,480 5,415,117
Enterprise Rent-A-Car USA Finance Co., M.T.N.,
6.35%, 01/15/01............................... Baa3 11,200 11,226,992
6.95%, 03/01/04............................... Baa2 17,500 17,663,100
7.00%, 06/15/00............................... Baa3 23,000 23,098,210
7.50%, 06/15/03............................... Baa3 5,000 5,158,900
First Industrial, L.P.,
6.50%, 04/05/11............................... Baa2 9,000 8,864,730
General Motors Acceptance Corp., M.T.N.,
5.95%, 04/20/01............................... A2 30,300 30,542,400
Household Finance Corp.,
6.50%, 11/15/08............................... A2 72,000 74,520,000
Lehman Brothers Holdings, Inc.,
6.33%, 08/01/00............................... Baa1 17,200 17,317,476
6.40%, 08/30/00............................... Baa1 21,700 21,705,425
MCN Investment Corp.,
6.30%, 04/02/11............................... Baa2 8,250 8,194,725
Merrill Lynch, Pierce, Fenner & Smith, Inc.,
6.875%, 11/15/18.............................. Aa3 16,900 17,519,385
Morgan Stanley Dean Witter & Co., M.T.N.,
5.89%, 03/20/00............................... A1 20,000 20,140,800
6.09%, 03/09/11............................... A1 21,000 21,280,350
PaineWebber Group, Inc.,
7.015%, 02/10/04.............................. Baa1 6,000 6,288,840
7.625%, 10/15/08.............................. Baa1 5,000 5,387,250
PT Alatief Freeport Financial Co., Sr. Notes,
(Netherlands),
9.75%, 04/15/01 (b)/(c)....................... Ba2 8,950 6,444,000
Salomon, Inc.,
6.59%, 02/21/01............................... Baa1 9,750 9,937,200
6.75%, 02/15/03............................... Baa1 5,000 5,137,450
7.25%, 05/01/01............................... Baa1 8,625 8,933,430
Textron Financial Corp.,
6.05%, 03/16/09............................... Aaa 26,319 26,369,655
--------------
632,694,944
--------------
<CAPTION>
MOODY'S PRINCIPAL
LONG-TERM RATING AMOUNT VALUE
BONDS (CONTINUED) (UNAUDITED) (000) (NOTE 2)
------------ --------- --------------
<S> <C> <C> <C>
FOREST PRODUCTS -- 0.4%
Fort James Corp.,
6.234%, 03/15/11.............................. Baa3 $ 17,500 $ 17,664,675
--------------
INDUSTRIAL -- 2.5%
Compania Sud Americana de Vapores, S.A.,
(Chile),
7.375%, 12/08/03.............................. Baa 7,600 6,821,000
Scotia Pacific Co.,
7.11%, 01/20/14............................... A3 7,900 7,518,904
7.71%, 01/20/14............................... Baa2 23,800 21,321,944
Security Capital Group,
6.95%, 06/15/05............................... Baa1 4,500 4,297,500
U.S. Filter Corp.,
6.375%, 05/15/01.............................. Ba1 60,090 59,445,835
6.50%, 05/15/03............................... Ba1 20,000 19,481,800
--------------
118,886,983
--------------
LODGING -- 0.9%
ITT Corp.,
6.25%, 11/15/00............................... Ba1 23,703 22,867,232
6.75%, 11/15/03............................... Baa2 21,500 19,797,845
--------------
42,665,077
--------------
MEDIA -- 1.1%
Paramount Communications, Inc.,
7.50%, 01/15/02............................... Ba2 6,425 6,704,680
Time Warner, Inc.,
6.10%, 12/30/01............................... Ba1 27,650 27,926,500
8.11%, 08/15/06............................... Ba1 1,500 1,710,075
Viacom, Inc.,
7.75%, 06/01/05............................... Ba2 13,775 14,943,533
--------------
51,284,788
--------------
MISCELLANEOUS -- 0.1%
Tokai Pfd Capital,
9.98%, 12/29/49............................... A3 4,700 3,948,000
--------------
OIL & GAS -- 0.3%
B.J. Services Co.,
7.00%, 02/01/06............................... Ba1 4,000 4,139,880
Petro Canada,
7.00%, 11/15/28............................... A3 10,000 9,861,200
--------------
14,001,080
--------------
OIL & GAS SERVICES -- 3.7%
KN Energy, Inc.,
6.30%, 03/01/21............................... Baa2 27,550 27,627,416
6.45%, 11/30/01............................... Baa2 18,000 18,009,000
R&B Falcon Corp.
6.50%, 04/15/03............................... Ba1 44,350 40,283,992
6.75%, 04/15/05............................... Ba1 28,750 24,725,000
Seagull Energy Co.,
7.50%, 09/15/27............................... Ba1 8,000 7,165,360
Williams Companies, Inc.,
5.95%, 02/15/10............................... Baa2 59,000 59,064,900
--------------
176,875,668
--------------
REAL ESTATE INVESTMENT TRUST -- 3.5%
Camden Prop Trst,
7.23%, 10/30/00............................... Baa2 22,000 22,052,800
Colonial Realty,
7.00%, 07/14/07............................... Baa3 4,250 4,075,368
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
B7
<PAGE>
CONSERVATIVE BALANCED PORTFOLIO (CONTINUED)
DECEMBER 31, 1998
<TABLE>
<CAPTION>
MOODY'S PRINCIPAL
LONG-TERM RATING AMOUNT VALUE
BONDS (CONTINUED) (UNAUDITED) (000) (NOTE 2)
------------ --------- --------------
REAL ESTATE INVESTMENT TRUST (CONT'D.)
<S> <C> <C> <C>
EOP Operating, L.P.,
6.50%, 06/15/04............................... Baa1 $ 6,000 $ 5,900,400
6.625%, 02/15/05.............................. Baa 17,938 17,583,366
Equity Residential,
6.15%, 09/15/00............................... A3 45,000 44,703,000
ERP Operating, L.P.,
6.63%, 04/13/15............................... A3 22,400 22,103,424
Felcor Suite Hotels, Inc.,
7.625%, 10/01/07.............................. Ba1 8,000 7,620,000
Gables Realty Trust,
6.80%, 03/15/05............................... Baa2 7,500 7,157,175
Simon Debartolo Group, Inc.,
6.75%, 06/15/05............................... Baa1 17,500 16,969,750
6.75%, 07/15/04............................... Baa1 8,000 7,897,520
6.875%, 10/27/05.............................. Baa1 14,858 14,539,296
--------------
170,602,099
--------------
RETAIL -- 4.3%
Federated Department Stores, Inc.,
8.125%, 10/15/02.............................. Ba1 41,030 44,227,468
8.50%, 06/15/03............................... Ba1 32,400 35,736,552
Fred Meyer, Inc.,
7.15%, 03/01/03............................... Ba2 12,400 12,900,712
Rite Aid Corp.,
6.70%, 12/15/01............................... A3 5,000 5,128,000
Safeway Stores Inc.,
5.75%, 11/15/00............................... Baa2 6,000 6,012,000
6.05%, 11/15/03............................... Baa2 12,000 12,082,320
Saks Inc.,
7.25%, 12/01/04............................... Baa3 20,900 20,974,195
7.50%, 12/01/10............................... Baa3 22,500 22,498,425
8.25%, 11/15/08............................... Baa3 30,900 32,754,000
Sears Roebuk & Co.,
6.50%, 12/01/28............................... A2 16,000 15,704,480
--------------
208,018,152
--------------
TECHNOLOGY -- 0.7%
Time Warner Inc,
6.625%, 05/15/29.............................. Baa3 33,000 33,576,180
--------------
TELECOMMUNICATIONS -- 2.0%
360 Communication Co.,
7.125%, 03/01/03.............................. Ba2 22,550 23,863,538
7.60%, 04/01/09............................... Ba1 7,000 7,932,750
Sprint Cap Corp.,
5.70%, 11/15/03............................... Baa1 11,000 11,039,270
6.125%, 11/15/08.............................. Baa1 25,000 25,545,750
6.875%, 11/15/28.............................. Baa1 24,500 25,462,850
--------------
93,844,158
--------------
TOBACCO -- 1.3%
Philip Morris Cos., Inc.,
6.15%, 03/15/10............................... A2 40,000 40,332,000
RJR Nabisco, Inc.,
8.75%, 08/15/05............................... Baa3 6,900 6,962,584
9.25%, 08/15/13............................... Baa3 13,571 13,953,159
--------------
61,247,743
--------------
<CAPTION>
MOODY'S PRINCIPAL
LONG-TERM RATING AMOUNT VALUE
BONDS (CONTINUED) (UNAUDITED) (000) (NOTE 2)
------------ --------- --------------
<S> <C> <C> <C>
UTILITIES -- 0.5%
Commonwealth Edison Co.,
7.375%, 01/15/04.............................. Baa3 $ 14,000 $ 14,930,300
Niagara Mohawk Power,
7.375%, 08/01/03.............................. Ba2 10,000 10,569,100
--------------
25,499,400
--------------
WASTE MANAGEMENT -- 0.2%
USA Waste Service,
6.125%, 07/15/01.............................. Baa3 10,000 10,062,000
--------------
U.S. GOVERNMENT & AGENCY OBLIGATIONS -- 3.6%
United States Treasury Bond,
8.00%, 11/15/21............................... 55,300 73,937,759
United States Treasury Notes,
4.75%, 11/15/08............................... 8,600 8,667,166
5.50%, 08/15/28............................... 36,075 37,760,424
5.75%, 08/15/03............................... 3,900 4,072,458
5.875%, 11/15/05.............................. 2,200 2,346,784
6.375%, 08/15/27.............................. 27,000 31,032,990
7.50%, 02/15/05............................... 900 1,030,500
7.875%, 11/15/04.............................. 3,000 3,475,770
United States Treasury Strip,
6.50%, 05/15/05............................... 10,150 11,123,791
--------------
173,447,642
--------------
TOTAL LONG-TERM BONDS
(cost $2,694,909,653)....................................................
2,633,351,262
--------------
<CAPTION>
COMMON STOCKS -- 38.7% SHARES
------------
<S> <C> <C> <C>
AEROSPACE -- 0.6%
Aeroquip-Vickers, Inc........................... 4,400 131,725
AlliedSignal, Inc............................... 88,300 3,912,794
Boeing Co....................................... 156,500 5,105,812
GenCorp, Inc.................................... 98,400 2,453,850
General Dynamics Corp........................... 19,700 1,154,912
Goodrich (B.F.) Co.............................. 11,300 405,387
Litton Industries, Inc.(b)...................... 77,600 5,063,400
Lockheed Martin Corp............................ 30,400 2,576,400
Northrop Grumman Corp........................... 10,500 767,812
Parker-Hannifin Corp............................ 60,625 1,985,469
Raytheon Co. (Class "B" Stock).................. 52,900 2,816,925
United Technologies Corp........................ 36,500 3,969,375
--------------
30,343,861
--------------
AIRLINES -- 0.4%
AMR Corp.(b).................................... 183,600 10,901,250
Delta Air Lines, Inc............................ 23,400 1,216,800
Southwest Airlines Co........................... 51,900 1,164,506
US Airways Group, Inc.(b)....................... 128,200 6,666,400
--------------
19,948,956
--------------
APPAREL -- 0.1%
Fruit of the Loom, Inc. (Class "A" Stock)(b).... 84,100 1,161,631
Nike, Inc. (Class "B" Stock).................... 45,500 1,845,594
Phillips-Van Heusen Corp........................ 94,700 680,656
Reebok International Ltd........................ 8,800 130,900
--------------
3,818,781
--------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
B8
<PAGE>
CONSERVATIVE BALANCED PORTFOLIO (CONTINUED)
DECEMBER 31, 1998
<TABLE>
<CAPTION>
COMMON VALUE
STOCKS (CONTINUED) SHARES (NOTE 2)
------------- --------------
AUTOS - CARS & TRUCKS -- 1.0%
<S> <C> <C> <C>
Cummins Engine Co., Inc......................... 6,000 $ 213,000
DaimlerChrysler AG.............................. 80,071 7,691,820
Dana Corp....................................... 25,600 1,046,400
Ford Motor Co................................... 281,900 16,544,006
General Motors Corp............................. 213,000 15,242,813
Genuine Parts Co................................ 28,000 936,250
Johnson Controls, Inc........................... 13,200 778,800
MascoTech, Inc.................................. 94,400 1,616,600
Midas, Inc...................................... 22,100 687,862
Navistar International Corp.(b)................. 11,300 322,050
PACCAR, Inc..................................... 12,200 501,725
Titan International, Inc........................ 101,250 961,875
TRW, Inc........................................ 19,300 1,084,419
--------------
47,627,620
--------------
BANKS AND SAVINGS & LOANS -- 2.2%
Banc One Corp................................... 183,772 9,383,858
Bank of New York Co., Inc....................... 118,000 4,749,500
BankAmerica Corp................................ 271,761 16,339,630
BankBoston Corp................................. 45,600 1,775,550
Bankers Trust Corp.............................. 15,300 1,307,194
BB&T Corp....................................... 44,600 1,797,937
Chase Manhattan Corp............................ 133,600 9,093,150
Comerica, Inc................................... 24,700 1,684,231
First Union Corp................................ 151,500 9,213,094
Fleet Financial Group, Inc...................... 87,000 3,887,812
Golden West Financial Corp...................... 8,900 816,019
Huntington Bancshares, Inc...................... 33,000 992,062
KeyCorp......................................... 68,800 2,201,600
Mellon Bank Corp................................ 39,900 2,743,125
Mercantile Bancorporation, Inc.................. 22,700 1,047,037
Morgan (J.P.) & Co., Inc........................ 27,800 2,920,737
National City Corp.............................. 51,400 3,726,500
Northern Trust Corp............................. 17,500 1,527,969
PNC Bank Corp................................... 47,800 2,587,175
Providian Financial Corp........................ 22,350 1,676,250
Regions Financial Corp.......................... 30,000 1,209,375
Republic New York Corp.......................... 17,100 779,119
Summit Bancorp.................................. 27,600 1,205,775
Suntrust Banks, Inc............................. 33,000 2,524,500
Synovus Financial Corp.......................... 41,150 1,003,031
U.S. Bancorp.................................... 115,300 4,093,150
Union Planters Corp............................. 17,000 770,312
Wachovia Corp................................... 32,300 2,824,231
Wells Fargo & Co................................ 251,300 10,036,294
--------------
103,916,217
--------------
BUSINESS SERVICES -- 0.1%
Equifax, Inc.................................... 23,500 803,406
Omnicom Group, Inc.............................. 25,400 1,473,200
--------------
2,276,606
--------------
<CAPTION>
COMMON VALUE
STOCKS (CONTINUED) SHARES (NOTE 2)
------------- --------------
<S> <C> <C> <C>
CHEMICALS -- 0.7%
Air Products & Chemicals, Inc................... 36,900 $ 1,476,000
Dow Chemical Co................................. 35,500 3,228,281
Du Pont (E.I.) de Nemours & Co.................. 177,200 9,402,675
Eastman Chemical Co............................. 12,300 550,425
Engelhard Corp.................................. 22,600 440,700
Ferro Corp...................................... 134,900 3,507,400
FMC Corp.(b).................................... 5,400 302,400
Grace (W.R.) & Co............................... 11,600 181,975
Great Lakes Chemical Corp....................... 9,400 376,000
Hercules, Inc................................... 15,100 413,362
Millennium Chemicals, Inc.(b)................... 146,527 2,912,224
Monsanto Co..................................... 92,900 4,412,750
Morton International, Inc....................... 20,400 499,800
Nalco Chemical Co............................... 10,400 322,400
OM Group, Inc................................... 63,300 2,310,450
Praxair, Inc.................................... 24,700 870,675
Raychem Corp.................................... 13,300 429,756
Rohm & Haas Co.................................. 28,800 867,600
Sigma-Aldrich Corp.............................. 15,700 461,187
Union Carbide Corp.............................. 19,300 820,250
--------------
33,786,310
--------------
COMMERCIAL SERVICES -- 0.1%
Cendant Corp.(b)................................ 129,900 2,476,219
Deluxe Corp..................................... 12,700 464,344
Moore Corp. Ltd................................. 13,900 152,900
--------------
3,093,463
--------------
COMPUTER SERVICES -- 2.4%
3Com Corp.(b)................................... 55,500 2,487,094
Adobe Systems, Inc.............................. 10,800 504,900
America Online, Inc.(b)......................... 10,500 1,680,000
Autodesk, Inc................................... 7,300 311,619
Automatic Data Processing, Inc.................. 46,800 3,752,775
BMC Software, Inc.(b)........................... 31,000 1,381,437
Cabletron Systems, Inc.(b)...................... 24,800 207,700
Ceridian Corp.(b)............................... 11,300 788,881
Cisco Systems, Inc.(b).......................... 241,100 22,377,094
Computer Associates International, Inc.......... 85,500 3,644,437
Computer Sciences Corp.(b)...................... 24,400 1,572,275
Electronic Data Systems Corp.................... 76,000 3,819,000
EMC Corp.(b).................................... 77,700 6,604,500
First Data Corp................................. 67,000 2,123,062
Microsoft Corp.(b).............................. 383,300 53,158,919
Novell, Inc.(b)................................. 55,000 996,875
Oracle Corp.(b)................................. 154,100 6,645,562
Parametric Technology Corp.(b).................. 40,200 658,275
Peoplesoft, Inc................................. 30,000 568,125
Silicon Graphics, Inc.(b)....................... 29,400 378,525
Unisys Corp..................................... 39,100 1,346,506
--------------
115,007,561
--------------
COMPUTERS -- 1.5%
Apple Computer, Inc.(b)......................... 20,800 851,500
Compaq Computer Corp............................ 258,789 10,852,964
Data General Corp.(b)........................... 7,600 124,925
Dell Computer Corp.(b).......................... 196,300 14,366,706
Gateway 2000, Inc.(b)........................... 24,300 1,243,856
Hewlett-Packard Co.............................. 162,900 11,128,106
International Business Machines Corp............ 144,700 26,733,325
Seagate Technology, Inc.(b)..................... 37,900 1,146,475
Sun Microsystems, Inc.(b)....................... 59,100 5,060,437
--------------
71,508,294
--------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
B9
<PAGE>
CONSERVATIVE BALANCED PORTFOLIO (CONTINUED)
DECEMBER 31, 1998
<TABLE>
<CAPTION>
COMMON VALUE
STOCKS (CONTINUED) SHARES (NOTE 2)
------------- --------------
CONSTRUCTION -- 0.2%
<S> <C> <C> <C>
Centex Corp..................................... 9,300 $ 419,081
Fluor Corp...................................... 13,100 557,569
Foster Wheeler Corp............................. 6,400 84,400
Oakwood Homes Corp.............................. 139,300 2,115,619
Pulte Corp...................................... 6,600 183,562
Standard Pacific Corp........................... 154,000 2,175,250
Webb (Del E.) Corp.............................. 140,300 3,867,019
--------------
9,402,500
--------------
CONTAINERS -- 0.1%
Ball Corp....................................... 4,700 215,025
Bemis Co., Inc.................................. 8,300 314,881
Crown Cork & Seal Co., Inc...................... 20,100 619,331
Owens-Illinois, Inc.(b)......................... 81,500 2,495,937
Sealed Air Corp................................. 12,900 658,706
--------------
4,303,880
--------------
COSMETICS & SOAPS -- 0.7%
Alberto Culver Co. (Class "B" Stock)............ 8,900 237,519
Avon Products, Inc.............................. 41,400 1,831,950
Colgate-Palmolive Co............................ 46,300 4,300,112
Gillette Co..................................... 175,400 8,474,012
International Flavors & Fragrances, Inc......... 17,100 755,606
Procter & Gamble Co............................. 210,200 19,193,887
--------------
34,793,086
--------------
DIVERSIFIED CONSUMER PRODUCTS -- 0.1%
Eastman Kodak Co................................ 86,800 6,249,600
--------------
DIVERSIFIED OFFICE EQUIPMENT -- 0.2%
Avery Dennison Corp............................. 17,300 779,581
Pitney Bowes, Inc............................... 42,800 2,827,475
Xerox Corp...................................... 51,000 6,018,000
--------------
9,625,056
--------------
DIVERSIFIED OPERATIONS -- 1.1%
Fortune Brands, Inc............................. 26,900 850,712
General Electric Capital Corp................... 504,700 51,510,944
--------------
52,361,656
--------------
DRUGS AND MEDICAL SUPPLIES -- 3.8%
Abbott Laboratories............................. 239,600 11,740,400
Allergan, Inc................................... 10,200 660,450
ALZA Corp.(b)................................... 13,400 700,150
American Home Products Corp..................... 203,500 11,459,594
Amgen, Inc.(b).................................. 41,200 4,307,975
Bard (C.R.), Inc................................ 8,900 440,550
Bausch & Lomb, Inc.............................. 8,700 522,000
Baxter International, Inc....................... 43,900 2,823,319
Becton, Dickinson & Co.......................... 38,200 1,630,662
Biomet, Inc..................................... 17,500 704,375
Boston Scientific Corp.(b)...................... 61,000 1,635,562
Bristol-Myers Squibb Co......................... 154,300 20,647,269
Cardinal Health, Inc............................ 29,700 2,253,487
Guidant Corp.................................... 23,600 2,601,900
Johnson & Johnson............................... 210,600 17,664,075
Lilly (Eli) & Co................................ 171,700 15,259,837
Mallinckrodt, Inc............................... 11,400 351,262
Medtronic, Inc.................................. 73,400 5,449,950
Merck & Co., Inc................................ 184,800 27,292,650
Pfizer, Inc.,................................... 204,200 25,614,337
Pharmacia & Upjohn, Inc......................... 79,500 4,501,687
Schering-Plough Corp............................ 229,400 12,674,350
St. Jude Medical, Inc.(b)....................... 14,400 398,700
Warner-Lambert Co............................... 127,900 9,616,481
--------------
180,951,022
--------------
<CAPTION>
COMMON VALUE
STOCKS (CONTINUED) SHARES (NOTE 2)
------------- --------------
<S> <C> <C> <C>
ELECTRONICS -- 1.3%
Advanced Micro Devices, Inc.(b)................. 22,200 $ 642,412
AMP Inc......................................... 34,500 1,796,156
Applied Materials, Inc.(b)...................... 57,300 2,445,994
Belden, Inc..................................... 67,100 1,421,681
EG&G, Inc....................................... 7,100 197,469
Emerson Electric Co............................. 69,400 4,341,837
Grainger (W.W.), Inc............................ 15,600 649,350
Harris Corp..................................... 12,500 457,812
Honeywell, Inc.................................. 19,900 1,498,719
Intel Corp...................................... 260,600 30,897,387
KLA-Tencor Corp.(b)............................. 13,200 572,550
LSI Logic Corp.(b).............................. 22,200 357,975
Micron Technology, Inc.......................... 33,100 1,673,619
Motorola, Inc................................... 93,500 5,709,344
Perkin-Elmer Corp............................... 7,600 741,475
Rockwell International Corp..................... 31,500 1,529,719
Solectron Corp.................................. 5,000 464,687
Tektronix, Inc.................................. 7,900 237,494
Texas Instruments, Inc.......................... 61,100 5,227,869
Thomas & Betts Corp............................. 8,600 372,487
--------------
61,236,036
--------------
ENGINEERING & CONSTRUCTION
Giant Cement Holdings, Inc.(b).................. 58,100 1,437,975
--------------
ENVIRONMENTAL SERVICES
Browning-Ferris Industries, Inc................. 28,800 819,000
--------------
EXPLORATION & PRODUCTION
Apex Silver Mines Ltd........................... 82,200 678,150
--------------
FINANCIAL SERVICES -- 2.2%
American Express Co............................. 70,800 7,239,300
Associates First Capital Corp................... 108,544 4,599,552
Bear Stearns Companies, Inc..................... 16,500 616,687
Block (H.R.), Inc............................... 16,400 738,000
Capital One Financial Corp...................... 9,600 1,104,000
Citigroup, Inc.................................. 407,500 20,171,250
Countrywide Credit Industries, Inc.............. 17,000 853,187
Dun & Bradstreet Corp........................... 26,700 842,719
Federal Home Loan Mortgage Corp................. 105,700 6,811,044
Federal National Mortgage Assoc................. 161,900 11,980,600
Fifth Third Bancorp............................. 39,500 2,816,844
Franklin Resource, Inc.......................... 39,600 1,267,200
Household International, Inc.................... 75,752 3,001,673
Lehman Brothers Holdings, Inc................... 189,600 8,354,250
MBNA Corp....................................... 117,750 2,936,391
Merrill Lynch & Co., Inc........................ 112,300 7,496,025
Morgan Stanley Dean Witter & Co................. 146,790 10,422,090
Paychex, Inc.................................... 23,000 1,183,062
Schwab (Charles) Corp.(b)....................... 62,400 3,506,100
SLM Holding Corp................................ 25,000 1,200,000
State Street Corp............................... 25,200 1,752,975
Sunamerica, Inc................................. 30,600 2,482,425
Transamerica Corp............................... 9,800 1,131,900
Washington Mutual, Inc.......................... 89,178 3,405,485
--------------
105,912,759
--------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
B10
<PAGE>
CONSERVATIVE BALANCED PORTFOLIO (CONTINUED)
DECEMBER 31, 1998
<TABLE>
<CAPTION>
COMMON VALUE
STOCKS (CONTINUED) SHARES (NOTE 2)
------------- --------------
FOOD & BEVERAGES -- 1.7%
<S> <C> <C> <C>
Anheuser-Busch Companies, Inc................... 76,700 $ 5,033,437
Archer-Daniels-Midland Co....................... 93,975 1,615,195
Bestfoods....................................... 45,100 2,401,575
Brown-Forman Corp. (Class "B" Stock)............ 10,800 817,425
Campbell Soup Co................................ 71,500 3,932,500
Coca Cola Enterprises, Inc...................... 60,000 2,145,000
Coca-Cola Co.................................... 383,500 25,646,562
ConAgra, Inc.................................... 74,500 2,346,750
Coors (Adolph) Co. (Class "B" Stock)............ 5,800 327,337
General Mills, Inc.............................. 24,800 1,928,200
Heinz (H.J.) & Co............................... 57,200 3,238,950
Hershey Foods Corp.............................. 22,400 1,393,000
Kellogg Co...................................... 64,400 2,197,650
PepsiCo, Inc.................................... 235,600 9,644,875
Pioneer Hi-Bred International, Inc.............. 38,300 1,034,100
Quaker Oats Co.................................. 21,700 1,291,150
Ralston-Ralston Purina Group.................... 50,400 1,631,700
Sara Lee Corp................................... 148,200 4,177,388
Seagram Co., Ltd................................ 55,800 2,120,400
Sysco Corp...................................... 53,300 1,462,419
Whitman Corp.................................... 132,800 3,369,800
Wrigley (William) Jr. Co........................ 18,200 1,630,037
--------------
79,385,450
--------------
FOREST PRODUCTS -- 0.6%
Boise Cascade Corp.............................. 152,000 4,712,000
Champion International Corp..................... 109,700 4,442,850
Fort James Corp................................. 32,700 1,308,000
Georgia-Pacific Corp............................ 14,500 849,156
International Paper Co.......................... 47,300 2,119,631
Louisiana-Pacific Corp.......................... 189,700 3,473,881
Mead Corp....................................... 111,300 3,262,481
Potlatch Corp................................... 4,500 165,937
Temple-Inland, Inc.............................. 8,900 527,881
Union Camp Corp................................. 10,900 735,750
Westvaco Corp................................... 16,000 429,000
Weyerhaeuser Co................................. 31,300 1,590,431
Willamette Industries, Inc...................... 86,500 2,897,750
--------------
26,514,748
--------------
GAS PIPELINES -- 0.1%
Columbia Energy Group........................... 13,000 750,750
Consolidated Natural Gas Co..................... 15,000 810,000
Peoples Energy Corp............................. 5,500 219,312
Sempra Energy................................... 33,699 855,112
Sonat, Inc...................................... 17,200 465,475
Williams Companies, Inc......................... 64,400 2,008,475
--------------
5,109,124
--------------
HOSPITALS/ HEALTHCARE -- 0.3%
Columbia/HCA Healthcare Corp.................... 301,900 7,472,025
HBO & Co........................................ 69,000 1,979,437
Healthsouth Corp.(b)............................ 63,600 981,825
Humana, Inc.(b)................................. 25,700 457,781
IMS Health, Inc................................. 25,400 1,916,112
Manor Care, Inc................................. 12,000 352,500
Service Corp. International..................... 39,400 1,499,662
Shared Medical Systems Corp..................... 4,100 204,487
Tenet Healthcare Corp.(b)....................... 48,000 1,260,000
--------------
16,123,829
--------------
<CAPTION>
COMMON VALUE
STOCKS (CONTINUED) SHARES (NOTE 2)
------------- --------------
HOSPITALS/ HEALTHCARE (CONT'D.)
<S> <C> <C> <C>
(CONT'D.)
HOUSEHOLD PRODUCTS & PERSONAL CARE -- 0.2%
Clorox Co....................................... 16,200 $ 1,892,362
Kimberly-Clark Corp............................. 87,000 4,741,500
Leggett & Platt, Inc............................ 114,700 2,523,400
--------------
9,157,262
--------------
HOUSING RELATED -- 0.5%
Armstrong World Industries, Inc................. 6,400 386,000
Fleetwood Enterprises, Inc...................... 5,700 198,075
Hanson, PLC, ADR, (United Kingdom).............. 309,562 12,072,918
Kaufman & Broad Home Corp....................... 6,100 175,375
Lowe's Companies, Inc........................... 54,800 2,805,075
Masco Corp...................................... 51,800 1,489,250
Maytag Corp..................................... 14,900 927,525
Owens Corning................................... 106,900 3,788,269
Stanley Works................................... 14,000 388,500
Tupperware Corp................................. 9,600 157,800
Whirlpool Corp.................................. 11,700 647,887
--------------
23,036,674
--------------
INSURANCE -- 1.5%
Aetna, Inc...................................... 23,300 1,831,962
Allstate Corp................................... 131,300 5,071,462
American General Corp........................... 39,700 3,096,600
American International Group, Inc............... 163,500 15,798,187
Aon Corp........................................ 26,300 1,456,362
Berkley (W.R.) Corp............................. 42,400 1,444,250
Berkshire Hathaway, Inc. (Class "B" Stock)...... 452 1,061,025
Chubb Corp...................................... 26,700 1,732,162
CIGNA Corp...................................... 34,800 2,690,475
Cincinnati Financial Corp....................... 25,800 944,925
Conseco, Inc.................................... 49,021 1,498,204
Financial Security Assurance Holdings Ltd....... 34,000 1,844,500
Hartford Financial Services Group, Inc.......... 37,000 2,030,375
Jefferson-Pilot Corp............................ 16,600 1,245,000
Lincoln National Corp........................... 16,000 1,309,000
Loews Corp...................................... 47,000 4,617,750
Marsh & McLennan Companies, Inc................. 39,900 2,331,656
MBIA, Inc....................................... 15,300 1,003,106
MGIC Investment Corp............................ 17,900 712,644
Progressive Corp................................ 11,300 1,913,938
Provident Companies, Inc........................ 70,400 2,921,600
Reinsurance Group of America, Inc............... 115,550 8,088,500
SAFECO Corp..................................... 22,100 948,919
St. Paul Companies, Inc......................... 36,200 1,257,950
TIG Holdings, Inc............................... 85,500 1,330,594
Torchmark Corp.................................. 21,900 773,329
Trenwick Group, Inc............................. 64,850 2,115,731
United Healthcare Corp.......................... 29,500 1,270,344
UNUM Corp....................................... 21,700 1,266,737
--------------
73,607,287
--------------
INTRUMENTS-CONTROLS
Flowserve Corp.................................. 39,486 653,987
--------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
B11
<PAGE>
CONSERVATIVE BALANCED PORTFOLIO (CONTINUED)
DECEMBER 31, 1998
<TABLE>
<CAPTION>
COMMON VALUE
STOCKS (CONTINUED) SHARES (NOTE 2)
------------- --------------
LEISURE -- 0.3%
<S> <C> <C> <C>
Brunswick Corp.................................. 15,600 $ 386,100
Carnival Corp. (Class "A" Stock)................ 78,500 3,768,000
Disney (Walt) Co................................ 317,100 9,513,000
Harrah's Entertainment, Inc.(b)................. 15,800 247,862
Hilton Hotels Corp.............................. 39,200 749,700
King World Productions, Inc..................... 11,500 338,531
Marriott International, Inc. (Class "A"
Stock)........................................ 40,000 1,160,000
Mirage Resorts, Inc.(b)......................... 28,100 419,744
--------------
16,582,937
--------------
MACHINERY -- 0.3%
Briggs & Stratton Corp.......................... 3,900 194,513
Case Corp....................................... 98,800 2,155,075
Caterpillar, Inc................................ 58,300 2,681,800
Cooper Industries, Inc.......................... 19,000 906,063
Deere & Co...................................... 39,100 1,295,188
Dover Corp...................................... 34,800 1,274,550
DT Industries, Inc.............................. 35,800 563,850
Eaton Corp...................................... 11,200 791,700
Global Industrial Technologies, Inc.(b)......... 61,400 656,213
Harnischfeger Industries, Inc................... 7,500 76,406
Ingersoll-Rand Co............................... 25,900 1,215,681
Milacron, Inc................................... 6,300 121,275
Paxar Corp...................................... 229,925 2,054,955
Snap-On, Inc.................................... 9,500 330,719
Timken Co....................................... 9,900 186,863
--------------
14,504,851
--------------
MANUFACTURING -- 0.3%
Hussmann International, Inc..................... 66,400 1,286,500
Illinois Tool Works, Inc........................ 39,100 2,267,800
Smith (A.O.) Corp.,............................. 105,450 2,590,116
Tyco International Ltd.......................... 98,651 7,441,985
--------------
13,586,401
--------------
MEDIA -- 1.3%
CBS Corp.(b).................................... 304,000 9,956,000
Central Newspapers, Inc.(Class "A" Stock)....... 50,000 3,571,875
Clear Channel Communications, Inc.(b)........... 38,600 2,103,700
Comcast Corp. (Special Class "A" Stock)......... 56,700 3,327,581
Donnelley (R.R.) & Sons Co...................... 22,800 998,925
Dow Jones & Co., Inc............................ 15,100 726,688
Gannett Co., Inc................................ 44,400 2,938,725
Houghton Mifflin Co............................. 58,700 2,773,576
Interpublic Group of Companies, Inc............. 19,700 1,571,075
Knight-Ridder, Inc.............................. 70,600 3,609,425
Lee Enterprises, Inc............................ 50,900 1,603,350
McGraw-Hill, Inc................................ 15,500 1,579,063
Mediaone Group, Inc............................. 95,100 4,469,700
Meredith Corp................................... 8,300 314,363
New York Times Co. (Class "A" Stock)............ 30,000 1,040,625
Tele-Communications, Inc. (Series "A"
Stock)(b)..................................... 79,400 4,391,813
Time Warner, Inc................................ 183,000 11,357,438
Times Mirror Co. (Class "A" Stock).............. 13,900 778,400
Tribune Co...................................... 19,300 1,273,800
Viacom, Inc. (Class "B" Stock)(b)............... 55,300 4,092,200
--------------
62,478,322
--------------
<CAPTION>
COMMON VALUE
STOCKS (CONTINUED) SHARES (NOTE 2)
------------- --------------
<S> <C> <C> <C>
METALS-FERROUS -- 0.3%
AK Steel Holding Corp........................... 213,400 $ 5,014,900
Allegheny Teledyne, Inc......................... 30,700 627,431
Bethlehem Steel Corp.(b)........................ 241,500 2,022,563
LTV Corp........................................ 204,900 1,190,981
Material Sciences Corp.(b)...................... 96,900 823,650
National Steel Corp. (Class "B" Stock)(b)....... 42,200 300,675
Nucor Corp...................................... 13,800 596,850
USX-U.S. Steel Group, Inc....................... 80,900 1,860,700
Worthington Industries, Inc..................... 15,200 190,000
--------------
12,627,750
--------------
METALS-NON FERROUS -- 0.3%
Alcan Aluminum Ltd.............................. 35,600 963,425
Aluminum Company of America..................... 184,300 13,741,869
Cyprus Amax Minerals Co......................... 14,600 146,000
Inco Ltd........................................ 26,200 276,738
Reynolds Metals Co.............................. 11,600 611,175
--------------
15,739,207
--------------
MINERAL RESOURCES
ASARCO, Inc..................................... 6,300 94,894
Burlington Resources, Inc....................... 27,600 988,425
Homestake Mining Co............................. 33,100 304,106
Phelps Dodge Corp............................... 9,200 468,050
--------------
1,855,475
--------------
MISCELLANEOUS - BASIC INDUSTRY -- 0.4%
AES Corp........................................ 24,000 1,137,000
Coltec Industries, Inc.......................... 43,700 852,150
Crane Co........................................ 10,800 326,025
Danaher Corp.................................... 14,000 760,375
Donaldson Co., Inc.............................. 109,200 2,265,900
Ecolab, Inc..................................... 20,200 730,988
IDEX Corp....................................... 60,100 1,472,450
ITT Industries, Inc............................. 18,500 735,375
Laidlaw, Inc.................................... 51,500 518,219
Mark IV Industries, Inc......................... 86,542 1,125,046
Millipore Corp.................................. 6,800 193,375
NACCO Industries, Inc. (Class "A" Stock)........ 1,300 119,600
Pall Corp....................................... 19,500 493,594
PPG Industries, Inc............................. 27,900 1,625,175
Textron, Inc.................................... 25,700 1,951,594
Thermo Electron Corp.(b)........................ 24,900 421,744
Trinity Industries, Inc......................... 52,200 2,009,700
York International Corp......................... 27,000 1,101,938
--------------
17,840,248
--------------
MISCELLANEOUS - CONSUMER GROWTH/STAPLE -- 0.4%
American Greetings Corp. (Class "A" Stock)...... 11,400 468,113
Black & Decker Corp............................. 14,900 835,331
Corning, Inc.................................... 36,200 1,629,000
Jostens, Inc.................................... 6,100 159,744
Minnesota Mining & Manufacturing Co............. 64,000 4,552,000
Polaroid Corp................................... 7,000 130,813
Rubbermaid, Inc................................. 23,500 738,781
Unilever N.V., ADR, (United Kingdom)............ 100,300 8,318,631
--------------
16,832,413
--------------
MISCELLANEOUS - INDUSTRIAL
Tenneco, Inc.................................... 26,700 909,469
--------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
B12
<PAGE>
CONSERVATIVE BALANCED PORTFOLIO (CONTINUED)
DECEMBER 31, 1998
<TABLE>
<CAPTION>
COMMON VALUE
STOCKS (CONTINUED) SHARES (NOTE 2)
------------- --------------
OIL & GAS -- 2.0%
<S> <C> <C> <C>
Amerada Hess Corp............................... 14,400 $ 716,400
Amoco Corp...................................... 149,000 8,995,875
Anadarko Petroleum Corp......................... 18,800 580,450
Ashland, Inc.................................... 11,800 570,825
Atlantic Richfield Co........................... 50,200 3,275,550
Basin Exploration, Inc.(b)...................... 17,400 218,588
Cabot Oil & Gas Corp. (Class "A" Stock)......... 88,600 1,329,000
Chevron Corp.................................... 102,900 8,534,269
Coastal Corp.................................... 33,200 1,159,925
Eastern Enterprises............................. 3,200 140,000
Enron Oil & Gas Co.............................. 48,400 834,900
Exxon Corp...................................... 380,300 27,809,438
Kerr-McGee Corp................................. 7,500 286,875
Mobil Corp...................................... 122,800 10,698,950
Murphy Oil Corp................................. 27,600 1,138,500
NICOR, Inc...................................... 7,600 321,100
Noble Affiliates, Inc........................... 50,900 1,253,413
Phillips Petroleum Co........................... 41,200 1,756,150
Pioneer Natural Resources Co.................... 334,644 2,928,135
Royal Dutch Petroleum Co........................ 335,800 16,076,426
Seagull Energy Corp.(b)......................... 63,700 402,106
Sunoco, Inc..................................... 14,800 533,725
Texaco, Inc..................................... 85,800 4,536,675
Union Pacific Resources Group, Inc.............. 39,800 360,688
Unocal Corp..................................... 38,600 1,126,638
USX-Marathon Group.............................. 45,200 1,361,650
Western Gas Resources, Inc...................... 103,000 592,250
--------------
97,538,501
--------------
OIL & GAS EXPLORATION/PRODUCTION -- 0.2%
Elf Aquitaine SA, ADR, (France)................. 124,800 7,066,800
Occidental Petroleum Corp....................... 53,100 896,063
Oryx Energy Co.(b).............................. 140,000 1,881,250
--------------
9,844,113
--------------
OIL & GAS SERVICES -- 0.5%
Apache Corp..................................... 15,000 379,688
Baker Hughes, Inc............................... 49,450 874,647
Enron Corp...................................... 51,400 2,933,013
Halliburton Co.................................. 68,500 2,029,313
Helmerich & Payne, Inc.......................... 7,900 153,063
J. Ray McDermott, SA............................ 163,800 4,002,864
McDermott International, Inc.................... 431,600 10,655,125
ONEOK, Inc...................................... 4,900 177,013
Rowan Companies, Inc.(b)........................ 13,600 136,000
Schlumberger Ltd................................ 83,000 3,828,375
Wolverine Tube, Inc.(b)......................... 37,000 777,000
--------------
25,946,101
--------------
PRECIOUS METALS -- 0.1%
Barrick Gold Corp............................... 58,500 1,140,750
Battle Mountain Gold Co......................... 36,000 148,500
Freeport-McMoRan Copper & Gold, Inc. (Class
"B").......................................... 30,300 316,256
Newmont Mining Corp............................. 24,500 442,531
Placer Dome, Inc................................ 38,700 445,050
--------------
2,493,087
--------------
RAILROADS -- 0.2%
Burlington Northern Santa Fe Corp............... 73,500 2,480,625
CSX Corp........................................ 34,200 1,419,300
Norfolk Southern Corp........................... 59,100 1,872,731
Union Pacific Corp.............................. 38,700 1,743,919
--------------
7,516,575
--------------
<CAPTION>
COMMON VALUE
STOCKS (CONTINUED) SHARES (NOTE 2)
------------- --------------
<S> <C> <C> <C>
REAL ESTATE DEVELOPMENT -- 0.3%
Crescent Operating, Inc......................... 17,060 $ 81,035
Crescent Real Estate Equities Co................ 336,700 7,744,100
Equity Residential Properties Trust............. 14,400 582,300
Vornado Operating, Inc.(b)...................... 4,920 39,668
Vornado Realty Trust(b)......................... 185,200 6,250,500
--------------
14,697,603
--------------
RESTAURANTS -- 0.2%
Darden Restaurants, Inc......................... 18,200 327,600
McDonald's Corp................................. 107,900 8,267,838
Tricon Global Restaurants, Inc.(b).............. 23,800 1,192,975
Wendy's International, Inc...................... 20,700 451,519
--------------
10,239,932
--------------
RETAIL -- 2.6%
Albertson's, Inc................................ 38,500 2,451,969
American Stores Co.............................. 42,800 1,580,925
AutoZone, Inc.(b)............................... 23,800 783,913
Bombay Company, Inc.(b)......................... 139,200 774,300
Charming Shoppes, Inc.(b)....................... 811,300 3,498,731
Circuit City Stores, Inc........................ 15,500 774,031
Consolidated Stores Corp........................ 16,900 341,169
Costco Companies, Inc.(b)....................... 33,600 2,425,500
CVS Corp........................................ 59,800 3,289,000
Dayton-Hudson Corp.............................. 68,500 3,716,125
Designs, Inc.(b)................................ 51,900 100,556
Dillard's, Inc.................................. 49,100 1,393,213
Dollar General Corporation...................... 22,500 531,563
Federated Department Stores, Inc.(b)............ 32,900 1,433,206
Fred Meyer, Inc................................. 21,000 1,265,250
Great Atlantic & Pacific Tea Co., Inc........... 6,000 177,750
Harcourt General, Inc........................... 11,100 590,381
Home Depot, Inc................................. 229,100 14,018,056
IKON Office Solutions, Inc...................... 21,100 180,669
J.C. Penney Co., Inc............................ 39,100 1,832,813
Jan Bell Marketing, Inc.(b)..................... 73,200 471,225
Kmart Corp.(b).................................. 685,800 10,501,313
Kohl's Corp.(b)................................. 22,600 1,388,488
Kroger Co.(b)................................... 39,923 2,415,342
Liz Claiborne, Inc.............................. 10,500 331,406
Longs Drug Stores, Inc.......................... 6,100 228,750
May Department Stores Co........................ 36,200 2,185,575
Newell Co....................................... 24,900 1,027,125
Nordstrom, Inc.................................. 28,200 978,188
Pep Boys - Manny, Moe & Jack.................... 9,900 155,306
Rite Aid Corp................................... 40,400 2,002,325
Safeway, Inc.,(b)............................... 71,000 4,326,563
Sears, Roebuck & Co............................. 61,400 2,609,500
Sherwin-Williams Co............................. 27,100 796,063
Staples, Inc.(b)................................ 43,000 1,878,563
Supervalu, Inc.................................. 18,800 526,400
Tandy Corp...................................... 16,200 667,238
The Gap, Inc.................................... 93,000 5,231,250
The Limited, Inc................................ 247,100 7,196,788
TJX Companies, Inc.............................. 50,600 1,467,400
Toys 'R' Us, Inc.(b)............................ 131,700 2,222,439
Wal-Mart Stores, Inc............................ 347,700 28,315,819
Walgreen Co..................................... 77,600 4,544,450
Winn-Dixie Stores, Inc.......................... 23,300 1,045,588
--------------
123,672,224
--------------
RUBBER -- 0.1%
Cooper Tire & Rubber Co......................... 12,300 251,381
Goodyear Tire & Rubber Co....................... 63,600 3,207,825
--------------
3,459,206
--------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
B13
<PAGE>
CONSERVATIVE BALANCED PORTFOLIO (CONTINUED)
DECEMBER 31, 1998
<TABLE>
<CAPTION>
COMMON VALUE
STOCKS (CONTINUED) SHARES (NOTE 2)
------------- --------------
SEMICONDUCTORS
<S> <C> <C> <C>
National Semiconductor Corp.(b)................. 25,700 $ 346,950
--------------
TELECOMMUNICATIONS -- 3.5%
Airtouch Communications, Inc.(b)................ 88,400 6,375,850
Alcatel Alsthom, ADR, (France).................. 124,900 3,052,244
Alltel Corp..................................... 42,800 2,559,975
Ameritech Corp.................................. 171,400 10,862,476
Andrew Corp.(b)................................. 13,900 229,350
Ascend Communications, Inc.(b).................. 30,200 1,985,650
AT&T Corp....................................... 280,600 21,115,150
Bell Atlantic Corp.............................. 243,200 13,816,800
BellSouth Corp.................................. 305,200 15,221,850
Deutsche Telekom AG, ADR, (Germany)............. 45,000 1,473,750
Frontier Corp................................... 25,700 873,800
General Instrument Corp......................... 23,200 787,350
GTE Corp........................................ 150,000 10,115,625
Lucent Technologies, Inc........................ 205,400 22,594,000
MCI Worldcom, Inc............................... 280,414 20,119,705
Nextel Communications, Inc. (Class "A"
Stock)(b)..................................... 41,100 970,988
Northern Telecom Ltd............................ 102,140 5,119,768
SBC Communications, Inc......................... 302,100 16,200,113
Scientific-Atlanta, Inc......................... 12,400 282,875
Sprint Corp..................................... 112,950 6,717,269
Tellabs, Inc.(b)................................ 28,400 1,947,175
US West, Inc.................................... 77,860 5,031,703
--------------
167,453,466
--------------
TEXTILES
National Service Industries, Inc................ 6,700 254,600
Pillowtex Corp.(b).............................. 18,530 495,678
Russell Corp.................................... 5,700 115,781
Springs Industries, Inc......................... 3,200 132,600
Tultex Corp.(b)................................. 88,300 77,263
VF Corp......................................... 19,100 895,313
--------------
1,971,235
--------------
TOBACCO -- 0.7%
Philip Morris Co., Inc.......................... 479,600 25,658,600
RJR Nabisco Holdings Corp....................... 303,500 9,010,157
UST, Inc........................................ 28,900 1,007,888
--------------
35,676,645
--------------
TOYS
Hasbro, Inc..................................... 20,800 751,400
Mattel, Inc..................................... 45,551 1,039,132
--------------
1,790,532
--------------
TRUCKING/SHIPPING -- 0.1%
Federal Express Corp............................ 23,000 2,047,000
Ryder System, Inc............................... 12,000 312,000
Yellow Corp.(b)................................. 43,600 833,850
--------------
3,192,850
--------------
<CAPTION>
COMMON VALUE
STOCKS (CONTINUED) SHARES (NOTE 2)
------------- --------------
<S> <C> <C> <C>
UTILITY - ELECTRIC -- 0.8%
Ameren Corp..................................... 21,500 $ 917,781
American Electric Power Co., Inc................ 29,700 1,397,757
Baltimore Gas & Electric Co..................... 23,100 713,213
Carolina Power & Light Co....................... 23,500 1,105,969
Central & South West Corp....................... 33,200 910,925
CINergy Corp.................................... 24,700 849,063
Consolidated Edison, Inc........................ 36,800 1,945,800
Dominion Resources, Inc......................... 30,300 1,416,525
DTE Energy Co................................... 22,700 973,263
Duke Energy Corp................................ 56,400 3,613,125
Edison International............................ 56,700 1,580,513
Entergy Corp.................................... 38,200 1,188,975
FirstEnergy Corp.(b)............................ 36,100 1,175,506
FPL Group, Inc.................................. 28,500 1,756,313
GPU, Inc........................................ 19,900 879,331
Houston Industries, Inc......................... 44,300 1,423,138
New Century Energies, Inc....................... 15,000 731,250
Niagara Mohawk Power Corp.(b)................... 22,600 364,425
Northern States Power Co........................ 23,300 646,575
Pacific Gas & Electric Co....................... 59,700 1,880,550
PacifiCorp...................................... 46,400 977,300
PECO Energy Co.................................. 34,900 1,452,713
PP&L Resources, Inc............................. 26,000 724,750
Public Service Enterprise Group, Inc............ 36,300 1,452,000
Southern Co..................................... 108,100 3,141,656
Texas Utilities Co.............................. 41,600 1,942,200
Unicom Corp..................................... 33,900 1,307,269
--------------
36,467,885
--------------
WASTE MANAGEMENT -- 0.1%
Waste Management, Inc........................... 127,902 5,963,431
--------------
TOTAL COMMON STOCKS
(cost $1,566,786,221)..........................................
1,853,914,159
--------------
<CAPTION>
PREFERRED STOCKS -- 0.7%
<S> <C> <C> <C>
FINANCIAL SERVICES -- 0.6%
Central Hispano Capital Corp.................... 1,225,900 31,289,903
--------------
TELECOMMUNICATIONS -- 0.1%
Telecomunicacoes Brasileiras S.A., ADR.......... 55,900 4,063,231
--------------
TOTAL PREFERRED STOCKS
(cost $36,876,618).............................................
35,353,134
--------------
TOTAL LONG-TERM INVESTMENTS
(cost $4,298,572,492)..........................................
4,522,618,555
--------------
<CAPTION>
MOODY'S
SHORT-TERM RATING PRINCIPAL
INVESTMENTS -- 5.0% (UNAUDITED) AMOUNT (000)
------------- --------------
<S> <C> <C> <C>
CERTIFICATES OF DEPOSIT-YANKEE
Alltel Corp.,
5.75%, 01/04/99............................... NR $ 1,200 1,200,000
Avery Dennison,
5.00%, 01/04/99............................... NR 1,174 1,174,000
--------------
2,374,000
--------------
COMMERCIAL PAPER -- 0.3%
Barton Capital Corp,
5.35%, 01/04/99............................... P1 1,200 1,199,465
Campbell Soup Company,
4.80%, 01/04/99............................... P1 1,270 1,269,492
Countrywide Home Loan,
5.40%, 01/04/99............................... P1 1,200 1,199,460
CXC Inc.,
5.30%, 01/04/99............................... P1 1,200 1,199,470
Dover,
5.30%, 01/04/99............................... P1 1,200 1,199,470
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
B14
<PAGE>
CONSERVATIVE BALANCED PORTFOLIO (CONTINUED)
DECEMBER 31, 1998
<TABLE>
<CAPTION>
SHORT-TERM MOODY'S PRINCIPAL
INVESTMENTS RATING AMOUNT VALUE
(CONTINUED) (UNAUDITED) (000) (NOTE 2)
------------ --------- --------------
COMMERCIAL PAPER (CONT'D.)
<S> <C> <C> <C>
Duke Capital Corp,
5.05%, 01/04/99............................... P1 $ 1,200 $ 1,199,495
John Hancock Cap. Corp.,
5.25%, 01/07/99............................... P1 1,200 1,198,950
Novartis Finance Corp.,
5.25%, 01/04/99............................... P1 912 911,601
Pitney Bowes Credit Corp,
5.10%, 01/04/99............................... P1 1,206 1,205,488
Reed Elsevier, Inc.,
5.05%, 01/04/99............................... P1 1,200 1,199,495
SBC Communications,
5.00%, 01/04/99............................... P1 1,200 1,199,500
Sonoco Products,
5.35%, 01/04/99............................... P1 1,000 999,554
Triple-A One Plus Funding,,
5.30%, 01/04/99............................... P1 728 727,678
Xerox Capital Corp,
5.30%, 01/04/99............................... P1 1,200 1,199,470
--------------
15,908,588
--------------
OTHER CORPORATE OBLIGATIONS -- 2.3%
Advanta Corp., M.T.N.,
6.99%, 10/18/99............................... Ba3 15,000 14,448,000
7.25%, 08/16/99............................... Ba2 3,000 2,976,150
AT&T Capital Corp., M.T.N.,
6.65%, 04/30/99............................... Baa3 32,000 32,104,319
Comdisco, Inc.,
6.11%, 08/04/99............................... Baa1 12,500 12,541,375
Enterprise Rent-A-Car USA Finance Co., M.T.N.,
8.75%, 12/15/99............................... Baa3 5,000 5,120,350
Federal Express Corp.,
10.05%, 06/15/99.............................. Baa3 500 510,090
First Union Corp.,
9.45%, 06/15/99............................... A3 4,000 4,071,961
Lehman Brothers Holdings, Inc.,
6.71%, 10/12/99............................... Baa1 6,000 6,049,020
Okobank, (Finland),
6.793%, 1/14/99............................... A3 12,500 12,500,000
SunAmerica, Inc.,
6.20%, 10/31/99............................... Baa1 9,000 9,068,850
Tele-Communications, Inc.,
6.375%, 09/15/99.............................. Ba1 8,000 8,056,240
--------------
107,446,355
--------------
<CAPTION>
SHORT-TERM MOODY'S PRINCIPAL
INVESTMENTS RATING AMOUNT VALUE
(CONTINUED) (UNAUDITED) (000) (NOTE 2)
------------ --------- --------------
<S> <C> <C> <C>
REPURCHASE AGREEMENT -- 2.3%
Joint Repurchase Agreement Account,
4.693%, 01/04/99 (Note 5)..................... $ 109,421 $ 109,421,000
--------------
U. S. GOVERNMENT OBLIGATION -- 0.1%
United States Treasury Bills,
4.32%, 03/18/99 (a)........................... 100 99,088
4.36%, 03/18/99 (a)........................... 4,650 4,607,199
--------------
4,706,287
--------------
TOTAL SHORT-TERM INVESTMENTS
(cost $197,485,955)......................................................
239,856,230
--------------
TOTAL INVESTMENTS -- 99.3%
(cost $4,496,058,447; Note 6)............................................
4,762,474,785
VARIATION MARGIN ON OPEN FUTURES CONTRACTS (D).............................
85,990
OTHER ASSETS IN EXCESS OF LIABILITIES -- 0.7%..............................
33,398,995
--------------
TOTAL NET ASSETS -- 100.0%.................................................
$4,795,959,770
--------------
--------------
</TABLE>
The following abbreviations are used in portfolio descriptions:
AG Aktiengesellschaft (German Stock Company)
ADR American Depository Receipt
L.P. Limited Partnership
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) Non-income producing security.
(c) Issue in default.
(d) Open futures contracts as of December 31, 1998 are as follows:
<TABLE>
<CAPTION>
VALUE AT VALUE AT
NUMBER OF EXPIRATION TRADE DECEMBER APPRECIATION/
CONTRACTS TYPE DATE DATE 31, 1998 DEPRECIATION
<C> <S> <C> <C> <C> <C>
Long Position:
307 U.S. T-Bond Mar 99 $39,190,000 3$9,228,844 $ 38,844
S&P 500
148 Index Mar 99 $43,681,225 4$6,083,500 $2,402,275
U.S.
110 Treasury 5yr Mar 99 $12,429,218 1$2,467,812 $ 38,594
-----------
$2,479,713
-----------
-----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
B15
<PAGE>
FLEXIBLE MANAGED PORTFOLIO
DECEMBER 31, 1998
<TABLE>
<CAPTION>
LONG-TERM INVESTMENTS -- 88.7%
VALUE
COMMON STOCKS -- 52.8% SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
AEROSPACE -- 1.0%
Aeroquip-Vickers, Inc........................... 4,500 $ 134,719
AlliedSignal, Inc............................... 91,400 4,050,162
Boeing Co....................................... 162,100 5,288,512
GenCorp, Inc.................................... 403,900 10,072,256
General Dynamics Corp........................... 20,400 1,195,950
Goodrich (B.F.) Co.............................. 11,600 416,150
Litton Industries, Inc. (a)..................... 306,000 19,966,500
Lockheed Martin Corp............................ 31,500 2,669,625
Northrop Grumman Corp........................... 10,800 789,750
Raytheon Co. (Class "B" Stock).................. 55,000 2,928,750
United Technologies Corp........................ 37,700 4,099,875
--------------
51,612,249
--------------
AIRLINES -- 1.2%
AMR Corp. (a)................................... 646,300 38,374,062
Delta Air Lines, Inc............................ 24,200 1,258,400
Southwest Airlines Co........................... 53,700 1,204,894
US Airways Group, Inc. (a)...................... 479,200 24,918,400
--------------
65,755,756
--------------
APPAREL -- 0.1%
Fruit of the Loom, Inc. (Class "A" Stock) (a)... 310,300 4,286,018
Nike, Inc. (Class "B" Stock).................... 47,200 1,914,550
Reebok International Ltd........................ 9,100 135,362
--------------
6,335,930
--------------
AUTOS - CARS & TRUCKS -- 2.2%
Cummins Engine Co., Inc......................... 6,200 220,100
DaimlerChrysler AG.............................. 327,975 31,506,098
Dana Corp....................................... 26,550 1,085,231
Ford Motor Co................................... 478,700 28,093,707
General Motors Corp............................. 553,900 39,638,469
Genuine Parts Co................................ 29,000 969,687
Johnson Controls, Inc........................... 13,700 808,300
MascoTech, Inc.................................. 388,000 6,644,500
Midas, Inc...................................... 90,866 2,828,204
Navistar International Corp. (a)................ 11,700 333,450
PACCAR, Inc..................................... 12,600 518,175
Titan International, Inc........................ 415,700 3,949,150
TRW, Inc........................................ 19,900 1,118,131
--------------
117,713,202
--------------
BANKS AND SAVINGS & LOANS -- 2.0%
Banc One Corp................................... 190,264 9,715,355
Bank of New York Co., Inc....................... 122,000 4,910,500
BankAmerica Corp................................ 281,141 16,903,603
BankBoston Corp................................. 47,200 1,837,850
Bankers Trust Corp.............................. 15,900 1,358,456
BB&T Corp....................................... 46,200 1,862,437
Chase Manhattan Corp............................ 136,700 9,304,144
Comerica, Inc................................... 25,500 1,738,781
First Union Corp................................ 156,800 9,535,400
Fleet Financial Group, Inc...................... 90,000 4,021,875
Golden West Financial Corp...................... 9,200 843,525
Huntington Bancshares, Inc...................... 34,120 1,025,732
KeyCorp......................................... 71,200 2,278,400
Mellon Bank Corp................................ 41,300 2,839,375
Mercantile Bancorporation, Inc.................. 23,800 1,097,775
Morgan (J.P.) & Co., Inc........................ 28,800 3,025,800
National City Corp.............................. 53,200 3,857,000
Northern Trust Corp............................. 18,100 1,580,356
PNC Bank Corp................................... 49,500 2,679,187
<CAPTION>
VALUE
COMMON STOCKS (CONTINUED) SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
Providian Financial Corp........................ 23,100 $ 1,732,500
Regions Financial Corp.......................... 32,000 1,290,000
Republic New York Corp.......................... 17,700 806,456
Summit Bancorp.................................. 28,500 1,245,094
Suntrust Banks, Inc............................. 34,200 2,616,300
Synovus Financial Corp.......................... 42,500 1,035,937
U.S. Bancorp.................................... 119,400 4,238,700
Union Planters Corp............................. 18,000 815,625
Wachovia Corp................................... 33,400 2,920,412
Wells Fargo & Co................................ 259,400 10,359,787
--------------
107,476,362
--------------
BUSINESS SERVICES
Equifax, Inc.................................... 24,400 834,175
Omnicom Group, Inc.............................. 27,300 1,583,400
--------------
2,417,575
--------------
CHEMICALS -- 1.1%
Air Products & Chemicals, Inc................... 38,100 1,524,000
Dow Chemical Co................................. 36,800 3,346,500
Du Pont (E.I.) de Nemours & Co.................. 183,500 9,736,969
Eastman Chemical Co............................. 12,700 568,325
Engelhard Corp.................................. 23,400 456,300
Ferro Corp...................................... 553,650 14,394,900
FMC Corp. (a)................................... 5,600 313,600
Grace (W.R.) & Co............................... 12,000 188,250
Great Lakes Chemical Corp....................... 9,700 388,000
Hercules, Inc................................... 15,700 429,787
Millennium Chemicals, Inc. (a).................. 601,600 11,956,800
Monsanto Co..................................... 96,200 4,569,500
Morton International, Inc....................... 21,200 519,400
Nalco Chemical Co............................... 10,800 334,800
OM Group, Inc................................... 260,300 9,500,950
Praxair, Inc.................................... 25,600 902,400
Raychem Corp.................................... 13,800 445,912
Rohm & Haas Co.................................. 29,700 894,712
Sigma-Aldrich Corp.............................. 16,300 478,812
Union Carbide Corp.............................. 20,800 884,000
--------------
61,833,917
--------------
COMMERCIAL SERVICES -- 0.1%
Cendant Corp. (a)............................... 136,500 2,602,031
Deluxe Corp..................................... 13,200 482,625
Moore Corp. Ltd................................. 14,300 157,300
--------------
3,241,956
--------------
COMPUTER SERVICES -- 2.2%
3Com Corp. (a).................................. 57,500 2,576,719
Adobe Systems, Inc.............................. 11,200 523,600
America Online, Inc. (a)........................ 10,900 1,744,000
Autodesk, Inc................................... 7,600 324,425
Automatic Data Processing, Inc.................. 48,500 3,889,094
BMC Software, Inc. (a).......................... 32,600 1,452,737
Cabletron Systems, Inc. (a)..................... 25,600 214,400
Ceridian Corp. (a).............................. 11,700 816,806
Cisco Systems, Inc. (a)......................... 248,500 23,063,906
Computer Associates International, Inc.......... 88,600 3,776,575
Computer Sciences Corp. (a)..................... 25,300 1,630,269
Electronic Data Systems Corp.................... 78,000 3,919,500
EMC Corp. (a)................................... 80,400 6,834,000
First Data Corp................................. 69,400 2,199,112
Microsoft Corp. (a)............................. 396,700 55,017,331
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
B16
<PAGE>
FLEXIBLE MANAGED PORTFOLIO (CONTINUED)
DECEMBER 31, 1998
<TABLE>
<CAPTION>
VALUE
COMMON STOCKS (CONTINUED) SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
Novell, Inc. (a)................................ 56,900 $ 1,031,312
Oracle Corp. (a)................................ 159,500 6,878,437
Parametric Technology Corp. (a)................. 43,200 707,400
Peoplesoft, Inc................................. 30,000 568,125
Silicon Graphics, Inc. (a)...................... 30,400 391,400
Unisys Corp..................................... 40,400 1,391,275
--------------
118,950,423
--------------
COMPUTERS -- 1.4%
Apple Computer, Inc. (a)........................ 21,600 884,250
Compaq Computer Corp............................ 267,961 11,237,614
Data General Corp. (a).......................... 7,900 129,856
Dell Computer Corp. (a)......................... 203,200 14,871,700
Gateway 2000, Inc. (a).......................... 25,100 1,284,806
Hewlett-Packard Co.............................. 168,600 11,517,487
International Business Machines Corp............ 149,800 27,675,550
Seagate Technology, Inc. (a).................... 39,300 1,188,825
Sun Microsystems, Inc. (a)...................... 61,200 5,240,250
--------------
74,030,338
--------------
CONSTRUCTION -- 0.6%
Centex Corp..................................... 9,600 432,600
Fluor Corp...................................... 13,600 578,850
Foster Wheeler Corp............................. 6,600 87,037
Oakwood Homes Corp.............................. 572,000 8,687,250
Pulte Corp...................................... 6,900 191,906
Standard Pacific Corp........................... 632,400 8,932,650
Webb (Del E.) Corp.............................. 576,500 15,889,781
--------------
34,800,074
--------------
CONTAINERS -- 0.2%
Ball Corp....................................... 4,900 224,175
Bemis Co., Inc.................................. 8,600 326,262
Crown Cork & Seal Co., Inc...................... 20,800 640,900
Owens-Illinois, Inc. (a)........................ 260,800 7,987,000
Sealed Air Corp................................. 13,400 684,237
--------------
9,862,574
--------------
COSMETICS & SOAPS -- 0.7%
Alberto Culver Co. (Class "B" Stock)............ 9,200 245,525
Avon Products, Inc.............................. 42,800 1,893,900
Colgate-Palmolive Co............................ 47,900 4,448,712
Gillette Co..................................... 181,600 8,773,550
International Flavors & Fragrances, Inc......... 17,700 782,119
Procter & Gamble Co............................. 216,700 19,787,419
--------------
35,931,225
--------------
DIVERSIFIED OFFICE EQUIPMENT -- 0.2%
Avery Dennison Corp............................. 17,300 779,581
Pitney Bowes, Inc............................... 44,400 2,933,175
Xerox Corp...................................... 52,800 6,230,400
--------------
9,943,156
--------------
DIVERSIFIED OPERATIONS -- 1.3%
Fortune Brands, Inc............................. 27,800 879,175
General Electric Corp........................... 522,400 53,317,450
Loews Corp...................................... 183,800 18,058,350
--------------
72,254,975
--------------
DRUGS AND MEDICAL SUPPLIES -- 3.5%
Abbott Laboratories............................. 248,000 $ 12,152,000
Allergan, Inc................................... 10,600 686,350
<CAPTION>
VALUE
COMMON STOCKS (CONTINUED) SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
ALZA Corp. (a).................................. 13,900 726,275
American Home Products Corp..................... 210,700 11,865,044
Amgen, Inc. (a)................................. 41,700 4,360,256
Bard (C.R.), Inc................................ 9,200 455,400
Bausch & Lomb, Inc.............................. 9,000 540,000
Baxter International, Inc....................... 45,400 2,919,787
Becton, Dickinson & Co.......................... 39,700 1,694,694
Biomet, Inc..................................... 18,100 728,525
Boston Scientific Corp. (a)..................... 63,200 1,694,550
Bristol-Myers Squibb Co......................... 159,700 21,369,856
Cardinal Health, Inc............................ 32,250 2,446,969
Guidant Corp.................................... 24,400 2,690,100
Johnson & Johnson............................... 217,200 18,217,650
Lilly (Eli) & Co................................ 176,900 15,721,987
Mallinckrodt, Inc............................... 11,800 363,587
Medtronic, Inc.................................. 75,900 5,635,575
Merck & Co., Inc................................ 191,200 28,237,850
Pfizer, Inc..................................... 210,500 26,404,594
Pharmacia & Upjohn, Inc......................... 82,300 4,660,237
Schering-Plough Corp............................ 237,400 13,116,350
St. Jude Medical, Inc. (a)...................... 14,900 412,544
Warner-Lambert Co............................... 132,400 9,954,825
--------------
187,055,005
--------------
ELECTRONICS -- 1.3%
Advanced Micro Devices, Inc. (a)................ 23,000 665,562
AMP Inc......................................... 35,700 1,858,631
Applied Materials, Inc. (a)..................... 59,400 2,535,637
Belden, Inc..................................... 275,600 5,839,275
EG&G, Inc....................................... 7,300 203,031
Emerson Electric Co............................. 71,900 4,498,244
Grainger (W.W.), Inc............................ 16,100 670,162
Harris Corp..................................... 13,000 476,125
Honeywell, Inc.................................. 20,600 1,551,437
Intel Corp...................................... 269,700 31,976,306
KLA-Tencor Corp. (a)............................ 13,700 594,237
LSI Logic Corp. (a)............................. 23,000 370,875
Micron Technology, Inc.......................... 34,300 1,734,294
Motorola, Inc................................... 96,800 5,910,850
National Semiconductor Corp. (a)................ 26,700 360,450
Perkin-Elmer Corp............................... 7,900 770,744
Rockwell International Corp..................... 32,500 1,578,281
Solectron Corp.................................. 5,200 483,275
Tektronix, Inc.................................. 8,200 246,512
Texas Instruments, Inc.......................... 63,200 5,407,550
Thomas & Betts Corp............................. 9,000 389,812
--------------
68,121,290
--------------
ENGINEERING & CONSTRUCTION -- 0.1%
Giant Cement Holding, Inc. (a).................. 244,900 6,061,275
--------------
ENVIRONMENTAL SERVICES -- 0.2%
Browning-Ferris Industries, Inc................. 29,800 847,437
Waste Management, Inc........................... 256,562 11,962,203
--------------
12,809,640
--------------
FINANCIAL SERVICES -- 3.0%
American Express Co............................. 73,300 7,494,925
Associates First Capital Corp................... 112,390 4,762,526
Bear Stearns Companies, Inc..................... 17,500 654,062
Block (H.R.), Inc............................... 17,000 765,000
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
B17
<PAGE>
FLEXIBLE MANAGED PORTFOLIO (CONTINUED)
DECEMBER 31, 1998
<TABLE>
<CAPTION>
VALUE
COMMON STOCKS (CONTINUED) SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
Capital One Financial Corp...................... 10,200 $ 1,173,000
Citigroup, Inc.................................. 584,451 28,930,324
Countrywide Credit Industries, Inc.............. 17,600 883,300
Dun & Bradstreet Corp........................... 27,600 871,125
Federal Home Loan Mortgage Corp................. 109,600 7,062,350
Federal National Mortgage Association........... 167,500 12,395,000
Fifth Third Bancorp............................. 41,100 2,930,944
Franklin Resources, Inc......................... 41,000 1,312,000
Household International, Inc.................... 78,392 3,106,283
Lehman Brothers Holdings, Inc................... 724,900 31,940,906
MBNA Corp....................................... 121,800 3,037,387
Merrill Lynch & Co., Inc........................ 294,000 19,624,500
Morgan Stanley Dean Witter & Co................. 317,795 22,563,445
Paychex, Inc.................................... 23,000 1,183,062
Schwab (Charles) Corp. (a)...................... 64,500 3,624,094
SLM Holding Corp................................ 26,000 1,248,000
State Street Corp............................... 26,100 1,815,581
SunAmerica, Inc................................. 31,700 2,571,662
Transamerica Corp............................... 10,200 1,178,100
Washington Mutual, Inc.......................... 92,336 3,526,081
--------------
164,653,657
--------------
FOOD & BEVERAGES -- 2.3%
Anheuser-Busch Companies, Inc................... 79,400 5,210,625
Archer-Daniels-Midland Co....................... 101,115 1,737,914
Bestfoods....................................... 46,700 2,486,775
Brown-Forman Corp. (Class "B" Stock)............ 11,200 847,700
Campbell Soup Co................................ 74,000 4,070,000
Coca-Cola Co.................................... 395,900 26,475,812
Coca-Cola Enterprises, Inc...................... 62,000 2,216,500
ConAgra, Inc.................................... 77,100 2,428,650
Coors (Adolph) Co. (Class "B" Stock)............ 6,000 338,625
General Mills, Inc.............................. 25,700 1,998,175
Heinz (H.J.) & Co............................... 59,300 3,357,862
Hershey Foods Corp.............................. 23,200 1,442,750
Kellogg Co...................................... 66,600 2,272,725
PepsiCo, Inc.................................... 240,300 9,837,281
Pioneer Hi-Bred International, Inc.............. 39,600 1,069,200
Quaker Oats Co.................................. 22,400 1,332,800
Ralston-Ralston Purina Group.................... 52,000 1,683,500
RJR Nabisco Holdings Corp....................... 1,124,200 33,374,688
Sara Lee Corp................................... 149,600 4,216,850
Seagram Co., Ltd................................ 57,800 2,196,400
Sysco Corp...................................... 55,200 1,514,550
Whitman Corp.................................... 545,200 13,834,450
Wrigley (William) Jr. Co........................ 18,800 1,683,775
--------------
125,627,607
--------------
FOREST PRODUCTS -- 1.5%
Boise Cascade Corp.............................. 669,400 20,751,400
Champion International Corp..................... 404,400 16,378,200
Fort James Corp................................. 35,200 1,408,000
Georgia-Pacific Corp............................ 15,000 878,437
International Paper Co.......................... 49,000 2,195,812
Louisiana-Pacific Corp.......................... 706,600 12,939,612
Mead Corp....................................... 406,800 11,924,325
Potlatch Corp................................... 4,700 173,312
Temple-Inland, Inc.............................. 9,100 539,744
Union Camp Corp................................. 11,300 $ 762,750
<CAPTION>
VALUE
COMMON STOCKS (CONTINUED) SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
Westvaco Corp................................... 16,600 445,087
Weyerhaeuser Co................................. 32,300 1,641,244
Willamette Industries, Inc...................... 302,500 10,133,750
--------------
80,171,673
--------------
GAS PIPELINES -- 0.1%
Columbia Energy Group........................... 13,500 779,625
Consolidated Natural Gas Co..................... 15,500 837,000
Peoples Energy Corp............................. 5,700 227,287
Sempra Energy................................... 37,053 940,220
Sonat, Inc...................................... 17,800 481,712
Williams Companies, Inc......................... 66,600 2,077,087
--------------
5,342,931
--------------
HOSPITALS/HOSPITAL MANAGEMENT -- 0.6%
Columbia/HCA Healthcare Corp.................... 911,500 22,559,625
HBO & Co........................................ 71,300 2,045,419
Healthsouth Corp. (a)........................... 65,700 1,014,244
Humana, Inc. (a)................................ 26,600 473,812
IMS Health, Inc................................. 26,300 1,984,006
Manor Care, Inc................................. 13,300 390,687
Service Corp. International..................... 40,800 1,552,950
Shared Medical Systems Corp..................... 4,200 209,475
Tenet Healthcare Corp. (a)...................... 49,700 1,304,625
--------------
31,534,843
--------------
HOUSEHOLD PRODUCTS & PERSONAL CARE -- 0.3%
Clorox Co....................................... 16,700 1,950,769
Kimberly-Clark Corp............................. 90,100 4,910,450
Leggett & Platt, Inc............................ 470,800 10,357,600
--------------
17,218,819
--------------
HOUSING RELATED -- 1.3%
Armstrong World Industries, Inc................. 6,500 392,031
Fleetwood Enterprises, Inc...................... 6,100 211,975
Hanson, PLC, ADR, (United Kingdom).............. 1,221,100 47,622,900
Kaufman & Broad Home Corp....................... 6,400 184,000
Lowe's Companies, Inc........................... 56,800 2,907,450
Masco Corp...................................... 53,500 1,538,125
Maytag Corp..................................... 15,400 958,650
Owens Corning................................... 413,400 14,649,862
Stanley Works................................... 14,400 399,600
Tupperware Corp................................. 9,900 162,731
Whirlpool Corp.................................. 12,100 670,037
--------------
69,697,361
--------------
INSURANCE -- 2.3%
Aetna, Inc...................................... 24,100 1,894,862
Allstate Corp................................... 135,800 5,245,275
American General Corp........................... 41,100 3,205,800
American International Group, Inc............... 169,200 16,348,950
Aon Corp........................................ 27,100 1,500,662
Berkley (W.R.) Corp............................. 175,850 5,989,891
Berkshire Hathaway, Inc. (Class "B" Stock)...... 494 1,159,725
Chubb Corp...................................... 27,600 1,790,550
CIGNA Corp...................................... 36,000 2,783,250
Cincinnati Financial Corp....................... 26,700 977,887
Conseco, Inc.................................... 50,687 1,549,121
Financial Security Assurance Holdings Ltd....... 140,100 7,600,425
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
B18
<PAGE>
FLEXIBLE MANAGED PORTFOLIO (CONTINUED)
DECEMBER 31, 1998
<TABLE>
<CAPTION>
VALUE
COMMON STOCKS (CONTINUED) SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
Hartford Financial Services Group, Inc.......... 38,300 $ 2,101,712
Jefferson-Pilot Corp............................ 17,200 1,290,000
Lincoln National Corp........................... 16,600 1,358,087
Marsh & McLennan Companies, Inc................. 41,300 2,413,469
MBIA, Inc....................................... 15,900 1,042,444
Magic Investment Corp........................... 18,500 736,531
Progressive Corp................................ 11,700 1,981,687
Provident Companies, Inc........................ 238,400 9,893,600
Reinsurance Group of America, Inc............... 474,600 33,222,000
SAFECO Corp..................................... 22,900 983,269
St. Paul Companies, Inc......................... 37,400 1,299,650
TIG Holdings, Inc............................... 351,200 5,465,550
Torchmark Corp.................................. 22,700 801,594
Trenwick Group, Inc............................. 273,300 8,916,413
United Healthcare Corp.......................... 30,500 1,313,406
UNUM Corp....................................... 22,500 1,313,438
--------------
124,179,248
--------------
INTRUMENTS - CONTROLS -- 0.1%
Parker-Hannifin Corp............................ 194,900 6,382,975
--------------
LEISURE -- 0.3%
Brunswick Corp.................................. 16,200 400,950
Carnival Corp. (Class "A" Stock)................ 78,500 3,768,000
Disney (Walt) Co................................ 328,300 9,849,000
Harrah's Entertainment, Inc. (a)................ 16,400 257,275
Hilton Hotels Corp.............................. 40,600 776,475
King World Productions, Inc..................... 11,900 350,306
Marriott International, Inc. (Class "A"
Stock)........................................ 41,400 1,200,600
Mirage Resorts, Inc. (a)........................ 29,100 434,681
--------------
17,037,287
--------------
MACHINERY -- 0.6%
Briggs & Stratton Corp.......................... 4,000 199,500
Case Corp....................................... 369,200 8,053,175
Caterpillar, Inc................................ 60,400 2,778,400
Cooper Industries, Inc.......................... 19,600 934,675
Deere & Co...................................... 40,500 1,341,563
Dover Corp...................................... 36,100 1,322,163
DT Industries, Inc.............................. 146,800 2,312,100
Eaton Corp...................................... 11,600 819,975
Global Industrial Technologies, Inc. (a)........ 258,100 2,758,444
Harnischfeger Industries, Inc................... 7,800 79,463
Ingersoll-Rand Co............................... 26,900 1,262,619
Milacron, Inc................................... 6,400 123,200
Paxar Corp...................................... 954,575 8,531,514
Snap-On, Inc.................................... 9,900 344,644
Timken Co....................................... 10,200 192,525
--------------
31,053,960
--------------
MANUFACTURING -- 0.5%
Flowserve Corp.................................. 161,991 2,682,976
Hussmann International, Inc..................... 272,600 5,281,625
Illinois Tool Works, Inc........................ 40,400 2,343,200
Smith (A.O.) Corp............................... 433,350 10,644,159
Tyco International Ltd.......................... 102,157 7,706,469
--------------
28,658,429
--------------
<CAPTION>
VALUE
COMMON STOCKS (CONTINUED) SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
MEDIA -- 2.2%
CBS Corp. (a)................................... 910,000 $ 29,802,500
Central Newspapers, Inc.(Class "A" Stock)....... 205,300 14,666,119
Clear Channel Communications, Inc. (a).......... 40,000 2,180,000
Comcast Corp. (Special Class "A" Stock)......... 57,600 3,380,400
Donnelley (R.R.) & Sons Co...................... 23,700 1,038,356
Dow Jones & Co., Inc............................ 15,600 750,750
Gannett Co., Inc................................ 46,000 3,044,625
Houghton Mifflin Co............................. 240,700 11,373,075
Interpublic Group of Companies, Inc............. 21,200 1,690,700
Knight-Ridder, Inc.............................. 251,600 12,863,051
Lee Enterprises, Inc............................ 208,900 6,580,350
McGraw-Hill, Inc................................ 16,100 1,640,188
Mediaone Group, Inc............................. 98,500 4,629,500
Meredith Corp................................... 8,600 325,725
New York Times Co. (Class "A" Stock)............ 31,200 1,082,250
Tele-Communications, Inc. (Class "A"
Stock) (a).................................... 82,268 4,550,449
Time Warner, Inc................................ 189,400 11,754,638
Times Mirror Co. (Class "A" Stock).............. 14,300 800,800
Tribune Co...................................... 19,900 1,313,400
Viacom, Inc. (Class "B" Stock) (a).............. 57,300 4,240,200
--------------
117,707,076
--------------
METALS-FERROUS -- 0.8%
AK Steel Holding Corp........................... 880,000 20,680,000
Allegheny Teledyne, Inc......................... 31,800 649,913
Bethlehem Steel Corp. (a)....................... 924,400 7,741,851
LTV Corp........................................ 841,400 4,890,638
Material Sciences Corp. (a)..................... 397,900 3,382,150
National Steel Corp. (Class "B" Stock) (a)...... 172,800 1,231,200
Nucor Corp...................................... 14,200 614,150
USX-U.S. Steel Group, Inc....................... 291,100 6,695,300
Worthington Industries, Inc..................... 15,700 196,250
--------------
46,081,452
--------------
METALS-NON FERROUS -- 1.0%
Alcan Aluminum Ltd.............................. 36,900 998,606
Aluminum Company of America..................... 678,200 50,568,287
Cyprus Amax Minerals Co......................... 15,100 151,000
Inco Ltd........................................ 27,000 285,188
Reynolds Metals Co.............................. 11,900 626,981
--------------
52,630,062
--------------
MINERAL RESOURCES
ASARCO, Inc..................................... 6,500 97,906
Burlington Resources, Inc....................... 28,600 1,024,237
Homestake Mining Co............................. 34,300 315,131
Phelps Dodge Corp............................... 9,500 483,313
--------------
1,920,587
--------------
MISCELLANEOUS - BASIC INDUSTRY -- 0.9%
AES Corp........................................ 25,000 1,184,375
Coltec Industries, Inc.......................... 179,200 3,494,400
Crane Co........................................ 11,100 335,081
Danaher Corp.................................... 14,000 760,375
Donaldson Co., Inc.............................. 448,600 9,308,450
Ecolab, Inc..................................... 20,900 756,319
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
B19
<PAGE>
FLEXIBLE MANAGED PORTFOLIO (CONTINUED)
DECEMBER 31, 1998
<TABLE>
<CAPTION>
VALUE
COMMON STOCKS (CONTINUED) SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
IDEX Corp....................................... 246,700 $ 6,044,150
ITT Industries, Inc............................. 19,300 767,175
Laidlaw, Inc.................................... 53,300 536,331
Mark IV Industries, Inc......................... 355,500 4,621,500
Millipore Corp.................................. 7,000 199,063
NACCO Industries, Inc. (Class "A" Stock)........ 1,300 119,600
Pall Corp....................................... 20,200 511,313
PPG Industries, Inc............................. 28,900 1,683,425
Textron, Inc.................................... 26,700 2,027,531
Thermo Electron Corp. (a)....................... 25,800 436,988
Trinity Industries, Inc......................... 214,100 8,242,850
Wolverine Tube, Inc. (a)........................ 155,300 3,261,300
York International Corp......................... 110,600 4,513,863
--------------
48,804,089
--------------
MISCELLANEOUS - CONSUMER GROWTH/STAPLE -- 0.6%
American Greetings Corp. (Class "A" Stock)...... 11,800 484,538
Black & Decker Corp............................. 15,400 863,362
Corning, Inc.................................... 37,400 1,683,000
Eastman Kodak Co................................ 195,400 14,068,800
Jostens, Inc.................................... 6,300 164,981
Minnesota Mining & Manufacturing Co............. 66,200 4,708,475
Polaroid Corp................................... 7,300 136,419
Rubbermaid, Inc................................. 24,300 763,931
Unilever N.V., ADR, (United Kingdom)............ 103,800 8,608,913
--------------
31,482,419
--------------
MISCELLANEOUS - INDUSTRIAL
Tenneco, Inc.................................... 27,600 940,125
--------------
OIL & GAS -- 2.4%
Amerada Hess Corp............................... 14,800 736,300
Amoco Corp...................................... 154,200 9,309,825
Anadarko Petroleum Corp......................... 19,400 598,975
Ashland, Inc.................................... 12,200 590,175
Atlantic Richfield Co........................... 52,000 3,393,000
Basin Exploration, Inc. (a)..................... 71,400 896,963
Cabot Oil & Gas Corp. (Class "A" Stock)......... 363,800 5,457,000
Chevron Corp.................................... 106,500 8,832,844
Coastal Corp.................................... 34,500 1,205,344
Eastern Enterprises............................. 3,300 144,375
Enron Oil & Gas Co.............................. 198,700 3,427,575
Exxon Corp...................................... 393,100 28,745,438
Kerr-McGee Corp................................. 7,700 294,525
Mobil Corp...................................... 125,500 10,934,188
Murphy Oil Corp................................. 114,000 4,702,500
NICOR, Inc...................................... 7,800 329,550
Noble Affiliates, Inc........................... 208,900 5,144,163
Phillips Petroleum Co........................... 42,600 1,815,825
Pioneer Natural Resources Co.................... 1,488,431 13,023,771
Royal Dutch Petroleum Co........................ 345,700 16,550,388
Seagull Energy Corp. (a)........................ 245,500 1,549,719
Sunoco, Inc..................................... 15,300 551,756
Texaco, Inc..................................... 87,700 4,637,138
Union Pacific Resources Group, Inc.............. 41,200 373,375
Unocal Corp..................................... 39,900 1,164,581
<CAPTION>
VALUE
COMMON STOCKS (CONTINUED) SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
USX-Marathon Group.............................. 46,800 $ 1,409,850
Western Gas Resources, Inc...................... 423,100 2,432,825
--------------
128,251,968
--------------
OIL & GAS EXPLORATION/PRODUCTION -- 0.7%
Elf Aquitaine SA, ADR, (France)................. 513,400 29,071,275
Occidental Petroleum Corp....................... 57,100 963,563
Oryx Energy Co. (a)............................. 524,100 7,042,594
--------------
37,077,432
--------------
OIL & GAS SERVICES -- 1.3%
Apache Corp..................................... 15,500 392,344
Baker Hughes, Inc............................... 51,340 908,076
Enron Corp...................................... 53,200 3,035,725
Halliburton Co.................................. 70,900 2,100,413
Helmerich & Payne, Inc.......................... 8,200 158,875
J. Ray McDermott, SA............................ 672,900 16,443,994
McDermott International, Inc.................... 1,745,600 43,094,501
ONEOK, Inc...................................... 5,000 180,625
Rowan Companies, Inc. (a)....................... 14,100 141,000
Schlumberger Ltd................................ 85,800 3,957,525
--------------
70,413,078
--------------
PRECIOUS METALS -- 0.1%
Apex Silver Mines Ltd........................... 340,400 2,808,300
Barrick Gold Corp............................... 60,400 1,177,800
Battle Mountain Gold Co......................... 37,200 153,450
Freeport-McMoRan Copper & Gold, Inc. (Class "B"
Stock)........................................ 31,400 327,738
Newmont Mining Corp............................. 25,400 458,788
Placer Dome, Inc................................ 40,000 460,000
--------------
5,386,076
--------------
RAILROADS -- 0.1%
Burlington Northern Santa Fe Corp............... 75,900 2,561,625
CSX Corp........................................ 35,400 1,469,100
Norfolk Southern Corp........................... 61,100 1,936,106
Union Pacific Corp.............................. 40,000 1,802,500
--------------
7,769,331
--------------
REAL ESTATE DEVELOPMENT -- 1.2%
Crescent Operating, Inc......................... 67,240 319,390
Crescent Real Estate Equities Co................ 1,377,600 31,684,800
Equity Residential Properties Trust............. 150,900 6,102,019
Vornado Operating, Inc. (a)..................... 20,000 161,250
Vornado Realty Trust (a)........................ 745,100 25,147,125
--------------
63,414,584
--------------
RESTAURANTS -- 0.2%
Darden Restaurants, Inc......................... 19,000 342,000
McDonald's Corp................................. 111,700 8,559,013
Tricon Global Restaurants, Inc. (a)............. 24,600 1,233,075
Wendy's International, Inc...................... 21,500 468,969
--------------
10,603,057
--------------
RETAIL -- 3.7%
Albertson's, Inc................................ 39,800 2,534,763
American Stores Co.............................. 44,300 1,636,331
AutoZone, Inc. (a).............................. 24,600 810,263
Bombay Co., Inc. (a)............................ 571,600 3,179,525
Charming Shoppes, Inc. (a)...................... 3,332,400 14,370,975
Circuit City Stores, Inc........................ 16,000 799,000
Consolidated Stores Corp........................ 17,400 351,263
Costco Companies, Inc. (a)...................... 34,700 2,504,906
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
B20
<PAGE>
FLEXIBLE MANAGED PORTFOLIO (CONTINUED)
DECEMBER 31, 1998
<TABLE>
<CAPTION>
VALUE
COMMON STOCKS (CONTINUED) SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
RETAIL (CONT'D.)
CVS Corp........................................ 62,000 $ 3,410,000
Dayton-Hudson Corp.............................. 70,800 3,840,900
Designs, Inc. (a)............................... 203,900 395,056
Dillard's, Inc.................................. 148,300 4,208,013
Dollar General Corp............................. 27,500 649,688
Federated Department Stores, Inc. (a)........... 34,000 1,481,125
Fred Meyer, Inc................................. 23,000 1,385,750
Great Atlantic & Pacific Tea Co., Inc........... 6,200 183,675
Harcourt General, Inc........................... 11,500 611,656
Home Depot, Inc................................. 237,200 14,513,675
IKON Office Solutions, Inc...................... 21,800 186,663
J.C. Penney Co., Inc............................ 40,500 1,898,438
Jan Bell Marketing, Inc. (a).................... 295,700 1,903,569
Kmart Corp. (a)................................. 2,576,000 39,445,000
Kohl's Corp. (a)................................ 25,200 1,548,225
Kroger Co. (a).................................. 41,300 2,498,650
Liz Claiborne, Inc.............................. 10,900 344,031
Longs Drug Stores, Inc.......................... 6,300 236,250
May Department Stores Co........................ 37,500 2,264,063
Newell Co....................................... 25,800 1,064,250
Nordstrom, Inc.................................. 28,900 1,002,469
Pep Boys - Manny, Moe & Jack.................... 10,300 161,581
Phillips-Van Heusen Corp........................ 389,200 2,797,375
Rite Aid Corp................................... 41,800 2,071,713
Safeway, Inc. (a)............................... 72,000 4,387,500
Sears, Roebuck & Co............................. 63,500 2,698,750
Sherwin-Williams Co............................. 28,000 822,500
Staples, Inc. (a)............................... 43,000 1,878,563
Supervalu, Inc.................................. 19,400 543,200
Tandy Corp...................................... 16,700 687,831
The Gap, Inc.................................... 96,300 5,416,875
The Limited, Inc................................ 826,500 24,071,813
TJX Companies, Inc.............................. 52,400 1,519,600
Toys 'R' Us, Inc. (a)........................... 404,100 6,819,188
Wal-Mart Stores, Inc............................ 360,200 29,333,788
Walgreen Co..................................... 80,300 4,702,569
Winn-Dixie Stores, Inc.......................... 24,100 1,081,488
--------------
198,252,506
--------------
RUBBER -- 0.2%
Cooper Tire & Rubber Co......................... 12,800 261,600
Goodyear Tire & Rubber Co....................... 186,400 9,401,550
--------------
9,663,150
--------------
TELECOMMUNICATIONS -- 3.4%
Airtouch Communications, Inc. (a)............... 91,400 6,592,225
Alcatel Alsthom, ADR, (France).................. 513,000 12,536,438
Alltel Corp..................................... 43,000 2,571,938
Ameritech Corp.................................. 177,500 11,249,063
Andrew Corp. (a)................................ 14,300 235,950
Ascend Communications, Inc. (a)................. 31,300 2,057,975
AT&T Corp....................................... 290,800 21,882,700
Bell Atlantic Corp.............................. 251,800 14,305,388
BellSouth Corp.................................. 316,000 15,760,500
Deutsche Telekom AG, ADR, (Germany)............. 185,000 6,058,750
Frontier Corp................................... 26,700 907,800
General Instrument Corp......................... 24,000 814,500
GTE Corp........................................ 155,300 10,473,044
Lucent Technologies, Inc........................ 211,000 23,210,000
<CAPTION>
VALUE
COMMON STOCKS (CONTINUED) SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
TELECOMMUNICATIONS (CONT'D.)
MCI WorldCom, Inc............................... 287,270 $ 20,611,623
Nextel Communications, Inc. (Class "A"
Stock) (a).................................... 42,500 1,004,063
Northern Telecom Ltd............................ 105,800 5,303,225
SBC Communications, Inc......................... 313,200 16,795,350
Scientific-Atlanta, Inc......................... 12,800 292,000
Sprint Corp..................................... 69,700 5,863,513
Sprint Corp. (PCS Group)........................ 46,850 1,083,406
Tellabs, Inc. (a)............................... 30,600 2,098,013
US West, Inc.................................... 80,441 5,198,500
--------------
186,905,964
--------------
TEXTILES -- 0.1%
National Service Industries, Inc................ 6,900 262,200
Pillowtex Corp. (a)............................. 73,932 1,977,681
Russell Corp.................................... 5,900 119,844
Springs Industries, Inc......................... 3,300 136,744
Tultex Corp. (a)................................ 362,600 317,275
VF Corp......................................... 19,800 928,125
--------------
3,741,869
--------------
TOBACCO -- 0.8%
Philip Morris Co., Inc.......................... 801,400 42,874,900
UST, Inc........................................ 29,800 1,039,275
--------------
43,914,175
--------------
TOYS
Hasbro, Inc..................................... 21,600 780,300
Mattel, Inc..................................... 47,200 1,076,750
--------------
1,857,050
--------------
TRUCKING/SHIPPING -- 0.1%
Federal Express Corp. (a)....................... 23,800 2,118,200
Ryder System, Inc............................... 12,400 322,400
Yellow Corp. (a)................................ 178,700 3,417,638
--------------
5,858,238
--------------
UTILITY - ELECTRIC -- 0.7%
Ameren Corp..................................... 22,200 947,663
American Electric Power Co., Inc................ 30,700 1,444,819
Baltimore Gas & Electric Co..................... 24,000 741,000
Carolina Power & Light Co....................... 24,400 1,148,325
Central & South West Corp....................... 34,400 943,850
CINergy Corp.................................... 25,600 880,000
Consolidated Edison, Inc........................ 38,100 2,014,538
Dominion Resources, Inc......................... 31,400 1,467,950
DTE Energy Co................................... 23,500 1,007,563
Duke Energy Corp................................ 58,300 3,734,844
Edison International............................ 58,900 1,641,838
Entergy Corp.................................... 39,600 1,232,550
FirstEnergy Corp. (a)........................... 37,300 1,214,581
FPL Group, Inc.................................. 29,500 1,817,938
GPU, Inc........................................ 20,600 910,263
Houston Industries, Inc......................... 47,600 1,529,150
New Century Energies, Inc....................... 15,000 731,250
Niagara Mohawk Power Corp. (a).................. 24,300 391,838
Northern States Power Co........................ 24,200 671,550
Pacific Gas & Electric Co....................... 61,800 1,946,700
PacifiCorp...................................... 48,100 1,013,106
PECO Energy Co.................................. 36,100 1,502,663
PP&L Resources, Inc............................. 26,900 749,838
Public Service Enterprise Group, Inc............ 37,600 1,504,000
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
B21
<PAGE>
FLEXIBLE MANAGED PORTFOLIO (CONTINUED)
DECEMBER 31, 1998
<TABLE>
<CAPTION>
VALUE
COMMON STOCKS (CONTINUED) SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
UTILITY - ELECTRIC (CONT'D.)
Southern Co..................................... 111,800 $ 3,249,188
Texas Utilities Co.............................. 44,500 2,077,594
Unicom Corp..................................... 35,100 1,353,544
--------------
37,868,143
--------------
TOTAL COMMON STOCKS
(cost $2,611,554,092).......................................... 2,858,308,143
--------------
PREFERRED STOCKS -- 0.8%
FINANCIAL SERVICES -- 0.5%
Central Hispano Capital Corp. (Portugal)........ 1,000,000 25,000,000
--------------
TELECOMMUNICATIONS -- 0.3%
Telecomunicacoes Brasileiras S.A., ADR
(Brazil)...................................... 223,400 16,238,388
--------------
TOTAL PREFERRED STOCKS
(cost $47,988,630)............................................. 41,238,388
--------------
MOODY'S PRINCIPAL
RATING AMOUNT
LONG-TERM BONDS -- 35.1% (UNAUDITED) (000)
------------ ---------
AEROSPACE -- 0.7%
Raytheon Co.,
5.95%, 03/15/01............................... Baa1 $ 14,000 14,122,920
6.40%, 12/15/18............................... Baa1 25,000 24,812,500
--------------
38,935,420
--------------
AIRLINES -- 2.3%
Continental Airlines, Inc.,
8.00%, 12/15/05............................... Ba2 15,000 14,821,500
Delta Airlines, Inc.,
10.125%, 05/15/10............................. Baa3 19,335 24,187,118
10.375%, 02/01/11............................. Ba1 31,250 39,896,250
United Airlines, Inc.,
10.67%, 05/01/04.............................. Baa3 19,500 23,072,400
11.21%, 05/01/14.............................. Baa3 17,500 22,981,000
--------------
124,958,268
--------------
ASSET-BACKED SECURITIES -- 0.2%
California Infrastructure,
1997-1 6.17%, 03/25/03........................ A3 4,000 4,049,040
Standard Credit Card Master Trust, 1993-2A
5.95%, 10/07/04............................... Aaa 4,500 4,566,060
--------------
8,615,100
--------------
AUTO - CARS & TRUCKS -- 0.2%
Navistar International Corp.,
7.00%, 02/01/03............................... Ba1 11,500 11,501,797
--------------
BANKS AND SAVINGS & LOANS -- 1.9%
Banco de Commercio Exterior de Columbia, SA,
M.T.N. (Colombia),
8.625%, 06/02/00.............................. NR 5,500 5,390,000
Bank of Nova Scotia (Canada),
6.50%, 07/15/07............................... A1 5,400 5,437,692
<CAPTION>
MOODY'S PRINCIPAL
RATING AMOUNT VALUE
LONG-TERM BONDS (CONT'D) (UNAUDITED) (000) (NOTE 2)
------------ --------- --------------
<S> <C> <C> <C>
BANKS AND SAVINGS & LOANS (CONT'D.)
Bayerische Landesbank Girozentrale (Germany),
5.875%, 12/01/08.............................. Aaa $ 12,500 $ 12,780,000
Capital One Bank,
6.844%, 06/13/00.............................. Baa3 23,900 24,081,401
Central Hispano Financial Services (Portugal),
6.188%, 04/28/05.............................. A3 5,000 4,966,600
Citicorp, M.T.N.,
6.375%, 11/15/08.............................. A1 12,500 12,924,625
Kansallis-Osake-Pankki (Finland),
8.65%, 01/01/49............................... Baa1 9,000 9,132,480
National Australia Bank (Australia),
6.40%, 12/10/07............................... A1 8,700 8,874,000
6.60%, 12/10/07............................... A1 5,000 5,182,500
Okobank (Finland),
6.75%, 09/27/49............................... A3 16,250 16,233,750
--------------
105,003,048
--------------
CABLE & PAY TELEVISION SYSTEMS -- 1.0%
Cable & Wire Communications PLC (United
Kingdom),
6.75%, 12/01/08............................... Baa1 12,100 12,334,740
Continental Cablevision, Inc.,
8.50%, 09/15/01............................... Ba2 5,100 5,409,876
Rogers Cablesystems, Inc. (Canada),
10.00%, 03/15/05.............................. Ba3 2,000 2,240,000
Tele-Communications, Inc.,
6.34%, 02/01/02............................... Ba1 8,500 8,706,125
7.375%, 02/15/00.............................. Ba1 6,000 6,130,500
9.875%, 06/15/22.............................. Baa3 12,878 18,257,784
--------------
53,079,025
--------------
COMPUTERS SOFTWARE & SERVICES -- 0.3%
Computer Associates International, Inc.,
6.375%, 04/15/05.............................. Baa1 13,750 13,607,550
--------------
CONSULTING -- 0.6%
Comdisco, Inc.,
5.94%, 04/13/00............................... Baa1 12,500 12,468,750
6.32%, 11/27/00............................... Baa1 19,000 19,088,540
6.375%, 11/30/01.............................. Baa1 2,700 2,711,691
--------------
34,268,981
--------------
CONSUMER SERVICES -- 0.6%
Loewen Group, Inc.,
7.20%, 06/01/03............................... Ba3 20,000 16,800,000
7.60%, 06/01/08............................... Ba3 16,200 12,798,000
Service Corp. International,
7.00%, 06/01/15............................... A3 2,500 2,588,375
--------------
32,186,375
--------------
CONTAINERS -- 0.7%
Owens-Illinois, Inc.,
7.15%, 05/15/05............................... Ba1 40,000 40,088,400
--------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
B22
<PAGE>
FLEXIBLE MANAGED PORTFOLIO (CONTINUED)
DECEMBER 31, 1998
<TABLE>
<CAPTION>
MOODY'S PRINCIPAL
RATING AMOUNT VALUE
LONG-TERM BONDS (CONT'D) (UNAUDITED) (000) (NOTE 2)
------------ --------- --------------
<S> <C> <C> <C>
DRUGS & MEDICAL SUPPLIES -- 0.1%
Mallinckrodt, Inc.,
6.30%, 03/15/11 (b)........................... Baa2 $ 8,000 $ 7,876,500
--------------
FINANCIAL SERVICES -- 7.7%
Advanta Corp., M.T.N.,
6.99%, 10/18/99............................... Ba3 10,000 9,632,000
Associates Corp.,
6.95%, 11/01/18............................... Aa3 29,000 30,901,820
AT&T Capital Corp,
7.50%, 11/15/00............................... Baa3 40,000 40,489,600
AT&T Capital Corp., M.T.N.,
6.25%, 05/15/01............................... Baa3 16,500 16,275,435
Calair Capital Corp.,
8.125%, 04/01/08.............................. Ba2 6,000 5,867,700
Conseco, Inc.,
6.40%, 06/15/11............................... Baa2 25,000 23,972,500
6.80%, 06/15/05............................... Baa3 2,000 1,815,600
8.70%, 11/15/26............................... Ba2 30,038 27,443,161
8.796%, 04/01/27.............................. Ba2 10,200 9,325,860
ContiFinancial Corp.,
7.50%, 03/15/02............................... Ba1 7,740 5,418,000
8.125%, 04/01/08.............................. Ba1 10,700 7,276,000
8.375%, 08/15/03.............................. Ba1 8,000 5,600,000
Enterprise Rent-A-Car USA Finance Co.,
6.35%, 01/15/01............................... Baa3 21,000 21,050,610
6.95%, 03/01/04............................... Baa2 7,500 7,569,900
7.00%, 06/15/00............................... Baa3 13,500 13,557,645
General Motors Acceptance Corp., M.T.N.,
5.95%, 04/20/01............................... A3 14,700 14,817,600
International Lease Finance Corp.,
6.00%, 05/15/02............................... A1 43,100 43,502,123
Lehman Brothers Holdings, Inc.,
6.40%, 08/30/00............................... Baa1 25,650 25,656,413
MCN Investment Corp.,
6.30%, 04/02/11............................... Baa2 8,250 8,194,725
Merrill Lynch, Pierce, Fenner & Smith, Inc.,
6.875%, 11/15/18.............................. Aa3 18,500 19,178,025
Morgan Stanley Dean Witter & Co., M.T.N.,
5.89%, 03/20/00............................... A1 15,000 15,105,600
6.09%, 03/09/11............................... A1 15,000 15,200,250
PT Alatief Freeport Co. (Netherlands),
9.75%, 04/15/01(a)/(c)........................ Ba2 7,600 5,472,000
Salomon, Inc., M.T.N.,
6.59%, 02/21/01............................... Baa1 8,250 8,408,400
6.75%, 08/15/03............................... Baa1 5,000 5,162,200
7.25%, 05/01/01............................... Baa1 8,625 8,933,430
Textron Financial Corp.,
6.05%, 03/16/09 1997-A........................ Aaa 17,639 17,672,740
--------------
413,499,337
--------------
FOREST PRODUCTS -- 0.2%
Fort James Corp.,
6.234%, 03/15/11 1997-A....................... Baa3 11,000 11,103,510
--------------
<CAPTION>
MOODY'S PRINCIPAL
RATING AMOUNT VALUE
LONG-TERM BONDS (CONT'D) (UNAUDITED) (000) (NOTE 2)
------------ --------- --------------
<S> <C> <C> <C>
FOREST PRODUCTS (CONT'D.)
INDUSTRIAL -- 2.0%
Compania Sud Americana de Vapores, S.A. (Chile),
7.375%, 12/08/03.............................. NR $ 5,650 $ 5,070,875
Scotia Pacific Co.,
7.71%, 01/20/14............................... NR 9,800 9,327,248
7.71%, 01/20/14............................... NR 29,500 26,428,460
Security Capital Group,
6.95%, 06/15/05............................... Baa1 4,500 4,297,500
U.S. Filter Corp.,
6.375%, 05/15/01.............................. Ba1 20,000 19,785,600
6.50%, 05/15/03............................... Ba1 42,000 40,911,780
--------------
105,821,463
--------------
LODGING -- 1.0%
ITT Corp.,
6.25%, 11/15/00............................... Baa2 41,983 40,502,679
6.75%, 11/15/03............................... Baa2 14,000 12,891,620
--------------
53,394,299
--------------
MEDIA -- 1.2%
Paramount Communications, Inc.,
7.50%, 01/15/02............................... Ba2 9,100 9,496,123
Time Warner Inc.,
6.625%, 05/15/29.............................. Baa3 36,000 36,628,560
Viacom, Inc.,
7.75%, 06/01/05............................... Ba2 16,850 18,279,386
--------------
64,404,069
--------------
MISCELLANEOUS -- 0.1%
Tokai Preferred Capital,
9.98%, 12/29/49............................... A3 6,000 5,040,000
--------------
OIL & GAS -- 0.1%
B.J. Services Co.,
7.00%, 02/01/06............................... Ba1 4,000 4,139,880
--------------
OIL & GAS SERVICES -- 2.0%
KN Energy, Inc.,
6.30%, 03/01/21............................... Baa2 20,000 20,056,200
R&B Falcon Corp.,
6.50%, 04/15/03............................... Ba1 15,375 13,965,420
6.75%, 04/15/05............................... Ba1 30,000 25,800,000
Seagull Energy Co.,
7.50%, 09/15/27............................... Ba1 8,225 7,366,886
Williams Companies, Inc.,
5.95%, 02/15/10............................... Baa2 41,000 41,045,100
--------------
108,233,606
--------------
REAL ESTATE INVESTMENT TRUST -- 2.1%
Colonial Realty,
7.00%, 07/14/07............................... Baa3 3,350 3,212,349
EOP Operating, L.P.,
6.50%, 06/15/04............................... Baa1 6,000 5,900,400
6.625%, 02/15/05.............................. Bbb 18,187 17,827,443
Equity Residential Properties Trust,
6.15%, 09/15/00............................... A3 25,000 24,835,000
6.63%, 04/13/15............................... A3 15,300 15,097,428
Felcor Suites, L.P.,
7.375%, 10/01/04.............................. Ba1 25,000 23,812,500
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
B23
<PAGE>
FLEXIBLE MANAGED PORTFOLIO (CONTINUED)
DECEMBER 31, 1998
<TABLE>
<CAPTION>
MOODY'S PRINCIPAL
RATING AMOUNT VALUE
LONG-TERM BONDS (CONT'D) (UNAUDITED) (000) (NOTE 2)
------------ --------- --------------
<S> <C> <C> <C>
REAL ESTATE INVESTMENT TRUST (CONT'D.)
REAL ESTATE INVESTMENT TRUST (CONT'D.)
Gables Realty Trust,
6.80%, 03/15/05............................... Baa2 $ 7,500 $ 7,157,175
Simon DeBartolo Group, Inc.,
6.75%, 06/15/05............................... Baa1 17,500 16,969,750
--------------
114,812,045
--------------
RETAIL -- 2.8%
Dayton Hudson,
5.95%, 06/15/00............................... A3 9,000 9,072,270
Federated Department Stores, Inc.,
8.125%, 10/15/02.............................. Ba1 3,600 3,880,548
8.50%, 06/15/03............................... Ba1 54,890 60,542,572
Meyer (Fred), Inc.,
7.15%, 03/01/03............................... Ba2 12,445 12,947,529
Saks, Inc.,
7.50%, 12/01/10............................... Baa3 29,000 28,997,970
8.25%, 11/15/08............................... Baa3 19,700 20,882,000
Sears Roebuck & Co.,
6.50%, 12/01/28............................... A2 17,000 16,686,010
--------------
153,008,899
--------------
TELECOMMUNICATIONS -- 2.1%
360 Communication Co.,
7.125%, 03/01/03.............................. Ba2 23,776 25,160,952
7.60%, 04/01/09............................... Ba1 12,885 14,601,926
Qwest Communications International Inc.,
7.50%, 11/01/08............................... Ba1 39,000 40,560,000
Sprint Corp.,
6.875%, 11/15/28.............................. Baa1 26,000 27,021,800
Worldcom Inc,
6.125%, 08/15/01.............................. Baa2 7,600 7,721,448
--------------
115,066,126
--------------
TOBACCO -- 0.6%
Philip Morris Companies, Inc.,
6.15%, 03/15/10............................... A2 20,000 20,166,000
RJR Nabisco, Inc.,
8.75%, 08/15/05............................... Baa3 4,600 4,641,722
9.25%, 08/15/13............................... Baa3 7,000 7,197,120
--------------
32,004,842
--------------
TRANSPORTATION/TRUCKING/SHIPPING -- 0.2%
Ryder System, Inc.,
7.51%, 03/24/00............................... Baa1 3,000 3,076,080
8.34%, 01/26/00............................... Baa1 5,000 5,152,750
--------------
8,228,830
--------------
UTILITIES -- 1.3%
Calenergy Co., Inc.,
6.96%, 09/15/03............................... Ba1 15,000 15,267,450
8.48%, 09/15/28............................... Ba1 23,000 25,427,190
Enersis SA, (Chile)
7.40%, 12/01/16............................... Baa1 6,400 5,267,200
Niagara Mohawk Power,
7.00%, 10/01/00............................... Ba3 25,000 25,250,000
--------------
71,211,840
--------------
<CAPTION>
MOODY'S PRINCIPAL
RATING AMOUNT VALUE
LONG-TERM BONDS (CONT'D) (UNAUDITED) (000) (NOTE 2)
------------ --------- --------------
<S> <C> <C> <C>
UTILITIES (CONT'D.)
U.S. GOVERNMENT & AGENCY OBLIGATIONS -- 3.1%
Federal National Mortgage Association,
Zero Coupon, 10/09/19......................... $ 11,800 $ 3,521,592
U.S. Treasury Bond,
6.25%, 08/15/23............................... 10,000 11,176,600
U.S. Treasury Note,
4.75%, 11/15/08 (b)........................... 3,700 3,728,897
5.50%, 08/15/28............................... 2,475 2,590,632
6.50%, 05/15/05............................... 9,600 10,521,024
7.50%, 02/15/05............................... 3,100 3,549,500
6.75%, 08/15/26............................... 109,900 131,656,903
--------------
166,745,148
--------------
TOTAL LONG-TERM BONDS
(cost $1,900,228,227).................................................... 1,896,834,358
--------------
TOTAL LONG-TERM INVESTMENTS
(cost $4,559,770,949).................................................... 4,796,380,889
--------------
SHORT-TERM INVESTMENTS -- 10.9%
COMMERCIAL PAPER -- 0.4%
Barton Capital Corp,
5.35%, 01/04/99............................... P1 1,700 1,699,242
Campbell Soup Co.
4.80%, 01/04/99............................... P1 1,198 1,197,521
Countrywide Home Loan,
5.40%, 01/04/99............................... P2 1,700 1,699,235
CXC Inc.,
5.30%, 01/04/99............................... P1 1,700 1,699,249
Dover,
5.30%, 01/04/99............................... NR 1,700 1,699,249
Hershey,
5.00%, 01/04/99............................... P1 1,427 1,426,405
John Hancock Capital Corp.,
5.25%, 01/07/99............................... P1 1,700 1,698,513
Novartis Finance Corp.,
5.25%, 01/04/99............................... P1 1,500 1,499,344
Reed Elsevier, Inc.,
5.05%, 01/04/99............................... P1 1,700 1,699,285
SBC Communications,
5.00%, 01/04/99............................... P1 1,700 1,699,291
Sonoco Products,
5.35%, 01/04/99............................... P1 1,000 999,554
Triple-A One Plus Funding,
5.30%, 01/04/99............................... P1 1,500 1,499,338
Xerox Capital Corp,
5.30%, 01/04/99............................... P1 1,700 1,699,249
--------------
20,215,475
--------------
LOAN PARTICIPATIONS
Alltel Corp.,
5.75%, 01/04/99............................... P1 1,700 1,700,000
--------------
OTHER CORPORATE OBLIGATIONS -- 1.2%
AT&T Capital Corp., M.T.N.,
6.65%, 04/30/99............................... Baa3 24,500 24,579,870
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
B24
<PAGE>
FLEXIBLE MANAGED PORTFOLIO (CONTINUED)
DECEMBER 31, 1998
<TABLE>
<CAPTION>
MOODY'S PRINCIPAL
RATING AMOUNT VALUE
SHORT-TERM INVESTMENTS (CONT'D) (UNAUDITED) (000) (NOTE 2)
------------ --------- --------------
<S> <C> <C> <C>
OTHER CORPORATE OBLIGATIONS (CONT'D.)
Banco Ganadero, SA, M.T.N., (Colombia),
9.75%, 08/26/99............................... NR $ 7,300 $ 7,263,500
Comdisco, Inc.,
6.11%, 08/04/99............................... Baa1 12,500 12,541,375
Okobank (Finland)
6.793%, 1/14/99 (d)........................... NR 12,500 12,500,000
Tele-Communications, Inc.
6.375%, 09/15/99.............................. Ba1 6,400 6,444,992
--------------
63,329,737
--------------
U. S. GOVERNMENT OBLIGATION -- 0.4%
U.S. Treasury Bill,
4.32%, 03/18/99 (b)......................................... 100 99,088
4.36%, 03/18/99 (b)......................................... 22,400 22,193,820
--------------
22,292,908
--------------
REPURCHASE AGREEMENT -- 8.9%
Joint Repurchase Agreement Account
4.693%, 01/04/99 (Note 5)................................... 482,631 482,631,000
--------------
TOTAL SHORT-TERM INVESTMENTS
(cost $590,187,085)...................................................... 590,169,120
--------------
TOTAL INVESTMENTS -- 99.6%................................................. 5,386,550,009
(cost $5,149,958,034; Note 6)
VARIATION MARGIN ON OPEN FUTURES CONTRACTS (E).............................
809,059
OTHER ASSETS IN EXCESS OF LIABILITIES -- 0.4%..............................
22,622,320
--------------
TOTAL NET ASSETS -- 100.0%................................................. $5,409,981,388
--------------
--------------
</TABLE>
The following abbreviations are used in portfolio descriptions:
ADR American Depository Receipt
AG Aktiengesellschaft (German Stock Company)
L.P. Limited Partnership
M.T.N. Medium Term Note
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) Issue in default.
(d) Indicates a variable rate security. The maturity date presented for this
instrument is the later of the next date on which the security can be
redeemed at par or the next date on which the rate of interest is adjusted.
The interest rate shown reflects the rate in effect at December 31, 1998.
(e) Open futures contracts as of December 31, 1998 are as follows:
<TABLE>
<CAPTION>
NUMBER OF EXPIRATION VALUE AT VALUE AT APPRECIATION/
CONTRACTS TYPE DATE TRADE DATE DECEMBER 31, 1998 DEPRECIATION
<S> <C> <C> <C> <C> <C>
Long positions:
U.S. Treasury
1,241 Bond Mar 99 $159,480,156 $ 158,576,531 $ (903,625)
1,134 S&P 500 Index Mar 99 337,073,687 353,099,250 16,025,563
------------
$15,121,938
------------
------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
B25
<PAGE>
STOCK INDEX PORTFOLIO
DECEMBER 31, 1998
<TABLE>
<CAPTION>
LONG-TERM INVESTMENTS -- 97.3%
VALUE
COMMON STOCKS SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
AEROSPACE -- 1.3%
Aeroquip-Vickers, Inc........................... 9,700 $ 290,394
AlliedSignal, Inc............................... 195,400 8,658,662
Boeing Co....................................... 343,536 11,207,862
General Dynamics Corp........................... 44,400 2,602,950
Goodrich (B.F.) Co.............................. 25,600 918,400
Lockheed Martin Corp............................ 68,049 5,767,153
Northrop Grumman Corp........................... 24,200 1,769,625
Parker-Hannifin Corp............................ 38,225 1,251,869
Raytheon Co. (Class "B" Stock).................. 118,018 6,284,458
United Technologies Corp........................ 79,700 8,667,375
--------------
47,418,748
--------------
AIRLINES -- 0.3%
AMR Corp. (a)................................... 63,900 3,794,062
Delta Air Lines, Inc............................ 53,200 2,766,400
Southwest Airlines Co........................... 117,150 2,628,553
US Airways Group, Inc. (a)...................... 34,900 1,814,800
--------------
11,003,815
--------------
APPAREL -- 0.1%
Fruit of the Loom, Inc. (Class "A" Stock) (a)... 25,200 348,075
Nike, Inc. (Class "B" Stock).................... 101,100 4,100,869
Reebok International Ltd........................ 19,000 282,625
--------------
4,731,569
--------------
AUTOS - CARS & TRUCKS -- 1.4%
Cummins Engine Co., Inc......................... 12,400 440,200
Dana Corp....................................... 57,094 2,333,717
Ford Motor Co................................... 420,500 24,678,094
General Motors Corp............................. 224,400 16,058,625
Genuine Parts Co................................ 61,925 2,070,617
Johnson Controls, Inc........................... 29,300 1,728,700
Navistar International Corp. (a)................ 23,900 681,150
PACCAR, Inc..................................... 27,160 1,116,955
TRW, Inc........................................ 42,000 2,359,875
--------------
51,467,933
--------------
BANKS AND SAVINGS & LOANS -- 6.5%
Banc One Corp................................... 404,445 20,651,973
Bank of New York Co., Inc....................... 261,100 10,509,275
BankAmerica Corp................................ 600,844 36,125,745
BankBoston Corp................................. 102,600 3,994,987
Bankers Trust Corp.............................. 34,200 2,921,962
BB&T Corp....................................... 98,700 3,978,844
Chase Manhattan Corp............................ 295,094 20,084,835
Comerica, Inc................................... 54,150 3,692,353
First Union Corp................................ 334,578 20,346,525
Fleet Financial Group, Inc...................... 198,400 8,866,000
Golden West Financial Corp...................... 20,100 1,842,919
Huntington Bancshares, Inc...................... 73,500 2,209,594
KeyCorp......................................... 152,900 4,892,800
Mellon Bank Corp................................ 91,200 6,270,000
Mercantile Bancorporation, Inc.................. 53,400 2,463,075
Morgan (J.P.) & Co., Inc........................ 61,950 6,508,622
National City Corp.............................. 114,700 8,315,750
Northern Trust Corp............................. 38,300 3,344,069
PNC Bank Corp................................... 104,600 5,661,475
Providian Financial Corp........................ 48,750 3,656,250
Regions Financial Corp.......................... 75,100 3,027,469
Republic New York Corp.......................... 37,100 1,690,369
Summit Bancorp.................................. 60,900 2,660,569
Suntrust Banks, Inc............................. 72,800 5,569,200
<CAPTION>
VALUE
COMMON STOCKS (CONTINUED) SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
BANKS AND SAVINGS & LOANS (CONT'D.)
Synovus Financial Corp.......................... 91,500 $ 2,230,312
U.S. Bancorp.................................... 259,426 9,209,623
Union Planters Corp............................. 43,800 1,984,687
Wachovia Corp................................... 71,900 6,286,756
Wells Fargo & Co................................ 565,260 22,575,071
--------------
231,571,109
--------------
BUSINESS SERVICES -- 0.1%
Equifax, Inc.................................... 52,300 1,788,006
Omnicom Group, Inc.............................. 58,400 3,387,200
--------------
5,175,206
--------------
CHEMICALS -- 1.6%
Air Products & Chemicals, Inc................... 81,100 3,244,000
Dow Chemical Co................................. 77,900 7,084,031
Du Pont (E.I.) de Nemours & Co.................. 394,400 20,927,850
Eastman Chemical Co............................. 27,600 1,235,100
Engelhard Corp.................................. 49,875 972,562
FMC Corp. (a)................................... 12,300 688,800
Grace (W.R.) & Co............................... 24,400 382,775
Great Lakes Chemical Corp....................... 20,600 824,000
Hercules, Inc................................... 32,400 886,950
Monsanto Co..................................... 209,300 9,941,750
Morton International, Inc....................... 46,100 1,129,450
Nalco Chemical Co............................... 23,100 716,100
Praxair, Inc.................................... 55,600 1,959,900
Raychem Corp.................................... 30,200 975,837
Rohm & Haas Co.................................. 61,800 1,861,725
Sigma-Aldrich Corp.............................. 34,000 998,750
Union Carbide Corp.............................. 47,000 1,997,500
--------------
55,827,080
--------------
COMMERCIAL SERVICES -- 0.2%
Cendant Corp. (a)............................... 299,618 5,711,468
Deluxe Corp..................................... 27,000 987,187
Moore Corp. Ltd................................. 28,500 313,500
--------------
7,012,155
--------------
COMPUTER SERVICES -- 7.2%
3Com Corp. (a).................................. 124,000 5,556,750
Adobe Systems, Inc.............................. 23,600 1,103,300
America Online, Inc. (a)........................ 24,000 3,840,000
Autodesk, Inc................................... 15,800 674,462
Automatic Data Processing, Inc.................. 104,700 8,395,631
BMC Software, Inc. (a).......................... 71,100 3,168,394
Cabletron Systems, Inc. (a)..................... 53,500 448,062
Ceridian Corp. (a).............................. 24,600 1,717,387
Cisco Systems, Inc. (a)......................... 537,450 49,882,078
Computer Associates International, Inc.......... 195,143 8,317,970
Computer Sciences Corp. (a)..................... 55,200 3,556,950
Electronic Data Systems Corp.................... 170,100 8,547,525
EMC Corp. (a)................................... 173,300 14,730,500
First Data Corp................................. 154,300 4,889,381
Microsoft Corp. (a)............................. 858,300 119,035,481
Novell, Inc. (a)................................ 120,100 2,176,812
Oracle Corp. (a)................................ 336,687 14,519,627
Parametric Technology Corp. (a)................. 93,000 1,522,875
Peoplesoft, Inc................................. 70,000 1,325,625
Silicon Graphics, Inc. (a)...................... 61,800 795,675
Unisys Corp..................................... 85,900 2,958,181
--------------
257,162,666
--------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
B26
<PAGE>
STOCK INDEX PORTFOLIO (CONTINUED)
DECEMBER 31, 1998
<TABLE>
<CAPTION>
VALUE
COMMON STOCKS (CONTINUED) SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
COMPUTERS -- 4.5%
Apple Computer, Inc. (a)........................ 45,700 $ 1,870,844
Compaq Computer Corp............................ 580,769 24,356,000
Data General Corp. (a).......................... 15,800 259,712
Dell Computer Corp. (a)......................... 440,200 32,217,137
Gateway 2000, Inc. (a).......................... 54,200 2,774,362
Hewlett-Packard Co.............................. 361,400 24,688,137
International Business Machines Corp............ 323,800 59,822,050
Seagate Technology, Inc. (a).................... 83,100 2,513,775
Sun Microsystems, Inc. (a)...................... 131,000 11,216,875
--------------
159,718,892
--------------
CONSTRUCTION -- 0.1%
Centex Corp..................................... 21,600 973,350
Fluor Corp...................................... 28,300 1,204,519
Foster Wheeler Corp............................. 13,300 175,394
Pulte Corp...................................... 14,500 403,281
--------------
2,756,544
--------------
CONTAINERS -- 0.2%
Ball Corp....................................... 10,900 498,675
Bemis Co., Inc.................................. 18,100 686,669
Crown Cork & Seal Co., Inc...................... 44,200 1,361,912
Owens-Illinois, Inc. (a)........................ 54,700 1,675,187
Sealed Air Corp................................. 29,510 1,506,854
--------------
5,729,297
--------------
COSMETICS & SOAPS -- 2.2%
Alberto Culver Co. (Class "B" Stock)............ 19,100 509,731
Avon Products, Inc.............................. 92,000 4,071,000
Colgate-Palmolive Co............................ 102,700 9,538,262
Gillette Co..................................... 391,700 18,924,006
International Flavors & Fragrances, Inc......... 36,400 1,608,425
Procter & Gamble Co............................. 463,504 42,323,709
--------------
76,975,133
--------------
DIVERSIFIED OFFICE EQUIPMENT -- 0.6%
Avery Dennison Corp............................. 40,800 1,838,550
Pitney Bowes, Inc............................... 98,100 6,480,731
Xerox Corp...................................... 113,446 13,386,628
--------------
21,705,909
--------------
DIVERSIFIED OPERATIONS -- 3.3%
Fortune Brands, Inc............................. 61,300 1,938,612
General Electric Co............................. 1,124,600 114,779,487
--------------
116,718,099
--------------
DRUGS AND MEDICAL SUPPLIES -- 11.3%
Abbott Laboratories............................. 534,900 26,210,100
Allergan, Inc................................... 23,300 1,508,675
ALZA Corp. (a).................................. 30,600 1,598,850
American Home Products Corp..................... 457,400 25,757,337
Amgen, Inc. (a)................................. 88,700 9,274,694
Bard (C.R.), Inc................................ 19,000 940,500
Bausch & Lomb, Inc.............................. 20,100 1,206,000
Baxter International, Inc....................... 99,900 6,424,819
Becton, Dickinson & Co.......................... 86,600 3,696,737
Biomet, Inc..................................... 39,100 1,573,775
Boston Scientific Corp. (a)..................... 136,600 3,662,587
Bristol-Myers Squibb Co......................... 343,780 46,002,061
Cardinal Health, Inc............................ 69,450 5,269,519
Guidant Corp.................................... 52,900 5,832,225
<CAPTION>
VALUE
COMMON STOCKS (CONTINUED) SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
Johnson & Johnson............................... 464,800 $ 38,985,100
Lilly (Eli) & Co................................ 381,400 33,896,925
Mallinckrodt, Inc............................... 23,800 733,337
Medtronic, Inc.................................. 163,500 12,139,875
Merck & Co., Inc................................ 411,650 60,795,559
Pfizer, Inc..................................... 453,600 56,898,450
Pharmacia & Upjohn, Inc......................... 177,425 10,046,691
Schering-Plough Corp............................ 509,400 28,144,350
St. Jude Medical, Inc. (a)...................... 30,300 838,931
Warner-Lambert Co............................... 281,500 21,165,281
--------------
402,602,378
--------------
ELECTRONICS -- 3.8%
Advanced Micro Devices, Inc. (a)................ 48,100 1,391,894
AMP Inc......................................... 76,044 3,959,041
Applied Materials, Inc. (a)..................... 127,600 5,446,925
EG&G, Inc....................................... 15,000 417,187
Emerson Electric Co............................. 154,100 9,640,881
Grainger (W.W.), Inc............................ 33,400 1,390,275
Harris Corp..................................... 27,100 992,537
Honeywell, Inc.................................. 44,000 3,313,750
Intel Corp...................................... 582,500 69,062,656
KLA-Tencor Corp. (a)............................ 29,700 1,288,237
LSI Logic Corp. (a)............................. 47,500 765,937
Micron Technology, Inc.......................... 74,900 3,787,131
Motorola, Inc................................... 207,100 12,646,044
National Semiconductor Corp. (a)................ 58,000 783,000
Perkin-Elmer Corp............................... 17,200 1,678,075
Rockwell International Corp..................... 68,500 3,326,531
Solectron Corp.................................. 11,600 1,078,075
Tektronix, Inc.................................. 17,500 526,094
Texas Instruments, Inc.......................... 136,000 11,636,500
Thomas & Betts Corp............................. 19,800 857,587
--------------
133,988,357
--------------
ENVIRONMENTAL SERVICES -- 0.1%
Browning-Ferris Industries, Inc................. 66,200 1,882,562
--------------
FINANCIAL SERVICES -- 5.6%
American Express Co............................. 159,900 16,349,775
Associates First Capital Corp................... 240,066 10,172,797
Bear Stearns Companies, Inc..................... 40,100 1,498,737
Block (H.R.), Inc............................... 36,700 1,651,500
Capital One Financial Corp...................... 22,800 2,622,000
Citigroup, Inc.................................. 791,209 39,164,845
Countrywide Credit Industries, Inc.............. 38,800 1,947,275
Dun & Bradstreet Corp........................... 58,360 1,841,987
Federal Home Loan Mortgage Corp................. 233,000 15,013,937
Federal National Mortgage Association........... 360,100 26,647,400
Fifth Third Bancorp............................. 93,800 6,689,112
Franklin Resources, Inc......................... 88,400 2,828,800
Household International, Inc.................... 171,258 6,786,098
Lehman Brothers Holdings, Inc................... 40,200 1,771,312
MBNA Corp....................................... 258,768 6,453,027
Merrill Lynch & Co., Inc........................ 120,400 8,036,700
Morgan Stanley Dean Witter & Co................. 200,905 14,264,255
Paychex, Inc.................................... 52,000 2,674,750
Schwab (Charles) Corp........................... 139,200 7,821,300
SLM Holding Corp................................ 59,600 2,860,800
State Street Corp............................... 55,800 3,881,587
SunAmerica, Inc................................. 71,700 5,816,662
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
B27
<PAGE>
STOCK INDEX PORTFOLIO (CONTINUED)
DECEMBER 31, 1998
<TABLE>
<CAPTION>
VALUE
COMMON STOCKS (CONTINUED) SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
Transamerica Corp............................... 21,600 $ 2,494,800
Washington Mutual, Inc.......................... 206,248 7,876,095
--------------
197,165,551
--------------
FOOD & BEVERAGES -- 4.7%
Anheuser-Busch Companies, Inc................... 168,500 11,057,812
Archer-Daniels-Midland Co....................... 206,173 3,543,598
Bestfoods....................................... 100,700 5,362,275
Brown-Forman Corp. (Class "B" Stock)............ 24,500 1,854,344
Campbell Soup Co................................ 152,400 8,382,000
Coca-Cola Co.................................... 852,900 57,037,687
Coca-Cola Enterprises, Inc...................... 139,000 4,969,250
ConAgra, Inc.................................... 169,100 5,326,650
Coors (Adolph) Co. (Class "B" Stock)............ 12,800 722,400
General Mills, Inc.............................. 54,400 4,229,600
Heinz (H.J.) & Co............................... 127,850 7,239,506
Hershey Foods Corp.............................. 49,800 3,096,937
Kellogg Co...................................... 141,700 4,835,512
PepsiCo, Inc.................................... 510,000 20,878,125
Pioneer Hi-Bred International, Inc.............. 84,900 2,292,300
Quaker Oats Co.................................. 48,200 2,867,900
Ralston-Ralston Purina Group.................... 109,220 3,535,997
Sara Lee Corp................................... 323,400 9,115,837
Seagram Co., Ltd................................ 130,200 4,947,600
Sysco Corp...................................... 117,500 3,223,906
Wrigley (William) Jr. Co........................ 39,900 3,573,544
--------------
168,092,780
--------------
FOREST PRODUCTS -- 0.6%
Boise Cascade Corp.............................. 18,886 585,466
Champion International Corp..................... 33,000 1,336,500
Fort James Corp................................. 76,000 3,040,000
Georgia-Pacific Corp............................ 31,400 1,838,862
International Paper Co.......................... 107,434 4,814,386
Louisiana-Pacific Corp.......................... 38,900 712,356
Mead Corp....................................... 35,400 1,037,662
Potlatch Corp................................... 10,000 368,750
Temple-Inland, Inc.............................. 19,000 1,126,937
Union Camp Corp................................. 25,100 1,694,250
Westvaco Corp................................... 35,700 957,206
Weyerhaeuser Co................................. 68,900 3,500,981
Willamette Industries, Inc...................... 40,100 1,343,350
--------------
22,356,706
--------------
GAS PIPELINES -- 0.3%
Columbia Energy Group........................... 28,250 1,631,437
Consolidated Natural Gas Co..................... 33,700 1,819,800
Peoples Energy Corp............................. 11,400 454,575
Sempra Energy................................... 84,104 2,134,139
Sonat, Inc...................................... 36,900 998,606
Williams Companies, Inc......................... 146,300 4,562,731
--------------
11,601,288
--------------
HOSPITALS/ HOSPITAL MANAGEMENT -- 0.7%
Columbia/HCA Healthcare Corp.................... 226,298 5,600,875
HBO & Co........................................ 151,100 4,334,681
Healthsouth Corp. (a)........................... 146,500 2,261,594
Humana, Inc. (a)................................ 58,100 1,034,906
IMS Health, Inc................................. 57,560 4,342,183
Manor Care, Inc................................. 30,850 906,219
Service Corp. International..................... 89,500 3,406,594
<CAPTION>
VALUE
COMMON STOCKS (CONTINUED) SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
Shared Medical Systems Corp..................... 9,000 $ 448,875
Tenet Healthcare Corp. (a)...................... 107,100 2,811,375
--------------
25,147,302
--------------
HOUSEHOLD PRODUCTS & PERSONAL CARE -- 0.4%
Clorox Co....................................... 36,600 4,275,338
Kimberly-Clark Corp............................. 186,988 10,190,846
--------------
14,466,184
--------------
HOUSING RELATED -- 0.5%
Armstrong World Industries, Inc................. 13,700 826,281
Fleetwood Enterprises, Inc...................... 12,600 437,850
Kaufman & Broad Home Corp....................... 13,166 378,523
Lowe's Companies, Inc........................... 122,900 6,290,944
Masco Corp...................................... 118,200 3,398,250
Maytag Corp..................................... 32,700 2,035,575
Owens Corning................................... 19,100 676,856
Stanley Works................................... 32,300 896,325
Tupperware Corp................................. 22,300 366,556
Whirlpool Corp.................................. 27,300 1,511,738
--------------
16,818,898
--------------
INSURANCE -- 3.4%
Aetna, Inc...................................... 50,912 4,002,956
Allstate Corp................................... 283,988 10,969,037
American General Corp........................... 88,686 6,917,508
American International Group, Inc............... 363,532 35,126,280
Aon Corp........................................ 58,150 3,220,056
Berkshire Hathaway, Inc. (Class "B" Stock)...... 982 2,307,113
Chubb Corp...................................... 58,400 3,788,700
CIGNA Corp...................................... 71,100 5,496,919
Cincinnati Financial Corp....................... 58,500 2,142,563
Conseco, Inc.................................... 108,259 3,308,666
Hartford Financial Services Group, Inc.......... 81,300 4,461,338
Jefferson-Pilot Corp............................ 37,012 2,775,900
Lincoln National Corp........................... 35,100 2,871,619
Loews Corp...................................... 39,700 3,900,525
Marsh & McLennan Companies, Inc................. 88,400 5,165,875
MBIA, Inc....................................... 34,300 2,248,794
MGIC Investment Corp............................ 40,200 1,600,463
Progressive Corp................................ 25,100 4,251,313
Provident Companies, Inc........................ 47,200 1,958,800
SAFECO Corp..................................... 48,300 2,073,881
St. Paul Companies, Inc......................... 82,410 2,863,748
Torchmark Corp.................................. 48,000 1,695,000
United Healthcare Corp.......................... 67,500 2,906,719
UNUM Corp....................................... 48,500 2,831,188
--------------
118,884,961
--------------
LEISURE -- 1.1%
Brunswick Corp.................................. 33,400 826,650
Carnival Corp. (Class "A" Stock)................ 181,000 8,688,000
Disney (Walt) Co................................ 712,601 21,378,030
Harrah's Entertainment, Inc. (a)................ 35,350 554,553
Hilton Hotels Corp.............................. 87,800 1,679,175
King World Productions, Inc..................... 25,600 753,600
Marriott International, Inc. (Class "A"
Stock)........................................ 90,200 2,615,800
Mirage Resorts, Inc. (a)........................ 61,900 924,631
--------------
37,420,439
--------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
B28
<PAGE>
STOCK INDEX PORTFOLIO (CONTINUED)
DECEMBER 31, 1998
<TABLE>
<CAPTION>
VALUE
COMMON STOCKS (CONTINUED) SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
MACHINERY -- 0.6%
Briggs & Stratton Corp.......................... 7,800 $ 389,025
Case Corp....................................... 25,400 554,038
Caterpillar, Inc................................ 127,700 5,874,200
Cooper Industries, Inc.......................... 42,600 2,031,488
Deere & Co...................................... 85,200 2,822,250
Dover Corp...................................... 78,100 2,860,413
Eaton Corp...................................... 25,500 1,802,531
Harnischfeger Industries, Inc................... 16,100 164,019
Ingersoll-Rand Co............................... 57,550 2,701,253
Milacron, Inc................................... 12,600 242,550
Snap-On, Inc.................................... 20,800 724,100
Timken Co....................................... 21,500 405,813
--------------
20,571,680
--------------
MANUFACTURING -- 0.6%
Illinois Tool Works, Inc........................ 87,200 5,057,600
Tyco International Ltd.......................... 224,608 16,943,866
--------------
22,001,466
--------------
MEDIA -- 2.9%
CBS Corp........................................ 248,100 8,125,275
Clear Channel Communications, Inc. (a).......... 86,200 4,697,900
Comcast Corp. (Special Class "A" Stock)......... 128,200 7,523,738
Donnelley (R.R.) & Sons Co...................... 49,500 2,168,719
Dow Jones & Co., Inc............................ 32,200 1,549,625
Gannett Co., Inc................................ 99,400 6,579,038
Interpublic Group of Companies, Inc............. 47,900 3,820,025
Knight-Ridder, Inc.............................. 27,600 1,411,050
McGraw-Hill, Inc................................ 34,700 3,535,063
Mediaone Group, Inc............................. 212,200 9,973,400
Meredith Corp................................... 17,800 674,175
New York Times Co. (Class "A" Stock)............ 65,200 2,261,625
Tele-Communications, Inc. (Series "A"
Stock) (a).................................... 182,800 10,111,125
Time Warner, Inc................................ 411,080 25,512,653
Times Mirror Co. (Class "A" Stock).............. 30,600 1,713,600
Tribune Co...................................... 42,600 2,811,600
Viacom, Inc. (Class "B" Stock) (a).............. 125,367 9,277,158
--------------
101,745,769
--------------
METALS-FERROUS -- 0.1%
Allegheny Teledyne, Inc......................... 69,880 1,428,173
Bethlehem Steel Corp. (a)....................... 47,300 396,138
Nucor Corp...................................... 30,800 1,332,100
USX-U.S. Steel Group, Inc....................... 31,540 725,420
Worthington Industries, Inc..................... 34,000 425,000
--------------
4,306,831
--------------
METALS-NON FERROUS -- 0.3%
Alcan Aluminum Ltd.............................. 79,350 2,147,409
Aluminum Company of America..................... 65,500 4,883,844
Cyprus Amax Minerals Co......................... 32,700 327,000
Inco Ltd........................................ 56,200 593,613
Reynolds Metals Co.............................. 25,600 1,348,800
--------------
9,300,666
--------------
MINERAL RESOURCES -- 0.1%
ASARCO, Inc..................................... 14,500 218,406
Burlington Resources, Inc....................... 60,917 2,181,590
<CAPTION>
VALUE
COMMON STOCKS (CONTINUED) SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
Homestake Mining Co............................. 72,700 $ 667,931
Phelps Dodge Corp............................... 20,300 1,032,763
--------------
4,100,690
--------------
MISCELLANEOUS - BASIC INDUSTRY -- 0.6%
AES Corp........................................ 63,300 2,998,838
Crane Co........................................ 23,625 713,180
Danaher Corp.................................... 43,100 2,340,869
Ecolab, Inc..................................... 46,000 1,664,625
ITT Industries, Inc............................. 41,900 1,665,525
Laidlaw, Inc.................................... 112,400 1,131,025
Millipore Corp.................................. 14,200 403,813
NACCO Industries, Inc. (Class "A" Stock)........ 2,800 257,600
Pall Corp....................................... 42,000 1,063,125
PPG Industries, Inc............................. 62,200 3,623,150
Textron, Inc.................................... 57,200 4,343,625
Thermo Electron Corp. (a)....................... 57,000 965,438
--------------
21,170,813
--------------
MISCELLANEOUS - CONSUMER GROWTH/STAPLE -- 1.2%
American Greetings Corp. (Class "A" Stock)...... 24,800 1,018,350
Black & Decker Corp............................. 32,900 1,844,456
Corning, Inc.................................... 80,600 3,627,000
Eastman Kodak Co................................ 113,100 8,143,200
Jostens, Inc.................................... 12,400 324,725
Minnesota Mining & Manufacturing Co............. 137,300 9,765,463
Polaroid Corp................................... 15,400 287,788
Rubbermaid, Inc................................. 52,200 1,641,038
Unilever N.V., ADR, (United Kingdom)............ 221,700 18,387,244
--------------
45,039,264
--------------
MISCELLANEOUS - INDUSTRIAL -- 0.1%
Tenneco, Inc.................................... 58,900 2,006,281
--------------
OIL & GAS -- 5.5%
Amerada Hess Corp............................... 32,500 1,616,875
Amoco Corp...................................... 327,260 19,758,323
Anadarko Petroleum Corp......................... 41,600 1,284,400
Ashland, Inc.................................... 26,600 1,286,775
Atlantic Richfield Co........................... 112,270 7,325,618
Chevron Corp.................................... 227,700 18,884,869
Coastal Corp.................................... 72,700 2,539,956
Eastern Enterprises............................. 6,500 284,375
Exxon Corp...................................... 843,600 61,688,250
Kerr-McGee Corp................................. 16,200 619,650
Mobil Corp...................................... 272,000 23,698,000
NICOR, Inc...................................... 16,200 684,450
Phillips Petroleum Co........................... 90,300 3,849,038
Royal Dutch Petroleum Co........................ 745,300 35,681,238
Sunoco, Inc..................................... 33,200 1,197,275
Texaco, Inc..................................... 183,782 9,717,473
Union Pacific Resources Group, Inc.............. 86,056 779,883
Unocal Corp..................................... 84,600 2,469,263
USX-Marathon Group.............................. 100,000 3,012,500
--------------
196,378,211
--------------
OIL & GAS EXPLORATION/PRODUCTION -- 0.1%
Occidental Petroleum Corp....................... 128,000 2,160,000
Oryx Energy Co. (a)............................. 37,200 499,875
--------------
2,659,875
--------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
B29
<PAGE>
STOCK INDEX PORTFOLIO (CONTINUED)
DECEMBER 31, 1998
<TABLE>
<CAPTION>
VALUE
COMMON STOCKS (CONTINUED) SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
OIL & GAS SERVICES -- 0.7%
Apache Corp..................................... 34,100 $ 863,156
Baker Hughes, Inc............................... 112,130 1,983,299
Enron Corp...................................... 114,200 6,516,538
Halliburton Co.................................. 152,700 4,523,738
Helmerich & Payne, Inc.......................... 18,100 350,688
McDermott International, Inc.................... 20,700 511,031
ONEOK, Inc...................................... 10,000 361,250
Rowan Companies, Inc. (a)....................... 28,700 287,000
Schlumberger Ltd................................ 189,100 8,722,238
--------------
24,118,938
--------------
PRECIOUS METALS -- 0.2%
Barrick Gold Corp............................... 129,300 2,521,350
Battle Mountain Gold Co......................... 81,000 334,125
Freeport-McMoRan Copper & Gold, Inc. (Class "B"
Stock)........................................ 66,200 690,963
Newmont Mining Corp............................. 54,503 984,460
Placer Dome, Inc................................ 86,000 989,000
--------------
5,519,898
--------------
RAILROADS -- 0.5%
Burlington Northern Santa Fe Corp............... 163,626 5,522,378
CSX Corp........................................ 76,612 3,179,398
Norfolk Southern Corp........................... 132,300 4,192,256
Union Pacific Corp.............................. 86,800 3,911,425
--------------
16,805,457
--------------
RESTAURANTS -- 0.6%
Darden Restaurants, Inc......................... 50,300 905,400
McDonald's Corp................................. 238,800 18,298,050
Tricon Global Restaurants, Inc. (a)............. 53,850 2,699,231
Wendy's International, Inc...................... 44,800 977,200
--------------
22,879,881
--------------
RETAIL -- 6.4%
Albertson's, Inc................................ 85,800 5,464,388
American Stores Co.............................. 95,800 3,538,613
AutoZone, Inc. (a).............................. 51,900 1,709,456
Circuit City Stores, Inc........................ 33,800 1,687,888
Consolidated Stores Corp........................ 37,200 750,975
Costco Companies, Inc. (a)...................... 75,466 5,447,702
CVS Corp........................................ 134,800 7,414,000
Dayton-Hudson Corp.............................. 152,284 8,261,407
Dillard's, Inc.................................. 37,750 1,071,156
Dollar General Corporation...................... 63,875 1,509,047
Federated Department Stores, Inc. (a)........... 73,500 3,201,844
Fred Meyer, Inc................................. 54,100 3,259,525
Great Atlantic & Pacific Tea Co., Inc........... 12,400 367,350
Harcourt General, Inc........................... 25,006 1,330,007
Home Depot, Inc................................. 519,446 31,783,602
IKON Office Solutions, Inc...................... 46,476 397,951
J.C. Penney Co., Inc............................ 88,800 4,162,500
Kmart Corp. (a)................................. 168,400 2,578,625
Kohl's Corp. (a)................................ 55,600 3,415,925
Kroger Co. (a).................................. 88,700 5,366,350
Liz Claiborne, Inc.............................. 23,400 738,563
Longs Drug Stores, Inc.......................... 13,700 513,750
May Department Stores Co........................ 80,600 4,866,225
Newell Co....................................... 55,000 2,268,750
Nordstrom, Inc.................................. 52,300 1,814,156
Pep Boys-Manny, Moe & Jack...................... 21,700 340,419
Rite Aid Corp................................... 90,600 4,490,363
Safeway, Inc. (a)............................... 166,100 10,121,719
<CAPTION>
VALUE
COMMON STOCKS (CONTINUED) SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
Sears, Roebuck & Co............................. 130,400 $ 5,542,000
Sherwin-Williams Co............................. 59,700 1,753,688
Staples, Inc. (a)............................... 105,200 4,595,925
Supervalu, Inc.................................. 40,800 1,142,400
Tandy Corp...................................... 34,530 1,422,204
The Gap, Inc.................................... 201,525 11,335,781
The Limited, Inc................................ 82,048 2,389,648
TJX Companies, Inc.............................. 109,400 3,172,600
Toys 'R' Us, Inc. (a)........................... 98,450 1,661,344
Wal-Mart Stores, Inc............................ 774,000 63,032,625
Walgreen Co..................................... 172,900 10,125,456
Winn-Dixie Stores, Inc.......................... 51,900 2,329,013
--------------
226,374,940
--------------
RUBBER -- 0.1%
Cooper Tire & Rubber Co......................... 28,800 588,600
Goodyear Tire & Rubber Co....................... 54,300 2,738,756
--------------
3,327,356
--------------
TELECOMMUNICATIONS -- 10.3%
Airtouch Communications, Inc. (a)............... 198,900 14,345,663
Alltel Corp..................................... 94,700 5,664,244
Ameritech Corp.................................. 383,400 24,297,975
Andrew Corp. (a)................................ 29,112 480,348
Ascend Communications, Inc. (a)................. 74,800 4,918,100
AT&T Corp....................................... 624,473 46,991,593
Bell Atlantic Corp.............................. 538,390 30,587,282
BellSouth Corp.................................. 682,000 34,014,750
Frontier Corp................................... 60,400 2,053,600
General Instrument Corp......................... 51,300 1,740,994
GTE Corp........................................ 330,320 22,275,955
Lucent Technologies, Inc........................ 454,620 50,008,200
MCI WorldCom, Inc............................... 620,572 44,526,041
Nextel Communications, Inc. (Class "A"
Stock) (a).................................... 99,800 2,357,775
Northern Telecom Ltd............................ 226,720 11,364,340
SBC Communications, Inc......................... 675,286 36,212,212
Scientific-Atlanta, Inc......................... 27,200 620,500
Sprint Corp..................................... 149,700 12,593,513
Sprint Corp. (PCS Group)........................ 123,850 2,864,031
Tellabs, Inc. (a)............................... 67,600 4,634,825
US West, Inc.................................... 179,622 11,608,072
--------------
364,160,013
--------------
TEXTILES -- 0.1%
National Service Industries, Inc................ 14,700 558,600
Russell Corp.................................... 12,700 257,969
Springs Industries, Inc......................... 6,700 277,631
VF Corp......................................... 42,836 2,007,938
--------------
3,102,138
--------------
TOBACCO -- 1.4%
Philip Morris Co., Inc.......................... 843,000 45,100,500
RJR Nabisco Holdings Corp....................... 111,900 3,322,031
UST, Inc........................................ 66,100 2,305,238
--------------
50,727,769
--------------
TOYS -- 0.1%
Hasbro, Inc..................................... 45,700 1,650,913
Mattel, Inc..................................... 102,381 2,335,567
--------------
3,986,480
--------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
B30
<PAGE>
STOCK INDEX PORTFOLIO (CONTINUED)
DECEMBER 31, 1998
<TABLE>
<CAPTION>
COMMON STOCKS VALUE
(CONTINUED) SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
TRUCKING/SHIPPING -- 0.1%
Federal Express Corp. (a)....................... 50,620 $ 4,505,180
Ryder System, Inc............................... 25,800 670,800
--------------
5,175,980
--------------
UTILITY - ELECTRIC -- 2.3%
Ameren Corp..................................... 47,200 2,014,850
American Electric Power Co., Inc................ 66,500 3,129,656
Baltimore Gas & Electric Co..................... 50,550 1,560,731
Carolina Power & Light Co....................... 52,000 2,447,250
Central & South West Corp....................... 73,400 2,013,913
CINergy Corp.................................... 55,739 1,916,028
Consolidated Edison, Inc........................ 81,800 4,325,175
Dominion Resources, Inc......................... 67,950 3,176,663
DTE Energy Co................................... 50,600 2,169,475
Duke Energy Corp................................ 125,131 8,016,205
Edison International............................ 120,800 3,367,300
Entergy Corp.................................... 86,300 2,686,088
FirstEnergy Corp. (a)........................... 82,200 2,676,638
FPL Group, Inc.................................. 63,100 3,888,538
GPU, Inc........................................ 44,200 1,953,088
Houston Industries, Inc......................... 103,410 3,322,046
New Century Energies, Inc....................... 40,900 1,993,875
Niagara Mohawk Power Corp. (a).................. 64,600 1,041,675
Northern States Power Co........................ 50,900 1,412,475
Pacific Gas & Electric Co....................... 131,000 4,126,500
PacifiCorp...................................... 102,300 2,154,694
PECO Energy Co.................................. 77,500 3,225,938
PP&L Resources, Inc............................. 49,000 1,365,875
Public Service Enterprise Group, Inc............ 80,400 3,216,000
Southern Co..................................... 240,800 6,998,250
Texas Utilities Co.............................. 97,506 4,552,311
Unicom Corp..................................... 75,100 2,896,044
--------------
81,647,281
--------------
WASTE MANAGEMENT -- 0.3%
Waste Management, Inc........................... 199,530 9,303,086
--------------
TOTAL LONG-TERM INVESTMENTS
(cost $1,826,272,044).......................................... 3,451,812,324
--------------
PRINCIPAL
AMOUNT VALUE
SHORT-TERM INVESTMENTS -- 2.6% (000) (NOTE 2)
------------- --------------
REPURCHASE AGREEMENT -- 2.4%
Joint Repurchase Agreement Account,
4.693%, 01/04/99 (Note 5)..................... $ 86,854 $ 86,854,000
--------------
U. S. GOVERNMENT OBLIGATION -- 0.2%
United States Treasury Bill,
4.36%, 03/18/99 (b)........................... 5,900 5,847,844
--------------
TOTAL SHORT-TERM INVESTMENTS
(cost $92,699,694)............................................. 92,701,844
--------------
TOTAL INVESTMENTS -- 99.9%
(cost $1,918,971,738; Note 6) 3,544,514,168
VARIATION MARGIN ON OPEN FUTURES CONTRACTS(C)....................
246,890
OTHER ASSETS IN EXCESS OF LIABILITIES -- 0.1%....................
3,327,932
--------------
TOTAL NET ASSETS -- 100.0%....................................... $3,548,088,990
--------------
--------------
</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, 1998 are as follows:
<TABLE>
<C> <S> <C> <C> <C> <C>
VALUE AT
NUMBER OF EXPIRATION VALUE AT DECEMBER 31,
CONTRACTS TYPE DATE TRADE DATE 1998 APPRECIATION
Long Position:
S&P 500
288 Index Mar 99 $85,070,625 $89,676,000 $4,605,375
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
B31
<PAGE>
EQUITY PORTFOLIO
DECEMBER 31, 1998
<TABLE>
<CAPTION>
LONG-TERM INVESTMENTS -- 92.0%
VALUE
COMMON STOCKS SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
AEROSPACE
Raytheon Co..................................... 44,639 $ 2,307,278
--------------
AUTOS - CARS & TRUCKS -- 2.8%
General Motors Corp............................. 700,000 50,093,750
LucasVarity PLC (United Kingdom)................ 29,951,922 99,787,075
Navistar International Corp. (a)................ 395,200 11,263,200
PACCAR, Inc..................................... 279,400 11,490,325
--------------
172,634,350
--------------
BANKS AND SAVINGS & LOANS -- 6.1%
Bank of New York Co., Inc....................... 2,400,000 96,600,000
BankAmerica Corp................................ 1,789,856 107,615,092
Chase Manhattan Corp............................ 1,216,800 82,818,450
Mellon Bank Corp................................ 270,100 18,569,375
Mercantile Bankshares Corp...................... 419,400 16,146,900
Morgan (J.P.) & Co., Inc........................ 327,900 34,449,994
National City Corp.............................. 61,560 4,463,100
Republic New York Corp.......................... 450,000 20,503,125
--------------
381,166,036
--------------
CHEMICALS -- 2.4%
BOC Group, PLC ADR (United Kingdom)............. 800,000 21,800,000
Dow Chemical Co................................. 556,300 50,588,531
Eastman Chemical Co............................. 941,550 42,134,362
Potash Corp. of Saskatchewan Inc., (Canada)..... 380,000 24,272,500
Wellman, Inc.................................... 798,200 8,131,662
Witco Corp...................................... 268,800 4,284,000
--------------
151,211,055
--------------
COMPUTERS -- 5.3%
Compaq Computer Corp............................ 3,669,250 153,879,172
Gerber Scientific, Inc.......................... 419,800 9,996,487
Hewlett-Packard Co.............................. 1,100,000 75,143,750
NCR Corp........................................ 100,000 4,175,000
Seagate Technology, Inc. (a).................... 2,975,800 90,017,950
--------------
333,212,359
--------------
CONSTRUCTION & HOUSING -- 1.5%
American Standard Co., Inc. (a)................. 1,050,000 37,734,375
Centex Corp..................................... 1,200,000 54,075,000
--------------
91,809,375
--------------
DIVERSIFIED CONSUMER PRODUCTS -- 1.2%
Eastman Kodak Co................................ 889,800 64,065,600
Gibson Greeting, Inc. (a)....................... 750,000 8,906,250
--------------
72,971,850
--------------
ELECTRONICS -- 5.3%
AMP Inc......................................... 1,644,191 85,600,694
Arrow Electronics, Inc. (a)..................... 2,145,500 57,258,031
Avnet, Inc...................................... 887,600 53,699,800
Harris Corp..................................... 2,884,000 105,626,500
Hitachi Ltd. ADR................................ 515,000 31,125,312
--------------
333,310,337
--------------
FINANCIAL SERVICES -- 5.4%
American Express Co............................. 350,000 35,787,500
Citigroup, Inc.................................. 1,941,601 96,109,249
Lehman Brothers Holdings, Inc................... 849,800 37,444,312
Morgan Stanley Dean Witter & Co................. 2,335,000 165,785,000
--------------
335,126,061
--------------
<CAPTION>
VALUE
COMMON STOCKS (CONTINUED) SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
FOREST PRODUCTS -- 9.2%
Fort James Corp................................. 664,000 $ 26,560,000
Georgia-Pacific Corp............................ 1,724,000 100,961,750
Georgia-Pacific Timber Group.................... 1,158,000 27,574,875
International Paper Co.......................... 1,820,000 81,558,750
Mead Corp....................................... 2,306,000 67,594,625
Rayonier Inc.................................... 830,400 38,146,500
Temple-Inland, Inc.............................. 1,240,500 73,577,156
Weyerhaeuser Co................................. 1,522,500 77,362,031
Willamette Industries, Inc...................... 2,500,000 83,750,000
--------------
577,085,687
--------------
HOSPITALS/ HOSPITAL MANAGEMENT -- 9.4%
Columbia/HCA Healthcare Corp.................... 5,790,100 143,304,975
Foundation Health Systems, Inc. (a)............. 4,724,610 56,400,032
PacifiCare Health Systems, Inc. (a)............. 838,800 66,684,600
Tenet Healthcare Corp. (a)...................... 5,122,832 134,474,340
Wellpoint Health Networks Inc................... 2,120,300 184,466,100
--------------
585,330,047
--------------
INSURANCE -- 13.1%
American Financial Group, Inc................... 552,700 24,249,712
American General Corp........................... 879,704 68,616,912
Chubb Corp...................................... 2,206,400 143,140,200
Equitable Companies, Inc........................ 1,466,900 84,896,837
Loews Corp...................................... 1,775,000 174,393,750
Old Republic International Corp................. 2,926,327 65,842,358
SAFECO Corp..................................... 2,855,800 122,620,913
St. Paul Companies, Inc......................... 1,653,800 57,469,550
Tokio Marine & Fire Insurance Co. Ltd., ADR
(Japan)....................................... 656,400 39,876,300
United Healthcare Corp.......................... 928,000 39,962,000
--------------
821,068,532
--------------
LEISURE -- 1.1%
Hilton Hotels Corp.............................. 3,470,600 66,375,225
--------------
METALS-FERROUS -- 0.2%
Birmingham Steel Corp........................... 1,492,400 6,249,425
Carpenter Technology Corp....................... 100,000 3,393,750
--------------
9,643,175
--------------
METALS-NON FERROUS -- 1.4%
Aluminum Company of America..................... 941,000 70,163,313
Cyprus Amax Minerals Co......................... 1,490,400 14,904,000
Nord Resources Corp. (a)........................ 130,500 130,500
--------------
85,197,813
--------------
OIL & GAS -- 2.7%
Amerada Hess Corp............................... 325,000 16,168,750
Atlantic Richfield Co........................... 1,100,000 71,775,000
Keyspan Energy Co............................... 1,356,432 42,049,392
Total SA, ADR, (France)......................... 738,365 36,733,659
--------------
166,726,801
--------------
OIL & GAS EXPLORATION/PRODUCTION -- 2.8%
Elf Aquitaine SA, ADR, (France)................. 2,424,433 137,283,519
Occidental Petroleum Corp....................... 1,100,000 18,562,500
Oryx Energy Co. (a)............................. 1,600,000 21,500,000
--------------
177,346,019
--------------
PRECIOUS METALS -- 1.5%
Freeport-McMoRan Copper & Gold, Inc. (Class
"A").......................................... 3,853,300 37,328,844
Freeport-McMoRan Copper & Gold, Inc. (Class
"B").......................................... 319,600 3,335,825
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
B32
<PAGE>
EQUITY PORTFOLIO (CONTINUED)
DECEMBER 31, 1998
<TABLE>
<CAPTION>
VALUE
COMMON STOCKS (CONTINUED) SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
PRECIOUS METALS (CONT'D.)
Kinross Gold Corp. (a).......................... 105,126 $ 243,104
Newmont Mining Corp............................. 3,057,000 55,217,063
--------------
96,124,836
--------------
RESTAURANTS -- 2.3%
Darden Restaurants, Inc......................... 7,922,700 142,608,600
--------------
RETAIL -- 7.9%
Dillards, Inc................................... 3,649,000 103,540,375
HomeBase, Inc. (a).............................. 1,300,000 8,287,500
IKON Office Solutions, Inc...................... 5,193,000 44,465,063
Kmart Corp. (a)................................. 6,500,000 99,531,250
Nine West Group Inc. (a)........................ 1,430,800 22,266,825
Pep Boys - Manny, Moe & Jack.................... 2,025,000 31,767,188
Sears, Roebuck and Co........................... 690,000 29,325,000
Tandy Corp...................................... 2,784,900 114,703,069
Toys 'R' Us, Inc. (a)........................... 2,350,000 39,656,250
--------------
493,542,520
--------------
SEMICONDUCTORS -- 0.4%
National Semiconductor Corp. (a)................ 1,905,600 25,725,600
--------------
TELECOMMUNICATIONS -- 3.6%
Alltel Corp..................................... 1,255,088 75,069,951
AT&T Corp....................................... 1,100,000 82,775,000
Loral Corp...................................... 2,600,000 46,312,500
Portugal Telecom SA, ADR, (Portugal)............ 409,900 18,291,788
--------------
222,449,239
--------------
TEXTILES
Worldtex, Inc. (a).............................. 107,199 388,596
--------------
TOBACCO -- 3.5%
Philip Morris Co., Inc.......................... 2,025,000 108,337,500
RJR Nabisco Holdings Corp....................... 3,710,000 110,140,625
--------------
218,478,125
--------------
TRANSPORTATION -- 0.2%
Marine Transport Corp. (a)...................... 100,000 225,000
OMI Corp. (a)................................... 1,000,000 3,250,000
Overseas Shipholding Group, Inc................. 600,000 9,637,500
--------------
13,112,500
--------------
UTILITY - ELECTRIC -- 1.7%
American Electric Power, Inc.................... 180,000 8,471,250
GPU, Inc........................................ 500,000 22,093,750
Houston Industries, Inc......................... 974,519 31,306,423
Unicom Corp..................................... 1,112,900 42,916,206
--------------
104,787,629
--------------
UTILITY - WATER -- 0.1%
American Water Works Co., Inc................... 270,000 9,112,500
--------------
WASTE MANAGEMENT -- 0.9%
Waste Management, Inc........................... 1,176,892 54,872,590
--------------
TOTAL LONG-TERM INVESTMENTS
(cost $4,261,005,459).......................................... 5,743,724,735
--------------
MOODY'S PRINCIPAL
RATING AMOUNT VALUE
SHORT-TERM INVESTMENTS -- 8.1% (UNAUDITED) (000) (NOTE 2)
------------ --------- --------------
COMMERCIAL PAPER -- 7.0%
Barton Capital Corp.,
5.60%, 01/14/99............................... P1 $ 60,000 $ 59,878,667
Clipper Receivables Corp.,
5.42%, 01/22/99............................... P1 38,000 37,879,857
Countrywide Home Loan,
5.10%, 01/04/99............................... P1 33,850 33,835,614
Falcon Asset Securitization Corp.,
5.68%, 01/21/99............................... P1 21,332 21,264,686
Four Winds Funding Corp.,
5.70%, 01/29/99............................... P1 50,000 49,778,333
Old Line Funding Corp.,
5.40%, 01/27/99............................... P1 42,000 41,836,200
Thunder Bay Funding Inc.,
5.60%, 01/15/99............................... P1 27,447 27,387,226
5.70%, 01/20/99............................... P1 30,000 29,909,750
Triple-A One Funding Corp.,
5.55%, 01/19/99............................... P1 30,000 29,916,750
Wells Fargo & Co.,
5.70%, 01/22/99............................... P1 50,000 49,833,750
Windmill Funding Corp.,
5.57%, 01/22/99............................... P1 23,000 22,925,269
5.57%, 01/25/99............................... P1 37,000 36,862,606
--------------
441,308,708
--------------
REPURCHASE AGREEMENT -- 1.0%
Joint Repurchase Agreement Account,
4.693%, 01/04/99 (Note 5)..................... 60,667 60,667,000
--------------
U. S. GOVERNMENT & AGENCY OBLIGATIONS -- 0.1%
Federal National Mortgage Association,
4.94%, 02/23/99............................... 5,000 4,995,354
--------------
TOTAL SHORT-TERM INVESTMENTS
(cost $506,971,062)...................................................... 506,971,062
--------------
TOTAL INVESTMENTS -- 100.1%
(cost $4,767,976,521; Note 6)............................................ 6,250,695,797
LIABILITIES IN EXCESS OF OTHER ASSETS -- (0.1%)............................
(3,649,163)
--------------
NET ASSETS -- 100.0%....................................................... $6,247,046,634
--------------
--------------
</TABLE>
The following abbreviations are used in portfolio descriptions:
ADR American Depository Receipt.
PLC Public Limited Company (British Corporation).
SA Sociedad Anonima (Spanish Corporation) or Societe Anonyme (French
Corporation).
(a) Non-income producing security.
SEE NOTES TO FINANCIAL STATEMENTS.
B33
<PAGE>
GLOBAL PORTFOLIO
DECEMBER 31, 1998
<TABLE>
<CAPTION>
LONG-TERM INVESTMENTS -- 93.2%
VALUE
COMMON STOCKS -- 92.4% SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
AUSTRALIA -- 1.4%
AMP Limited..................................... 326,000 $ 4,120,529
Brambles Industries, Ltd........................ 298,600 7,256,327
FXF Trust....................................... 224,600 41,193
--------------
11,418,049
--------------
FEDERAL REPUBLIC OF GERMANY -- 1.8%
Mannesmann, AG.................................. 106,659 12,229,114
SAP, AG......................................... 6,580 2,843,954
--------------
15,073,068
--------------
FINLAND -- 3.4%
Nokia Corp. (Class "A" Stock)................... 236,662 28,974,152
--------------
FRANCE -- 9.7%
Casino Guichard Perrachon, SA................... 90,463 9,421,543
Elf Aquitaine, SA............................... 109,633 12,673,655
Legrand, SA..................................... 55,861 14,804,434
Pinault Printemps Redoute, SA................... 33,785 6,456,888
Suez Lyonnaise Des Eaux......................... 62,868 12,915,154
Thomson CSF..................................... 328,820 14,122,043
Valeo, SA....................................... 149,290 11,765,383
--------------
82,159,100
--------------
IRELAND -- 2.4%
Bank of Ireland................................. 917,988 20,058,961
--------------
ITALY -- 5.0%
Unicredito Italiano SpA......................... 4,786,492 28,426,851
Telecom Italia SpA.............................. 1,574,398 13,459,862
--------------
41,886,713
--------------
JAPAN -- 5.2%
Honda Motor Co.................................. 157,000 5,135,288
Nippon Telephone and Telegraph Corp............. 1,086 8,349,059
NTT Mobile Communication Network, Inc........... 216 8,855,191
Olympus Optical Co., Ltd........................ 1,070,000 12,254,177
Takefuji Corp................................... 131,700 9,579,237
--------------
44,172,952
--------------
NETHERLANDS -- 3.3%
ING Groep, N.V.................................. 242,234 14,776,328
Koninklijke Numico, N.V......................... 273,036 13,018,738
--------------
27,795,066
--------------
SPAIN -- 4.0%
Banco Central Hispanoamericano, SA.............. 1,155,224 13,735,794
Telefonica De Espana............................ 453,545 20,194,700
--------------
33,930,494
--------------
SWEDEN -- 4.3%
Drott, AB (Class "B" Shares).................... 182,794 1,681,558
Hennes & Mauritz, AB............................ 190,023 15,533,093
Nordbanken Holdings, AB......................... 2,193,279 14,082,865
Skanska, AB (Class "B" Shares).................. 195,773 5,439,126
--------------
36,736,642
--------------
SWITZERLAND -- 2.5%
Novartis, AG.................................... 7,831 15,388,428
UBS, AG......................................... 18,858 5,791,904
--------------
21,180,332
--------------
<CAPTION>
VALUE
COMMON STOCKS (CONTINUED) SHARES (NOTE 2)
------------- --------------
<S> <C> <C>
UNITED KINGDOM -- 10.4%
Bank of Scotland................................ 1,037,063 $ 12,388,630
Glaxo Wellcome PLC.............................. 351,881 12,114,335
Guest, Kean & Nettlefolds, PLC.................. 881,861 11,705,117
Hays, PLC....................................... 1,555,994 13,682,625
Siebe, PLC...................................... 2,275,337 8,928,172
Vodafone Group, PLC............................. 1,806,063 29,306,058
--------------
88,124,937
--------------
UNITED STATES -- 39.0%
Belo (A.H.) Corp. (Class "A" Stock)............. 514,900 10,265,819
Cisco Systems, Inc. (a)......................... 169,000 15,685,312
Citigroup, Inc.................................. 203,100 10,053,450
Computer Sciences Corp.......................... 199,000 12,823,062
Disney (Walt) Co................................ 300,600 9,018,000
Electronic Arts, Inc............................ 295,400 16,579,325
Fox Entertainment Group, Inc. (Class "A"
Stock)........................................ 418,600 10,543,487
Healthsouth Corp. (a)........................... 506,500 7,819,094
MCI WorldCom, Inc............................... 251,400 18,037,950
Microsoft Corp. (a)............................. 134,600 18,667,337
Office Depot, Inc............................... 304,700 11,254,856
Pfizer, Inc..................................... 48,100 6,033,544
PMC-Sierra, Inc................................. 289,900 18,299,938
Safeway, Inc. (a)............................... 468,800 28,567,500
SCI Systems, Inc. (a)........................... 189,200 10,926,300
Solectron Corp.................................. 129,200 12,007,525
Tenet Healthcare Corp. (a)...................... 341,800 8,972,250
Texas Instruments, Inc.......................... 218,400 18,686,850
The Limited, Inc................................ 175,800 5,120,175
Time Warner, Inc................................ 428,600 26,599,988
Transocean Offshore, Inc........................ 226,800 6,081,075
USA Networks, Inc............................... 404,300 13,392,438
Warner-Lambert Co............................... 66,800 5,022,525
Waste Management, Inc........................... 301,100 14,038,788
Wells Fargo & Co................................ 374,800 14,968,575
--------------
329,465,163
--------------
TOTAL COMMON STOCKS
(cost $539,856,453)............................................ 780,975,629
--------------
PREFERRED STOCKS -- 0.7%
FEDERAL REPUBLIC OF GERMANY
Wella, AG, 1.57%................................ 6,609 5,514,608
--------------
(cost $5,349,125)
RIGHTS(A) -- 0.1%
SPAIN
Telefonica, SA.................................. 453,545 403,254
--------------
(cost $256,876)
TOTAL LONG-TERM INVESTMENTS
(cost $545,462,454)............................................ 786,893,491
--------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
B34
<PAGE>
GLOBAL PORTFOLIO (CONTINUED)
DECEMBER 31, 1998
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
SHORT-TERM INVESTMENT -- 5.2% (000) (NOTE 2)
------------- --------------
<S> <C> <C>
REPURCHASE AGREEMENT
UNITED STATES
Bear, Stearns & Co. Inc., 4.73%,
01/04/99 (cost $44,130,000)(b)................ $ 44,130 $ 44,130,000
--------------
TOTAL INVESTMENTS -- 98.4%
(cost $589,592,454; Note 6).................................... 831,023,491
--------------
FORWARD CURRENCY CONTRACTS -- AMOUNT PAYABLE TO COUNTERPARTIES
(C) -- (0.5%).................................................. (3,828,254)
OTHER ASSETS IN EXCESS OF OTHER LIABILITIES -- 2.1%..............
17,346,722
--------------
TOTAL NET ASSETS -- 100.0%....................................... $ 844,541,959
--------------
--------------
</TABLE>
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) Bear, Stearns & Co. Inc., repurchase price $44,153,193, due
1/4/99. The value of the collateral was $45,098,734
(c) Outstanding forward currency contracts at December 31, 1998 were as
follows:
<TABLE>
<CAPTION>
VALUE AT
FOREIGN CURRENCY SETTLEMENT CURRENT
CONTRACTS DATE VALUE DEPRECIATION
- -------------------------------- ------------ ------------ -------------
<S> <C> <C> <C>
Sale:
Japanese Yen,
expiring 2/16/99 $ 2,200,000 $ 2,774,219 $ (574,219)
expiring 2/17/99 $ 2,450,000 $ 3,083,306 $ (633,306)
expiring 3/17/99 $ 1,775,000 $ 2,053,545 $ (278,545)
expiring 3/17/99 $ 5,925,000 $ 6,851,612 $ (926,612)
expiring 4/17/99 $ 6,259,542 $ 7,345,432 $(1,085,890)
expiring 6/24/99 $ 5,479,224 $ 5,632,213 $ (152,989)
expiring 6/28/99 $ 5,458,538 $ 5,635,231 $ (176,693)
-------------
$(3,828,254)
-------------
-------------
</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, 1998 were as
follows:
<TABLE>
<S> <C>
Commercial Banks 17.1%
Telecommunications 15.2%
Electronics 10.2%
Retail 9.0%
Computer Services 7.9%
Media 7.2%
Drugs & Medical Supplies 4.6%
Automobiles 3.4%
Machinery 2.5%
Construction 2.1%
Hospitals 2.0%
Electrical Equipment 1.7%
Environmental Services 1.7%
Commercial Services 1.6%
Chemicals 1.5%
Foods & Beverages 1.5%
Leisure 1.1%
Diversified Operations 0.9%
Oil & Gas Services 0.7%
Cosmetics & Soaps 0.6%
Insurance 0.5%
Real Estate Investment Trust 0.2%
Repurchase Agreement 5.2%
---------
98.4%
Forward currency contracts (0.5)%
Other assets in excess of liabilities 2.1%
---------
100.0%
---------
---------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
B35
<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 these
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
or at the bid price on such day in the absence of an asked price. 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 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
C1
<PAGE>
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.
FORWARD CURRENCY CONTRACTS: A forward currency contract is a commitment to
purchase or sell a foreign currency at a future date at a negotiated forward
rate. Certain portfolios of the Series Fund enter into forward currency
contracts in order to hedge their exposure to changes in foreign currency
exchange rates on their foreign portfolio holdings or on specific receivables
and payables denominated in a foreign currency. The contracts are valued daily
at current exchange rates and any unrealized gain or loss is included in net
unrealized appreciation or depreciation on investments. Gain or loss is realized
on the settlement date of the contract equal to the difference between the
settlement value of the original and renegotiated forward contracts. This gain
or loss, if any, is included in net realized gain (loss) on foreign currencies.
Risks may arise upon entering into these contracts from the potential inability
of the counterparties to meet the terms of their contracts.
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 year is estimated to be a return of capital and is recorded as a
reduction of their costs. 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 year ended
December 31, 1998, the application of this statement increased (decreased)
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>
Government Income Portfolio............ $ (64,303) $ 64,303 --
Equity Portfolio....................... -- 105,151 $ (105,151)
Global Portfolio....................... -- (4,162,755) 4,162,755
</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, 1998.
PIC is an indirect, wholly-owned subsidiaries of The Prudential.
The Series Fund has a credit agreement (the "Agreement") with an unaffiliated
lender. The maximum commitment under the Agreement is $250,000,000. The
Agreement expired on December 18, 1998 and has been extended through February
28, 1999 under the same terms. Interest on any such borrowings outstanding 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 did not borrow
any amounts pursuant to the Agreement during the year ended December 31, 1998.
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, 1998, Prudential Securities Incorporated,
an indirect, wholly-owned subsidiary of The Prudential, earned $444,399 in
brokerage commissions from transactions executed on behalf of the following
Portfolios:
<TABLE>
<CAPTION>
Fund Commission
- --------------------------------------- -----------
<S> <C>
Conservative Balanced Portfolio........ $ 32,490
Flexible Managed Portfolio............. 103,021
Equity Portfolio....................... 294,641
Global Portfolio....................... 14,247
-----------
$ 444,399
</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
$932,710,000 as of December 31, 1998. 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............. $ 31,305,000 3.36%
Government Income Portfolio............ 1,692,000 0.18
Conservative Balanced Portfolio........ 109,421,000 11.73
Flexible Managed Portfolio............. 482,631,000 51.75
Stock Index Portfolio.................. 86,854,000 9.31
Equity Portfolio....................... 60,667,000 6.50
All other portfolios (currently not
available to
VCA-24).............................. 160,140,000 17.17
------------- ----------
$ 932,710,000 100.00%
</TABLE>
As of such date, each repurchase agreement in the joint account and the
collateral therefor were as follows:
C4
<PAGE>
Bear, Stearns & Co., Inc., 4.75%, in the principal amount of $255,000,000,
repurchase price $255,134,583, due 1/4/99. The value of the collateral including
accrued interest was $260,454,041.
Credit Suisse First Boston Corp., 4.88%, in the principal amount of $50,000,000,
repurchase price $50,027,111, due 1/4/99. The value of the collateral including
accrued interest was $52,533,163.
CIBC Oppenheimer, 4.75%, in the principal amount of $255,000,000, repurchase
price $255,134,583, due 1/4/ 99. The value of the collateral including accrued
interest was $260,553,672.
SBC Warburg Dillon Reed Inc., 4.70%, in the principal amount of $255,000,000,
repurchase price $255,133,167, due 1/4/99. The value of the collateral including
accrued interest was $261,037,802.
Morgan (JP) Securities, Inc., 4.35%, in the principal amount of $117,710,000,
repurchase price $117,766,893, due 1/4/99. The value of the collateral including
accrued interest was $120,272,486.
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, 1998 were
as follows:
Cost of Purchases:
<TABLE>
<CAPTION>
DIVERSIFIED GOVERNMENT CONSERVATIVE FLEXIBLE STOCK
BOND INCOME BALANCED MANAGED INDEX
--------------- --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Government Securities.................. $1,084,548,820 $ 495,987,249 $2,907,392,972 $2,497,336,303 0
Non-Government Securities.............. $1,014,377,393 0 $4,664,947,720 $4,533,514,880 $ 506,725,666
<CAPTION>
EQUITY GLOBAL
--------------- ---------------
<S> <C> <C>
Government Securities.................. 0 0
Non-Government Securities.............. $1,642,979,141 $ 515,000,344
</TABLE>
Proceeds from Sales:
<TABLE>
<CAPTION>
DIVERSIFIED GOVERNMENT CONSERVATIVE FLEXIBLE STOCK
BOND INCOME BALANCED MANAGED INDEX
------------- ------------- --------------- --------------- ------------
<S> <C> <C> <C> <C> <C>
Government Securities.................. $981,769,931 $452,147,570 $2,956,094,381 $2,461,697,036 0
Non-Government Securities.............. $800,302,342 0 $4,778,976,239 $5,139,626,859 $98,694,085
<CAPTION>
EQUITY GLOBAL
--------------- -------------
<S> <C> <C>
Government Securities.................. 0 0
Non-Government Securities.............. $1,341,760,073 $488,859,228
</TABLE>
The federal income tax basis and unrealized appreciation (depreciation) of the
Series Funds' investments as of December 31, 1998 were as follows:
<TABLE>
<CAPTION>
DIVERSIFIED GOVERNMENT CONSERVATIVE FLEXIBLE STOCK
BOND INCOME BALANCED MANAGED INDEX
--------------- ------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Gross Unrealized Appreciation.......... $ 29,099,718 $ 19,061,880 $ 429,047,409 $ 555,358,703 $1,665,560,555
Gross Unrealized Depreciation.......... 16,654,189 472,714 164,278,673 320,658,740 40,647,788
Total Net Unrealized................... 12,445,529 18,589,166 264,768,736 234,699,963 1,624,912,767
Tax Basis.............................. 1,095,335,557 418,498,213 4,497,706,049 5,151,850,046 1,919,601,401
<CAPTION>
EQUITY GLOBAL
--------------- ---------------
<S> <C> <C>
Gross Unrealized Appreciation.......... $1,763,010,854 $ 239,116,983
Gross Unrealized Depreciation.......... 280,291,578 12,753,049
Total Net Unrealized................... 1,482,719,276 226,363,934
Tax Basis.............................. 4,767,976,521 604,659,557
</TABLE>
For federal income tax purposes, the following Portfolio had a capital loss
carryforward as of December 31, 1998. 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 1998 AVAILABLE EXPIRATION YEAR
---------------- --------------- ----------------
<S> <C> <C> <C>
Government Income Portfolio............ $ 7,210,024 $ 57,521 2003
</TABLE>
C5
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
DIVERSIFIED BOND
-------------------------------------------------
YEAR ENDED
DECEMBER 31,
-------------------------------------------------
1998 1997 1996 1995(a) 1994(a)
--------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net Asset Value, beginning of year..... $ 11.02 $ 11.07 $ 11.31 $ 10.04 $ 11.10
--------- -------- -------- -------- --------
INCOME FROM INVESTMENT OPERATIONS
Net investment income.................. 0.69 0.80 0.76 0.76 0.68
Net realized and unrealized gains
(losses) on investments.............. 0.08 0.11 (0.27) 1.29 (1.04)
--------- -------- -------- -------- --------
Total from investment operations... 0.77 0.91 0.49 2.05 (0.36)
--------- -------- -------- -------- --------
LESS DISTRIBUTIONS:
Dividends from net investment income... (0.69) (0.83) (0.73) (0.75) (0.68)
Distributions from net realized
gains................................ (0.04) (0.13) -- (0.03) (0.02)
--------- -------- -------- -------- --------
Total distributions................ (0.73) (0.96) (0.73) (0.78) (0.70)
--------- -------- -------- -------- --------
Net Asset Value, end of year........... $ 11.06 $ 11.02 $ 11.07 $ 11.31 $ 10.04
--------- -------- -------- -------- --------
--------- -------- -------- -------- --------
TOTAL INVESTMENT RETURN:(b)............ 7.15% 8.57% 4.40% 20.73% (3.23)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (in
millions)............................ $1,122.6 $816.7 $720.2 $655.8 $541.6
Ratios to average net assets:
Expenses............................. 0.42% 0.43% 0.45% 0.44% 0.45%
Net investment income................ 6.40% 7.18% 6.89% 7.00% 6.41%
Portfolio turnover rate................ 199% 224% 210% 199% 32%
FINANCIAL HIGHLIGHTS
</TABLE>
<TABLE>
<CAPTION>
GOVERNMENT INCOME
------------------------------------------------
YEAR ENDED
DECEMBER 31,
------------------------------------------------
1998 1997 1996 1995(a) 1994(a)
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net Asset Value, beginning of year..... $ 11.52 $ 11.22 $ 11.72 $ 10.46 $ 11.78
-------- -------- -------- -------- --------
INCOME FROM INVESTMENT OPERATIONS
Net investment income.................. 0.67 0.75 0.75 0.74 0.70
Net realized and unrealized gains
(losses) on investments.............. 0.36 0.30 (0.51) 1.28 (1.31)
-------- -------- -------- -------- --------
Total from investment operations... 1.03 1.05 0.24 2.02 (0.61)
-------- -------- -------- -------- --------
LESS DISTRIBUTIONS:
Dividends from net investment income... (0.68) (0.75) (0.74) (0.76) (0.71)
Dividends in excess of net investment
income............................... --(c) -- -- -- --
-------- -------- -------- -------- --------
Total distributions................ (0.68) (0.75) (0.74) (0.76) (0.71)
-------- -------- -------- -------- --------
Net Asset Value, end of year........... $ 11.87 $ 11.52 $ 11.22 $ 11.72 $ 10.46
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
TOTAL INVESTMENT RETURN:(b)............ 9.09% 9.67% 2.22% 19.48% (5.16)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (in
millions)............................ $443.2 $429.6 $482.0 $501.8 $487.6
Ratios to average net assets:
Expenses............................. 0.43% 0.44% 0.46% 0.45% 0.45%
Net investment income................ 5.71% 6.40% 6.38% 6.55% 6.30%
Portfolio turnover rate................ 109% 88% 95% 195% 34%
</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.
(c) Less than $.005 per share.
SEE NOTES TO FINANCIAL STATEMENTS.
D1
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
CONSERVATIVE BALANCED
-----------------------------------------------------
YEAR ENDED
DECEMBER 31,
-----------------------------------------------------
1998 1997 1996 1995(a) 1994(a)
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net Asset Value, beginning of year..... $ 14.97 $ 15.52 $ 15.31 $ 14.10 $ 14.91
--------- --------- --------- --------- ---------
INCOME FROM INVESTMENT OPERATIONS
Net investment income.................. 0.66 0.76 0.66 0.63 0.53
Net realized and unrealized gains
(losses) on investments.............. 1.05 1.26 1.24 1.78 (0.68)
--------- --------- --------- --------- ---------
Total from investment operations... 1.71 2.02 1.90 2.41 (0.15)
--------- --------- --------- --------- ---------
LESS DISTRIBUTIONS:
Dividends from net investment income... (0.66) (0.76) (0.66) (0.64) (0.51)
Distributions from net realized
gains................................ (0.94) (1.81) (1.03) (0.56) (0.15)
--------- --------- --------- --------- ---------
Total distributions................ (1.60) (2.57) (1.69) (1.20) (0.66)
--------- --------- --------- --------- ---------
Net Asset Value, end of year........... $ 15.08 $ 14.97 $ 15.52 $ 15.31 $ 14.10
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
TOTAL INVESTMENT RETURN:(b)............ 11.74% 13.45% 12.63% 17.27% (0.97)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (in
millions)............................ $4,796.0 $4,744.2 $4,478.8 $3,940.8 $3,501.1
Ratios to average net assets:
Expenses............................. 0.57% 0.56% 0.59% 0.58% 0.61%
Net investment income................ 4.19% 4.48% 4.13% 4.19% 3.61%
Portfolio turnover rate................ 167% 295% 295% 201% 125%
</TABLE>
<TABLE>
<CAPTION>
FLEXIBLE MANAGED
-----------------------------------------------------
YEAR ENDED
DECEMBER 31,
-----------------------------------------------------
1998 1997 1996 1995(a) 1994(a)
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net Asset Value, beginning of year..... $ 17.28 $ 17.79 $ 17.86 $ 15.50 $ 16.96
--------- --------- --------- --------- ---------
INCOME FROM INVESTMENT OPERATIONS
Net investment income.................. 0.58 0.59 0.57 0.56 0.47
Net realized and unrealized gains
(losses) on investments.............. 1.14 2.52 1.79 3.15 (1.02)
--------- --------- --------- --------- ---------
Total from investment operations... 1.72 3.11 2.36 3.71 (0.55)
--------- --------- --------- --------- ---------
LESS DISTRIBUTIONS:
Dividends from net investment income... (0.59) (0.58) (0.58) (0.56) (0.45)
Distributions from net realized
gains................................ (1.85) (3.04) (1.85) (0.79) (0.46)
--------- --------- --------- --------- ---------
Total distributions................ (2.44) (3.62) (2.43) (1.35) (0.91)
--------- --------- --------- --------- ---------
Net Asset Value, end of year........... $ 16.56 $ 17.28 $ 17.79 $ 17.86 $ 15.50
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
TOTAL INVESTMENT RETURN:(b)............ 10.24% 17.96% 13.64% 24.13% (3.16)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (in
millions)............................ $5,410.0 $5,490.1 $4,896.9 $4,261.2 $3,481.5
Ratios to average net assets:
Expenses............................. 0.61% 0.62% 0.64% 0.63% 0.66%
Net investment income................ 3.21% 3.02% 3.07% 3.30% 2.90%
Portfolio turnover rate................ 138% 227% 233% 173% 124%
</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,
----------------------------------------------------
1998 1997 1996 1995(a) 1994(a)
--------- --------- --------- --------- --------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net Asset Value, beginning of year..... $ 30.22 $ 23.74 $ 19.96 $ 14.96 $ 15.20
--------- --------- --------- --------- --------
INCOME FROM INVESTMENT OPERATIONS
Net investment income.................. 0.42 0.43 0.40 0.40 0.38
Net realized and unrealized gains
(losses) on investments.............. 8.11 7.34 4.06 5.13 (0.23)
--------- --------- --------- --------- --------
Total from investment operations... 8.53 7.77 4.46 5.53 0.15
--------- --------- --------- --------- --------
LESS DISTRIBUTIONS:
Dividends from net investment income... (0.42) (0.42) (0.40) (0.38) (0.37)
Distributions from net realized
gains................................ (0.59) (0.87) (0.28) (0.15) (0.02)
--------- --------- --------- --------- --------
Total distributions................ (1.01) (1.29) (0.68) (0.53) (0.39)
--------- --------- --------- --------- --------
Net Asset Value, end of year........... $ 37.74 $ 30.22 $ 23.74 $ 19.96 $ 14.96
--------- --------- --------- --------- --------
--------- --------- --------- --------- --------
TOTAL INVESTMENT RETURN:(B)............ 28.42% 32.83% 22.57% 37.06% 1.01%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (in
millions)............................ $3,548.1 $2,448.2 $1,581.4 $1,031.3 $664.5
Ratios to average net assets:
Expenses............................. 0.37% 0.37% 0.40% 0.38% 0.42%
Net investment income................ 1.25% 1.55% 1.95% 2.27% 2.50%
Portfolio turnover rate................ 3% 5% 1% 1% 2%
</TABLE>
<TABLE>
<CAPTION>
EQUITY
-----------------------------------------------------
YEAR ENDED
DECEMBER 31,
-----------------------------------------------------
1998 1997 1996 1995(a) 1994(a)
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net Asset Value, beginning of year..... $ 31.07 $ 26.96 $ 25.64 $ 20.66 $ 21.49
--------- --------- --------- --------- ---------
INCOME FROM INVESTMENT OPERATIONS
Net investment income.................. 0.60 0.69 0.71 0.55 0.51
Net realized and unrealized gains on
investments.......................... 2.21 5.88 3.88 5.89 0.05
--------- --------- --------- --------- ---------
Total from investment operations... 2.81 6.57 4.59 6.44 0.56
--------- --------- --------- --------- ---------
LESS DISTRIBUTIONS:
Dividends from net investment income... (0.60) (0.70) (0.67) (0.52) (0.49)
Distributions from net realized
gains................................ (3.64) (1.76) (2.60) (0.94) (0.90)
--------- --------- --------- --------- ---------
Total distributions................ (4.24) (2.46) (3.27) (1.46) (1.39)
--------- --------- --------- --------- ---------
Net Asset Value, end of year........... $ 29.64 $ 31.07 $ 26.96 $ 25.64 $ 20.66
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
TOTAL INVESTMENT RETURN:(b)............ 9.34% 24.66% 18.52% 31.29% 2.78%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (in
millions)............................ $6,247.0 $6,024.0 $4,814.0 $3,813.8 $2,617.8
Ratios to average net assets:
Expenses............................. 0.47% 0.46% 0.50% 0.48% 0.55%
Net investment income................ 1.81% 2.27% 2.54% 2.28% 2.39%
Portfolio turnover rate................ 25% 13% 20% 18% 7%
</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,
------------------------------------------------
1998 1997 1996 1995(a) 1994(a)
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net Asset Value, beginning of year..... $ 17.92 $ 17.85 $ 15.53 $ 13.88 $ 14.64
-------- -------- -------- -------- --------
INCOME FROM INVESTMENT OPERATIONS
Net investment income.................. 0.07 0.09 0.11 0.06 0.02
Net realized and unrealized gains
(losses) on investments.............. 4.38 1.11 2.94 2.14 (0.74)
-------- -------- -------- -------- --------
Total from investment operations... 4.45 1.20 3.05 2.20 (0.72)
-------- -------- -------- -------- --------
LESS DISTRIBUTIONS:
Dividends from net investment income... (0.16) (0.13) (0.11) (0.24) (0.02)
Dividends in excess of net investment
income............................... (0.12) (0.10) -- -- --
Distributions from net realized
gains................................ (0.93) (0.90) (0.62) (0.31) (0.02)
-------- -------- -------- -------- --------
Total distributions................ (1.21) (1.13) (0.73) (0.55) (0.04)
-------- -------- -------- -------- --------
Net Asset Value, end of year........... $ 21.16 $ 17.92 $ 17.85 $ 15.53 $ 13.88
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
TOTAL INVESTMENT RETURN:(b)............ 25.08% 6.98% 19.97% 15.88% (4.89)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (in
millions)............................ $844.5 $638.4 $580.6 $400.1 $345.7
Ratios to average net assets:
Expenses............................. 0.86% 0.85% 0.92% 1.06% 1.23%
Net investment income................ 0.29% 0.47% 0.64% 0.44% 0.20%
Portfolio turnover rate................ 73% 70% 41% 59% 37%
</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 portfolios 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, 1998, the results of each
of their operations for the year then ended, the changes in each of their net
assets for each of the two years in the period then ended and the financial
highlights for each of the three 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, 1998 by
correspondence with the custodian and brokers, provide a reasonable basis for
the opinion expressed above. The accompanying financial highlights for each of
the two years in the period ended December 31, 1995 for each of the Portfolios
were audited by other independent accountants, whose opinion dated February 15,
1996 was unqualified.
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, NY 10036
February 12, 1999
TAX INFORMATION (UNAUDITED)
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,
1998) as to the federal tax status of dividends paid by the Series Fund during
such fiscal year. Accordingly, we are advising you that in 1998, the Series Fund
paid dividends as follows:
<TABLE>
<CAPTION>
ORDINARY DIVIDENDS
- ------------------------------------------------------------------------------------------------
SHORT-TERM LONG-TERM TOTAL
INCOME CAPITAL GAINS CAPITAL GAINS DIVIDENDS
-------- ------------- ------------- ----------
<S> <C> <C> <C> <C>
Diversified Bond Portfolio $ 0.692 $ 0.041 -- $ 0.733
Government Income Portfolio 0.679 -- -- 0.679
Conservative Balanced Portfolio 0.664 0.898 $ 0.044 1.606
Flexible Managed Portfolio 0.586 0.949 0.901 2.436
Stock Index Portfolio 0.420 0.029 0.559 1.008
Equity Portfolio 0.606 0.094 3.544 4.244
Global Portfolio 0.277 -- 0.928 1.205
</TABLE>
E1
<PAGE>
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<PAGE>
The Prudential Series Fund, Inc.
SUPPLEMENT TO PROSPECTUS DATED MAY 1, 1998
The following disclosure replaces in its entirety the fourth paragraph under the
heading, "Investment Objectives and Policies of the Portfolios - Balanced
Portfolios - Flexible Managed Portfolio" in the Prospectus:
The bond portion of this portfolio will primarily be invested in securities
that have a rating at the time of purchase within the four highest grades
determined by Moody's, S&P, or a similar nationally-recognized rating
service. A description of corporate bond ratings is contained in the
Appendix to the statement of additional information. However, up to 25% of
the bond component of this portfolio may be invested in securities having
ratings at the time of purchase of "BB," "Ba" or lower, or if not rated, of
comparable quality in the opinion of the portfolio manager. These
securities are considered speculative and high risk. The risks of medium to
lower rated securities, are described in the Prospectus in connection with
the High Yield Bond Portfolio. Up to 20% of the bond portion of this
portfolio may be invested in United States currency denominated debt
securities issued outside the United States by foreign or domestic issuers.
The established company common stock component of this portfolio will
consist of the equity securities of major corporations that are believed to
be in sound financial condition. In selecting stocks of smaller
capitalization companies, the portfolio manager may invest in companies
that show above average profitability (measured by return-on-equity,
earnings, and dividend growth rates) with modest price/earnings ratios or
alternatively, in companies whose stock is undervalued relative to other
stocks in the market. The individual equity selections for this portfolio
may have more volatile market values than the equity securities selected
for the Equity Portfolio or the Conservative Balanced Portfolio. The
portfolio may also invest in preferred stock, including below investment
grade preferred stock, and other equity-related securities. The money
market portion of the portfolio will hold high quality money market
instruments of the kind held by the Money Market Portfolio. Moreover, when
conditions dictate a temporary defensive strategy or during temporary
periods of portfolio structuring and restructuring, the Flexible Managed
Portfolio may invest, without limit, in high quality money market
instruments of the kind held by the Money Market Portfolio.
F-1
<PAGE>
The following disclosure replaces in its entirety the seventh paragraph under
the heading, "Investment Objectives and Policies of the Portfolios - Balanced
Portfolios - Flexible Managed Portfolio" in the Prospectus:
The facts that this portfolio will invest in a mix of common stocks
regarded as having higher risks than the mix of common stocks that will be
purchased by the Conservative Balanced Portfolio; that the bond portion of
its portfolio will include a higher percentage of bonds having ratings at
the time of purchase of "BB," "Ba" or lower (or if unrated, of comparable
quality); and that the "normal" mix for this portfolio will include a
higher percentage of stocks all combine to mean that the risk of investing
in this portfolio is relatively higher - to the extent that each of these
factors results in greater risks - than the risk of investing in the
Conservative Balanced Portfolio.
Supplement dated: February 26, 1999
F-2
<PAGE>
THE PRUDENTIAL VARIABLE
CONTRACT ACCOUNT 10 &11
Committee Members
MENDEL A. MELZER, CFA
Chairman,
The Prudential Variable
Contract Accounts 10 &11
W. SCOTT McDONALD, JR., Ph.D.
Vice President,
Kaludis Consulting Group
JONATHAN M. GREENE
President,
The Prudential Variable
Contract Accounts 10 &11
SAUL K. FENSTER, Ph.D.
President, New Jersey
Institute of Technology
JOSEPH WEBER, Ph.D.
Vice President,
Interclass (international corporate learning)
<PAGE>
BOARD OF
DIRECTORS THE PRUDENTIAL SERIES FUND, INC.
<TABLE>
<S> <C> <C>
MENDEL A. MELZER, CFA W. SCOTT McDONALD, JR., Ph.D. E. MICHAEL CAULFIELD
CHAIRMAN, VICE PRESIDENT, EXECUTIVE VICE PRESIDENT,
THE PRUDENTIAL SERIES FUND, INC. KALUDIS CONSULTING GROUP PRUDENTIAL FINANCIAL MANAGEMENT
THE PRUDENTIAL INSURANCE
COMPANY OF AMERICA
</TABLE>
<TABLE>
<S> <C>
SAUL K. FENSTER, Ph.D. JOSEPH WEBER, Ph.D.
PRESIDENT, VICE PRESIDENT,
NEW JERSEY INSTITUTE OF TECHNOLOGY INTERCLASS (INTERNATIONAL CORPORATE LEARNING)
</TABLE>
<PAGE>
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<PAGE>
[LOGO]
Whether providing insurance protection for home, family and business, or
arranging to cover future education and retirement expenses, Prudential people
have always been able to deliver something more: personal service, quality,
attention to detail and the financial strength of The Rock(R). Since 1875,
Prudential has been helping individuals and families meet their financial needs.
-------------
The Prudential Insurance Company of America PRSRT.STD.
30 Scranton Office Park U.S. Postage
Scranton, PA 18507-1789 PAID
(800) 458-6333 Summit, N.J.
Permit # 657
Address Service Requested --------------
[LOGO]
FSP SAR X/97 Printed in the U.S.A.
on recycled paper. PI-RS-0299-M1094
MD.RA.004.0299
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